G.R. No. 203786 October 23, 2013
00; that
AQUILES RIOSA, Petitioner,
vs.
TABACO LA SUERTE CORPORATION, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 of the
1997 Rules of Civil Procedure assailing the May 30 2012
Decision1 of the Court of Appeals CA), and its September 20 2012
Resolution2 in CA-G.R. CV No. 96459 reversing the September 30
2010 Decision3 of the Regional Trial Court Branch 15 Tabaco City
Albay RTC), which granted the complaint for
annulment/declaration of nullity of the deed of absolute sale and
transfer certificate of title reconveyance and damages.
The Facts
On February 26, 2002, petitioner Aquiles Riosa (Aquiles) filed his
Complaint for Annulment/Declaration of Nullity of Deed of
Absolute Sale and Transfer Certificate of Title, Reconveyance and
Damages against respondent Tabaco La Suerte Corporation (La
Suerte) before the RTC.
In his complaint, Aquiles alleged that he was the owner and in
actual possession of a 52-square meter commercial lot situated in
Barangay Quinale, Tabaco City, Albay; that he acquired the said
property through a deed of cession and quitclaim executed by his
parents, Pablo Riosa, Sr. and Sabiniana Biron; that he declared the
property in his name and had been religiously paying the realty
tax on the said property; that thereafter, his daughter, Annie Lyn
Riosa Zampelis, renovated the commercial building on the lot and
introduced improvements costing no less than ₱300,000.
subsequently, on three (3) occasions, he obtained loans from Sia
Ko Pio in the total amount of ₱50,000.00; that as a security for the
payment of loans, Sia Ko Pio requested from him a photocopy of
the deed of cession and quitclaim; that Sia Ko Pio presented to him
a document purportedly a receipt for the ₱50,000.00 loan with an
undertaking to pay the total amount of ₱52,000.00 including the
₱2,000.00 attorney’s fees; that without reading the document, he
affixed his signature thereon; and that in September 2001, to his
surprise, he received a letter from La Suerte informing him that
the subject lot was already registered in its name.
Aquiles claimed that by means of fraud, misrepresentation and
deceit employed by Sia Ko Pio, he was made to sign the document
which he thought was a receipt and undertaking to pay the loan,
only to find out later that it was a document of sale. Aquiles
averred that he did not appear before the notary public to
acknowledge the sale, and that the notary public, a municipal
judge, was not authorized to notarize a deed of conveyance. He
further claimed that he could not have sold the commercial
building on the lot as he had no transmissible right over it, as it
was not included in the deed of cession and quitclaim. He, thus,
prayed for the nullification of the deed of sale and certificate of
title in the name of La Suerte and the reconveyance of the subject
property to him.4
In its Answer, La Suerte averred that it was the actual and lawful
owner of the commercial property, after purchasing it from
Aquiles on December 7, 1990; that it allowed Aquiles to remain in
possession of the property to avoid the ire of his father from
whom he had acquired property inter vivos, subject to his
obligation to vacate the premises anytime upon demand; that on
February 13, 1991, the Register of Deeds of Albay issued Transfer
Certificate of Title (TCT) No. T-80054 covering the subject
property in its name; that Aquiles necessarily undertook the cost
of repairs and did not pay rent for using the premises; that Aquiles
transacted with it, through Sia Ko Pio, now deceased, who was
then its Chief Executive Officer; that his opinion that only the land
was sold was absurd because the sale of the principal included its
accessories, not to mention that he did not make any reservation
at the time the deed was executed; that it repeatedly asked Aquiles
to vacate the premises but to no avail; that, instead, he tried to
renovate the building in 2001 which prompted it to lodge a
complaint with the Office of the Mayor on the ground that the
renovation work was without a building permit; and that Aquiles’
complaint was barred by prescription, laches, estoppel and
indefeasibility of La Suerte’s title.5
During the trial, Aquiles and his daughter, Anita Riosa Cabanele,
testified to prove his causes of action. To defend its rightful claim,
La Suerte presented the testimony of Juan Pielago Sia (Juan), the
son of Sia Ko Pio and a member of the board. Aquiles also
presented his wife, Erlinda, as rebuttal witness.
On September 30, 2010, the RTC ruled in favor of Aquiles,
disposing as follows:
Wherefore, foregoing premises considered, judgment is hereby
rendered in favor of the plaintiff and against the defendant.
1. Ordering the annulment of sale of the subject lot
purportedly executed by plaintiff Aquiles Riosa in favor of
defendant corporation;
2. Annulling the Transfer Certificate of Title No. 80054 in
the name of defendant corporation;
3. Ordering defendant corporation to pay plaintiff the
amount of Twenty Thousand Pesos (₱20,000.00) as
Attorney’s fees;
4. Ordering defendant to pay plaintiff the amount of
Twenty Thousand (₱20,000.00) as exemplary damages;
and
5. Ordering defendant to pay plaintiff the amount of
Twenty Thousand Pesos (₱20,000.00) as Attorney’s fees.
SO ORDERED.6
The RTC gave credence to the testimony of Aquiles that he was
made to sign an instrument of sale without his knowledge because
he trusted Sia Ko Pio and he was of the belief that what he had
signed was merely an instrument of indebtedness. It cited, as legal
basis, Article 1330 of the Civil Code which provides that a contract
where the consent is given thru violence, intimidation, undue
influence or fraud is voidable. Inasmuch as the property was
acquired thru fraud, the person who obtained it by force of law
was considered a trustee of an implied trust for the benefit of the
person from whom the property came. Thus, according to the RTC,
La Suerte was bound to reconvey to Aquiles the subject property.
With its motion for reconsideration denied, La Suerte appealed to
the CA. In its May 30, 2012 Decision, the CA reversed the RTC
decision and upheld the validity of the subject deed of sale in favor
of La Suerte. It declared La Suerte as the lawful owner of the
subject lot and improvements thereon, subject to the right of
reimbursement for the renovation expenses. The CA held that tax
declarations or realty tax payments by Aquiles were not
conclusive evidence of ownership, citing Spouses Camara v.
Spouses Malabao,7 where it was ruled that a party’s declaration of
real property and his payment of realty taxes could not defeat a
certificate of title which was an absolute and indefeasible
evidence of ownership of the property in favor of the person
whose name appeared thereon. The dispositive portion of the CA
decision reads:
WHEREFORE, premises considered, the instant appeal is
GRANTED. The September 30, 2010 Decision of the Regional Trial
Court of Tabaco City, Albay, Branch 15, is REVERSED and SET
ASIDE and a new one is rendered:
1. DISMISSING the complaint for annulment of deed of sale
and transfer certificate of title, without prejudice to the
right of plaintiff-appellee’s daughter to a reimbursement
for the renovation works she made on the
structure/building on the lot; and
2. GRANTING defendant-appellant’s counterclaim
although in the reduced amount of ₱100,000.00.
SO ORDERED.8
Aquiles filed his Motion for Reconsideration9 of the CA decision,
but the same was denied by the CA in its September 20, 2012
Resolution. Hence, Aquiles filed the present petition before this
Court raising the following
ISSUES
1. Whether or not the Honorable Court of Appeals
committed serious error in reversing the decision of the
Trial Court disregarding the conclusion and findings of the
Trial court;
2. Whether the Honorable Court of Appeals committed
serious error of law in holding that the personal loan of
petitioner obtained and granted by Sia Ko Pio is a
consideration of sale of the property in favor of the
respondent corporation La Suerte Corporation;
3. Whether the Honorable Court of Appeals erred in
finding that there was a valid and perfected contract of
sale of real property between petitioner and respondent
corporation La Suerte Corporation;
4. Whether the Honorable Court of Appeals committed
serious error of law and applicable jurisprudence in
resolving petitioner’s actual physical possession of the
property in question; and 5. Whether the Honorable Court
of Appeals committed serious error of law by awarding
damages to the respondent.10
The primordial issue to be resolved is whether there was a
perfected and valid contract of sale for the subject property
between Aquiles and La Suerte, through its Chief Executive
Officer, Sia Ko Pio.
Aquiles argues that there was no perfected contract to sell
because (1) there was no transaction between La Suerte and
Aquiles for the sale of the property in question; (2) there was no
board resolution authorizing Sia Ko Pio to purchase the property;
(3) there was no evidence that the money received by Aquiles
from Sia Ko Pio came from La Suerte; and (4) he did not appear
before the notary public for notarization of the instrument of sale.
Moreover, there was a discrepancy in the date appearing in the
deed of sale and the date in the acknowledgment and the notarial
reference.
La Suerte, in its Comment,11 argued that Aquiles’ petition should
be dismissed because it raised only questions of fact as only pure
question of law is allowed in a petition for certiorari under Rule
45. It counters that the notarized deed of sale was the very
evidence of the agreement between them. According to it, said
deed of sale was binding and enforceable between them, albeit
there was a discrepancy in the dates, for the time-honored rule is
that even a verbal contract of sale of real estate produces legal
effect between the parties. La Suerte adds that the absence of a
board resolution for the purchase of the property has no
controlling consequence as La Suerte had ratified the act of Sia Ko
Pio.
The Court’s Ruling
Notably, the issues raised in the petition are factual in nature.
Essentially, Aquiles asks the Court to review the factual
determination of the CA. As a rule, only questions of law may be
raised in a petition for review on certiorari because the Court is
not a trier of facts and is not to review or calibrate the evidence
on record.12 When supported by substantial evidence, the findings
of fact by the CA are conclusive and binding on the parties and are
not reviewable by this Court, unless the case falls under any of the
recognized exceptions.13 An acceptable exception is where there
is a conflict between the factual determination of the trial court
and that of the appellate court. In such a case, it becomes
imperative to digress from this general rule and revisit the factual
circumstances surrounding the controversy.14
In this case, although the RTC and the CA were one in ruling that
the prescriptive period of reconveyance did not run against
Aquiles because he remained in possession of the subject
property, they differred in their findings of fact and conclusions
on the question of whether there was a perfected and valid
contract of sale.
The RTC annulled the sale of the subject properties on the ground
of fraud as Aquiles was made to sign an instrument which he
believed to be a receipt of indebtedness. On the contrary, the CA
ruled that the contract of sale was valid. The CA wrote:
Nevertheless, We rule that the subject deed of sale is valid. We are
not convinced of Aquiles’ bare assertion that the said document
was executed through fraud, misrepresentation or deceit, and that
his wife’s signature thereon was forged. The rule is that for an
action for reconveyance based on fraud to prosper, the party
seeking reconveyance must prove by clear and convincing
evidence his title to the property and the fact of fraud. It must be
stressed that mere allegations of fraud are not enough. Intentional
acts to deceive and deprive another of his right, or in some
manner, injure him, must be specifically alleged and proved.15
After an assiduous assessment of the evidentiary records, the
Court holds otherwise.
The Court agrees with the finding of the RTC that there was no
perfected contract of sale. It is a hornbook doctrine that the
findings of fact of the trial court are entitled to great weight on
appeal and should not be disturbed except for strong and valid
reasons, because the trial court is in a better position to examine
the demeanor of the witnesses while testifying.16
The elements of a contract of sale are: a] consent or meeting of the
minds, that is, consent to transfer ownership in exchange for the
price; b] determinate subject matter; and c] price certain in money
or its equivalent.17
In this case, there was no clear and convincing evidence that
Aquiles definitely sold the subject property to La Suerte, nor was
there evidence that La Suerte authorized its chief executive
officer, Sia Ko Pio, to negotiate and conclude a purchase of the
property. Aquiles’ narration in open court is clear that he did not
intend to transfer ownership of his property. The pertinent parts
of his testimony read:
Q – How much is your debt to the father of Jhony known as Pia
Wo?
ATTY. GONZAGA: The question refers to Sia Ko Pio?
ATTY. BROTAMONTE: Pia Wa.
A – At first I borrowed ₱3,000.00.
Q – Thereafter is there any additional amount?
A – Then, he give me ₱10,000.00.
Q – Thereafter, is there any additional amount?
A – After the money was exhausted, I borrowed ₱10,000.00.
Q – After that ₱10,000.00, did you borrow another loan? A – The
next amount I borrowed from him is ₱20,000.00.
Q – Now did you sign any document showing receipt of that
amount you received from Pia Wa? A – The last time that I
borrowed from him he wants to buy the property but I told him
that I will not sell it.
ATTY. BROTAMONTE:
Q – What happened when you did not like to sell the property?
A – He did not say anything but he made me sign a paper
evidencing my debt from him.
Q – Were you able to read the papers you signed if there is
wording or statement?
A – I did not read it anymore because I trust him.
Q – What happened thereafter?
A – After several years we come to know that our property is
already in their name.18 [Emphases supplied]
The foregoing testimony negates any intention on the part of
Aquiles to sell the property in exchange for the amounts
borrowed. Evidently, it was a series of transactions between
Aquiles and Sia Po Ko, but not between the parties. The
transactions were between Aquiles, as borrower, and Sia Ko Pio,
as lender. It was not a sale between Aquiles, as vendor, and La
Suerte, as vendee. There was no agreement between the parties.
As the first element was wanting, Aquiles correctly argued that
there was no contract of sale. Under Article 1475 of the Civil Code,
the contract of sale is perfected at the moment there is a meeting
of minds on the thing which is the object of the contract and on
the price.
Aquiles acknowledged that he signed the receipt for the total loan
amount of ₱50,000.00 plus ₱2,000.00 as attorney’s fees. There is,
however, no proof that it came from La Suerte as the
consideration of the sale. Accordingly, there is no basis for a
holding that the personal loan of Aquiles from Sia Ko Pio was the
consideration for the sale of his property in favor of La Suerte. As
to La Suerte’s contention that a deed of absolute sale was
purportedly executed by Aquiles in its favor, it failed to adduce
convincing evidence to effectively rebut his consistent claim that
he was not aware that what he had signed was already an
instrument of sale, considering his trust and confidence on Sia Ko
Pio who was his long-time friend and former employer.
The fact that the alleged deed of sale indubitably bore Aquiles’
signature deserves no evidentiary value there being no consent
from him to part with his property. Had he known that the
document presented to him was an instrument of sale, he would
not have affixed his signature on the document. It has been held
that the existence of a signed document purporting to be a
contract of sale does not preclude a finding that the contract is
invalid when the evidence shows that there was no meeting of the
minds between the seller and buyer.19
Indeed, if Aquiles sold the property in favor of La Suerte, he would
not have religiously and continuously paid the real property taxes.
Also of note is the fact that his daughter spent ₱ 300,000.00 for the
renovation of improvements. More important, La Suerte did not
earlier ask him to transfer the possession thereof to the company.
These uncontroverted attendant circumstances bolster Aquiles’
positive testimony that he did not sell the property.
And for said reasons, the CA should not have favorably considered
the validity of the deed of absolute sale absent any written
authority from La Suerte’s board of directors for Sia Ko Pio to
negotiate and purchase Aquiles property on its behalf and to use
its money to pay the purchase price. The Court notes that when
Sia Ko Pio’s son, Juan was presented as an officer of La Suerte, he
admitted that he could not find in the records of the corporation
any board resolution authorizing his father to purchase disputed
property.20 In Spouses Firme v. Bukal Enterprises and
Development Corporation,21 it was written:
It is the board of directors or trustees which exercises almost all
the corporate powers in a corporation. Thus, the Corporation
Code provides:
SEC. 23. The board of directors or trustees. — Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the
holders of stock, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified. x x x
SEC. 36. Corporate powers and capacity. — Every corporation
incorporated under this Code has the power and capacity:
xxxx
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as
the transaction of a lawful business of the corporation may
reasonably and necessarily require, subject to the limitations
prescribed by the law and the Constitution.
xxxx
Under these provisions, the power to purchase real property is
vested in the board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of real property
needed by the corporation, the final say will have to be with the
board, whose approval will finalize the transaction. A corporation
can only exercise its powers and transact its business through its
board of directors and through its officers and agents when
authorized by a board resolution or its by-laws. As held in AF
Realty & Development, Inc. v. Dieselman Freight Services, Co.:
Section 23 of the Corporation Code expressly provides that the
corporate powers of all corporations shall be exercised by the
board of directors. Just as a natural person may authorize another
to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual
officers or agents appointed by it. Thus, contracts or acts of a
corporation must be made either by the board of directors or by a
corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an
individual director relating to the affairs of the corporation, but
not in the course of, or connected with, the performance of
authorized duties of such director, are held not binding on the
corporation.22 [Emphases supplied]
In the case at bench, Sia Ko Pio, although an officer of La Suerte,
had no authority from its Board of Directors to enter into a
contract of sale of Aquiles’ property. It is, thus, clear that the loan
obtained by Aquiles from Sia Ko Pio was a personal loan from the
latter, not a transaction between Aquiles and La Suerte. There was
no evidence to show that Sia Ko Pio was clothed with authority to
use his personal fund for the benefit of La Suerte. Evidently, La
Suerte was never in the picture.
The CA also failed to consider the glaring material discrepancies
on the dates appearing in the purported deed of absolute sale
notarized by Judge Arsenio Base, Municipal Court Presiding Judge
of Tabaco City (Judge Base).
An examination of the alleged contract of sale shows three (3)
dates:
1. In witness whereof, I have hereunto affixed my
signature this 8th day of December 1999 in Tabaco, Albay,
Philippines;
2. Before me, this 7th day of December, 1990 in Tabaco,
Albay; and
3. Doc. No. 587;
Page No. 12;
Book No. 4;
Series of 1990.
The document was dated 1999, but the date in the
acknowledgment and notarial reference was an earlier date, 1990.
The ex-oficio notary public, Judge Base, was not presented to
explain the apparent material discrepancy of the dates appearing
on the questioned document. This only confirms the claim of
Aquiles that he signed the receipt representing his loan at the
bodega of Sia Ko Pio sometime in 1990, and not at the office of
Judge Base in 1999.
La Suerte insists that the discrepancy on the dates was a mere
clerical error that did not invalidate the deed of sale. It is worthy
to stress that a notarial document is evidence of the facts in the
clear unequivocal manner therein expressed and has in its favor
the presumption of regularity. While it is true that an error in the
notarial inscription does not generally invalidate a sale, if indeed
it took place, the same error can only mean that the document
cannot be treated as a notarial document and thus, not entitled to
the presumption of regularity. The document would be taken out
of the realm of public documents whose genuineness and due
execution need not be proved.23
An even more substantial irregularity raised by Aquiles pertains
to the capacity of the notary public, Judge Base, to notarize the
deed of sale. Judge Base, who acted as ex-oficio notary public, is
not allowed under the law to notarize documents not connected
with the exercise of his official duties. The case of Tigno v.
Aquino24 is enlightening:
There are possible grounds for leniency in connection with this
matter, as Supreme Court Circular No. I-90 permits notaries
public ex officio to perform any act within the competency of a
regular notary public provided that certification be made in the
notarized documents attesting to the lack of any lawyer or notary
public in such municipality or circuit. Indeed, it is only when there
are no lawyers or notaries public that the exception applies. The
facts of this case do not warrant a relaxed attitude towards Judge
Cariño's improper notarial activity. There was no such
certification in the Deed of Sale. Even if one was produced, we
would be hard put to accept the veracity of its contents,
considering that Alaminos, Pangasinan, now a city, was even then
not an isolated backwater town and had its fair share of practicing
lawyers.25
In fine, considering the irregularities or defects in the execution
and notarization of the deed of sale, the Court finds Itself unable
to stamp its seal of approval on it. The R TC was correct in
ordering its annulment.
WHEREFORE, the petition is GRANTED. The May 30, 2012
Decision of the Court of Appeals in CA-G.R. CV No. 96459 is
REVERSED and SET ASIDE. The September 30, 2010 Decision of
the Regional Trial Court, Branch 15 Tabaco City, Albay, is
REINSTATED.

In this case, no such certification was attached to the alleged This disposition is without prejudice to any valid claim of the heirs
notarized document.1âwphi1 Also, the Court takes note of of Sia Ko Pio against Aquiles. SO ORDERED.
Aquiles’ averment that there were several lawyers commissioned
as notary public in Tabaco City. With Judge Base not being
authorized to notarize a deed of conveyance, the notarized
document cannot be considered a valid registrable document in
favor of La Suerte.

Moreover, Aquiles wife, Erlinda, who appeared to have affixed her

signature as a witness to the purported document of sale,
categorically stated that she never signed such an instrument and
never appeared before a notary public.

Although it is true that the absence of notarization of the deed of

sale would not invalidate the transaction evidenced therein,26 yet
an irregular notarization reduces the evidentiary value of a
document to that of a private : document, which requires proof of
its due execution and authenticity to be admissible as evidence.27

It should be noted that the deed of sale was offered in evidence as

authentic by La Suerte, hence, the burden was upon it to prove its
authenticity and due execution. La Suerte unfortunately failed to
discharge this burden. Accordingly, the preponderance of
evidence is in favor of Aquiles.
[G.R. No. 109491. February 28, 2001]
ATRIUM MANAGEMENT CORPORATION, petitioner,
vs. COURT OF APPEALS, E.T. HENRY AND CO., LOURDES
VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-
CEMENT CORPORATION, respondents.
[G.R. No. 121794. February 28, 2001]
LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS,
ATRIUM MANAGEMENT CORPORATION, AND HI-
CEMENT CORPORATION, respondents.
DECISION
PARDO, J.:
What is before the Court are separate appeals from the
decision of the Court of Appeals,[1] ruling that Hi-Cement
Corporation is not liable for four checks amounting to P2 million
issued to E.T. Henry and Co. and discounted to Atrium
Management Corporation.
On January 3, 1983, Atrium Management Corporation filed
with the Regional Trial Court, Manila an action for collection of the
proceeds of four postdated checks in the total amount of P2
million. Hi-Cement Corporation through its corporate signatories,
petitioner Lourdes M. de Leon,[2] treasurer, and the late Antonio
de las Alas, Chairman, issued checks in favor of E.T. Henry and Co.
Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four
checks to petitioner Atrium Management Corporation for valuable
consideration. Upon presentment for payment, the drawee bank
dishonored all four checks for the common reason payment
stopped. Atrium, thus, instituted this action after its demand for
payment of the value of the checks was denied.[3]
After due proceedings, on July 20, 1989, the trial court
rendered a decision ordering Lourdes M. de Leon, her husband
Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement
Corporation to pay petitioner Atrium, jointly and severally, the
amount of P2 million corresponding to the value of the four
checks, plus interest and attorneys fees.[4]
On appeal to the Court of Appeals, on March 17, 1993, the
Court of Appeals promulgated its decision modifying the decision
of the trial court, absolving Hi-Cement Corporation from liability
and dismissing the complaint as against it. The appellate court
ruled that: (1) Lourdes M. de Leon was not authorized to issue the
subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the
subject checks by Lourdes M. de Leon and the late Antonio de las
Alas constituted ultra vires acts; and (3) The subject checks were
not issued for valuable consideration.[5]
At the trial, Atrium presented as its witness Carlos C. Syquia
who testified that in February 1981, Enrique Tan of E.T. Henry
approached Atrium for financial assistance, offering to discount
four RCBC checks in the total amount of P2 million, issued by Hi-
Cement in favor of E.T. Henry. Atrium agreed to discount the
checks, provided it be allowed to confirm with Hi-Cement the fact
that the checks represented payment for petroleum products
which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia
identified two letters, dated February 6, 1981 and February 9,
1981 issued by Hi-Cement through Lourdes M. de Leon, as
treasurer, confirming the issuance of the four checks in favor of
E.T. Henry in payment for petroleum products.[6]
Respondent Hi-Cement presented as witness Ms. Erlinda Yap
who testified that she was once a secretary to the treasurer of Hi-
Cement, Lourdes M. de Leon, and as such she was familiar with the
four RCBC checks as the postdated checks issued by Hi-Cement to
E.T. Henry upon instructions of Ms. de Leon. She testified that E.T.
Henry offered to give Hi-Cement a loan which the subject checks
would secure as collateral.[7]
On July 20, 1989, the Regional Trial Court, Manila, Branch 09
rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, and
plaintiff having proved its cause of action by preponderance of
evidence, judgment is hereby rendered ordering all the
defendants except defendant Antonio de las Alas to pay plaintiff
jointly and severally the amount of TWO MILLION
(P2,000,000.00) PESOS with the legal rate of interest from the
filling of the complaint until fully paid, plus the sum of TWENTY
THOUSAND (P20,000.00) PESOS as and for attorneys fees and the
cost of suit.
All other claims are, for lack of merit dismissed.
SO ORDERED.[8]
In due time, both Lourdes M. de Leon and Hi-Cement
appealed to the Court of Appeals.[9]
Lourdes M. de Leon submitted that the trial court erred in
ruling that she was solidarilly liable with Hi-Cement for the
amount of the check. Also, that the trial court erred in ruling that
Atrium was an ordinary holder, not a holder in due course of the
rediscounted checks.[10]
Hi-Cement on its part submitted that the trial court erred in
ruling that even if Hi-Cement did not authorize the issuance of the
checks, it could still be held liable for the checks. And assuming
that the checks were issued with its authorization, the same was
without any consideration, which is a defense against a holder in
due course and that the liability shall be borne alone by E.T.
Henry.[11]
On March 17, 1993, the Court of Appeals promulgated its
decision modifying the ruling of the trial court, the dispositive
portion of which reads:
Judgement is hereby rendered:
(1) dismissing the plaintiffs complaint as against
defendants Hi-Cement Corporation and Antonio De
las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and
Lourdes M. de Leon, jointly and severally to pay the
plaintiff the sum of TWO MILLION PESOS
(P2,000,000.00) with interest at the legal rate from
the filling of the complaint until fully paid, plus
P20,000.00 for attorneys fees.
(3) Ordering the plaintiff and defendants E.T. Henry and
Co., Inc. and Lourdes M. de Leon, jointly and severally
to pay defendant Hi-Cement Corporation, the sum of
P20,000.00 as and for attorneys fees.
With cost in this instance against the appellee Atrium
Management Corporation and appellant Lourdes
Victoria M. de Leon.
So ordered.[12]
Hence, the recourse to this Court.[13]
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
 1. Whether the issuance of the questioned checks was
an ultra vires act;
2. Whether Atrium was not a holder in due course and
for value; and
3. Whether the Court of Appeals erred in dismissing the
case against Hi-Cement and ordering it to pay
P20,000.00 as attorneys fees.[14]
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding
petitioner personally liable for the Hi-Cement checks
issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that
Atrium is a holder in due course;
3. Whether the Court of Appeals erred in ruling that
petitioner Lourdes M. de Leon as signatory of the
checks was personally liable for the value of the
checks, which were declared to be issued without
consideration;
4. Whether the Court of Appeals erred in ordering
petitioner to pay Hi-Cement attorneys fees and
costs.[15]
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the
checks was an ultra vires act. The record reveals that Hi-Cement
Corporation issued the four (4) checks to extend financial
assistance to E.T. Henry, not as payment of the balance of the P30
million pesos cost of hydro oil delivered by E.T. Henry to Hi-
Cement. Why else would petitioner de Leon ask for counterpart
checks from E.T. Henry if the checks were in payment for hydro
oil delivered by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not
issued for consideration and that Lourdes and E.T. Henry engaged
in a kiting operation to raise funds for E.T. Henry, who admittedly
was in need of financial assistance. The Court finds that there was
no sufficient evidence to show that such is the case. Lourdes M. de
Leon is the treasurer of the corporation and is authorized to sign
checks for the corporation. At the time of the issuance of the
checks, there were sufficient funds in the bank to cover payment
of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act
of issuing the checks was well within the ambit of a valid
corporate act, for it was for securing a loan to finance the activities
of the corporation, hence, not an ultra vires act.
An ultra vires act is one committed outside the object for
which a corporation is created as defined by the law of its
organization and therefore beyond the power conferred upon it
by law[16] The term ultra vires is distinguished from an illegal act
for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and
cannot be validated.[17]
The next question to determine is whether Lourdes M. de
Leon and Antonio de las Alas were personally liable for the checks
issued as corporate officers and authorized signatories of the
check.
"Personal liability of a corporate director, trustee or officer
along (although not necessarily) with the corporation may so
validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith or gross negligence in
directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its
stockholders or other persons;
 2. He consents to the issuance of watered down stocks or
who, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection
thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation; or
4. He is made, by a specific provision of law, to personally
answer for his corporate action.[18]
In the case at bar, Lourdes M. de Leon and Antonio de las Alas
as treasurer and Chairman of Hi-Cement were authorized to issue
the checks. However, Ms. de Leon was negligent when she signed
the confirmation letter requested by Mr. Yap of Atrium and Mr.
Henry of E.T. Henry for the rediscounting of the crossed checks
issued in favor of E.T. Henry. She was aware that the checks were
strictly endorsed for deposit only to the payees account and not to
be further negotiated. What is more, the confirmation letter
contained a clause that was not true, that is, that the checks issued
to E.T. Henry were in payment of Hydro oil bought by Hi-Cement
from E.T. Henry. Her negligence resulted in damage to the
corporation. Hence, Ms. de Leon may be held personally liable
therefor.
The next issue is whether or not petitioner Atrium was a
holder of the checks in due course. The Negotiable Instruments
Law, Section 52 defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
In the instant case, the checks were crossed checks and
specifically indorsed for deposit to payees account only. From the
beginning, Atrium was aware of the fact that the checks were all
for deposit only to payees account, meaning E.T. Henry. Clearly,
then, Atrium could not be considered a holder in due course.
However, it does not follow as a legal proposition that simply
because petitioner Atrium was not a holder in due course for
having taken the instruments in question with notice that the
same was for deposit only to the account of payee E.T. Henry that
it was altogether precluded from recovering on the
instrument. The Negotiable Instruments Law does not provide
that a holder not in due course can not recover on the
instrument.[19]
The disadvantage of Atrium in not being a holder in due
course is that the negotiable instrument is subject to defenses as
if it were non-negotiable.[20] One such defense is absence or failure
of consideration.[21] We need not rule on the other issues raised,
as they merely follow as a consequence of the foregoing
resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision
and resolution of the Court of Appeals in CA-G. R. CV No. 26686,
are hereby AFFIRMED in toto.
No costs.
SO ORDERED.
CAGAYAN VALLEY DRUG G.R. No. 151413 The Facts
CORPORATION,
Petitioner, Present:
QUISUMBING, J., Chairperson, Petitioner, a corporation duly organized and existing under
CARPIO,
- versus - CARPIO MORALES, Philippine laws, is a duly licensed retailer of medicine and other
TINGA, and pharmaceutical products. It operates two drugstores, one in
VELASCO, JR., JJ. Tuguegarao, Cagayan, and the other in Roxas, Isabela, under the
COMMISSIONER OF INTERNAL Promulgated:
REVENUE, name and style of Mercury Drug.
Respondent. February 13, 2008
x----------------------------------------------------------------------------------
Petitioner alleged that in 1995, it granted 20% sales discounts to
-------x
qualified senior citizens on purchases of medicine pursuant to
DECISION Republic Act No. (RA) 7432[3] and its implementing rules and
regulations.
VELASCO, JR., J.:
The Case
In compliance with Revenue Regulation No. (RR) 2-94, petitioner
treated the 20% sales discounts granted to qualified senior
This petition for review under Rule 45 of the Rules of
citizens in 1995 as deductions from the gross sales in order to
Court seeks the recall of the August 31, 2000 Resolution[1] of the
arrive at the net sales, instead of treating them as tax credit as
Court of Appeals (CA) in CA-G.R. SP No. 59778, which dismissed
provided by Section 4 of RA 7432.
petitioner Cagayan Valley Drug Corporations petition for review
of the April 26, 2000 Decision[2] of the Court of Tax Appeals (CTA)
On December 27, 1996, however, petitioner filed with the Bureau
in C.T.A. Case No. 5581 on the ground of defective verification and
of Internal Revenue (BIR) a claim for tax refund/tax credit of the
certification against forum shopping.
full amount of the 20% sales discount it granted to senior citizens
for the year 1995, allegedly totaling to PhP 123,083 in accordance
with Sec. 4 of RA 7432.
The BIRs inaction on petitioners claim for refund/tax credit
compelled petitioner to file on March 18, 1998 a petition for
review before the CTA docketed as C.T.A. Case No. 5581 in order
to forestall the two-year prescriptive period provided under Sec.
230[4] of the 1977 Tax Code, as amended. Thereafter, on March 31,
2000, petitioner amended its petition for review.
The Ruling of the Court of Tax Appeals
On April 26, 2000, the CTA rendered a Decision dismissing the
petition for review for lack of merit.[5]
The CTA sustained petitioners contention that pursuant to Sec. 4
of RA 7432, the 20% sales discounts petitioner extended to
qualified senior citizens in 1995 should be treated as tax credit
and not as deductions from the gross sales as erroneously
interpreted in RR 2-94. The CTA reiterated its consistent holdings
that RR 2-94 is an invalid administrative interpretation of the law
it purports to implement as it contravenes and does not conform
to the standards RA 7432 prescribes.
Notwithstanding petitioners entitlement to a tax credit
from the 20% sales discounts it extended to qualified senior
citizens in 1995, the CTA nonetheless dismissed petitioners action
for refund or tax credit on account of petitioners net loss in
1995. First, the CTA rejected the refund as it is clear that RA 7432
only grants the 20% sales discounts extended to qualified senior
citizens as tax credit and not as tax refund. Second, in rejecting the
tax credit, the CTA reasoned that while petitioner may be qualified
for a tax credit, it cannot be so extended to petitioner on account
of its net loss in 1995.
The CTA ratiocinated that on matters of tax credit claim,
the government applies the amount determined to be
reimbursable after proper verification against any sum that may
be due and collectible from the taxpayer. However, if no tax has
been paid or if no amount is due and collectible from the taxpayer,
then a tax credit is unavailing. Moreover, it held that before
allowing recovery for claims for a refund or tax credit, it must first
be established that there was an actual collection and receipt by
the government of the tax sought to be recovered. In the instant
case, the CTA found that petitioner did not pay any tax by virtue
of its net loss position in 1995.
Petitioners Motion for Reconsideration was likewise
denied through the appellate tax courts June 30, 2000
Resolution.[6]
The Ruling of the Court of Appeals
Aggrieved, petitioner elevated the matter before the CA,
docketed as CA-G.R. SP No. 59778. On August 31, 2000, the CA
issued the assailed Resolution[7] dismissing the petition on
procedural grounds. The CA held that the person who signed the The CA found no sufficient proof to show

verification and certification of absence of forum shopping, a that Concepcion was duly authorized by the Board of Directors of

certain Jacinto J. Concepcion, President of petitioner, failed to petitioner. The appellate court anchored its disposition on our

adduce proof that he was duly authorized by the board of ruling in Premium Marble Resources, Inc. v. Court of

directors to do so. Appeals (Premium), that [i]n the absence of an authority from the
Board of Directors, no person, not even the officers of the

As far as the CA was concerned, the main issue was corporation, can validly bind the corporation.[8]

whether or not the verification and certification of non-forum

shopping signed by the President of petitioner is sufficient Hence, we have this petition.

compliance with Secs. 4 and 5, Rule 7 of the 1997 Rules of Civil

Procedure. The Issues

The verification and certification in question reads: Petitioner raises two issues: first, whether petitioners president
can sign the subject verification and certification sans the
approval of its Board of Directors. And second, whether the CTA
I, JACINTO J. CONCEPCION, of legal age
with office address at 2nd Floor, Mercury Drug committed reversible error in denying and dismissing petitioners
Corporation, No. 7 Mercury Ave, action for refund or tax credit in C.T.A. Case No. 5581.
Bagumbayan, Quezon City, under oath, hereby
state that:
The Courts Ruling
1. I am the President of Cagayan Valley
Drug Corporation, Petitioner in the above-entitled
case and am duly authorized to sign this The petition is meritorious.
Verification and Certification of Absence of Forum
Shopping by the Board of Director.

xxxx
Premium not applicable
As regards the first issue, we find the CA to have
erroneously relied on Premium. In said case, the issue tackled was
not on whether the president of Premium Marble Resources, Inc.
was authorized to sign the verification and certification against
forum shopping, but rather on which of the two sets of officers,
both claiming to be the legal board of directors of Premium, have
the authority to file the suit for and in behalf of the company. The
factual antecedents and issues in Premium are not on all fours
with the instant case and is, therefore, not applicable.
With respect to an individual litigant, there is no question
that litigants must sign the sworn verification and certification
unless they execute a power of attorney authorizing another
person to sign it. With respect to a juridical person, Sec. 4, Rule 7
on verification and Sec. 5, Rule 7 on certification against forum
shopping are silent as to who the authorized signatory should
be. Said rules do not indicate if the submission of a board
resolution authorizing the officer or representative is necessary.
Corporate powers exercised through board of directors
It must be borne in mind that Sec. 23, in relation to Sec. 25
of the Corporation Code, clearly enunciates that all corporate
powers are exercised, all business conducted, and all properties
controlled by the board of directors. A corporation has a separate
and distinct personality from its directors and officers and can
only exercise its corporate powers through the board of directors.
Thus, it is clear that an individual corporate officer cannot solely
exercise any corporate power pertaining to the corporation
without authority from the board of directors. This has been our
constant holding in cases instituted by a corporation.
In a slew of cases, however, we have recognized the
authority of some corporate officers to sign the verification and
certification against forum shopping. In Mactan-Cebu
International Airport Authority v. CA, we recognized the authority
of a general manager or acting general manager to sign the
verification and certificate against forum shopping;[9] in Pfizer v.
Galan, we upheld the validity of a verification signed by an
employment specialist who had not even presented any proof of
her authority to represent the company;[10] in Novelty Philippines,
Inc., v. CA, we ruled that a personnel officer who signed the
petition but did not attach the authority from the company is
authorized to sign the verification and non-forum shopping
certificate;[11] and in Lepanto Consolidated Mining Company v.
WMC Resources International Pty. Ltd. (Lepanto), we ruled that the
Chairperson of the Board and President of the Company can sign
the verification and certificate against non-forum shopping even
without the submission of the boards authorization.[12]
 In sum, we have held that the following officials or
employees of the company can sign the verification and
certification without need of a board resolution: (1) the
Chairperson of the Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting General Manager,
(4) Personnel Officer, and (5) an Employment Specialist in a labor
case.
While the above cases do not provide a complete listing of
authorized signatories to the verification and certification
required by the rules, the determination of the sufficiency of the
authority was done on a case to case basis. The rationale applied
in the foregoing cases is to justify the authority of corporate
officers or representatives of the corporation to sign the
verification or certificate against forum shopping, being in a
position to verify the truthfulness and correctness of the
allegations in the petition.[13]
Authority from board of directors required
In Philippine Airlines v. Flight Attendants and Stewards
Association of the Philippines, we ruled that only individuals
vested with authority by a valid board resolution may sign the
certificate of non-forum shopping on behalf of a corporation. The
action can be dismissed if the certification was submitted
unaccompanied by proof of the signatory’s authority.[14] We
believe that appending the board resolution to the complaint or
petition is the better procedure to obviate any question on the
authority of the signatory to the verification and certification. The
required submission of the board resolution is grounded on the
basic precept that corporate powers are exercised by the board of
directors,[15]and not solely by an officer of the corporation. Hence,
the power to sue and be sued in any court or quasi-judicial
tribunal is necessarily lodged with the said board.
There is substantial compliance with Rule 7, Secs. 4 and 5
In the case at bar, we so hold that petitioner substantially
complied with Secs. 4 and 5, Rule 7 of the 1997 Revised Rules on
Civil Procedure. First, the requisite board resolution has been
submitted albeit belatedly by petitioner. Second, we apply our
ruling in Lepanto with the rationale that the President of
petitioner is in a position to verify the truthfulness and
correctness of the allegations in the petition. Third, the President
of petitioner has signed the complaint before the CTA at the
inception of this judicial claim for refund or tax credit.
Consequently, the petition in CA-G.R. SP No. 59778 ought
to be reinstated. However, in view of the enactment of RA 9282
which made the decisions of the CTA appealable to this Court, we
will directly resolve the second issue which is a purely legal one.
Petitioner entitled to tax credit
The pith of the dispute between petitioner and
respondent is whether petitioner is entitled to a tax refund or tax
credit of 20% sales discount granted to senior citizens under RA
7432 or whether the discount should be treated as a deduction
from gross income.
This issue is not new, as the Court has resolved several
cases involving the very same issue. In Commissioner of Internal
Revenue v. Central Luzon Drug Corporation (Central Luzon),[16] we
held that private drug companies are entitled to a tax credit for
the 20% sales discounts they granted to qualified senior citizens
under RA 7432 and nullified Secs. 2.i and 4 of RR 2-
94. In Bicolandia Drug Corporation (formerly Elmas Drug
Corporation) v. Commissioner of Internal Revenue,[17] we ruled that
petitioner therein is entitled to a tax credit of the cost or the full
20% sales discounts it granted pursuant to RA 7432. In the related
case of Commissioner of Internal Revenue v. Bicolandia Drug
Corporation,[18] we likewise ruled that respondent drug company
was entitled to a tax credit, and we struck down RR 2-94 to be null
and void for failing to conform with the law it sought to
implement.
A perusal of the April 26, 2000 CTA Decision shows that
the appellate tax court correctly ruled that the 20% sales
discounts petitioner granted to qualified senior citizens should be
deducted from petitioners income tax due and not from
petitioners gross sales as erroneously provided in RR 2-
94. However, the CTA erred in denying the tax credit to petitioner
on the ground that petitioner had suffered net loss in 1995, and
ruling that the tax credit is unavailing.
Net loss in a taxable year does not preclude grant of tax credit
It is true that petitioner did not pay any tax in 1995 since it
suffered a net loss for that taxable year. This fact, however,
without more, does not preclude petitioner from availing of its
statutory right to a tax credit for the 20% sales discounts it
granted to qualified senior citizens. The law then applicable on
this point is clear and without any qualification.Sec. 4 (a) of RA
7432 pertinently provides:
Sec. 4. Privileges for the Senior citizens.The senior
citizens shall be entitled to the following:
a) the grant of twenty percent (20%)
discount from all establishments relative
to utilization of transportation services,
hotels and similar lodging establishments,
restaurants and recreation centers and
purchase of medicines anywhere in the
country: Provided, That private
establishments may claim the cost
as tax credit. (Emphasis ours.)
 The fact that petitioner suffered a net loss in 1995 will not
make the tax credit due to petitioner unavailable. This is the core
issue resolved in Central Luzon, where we ruled that the net loss
for a taxable year does not bar the grant of the tax credit to a
taxpayer pursuant to RA 7432 and that prior tax payments are not
required for such grant. We explained:
Although this tax credit benefit is
available, it need not be used by losing ventures,
since there is no tax liability that calls for its
application. Neither can it be reduced to nil by the
quick yet callow stroke of an administrative pen,
simply because no reduction of taxes can instantly
be effected. By its nature, the tax credit may still
be deducted from a future, not a present, tax
liability, without which it does not have any use. x
xx
xxxx
disallowed the PhP 123,083 sales discounts petitioner claimed
before the BIR and CTA, we are constrained to grant them as tax
credit in favor of petitioner.
Consequently, petitioners appeal before the CA in CA-G.R.
SP No. 59778 must be granted, and, necessarily, the April 26, 2000
CTA Decision in C.T.A. Case No. 5581 reversed and set aside.
WHEREFORE, the petition is GRANTED. The August 31, 2000 CA
Resolution in CA-G.R. SP No. 59778 is ANNULLED and SET
ASIDE. The April 26, 2000 CTA Decision in C.T.A. Case No. 5581
dismissing petitioners claim for tax credit is
accordingly REVERSED AND SET ASIDE. The Commissioner of
Internal Revenue is ORDERED to issue a Tax Credit Certificate in
the name of petitioner in the amount of PhP 123,083. No costs.

While a tax liability is essential to SO ORDERED.

the availment or use of any tax credit, prior tax
payments are not. On the contrary, for
the existence or grant solely of such credit, neither
a tax liability nor a prior tax payment is
needed. The Tax Code is in fact replete with
provisions granting or allowing tax credits, even
though no taxes have been previously paid.[19]

It is thus clear that petitioner is entitled to a tax credit for

the full 20% sales discounts it extended to qualified senior citizens
for taxable year 1995. Considering that the CTA has not
G.R. No. L-36207 October 26, 1932
IRINEO G. CARLOS, plaintiff-appellant,
vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.
Jose Ayala for appellant.
Ross, Lawrence & Selph for appellees.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendants
the value of four bonds, Nos. 1219, 1220, 1221, and 1222, with due
and unpaid interest thereon, issued by the Mindoro Sugar
Company and placed in trust with the Philippine Trust Company
which, in turn, guaranteed them for value received. Said plaintiff
appealed from the judgment rendered by the Court of First
Instance of Manila absolving the defendants from the complaint,
excepting the Mindoro Sugar Company, which was sentenced to
pay the value of the four bonds with interest at 8 per cent per
annum, plus costs.
The Mindoro Sugar Company is a corporation constituted in
accordance with the laws of the country and registered on July 30,
1917. According to its articles of incorporation, Exhibit 5, one of
its principal purposes was to acquire and exercise the franchise
granted by Act No. 2720 to George H. Fairchild, to substitute the
organized corporation, the Mindoro Company, and to acquire all
the rights and obligations of the latter and of Horace Havemeyer
and Charles J. Welch in the so-called San Jose Estate in the
Province of Mindoro.
The Philippine Trust Company is another domestic corporation,
registered on October 21, 1917. In its articles of incorporation,
Exhibit A, some of its purposes are expressed thus: "To acquire by
purchase, subscription, or otherwise, and to invest in, hold, sell, or
otherwise dispose of stocks, bonds, mortgages, and other
securities, or any interest in either, or any obligations or
evidences of indebtedness, of any other corporation or
corporations, domestic or foreign. . . . Without in any particular
limiting any of the powers of the corporation, it is hereby
expressly declared that the corporation shall have power to make
any guaranty respecting the dividends, interest, stock, bonds,
mortgages, notes, contracts or other obligations of any
corporation, so far as the same may be permitted by the laws of
the Philippine Islands now or hereafter in force." Its principal
purpose, then, as its name indicates, is to engage in the trust
business.
On November 17, 1917, the board of directors of the Philippine
Trust Company, composed of Phil, C. Whitaker, chairman, and
James Ross, Otto Vorster, Charles D. Ayton, and William J.
O'Donovan, members, adopted a resolution authorizing its
president, among other things, to purchase at par and in the name
and for the use of the trust corporation all or such part as he may
deem expedient, of the bonds in the value of P3,000,000 that the
Mindoro Sugar Company was about to issue, and to resell them,
with or without the guarantee of said trust corporation, at a price
not less than par, and to guarantee to the Philippine National Bank
the payment of the indebtedness to said bank by the Mindoro
Sugar Company or Charles J. Welch and Horace Havemeyer, up to
P2,000,000. The relevant part of the resolution, Exhibit 3, reads as
follows:
Resolved that Mr. Phil. C. Whitaker, president of this
company, be and he hereby is authorized to purchase at
par in the name and for the use of this company all, or such
part as he may deem expedient, of the said P3,000,000 of
20-year 8 per cent coupon bonds of the said Mindoro
Sugar Company, and to resell or otherwise dispose of the
 said bonds, with or without this company's guaranty, at a
price not less than par; and it was further
Resolved that Mr. Phil. C. Whitaker, president of the
company be and he hereby is authorized in the name of
this company alone or in connection with others, by joint
and several obligations, to guarantee to the Philippine
National Bank the due and punctual payment of any and
all indebtedness owing to the said Bank by either the
Mindoro Sugar Company, the Mindoro Company, or
Charles J. Welch and Horace Havemeyer, up to
P2,000,000; and it was further
Resolved that the said president, Mr. Phil. C. Whitaker, be
and he hereby is authorized to execute in the name of this
company any and all notes, mortgages, bonds, guaranties,
or instruments in writing whatever necessary for the
carrying into effect of the authority hereby granted.
In pursuance of this resolution, on December 21, 1917, the
Mindoro Sugar Company executed in favor of the Philippine Trust
Company the deed of trust, Exhibit 6, transferring all of its
property to it in consideration of the bonds it had issued to the
value of P3,000,000, the value of each bond being $1,000, which
par value, with interest at 8 per cent per annum, the Philippine
Trust Company had guaranteed to the holders, and in
consideration, furthermore, of said trust corporation having
guaranteed to the Philippine National Bank all the obligations
contracted by the Mindoro Sugar Company, Charles J. Welch and
Horace Havemeyer up to the aforesaid amount of P2,000,000. The
aforementioned deed was approved by his Excellency, the
Governor-General, upon recommendation of the Secretary of
Agriculture and Natural Resources, and in accordance with the
provisions of Act No. 2720 of the Philippine Legislature. Following
are the clauses of said Exhibit 6 material to this decision:
Whereas, for the purposes aforesaid, and in further
pursuance of said resolutions of its board of directors and
of its stockholders, the company, in order to secure the
payment of said First Mortgage, Twenty Year, Eight Per
Cent, Gold Bonds, has determined to execute and deliver
to said Philippine Trust Company, as trustee, a deed of
trust of its properties hereinafter described, and the board
of directors of the Company has approved the form of this
indenture and directed that the same be executed and
delivered to said trustee; and
Whereas, all things necessary to make said bonds, when
certified by said trustee as in this indenture provided,
valid, binding, legal and negotiable obligations of the
company and this indenture a valid deed of trust to secure
the payment of said bonds, have been done and
performed, and the creation and issue of said bonds, and
the execution, acknowledgment and delivery of this deed
of trust have been duly authorized;
Now, therefore, in order to secure the payment of the
principal and interest of all such bonds at any time issued
and outstanding under this indenture, according to their
tenor, purport and effect, and to secure the performance
and observance of all the covenants and conditions herein
contained and to declare the terms and conditions upon
which said bonds are issued, received and held, and for
and in consideration of the premises, and of the purchase
or acceptance of such bonds by the holders thereof, and of
the sum of one dollar, United States currency, to it duly
paid at or before the ensealing and delivery of these
presents, the receipt whereof is hereby acknowledged, the
Mindoro Sugar Company, party of the first part, has sold
and conveyed, and by these presents does sell and convey
to the Philippine Trust Company, party of the second part,
its successors and assigns forever;
(Description of the property.)
In consequence of this transaction, the bonds, with their coupons
were placed on the market and sold by the Philippine Trust
Company, all endorsed as follows:
This is to certify that the within bond is one of the
series described in the trust deed therein
mentioned.
PHILIPPINE TRUST COMPANY
by: (Sgd.) PHIL. C. WHITAKER
President
For values received, the Philippine Trust Company
hereby guarantees the payment of principal and
interest of the within bond.
Manila, Jan.—2, 1918
PHILIPPINE TRUST COMPANY
by: (Sgd.) PHIL. C. WHITAKER
President
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to
1231, to Ramon Diaz for P27,300, at a net profit of P100 per bond.
The four bonds Nos. 1219, 1220, 1221, and 1222, here in
litigation, are included in the thirteen sold to Diaz.
The Philippine Trust Company paid the appellant, upon
presentation of the coupons, the stipulated interest from the date
of their maturity until the 1st of July, 1928, when it stopped
payments; and thenceforth it alleged that it did not deem itself
bound to pay such interest or to redeem the obligation because
the guarantee given for the bonds was illegal and void.
The appellant now contends that the judgment appealed from is
untenable, assigning the following errors:
FIRST ERROR
The lower court erred in sustaining the demurrer against
the amended complaint, filed by defendant J. S. Reis
(Reese) and consequently in dismissing the same with
regard to this defendant.
SECOND ERROR
The lower court, without a proof to support it or an
averment in defense by the defendant Philippine Trust
Company, erred in finding hypothetically that if the
guarantee made by this company be held valid, the trust
funds and deposits in its hands would probably be
endangered.
THIRD ERROR
The lower court erred in holding that the Philippine Trust
Company has no power to guarantee the obligation of
another juridical personality, for value received.
FOURTH ERROR
The lower court erred in not recognizing the validity and
effect of the guarantee subscribed by the Philippine Trust
Company for the payment of the four bonds claimed in the
complaint, endorsed upon them, and in absolving said
institution from the complaint.
FIFTH ERROR
 The lower court erred in absolving the ex-directors of the
Philippine Trust Company, Phil. C. Whitaker, O. Vorster,
and Charles D. Ayton, from the complaint.
We shall not follow the order of the appellant's argument,
deeming it unnecessary, but shall decide only the third and fourth
assignments of error upon which the merits of the case depend.
For the clear understanding of this decision and to avoid
erroneous interpretations, however, we wish to state that in this
decision we shall decide only the rights of the parties with regard
to the four bonds in question and whatever we say in no wise
affects or applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this
court who took part in the case are of opinion that the only point
of law to be decided is whether the Philippine Trust Company
acquired the four bonds in question, and whether as such it bound
itself legally and acted within its corporate powers in
guaranteeing them. This question was answered in the
affirmative.1awphil.net
In adopting this conclusion we have relied principally upon the
following facts and circumstances: Firstly, that the Philippine
Trust Company, although secondarily engaged in banking, was
primarily organized as a trust corporation with full power to
acquire personal property such as the bonds in question
according to both section 13 (par. 5) of the Corporation Law and
its duly registered by-laws and articles of incorporation; secondly,
that being thus authorized to acquire the bonds, it was given
implied power to guarantee them in order to place them upon the
market under better, more advantageous conditions, and thereby
secure the profit derived from their sale:
It is not, however, ultra vires for a corporation to enter
into contracts of guaranty or suretyship where it does so
in the legitimate furtherance of its purposes and business.
And it is well settled that where a corporation acquires
commercial paper or bonds in the legitimate transaction
of its business it may sell them, and in furtherance of such
a sale it may, in order to make them the more readily
marketable, indorse or guarantee their payment. (7 R. C.
L., p. 604 and cases cited.)
"Whenever a corporation has the power to take and dispose of the
securities of another corporation, of whatsoever kind, it may, for
the purpose of giving them a marketable quality, guarantee their
payment, even though the amount involved in the guaranty may
subject the corporation to liabilities in excess of the limit of
indebtedness which it is authorized to incur. A corporation which
has power by its charter to issue its own bonds has power to
guarantee the bonds of another corporation, which has been
taken in payment of a debt due to it, and which it sells or transfers
in payment of its own debt, the guaranty being given to enable it
to dispose of the bond to better advantage. And so guaranties of
payment of bonds taken by a loan and trust company in the
ordinary course of its business, made in connection with their
sale, are not ultra vires, and are binding." (14-A C. J., pp. 742-743
and cases cited); thirdly, that although it does not clearly appear
in the deed of trust (Exhibit 6) that the Mindoro Sugar Company
transferred the bonds therein referred to, to the Philippine Trust
Company, nevertheless, in the resolution of the board of directors
(Exhibit 3), the president of the Philippine Trust Company was
expressly authorized to purchase all or some of the bonds and to
guarantee them; whence it may be inferred that subsequent
purchasers of the bonds in the market relied upon the belief that
they were acquiring securities of the Philippine Trust Company,
guaranteed by this corporation; fourthly, that as soon as
P3,000,000 worth of bonds was issued, and by the deed of trust
the Mindoro, Sugar Company transferred all its real property to
the Philippine Trust Company, the cause or consideration of the
transfer being, (1) the guarantee given by the purchaser to the
bonds, and (2) its having likewise guaranteed its obligations and
those of Welch and Havemeyer in favor of the Philippine National
Bank up to the amount of P2,000,000; fifthly, that in transferring
its real property as aforesaid the Mindoro Sugar Company was
reduced to a real state of bankruptcy, as the parties specifically
agreed during the hearing of the case, to the point of having
become a nominal corporation without any assets whatsoever;
sixthly, that such operation or transaction cannot mean anything
other than that the real intention of the parties was that the
Philippine Trust Company acquired the bonds issued and at the
same time guaranteed the payment of their par value with
interest, because otherwise the transaction would be fraudulent,
inasmuch as nobody would be answerable to the bond-holders for
their value and interest; seventhly, that the Philippine Trust
Company had been paying the appellant the interest accrued upon
the four bonds from the date of their issuance until July 1, 1928,
such payment of interest being another proof that said
corporation had really become the owner of the aforesaid bonds;
and, eightly, that the Philippine Trust Company has not adduced
any evidence to show any other conclusions.
There are other considerations leading to the same result even in
the supposition that the Philippine Trust Company did not acquire
the bonds in question, but only guaranteed them. In such a case
the guarantee of these bonds would at any rate, be valid and the
said corporation would be bound to pay the appellant their value
with the accrued interest in view of the fact that they become due
on account of the lapse of sixty (60) days, without the accrued
interest due having been paid; and the reason is that it is estopped
from denying the validity of its guarantee.
. . . On the other hand, according to the view taken by other
courts, which it must be acknowledged are in the majority,
a recovery directly upon the contract is permitted, on the
ground that the corporation, having received money or
property by virtue of a contract not immoral or illegal of
itself, is estopped to deny liability; and that the only
remedy is one on behalf of the state to punish the
corporation for violating the law. (7 R. C. L., pp. 680-681
and cases cited.)
. . . The doctrine of ultra vires has been declared to be
entirely the creation of the courts and is of comparatively
modern origin. The defense is by some courts regarded as
an ungracious and odious one, to be sustained only where
the most persuasive considerations of public policy are
involved, and there are numerous decisions and dicta to
the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where
it will not advance justice but on the contrary will
accomplish a legal wrong. (14-A C. J., pp. 314-315.)
The doctrine of the Supreme Court of the United States
together with the English courts and some of the state
courts is that no performance upon either side can
validate an ultra vires transaction or authorize an action
to be maintained directly upon it. However, the great
weight of authority in the state courts is to the effect that
a transaction which is merely ultra vires and not malum in
se or malum prohibitum although it may be made by the
state a basis for the forfeiture of the corporate charter or
the dissolution of the corporation, is, if performed by one
party, not void as between the parties to all intents and
purposes, and that an action may be brought directly upon
the transaction and relief had according to its terms. ( 14-
A C. J., pp. 319-320.)
When a contract is not on its face necessarily beyond the
scope of the power of the corporation by which it was
made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to
contract within their powers. The doctrine of ultra vires,
 when invoked for or against a corporation, should not be
allowed to prevail where it would defeat the ends of
justice or work a legal wrong. (Coleman vs. Hotel de
France Co., 29 Phil., 323.)
Guaranties of payment of bonds taken by a loan and trust
company in the ordinary course of its business, made in
connection with their sale, are not ultra vires, and are
binding. (Broadway Nat. Bank vs. Baker, 57 N. E., p. 603.)
business, and that the prohibition of the law is not applicable to
the Philippine Trust Company, for the evidence shows that
Mindoro Sugar Company transferred all its real property, with the
improvements, to it, and the value of both, which surely could not
be less than the value of the obligation guaranteed, became a part
of its capital and assets; in other words, with the value of the real
property transferred to it, the Philippine Trust Company had
enough capital and assets to meet the amount of the bonds
guaranteed with interest thereon.

It has been intimated according to section 121 of the Corporation
Law, the Philippine Trust Company, as a banking institution, could
not guarantee the bonds to the value of P3,000,000 because this
amount far exceeds its capital of P1,000,000 of which only one-
half has been subscribed and paid. Section 121 reads as follows:
Wherefore, the decision appealed from is reversed and the
Philippine Trust Company is sentenced to pay to the appellant the
sum of four thousand dollars ($4,000) with interest at eight per
cent (8%) per annum from July 1, 1928 until fully paid, and the
costs of both instances. So ordered.

SEC. 212. No such bank shall at any time be indebted or in

any way liable to an amount exceeding the amount of its
capital stock at such time actually paid in and remaining
undiminished by losses or otherwise, except on account of
demands of the following nature:

(1) Moneys deposited with or collected by the

bank;

(2) Bills of exchange or drafts drawn against

money actually on deposit to the credit of the bank
or due thereto;
[G.R. No. 146608. October 23, 2003]
(3) Liabilities to the stockholders of the bank for
dividends and reserve profits.
SPOUSES CONSTANTE FIRME AND AZUCENA E.
This difficulty is easily obviated by bearing in mind that, as we
FIRME, petitioners, vs. BUKAL ENTERPRISES AND
stated above, the banking operations are not the primary aim of
DEVELOPMENT CORPORATION, respondent.
said corporation, which is engaged essentially in the trust
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari of the
Decision[1] dated 3 January 2001 of the Court of Appeals in CA-G.R.
CV No. 60747. The Court of Appeals reversed the Decision[2] of the
Regional Trial Court, Branch 223, Quezon City (trial court), which
held that there was no perfected contract of sale since there was
no consent on the part of the seller.
The Facts
Petitioner Spouses Constante and Azucena Firme (Spouses
Firme) are the registered owners of a parcel of land[3] (Property)
located on Dahlia Avenue, Fairview Park, Quezon City.Renato de
Castro (De Castro), the vice president of Bukal Enterprises and
Development Corporation (Bukal Enterprises) authorized his
friend, Teodoro Aviles (Aviles), a broker, to negotiate with the
Spouses Firme for the purchase of the Property.
On 28 March 1995, Bukal Enterprises filed a complaint for
specific performance and damages with the trial court, alleging
that the Spouses Firme reneged on their agreement to sell the
Property. The complaint asked the trial court to order the Spouses
Firme to execute the deed of sale and to deliver the title to the
Property to Bukal Enterprises upon payment of the agreed
purchase price.
During trial, Bukal Enterprises presented five witnesses,
namely, Aviles, De Castro, Antonio Moreno, Jocelyn Napa and
Antonio Ancheta.
Aviles testified that De Castro authorized him to negotiate on
behalf of Bukal Enterprises for the purchase of the
Property. According to Aviles, he met with the Spouses Firme
on 23 January 1995 and he presented them with a draft deed of
sale[4] (First Draft) dated February 1995. The First Draft of the
deed of sale provides:
DEED OF ABSOLUTE SALE
KNOW ALL MEN BY THESE PRESENTS:
This DEED OF ABSOLUTE SALE made and executed by and
between the Spouses CONSTANTE FIRME and AZUCENA E.
FIRME, both of legal age, Filipino citizens and with postal address
at No. 1450 Union, Paco, City of Manila, hereinafter called the
VENDOR, and
BUKAL ENTERPRISES and DEVELOPMENT CORPORATION, a
corporation duly organized and registered in accordance with
Philippine Laws, with business address at Dahlia
Avenue, Fairview Park, Quezon City, herein represented by its
PRESIDENT, MRS. ZENAIDA A. DE CASTRO, hereinafter called the
VENDEE.
WITNESSETH:
That the VENDOR is the absolute and registered owner of a certain
parcel of land located at Fairview Park, Quezon City, and more
particularly described as follows:
A parcel of land (Lot 4, Block 33 of the consolidation-subdivision
plan (LRC) Pcs-8124, Sheet No. I, being a portion of the
consolidation of Lots 41-B-2-A and 41-B-2-C, Psd-1136 and Lot
(LRC) Pcs-2665, (LRC) GLRO) Record. No. 1037), situated
in Quezon City, Island of Luzon. Bounded on the NE., points 2 to 5
by Road Lot 24, of the consolidation-subdivision plan. Beginning
at a point marked 1 on plan, being S. 67 deg. 23W., 9288.80 m.
from BLLM I, Mp of Montalban, Rizal; thence N. 85 deg. 35E., 17.39
m. to point 2; thence S. 54 deg. 22E., 4.00 m. to point 3; thence S.
14 deg. 21E., 17.87 m. to point 4; thence 3 deg. 56E., 17.92 m. to
point 5; thence N. 85 deg. 12 W., 23.38 m. to point 6; thence N. 4
deg. 55 W., 34.35 m. to the point of beginning; containing an area
of EIGHT HUNDRED AND SIX (806) SQUARE METERS, more or
less.
VENDORS title thereto being evidenced by Transfer Certificate of
Title No. 264243 issued by the Register of Deeds of Quezon City;
That the VENDOR, for and in consideration of the sum of THREE
MILLION TWO HUNDRED TWENTY FOUR THOUSAND PESOS
(P3,224,000.00) Philippine Currency, to them in hand paid and
receipt whereof is hereby acknowledged, do hereby SELL,
TRANSFER and CONVEY unto the said VENDEE, its assigns,
transferees and successors in interest the above described
property, free from all liens and encumbrances whatsoever;
It is hereby mutually agreed that the VENDEE shall bear all the
expenses for the capital gains tax, documentary stamps,
documentation, notarization, removal and relocation of the
squatters, registration, transfer tax and other fees as may be
required by law;
That the VENDOR shall pay the real estate tax for the current year
and back real estate taxes, charges and penalties if there are any.
IN WITNESS WHEREOF, we have hereunto affixed our signatures
this ____ day of February, 1995, at Quezon City, Philippines.
CONSTANTE FIRME BUKAL ENTERPRISES AND
DEVE
LOPM
ENT
CORP.
BY:
AZUCENA E. FIRME ZENAIDA A. DE CASTRO
VENDOR President
xxx
The Spouses Firme rejected this First Draft because of
several objectionable conditions, including the payment of capital
gains and other government taxes by the seller and the relocation
of the squatters at the sellers expense. During their second
meeting, Aviles presented to the Spouses Firme another draft
deed of sale[5] (Second Draft) dated March 1995. The Spouses
Firme allegedly accepted the Second Draft in view of the deletion
of the objectionable conditions contained in the First
Draft. According to Aviles, the Spouses Firme were willing to sell
the Property at P4,000 per square meter. They then agreed that
payment would be made at the Far East Bank and Trust Company
(FEBTC), Padre Faura Branch, Manila. However, the scheduled
payment had to be postponed due to problems in the transfer of
funds. The Spouses Firme later informed Aviles that they were no
longer interested in selling the Property.[6]
De Castro testified that he authorized Aviles to negotiate for
Bukal Enterprises the purchase of the Property owned by the
Spouses Firme. The Property was located beside the Dahlia
Commercial Complex owned by Bukal
Enterprises. Aviles informed him that the Spouses Firme agreed
to sell the Property at P4,000 per square meter, payable in cash
for a lump sum of P3,224,000. Furthermore, Bukal Enterprises
agreed to pay the taxes due and to undertake the relocation of the
squatters on the Property. For this purpose, Bukal Enterprises
applied for a loan of P4,500,000 which FEBTC granted. Bukal
Enterprises then relocated the four families squatting on the
Property at a cost of P60,000 per family. After the squatters
vacated the Property, Bukal Enterprises fenced the area, covered
it with filling materials, and constructed posts and riprap. Bukal
Enterprises spent approximately P300,000 for these
improvements. In a letter[7] dated 7 March 1995, Bukal
Enterprises offered to pay the purchase price of P3,224,000 to the
Spouses Firme upon execution of the transfer documents and
delivery of the owners duplicate copy of TCT No. 264243. The
Spouses Firme did not accept this offer but instead sent Bukal
Enterprises a letter demanding that its workers vacate the
Property. Bukal Enterprises then filed a complaint for specific
performance and damages.[8]
Antonio Moreno, one of the alleged squatters on the Property,
testified that he constructed his house on the Property sometime
in 1982. On 26 February 1995, he was summoned together with
the other squatters to a meeting with Aviles regarding their
relocation. They agreed to relocate provided they would be given
financial assistance of P60,000 per family. Thus, on 6 March 1995,
the squatter families were each paid P60,000 in the presence of
De Castro and Aviles. Thereafter, they voluntarily demolished
their houses and vacated the Property.[9]
Jocelyn Mapa, the manager of FEBTC, Padre Faura Branch,
testified that Bukal Enterprises has been their client since 1994.
According to her, Bukal Enterprises applied for a loan
of P4,500,000 on the third week of February 1995 allegedly to buy
a lot in Fairview. FEBTC approved the loan on the last week of
February and released the proceeds on the first week of March.[10]
Antonio Ancheta (Ancheta), barangay captain of Barangay
Fairview, testified that he was present when one of the officers of
Bukal Enterprises, a certain Renato, paid each of the four squatter
families around P60,000 to P100,000. Ancheta informed Dr.
Constante Firme that he told the squatters to leave considering
that they already received payment for their relocation. According
to Ancheta, Dr. Constante Firme must have misunderstood him
and thought that the squatters left through Anchetas own
efforts.[11]
On the other hand, Dr. Constante Firme (Dr. Firme) was the
sole witness for the defendant spouses.
Dr. Firme testified that on 30 January 1995, he and his wife
met with Aviles at the Aristocrat Restaurant in Quezon
City. Aviles arranged the meeting with the Spouses Firme
involving their Property in Fairview. Aviles offered to buy the
Property at P2,500 per square meter. The Spouses Firme did not
accept the offer because they were reserving the Property for
their children. On 6 February 1995, the Spouses Firme met again
with Aviles upon the latters insistence. Aviles showed the
Spouses Firme a copy of a draft deed of sale[12] (Third Draft)
which Aviles prepared. The Third Draft of the deed of sale
provides:
CONRACT OF SALE
KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, executed this ___ day of February, 1995, by and
between the Spouses CONSTANTE FIRME and AZUCENA E.
FIRME, both of legal age, Filipino citizen and with postal address
at __________, Quezon City, hereinafter referred to as the VENDORS,
and BUKAL ENTERPRISES and DEVELOPMENT CORPORATION, a
corporation duly organized and registered in accordance with
Philippine Laws, with postal address at Fairview Park, Quezon
City, herein represented by its President and Chief Executive
Officer, hereinafter referred to as the VENDEE.
WITNESSETH:
That for and in consideration of the sum of THREE MILLION TWO
HUNDRED TWENTY FOUR THOUSAND PESOS (P3,224,000.00),
Philippine Currency, payable in the form hereinafter expressed,
agreed to sell to the VENDEE and the VENDEE has agreed to buy
from the VENDORS, a parcel of land situated at Dahlia Avenue
corner Rolex Street, Fairview Park, Quezon City, containing an
area of 806 Square Meters more or less, of which the VENDORS
are the absolute registered owners in accordance with the Land
Registration Act, as evidenced by Transfer Certificate of Title No.
264243 issued by the Register of Deeds of Quezon City, more
particularly described and bounded as follows:
(DESCRIPTION AND BOUNDARIES OF PROPERTY)
THE FURTHER TERMS AND CONDITIONS OF THE CONTRACT
ARE AS FOLLOWS:
1. The VENDEE agrees to pay the VENDORS upon
execution of this Contract the sum of ONE MILLION
PESOS (P1,000,000.00), Philippine Currency, as
downpayment and agrees to pay the balance of TWO
MILLION TWO HUNDRED TWENTY FOUR
THOUSAND PESOS (P2,224,000.00) at the post office
address of the VENDORS in Quezon City, or such
other place or Office as the VENDORS may designate
within a period of sixty (60) days counted from the
date of this Contract;
2. The VENDORS have hereunto authorized the VENDEE
to mortgage the property and submit this Contract,
together with a certified true copy of the TCT, Tax
Declaration, Tax Clearance and Vicinity/Lot Plan,
with their Lending Bank. The proceeds of the
VENDEES Loan shall directly be paid and remitted by
the Bank to the VENDORS;
3. The said parcel of land shall remain in the name of the
VENDORS until the Lending Bank of the VENDEE shall
have issued a Letter Guaranty Payment in favor of the
VENDORS, at which time the VENDORS agree to
execute a Deed of Absolute Sale in favor of the
VENDEE and cause the issuance of the Certificate of
Title in the name of the latter. The Capital Gains Tax
and Documentary Stamps shall be charged from the
VENDORS in accordance with law;
4. The payment of the balance of P2,224,000.00 by the
VENDEE to the VENDORS shall be within a period of
sixty (60) days effective from the date of this
Contract. After the lapse of 60 days and the loan has
not yet been released due to fortuitous events the
VENDEE shall pay an interest of the balance a
monthly interest based on existing bank rate
until said fortuitous event is no longer present;
5. The VENDEE shall remove and relocate the Squatters,
however, such actual, reasonable and necessary
expenses shall be charged to the VENDORS upon
presentation of receipts anddocuments to support
the act;
6. The VENDEE shall be allowed for all legal purposes to
take possession of the parcel of land after the
execution of this Contract and payment of the
downpayment;
7. The VENDEE shall shoulder all expenses like the
documentation, registration, transfer tax and
relocation of the property.
IN WITNESS WHEREOF, we have hereunto affixed our signatures
this ____ day of February, 1995, at Quezon City, Philippines.
CONSTANTE E. FIRME BUKAL ENTERPRISES DEV. CORP.
VENDOR VENDEE
AZUCENA E. FIRME BY:
VENDOR ________________________
President & Chief Executive Officer
xxx
The Spouses Firme did not accept the Third Draft because
they found its provisions one-sided. The Spouses Firme
particularly opposed the provision on the delivery of the
Propertys title to Bukal Enterprises for the latter to obtain a loan
from the bank and use the proceeds to pay for the Property. The
Spouses Firme repeatedly told Aviles that the Property was not
for sale when Aviles called on 2 and 4 March 1995 regarding the
Property. On 6 March 1995, the Spouses Firme visited their
Property and discovered that there was a hollow block fence on
one side, concrete posts on another side and bunkers occupied by
workers of a certain Florante de Castro. On 11 March 1995,
Spouses Firme visited the Property again with a surveyor. Dr.
Firme talked with Ancheta who told him that the squatters had
voluntarily demolished their shanties. The Spouses Firme sent a
letter[13] dated 20 March 1995 to Bukal Enterprises demanding
removal of the bunkers and vacation by the occupants of the
Property. On 22 March 1995, the Spouses Firme received a
letter[14] dated 7 March 1995 from Bukal Enterprises demanding
that they sell the Property.[15]
On 7 August 1998, the trial court rendered judgment against
Bukal Enterprises as follows:
WHEREFORE, in the light of the foregoing premises, the above-
entitled case [is] hereby DISMISSED and plaintiff BUKAL
ENTERPRISES DEVELOPMENT CORPORATION is hereby ordered
to pay the defendants Spouses Constante and Azucena Firme:
1. the sum of Three Hundred Thirty Five Thousand Nine
Hundred Sixty Four and 90/100 (P335,964.90) as
and by way of actual and compensatory damages;
2. the sum of Five Hundred Thousand Pesos
(P500,000.00) as and by way of moral damages;
3. the sum of One Hundred Thousand Pesos
(P100,000.00) as and by way of attorneys fees;
and
4. the costs of the suit.
SO ORDERED.[16]
Bukal Enterprises appealed to the Court of Appeals, which
reversed and set aside the decision of the trial court. The
dispositive portion of the decision reads:
WHEREFORE, premises considered, the Decision, dated August 7,
1998, is hereby REVERSED and SET ASIDE. The complaint is
granted and the appellees are directed to henceforth execute the
Deed of Absolute Sale transferring the ownership of the subject
property to the appellant immediately upon receipt of the
purchase price of P3,224,000.00 and to perform all such acts
necessary and proper to effect the transfer of the property
covered by TCT No. 264243 to appellant. Appellant is directed to
deliver the payment of the purchase price of the property within
sixty days from the finality of this judgment.Costs against
appellees.
SO ORDERED.[17]
 Hence, the instant petition.
The Ruling of the Trial Court
The trial court held there was no perfected contract of
sale. Bukal Enterprises failed to establish that the Spouses Firme
gave their consent to the sale of the Property. The parties did not
go beyond the negotiation stage and there was no evidence of
meeting of the minds between the
parties. Furthermore, Aviles had no valid authority to bind Bukal
Enterprises in the sale transaction. Under Sections 23 and 36 (No.
7) of the Corporation Code, the corporate power to purchase a
specific property is exercised by the Board of Directors of the
corporation.Without an authorization from the Board of
Directors, Aviles could not validly finalize the purchase of the
Property on behalf of Bukal Enterprises. There is no basis to apply
the Statute of Frauds since there was no perfected contract of sale.
The Ruling of the Court of Appeals
The Court of Appeals held that the lack of a board resolution
authorizing Aviles to act on behalf of Bukal Enterprises in the
purchase of the Property was cured by ratification. Bukal
Enterprises ratified the purchase when it filed the complaint for
the enforcement of the sale.
The Court of Appeals also held there was a perfected contract
of sale. The appellate court ruled that the Spouses Firme revealed
their intent to sell the Property when they met
with Aviles twice. The Spouses Firme rejected the First Draft
because they considered the terms unacceptable.
When Aviles presented the Second Draft without the
objectionable provisions, the Spouses Firme no longer had any
cause for refusing to sell the Property. On the other hand, the acts
of Bukal Enterprises in fencing the Property, constructing posts,
relocating the squatters and obtaining a loan to purchase the
Property are circumstances supporting their claim that there was
a perfected contract of sale.
The Spouses Firme allowed Bukal Enterprises to exercise
acts of ownership over the Property when the latter introduced
improvements on the Property and evicted the squatters.These
acts constitute partial performance of the contract of sale that
takes the oral contract out of the scope of the Statute of Frauds.
The Issues
The Spouses Firme raise the following issues:
1. WHETHER THE COURT OF APPEALS ERRED IN
FINDING THAT THERE WAS A PERFECTED
CONTRACT OF SALE BETWEEN PETITIONERS AND
RESPONDENT DESPITE THE ADDUCED EVIDENCE
PATENTLY TO THE CONTRARY;
2. WHETHER THE COURT OF APPEALS ERRED IN NOT
FINDING THAT THE ALLEGED CONTRACT
OF SALE IS ENFORCEABLE DESPITE THE FACT THAT
THE SAME IS COVERED BY THE STATUTE OF
FRAUDS;
3. WHETHER THE COURT OF APPEALS ERRED IN
DISREGARDING THE FACT THAT IT WAS NOT
LEGALLY AND FACTUALLY POSSIBLE FOR
RESPONDENT TO PERFECT A CONTRACT OF SALE;
AND
 4. THE COURT OF APPEALS ERRED IN RULING THAT
THE AWARD BY THE TRIAL COURT OF MORAL AND
COMPENSATORY DAMAGES TO PETITIONERS IS
IMPROPER.[18]
The Ruling of the Court
The petition is meritorious.
The fundamental question for resolution is whether there
was a perfected contract of sale between the Spouses Firme and
Bukal Enterprises. This requires a review of the factual and legal
issues of this case. As a rule, only questions of law are appealable
to this Court under Rule 45[19] of the Rules of Civil Procedure. The
findings of fact by the Court of Appeals are generally conclusive
and binding on the parties and are not reviewable by this
Court.[20] However, when the factual findings of the Court of
Appeals are contrary to those of the trial court or when the
inference made is manifestly mistaken, this Court has the
authority to review the findings of fact.[21] Likewise, this Court
may review findings of fact when the judgment of the Court of
Appeals is premised on a misapprehension of facts.[22] This is the
situation in this case.
Whether there was a perfected contract of sale
We agree with the finding of the trial court that there was no
perfected contract of sale. Clearly, the Court of Appeals
misapprehended the facts of the case in ruling otherwise.
First, the records indubitably show that there was no consent
on the part of the Spouses Firme. Aviles did not present any draft
deed of sale during his first meeting with the Spouses Firme on 30
January 1995.[23] Dr. Firme was consistent in his testimony that he
and his wife rejected the provisions of the Third Draft presented
by Aviles during their second meeting on 6 February 1995. The
Spouses Firme found the terms and conditions unacceptable and
told Aviles that they would not sell the property.[24] Aviles showed
them only one draft deed of sale (Third Draft) during their second
and last meeting on 6 February 1995.[25] When shown a copy of
the First Draft, Dr. Firme testified that it was not the deed of sale
shown to them by Aviles during their second meeting[26] and that
the Third Draft was completely different from the First Draft.[27]
On the other hand, Aviles gave conflicting testimony as to
what transpired during the two meetings with the Spouses
Firme. In his direct examination, Aviles testified that during his
first meeting with the Spouses Firme on 23 January 1995, he
showed them the First Draft which the Spouses Firme
rejected.[28] On their second meeting, Aviles showed the
Spouses Firme the Second Draft, which the Spouses Firme
allegedly approved because the objectionable conditions
contained in the First Draft were already deleted. However, a
perusal of the First Draft and the Second Draft would show that
both deeds of sale contain exactly the same provisions. The only
difference is that the date of the First Draft is February 1995 while
that of the Second Draft is March 1995.
When Aviles testified again as rebuttal witness, his testimony
became more confusing. Aviles testified that during his first
meeting with the Spouses Firme on 30 January 1995, he showed
them the Third Draft, which was not acceptable to the
latter.[29] However, upon further questioning by his
counsel, Aviles concurred with Dr. Firmes testimony that he
presented the Third Draft (Exh. 5; Exh. L) to the Spouses Firme
only during their second meeting. He also stated that he prepared
and presented to the Spouses Firme the First Draft (Exh. C) and
the Second Draft (Exh. C-1) during their first or second meeting.
He testified:
ATTY. MARQUEDA:
Q: On page 11 of the tsn dated August 5, 1997 a question
was posed How did you find this draft the Contract
of Sale which was presented to you by Mr. Aviles on
the second meeting? The answer is On the first
meeting(sic), we find it totally unacceptable,
sir.[30] What can you say on this? Before that, Mr.
Witness, what is this Contract of Sale that you
presented to Mr. Aviles on the second meeting? Is
this different from the Contract of Sale that was
marked as Exhibit 5-L?
Q: May I see the document Exhibit 5 L?[31]
INTERPRETER:
Witness going over the record.
ATTY. MARQUEDA:
Q: Is that the same document that was presented by
you to Mr. Firme on the second meeting or there
is a different contract?
A: This is the same document draft of the document
that I submitted to them during our second
meeting. That was February. This was the draft.
Q: What about Exhibit C and C-1 [which] were identified
by you. When was this presented to Dr. Firme?
A: This is the same.
Q: Exhibit C and C-1?
A: Yes because I prepared two documents during our
meeting. One already with notarial, the one without
notarial page and the other one with notarial page
already, so I prepared two documents but with the
same contents both were dated February of
1995.[32]
Q: So, you are referring now to Exhibit C and C-1 for the
plaintiff?
A: C-1 is already in the final form because we agreed
already as to the date of the payment, so I prepared
already another document which is dated March
1995.[33] (Emphasis supplied)
In his cross-examination, Aviles again changed his
testimony. According to him, he presented the Third Draft to the
Spouses Firme during their first meeting.[34] However, when he
went over the records, he again changed his answer and stated
that he presented the Third Draft during their second meeting.[35]
In his re-direct examination, Aviles gave another version of
what he presented to the Spouses Firme during the two
meetings. According to him, he presented the Third Draft during
the first meeting. On their second meeting, he presented the First
and the Second Drafts to the Spouses Firme.[36]
Furthermore, Aviles admitted that the first proposal of Bukal
Enterprises was at P2,500 per square meter for the
Property.[37] But the First, Second and Third Drafts of the deed of
sale prepared by Aviles all indicated a purchase price of P4,000
per square meter or a lump sum of P3,224,000 (P4,000 per sq.m.
x 806 sq.m. = P3,224,000) for the Property. Hence, Avilescould not
have presented any of these draft deeds of sale to the
Spouses Firme during their first meeting.
Considering the glaring inconsistencies in Aviles testimony,
it was proper for the trial court to give more credence to the
testimony of Dr. Firme.
Even after the two meetings with Aviles, the
Spouses Firme were firm in their decision not to sell the
Property. Aviles called the Spouses Firme twice after their last
meeting. The Spouses Firme informed Aviles that they were not
selling the Property.[38] Aviles himself admitted this during his
testimony, thus:
Q. Now, the next question which states: But did you not
have any occasion to talk to him after that second
meeting? and the answer of Dr. Firme is He called up
a month after, thats March 2, 1995. What can you
say on this?
A. I called him to inform him that the loan was already
transferred from Makati to Padre Faura Branch of
the Far East Bank, so I scheduled already the
payment of their property.
Q. When?
A. On March 4, 1995.
Q. And then the next question which also states: What
did you talked (sic) about over the telephone? The
answer of Dr. Firme was When I found out that he
was calling, I told him that the property is not for
sale. What can you say on this?
A. He mentioned that they are no longer interested to
sell their property, perhaps they would like a
higher price of the property. They did not mention
to me. I do not know what was their reason.
Q. The next question So, what happened next? The
answer is He called up two days later, March 4 and
my wife answered the telephone and told him that
the property is not for sale, sir. What can you say on
this?
A. That is true. That is what Mrs. Firme told me during
our conversation on the telephone that they are
no longer interested to sell the property for
obvious reason.
Q. When was that?
A. March 4, 1995, your honor.[39] (Emphasis supplied)
Significantly, De Castro also admitted that he was aware of
the Spouses Firmes refusal to sell the Property.[40]
The confusing testimony of Aviles taken together with De
Castros admission that he was aware of the Spouses Firmes
refusal to sell the Property reinforces Dr. Firmes testimony that
he and his wife never consented to sell the Property.
Consent is one of the essential elements of a valid contract.
The Civil Code provides:
Art. 1318. There is no contract unless the following requisites
concur:
1. Consent of the contracting parties;
2. Object certain which is the subject matter of the
contract;
3. Cause of the obligation which is established.
The absence of any of these essential elements will negate the
existence of a perfected contract of sale.[41] Thus, where there is
want of consent, the contract is non-existent.[42] As held
in Salonga, et al. v. Farrales, et al.:[43]
It is elementary that consent is an essential element for the
existence of a contract, and where it is wanting, the contract is
non-existent. The essence of consent is the conformity of the
parties on the terms of the contract, the acceptance by one of
the offer made by the other. The contract to sell is a bilateral
contract. Where there is merely an offer by one party, without the
acceptance of the other, there is no consent. (Emphasis supplied)
 In this case, the Spouses Firme flatly rejected the offer
of Aviles to buy the Property on behalf of Bukal Enterprises. There
was therefore no concurrence of the offer and the acceptance on
the subject matter, consideration and terms of payment as would
result in a perfected contract of sale.[44] Under Article 1475 of the
Civil Code, the contract of sale is perfected at the moment there is
a meeting of minds on the thing which is the object of the contract
and on the price.
Another piece of evidence which supports the contention of
the Spouses Firme that they did not consent to the contract of sale
is the fact they never signed any deed of sale. If the Spouses Firme
were already agreeable to the offer of Bukal Enterprises as
embodied in the Second Draft, then the Spouses Firme could have
simply affixed their signatures on the deed of sale, but they did
not.
Even the existence of a signed document purporting to be a
contract of sale does not preclude a finding that the contract is
invalid when the evidence shows that there was no meeting of the
minds between the seller and buyer.[45] In this case, what were
offered in evidence were mere unsigned deeds of sale which have
no probative value.[46] Bukal Enterprises failed to show the
existence of a perfected contract of sale by competent proof.
Second, there was no approval from the Board of Directors of
Bukal Enterprises as would finalize any transaction with the
Spouses Firme. Aviles did not have the proper authority to
negotiate for Bukal Enterprises. Aviles testified that his friend, De
Castro, had asked him to negotiate with the Spouses Firme to buy
the Property.[47] De Castro, as Bukal Enterprises vice president,
testified that he authorized Aviles to buy the
Property.[48] However, there is no Board Resolution
authorizing Aviles to negotiate and purchase the Property on
behalf of Bukal Enterprises.[49]
It is the board of directors or trustees which exercises almost
all the corporate powers in a corporation. Thus, the Corporation
Code provides:
SEC. 23. The board of directors or trustees. Unless otherwise
provided in this Code, the corporate powers of all corporations
formed under this Code shall be exercised, all business conducted
and all property of such corporations controlled and held by the
board of directors or trustees to be elected from among the
holders of stock, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified. x x x
SEC. 36. Corporate powers and capacity. Every corporation
incorporated under this Code has the power and capacity:
xxx
7. To purchase, receive, take or grant, hold, convey, sell,
lease, pledge, mortgage and otherwise deal with such
real and personal property, including securities and
bonds of other corporations, as the transaction of a
lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed
by the law and the Constitution.
xxx
Under these provisions, the power to purchase real property
is vested in the board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of real property
needed by the corporation, the final say will have to be with the
board, whose approval will finalize the transaction.[50] A
corporation can only exercise its powers and transact its business
through its board of directors and through its officers and agents
when authorized by a board resolution or its by-laws.[51] As held
in AF Realty & Development, Inc. v. DieselmanFreight Services,
Co.:[52]
Section 23 of the Corporation Code expressly provides that the
corporate powers of all corporations shall be exercised by the
board of directors. Just as a natural person may authorize another
to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual
officers or agents appointed by it. Thus, contracts or acts of a
corporation must be made either by the board of directors or
by a corporate agent duly authorized by the board. Absent such
valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of
the corporation, but not in the course of, or connected with, the
performance of authorized duties of such director, are held not
binding on the corporation. (Emphasis supplied)
In this case, Aviles, who negotiated the purchase of the
Property, is neither an officer of Bukal Enterprises nor a member
of the Board of Directors of Bukal Enterprises. There is no Board
Resolution authorizing Aviles to negotiate and purchase the
Property for Bukal Enterprises. There is also no evidence to prove
that Bukal Enterprises approved whatever
transaction Aviles made with the Spouses Firme. In fact, the
president of Bukal Enterprises did not sign any of the deeds of sale
presented to the Spouses Firme. Even De Castro admitted that he
had never met the Spouses Firme.[53] Considering all these
circumstances, it is highly improbable for Aviles to finalize any
contract of sale with the Spouses Firme.
Furthermore, the Court notes that in the Complaint filed by
Bukal Enterprises with the trial court, Aviles signed[54] the
verification and certification of non-forum shopping.[55] The
verification and certification of non-forum shopping was not
accompanied by proof that Bukal Enterprises authorized Aviles to
file the complaint on behalf of Bukal Enterprises.
The power of a corporation to sue and be sued is exercised by
the board of directors. The physical acts of the corporation, like
the signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws or
by a specific act of the board of directors.[56]
The purpose of verification is to secure an assurance that the
allegations in the pleading are true and correct and that it is filed
in good faith.[57] True, this requirement is procedural and not
jurisdictional. However, the trial court should have ordered the
correction of the complaint since Aviles was neither an officer of
Bukal Enterprises nor authorized by its Board of Directors to act
on behalf of Bukal Enterprises.
Whether the Statute of Frauds is applicable
The Court of Appeals held that partial performance of the
contract of sale takes the oral contract out of the scope of the
Statute of Frauds. This conclusion arose from the appellate courts
erroneous finding that there was a perfected contract of sale. The
records show that there was no perfected contract of sale. There
is therefore no basis for the application of the Statute of Frauds.
The application of the Statute of Frauds presupposes the existence
of a perfected contract.[58] Article 1403 of the Civil Code provides:
Art. 1403. The following contracts are unenforceable, unless they
are ratified:
(1) Those entered into in the name of another person by
one who has been given no authority or legal
representation, or who has acted beyond his powers;
(2) Those that do not comply with the Statute of Frauds as set
forth in this number. In the following cases an agreement
hereafter made shall be unenforceable by action, unless the same,
or some note or memorandum thereof, be in writing and
subscribed by the party charged or by his agent; evidence,
therefore, of the agreement cannot be received without the
writing, or a secondary evidence of its contents:
 xxx A: From the period of March 2, 1995 or two (2) weeks
after the removal of the squatters.
(e) An agreement for the leasing for a longer period than one year,
Q: When were the squatters removed?
or for the sale of real property or of an interest therein;
WITNESS:
xxx
A: March 6 and 7 because there were four (4)
squatters.

Whether Bukal Enterprises is a builder in good faith ATTY. EJERCITO:

Q: When did you find out that the Spouses Firme did not
Bukal Enterprises is not a builder in good faith. The Spouses want to sell the same?
Firme did not accept Aviles offer to purchase the A: First week of March 1995.
Property. Aviles testified that when he called the
Spouses Firme on 2 March 1995, Dr. Firme informed him that Q: In your Complaint you said you find out on March 3,
they were no longer interested in selling the Property. On 4 March 1995. Is that not correct?
1995, Aviles called again and this time Mrs. Firme told him that A: I cannot exactly remember, sir.
they were not selling the Property. Aviles informed De Castro of
the refusal of the Spouses Firme to sell the Property. However, ATTY. MARQUEDA:
Bukal Enterprises still proceeded in relocating the squatters and
In the Complaint it does not state March 3. Maybe
constructing improvements on the Property. De Castro testified:
counsel was thinking of this Paragraph 6 which
ATTY. EJERCITO: states, When the property was rid of the squatters
on March 2, 1995 for the documentation and
Q: The truth of the matter, Mr. Witness, is that the post payment of the sale, xxx.
was constructed sometime late 1994. Is that not
correct? ATTY. EJERCITO:
A: No, sir. It is not true. Q: So, you found out on March 2, 1995 that the
defendants were no longer interested in selling to
Q: When was it constructed? you the property. Is that correct?
A: That March. A: Yes, sir, because Mr. Aviles relayed it to me.
Q: When in March? Q: Mr. Aviles relayed to you that the Spouses Firme
A: 1995. were no longer interested in selling to you the
property in March 2, 1995. Is that correct?
Q: When in March 1995?
A: Yes, sir. Mr. Aviles told me.
Q: In so many words, Mr. Witness, you learned that
the Spouses Firme were no longer interested in
selling the property before you spent allegedly
all the sum of money for the relocation of
squatters for all this construction that you are
telling this Court now?
WITNESS:
A: The refusal to sell is not yet formal and the lawyer
sent a letter tendering full payment of the
purchase price.
ATTY. EJERCITO:
Q: You mean to say that you did not believe Mr. Aviles
when he told you that the Spouses Firme were no
longer selling the property?
A: No, sir.
Q: Was there anything formal when you say the
Spouses Firme agreed to sell the property?
A: None, sir.
Q: And yet that time you believe Mr. Aviles when he
verbally told you that the Sps. Firme agreed to
sell the property? At what point of the
transaction with the Spouses Firme were you
advised by your lawyer?
WITNESS:
A: At the time when they refused to sell the lot.
ATTY. EJERCITO:
Q: Was that before the squatters were relocated
allegedly by Bukal Enterprises?
A: Yes, sir.
Q: In fact, it was the lawyer who advised you to relocate
the squatters. Is it not true?
A: No, sir.[59] (Emphasis supplied)
Bukal Enterprises is obviously a builder in bad faith. No deed
of sale has been executed in this case. Despite the refusal of the
Spouses Firme to sell the Property, Bukal Enterprises still
proceeded to introduce improvements on the Property. Bukal
Enterprises introduced improvements on the Property without
the knowledge and consent of the Spouses Firme. When the
Spouses Firme learned about the unauthorized constructions
made by Bukal Enterprises on the Property, they advised the
latter to desist from further acts of trespass on their Property.[60]
The Civil Code provides:
Art. 449. He who builds, plants or sows in bad faith on the land of
another, loses what is built, planted or sown without right of
indemnity.
Art. 450. The owner of the land on which anything has been built,
planted or sown in bad faith may demand the demolition of the
work, or that the planting or sowing be removed, in order to
replace things in their former condition at the expense of the
person who built, planted or sowed; or he may compel the builder
or planter to pay the price of the land, and the owner the proper
rent.
Under these provisions the Spouses Firme have the following
options: (1) to appropriate what Bukal Enterprises has built
without any obligation to pay indemnity; (2) to ask Bukal
Enterprises to remove what it has built; or (3) to compel Bukal
Enterprises to pay the value of the land.[61] Since the
Spouses Firme are undoubtedly not selling the Property to Bukal
Enterprises, they may exercise any of the first two options. They
may appropriate what has been built without paying indemnity or
they may ask Bukal Enterprises to remove what it has built at
Bukal Enterprises own expense.
Bukal Enterprises is not entitled to reimbursement for the
expenses incurred in relocating the squatters. Bukal Enterprises
spent for the relocation of the squatters even after learning that
the Spouses Firme were no longer interested in selling the
Property. De Castro testified that even though the
Spouses Firme did not require them to remove the squatters, they
chose to spend for the relocation of the squatters since they were
interested in purchasing the Property.[62]
Whether the Spouses Firme are entitled to
compensatory and moral damages
The Court agrees with the Court of Appeals to delete the
award for compensatory and moral damages. In awarding actual
damages, the trial court took into account the traveling expenses
incurred by the Spouses Firme who are already residing in
the United States. However, the trial court failed to consider the
testimony of Dr. Firme that they normally travel to
the Philippines more than once a year to visit their
children.[63] Thus, the expenses for the roundtrip tickets dated
1996-1997 could not be attributed solely for the attendance of
hearings in the case.
Nevertheless, an award of nominal damages of P30,000 is
warranted since Bukal Enterprises violated the property rights
of the Spouses Firme.[64] The Civil Code provides:
Art. 2221. Nominal damages are adjudicated in order that a right
of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the
purpose of indemnifying the plaintiff for any loss suffered by him.
Art. 2222. The court may award nominal damages in every
obligation arising from any source enumerated in article 1157, or
in every case where any property right has been invaded.
The award of damages is also in accordance with Article 451
of the Civil Code which states that the landowner is entitled to
damages from the builder in bad faith.[65]
WHEREFORE, we SET ASIDE the Decision of the Court of
Appeals and RENDER a new one:
1. Declaring that there was no perfected contract of sale;
2. Ordering Bukal Enterprises to pay the Spouses
Firme P30,000 as nominal damages.
SO ORDERED.
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Tañada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First
Instance of Occidental Negros, in its Civil Case No. 2603,
dismissing plaintiff's complaint that sought to compel the
defendant Milling Company to increase plaintiff's share in the
sugar produced from their cane, from 60% to 62.33%, starting
from the 1951-1952 crop year.1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano,
Alejandro Montelibano, and the Limited co-partnership Gonzaga
and Company, had been and are sugar planters adhered to the
defendant-appellee's sugar central mill under identical milling
contracts. Originally executed in 1919, said contracts were
stipulated to be in force for 30 years starting with the 1920-21
crop, and provided that the resulting product should be divided in
the ratio of 45% for the mill and 55% for the planters. Sometime
in 1936, it was proposed to execute amended milling contracts,
increasing the planters' share to 60% of the manufactured sugar
and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to
45 years. To this effect, a printed Amended Milling Contract form
was drawn up. On August 20, 1936, the Board of Directors of the
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution
(Acts No. 11, Acuerdo No. 1) granting further concessions to the
planters over and above those contained in the printed Amended
Milling Contract. The bone of contention is paragraph 9 of this
resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. — Previa mocion debidamente
secundada, la Junta en consideracion a una
peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el
contrato de molienda enmendado medientelas
siguentes:
x x x x x x x x x
9.a Que si durante la vigencia de este contrato de
Molienda Enmendado, lascentrales azucareras, de
Negros Occidental, cuya produccion anual de
azucar centrifugado sea mas de una tercera parte
de la produccion total de todas lascentrales
azucareras de Negros Occidental, concedieren a
sus plantadores mejores condiciones que la
estipuladas en el presente contrato, entonces esas
mejores condiciones se concederan y por el
presente se entenderan concedidas a los
platadores que hayan otorgado este Contrato de
Molienda Enmendado.
Appellants signed and executed the printed Amended Milling
Contract on September 10, 1936, but a copy of the resolution of
August 10, 1936, signed by the Central's General Manager, was not
attached to the printed contract until April 17, 1937; with the
notation —
Las enmiendas arriba transcritas forman parte del
contrato de molienda enmendado, otorgado por — y la
Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending
that three Negros sugar centrals (La Carlota, Binalbagan-Isabela
and San Carlos), with a total annual production exceeding one-
third of the production of all the sugar central mills in the
province, had already granted increased participation (of 62.5%)
to their planters, and that under paragraph 9 of the resolution of
August 20, 1936, heretofore quoted, the appellee had become
obligated to grant similar concessions to the plaintiffs (appellants
herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the
claim, and defended by urging that the stipulations contained in
the resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio, being
in effect a donation that was ultra viresand beyond the powers of
the corporate directors to adopt.
After trial, the court below rendered judgment upholding the
stand of the defendant Milling company, and dismissed the
complaint. Thereupon, plaintiffs duly appealed to this Court.
We agree with appellants that the appealed decisions can not
stand. It must be remembered that the controverted resolution
was adopted by appellee corporation as a supplement to, or
further amendment of, the proposed milling contract, and that it
was approved on August 20, 1936, twenty-one days prior to the
signing by appellants on September 10, of the Amended Milling
Contract itself; so that when the Milling Contract was executed,
the concessions granted by the disputed resolution had been
already incorporated into its terms. No reason appears of record
why, in the face of such concessions, the appellants should reject
them or consider them as separate and apart from the main
amended milling contract, specially taking into account that
appellant Alfredo Montelibano was, at the time, the President of
the Planters Association (Exhibit 4, p. 11) that had agitated for the
concessions embodied in the resolution of August 20, 1936. That
the resolution formed an integral part of the amended milling
contract, signed on September 10, and not a separate bargain, is
further shown by the fact that a copy of the resolution was simply
attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the
resolution of August 20, 1936 were supported by the
same causa or consideration underlying the main amended
milling contract; i.e., the promises and obligations undertaken
thereunder by the planters, and, particularly, the extension of its
operative period for an additional 15 years over and beyond the
30 years stipulated in the original contract. Hence, the conclusion
of the court below that the resolution constituted gratuitous
concessions not supported by any consideration is legally
untenable.
All disquisition concerning donations and the lack of power of the
directors of the respondent sugar milling company to make a gift
to the planters would be relevant if the resolution in question had
embodied a separate agreement after the appellants had already
bound themselves to the terms of the printed milling contract. But
this was not the case. When the resolution was adopted and the
additional concessions were made by the company, the appellants
were not yet obligated by the terms of the printed contract, since
they admittedly did not sign it until twenty-one days later, on
September 10, 1936. Before that date, the printed form was no
more than a proposal that either party could modify at its
pleasure, and the appellee actually modified it by adopting the
resolution in question. So that by September 10, 1936 defendant
corporation already understood that the printed terms were not
controlling, save as modified by its resolution of August 20, 1936;
and we are satisfied that such was also the understanding of
appellants herein, and that the minds of the parties met upon that
basis. Otherwise there would have been no consent or "meeting of
the minds", and no binding contract at all. But the conduct of the
parties indicates that they assumed, and they do not now deny,
that the signing of the contract on September 10, 1936, did give
rise to a binding agreement. That agreement had to exist on the
basis of the printed terms as modified by the resolution of August
20, 1936, or not at all. Since there is no rational explanation for
the company's assenting to the further concessions asked by the
planters before the contracts were signed, except as further
inducement for the planters to agree to the extension of the
contract period, to allow the company now to retract such
concessions would be to sanction a fraud upon the planters who
relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of
appellees. There can be no novation unless two distinct and
successive binding contracts take place, with the later designed to
replace the preceding convention. Modifications introduced
before a bargain becomes obligatory can in no sense constitute
novation in law.
Stress is placed on the fact that the text of the Resolution of August
20, 1936 was not attached to the printed contract until April 17,
1937. But, except in the case of statutory forms or solemn
agreements (and it is not claimed that this is one), it is the assent
and concurrence (the "meeting of the minds") of the parties, and
not the setting down of its terms, that constitutes a binding
contract. And the fact that the addendum is only signed by the
General Manager of the milling company emphasizes that the
addition was made solely in order that the memorial of the terms
of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by
the Board of Directors of the appellee company in November 19,
1936 (Exhibit 4) only made mention of 90%, the planters having
agreed to the 60-40 sharing of the sugar set forth in the printed
"amended milling contracts", and did not make any reference at
all to the terms of the resolution of August 20, 1936. But a reading
of this report shows that it was not intended to inventory all the
details of the amended contract; numerous provisions of the
printed terms are alao glossed over. The Directors of the appellee
Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major
change was paragraph 9 heretofore quoted; but when the report
was made, that paragraph was not yet in effect, since it was
conditioned on other centrals granting better concessions to their
planters, and that did not happen until after 1950. There was no
reason in 1936 to emphasize a concession that was not yet, and
might never be, in effective operation.
There can be no doubt that the directors of the appellee company
had authority to modify the proposed terms of the Amended
Milling Contract for the purpose of making its terms more
acceptable to the other contracting parties. The rule is that —
It is a question, therefore, in each case of the logical
relation of the act to the corporate purpose expressed in
the charter. If that act is one which is lawful in itself, and
not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the
promotion of those ends, in a substantial, and not in a
remote and fanciful sense, it may fairly be considered
within charter powers. The test to be applied is whether
the act in question is in direct and immediate furtherance
of the corporation's business, fairly incident to the express
powers and reasonably necessary to their exercise. If so,
the corporation has the power to do it; otherwise, not.
(Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the
board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits of the central, the court
has no authority to review them.
They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so
doing they cannot be controlled in the reasonable exercise
and performance of such duty. Whether the business of a
corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely
business and economic problem to be determined by the
directors of the corporation and not by the court. It is a
well-known rule of law that questions of policy or of
management are left solely to the honest decision of
officers and directors of a corporation, and the court is
without authority to substitute its judgment of the board
 of directors; the board is the business manager of the 0,333% to appellants Montelibano for the 1951-1952 crop
corporation, and so long as it acts in good faith its orders year, said appellants having received an additional 2%
are not reviewable by the courts. (Fletcher on corresponding to said year in October, 1953;
Corporations, Vol. 2, p. 390).
2.333% to appellant Gonzaga & Co., for the 1951-1952
And it appearing undisputed in this appeal that sugar centrals of crop year; and to all appellants thereafter —
La Carlota, Hawaiian Philippines, San Carlos and Binalbagan 4.2% for the 1952-1953 crop year;
(which produce over one-third of the entire annual sugar 4.3% for the 1953-1954 crop year;
production in Occidental Negros) have granted progressively 4.5% for the 1954-1955 crop year;
increasing participations to their adhered planter at an average 3.5% for the 1955-1956 crop year;
rate of
with interest at the legal rate on the value of such differential
62.333% for the 1951-52 crop year; during the time they were withheld; and the right is reserved to
plaintiffs-appellants to sue for such additional increases as they
64.2% for 1952-53; may be entitled to for the crop years subsequent to those herein
adjudged.
64.3% for 1953-54;
64.5% for 1954-55; and Costs against appellee, Bacolod-Murcia Milling Co.

63.5% for 1955-56,

SECOND DIVISION
the appellee Bacolod-Murcia Milling Company is, under the terms
of its Resolution of August 20, 1936, duty bound to grant similar
increases to plaintiffs-appellants herein. VALLE VERDE COUNTRY CLUB, INC., G.R. No. 151969
ERNESTO VILLALUNA, RAY GAMBOA, AMADO
WHEREFORE, the decision under appeal is reversed and set aside; M. SANTIAGO, JR., FORTUNATO DEE, Present:
and judgment is decreed sentencing the defendant-appellee to AUGUSTO SUNICO, VICTOR SALTA,
pay plaintiffs-appellants the differential or increase of FRANCISCO ORTIGAS III, ERIC ROXAS, in their QUISUMBING, J., Chairperson
participation in the milled sugar in accordance with paragraph 9 capacities as members of the Board of CARPIO-MORALES,
of the appellee Resolution of August 20, 1936, over and in addition Directors of Valle Verde Country Club, Inc., BRION,
to the 60% expressed in the printed Amended Milling Contract, or and JOSE RAMIREZ, DEL CASTILLO, and
the value thereof when due, as follows: Petitioners, ABAD, JJ.

- versus -

VICTOR AFRICA,
Respondent. Promulgated:
September 4, 2009
x ---------------------------------------------------------------------------------------------- x
DECISION
BRION, J.:
In this petition for review on certiorari,[1] the parties raise
a legal question on corporate governance: Can the members of a
corporations board of directors elect another director to fill in a
vacancy caused by the resignation of a hold-over director?
THE FACTUAL ANTECEDENTS
On February 27, 1996, during the Annual Stockholders
Meeting of petitioner Valle Verde Country Club, Inc. (VVCC), the
following were elected as members of the VVCC Board of
Directors: Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan),
Eduardo Makalintal (Makalintal), Francisco Ortigas III, Victor
Salta, Amado M. Santiago, Jr., Fortunato Dee, Augusto Sunico, and
Ray Gamboa.[2] In the years 1997, 1998, 1999, 2000, and 2001,
however, the requisite quorum for the holding of the stockholders
meeting could not be obtained. Consequently, the above-named
directors continued to serve in the VVCC Board in a hold-over
capacity.
On September 1, 1998, Dinglasan resigned from his
position
as member of the VVCC Board. In a meeting held
on October 6, 1998, the remaining directors, still constituting a
quorum of VVCCs nine-member board, elected Eric Roxas (Roxas)
to fill in the vacancy created by the resignation of Dinglasan.
A year later, or on November 10, 1998, Makalintal also
resigned as member of the VVCC Board. He was replaced by Jose
Ramirez (Ramirez), who was elected by the remaining members
of the VVCC Board on March 6, 2001.
Respondent Africa (Africa), a member of VVCC,
questioned the election of Roxas and Ramirez as members of the
VVCC Board with the Securities and Exchange Commission (SEC)
and the Regional Trial Court (RTC), respectively. The SEC case
questioning the validity of Roxas appointment was docketed as
SEC Case No. 01-99-6177.The RTC case questioning the validity of
Ramirez appointment was docketed as Civil Case No. 68726.
In his nullification complaint[3] before the
RTC, Africa alleged that the election of Roxas was contrary to
Section 29, in relation to Section 23, of the Corporation Code of
the Philippines (Corporation Code). These provisions read:
 Sec. 23. The board of directors or trustees. -
Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders of
stocks, or where there is no stock, from among the
members of the corporation, who shall hold
office for one (1) year until their successors
are elected and qualified.
xxxx
Sec. 29. Vacancies in the office of director or
trustee. - Any vacancy occurring in the board of
directors or trustees other than by removal by
the stockholders or members or by expiration of
term, may be filled by the vote of at least a
majority of the remaining directors or
trustees, if still constituting a
quorum; otherwise, said vacancies must be
filled by the stockholders in a regular or special
meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected
only for the unexpired term of his predecessor in
office. xxx. [Emphasis supplied.]
Africa claimed that a year after Makalintals election as member of
the VVCC Board in 1996, his [Makalintals] term as well as those of
the other members of the VVCC Board should be considered to
have already expired. Thus, according to Africa, the resulting
vacancy should have been filled by the stockholders in a regular
or special meeting called for that purpose, and not by the
remaining members of the VVCC Board, as was done in this case.
Africa additionally contends that for the members to
exercise the authority to fill in vacancies in the board of directors,
Section 29 requires, among others, that there should be
an unexpired term during which the successor-member shall
serve. Since Makalintals term had already expired with the lapse
of the one-year term provided in Section 23, there is no more
unexpired term during which Ramirez could serve.
Through a partial decision[4] promulgated on January 23, 2002,
the RTC ruled in favor of Africa and declared the election of
Ramirez, as Makalintals replacement, to the VVCC Board as null
and void.
Incidentally, the SEC issued a similar ruling on June 3, 2003,
nullifying the election of Roxas as member of the VVCC
Board, vice hold-over director Dinglasan. While VVCC manifested
its intent to appeal from the SECs ruling, no petition was actually
filed with the Court of Appeals; thus, the appellate court
considered the case closed and terminated and the SECs ruling
final and executory.[5]
THE PETITION
VVCC now appeals to the Court to assail the RTCs January 23,
2002 partial decision for being contrary to law and
jurisprudence. VVCC made a direct resort to the Court via a
petition for review on certiorari, claiming that the sole issue in the
present case involves a purely legal question.
As framed by VVCC, the issue for resolution is whether the
remaining directors of the corporations Board, still
constituting a quorum, can elect another director to fill in a
vacancy caused by the resignation of a hold-over director.
Citing law and jurisprudence, VVCC posits that the power
to fill in a vacancy created by the resignation of a hold-over
director is expressly granted to the remaining members of the
corporations board of directors.
Under the above-quoted Section 29 of the Corporation
Code, a vacancy occurring in the board of directors caused by the
expiration of a members term shall be filled by the corporations
stockholders. Correlating Section 29 with Section 23 of the same
law, VVCC alleges that a members term shall be for one
year and until his successor is elected and
qualified; otherwise stated, a members term expires only when
his successor to the Board is elected and qualified. Thus, until such
time as [a successor is] elected or qualified in an annual election
where a quorum is present, VVCC contends that the term of [a
member] of the board of directors has yet not expired.
As the vacancy in this case was caused by Makalintals
resignation, not by the expiration of his term, VVCC insists that the
board rightfully appointed Ramirez to fill in the vacancy.
In support of its arguments, VVCC cites the Courts ruling
in the 1927 El Hogar[6] case which states:
Owing to the failure of a quorum at most of the
general meetings since the respondent has
been in existence, it has been the practice of
the directors to fill in vacancies in the
directorate by choosing suitable persons from
among the stockholders. This custom finds its
sanction in Article 71 of the By-Laws, which reads
as follows:
Art. 71. The directors shall elect
from among the shareholders
members to fill the vacancies that
may occur in the board of
directors until the election at the
general meeting.
xxxx
Upon failure of a quorum at any annual meeting
the directorate naturally holds over and continues
to function until another directorate is chosen and
qualified. Unless the law or the charter of a
corporation expressly provides that an office shall
become vacant at the expiration of the term of
office for which the officer was elected, the general
rule is to allow the officer to hold over until his
successor is duly qualified. Mere failure of a
 corporation to elect officers does not terminate legal issue is significantly hinged on the determination of what
the terms of existing officers nor dissolve the
corporation. The doctrine above stated finds constitutes a directors term of office.
expression in article 66 of the by-laws of the
respondent which declares in so many words that The holdover
directors shall hold office "for the term of one year period is not part
or until their successors shall have been elected of the term of
and taken possession of their offices." xxx. office of a member
of the board of
It results that the practice of the directorate of directors
filling vacancies by the action of the directors
themselves is valid. Nor can any exception be
taken to the personality of the individuals chosen The word term has acquired a definite meaning in
by the directors to fill vacancies in the body. jurisprudence. In several cases, we have defined term as the time
[Emphasis supplied.]
during which the officer may claim to hold the office as of
right, and fixes the interval after which the several incumbents
Africa, in opposing VVCCs contentions, raises the same arguments
shall succeed one another.[7] The term of office is not affected
that he did before the trial court.
by the holdover.[8] The term is fixed by statute and it does not
change simply because the office may have become vacant, nor
THE COURTS RULING
because the incumbent holds over in office beyond the end of the
term due to the fact that a successor has not been elected and has
We are not persuaded by VVCCs arguments and, thus, failed to qualify.
find its petition unmeritorious.
Term is distinguished from tenure in that an
To repeat, the issue for the Court to resolve is whether the officers tenure represents the term during which the
remaining directors of a corporations Board, still constituting incumbent actually holds office. The tenure may be shorter (or,
a quorum, can elect another director to fill in a vacancy caused in case of holdover, longer) than the term for reasons within or
by the resignation of a hold-over director. The resolution of this beyond the power of the incumbent.
 Based on the above discussion, when Section 23[9] of the
Corporation Code declares that the board of directorsshall hold
office for one (1) year until their successors are elected and
qualified, we construe the provision to mean that the term of the
members of the board of directors shall be only for one
year; their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a
members election to the Board and until his successors election
and qualification is not part of the directors original term of office,
nor is it a new term; the holdover period, however, constitutes
part of his tenure. Corollary, when an incumbent member of the
board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and
the incumbent is holding the succeeding term.[10]
After the lapse of one year from his election as member of the
VVCC Board in 1996, Makalintals term of office is deemed to have
already expired. That he continued to serve in the VVCC Board in
a holdover capacity cannot be considered as extending his
term. To be precise, Makalintals term of office began in 1996 and
expired in 1997, but, by virtue of the holdover doctrine in Section
23 of the Corporation Code, he continued to hold office until his
resignation on November 10, 1998. This holdover period,
however, is not to be considered as part of his term, which, as
declared, had already expired.
With the expiration of Makalintals term of office, a vacancy
resulted which, by the terms of Section 29[11] of the Corporation
Code, must be filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To assume as VVCC does
that the vacancy is caused by Makalintals resignation in 1998, not
by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the
expiration of Makalintals term had been created long before his
resignation.
The powers of the
corporations
board of directors
emanate from its
stockholders
VVCCs construction of Section 29 of the Corporation Code on the
authority to fill up vacancies in the board of directors, in relation
to Section 23 thereof, effectively weakens the stockholders power
to participate in the corporate governance by electing their
representatives to the board of directors. The board of directors
is the directing and controlling body of the corporation. It is a
creation of the stockholders and derives its power to control and
direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the stockholders,
in the sense that the board should exercise not only care and
diligence, but utmost good faith in the management of corporate
affairs.[12]
The underlying policy of the Corporation Code is that the business
and affairs of a corporation must be governed by a board of
directors whose members have stood for election, and who have
actually been elected by the stockholders, on an annual basis. Only
in that way can the directors' continued accountability to
shareholders, and the legitimacy of their decisions that bind the
corporation's stockholders, be assured. The shareholder vote is
critical to the theory that legitimizes the exercise of power by the
directors or officers over properties that they do not own.[13]
This theory of delegated power of the board of directors similarly
explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporations board of directors is caused
not by the expiration of a members term, the successor so elected
to fill in a vacancy shall be elected only for the unexpired term of
the his predecessor in office. The law has authorized the
remaining members of the board to fill in a vacancy only in
specified instances, so as not to retard or impair the corporations
operations; yet, in recognition of the stockholders right to elect
the members of the board, it limited the period during which the
successor shall serve only to the unexpired term of his
predecessor in office.
While the Court in El Hogar approved of the practice of the
directors to fill vacancies in the directorate, we point out that this
ruling was made before the present Corporation Code was
enacted[14] and before its Section 29 limited the instances when
the remaining directors can fill in vacancies in the board, i.e., when
the remaining directors still constitute a quorum and when the
vacancy is caused for reasons other than by removal by the
stockholders or by expiration of the term.
It also bears noting that the vacancy referred to in Section
29 contemplates a vacancy occurring within the directors term
of office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations stockholders
who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.
As correctly pointed out by the RTC, when remaining
members of the VVCC Board elected Ramirez to replace
Makalintal, there was no more unexpired term to speak of, as
Makalintals one-year term had already expired. Pursuant to law,
the authority to fill in the vacancy caused by Makalintals leaving
lies with the VVCCs stockholders, not the remaining members of
its board of directors.
 WHEREFORE, we DENY the petitioners petition for
review on certiorari, and AFFIRM the partial decision of the
Regional Trial Court, Branch 152, Manila, promulgated on January
23, 2002, in Civil Case No. 68726. Costs against the petitioners.

SO ORDERED.

NECTARINA S. RANIEL and G.R. No. 153413

MA. VICTORIA R. PAG-ONG,
Petitioners,
Present:

YNARES-SANTIAGO, J., Chairperson,

- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR.,
CHICO-NAZARIO, and
NACHURA, JJ.

PAUL JOCHICO, JOHN

STEFFENS and SURYA
VIRIYA, Promulgated:
Respondents. March 1, 2007 respondents' plan to enter into a joint venture with the Butuan
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Doctors' Hospital and College, Inc. sometime in December
-x
1997. Because of this, petitioners claim that respondents tried to
compel them to waive and assign their shares with Nephro but
DECISION
they refused. Thereafter, Raniel sought an indefinite leave of
AUSTRIA-MARTINEZ, J.:
absence due to stress, but this was denied by Jochico,

Assailed in the present Petition for Review on Certiorari is as Nephro President. Raniel, nevertheless, did not report for

the Decision[1] of the Court of Appeals (CA) dated April 30, 2002, work, causing Jochico to demand an explanation from her why she

affirming with modification the Decision dated October 27, should not be removed as Administrator and Corporate

2000 rendered by the Securities and Exchange Commission (SEC) Secretary. Raniel replied, expressing her sentiments over the

which held as valid the removal of petitioners Ma. Victoria R. Pag- disapproval of her request for leave and respondents' decision

ong (Pag-ong) as director and Nectarina S. Raniel (Raniel) as with regard to the Butuan venture.

director and corporate officer

of Nephro Systems Dialysis Center (Nephro). On January 30, 1998, Jochico issued a Notice of Special
Board Meeting on February 2, 1998. Despite receipt of the notice,

Petitioners first questioned their removal in SEC Case No. petitioners did not attend the board meeting. In said meeting, the

02-98-5902 for Declaration of Nullity of the Illegal Acts of Board passed several resolutions ratifying the disapproval of

Respondents, Damages and Injunction. Petitioners, together with Raniel's request for leave, dismissing her as Administrator of

respondents Paul Jochico (Jochico), Nephro, declaring the position of Corporate Secretary vacant,

John Steffens and Surya Viriya, were incorporators and directors appointing Otelio Jochico as the new Corporate Secretary and

of Nephro, with Raniel acting as Corporate Secretary and authorizing the call of a Special Stockholders' Meeting on

Administrator. The conflict started when petitioners questioned


February 16, 1998 for the purpose of the removal of petitioners
as directors of Nephro.
Otelio Jochico issued the corresponding notices for the
Special Stockholders' Meeting to be held on February 16,
1998 which were received by petitioners on February 2, 1998.
Again, they did not attend the meeting. The stockholders who
were present removed the petitioners as directors of
Nephro. Thus, petitioners filed SEC Case No. 02-98-5902.
On October 27, 2000, the SEC rendered its Decision,
the dispositive portion of which reads:
WHEREFORE, the Commission so holds
that complainants cannot be awarded the reliefs
prayed for in reinstating Nectarina S. Raniel as
secretary and administrator.
The corporation acting thru its Board of
Directors can validly remove its corporate officers,
particularly complainant Nectarina S. Raniel as
corporate secretary, treasurer and administrator
of the Dialysis Clinic.
Also, the Commission cannot grant the
relief prayed for by complainants in restraining
the respondents from interfering in the
administration of the Dialysis Clinic owned by the
corporation and the use of corporate funds.
The administration of the Dialysis Clinic of
the corporation and the use of corporate funds,
rightfully belong to the officers of the corporation,
which in this case are the respondents.
The counterclaim of respondents to return
or assign back the complainants' shares in favor of
respondent Paul Jochico or his nominee is hereby
denied for lack of merit.
The respondents failed to show any clear
and convincing evidence to rebut the presumption
of the validity and truthfulness of documents
submitted to the Commission in the grant of
corporate license.
The claim for attorney's fees and damages
of both parties are likewise denied for lack of
merit, as neither party should be punished for
vindicating a right, which he/she believes should
be protected or enforced.
SO ORDERED.[2]
Dissatisfied, petitioners filed a petition for review with the
CA.
 On April 30, 2002, the CA rendered the assailed Decision,
with the following dispositive portion:
WHEREFORE, in light of the foregoing
discussions, the appealed decision of the
Securities and Exchange Commission is hereby
AFFIRMED with the MODIFICATION that the
renewal of petitioners as directors of Nephro is
declared valid.
SO ORDERED.[3]
Respondents filed a Manifestation and Motion to Correct
Typographical Error, stating that the term renewal as provided in
the CA Decision should be removal.[4]Petitioners, on the other
hand, filed the present petition for review on certiorari.
On November 20, 2002, the CA issued a Resolution
resolving to refrain from acting on all pending incidents before it
in view of the filing of the petition with the Court.[5]
In the present petition, petitioners raised basically the
same argument they had before the SEC and the CA, i.e., their
removal from Nephro was not valid.
Both the SEC and the CA held that Pag-ong's removal as
director and Raniel's removal as director and officer of Nephro
were valid. For its part, the SEC ruled that the Board of Directors
had sufficient ground to remove Raniel as officer due to loss of
trust and confidence, as her abrupt and unauthorized leave of
absence exhibited her disregard of her responsibilities as an
officer of the corporation and disrupted the operations of
Nephro. The SEC also held that the Special Board Meeting held
on February 2, 1998 was valid and the resolutions adopted
therein are binding on petitioners.[6]
The CA upheld the SEC's conclusions, adding further that
the special stockholders' meeting on February 16, 1998 was
likewise validly held. The CA also ruled that Pag-ong's removal as
director of Nephro was justified as it was due to her undenied
delay in the release of Nephro's medical supplies from the
warehouse of the Fly-High Brokerage where she was an officer, on
top of her and her co-petitioner Raniel's absence from the
aforementioned directors' and stockholders' meetings of Nephro
despite due notice.[7]
 It is well to stress the settled rule that the findings of fact
of administrative bodies, such as the SEC, will not be interfered
with by the courts in the absence of grave abuse of discretion on
the part of said agencies, or unless the aforementioned findings
are not supported by substantial evidence. They carry even more
weight when affirmed by the CA.[8] Such findings are accorded not
only great respect but even finality, and are binding upon this
Court, unless it is shown that it had arbitrarily disregarded or
misapprehended evidence before it to such an extent as to compel
a contrary conclusion had such evidence been properly
appreciated.[9] This rule is rooted in the doctrine that this Court is
not a trier of facts, as well as in the respect to be accorded the
A corporation exercises its powers through its board
of directors and/or its duly authorized officers and agents,
except in instances where the Corporation Code requires
stockholders approval for certain specific acts.[11]
Based on Section 23 of the Corporation Code which
provides:
SEC. 23. The Board of Directors or Trustees.
Unless otherwise provided in this Code, the
corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees x x x.

determinations made by administrative bodies in general on

matters falling within their respective fields of specialization or a corporations board of directors is understood to be that body

expertise.[10] which (1) exercises all powers provided for under

A review of the petition failed to demonstrate any the Corporation Code; (2) conducts all business of

reversible error committed by the two tribunals, hence, the the corporation; and (3) controls and holds all property of

petition must be denied. It does not present any argument which the corporation. Its members have been characterized as trustees

convinces the Court that the SEC and the CA made any or directors clothed with a fiduciary character. [12]Moreover, the

misappreciation of the facts and the applicable laws such that directors may appoint officers and agents and as incident to this

their decisions should be overturned. power of appointment, they may discharge those
appointed.[13]

In this case, petitioner Raniel was removed as a corporate
officer through the resolution of Nephro's Board of Directors
adopted in a special meeting on February 2, 1998.As correctly
ruled by the SEC, petitioners' removal was a valid exercise of the
powers of Nephro's Board of Directors, viz.:
In the instant complaint, do respondents
have sufficient grounds to cause the removal of
Raniel from her positions as Corporate Secretary,
Treasurer and Administrator of the Dialysis
Clinic? Based on the facts proven during the
hearing of this case, the answer is in the
affirmative.
Raniel's letter of January 26, 1998 speaks
for itself. Her request for an indefinite leave,
immediately effective yet without prior notice,
reveals a disregard of the critical responsibilities
pertaining to the sensitive positions she held in
the corporation. Prior to her hasty departure,
Raniel did not make a proper turn-over of her
duties and had to be expressly requested to hand
over documents and records, including keys to the
office and the cabinets (Exh. 15).
xxxx
Since Raniel occupied all three positions in
Nephro, it is not difficult to foresee the disruption
that her immediate and indefinite absence can
inflict on the operations of the company. By
leaving abruptly, Raniel abandoned the positions
she is now trying to reclaim. Raniel's actuation has
been sufficiently proven to warrant loss of the
Board's confidence.[14]
The SEC also correctly concluded that petitioner Raniel
was removed as an officer of Nephro in compliance with
established procedure, thus:
The resolutions of the Board dismissing
complainant Raniel from her various positions in
Nephro are valid. Notwithstanding the absence of
complainants from the meeting, a quorum was
validly constituted. x x x.
xxxx
Based on its articles of incorporation,
Nephro has five directors two of the positions
were occupied by complainants and the remaining
three are held by respondents. This being the case,
the presence of all three respondents in the
Special Meeting of the Board on February 2,
1998 established a quorum for the conduct of
business. The unanimous resolutions carried by
the Board during such meeting are therefore valid
and binding against complainants.
It bears emphasis that Raniel was given
sufficient opportunity to be heard. Jochico's
letters of January 26, 1998 and January 27, 1998,
albeit adversarial, recognized her right to explain
 herself and gave her the chance to do so. In fact,
Raniel did respond to Jochico's letter on January
28, 1998 and took the occasion to voice her
opinions about Jochico's alleged practice of using
others for your own benefit, without cost. (Exh.
14). Moreover, the Special Meeting of the Board
could have been the appropriate venue for Raniel
to air her side. Had Raniel decided to grace the
meeting with her presence, she could have
explained herself before the board and tried to
convince them to allow her to keep her posts.[15]
Petitioners Raniel and Pag-ong's removal as members of
Nephro's Board of Directors was likewise valid.
Only stockholders or members have the power to remove
the directors or trustees elected by them, as laid down in Section
28 of the Corporation Code,[16] which provides in part:
SEC. 28. Removal of directors or trustees. -
- Any director or trustee of a corporation may
be removed from office by a vote of the
stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital
stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3)
of the members entitled to vote: Provided, that
such removal shall take place either at a regular
meeting of the corporation or at a special meeting
called for the purpose, and in either case, after
previous notice to stockholders or members of the
corporation of the intention to propose such
removal at the meeting. A special meeting of the
stockholders or members of a corporation for the
purpose of removal of directors or trustees or any
of them, must be called by the secretary on order
of the president or on the written demand of the
stockholders representing or holding at least a
majority of the outstanding capital stock, or if it be
a non-stock corporation, on the written demand of
a majority of the members entitled to vote. x x
x Notice of the time and place of such meeting, as
well as of the intention to propose such removal,
must be given by publication or by written notice
as prescribed in this Code. x x x Removal may be
with or without cause: Provided, That removal
without cause may not be used to deprive
minority stockholders or members of the right of
representation to which they may be entitled
under Section 24 of this Code. (Emphasis
supplied)
Petitioners do not dispute that the stockholders' meeting
was held in accordance with Nephro's By-Laws. The ownership of
Nephro's outstanding capital stock is distributed as follows:
Jochico - 200 shares; Steffens - 100 shares; Viriya - 100 shares;
Raniel - 75 shares; and Pag-ong - 25 shares,[17] or a total of 500
shares. A two-thirds vote of Nephro's outstanding capital stock
would be 333.33 shares, and during the Stockholders' Special
Meeting held on February 16, 1998, 400 shares voted for
petitioners' removal. Said number of votes is more than enough to
oust petitioners from their respective positions as members of the
board, with or without cause.

Verily therefore, there is no cogent reason to grant the

present petition.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.

PAUL LEE TAN, ANDREW G.R. No. 153468

LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ. The Case
Petitioners,
- versus -
PAUL SYCIP and MERRITTO
LIM, Promulgated: The present Petition for Review on Certiorari[1] under
Respondents. August 17, 2006
Rule 45 of the Rules of Court seeks the reversal of the January
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

23[2] and May 7, 2002,[3]Resolutions of the Court of Appeals (CA)

DECISION in CA-GR SP No. 68202. The first assailed Resolution dismissed

PANGANIBAN, CJ.: the appeal filed by petitioners with the CA.Allegedly, without the

proper authorization of the other petitioners, the Verification and

Certification of Non-Forum Shopping were signed by only one of

For stock corporations, the quorum referred to in Section 52

them -- Atty. Sabino Padilla Jr. The second Resolution denied
of the Corporation Code is based on the number of outstanding
reconsideration.
The Facts
voting stocks. For nonstock corporations, only those who are actual,

living members with voting rights shall be counted in determining

the existence of a quorum during members meetings.Dead members

Petitioner Grace Christian High School (GCHS) is a nonstock, non-
shall not be counted. profit educational corporation with fifteen (15) regular members,
who also constitute the board of trustees.[4] During the annual basis for determining the quorum in a meeting of members should

members meeting held on April 6, 1998, there were only eleven be their number as specified in the articles of incorporation, not

(11)[5] living member-trustees, as four (4) had already died. Out of simply the number of living members.[8] She explained that the

the eleven, seven (7)[6] attended the meeting through their qualifying phrase entitled to vote in Section 24[9] of the

respective proxies. The meeting was convened and chaired by Corporation Code, which provided the basis for determining a

Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, quorum for the election of directors or trustees, should be read

who argued that there was no quorum.[7] In the meeting, together with Section 89.[10]

Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith

The hearing officer also opined that Article III (2)[11] of the
Tan were voted to replace the four deceased member-trustees.
By-Laws of GCHS, insofar as it prescribed the mode of filling

When the controversy reached the Securities and Exchange vacancies in the board of trustees, must be interpreted in

Commission (SEC), petitioners maintained that the deceased conjunction with Section 29[12] of the Corporation Code. The SEC

member-trustees should not be counted in the computation of the en banc denied the appeal of petitioners and affirmed the Decision

quorum because, upon their death, members automatically lost all of the hearing officer in toto.[13] It found to be untenable their

their rights (including the right to vote) and interests in the contention that the word members, as used in Section 52[14] of the

corporation. Corporation Code, referred only to the living members of a

nonstock corporation.[15]
SEC Hearing Officer Malthie G. Militar declared the April 6,

1998 meeting null and void for lack of quorum. She held that the

As earlier stated, the CA dismissed the appeal of
petitioners, because the Verification and Certification of Non-
Forum Shopping had been signed only by Atty. Sabino Padilla
Jr. No Special Power of Attorney had been attached to show his
authority to sign for the rest of the petitioners.
Hence, this Petition.[16]
Issues
Petitioners state the issues as follows:
Petitioners principally pray for the resolution of
the legal question of whether or not in NON-
STOCK corporations, dead members should still be
counted in determination of quorum for purposed
of conducting the Annual Members Meeting.
Petitioners have maintained before the courts
below that the DEAD members should no longer
be counted in computing quorum primarily on the
ground that members rights are personal and non-
transferable as provided in Sections 90 and 91 of
the Corporation Code of the Philippines.
The SEC ruled against the petitioners solely on the
basis of a 1989 SEC Opinion that did not even
involve a non-stock corporation as petitioner
GCHS.
The Honorable Court of Appeals on the
other hand simply refused to resolve this question
and instead dismissed the petition for review on a
technicality the failure to timely submit an SPA
from the petitioners authorizing their co-
petitioner Padilla, their counsel and also a
petitioner before the Court of Appeals, to sign the
petition on behalf of the rest of the petitioners.
Petitioners humbly submit that the action of both
the SEC and the Court of Appeals are not in accord
with law particularly the pronouncements of this
Honorable Court in Escorpizo v. University of
Baguio (306 SCRA 497), Robern Development
Corporation v. Quitain (315 SCRA 150,) and MC
Engineering, Inc. v. NLRC, (360 SCRA 183). Due
course should have been given the petition below
and the merits of the case decided in petitioners
favor.[17]
 The Petition before the CA was initially flawed, because

the Verification and Certification of Non-Forum Shopping were

In sum, the issues may be stated simply in this wise: 1) whether signed by only one, not by all, of the petitioners; further, it failed

the CA erred in denying the Petition below, on the basis of a to show proof that the signatory was authorized to sign on behalf

defective Verification and Certification; and 2) whether dead of all of them. Subsequently, however, petitioners submitted a

members should still be counted in the determination of the Special Power of Attorney, attesting that Atty. Padilla was

quorum, for purposes of conducting the annual members meeting. authorized to file the action on their behalf.[18]

In the interest of substantial justice, this initial procedural

The Courts Ruling
lapse may be excused. [19] There appears to be no intention to

circumvent the need for proper verification and certification,

The present Petition is partly meritorious.
which are aimed at assuring the truthfulness and correctness of

the allegations in the Petition for Review and at discouraging

Procedural Issue:
forum shopping.[20] More important, the substantial merits of
Verification and Certification
petitioners case and the purely legal question involved in the
of Non-Forum Shopping
Petition should be considered special circumstances[21] or

compelling reasons that justify an exception to the strict

requirements of the verification and the certification of non- charged with the management of the corporation.[25] The board, in
forum shopping.[22]
turn, periodically elects officers to carry out management
Main Issue:
functions on a day-to-day basis. As owners, though, the
Basis for Quorum
stockholders or members have residual powers over fundamental

and major corporate changes.

While stockholders and members (in some instances) are entitled

Generally, stockholders or members meetings are called for the
to receive profits, the management and direction of the
purpose of electing directors or trustees[23] and transacting some
corporation are lodged with their representatives and agents --
other business calling for or requiring the action or consent of the
the board of directors or trustees.[26] In other words, acts of
shareholders or members,[24] such as the amendment of the
management pertain to the board; and those of ownership, to the
articles of incorporation and bylaws, sale or disposition of all or
stockholders or members. In the latter case, the board cannot act
substantially all corporate assets, consolidation and merger and
alone, but must seek approval of the stockholders or members.[27]
the like, or any other business that may properly come before the
Conformably with the foregoing principles, one of the most
meeting.
important rights of a qualified shareholder or member is the right
Under the Corporation Code, stockholders or members
to vote -- either personally or by proxy -- for the directors or
periodically elect the board of directors or trustees, who are
trustees who are to manage the corporate affairs.[28] The right to members have no right to vote.[30] Voting may be expressed

choose the persons who will direct, manage and operate the personally, or through proxies who vote in their representative

corporation is significant, because it is the main way in which a capacities.[31] Generally, the right to be present and to vote in a

stockholder can have a voice in the management of corporate meeting is determined by the time in which the meeting is held.[32]

affairs, or in which a member in a nonstock corporation can have

a say on how the purposes and goals of the corporation may be Section 52 of the Corporation Code states:

achieved.[29]Once the directors or trustees are elected, the

Section 52. Quorum in Meetings. Unless otherwise
stockholders or members relinquish corporate powers to the provided for in this Code or in the by-laws, a

board in accordance with law. quorum shall consist of the stockholders

representing a majority of the outstanding capital

stock or a majority of the members in the case of

In the absence of an express charter or statutory provision to the
non-stock corporations.
contrary, the general rule is that every member of a nonstock

corporation, and every legal owner of shares in a stock

corporation, has a right to be present and to vote in all corporate

meetings. Conversely, those who are not stockholders or

In stock corporations, the presence of a quorum is ascertained and The right to vote is inherent in and incidental to the ownership of

counted on the basis of the outstanding capital stock, as defined by corporate stocks.[33] It is settled that unissued stocks may not be

the Code thus: voted or considered in determining whether a quorum is present

in a stockholders meeting, or whether a requisite proportion of

SECTION 137. Outstanding capital stock defined. The term

outstanding capital stock as used in this Code, the stock of the corporation is voted to adopt a certain measure or

means the total shares of stock issued under act. Only stock actually issued and outstanding may be

binding subscription agreements to subscribers or voted.[34] Under Section 6 of the Corporation Code, each share of
stockholders, whether or not fully or partially
stock is entitled to vote, unless otherwise provided in the articles
paid, except treasury shares. (Underscoring
of incorporation or declared delinquent[35] under Section 67 of the
supplied)
Code.

Neither the stockholders nor the corporation can vote or

The Right to Vote in represent shares that have never passed to the ownership of

stockholders; or, having so passed, have again been purchased by

Stock Corporations
the corporation.[36] These shares are not to be taken into
 further, that there shall always be a class or series
consideration in determining majorities. When the law speaks of
of shares which have complete voting rights.
a

given proportion of the stock, it must be construed to mean xxxxxxxxx

the shares that have passed from the corporation, and that may be
Where the articles of incorporation provide for non-
voted.[37]
voting shares in the cases allowed by this Code, the

holders of such shares shall nevertheless be

Section 6 of the Corporation Code, in part, provides:
entitled to vote on the following matters:

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

stock corporations may be divided into classes or 1. Amendment of the articles of

series of shares, or both, any of which classes or incorporation;

series of shares may have such rights, privileges or 2. Adoption and amendment of by-laws;

restrictions as may be stated in the articles of 3. Sale, lease, exchange, mortgage,

incorporation: Provided, That no share may be pledge or other disposition of all or

deprived of voting rights except those classified substantially all of the corporation

and issued as preferred or redeemable shares, property;

unless otherwise provided in this Code: Provided,

 4. Incurring, creating or increasing
Taken in conjunction with Section 137, the last paragraph
bonded indebtedness;

5. Increase or decrease of capital stock; of Section 6 shows that the intention of the lawmakers was to base

6. Merger or consolidation of the the quorum mentioned in Section 52 on the number

corporation with another corporation of outstanding voting stocks.[38]

or other corporations;

7. Investment of corporate funds in The Right to Vote in

another corporation or business in Nonstock Corporations

accordance with this Code; and

8. Dissolution of the corporation.

In nonstock corporations, the voting rights attach to

Except as provided in the immediately preceding
membership.[39] Members vote as persons, in accordance with the
paragraph, the vote necessary to approve a

particular corporate act as provided in this Code law and the bylaws of the corporation. Each member shall be

shall be deemed to refer only to stocks with voting entitled to one vote unless so limited, broadened, or denied in the

rights. articles of incorporation or bylaws.[40] We hold that when the

principle for determining the quorum for stock corporations is

applied by analogy to nonstock corporations, only those who in the case of stock corporations, it is the stock and transfer

are actual members with voting rights should be counted. book.[43]

Under Section 52 of the Corporation Code, the majority of

the members representing the actual number of voting rights, not Section 25 of the Code specifically provides that a majority of

the number or numerical constant that may originally be specified the directors or trustees, as fixed in the articles of

incorporation, shall constitute a quorum for the transaction of

in the articles of incorporation, constitutes the quorum.[41]
corporate business (unless the articles of incorporation or the

bylaws provide for a greater majority). If the intention of the

The March 3, 1986 SEC Opinion[42] cited by the hearing
lawmakers was to base the quorum in the meetings of
officer uses the phrase majority vote of the members; likewise
stockholders or members on their absolute number as fixed in the

Section 48 of the Corporation Code refers to 50 percent of 94 articles of incorporation, it would have expressly specified

(the number of registered members of the association mentioned so. Otherwise, the only logical conclusion is that the legislature did

therein) plus one. The best evidence of who are not have that intention.

the present members of the corporation is the membership book;

Effect of the Death
On the other hand, membership in and all rights arising from a

of a Member or Shareholder nonstock corporation are personal and non-transferable, unless

the articles of incorporation or the bylaws of the corporation

Having thus determined that the quorum in a members
provide otherwise.[45] In other words, the determination of
meeting is to be reckoned as the actual number of members of the
whether or not dead members are entitled to exercise their voting
corporation, the next question to resolve is what happens in the
rights (through their executor or administrator), depends on
event of the death of one of them.
those articles of incorporation or bylaws.
In stock corporations, shareholders may generally transfer their

shares. Thus, on the death of a shareholder, the executor or Under the By-Laws of GCHS, membership in the corporation shall,

administrator duly appointed by the Court is vested with the legal among others, be terminated by the death of the

title to the stock and entitled to vote it. Until a settlement and member.[46] Section 91 of the Corporation Code further provides

that termination extinguishes all the rights of a member of the

division of the estate is effected, the stocks of the decedent are
corporation, unless otherwise provided in the articles of
held by the administrator or executor.[44]
incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead
members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS are
not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members
meeting. With 11 remaining members, the quorum in the present
case should be 6. Therefore, there being a quorum, the annual
members meeting, conducted with six[47] members present, was
valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section
29 of the Corporation Code provides:
SECTION 29. Vacancies in the office of
director or trustee. -- Any vacancy occurring in the
board of directors or trustees other than by
removal by the stockholders or members or by
expiration of term, may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum; otherwise,
said vacancies must be filled by the stockholders
in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a
vacancy shall be elected only for the unexpired
term of his predecessor in office.
Undoubtedly, trustees may fill vacancies in the board,
provided that those remaining still constitute a quorum. The
phrase may be filled in Section 29 shows that the filling of
vacancies in the board by the remaining directors or trustees
constituting a quorum is merely permissive, not
mandatory.[48]Corporations, therefore, may choose how vacancies
in their respective boards may be filled up -- either by the
remaining directors constituting a quorum, or by the stockholders these remaining member-trustees must sit as a board in order to

or members in a regular or special meeting called for the validly elect the new ones.

purpose.[49]
Indeed, there is a well-defined distinction between a corporate act

to be done by the board and that by the constituent members of

the corporation. The board of trustees must act, not individually

The By-Laws of GCHS prescribed the specific mode of filling up
or separately, but as a body in a lawful meeting. On the other hand,
existing vacancies in its board of directors; that is, by a majority
in their annual meeting, the members may be represented by their
vote of the remaining members of the board.[50]
respective proxies, as in the contested annual members meeting

of GCHS.

While a majority of the remaining corporate members

were present, however, the election of the four trustees cannot be

legally upheld for the obvious reason that it was held in an annual WHEREFORE, the Petition is partly GRANTED. The

meeting of the members, not of the board of trustees. We are not assailed Resolutions of the Court of Appeals are

unmindful of the fact that the members of GCHS themselves also hereby REVERSED AND SET ASIDE. The remaining members of
constitute the trustees, but we cannot ignore the GCHS bylaw
the board of trustees of Grace Christian High School (GCHS) may
provision, which specifically prescribes that vacancies in the
convene and fill up the vacancies in the board, in accordance with
board must be filled up by the remaining trustees. In other words,
this Decision. No pronouncement as to costs in this instance.
SO ORDERED.

FILIPINAS PORT SERVICES, INC., G.R. No. 161886

represented by stockholders, ELIODORO C.
CRUZ and MINDANAO TERMINAL AND
Present:
BROKERAGE SERVICES, INC.,
Petitioners,
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus -
 CORONA, Assailed and sought to be set aside in this petition for
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, AZCUNA, and review on certiorari is the Decision[1] dated 19 January 2004 of the
EDGAR C. TRINIDAD, HERMENEGILDO M. Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier
GARCIA, JJ.
TRINIDAD, JESUS SYBICO, MARY JEAN D.
CO, HENRY CHUA, JOSELITO S. JAYME, decision of the Regional Trial Court (RTC) of Davao City and
ERNESTO S. JAYME, and ELIEZER B. DE accordingly dismissing the derivative suit instituted by petitioner
JESUS, Eliodoro C. Cruz for and in behalf of the stockholders of co-
Respondents. petitioner Filipinas Port Services, Inc. (Filport, hereafter).

The case is actually an intra-corporate dispute involving

Filport, a domestic corporation engaged in stevedoring services
Promulgated:
with principal office in Davao City. It was initially instituted with
the Securities and Exchange Commission (SEC) where the case
March 16, 2007
hibernated and remained unresolved for several years until it was
x------------------------------------------------------------------------------------x
overtaken by the enactment into law, on 19 July 2000, of Republic
Act (R.A.) No. 8799, otherwise known as the Securities Regulation
Code. From the SEC and consistent with R.A. No. 8799, the case
DECISION
was transferred to the RTC of Manila, Branch 14, sitting as a
corporate court. Subsequently, upon respondents motion, the
GARCIA, J.:
case eventually landed at the RTC of Davao City where it was
docketed as Civil Case No. 28,552-2001. RTC-Davao City, Branch
10, ruled in favor of the petitioners prompting respondents to go

to the CA in CA-G.R. CV No. 73827. This time, the respondents
prevailed, hence, this petition for review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports
president from 1968 until he lost his bid for reelection as Filports
president during the general stockholders meeting in 1991, wrote
a letter[2] to the corporations Board of Directors questioning the
boards creation of the following positions with a monthly
remuneration of P13,050.00 each, and the election thereto of
certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C.
Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de
Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co
(Director)
Asst. Vice-President for Administration - Henry Chua
(Director)
Special Asst. to the Chairman - Arsenio Lopez
Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take
necessary action/actions to recover from those elected to the
aforementioned positions the salaries they have received.
On 15 September 1992, the board met and took up Cruzs
letter. The records do not show what specific action/actions the
board had taken on the letter. Evidently, whatever action/actions
the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of
Filport and its stockholders, among which is herein co-petitioner
Mindanao Terminal and Brokerage Services, Inc. (Minterbro),
filed with the SEC a petition[3] which he describes as a derivative
suit against the herein respondents who were then the incumbent
members of Filports Board of Directors, for alleged acts of
mismanagement detrimental to the interest of the corporation
and its shareholders at large, namely:
 3. re-creation of the positions of Assistant Vice-
1. creation of an executive committee in 1991 Presidents (AVPs) for Corporate Planning,
composed of seven (7) members of the Operations, Finance and Administration,
board with compensation of P500.00 for and the election thereto of board members
each member per meeting, an office which, Edgar C. Trinidad, Eliezer de Jesus, Mary
to Cruz, is not provided for in the by-laws Jean D. Co and Henry Chua, respectively;
of the corporation and whose function and
merely duplicates those of the President

and General Manager; 4. creation of the additional positions of Special

Assistants to the President and the Board

2. increase in the emoluments of the Chairman,
Vice-President, Treasurer and Assistant
General Manager which increases are
greatly disproportionate to the volume
and character of the work of the directors
holding said positions;
Chairman, with Fortunato V. de Castro and
Arsenio Lopez Chua elected to the same,
the directors elected/appointed thereto
not doing any work to deserve the monthly
remuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz

alleged that despite demands made upon the respondent
 Assistant General Manager were well
members of the board of directors to desist from creating the
positions in question and to account for the amounts incurred in within the financial capacity of the

creating the same, the demands were unheeded. Cruz thus prayed corporation and well-deserved by the
that the respondent members of the board of directors be made to
officers elected thereto; and
pay Filport, jointly and severally, the sums of money variedly
representing the damages incurred as a result of the creation of
the offices/positions complained of and the aggregate amount of 3. the positions of AVPs for Corporate Planning,

the questioned increased salaries. Operations, Finance and Administration

were already in existence during the

In their common Answer with Counterclaim,[4] the respondents tenure of Cruz as president of the
denied the allegations of mismanagement and materially
corporation, and were merely recreated
averred as follows:
by the Board, adding that all those
1. the creation of the executive committee and the
appointed to said positions of Assistant
grant of per diems for the attendance of
Vice Presidents, as well as the additional
each member are allowed under the by-
position of Special Assistants to the
laws of the corporation;
Chairman and the President, rendered

services to deserve their compensation.

2. the increases in the salaries/emoluments of the

Chairman, Vice-President, Treasurer and

In the same Answer, respondents further averred that Cruz and
his co-petitioner Minterbro, while admittedly stockholders of
Filport, have no authority nor standing to bring the so-called
derivative suit for and in behalf of the corporation; that
respondent Mary Jean D. Co has already ceased to be a corporate
director and so with Fortunato V. de Castro, one of those holding
an assailed position; and that no demand to cease and desist from
further committing the acts complained of was made upon the
board. By way of affirmative defenses, respondents asserted that
(1) the petition is not duly verified by petitioner Filport which is
the real party-in-interest; (2) Filport, as represented by Cruz and
Minterbro, failed to exhaust remedies for redress within the
corporation before bringing the suit; and (3) the petition does not
show that the stockholders bringing the suit are joined as nominal
parties. In support of their counterclaim, respondents averred
that Cruz filed the alleged derivative suit in bad faith and purely
for harassment purposes on account of his non-reelection to the
board in the 1991 general stockholders meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-
93-4491) hibernated with the SEC for a long period of time. With
the enactment of R.A. No. 8799, the case was first turned over to
the RTC of Manila, Branch 14, sitting as a corporate court.
Thereafter, on respondents motion, it was eventually transferred
to the RTC of Davao City whereat it was docketed as Civil Case No.
28,552-2001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its
decision[5] in the case. Even as it found that (1) Filports Board of
Directors has the power to create positions not provided for in the
by-laws of the corporation since the board is the governing body;
and (2) the increases in the salaries of the board chairman, vice-
president, treasurer and assistant general manager are
reasonable, the trial court nonetheless rendered judgment against
the respondents by ordering the directors holding the positions of
Assistant Vice President for Corporate Planning, Special Assistant
to the President and Special Assistant to the Board Chairman to
refund to the corporation the salaries they have received as such
officers considering that Filipinas Port Services is not a big
corporation requiring multiple executive positions and that said
positions were just created for accommodation.We quote
the fallo of the trial courts decision.
WHEREFORE, judgment is rendered ordering:
 Edgar C. Trinidad under the third and fourth
causes of action to restore to the corporation the
total amount of salaries he received as assistant
vice president for corporate planning; and
likewise ordering Fortunato V. de Castro and
Arsenio Lopez Chua under the fourth cause of
action to restore to the corporation the salaries
they each received as special assistants
respectively to the president and board
chairman. In case of insolvency of any or all of
them, the members of the board who created their
positions are subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents
went on appeal to the CA in CA-G.R. CV No. 73827.
In its decision[6] of 19 January 2004, the CA, taking exceptions to
the findings of the trial court that the creation of the positions of
Assistant Vice President for Corporate Planning, Special Assistant
to the President and Special Assistant to the Board Chairman was
merely for accommodation purposes, granted the respondents
appeal, reversed and set aside the appealed decision of the trial
court and accordingly dismissed the so-called derivative suit filed
by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant
appeal is GRANTED, the challenged decision
is REVERSED and SET ASIDE, and a new one
entered DISMISSING Civil Case No. 28,552-2001
with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its
decision, the CA, before proceeding to address the merits of the
appeal, prefaced its disposition with the statement reading [T]he
appeal is bereft of merit,[7] thereby contradicting the very fallo of
its own decision and the discussions made in the body thereof,
respondents filed with the appellate court a Motion For Nunc Pro

Tunc Order,[8] thereunder praying that the phrase [T]he appeal is
bereft of merit, be corrected to read [T]he appeal is impressed with
merit. In its resolution[9] of 23 April 2004, the CA granted the
respondents motion and accordingly effected the desired
correction.
Hence, petitioners present recourse.
Petitioners assigned four (4) errors allegedly committed by the
CA. For clarity, we shall formulate the issues as follows:
1. Whether the CA erred in holding that Filports
Board of Directors acted within its powers
in creating the executive committee and
the positions of AVPs for Corporate
Planning, Operations, Finance and
Administration, and those of the Special
Assistants to the President and the Board
Chairman, each with corresponding
remuneration, and in increasing the
salaries of the positions of Board
Chairman, Vice-President, Treasurer and
Assistant General Manager; and
2. Whether the CA erred in finding that no
evidence exists to prove that (a) the
positions of AVP for Corporate Planning,
Special Assistant to the President and
Special Assistant to the Board Chairman
were created merely for accommodation,
and (b) the salaries/emoluments
corresponding to said positions were
actually paid to and received by the
directors appointed thereto.
For their part, respondents, aside from questioning the propriety
of the instant petition as the same allegedly raises only questions
of fact and not of law, also put in issue the purported derivative
nature of the main suit initiated by petitioner Eliodoro C. Cruz
allegedly in representation of and in behalf of Filport and its
stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule
45 of the Rules of Court, only questions of law may be raised and
passed upon by the Court. Factual findings of the CA are binding
and conclusive and will not be reviewed or disturbed on
appeal.[10] Of course, the rule is not cast in stone; it admits of
certain exceptions, such as when the findings of fact of the
appellate court are at variance with those of the trial court,[11] as
here. For this reason, and for a proper and complete resolution of
the case, we shall delve into the records and reexamine the same.
The governing body of a corporation is its board of
directors. Section 23 of the Corporation
Code[12] explicitly provides that unless otherwise provided
therein, the corporate powers of all corporations formed under
the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of some powers
expressly granted by law to stockholders (or members, in case of
non-stock corporations), the board of directors (or trustees, in
case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the ordinary
business of the corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant provisions of
law. Verily, the authority of the board of directors is restricted to
the management of the regular business affairs of the corporation,
unless more extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers on
the board of directors is not lost on the Court. Indeed, the
concentration in the board of the powers of control of corporate
business and of appointment of corporate officers and managers
is necessary for efficiency in any large organization. Stockholders
are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of
corporate organization is for the stockholders to choose the
directors who shall control and supervise the conduct of
corporate business.[13]
In the present case, the boards creation of the positions
of Assistant Vice Presidents for Corporate Planning, Operations,
Finance and Administration, and those of the Special Assistants to
the President and the Board Chairman, was in accordance with the
regular business operations of Filport as it is authorized to do so
by the corporations by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under
Section 25 of the Code which reads:
Sec. 25. Corporate officers, quorum. Immediately
after their election, the directors of a corporation
must formally organize by the election of a
president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall
be a resident and citizen of the Philippines,
and such other officers as may be provided for
in the by-laws. (Emphasis supplied.)
In turn, the amended Bylaws of Filport[14] provides the following:
Officers of the corporation, as provided
for by the by-laws, shall be elected by the
board of directors at their first meeting after the
election of Directors. xxx
The officers of the corporation shall be a
Chairman of the Board, President, a Vice-
President, a Secretary, a Treasurer, a General
Manager and such other officers as the Board of
Directors may from time to time provide, and
these officers shall be elected to hold office until
their successors are elected and
qualified. (Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the
positions in question is provided for in the same by-laws of the
corporation, viz:
xxx The Board of Directors shall fix the
compensation of the officers and agents of the
corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to
the creation by its board of directors of an executive
committee. Under Section 35[15] of the Corporation Code, the
creation of an executive committee must be provided for in the
bylaws of the corporation.
Notwithstanding the silence of Filports bylaws on the
matter, we cannot rule that the creation of the executive
committee by the board of directors is illegal or unlawful. One
reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the
executive committee, referred to in Section 35 of the Corporation
Code which is as powerful as the board of directors and in effect
acting for the board itself, should be distinguished from other
committees which are within the competency of the board to
create at anytime and whose actions require ratification and
confirmation by the board.[16] Another reason is that, ratiocinated
by both the two (2) courts below, the Board of Directors has the
power to create positions not provided for in Filports bylaws
since the board is the corporations governing body, clearly
upholding the power of its board to exercise its prerogatives in
managing the business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and
admitted by petitioner Cruz himself, it was during his incumbency
as Filport president that the executive committee in question was
created, and that he was even the one who moved for the creation
of the positions of the AVPs for Operations, Finance and
Administration. By his acquiescence and/or ratification of the
creation of the aforesaid offices, Cruz is virtually precluded from
suing to declare such acts of the board as invalid or illegal. And it
makes no difference that he sues in behalf of himself and of the
other stockholders. Indeed, as his voice was not heard in protest
when he was still Filports president, raising a hue and cry only
now leads to the inevitable conclusion that he did so out of spite
and resentment for his non-reelection as president of the
corporation.
With regard to the increased emoluments of the Board Chairman,
Vice-President, Treasurer and Assistant General Manager which
are supposedly disproportionate to the volume and nature of their
work, the Court, after a judicious scrutiny of the increase vis--
vis the value of the services rendered to the corporation by the
officers concerned, agrees with the findings of both the trial and
appellate courts as to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate
their evidence as to the alleged acts of mismanagement by the
then incumbent board. A perusal of the records, however, reveals
that petitioners merely relied on the testimony of Cruz in support
of their bold claim of mismanagement. To the mind of the Court,
Cruz testimony on the matter of mismanagement is bereft of any
foundation. As it were, his testimony consists merely of
insinuations of alleged wrongdoings on the part of the board.
Without more, petitioners posture of mismanagement must fall
and with it goes their prayer to hold the respondents liable
therefor.
But even assuming, in gratia argumenti, that there was
mismanagement resulting to corporate damages and/or business
losses, still the respondents may not be held liable in the absence,
as here, of a showing of bad faith in doing the acts complained of.
connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong,
a breach of a known duty through some motive or interest or ill-
will partaking of the nature of fraud.[18] We have searched the
records and nowhere do we find a dishonest purpose or some
moral obliquity, or conscious doing of a wrong on the part of the
respondents that partakes of the nature of fraud.
We thus extend concurrence to the following findings of the CA,
affirmatory of those of the trial court:
xxx As a matter of fact, it was during the
term of appellee Cruz, as president and director,
that the executive committee was created. What is
more, it was appellee himself who moved for the

If the cause of the losses is merely error in business judgment, not creation of the positions of assistant vice
amounting to bad faith or negligence, directors and/or officers are
presidents for operations, for finance, and for
not liable.[17] For them to be held accountable, the
administration. He should not be heard to
mismanagement and the resulting losses on account thereof are
complain thereafter for similar corporate acts.
not the only matters to be proven; it is likewise necessary to show
that the directors and/or officers acted in bad faith and with
malice in doing the assailed acts. Bad faith does not simply
 The increase in the salaries of the board chairman,
president, treasurer, and assistant general
manager are indeed reasonable enough in view of
the responsibilities assigned to them, and the
special knowledge required, to be able to
effectively discharge their respective functions
and duties.
Surely, factual findings of trial courts, especially when affirmed by
the CA, are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial
court parted ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation
of the positions of the three (3) AVPs for Corporate Planning,
Special Assistant to the President and Special Assistant to the
Board Chairman, each with a salary of P13,050.00 a month, was
merely for accommodation purposes considering that Filport is
not a big corporation requiring multiple executive
positions. Hence, the trial courts order for said officers to return
the amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled
that Cruzs accommodation theory is not based on facts and
without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside
from Cruzs bare and self-serving testimony, no other evidence
was presented to show the fact of accommodation. By itself, the
testimony of Cruz is not enough to support his claim that
accommodation was the underlying factor behind the creation of
the aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not
constitute evidence adequate to support a conclusion. It is basic in
the rule of evidence that he who alleges a fact bears the burden of
proving it by the quantum of proof required. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under
the Rules of Court.[19] The party having the burden of proof must
establish his case by a preponderance of evidence.[20]
Besides, the determination of the necessity for additional offices
and/or positions in a corporation is a management prerogative
which courts are not wont to review in the absence of any proof the latter allegedly admitted the same in their Answer With
that such prerogative was exercised in bad faith or with malice.
Counterclaim.
Indeed, it would be an improper judicial intrusion into the internal
We are not persuaded.
affairs of Filport were the Court to determine the propriety or
impropriety of the creation of offices therein and the grant of
By claiming that Filport suffered damages because the directors
salary increases to officers thereof. Such are corporate and/or
appointed to the assailed positions are not doing anything to
business decisions which only the corporations Board of Directors
deserve their compensation, petitioners are saddled with the
can determine.
burden of proving that salaries were actually paid. Since the trial
So it is that in Philippine Stock Exchange, Inc. v. CA,[21] the Court
court, in effect, found that the petitioners successfully proved
unequivocally held:
Questions of policy or of management are payment of the salaries when it directed the reimbursements of
left solely to the honest decision of the board as the same, respondents necessarily have to raise the issue on
the business manager of the corporation, and the
appeal. And the CA rightly resolved the issue when it found that
court is without authority to substitute its
judgment for that of the board, and as long as it no evidence of actual payment of the salaries in question was
acts in good faith and in the exercise of honest actually adduced. Respondents alleged admission of the fact of
judgment in the interest of the corporation, its
orders are not reviewable by the courts. payment cannot be inferred from a reading of the pertinent
portions of the parties respective initiatory pleadings.
In a last-ditch attempt to salvage their cause, petitioners assert
Respondents allegations in their Answer With Counterclaim that
that the CA went beyond the issues raised in the court of
the officers corresponding to the positions created performed the
origin when it ruled on the absence of receipt of actual payment work called for in their positions or deserve their compensation,
of the salaries/emoluments pertaining to the positions of cannot be interpreted to mean that they were actually paid such
Assistant Vice-President for Corporate Planning, Special Assistant compensation. Directly put, the averment that one deserves ones

to the Board Chairman and Special Assistant to the compensation does not necessarily carry the implication that such
compensation was actually remitted or received. And because
President. Petitioners insist that the issue of nonpayment was
payment was not duly proven, there is no evidentiary or factual
never raised by the respondents before the trial court, as in fact,
basis for the trial court to direct respondents to make
reimbursements thereof to the corporation.
This brings us to the respondents claim that the case filed
by the petitioners before the SEC, which eventually landed in RTC-
Davao City as Civil Case No. 28,552-2001, is not a derivative suit,
as maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an
injured party, its power to sue is lodged with its board of directors
or trustees. But an individual stockholder may be permitted to
institute a derivative suit in behalf of the corporation in order to
protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the
necessary action would be futile because they are the ones to be
sued, or because they hold control of the corporation.[22] In such
actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal
party.[23]
Here, the action below is principally for damages resulting from
alleged mismanagement of the affairs of Filport by its
directors/officers, it being alleged that the acts of
mismanagement are detrimental to the interests of Filport. Thus,
the injury complained of primarily pertains to the corporation so
that the suit for relief should be by the corporation. However,
since the ones to be sued are the directors/officers of the
corporation itself, a stockholder, like petitioner Cruz, may validly
institute a derivative suit to vindicate the alleged corporate injury,
in which case Cruz is only a nominal party while Filport is the real
party-in-interest. For sure, in the prayer portion of petitioners
petition before the SEC, the reliefs prayed were asked to be made
in favor of Filport.
Besides, the requisites before a derivative suit can be filed
by a stockholder are present in this case, to wit:
a) the party bringing suit should be a shareholder
as of the time of the act or transaction
complained of, the number of his shares
not being material;
b) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
board of directors for the appropriate
relief but the latter has failed or refused to
heed his plea; and

c) the cause of action actually devolves on the
corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit.[24]
as Civil Case No. 28,552-2001, is a derivative suit of which Cruz has
the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision
of the CA is AFFIRMED in all respects.

Indisputably, petitioner Cruz (1) is a stockholder of

No pronouncement as to costs.
Filport; (2) he sought without success to have its board of
directors remedy what he perceived as wrong when he wrote a SO ORDERED.
letter requesting the board to do the necessary action in his
complaint; and (3) the alleged wrong was in truth a wrong against
the stockholders of the corporation generally, and not against
Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz
which directly stands to benefit from the suit. And while it is true
that the complaining stockholder must show to the satisfaction of
the court that he has exhausted all the means within his reach to
attain within the corporation itself the redress for his grievances,
or actions in conformity to his wishes, nonetheless, where the
corporation is under the complete control of the principal
defendants, as here, there is no necessity of making a demand
upon the directors. The reason is obvious: a demand upon the
board to institute an action and prosecute the same effectively
would have been useless and an exercise in futility. In fine, we rule
and so hold that the petition filed with the SEC at the instance of
Cruz, which ultimately found its way to the RTC of Davao City
G.R. No. 137686 February 8, 2000
RURAL BANK OF MILAOR (CAMARINES SUR), petitioner,
vs.
FRANCISCA OCFEMIA, ROWENA BARROGO, MARIFE O. NIÑO,
FELICISIMO OCFEMIA, RENATO OCFEMIA JR, and WINSTON
OCFEMIA, respondents.
PANGANIBAN, J.:
When a bank, by its acts and failure to act, has clearly clothed its
manager with apparent authority to sell an acquired asset in the
normal course of business, it is legally obliged to confirm the
transaction by issuing a board resolution to enable the buyers to
register the property in their names. It has a duty to perform
necessary and lawful acts to enable the other parties to enjoy all
benefits of the contract which it had authorized.
The Case
Before this Court is a Petition for Review on Certiorari challenging
the December 18, 1998 Decision of the Court of Appeals 1 (CA) in
CA-GR SP No. 46246, which affirmed the May 20, 1997
Decision 2 of the Regional Trial Court (RTC) of Naga City (Branch
28). The CA disposed as follows:
Wherefore, premises considered, the Judgment appealed
from is hereby AFFIRMED. Costs against the respondent-
appellant. 3
The dispositive portion of the judgment affirmed by the CA ruled
in this wise:
WHEREFORE, in view of all the foregoing findings,
decision is hereby rendered whereby the [petitioner]
Rural Bank of Milaor (Camarines Sur), Inc. through its
Board of Directors is hereby ordered to immediately issue
a Board Resolution confirming the Deed of Sale it executed
in favor of Renato Ocfemia marked Exhibits C, C-1 and C-
2); to pay [respondents] the sum of FIVE HUNDRED
(P500.00) PESOS as actual damages; TEN THOUSAND
(P10,000.00) PESOS as attorney's fees; THIRTY
THOUSAND (P30,000.00) PESOS as moral damages;
THIRTY THOUSAND (P30,000.00) PESOS as exemplary
damages; and to pay the costs. 4
Also assailed is the February 26, 1999 CA Resolution 5 which
denied petitioner's Motion for Reconsideration.
The Facts
The trial court's summary of the undisputed facts was reproduced
in the CA Decision as follows:
This is an action for mandamus with damages. On April 10,
1996, [herein petitioner] was declared in default on
motion of the [respondents] for failure to file an answer
within the reglementary-period after it was duly served
with summons. On April 26, 1996, [herein petitioner] filed
a motion to set aside the order of default with objection
thereto filed by [herein respondents].
On June 17, 1996, an order was issued denying
[petitioner's] motion to set aside the order of default. On
July 10, 1996, the defendant filed a motion for
reconsideration of the order of June 17, 1996 with
objection thereto by [respondents]. On July 12, 1996, an
order was issued denying [petitioner's] motion for
reconsideration. On July 31, 1996, [respondents] filed a
motion to set case for hearing. A copy thereof was duly
furnished the [petitioner] but the latter did not file any
opposition and so [respondents] were allowed to present
their evidence ex-parte. A certiorari case was filed by the
[petitioner] with the Court of Appeals docketed as CA GR
No. 41497-SP but the petition was denied in a decision
rendered on March 31, 1997 and the same is now final.
The evidence presented by the [respondents] through the
testimony of Marife O. Niño, one of the [respondents] in
this case, show[s] that she is the daughter of Francisca
Ocfemia, a co-[respondent] in this case, and the late
Renato Ocfemia who died on July 23, 1994. The parents of
her father, Renato Ocfemia, were Juanita Arellano Ocfemia
and Felicisimo Ocfemia. Her other co-[respondents]
Rowena O. Barrogo, Felicisimo Ocfemia, Renato Ocfemia,
Jr. and Winston Ocfemia are her brothers and
sisters.1âwphi1.nêt
Marife O. Niño knows the five (5) parcels of land described
in paragraph 6 of the petition which are located in
Bombon, Camarines Sur and that they are the ones
possessing them which [were] originally owned by her
grandparents, Juanita Arellano Ocfemia and Felicisimo
Ocfemia. During the lifetime of her grandparents,
[respondents] mortgaged the said five (5) parcels of land
and two (2) others to the [petitioner] Rural Bank of Milaor
as shown by the Deed of Real Estate Mortgage (Exhs. A and
A-1) and the Promissory Note (Exh. B).
The spouses Felicisimo Ocfemia and Juanita Arellano
Ocfemia were not able to redeem the mortgaged
properties consisting of seven (7) parcels of land and so
the mortgage was foreclosed and thereafter ownership
thereof was transferred to the [petitioner] bank. Out of the
seven (7) parcels that were foreclosed, five (5) of them are
in the possession of the [respondents] because these five
(5) parcels of land described in paragraph 6 of the petition
were sold by the [petitioner] bank to the parents of Marife
O. Niño as evidenced by a Deed of Sale executed in January
1988 (Exhs. C, C-1 and C-2).
The aforementioned five (5) parcels of land subject of the
deed of sale (Exh. C), have not been, however transferred
in the name of the parents of Merife O. Niño after they
were sold to her parents by the [petitioner] bank because
according to the Assessor's Office the five (5) parcels of
land, subject of the sale, cannot be transferred in the name
of the buyers as there is a need to have the document of
sale registered with the Register of Deeds of Camarines
Sur.
In view of the foregoing, Marife O. Niño went to the
Register of Deeds of Camarines Sur with the Deed of Sale
(Exh. C) in order to have the same registered. The Register
of Deeds, however, informed her that the document of sale
cannot be registered without a board resolution of the
[petitioner] Bank. Marife Niño then went to the bank,
showed to if the Deed of Sale (Exh. C), the tax declaration
and receipt of tax payments and requested the [petitioner]
for a board resolution so that the property can be
transferred to the name of Renato Ocfemia the husband of
petitioner Francisca Ocfemia and the father of the other
[respondents] having died already.
The [petitioner] bank refused her request for a board
resolution and made many alibi[s]. She was told that the
[petitioner] bank ha[d] a new manager and it had no
record of the sale. She was asked and she complied with
the request of the [petitioner] for a copy of the deed of sale
and receipt of payment. The president of the [petitioner]
bank told her to get an authority from her parents and
other [respondents] and receipts evidencing payment of
the consideration appearing in the deed of sale. She
complied with said requirements and after she gave all
these documents, Marife O. Niño was again told to wait for
two (2) weeks because the [petitioner] bank would still
study the matter.
After two (2) weeks, Marife O. Niño returned to the
[petitioner] bank and she was told that the resolution of
the board would not be released because the [petitioner]
bank ha[d] no records from the old manager. Because of
this, Marife O. Niño brought the matter to her lawyer and
the latter wrote a letter on December 22, 1995 to the
[petitioner] bank inquiring why no action was taken by
the board of the request for the issuance of the resolution
considering that the bank was already fully paid [for] the
consideration of the sale since January 1988 as shown by
the deed of sale itself (Exh. D and D-1 ).
On January 15, 1996 the [petitioner] bank answered
[respondents'] lawyer's letter (Exh. D and D-1) informing
the latter that the request for board resolution ha[d]
already been referred to the board of directors of the
[petitioner] bank with another request that the latter
should be furnished with a certified machine copy of the
receipt of payment covering the sale between the
[respondents] and the [petitioner] (Exh. E). This request
of the [petitioner] bank was already complied [with] by
Marife O. Niño even before she brought the matter to her
lawyer.
On January 23, 1996 [respondents'] lawyer wrote back the
branch manager of the [petitioner] bank informing the
latter that they were already furnished the receipts the
bank was asking [for] and that the [respondents] want[ed]
already to know the stand of the bank whether the board
[would] issue the required board resolution as the deed of
sale itself already show[ed] that the [respondents were]
clearly entitled to the land subject of the sale (Exh. F). The
manager of the [petitioner] bank received the letter which
was served personally to him and the latter told Marife O.
Niño that since he was the one himself who received the
letter he would not sign anymore a copy showing him as
having already received said letter (Exh. F).
After several days from receipt of the letter (Exh. F) when
Marife O. Niño went to the [petitioner] again and
reiterated her request, the manager of the [petitioner]
bank told her that they could not issue the required board
resolution as the [petitioner] bank ha[d] no records of the
sale. Because of this Merife O. Niño already went to their
lawyer and ha[d] this petition filed.
The [respondents] are interested in having the property
described in paragraph 6 of the petition transferred to
their names because their mother and co-petitioner,
Francisca Ocfemia, is very sickly and they want to
mortgage the property for the medical expenses of
Francisca Ocfemia. The illness of Francisca Ocfemia
beg[a]n after her husband died and her suffering from
arthritis and pulmonary disease already became serious
before December 1995.
Marife O. Niño declared that her mother is now in serious
condition and they could not have her hospitalized for
treatment as they do not have any money and this is
causing the family sleepless nights and mental anguish,
thinking that their mother may die because they could not
submit her for medication as they do not have money. 6
The trial court granted the Petition. As noted earlier, the CA
affirmed the RTC Decision.
Hence, this recourse. 7 In a Resolution dated June 23, 1999, this
Court issued a Temporary Restraining Order directing the trial
court "to refrain and desist from executing [pending appeal] the
decision dated May 20, 1997 in Civil Case No. RTC-96-3513,
effective immediately until further orders from this Court." 8
Ruling of the Court of Appeals
The CA held that herein respondents were "able to prove their
present cause of action" against petitioner. It ruled that the RTC
had jurisdiction over the case, because (1) the Petition involved a
matter incapable of pecuniary estimation; (2) mandamus fell
within the jurisdiction of RTC; and (3) assuming that the action
was for specific performance as argued by the petitioner, it was
still cognizable by the said court.
Issues
In its Memorandum, 9 the bank posed the following questions:
1. Question of Jurisdiction of the Regional Trial Court. —
Has a Regional Trial Court original jurisdiction over an
action involving title to real property with a total assessed
value of less than P20,000.00?
2. Question of Law. — May the board of directors of a rural
banking corporation be compelled to confirm a deed of
absolute sale of real property owned by the corporation
which deed of sale was executed by the bank manager
without prior authority of the board of directors of the
rural banking corporation? 10
This Court's Ruling
The present Petition has no merit.
First Issue:
Jurisdiction of the Regional Trial Court
Petitioner submits that the RTC had no jurisdiction over the case.
Disputing the ruling of the appellate court that the present action
was incapable of pecuniary estimation, petitioner argues that the
matter in fact involved title to real property worth less than
P20,000. Thus, under RA 7691, the case should have been filed
before a metropolitan trial court, a municipal trial court or a
municipal circuit trial court.
We disagree. The well-settled rule is that jurisdiction is
determined by the allegations of the complaint. 11 In the present
case, the Petition for Mandamus filed by respondents before the
trial court prayed that petitioner-bank be compelled to issue a
board resolution confirming the Deed of Sale covering five parcels
of unregistered land, which the bank manager had executed in
their favor. The RTC has jurisdiction over such action pursuant to
Section 21 of BP 129, which provides:
Sec. 21. Original jurisdiction in other cases. — Regional
Trial Courts shall exercise original jurisdiction;
(1) in the issuance of writ of certiorari, prohibition,
mandamus, quo warranto, habeas corpus and injunction
which may be enforced in any part of their respective
regions; and
(2) In actions affecting ambassadors and other public
ministers and consuls.
A perusal of the Petition shows that the respondents did not raise
any question involving the title to the property, but merely asked
that petitioner's board of directors be directed to issue the subject
resolution. Moreover, the bank did not controvert the allegations
in the said Petition. To repeat, the issue therein was not the title
to the property; it was respondents' right to compel the bank to
issue a board resolution confirming the Deed of Sale.
Second Issue:
Authority of the Bank Manager
Respondents initiated the present proceedings, so that they could
transfer to their names the subject five parcels of land; and
subsequently, to mortgage said lots and to use the loan proceeds
for the medical expenses of their ailing mother. For the property
to be transferred in their names, however, the register of deeds
required the submission of a board resolution from the bank
confirming both the Deed of Sale and the authority of the bank
manager, Fe S. Tena, to enter into such transaction. Petitioner
refused. After being given the runaround by the bank,
respondents sued in exasperation.
Allegations in the Petition for Mandamus Deemed Admitted
Respondents based their action before the trial court on the Deed
of Sale, the substance of which was alleged in and a copy thereof
was attached to the Petition for Mandamus. The Deed named Fe S.
Tena as the representative of the bank. Petitioner, however, failed
to specifically deny under oath the allegations in that contract. In
fact, it filed no answer at all, for which reason it was declared in
default. Pertinent provisions of the Rules of Court read:
Sec. 7. Action or defense based on document. — Whenever
an action or defense is based upon a written instrument or
document, the substance of such instrument or document
shall be set forth in the pleading, and the original or a copy
thereof shall be attached to the pleading as an exhibit,
which shall be deemed to be a part of the pleading, or said
copy may with like effect be set forth in the pleading.
Sec. 8. How to contest genuineness of such documents.—
When an action or defense is founded upon a written
instrument, copied in or attached to the corresponding
pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to
be the facts; but this provision does not apply when the
adverse party does not appear to be a party to the
instrument or when compliance with an order for an
inspection of the original instrument is refused. 12
In failing to file its answer specifically denying under oath the
Deed of Sale, the bank admitted the due execution of the said
contract. Such admission means that it acknowledged that Tena
was authorized to sign the Deed of Sale on its behalf. 13 Thus,
defenses that are inconsistent with the due execution and the
genuineness of the written instrument are cut off by an admission
implied from a failure to make a verified specific denial.
Other Acts of the Bank
In any event, the bank acknowledged, by its own acts or failure to
act, the authority of Fe S. Tena to enter into binding contracts.
After the execution of the Deed of Sale, respondents occupied the
properties in dispute and paid the real estate taxes due thereon. If
the bank management believed that it had title to the property, it
should have taken some measures to prevent the infringement or
invasion of its title thereto and possession thereof.
Likewise, Tena had previously transacted business on behalf of
the bank, and the latter had acknowledged her authority. A bank
is liable to innocent third persons where representation is made
in the course of its normal business by an agent like Manager
Tena, even though such agent is abusing her authority. 14 Clearly,
persons dealing with her could not be blamed for believing that
she was authorized to transact business for and on behalf of the
bank. Thus, this Court has ruled in Board of Liquidators
v. Kalaw: 15
Settled jurisprudence has it that where similar acts have
been approved by the directors as a matter of general
practice, custom, and policy, the general manager may
bind the company without formal authorization of the
board of directors. In varying language, existence of such
authority is established, by proof of the course of business,
the usages and practices of the company and by the
knowledge which the board of directors has, or must be
presumed to have, of acts and doings of its subordinates
in and about the affairs of the corporation. So also,
. . . authority to act for and bind a corporation may be
presumed from acts of recognition in other instances
where the power was in fact exercised.
. . . Thus, when, in the usual course of business of a
corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent
the corporation may be implied from the manner in which
he has been permitted by the directors to manage its
business.
Notwithstanding the putative authority of the manager to bind the
bank in the Deed of Sale, petitioner has failed to file an answer to
the Petition below within the reglementary period, let alone
present evidence controverting such authority. Indeed, when one
of herein respondents, Marife S. Nino, went to the bank to ask for
the board resolution, she was merely told to bring the receipts.
The bank failed to categorically declare that Tena had no
authority. This Court stresses the following:
. . . Corporate transactions would speedily come to a
standstill were every person dealing with a corporation
held duty-bound to disbelieve every act of its responsible
officers, no matter how regular they should appear on
their face. This Court has observed in Ramirez
vs. Orientalist Co., 38 Phil. 634, 654-655, that —
In passing upon the liability of a corporation in
cases of this kind it is always well to keep in mind
the situation as it presents itself to the third party
with whom the contract is made. Naturally he can
have little or no information as to what occurs in
corporate meetings; and he must necessarily rely
upon the external manifestation of corporate
consent. The integrity of commercial transactions
can only be maintained by holding the corporation
strictly to the liability fixed upon it by its agents in
accordance with law; and we would be sorry to
announce a doctrine which would permit the
property of man in the city of Paris to be whisked
out of his hands and carried into a remote quarter
of the earth without recourse against the
corporation whose name and authority had been
used in the manner disclosed in this case. As
already observed, it is familiar doctrine that if a
corporation knowingly permits one of its officers,
or any other agent, to do acts within the scope of
an apparent authority, and thus holds him out to
the public as possessing power to do those acts,
the corporation will, as against any one who has in
good faith dealt with the corporation through such
agent, be estopped from denying his authority;
and where it is said "if the corporation permits this
means the same as "if the thing is permitted by the
directing power of the corporation." 16
In this light, the bank is estopped from questioning the authority
of the bank manager to enter into the contract of sale. If a
corporation knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, it holds the
agent out to the public as possessing the power to do those acts;
thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the
agent's authority. 17
Unquestionably, petitioner has authorized Tena to enter into the
Deed of Sale. Accordingly, it has a clear legal duty to issue the
board resolution sought by respondent's. Having authorized her
to sell the property, it behooves the bank to confirm the Deed of
Sale so that the buyers may enjoy its full use.
The board resolution is, in fact, mere paper work. Nonetheless, it
is paper work necessary in the orderly operations of the register
of deeds and the full enjoyment of respondents' rights. Petitioner-
bank persistently and unjustifiably refused to perform its legal
duty. Worse, it was less than candid in dealing with respondents
regarding this matter. In this light, the Court finds it proper to
assess the bank treble costs, in addition to the award of damages.
WHEREFORE, the Petition is hereby DENIED and the assailed
Decision and Resolution AFFIRMED. The Temporary Restraining
Order issued by this Court is hereby LIFTED. Treble costs against
petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., please see concurring opinion.
Separate Opinions
VITUG, J., concurring opinion;
I share the views expressed in the ponencia written for the Court
by our esteemed colleague Mr. Justice Artemio V. Panganiban.
There is just a brief clarificatory statement that I thought could be
made.
The Civil Code, being a law of general application, can be
suppletory to special laws and certainly not preclusive of those
that govern commercial transactions. Indeed, in its generic sense,
civil law can rightly be said to encompass commercial law. Jus
civile, in ancient Rome, was merely used to distinguish it from jus
gentium or the law common to all the nations within the empire
and, at some time later, only in contrast to international law. In
more recent times, civil law is so referred to as private law in
distinction from public law and criminal law. Today, it may not be
totally inaccurate to consider commercial law, among some other
special laws, as being a branch of civil law.
Sec. 45 of the Corporation Code provides:
Sec. 45. Ultra vires acts of corporations. — No corporation
under this Code shall possess or exercise any corporate
powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary
or incidental to the exercise of the powers so conferred.
The language of the Code appears to confine the term ultra vires to
an act outside or beyond express, implied and incidental
corporate powers. Nevertheless, the concept can also include
those acts that may ostensibly be within such powers but are, by
general or special laws, either proscribed or declared illegal. In
general, although perhaps loosely, ultra vires has also been used
to designate those acts of the board of directors or of corporate
officers when acting beyond their respective spheres of authority.
In the context that the law has used the term in Article 45 of the
Corporation Code, an ultra vires act would be void and not
susceptible to ratification. 1 In determining whether or not a
corporation may perform an act, one considers the logical and
necessary relation between the act assailed and the corporate
purpose expressed by the law or in the charter. For if the act were
one which is lawful in itself or not otherwise prohibited and done
for the purpose of serving corporate ends or reasonably
contributes to the promotion of those ends in a substantial and
not merely in a remote and fanciful sense, it may be fairly
considered within corporate powers. 2
Sec. 23 of the Corporation Code states that the corporate powers
are to be exercised, all business conducted, and all property of
corporations controlled and held, by the Board of Directors. When
the act of the board is within corporate powers but it is done
without the concurrence of the shareholders as and when such
approval is required by law 3 or when the act is beyond its
competence to do, 4 the act has been described as void 5 or, as
unenforceable, 6 or as ineffective and not legally binding. 7 These
holdings notwithstanding, the act cannot accurately be likened to
an ultra vires act of the corporation itself defined in Section 45 of
the Code. Where the act is within corporate powers but the board
has acted without being competent to independently do so, the
action is not necessarily and totally devoid of effects, and it may
generally be ratified expressly or impliedly. Thus, an acceptance
of benefits derived by the shareholders from an outside
investment made by the board without the required concurrence
of the stockholders may, nonetheless, be so considered as an
effective investment. 8 It may be said, however, that when the
board resolution is yet executory, the act should aptly be deemed
inoperative and specific performance cannot be validly demanded
but, if for any reason, the contemplated action is carried out, such
principles as ratification or prescription when applicable,
normally unknown in void contracts, can serve to negate a claim
for the total nullity thereof.
Corporate officers, in their case, may act on such matters as may
be authorized either expressly by the By-laws or Board
Resolutions or impliedly such as by general practice or policy or
as are implied by express powers. When officers are allowed to act
in certain particular cases, their acts conformably therewith can
bind the company. Hence, a corporate officer entrusted with
general management and control of the business has the implied
authority to act or contract for the corporation which may be
necessary or appropriate to conduct the ordinary business. 9 If the
act of corporate officers comes within corporate powers but it is
done without any express or implied authority therefor from the
by-laws, board resolutions or corporate practices, such an act
does not bind the corporation. The Board, however, acting within
its competence, may ratify the unauthorized act of the corporate
officer. So, too, a corporation may be held in estoppel from
denying as against innocent third persons the authority of its
officers or agents who have been clothed by it with ostensible or
apparent authority. 10
The Corporation Code itself has not been that explicit with respect
to the consequences of ultra vires acts; hence, the varied
ascriptions to its effects heretofore expressed. It may well be to
consider futile any further attempt to have these situations bear
any exact equivalence to the civil law precepts of defective
contracts. Nevertheless, general statements could be made. Here
reiterated, while an act of the corporation which is either illegal
or outside of express, implied or incidental powers as so provided
by law or the charter would be void under Article 5 11 of the Civil
Code, and the act is not susceptible to ratification, an unauthorized
act (if within corporate powers) of the board or a corporate
officer, however, would only be unenforceable conformably with
Article 1403 12 of the Civil Code but, if the party with whom the
agent has contracted is aware of the latter's limits of powers, the
unauthorized act is declared void by Article 1898 13 of the same
Code, although still susceptible thereunder to ratification by the
principal. Any person dealing with corporate boards and officers
may be said to be charged with the knowledge that the latter can
only act within their respective limits of power, and he is put to
notice accordingly. Thus, it would generally behoove such a
person to look into the extent of the authority of corporate agents
since the onus would ordinarily be with him.
 [G.R. No. 113032. August 21, 1997]
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L.
VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS &
REGINALD F. VILLASIS, petitioners, vs. RICARDO T.
SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO
PARIAN, respondents.
DECISION
HERMOSISIMA, JR., J.:
Up for review on certiorari are: (1) the Decision September 6,
1993 and (2) the order dated November 23, 1993 of Branch 33 of
the Regional Trial Court of Iloilo City in Criminal Cases Nos. 37097
and 37098 for estafa and falsification of a public document,
respectively. The judgment acquitted the private respondents of
both charges, but petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas,
Soledad Salas-Tubilleja, Antonio S. Salas, and Richard S. Salas,
belonging to the same family, are the majority and controlling
members of the Board of Trustees of Western Institute of
Technology, Inc. (WIT, for short), a stock corporation engaged in
the operation, among others, of an educational institution.
According to petitioners, the minority stockholders of WIT,
sometime on June 1, 1986 in the principal office of WIT at La Paz,
Iloilo City, a Special Board meeting was held. In attendance were
other members of the Board including one of the petitioners
Reginald Villasis. Prior to aforesaid Special Board Meeting, copies
of notice thereof, dated May 24, 1986, were distributed to all
Board Members. The notice allegedly indicated that the meeting
to be held on June 1, 1986 included item No. 6 which states:
"Possible implementation of Art. III, Sec. 6 of the Amended By-
Laws of Western Institute of Technology, Inc. on compensation of
all officers of the corporation." [1]
In said meeting, the Board of Trustees passed Resolution No.
48, s. 1986, granting monthly compensation to the private
respondents as corporate officers retroactive June 1, 1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by
Mrs. Soledad Tubilleja (accused), it was unanimously resolved
that:
The Officers of the Corporation be granted monthly
compensation for services rendered as follows: Chairman
- P9,000.00/month, Vice-Chairman - P3,500.00/month,
Corporate Treasurer - P3,500.00/month and Corporate
Secretary - P3,500.00/month, retroactive June 1, 1985 and the
ten percentum of the net profits shall be distributed equally
among the ten members of the Board of Trustees. This shall
amend and superceed(sic) any previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular
meeting of the Board of Trustees of Western Institute of
Technology, Inc. held on March 30, 1986 is true and correct to
the best of my knowledge and belief.
(Sgd) AN
TONIO S. SALAS
 Corporat
e Secretary[2]
A few years later, that is, on March 13, 1991, petitioners
Homero Villasis, Preston Villasis, Reginald Villasis and Dimas
Enriquez filed an affidavit-complaint against private respondents
before the Office of the City Prosecutor of Iloilo, as a result of
which two (2) separate criminal informations, one for falsification
of a public document under Article 171 of the Revised Penal Code
and the other for estafa under Article 315, par. 1(b) of the RPC,
were filed before Branch 33 of the Regional Trial Court of Iloilo
City. The charge for falsification of public document was anchored
on the private respondents submission of WITs income statement
for the fiscal year 1985-1986 with the Securities and Exchange
Commission (SEC) reflecting therein the disbursement of
corporate funds for the compensation of private respondents
based on Resolution No. 4, series of 1986, making it appear that
the same was passed by the board on March 30, 1986, when in
truth, the same was actually passed on June 1, 1986, a date not
covered by the corporations fiscal year 1985-1986 (beginning
May 1, 1985 and ending April 30, 1986).The information for
falsification of a public document states:
The undersigned City Prosecutor accuses RICARDO T. SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS and RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of FALSIFICATION OF A
PUBLC DOCUMENT, Art. 171 of the Revised Penal Code,
committed as follows:
That on or about the 10th day of June, 1986, in the City of Iloilo,
Philippines and within the jurisdiction of this Honorable Court,
the above-named accused, being then the Chairman, Vice-
Chairman, Treasurer, Secretary and Trustee (who later became
the secretary), respectively, of the board of trustees of the
Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did
then and there wilfully, unlawfully and criminally prepare and
execute and subsequently cause to be submitted to the Securities
and Exchange Commission an income statement of the
corporation for the fiscal year 1985-1986, the same being
required to be submitted every end of the corporation fiscal year
by the aforesaid Commission and therefore, a public document,
including therein the disbursement of the retroactive
compensation of accused corporate officers in the amount
of P186,470.70, by then and there making it appear that the basis
thereof Resolution No. 4, Series of 1986 was passed by the board of
trustees on March 30, 1986, a date covered by the corporations
fiscal year 1985-1986 (i.e., from May 1, 1985 to April 30, 1986),
when in truth and in fact, as said accused well knew, no such
Resolution No. 48, Series of 1986 was passed on March 30, 1986.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991.[3] [Underscoring
ours].
The Information, on the other hand, for estafa reads:
The undersigned City Prosecutor accuses RICARDO SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS, RICHARD S. SALAS (whose dates and places of birth
cannot be ascertained) of the crime of ESTAFA, Art. 315, par 1(b)
of the Revised Penal Code, committed as follows:
That on or about the 1st day of June, 1986, in the City of Iloilo,
Philippines and within the jurisdiction of this Honorable Court,
the above-named accused, being then the Chairman, Vice-
Chairman, Treasurer, Secretary and Trustee (who later became
the secretary), respectively, of the board of trustees of the
Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually
helping one another, to better realize their purpose, did then and
there wilfully, unlawfully and feloniously defraud the said
corporation (and its stockholders) in the following manner, to
wit: herein accused, knowing fully well that they have no sufficient,
lawful authority to disburse--- let alone violation of applicable
laws and jurisprudence, disbursed the funds of the corporation by
effecting payment of their retroactive salaries in the amount
of P186,470.70 and subsequently paying themselves every 15th and
30th of the month starting June 15, 1986 until the present, in the
amount of P19,500.00 per month, as if the same were their own,
and when herein accused were informed of the illegality of these
disbursements by the minority stockholders by way of
objections made in an annual stockholders meeting held on June
14, 1986 and every year thereafter, they refused, and still refuse,
to rectify the same to the damage and prejudice of the
corporation (and its stockholders) in the total sum
of P1,453,970.79 as of November 15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991.[4] [Underscoring
ours]
Thereafter, trial for the two criminal cases, docketed as
Criminal Cases Nos. 37097 and 37098, was consolidated. After a
full-blown hearing, Judge Porfirio Parian handed down a verdict
of acquittal on both counts[5] dated September 6, 1993 without
imposing any civil liability against the accused therein.
Petitioners filed a Motion for Reconsideration[6] of the civil
aspect of the RTC Decision which was, however, denied in an
Order dated November 23, 1993.[7]
Hence, the instant petition.
Significantly on December 8, 1994, a Motion for Intervention,
dated December 2, 1994, was filed before this Court by Western
Institute of Technology, Inc., supposedly one of the petitioners
herein, disowning its inclusion in the petition and submitting that
Atty. Tranquilino R. Gale, counsel for the other petitioners, had no
authority whatsoever to represent the corporation in filing the
petition. Intervenor likewise prayed for the dismissal of the
petition for being utterly without merit. The Motion for
Intervention was granted on January 16, 1995.[8]
Petitioners would like us to hold private respondents civilly
liable despite their acquittal in Criminal Cases Nos. 37097 and
37098. They base their claim on the alleged illegal issuance by
private respondents of Resolution No. 48, series of 1986 ordering
the disbursement of corporate funds in the amount
of P186,470.70 representing the retroactive compensation as of
June 1, 1985 in favor of private respondents, board members of
WIT, plus P1,453,970.79 for the subsequent collective salaries of
private respondent every 15th and 30th of the month until the
filing of the criminal complaints against them on March 1991.
Petitioners maintain that this grant of compensation to private
respondents is proscribed under Section 30 of the Corporation
Code. Thus, private respondents are obliged to return these
amounts to the corporation with interest.
We cannot sustain the petitioners. The pertinent section of
the Corporation Code provides:
Sec. 30. Compensation of directors.--- In the absence of any
provision in the by-laws fixing their compensation, the directors
shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such
compensation (other than per diems) may be granted to
directors by the vote of the stockholders representing at least a
majority of the outstanding capital stock at a regular or special
stockholders meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation
during the preceding year. [Underscoring ours]
There is no argument that directors or trustees, as the case
may be, are not entitled to salary or other compensation when
they perform nothing more than the usual and ordinary duties of
their office. This rule is founded upon a presumption that
directors /trustees render service gratuitously and that the return
upon their shares adequately furnishes the motives for service,
without compensation[9] Under the foregoing section, there are
only two (2) ways by which members of the board can be granted
compensation apart from reasonable per diems: (1) when there is
a provision in the by-laws fixing their compensation; and (2)
when the stockholders representing a majority of the outstanding
capital stock at a regular or special stockholders meeting agree to
give it to them.
This proscription, however, against granting compensation
to directors/trustees of a corporation is not a sweeping rule.
Worthy of note is the clear phraseology of Section 30 which states:
xxx [T]he directors shall not receive any compensation, as such
directors, xxx. The phrase as such directors is not without
significance for it delimits the scope of the prohibition to
compensation given to them for services performed purely in
their capacity as directors or trustees. The unambiguous
implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they
render services to the corporation in a capacity other than as
directors/trustees.[10] In the case at bench, Resolution No. 48, s.
1986 granted monthly compensation to private respondents not
in their capacity as members of the board, but rather as officers of
the corporation, more particularly as Chairman, Vice-Chairman,
Treasurer and Secretary of Western Institute of Technology. We
quote once more Resolution No. 48, s. 1986 for easy
reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by
Mrs. Soledad Tubilleja (accused), it was unanimously resolved
that:
The Officers of the Corporation be granted monthly
compensation for services rendered
as follows: Chairman - P9,000.00/month, Vice-
Chairman - P3,500.00/month, Corporate
Treasurer - P3,500.00/month and Corporate
Secretary - P3,500.00/month, retroactive June 1, 1985 and the
ten percentum of the net profits shall be distributed equally
among the ten members of the Board of Trustees. This shall
amend and superceed(sic) any previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular
meeting of the Board of Trustees of Western Institute of
Technology, Inc. held on March 30, 1986 is true and correct to
the best of my knowledge and belief.
(Sgd) A
NTONIO S. SALAS
Corpor
ate Secretary[11] [Underscoring ours]
Clearly, therefore , the prohibition with respect to granting
compensation to corporate directors/trustees as such under
Section 30 is not violated in this particular case. Consequently, the
last sentence of Section 30 which provides:
xxx xxx. In no case shall the total yearly compensation of
directors, as such directors, exceed ten (10%) percent of the net
income before income tax of the corporation during the preceding
year. [Underscoring ours]
does not likewise find application in this case since the
compensation is being given to private respondents in their
capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit
brought by them as minority shareholders of WIT for and on
behalf of the corporation to annul Resolution No. 48, s. 1986
which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by
minority shareholders in the name of the corporation to redress
wrongs committed against it, for which the directors refuse to
sue.[12] It is a remedy designed by equity and has been the
principal defense of the minority shareholders against abuses by
the majority.[13] Here, however, the case is not a derivative suit but
is merely an appeal on the civil aspect of Criminal Cases Nos.
37097 and 37098 filed with the RTC of Iloilo for estafa and
falsification of public document. Among the basic requirements
for a derivative suit to prosper is that the minority shareholder
who is suing for and on behalf of the corporation must allege his
complaint before the proper forum that he is suing on a derivative
cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join.[14] This is
necessary to vest jurisdiction upon the tribunal in line with the
rule that it is the allegations in the complaint that vests
jurisdiction upon the court or quasi-judicial body concerned over
the subject matter and nature of the action.[15] This was not
complied with by the petitioners either in their complaint before
the court a quo nor in the instant petition which, in part, merely
states that this is a petition for review on certiorari on pure
questions of law to set aside a portion of the RTC decision in
Criminal Cases Nos. 37097 and 37098[16] since the trial courts
judgment of acquittal failed to impose any civil liability against the
private respondents. By no amount of equity considerations, if at
all deserved, can a mere appeal on the civil aspect of a criminal
case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative
suit as insisted by petitioners, which it is not, the same is
outrightly dismissible for having been wrongfully filed in the
regular court devoid of any jurisdiction to entertain the
complaint. The case should have been filed with the Securities and
Exchange Commission (SEC) which exercises original and
exclusive jurisdiction over derivative suits, they being intra-
corporate disputes, per Section 5(b) of P.D. No. 902-A:
In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it
as expressly granted under existing laws and decrees, it shall
have original and exclusive jurisdiction to hear and decide cases
involving:
xxx xxx xxx
b) Controversies arising out of intra-corporate or
partnership relations, between and among stockholders,
members, or associates; between any or all of them and the
corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between
such corporation, partnership or association and the State
insofar as it concerns their individual franchise or right to exist
as such entity;
xxx xxx xxx. [Underscoring ours]
Once the case is decided by the SEC, the losing party may file a be considered other than the Minutes (Exh. 1) itself of the Regular
petition for review before the Court of Appeals raising questions Meeting of the Board of Trustees on March 30, 1986. The
of fact, of law, or mixed questions of fact and law.[17] It is only after imputation that said Resolution No.48 was neither taken up nor
the case has ran this course, and not earlier, can it be brought to passed on March 30, 1986 because the matter regarding
us via a petition for review on certiorari under Rule 45 raising compensation was not specifically stated or written in the Agenda
only pure questions of law.[18] Petitioners, in pleading that we and that the words possible implementation of said Resolution No.
treat the instant petition as a derivative suit, are trying to short- 48, was expressly written in the Agenda for the Special Meeting of
circuit the entire process which we cannot here sanction. the Board on June 1, 1986, is simply an implication. This evidence
by implication to the mind of the court cannot prevail over the
As an appeal on the civil aspect of Criminal Cases Nos. 37097
Minutes (Exh. 1) and cannot ripen into proof beyond reasonable
and 37098 for falsification of public document and estafa, which
doubt which is demanded in all criminal prosecutions.
this petition truly is, we have to deny the petition just the same. It
will be well to quote the respondent courts ratiocinations
This Court finds that under the Eleventh Article (Exh. 3-D-1) of
acquitting the private respondents on both counts:
the Articles of Incorporation (Exh. 3-B) of the Panay Educational
Institution, Inc., now the Western Institute of Technology, Inc.,
The prosecution wants this Court to believe and agree that there
the officers of the corporation shall receive such compensation
is falsification of public document because, as claimed by the
as the Board of Directors may provide. These Articles of
prosecution, Resolution No. 48, Series of 1986 (Exh. 1-E-1) was
Incorporation was adopted on May 17, 1957 (Exh. 3-E). The
not taken up and passed during the Regular Meeting of the Board
Officers of the corporation and their corresponding duties are
of Trustees of the western Institute of Technology (WIT), Inc. on
enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of the
March 30, 1986, but on June 1, 1986 special meeting of the same
Amended By-Laws of the Corporation (Exh. 4-A) which was
board of trustees.
adopted on May 31, 1957. According to Sec. 6, Art. III of the same
By-Laws, all officers shall receive such compensation as may be
This Court is reluctant to accept this claim of falsification. The fixed by the Board of Directors.
prosecution omitted to submit the complete minutes of the regular
meeting of the Board of Trustees on March 30, 1986. It only
It is the perception of this Court that the grant of compensation
presented in evidence Exh. C, which is page 5 or the last page of the
or salary to the accused in their capacity as officers of the
said minutes. Had the complete minutes (Exh. 1 consisting of five
corporation, through Resolution No. 48, enacted on March 30,
(5) pages, been submitted, it can readily be seen and understood
1986 by the Board of Trustees, is authorized by both the Articles
that Resolution No. 48, Series of 1986 (Exh. 1-E-1) giving
of Incorporation and the By-Laws of the Corporation. To state
compensation to corporate officers, was indeed included in Other
otherwise is to depart from the clear terms of the said articles
Business, No. 6 of the Agenda, and was taken up and passed on
and by-laws. In their defense the accused have properly and
March 30, 1986. The mere fact of existence of Exh. C also proves
rightly asserted that the grant of salary is not for directors, but for
that it was passed on March 30, 1986 for Exh,. C is a part and
their being officers of the corporation who oversee the day to day
parcel of the whole minutes of the Board of Trustees Regular
activities and operations of the school.
Meeting on March 30, 1986. No better and more credible proof can
 xxx xxx xxx
xxx [O]n the question of whether or not the accused can be held
liable for estafa under Sec. 1 (b) of Art. 315 of the Revised Penal
Code, it is perceived by this Court that the receipt and the holding
of the money by the accused as salary on basis of the authority
granted by the Articles and By-Laws of the corporation are not
tainted with abuse of confidence. The money they received belongs
to them and cannot be said to have been converted and/or
misappropriated by them.
xxx xxx xxx.[19] [Underscoring ours]
From the foregoing factual findings, which we find to be
amply substantiated by the records, it is evident that there is
simply no basis to hold the accused, private respondents herein,
civilly liable. Section 2(b) of Rule 111 on the New Rules on
Criminal Procedure provides:
In case of acquittal, unless there is a clear showing that the act
from which the civil liability might arise did not exist, the
judgment shall make a finding on the civil liability of the accused
in favor of the offended party. [Underscoring ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not
merely based on reasonable doubt but rather on a finding that the
accused-private respondents did not commit the criminal acts
complained of. Thus, pursuant to the above rule and settled
jurisprudence, any civil action ex delicto cannot prosper. Acquittal
in a criminal action bars the civil action arising therefrom where
the judgment of acquittal holds that the accused did not commit
the criminal acts imputed to them.[20]
WHEREFORE, the instant petition is hereby DENIED with
costs against petitioners.
SO ORDERED.

SEC. 2. Institution of separate civil action.

xxx xxx xxx

(b) Extinction of the penal action does not carry with it

extinction of the civil, unless the extinction proceeds from a
declaration in a final judgment that the fact from which the civil
might arise did not exist. [Underscoring ours]

Likewise, the last paragraph of Section 2, Rule 120 reads:

SEC. 2. Form and contents of judgment.

xxx xxx xxx


G.R. No. 147590 April 2, 2007
ANTONIO C. CARAG, Petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, ISABEL G.
PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter,
NAFLU, and MARIVELES APPAREL CORPORATION LABOR
UNION, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 assailing the Decision
dated 29 February 20002 and the Resolution dated 27 March
20013 of the Court of Appeals (appellate court) in CA-G.R. SP Nos.
54404-06. The appellate court affirmed the decision dated 17
June 19944 of Labor Arbiter Isabel Panganiban-Ortiguerra
(Arbiter Ortiguerra) in RAB-III-08-5198-93 and the resolution
dated 5 January 19955 of the National Labor Relations
Commission (NLRC) in NLRC CA No. L-007731-94.
Arbiter Ortiguerra held that Mariveles Apparel Corporation
(MAC), MAC's Chairman of the Board Antonio Carag (Carag), and
MAC's President Armando David (David) (collectively,
respondents) are guilty of illegal closure and are solidarily liable
for the separation pay of MAC's rank and file employees. The
NLRC denied the motion to reduce bond filed by MAC and Carag.
The Facts
National Federation of Labor Unions (NAFLU) and Mariveles
Apparel Corporation Labor Union (MACLU) (collectively,
complainants), on behalf of all of MAC's rank and file employees,
filed a complaint against MAC for illegal dismissal brought about
by its illegal closure of business. In their complaint dated 12
August 1993, complainants alleged the following:
2. Complainant NAFLU is the sole and exclusive
bargaining agent representing all rank and file
employees of [MAC]. That there is an existing valid
Collective Bargaining Agreement (CBA) executed by the
parties and that at the time of the cause of action herein
below discussed happened there was no labor dispute
between the Union and Management except cases
pending in courts filed by one against the other.
3. That on July 8, 1993, without notice of any kind filed in
accordance with pertinent provisions of the Labor Code,
[MAC], for reasons known only by herself [sic] ceased
operations with the intention of completely closing its
shop or factory. Such intentions [sic] was manifested in a
letter, allegedly claimed by [MAC] as its notice filed only
on the same day that the operations closed.
4. That at the time of closure, employees who have
rendered one to two weeks work were not paid their
corresponding salaries/wages, which remain unpaid
until time [sic] of this writing.
5. That there are other benefits than those above-
mentioned which have been unpaid by [MAC] at the time
it decided to cease operations, benefits gained by the
 workers both by and under the CBA and by operations
[sic] of law.
6. That the closure made by [MAC] in the manner and
style done is perce [sic] illegal, and had caused
tremendous prejudice to all of the employees, who
suffered both mental and financial anguish and who in
view thereof merits [sic] award of all damages (actual,
exemplary and moral), [illegible] to set [an] example to
firms who in the future will [illegible] the idea of simply
prematurely closing without complying [with] the basic
requirement of Notice of Closure.6 (Emphasis supplied)
Upon receipt of the records of the case, Arbiter Ortiguerra
summoned the parties to explore options for possible settlement.
The non-appearance of respondents prompted Arbiter
Ortiguerra to declare the case submitted for resolution "based on
the extant pleadings."
In their position paper dated 3 January 1994, complainants
moved to implead Carag and David, as follows:
x x x x In the present case, it is unfortunate for respondents that
the records and evidence clearly demonstrate that the individual
complainants are entitled to the reliefs prayed for in their
complaint. However, any favorable judgment the Honorable
Labor Arbiter may render in favor of herein complainants will go
to naught should the Office fails [sic] to appreciate the glaring
fact that the respondents [sic] corporation is no longer existing
as it suddenly stopped business operation since [sic] 8 July 1993.
Under this given circumstance, the complainants have no option
left but to implead Atty. ANTONIO CARAG, in his official capacity
as Chairman of the Board along with MR. ARMANDO DAVID as
President. Both are also owners of the respondent corporation
with office address at 10th Floor, Gamon Centre, Alfaro Street,
Salcedo Village[,] Makati[,] Metro Manila although they may be
collectively served with summons and other legal processes
through counsel of record Atty. Joshua Pastores of 8th Floor,
Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro Manila.
This inclusion of individual respondents as party respondents in
the present case is to guarantee the satisfaction of any judgment
award on the basis of Article 212(c) of the Philippine Labor Code,
as amended, which says:
"Employer includes any person acting in the interest of an
employer, directly or indirectly. It does not, however, include any
labor organization or any of its officers or agents except when
acting as employer."
The provision was culled from Section 2, Republic Act 602, the
Minimum Wage Act. If the employer is an artificial person, it
must have an officer who can be presumed to be the employer,
being "the person acting in the interest of the employer." The
corporation is the employer, only in the technical sense. (A.C.
Ransom Labor Union CCLU VS. NLRC, G.R. 69494, June 10, 1986).
Where the employer-corporation, AS IN THE PRESENT CASE, is
no longer existing and unable to satisfy the judgment in favor of
the employee, the officer should be held liable for acting on
behalf of the corporation. (Gudez vs. NLRC, G.R. 83023, March 22,
1990). Also in the recent celebrated case of Camelcraft
Corporation vs. NLRC, G.R. 90634-35 (June 6, 1990), Carmen
contends that she is not liable for the acts of the company,
assuming it had [acted] illegally, because Camelcraft in a distinct
and separate entity with a legal personality of its own. She claims
that she is only an agent of the company carrying out the
decisions of its board of directors, "We do not agree," said the
Supreme Court. "She is, in fact and legal effect, the corporation,
being not only its president and general manager but also its
owner." The responsible officer of an employer can be held
personally liable not to say even criminally liable for
nonpayment of backwages. This is the policy of the law. If it were
otherwise, corporate employers would have devious ways to
evade paying backwages. (A.C. Ransom Labor Union-CCLU V.
NLRC, G.R. 69494, June 10, 1986). If no definite proof exists as to
who is the responsible officer, the president of the corporation
who can be deemed to be its chief operation officer shall be
presumed to be the responsible officer. In Republic Act 602, for
example, criminal responsibility is with the "manager" or in his
default, the person acting as such (Ibid.)7 (Emphasis supplied)
Atty. Joshua L. Pastores (Atty. Pastores), as counsel for
respondents, submitted a position paper dated 21 February
1994 and stated that complainants should not have impleaded
Carag and David because MAC is actually owned by a consortium
of banks. Carag and David own shares in MAC only to qualify
them to serve as MAC's officers.
Without any further proceedings, Arbiter Ortiguerra rendered
her Decision dated 17 June 1994 granting the motion to implead
Carag and David. In the same Decision, Arbiter Ortiguerra
declared Carag and David solidarily liable with MAC to
complainants.
The Ruling of the Labor Arbiter
In her Decision dated 17 June 1994, Arbiter Ortiguerra ruled as
follows:
This is a complaint for illegal dismissal brought about by the
illegal closure and cessation of business filed by NAFLU and
Mariveles Apparel Corporation Labor Union for and in behalf of
all rank and file employees against respondents Mariveles
Apparel Corporation, Antonio Carag and Armando David [who
are] its owners, Chairman of the Board and President,
respectively.
This case was originally raffled to the sala of Labor Arbiter
Adolfo V. Creencia. When the latter went on sick leave, his cases
were re-raffled and the instant case was assigned to the sala of
the undersigned. Upon receipt of the record of the case, the
parties were summoned for them to be able to explore options
for settlement. The respondents however did not appear
prompting this Office to submit the case for resolution based on
extant pleadings, thus this decision.
The complainants claim that on July 8, 1993 without notice of
any kind the company ceased its operation as a prelude to a final
closing of the firm. The complainants allege that up to the
present the company has remained closed.
The complainants bewail that at the time of the closure,
employees who have rendered one to two weeks of work were
not given their salaries and the same have remained unpaid.
The complainants aver that respondent company prior to its
closure did not even bother to serve written notice to employees
and to the Department of Labor and Employment at least one
month before the intended date of closure. The respondents did
not even establish that its closure was done in good faith.
Moreover, the respondents did not pay the affected employees
separation pay, the amount of which is provided in the existing
Collective Bargaining Agreement between the complainants and
the respondents.
The complainants pray that they be allowed to implead Atty.
Antonio Carag and Mr. Armando David[,] owners and
responsible officer[s] of respondent company to assure the
satisfaction of the judgment, should a decision favorable to them
be rendered. In support of their claims, the complainants
invoked the ruling laid down by the Supreme Court in the case of
A.C. Ransom Labor Union CCLU vs. NLRC, G.R. No. 69494, June
10, 1986 where it was held that [a] corporate officer can be held
liable for acting on behalf of the corporation when the latter is no
longer in existence and there are valid claims of workers that
must be satisfied.
The complainants pray for the declaration of the illegality of the
closure of respondents' business. Consequently, their
reinstatement must be ordered and their backwages must be
paid. Should reinstatement be not feasible, the complainants
pray that they be paid their separation pay in accordance with
the computation provided for in the CBA. Computations of
separation pay due to individual complainants were adduced in
evidence (Annexes "C" to "C-44", Complainants' Position Paper).
The complainants also pray for the award to them of attorney's
fee[s].
The respondents on the other hand by way of controversion
maintain that the present complaint was filed prematurely. The
respondents deny having totally closed and insist that
respondent company is only on a temporary shut-down
occasioned by the pending labor unrest. There being no
permanent closure any claim for separation pay must not be
given due course.
Respondents opposed the impleader of Atty. Antonio C. Carag
and Mr. Armando David saying that they are not the owners of
Mariveles Apparel Corporation and they are only minority
stockholders holding qualifying shares. Piercing the veil of
corporate fiction cannot be done in the present case for such
remedy can only be availed of in case of closed or family owned
corporations.
Respondents pray for the dismissal of the present complaint and
the denial of complainants' motion to implead Atty. Antonio C.
Carag and Mr. Armando David as party respondents.
This Office is now called upon to resolve the following issues:
1. Whether or not the respondents are guilty of illegal
closure;
2. Whether or not individual respondents could be held
personally liable; and
3. Whether or not the complainants are entitled to an
award of attorney's fees.
After a judicious and impartial consideration of the record, this
Office is of the firm belief that the complainants must prevail.
The respondents described the cessation of operations in its
premises as a temporary shut-down. While such posturing may
have been initially true, it is not so anymore. The cessation of
operations has clearly exceeded the six months period fixed in
Article 286 of the Labor Code. The temporary shutdown has
ripened into a closure or cessation of operations for causes not
due to serious business losses or financial reverses.
Consequently, the respondents must pay the displaced
employees separation pay in accordance with the computation
prescribed in the CBA, to wit, one month pay for every year of
service. It must be stressed that respondents did not controvert
the verity of the CBA provided computation.
The complainants claim that Atty. Antonio Carag and Mr.
Armando David should be held jointly and severally liable with
respondent corporation. This bid is premised on the belief that
the impleader of the aforesaid officers will guarantee payment of
whatever may be adjudged in complainants' favor by virtue of
this case. It is a basic principle in law that corporations have
personality distinct and separate from the stockholders. This
concept is known as corporate fiction. Normally, officers acting
for and in behalf of a corporation are not held personally liable
for the obligation of the corporation. In instances where
corporate officers dismissed employees in bad faith or wantonly
violate labor standard laws or when the company had already
ceased operations and there is no way by which a judgment in
favor of employees could be satisfied, corporate officers can be
held jointly and severally liable with the company. This Office
after a careful consideration of the factual backdrop of the case is
inclined to grant complainants' prayer for the impleader of Atty.
Antonio Carag and Mr. Armando David, to assure that valid
claims of employees would not be defeated by the closure of
respondent company.
The complainants pray for the award to them of moral and
exemplary damages, suffice it to state that they failed to establish
their entitlement to aforesaid reliefs when they did not adduce
persuasive evidence on the matter.
The claim for attorney's fee[s] will be as it is hereby resolved in
complainants' favor. As a consequence of the illegal closure of
respondent company, the complainants were compelled to
litigate to secure benefits due them under pertinent laws. For
this purpose, they secured the services of a counsel to assist
them in the course of the litigation. It is but just and proper to
order the respondents who are responsible for the closure and
subsequent filing of the case to pay attorney's fee[s].
WHEREFORE, premises considered, judgment is hereby
rendered declaring respondents jointly and severally guilty of
illegal closure and they are hereby ordered as follows:
1. To pay complainants separation pay computed on the
basis of one (1) month for every year of service, a
fraction of six (6) months to be considered as one (1)
year in the total amount of ₱49,101,621.00; and
2. To pay complainants attorney's fee in an amount
equivalent to 10% of the judgment award.
The claims for moral, actual and exemplary damages are
dismissed for lack of evidence.
SO ORDERED.8 (Emphasis supplied)
MAC, Carag, and David, through Atty. Pastores, filed their
Memorandum before the NLRC on 26 August 1994. Carag,
through a separate counsel, filed an appeal dated 30 August 1994
before the NLRC. Carag reiterated the arguments in respondents'
position paper filed before Arbiter Ortiguerra, stating that:
2.1 While Atty. Antonio C. Carag is the Chairman of the
Board of MAC and Mr. Armando David is the President,
they are not the owners of MAC;
2.2 MAC is owned by a consortium of banks, as
stockholders, and Atty. Antonio C. Carag and Mr.
Armando David are only minority stockholders of the
corporation, owning only qualifying shares;
2.3 MAC is not a family[-]owned corporation, that in case
of a close [sic] corporation, piercing the corporate veil its
[sic] possible to hold the stockholders liable for the
corporation's liabilities;
2.4 MAC is a corporation with a distinct and separate
personality from that of the stockholders; piercing the
corporate veil to hold the stockholders liable for
corporate liabilities is only true [for] close corporations
(family corporations); this is not the prevailing situation
in MAC;
 2.5 Atty. Antonio Carag and Mr. Armando David are
professional managers and the extension of shares to
them are just qualifying shares to enable them to occupy
subject position.9
Respondents also filed separate motions to reduce bond.
The Ruling of the NLRC
In a Resolution promulgated on 5 January 1995, the NLRC Third
Division denied the motions to reduce bond. The NLRC stated
that to grant a reduction of bond on the ground that the appeal is
meritorious would be tantamount to ruling on the merits of the
appeal. The dispositive portion of the Resolution of the NLRC
Third Division reads, thus:
PREMISES CONSIDERED, Motions to Reduce Bond for both
respondents are hereby DISMISSED for lack of merit.
Respondents are directed to post cash or surety bond in the
amount of forty eight million one hundred one thousand six
hundred twenty one pesos (₱48,101,621.00) within an
unextendible period of fifteen (15) days from receipt hereof.
No further Motions for Reconsideration shall be entertained.
SO ORDERED.10
Respondents filed separate petitions for certiorari before this
Court under Rule 65 of the 1964 Rules of Court. Carag filed his
petition, docketed as G.R. No. 118820, on 13 February 1995. In
the meantime, we granted MAC's prayer for the issuance of a
temporary restraining order to enjoin the NLRC from enforcing
Arbiter Ortiguerra's Decision. On 31 May 1995, we granted
complainants' motion for consolidation of G.R. No. 118820 with
G.R. No. 118839 (MAC v. NLRC, et al.) and G.R. No. 118880 (David
v. Arbiter Ortiguerra, et al.). On 12 July 1999, after all the parties
had filed their memoranda, we referred the consolidated cases to
the appellate court in accordance with our decision in St. Martin
Funeral Home v. NLRC.11 Respondents filed separate petitions
before the appellate court.
The Ruling of the Appellate Court
On 29 February 2000, the appellate court issued a joint decision
on the separate petitions. The appellate court identified two
issues as essential: (1) whether Arbiter Ortiguerra properly held
Carag and David, in their capacities as corporate officers, jointly
and severally liable with MAC for the money claims of the
employees; and (2) whether the NLRC abused its discretion in
denying the separate motions to reduce bond filed by MAC and
Carag.
The appellate court held that the absence of a formal hearing
before the Labor Arbiter is not a cause for Carag and David to
impute grave abuse of discretion. The appellate court found that
Carag and David, as the most ranking officers of MAC, had a
direct hand at the time in the illegal dismissal of MAC's
employees. The failure of Carag and David to observe the notice
requirement in closing the company shows malice and bad faith,
which justifies their solidary liability with MAC. The appellate
court also found that the circumstances of the present case do
not warrant a reduction of the appeal bond. Thus:
IN VIEW WHEREOF, the petitions are DISMISSED. The decision
of Labor Arbiter Isabel Panganiban-Ortiguerra dated June 17,
1994, and the Resolution dated January 5, 1995, issued by the
National Labor Relations Commission are hereby AFFIRMED. As
a consequence of dismissal, the temporary restraining order
issued on March 2, 1995, by the Third Division of the Supreme
Court is LIFTED. Costs against petitioners.
SO ORDERED.12 (Emphasis in the original)
The appellate court denied respondents' separate motions for
reconsideration.13
In a resolution dated 20 June 2001, this Court's First Division
denied the petition for Carag's failure to show sufficiently that
the appellate court committed any reversible error to warrant
the exercise of our discretionary appellate jurisdiction. Carag
filed a motion for reconsideration of our resolution denying his
petition. In a resolution dated 13 August 2001, this Court's First
Division denied Carag's reconsideration with finality.
Despite our 13 August 2001 resolution, Carag filed a second
motion for reconsideration with an omnibus motion for leave to
file a second motion for reconsideration. This Court's First
Division referred the motion to the Court En Banc. In a resolution
dated 25 June 2002, the Court En Banc resolved to grant the
omnibus motion for leave to file a second motion for
reconsideration, reinstated the petition, and required
respondents to comment on the petition. On 25 November 2003,
the Court En Banc resolved to suspend the rules to allow the
second motion for reconsideration. This Court's First Division
referred the petition to the Court En Banc on 14 July 2004, and
the Court En Banc accepted the referral on 15 March 2005.
The Issues
Carag questions the appellate court's decision of 29 February
2000 by raising the following issues before this Court:
1. Has petitioner Carag's right to due process been
blatantly violated by holding him personally liable for
over ₱50 million of the corporation's liability, merely as
board chairman and solely on the basis of the motion to
implead him in midstream of the proceedings as
additional respondent, without affording him the right to
present evidence and in violation of the accepted
procedure prescribed by Rule V of the NLRC Rules of
Procedure, as to render the ruling null and void?
2. Assuming, arguendo, that he had been accorded due
process, is the decision holding him solidarily liable
supported by evidence when the only pleadings (not
evidence) before the Labor Arbiter and that of the Court
of Appeals are the labor union's motion to implead him
as respondent and his opposition
thereto, without position papers, without evidence
submitted, and without hearing on the issue of personal
liability, and even when bad faith or malice, as the only
legal basis for personal liability, was expressly found
absent and wanting by [the] Labor Arbiter, as to render
said decision null and void?
3. Did the NLRC commit grave abuse of discretion in
denying petitioner's motion to reduce appeal bond?14
The Ruling of the Court
We find the petition meritorious.
On Denial of Due Process to Carag and David
Carag asserts that Arbiter Ortiguerra rendered her Decision of 17
June 1994 without issuing summons on him, without requiring
him to submit his position paper, without setting any hearing,
without giving him notice to present his evidence, and without
informing him that the case had been submitted for decision - in
violation of Sections 2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V of
The New Rules of Procedure of the NLRC.20
It is clear from the narration in Arbiter Ortiguerra's Decision that
she only summoned complainants and MAC, and not Carag, to a
conference for possible settlement. In her Decision, Arbiter
Ortiguerra stated that she scheduled the conference "upon
receipt of the record of the case." At the time of the conference,
complainants had not yet submitted their position paper which
contained the motion to implead Carag. Complainants could not
have submitted their position paper before the conference since
procedurally the Arbiter directs the submission of position
papers only after the conference.21 Complainants submitted their
position paper only on 10 January 1994, five months after filing
the complaint. In short, at the time of the conference, Carag was
not yet a party to the case. Thus, Arbiter Ortiguerra could not
have possibly summoned Carag to the conference.
Carag vigorously denied receiving summons to the conference,
and complainants have not produced any order of Arbiter
Ortiguerra summoning Carag to the conference. A thorough
search of the records of this case fails to show any order of
Arbiter Ortiguerra directing Carag to attend the conference.
Clearly, Arbiter Ortiguerra did not summon Carag to the
conference.
When MAC failed to appear at the conference, Arbiter Ortiguerra
declared the case submitted for resolution. In her Decision,
Arbiter Ortiguerra granted complainants' motion to implead
Carag and at the same time, in the same Decision, found Carag
personally liable for the debts of MAC consisting of ₱49,101,621
in separation pay to complainants. Arbiter Ortiguerra never
issued summons to Carag, never called him to a conference for
possible settlement, never required him to submit a position
paper, never set the case for hearing, never notified him to
present his evidence, and never informed him that the case was
submitted for decision - all in violation of Sections 2, 3, 4, 5(b),
and 11(c) of Rule V of The New Rules of Procedure of the NLRC.
Indisputably, there was utter absence of due process to Carag at
the arbitration level. The procedure adopted by Arbiter
Ortiguerra completely prevented Carag from explaining his side
and presenting his evidence. This alone renders Arbiter
Ortiguerra's Decision a nullity insofar as Carag is concerned.
While labor arbiters are not required to conduct a formal hearing
or trial, they have no license to dispense with the basic
requirements of due process such as affording respondents the
opportunity to be heard. In Habana v. NLRC,22 we held:
The sole issue to be resolved is whether private respondents
OMANFIL and HYUNDAI were denied due process when the
Labor Arbiter decided the case solely on the basis of the position
paper and supporting documents submitted in evidence by
Habana and De Guzman.
We rule in the affirmative. The manner in which this case was
decided by the Labor Arbiter left much to be desired in terms of
respect for the right of private respondents to due process -
First, there was only one conciliatory conference held in
this case. This was on 10 May 1996. During the
conference, the parties did not discuss at all the
possibility of amicable settlement due to petitioner's
stubborn insistence that private respondents be declared
in default.
Second, the parties agreed to submit their respective
motions - petitioner's motion to declare respondents in
default and private respondents' motion for bill of
particulars - for the consideration of the Labor Arbiter.
The Labor Arbitration Associate, one Ms. Gloria Vivar,
then informed the parties that they would be notified of
the action of the Labor Arbiter on the pending motions.
 xxx
Third, since the conference on 10 May 1996 no order or
notice as to what action was taken by the Labor Arbiter
in disposing the pending motions was ever received by
private respondents. They were not declared in default
by the Labor Arbiter nor was petitioner required to
submit a bill of particulars.
Fourth, neither was there any order or notice requiring
private respondents to file their position paper, nor an
order informing the parties that the case was already
submitted for decision. What private respondents
received was the assailed decision adverse to them.
It is clear from the foregoing that there was an utter absence of
opportunity to be heard at the arbitration level, as the procedure
adopted by the Labor Arbiter virtually prevented private
respondents from explaining matters fully and presenting their
side of the controversy. They had no chance whatsoever to at
least acquaint the Labor Arbiter with whatever defenses they
might have to the charge that they illegally dismissed petitioner.
In fact, private respondents presented their position paper and
documentary evidence only for the first time on appeal to the
NLRC.
The essence of due process is that a party be afforded a
reasonable opportunity to be heard and to submit any evidence
he may have in support of his defense. Where, as in this case,
sufficient opportunity to be heard either through oral arguments
or position paper and other pleadings is not accorded a party to
a case, there is undoubtedly a denial of due process.
It is true that Labor Arbiters are not bound by strict rules of
evidence and of procedure. The manner by which Arbiters
dispose of cases before them is concededly a matter of
discretion. However, that discretion must be exercised regularly,
legally and within the confines of due process. They are
mandated to use every reasonable means to ascertain the facts of
each case, speedily, objectively and without regard to
technicalities of law or procedure, all in the interest of justice
and for the purpose of accuracy and correctness in adjudicating
the monetary awards.
In this case, Carag was in a far worse situation. Here, Carag was
not issued summons, not accorded a conciliatory conference, not
ordered to submit a position paper, not accorded a hearing, not
given an opportunity to present his evidence, and not notified
that the case was submitted for resolution. Thus, we hold that
Arbiter Ortiguerra's Decision is void as against Carag for utter
absence of due process. It was error for the NLRC and the Court
of Appeals to uphold Arbiter Ortiguerra's decision as against
Carag.
On the Liability of Directors for Corporate Debts
This case also raises this issue: when is a director personally
liable for the debts of the corporation? The rule is that a director
is not personally liable for the debts of the corporation, which
has a separate legal personality of its own. Section 31 of the
Corporation Code lays down the exceptions to the rule, as
follows:
Liability of directors, trustees or officers. - Directors or trustees
who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
xxxx
Section 31 makes a director personally liable for corporate debts
if he wilfully and knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31 also makes a
director personally liable if he is guilty of gross negligence or bad
faith in directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully
and knowingly voted for or assented to any patently unlawful act
of MAC. Complainants did not present any evidence showing that
Carag wilfully and knowingly voted for or assented to any
patently unlawful act of MAC. Neither did Arbiter Ortiguerra
make any finding to this effect in her Decision.
Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC.
Complainants did not present any evidence showing that Carag is
guilty of gross negligence or bad faith in directing the affairs of
MAC. Neither did Arbiter Ortiguerra make any finding to this
effect in her Decision.
Arbiter Ortiguerra stated in her Decision that:
In instances where corporate officers dismissed employees in
bad faith or wantonly violate labor standard laws or when the
company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with
the company.23
After stating what she believed is the law on the matter, Arbiter
Ortiguerra stopped there and did not make any finding that
Carag is guilty of bad faith or of wanton violation of labor
standard laws. Arbiter Ortiguerra did not specify what act of bad
faith Carag committed, or what particular labor standard laws he
violated.
To hold a director personally liable for debts of the corporation,
and thus pierce the veil of corporate fiction, the bad faith or
wrongdoing of the director must be established clearly and
convincingly.24 Bad faith is never presumed.25 Bad faith does not
connote bad judgment or negligence. Bad faith imports a
dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the
nature of fraud.26 In Businessday Information Systems and
Services, Inc. v. NLRC,27 we held:
There is merit in the contention of petitioner Raul Locsin that the
complaint against him should be dismissed. A corporate officer is
not personally liable for the money claims of discharged
corporate employees unless he acted with evident malice and
bad faith in terminating their employment. There is no evidence
in this case that Locsin acted in bad faith or with malice in
carrying out the retrenchment and eventual closure of the
company (Garcia vs. NLRC, 153 SCRA 640), hence, he may not be
held personally and solidarily liable with the company for the
satisfaction of the judgment in favor of the retrenched
employees.
Neither does bad faith arise automatically just because a
corporation fails to comply with the notice requirement of labor
laws on company closure or dismissal of employees. The failure
to give notice is not an unlawful act because the law does not
define such failure as unlawful. Such failure to give notice is a
violation of procedural due process but does not amount to an
unlawful or criminal act. Such procedural defect is called illegal
dismissal because it fails to comply with mandatory procedural
requirements, but it is not illegal in the sense that it constitutes
an unlawful or criminal act.
For a wrongdoing to make a director personally liable for debts
of the corporation, the wrongdoing approved or assented to by
the director must be a patently unlawful act. Mere failure to
comply with the notice requirement of labor laws on company
closure or dismissal of employees does not amount to a patently
unlawful act. Patently unlawful acts are those declared unlawful
by law which imposes penalties for commission of such unlawful
acts. There must be a law declaring the act unlawful and
penalizing the act.
An example of a patently unlawful act is violation of Article 287
of the Labor Code, which states that "[V]iolation of this provision
is hereby declared unlawful and subject to the penal provisions
provided under Article 288 of this Code." Likewise, Article 288 of
the Labor Code on Penal Provisions and Liabilities, provides that
"any violation of the provision of this Code declared unlawful or
penal in nature shall be punished with a fine of not less than One
Thousand Pesos (₱1,000.00) nor more than Ten Thousand Pesos
(₱10,000.00), or imprisonment of not less than three months nor
more than three years, or both such fine and imprisonment at
the discretion of the court."
In this case, Article 28328 of the Labor Code, requiring a one-
month prior notice to employees and the Department of Labor
and Employment before any permanent closure of a company,
does not state that non-compliance with the notice is an unlawful
act punishable under the Code. There is no provision in any other
Article of the Labor Code declaring failure to give such notice an
unlawful act and providing for its penalty.
Complainants did not allege or prove, and Arbiter Ortiguerra did
not make any finding, that Carag approved or assented to any
patently unlawful act to which the law attaches a penalty for its
commission. On this score alone, Carag cannot be held personally
liable for the separation pay of complainants.
This leaves us with Arbiter Ortiguerra's assertion that "when the
company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with
the company." This assertion echoes the complainants' claim that
Carag is personally liable for MAC's debts to complainants "on
the basis of Article 212(e) of the Labor Code, as amended," which
says:
'Employer' includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except when
acting as employer. (Emphasis supplied)
Indeed, complainants seek to hold Carag personally liable for the
debts of MAC based solely on Article 212(e) of the Labor Code.
This is the specific legal ground cited by complainants, and used
by Arbiter Ortiguerra, in holding Carag personally liable for the
debts of MAC.
We have already ruled in McLeod v. NLRC29 and Spouses Santos
v. NLRC30 that Article 212(e) of the Labor Code, by itself, does not
make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors
for debts of the corporation is still Section 31 of the Corporation
Code. Thus, we explained in McLeod:
Personal liability of corporate directors, trustees or officers
attaches only when (1) they assent to a patently unlawful act of
the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of
interest resulting in damages to the corporation, its stockholders
or other persons; (2) they consent to the issuance of watered
down stocks or when, having knowledge of such issuance, do not
forthwith file with the corporate secretary their written
objection; (3) they agree to hold themselves personally and
solidarily liable with the corporation; or (4) they are made by
specific provision of law personally answerable for their
corporate action.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/
146667.htm -
xxx
The ruling in A.C. Ransom Labor Union-CCLU v.
NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPR
EME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/ja
n2007/146667.htm - which the Court of Appeals cited, does not
apply to this case. We quote pertinent portions of the ruling,
thus:
(a) Article 265 of the Labor Code, in part, expressly provides:
"Any worker whose employment has been terminated as a
consequence of an unlawful lockout shall be entitled to
reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article 265 of this
Code shall be punished by a fine of not exceeding five
hundred pesos and/or imprisonment for not less than one (1)
day nor more than six (6) months."
(b) How can the foregoing provisions be implemented when the
employer is a corporation? The answer is found in Article 212 (c)
of the Labor Code which provides:
"(c) 'Employer' includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except when
acting as employer."
The foregoing was culled from Section 2 of RA 602, the Minimum
Wage Law. Since RANSOM is an artificial person, it must have an
officer who can be presumed to be the employer, being the
"person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held
personally, not to say even criminally, liable for non-payment of
back wages. That is the policy of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation
employer can have devious ways for evading payment of back
wages. In the instant case, it would appear that RANSOM, in
1969, foreseeing the possibility or probability of payment of
back wages to the 22 strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased out if the
22 strikers win their case. RANSOM actually ceased operations
on May 1, 1973, after the December 19, 1972 Decision of the
Court of Industrial Relations was promulgated against RANSOM.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/
146667.htm - (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President,
organized ROSARIO to evade payment of backwages to the 22
strikers. This situation, or anything similar showing malice or
bad faith on the part of Patricio, does not obtain in the present
case. In Santos v. NLRC,
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/
146667.htm - the Court held, thus:
It is true, there were various cases when corporate officers were
themselves held by the Court to be personally accountable for
the payment of wages and money claims to its employees. In A.C.
Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled
that under the Minimum Wage Law, the responsible officer of an
employer corporation could be held personally liable for
nonpayment of backwages for "(i)f the policy of the law were
otherwise, the corporation employer (would) have devious ways
for evading payment of backwages." In the absence of a clear
identification of the officer directly responsible for failure to pay
the backwages, the Court considered the President of the
corporation as such officer. The case was cited in Chua vs.
NLRC in holding personally liable the vice-president of the
company, being the highest and most ranking official of the
corporation next to the President who was dismissed for the
latter's claim for unpaid wages.
A review of the above exceptional cases would readily disclose
the attendance of facts and circumstances that could rightly
sanction personal liability on the part of the company officer.
In A.C. Ransom, the corporate entity was a family corporation
and execution against it could not be implemented because
of the disposition posthaste of its leviable assets evidently in
order to evade its just and due obligations. The doctrine of
"piercing the veil of corporate fiction" was thus clearly
appropriate. Chua likewise involved another family corporation,
and this time the conflict was between two brothers occupying
the highest ranking positions in the company. There were
incontrovertible facts which pointed to extreme personal
animosity that resulted, evidently in bad faith, in the easing out
from the company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Court's
pronouncement in Sunio vs. National Labor Relations Commission,
thus:
We come now to the personal liability of petitioner, Sunio, who
was made jointly and severally responsible with petitioner
company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional
Director's Decision failed to disclose the reason why he was
made personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half (½) interest of
said corporation, and his alleged arbitrary dismissal of private
respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity
as General Manager of petitioner corporation. There appears to
be no evidence on record that he acted maliciously or in bad faith
in terminating the services of private respondents. His act,
therefore, was within the scope of his authority and was a
corporate act.
It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as
well as from that of any other legal entity to which it may be
related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. Petitioner Sunio, therefore,
should not have been made personally answerable for the
payment of private respondents' back
salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUP
REME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/j
an2007/146667.htm -
Thus, the rule is still that the doctrine of piercing the corporate
veil applies only when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime.
In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot
be made personally liable for corporate liabilities. Neither Article
212[e] nor Article 273 (now 272) of the Labor Code expressly
makes any corporate officer personally liable for the debts of the
corporation. As this Court ruled in H.L. Carlos Construction, Inc. v.
Marina Properties
Corporation:http://elibrary.supremecourt.gov.ph/DOCUMENTS/
SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C20
07/jan2007/146667.htm -
We concur with the CA that these two respondents are not liable.
Section 31 of the Corporation Code (Batas Pambansa Blg. 68)
provides:
"Section 31. Liability of directors, trustees or officers. - Directors
or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith ... shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders and other persons."
The personal liability of corporate officers validly attaches only
when (a) they assent to a patently unlawful act of the
corporation; or (b) they are guilty of bad faith or gross
negligence in directing its affairs; or (c) they incur conflict of
interest, resulting in damages to the corporation, its stockholders
or other persons.31 (Boldfacing in the original; boldfacing with
underscoring supplied)
Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court
of Appeals to hold Carag personally liable for the separation pay
owed by MAC to complainants based alone on Article 212(e) of
the Labor Code. Article 212(e) does not state that corporate
officers are personally liable for the unpaid salaries or
separation pay of employees of the corporation. The liability of
corporate officers for corporate debts remains governed by
Section 31 of the Corporation Code.
WHEREFORE, we GRANT the petition. We SET ASIDE the
Decision dated 29 February 2000 and the Resolution dated 27
March 2001 of the Court of Appeals in CA-G.R. SP Nos. 54404-06
insofar as petitioner Antonio Carag is concerned.
SO ORDERED.
G.R. No. 147590 April 2, 2007
ANTONIO C. CARAG, Petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, ISABEL G.
PANGANIBAN-ORTIGUERRA, as Executive Labor Arbiter,
NAFLU, and MARIVELES APPAREL CORPORATION LABOR
UNION, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 assailing the Decision
dated 29 February 20002 and the Resolution dated 27 March
20013 of the Court of Appeals (appellate court) in CA-G.R. SP Nos.
54404-06. The appellate court affirmed the decision dated 17
June 19944 of Labor Arbiter Isabel Panganiban-Ortiguerra
(Arbiter Ortiguerra) in RAB-III-08-5198-93 and the resolution
dated 5 January 19955 of the National Labor Relations
Commission (NLRC) in NLRC CA No. L-007731-94.
Arbiter Ortiguerra held that Mariveles Apparel Corporation
(MAC), MAC's Chairman of the Board Antonio Carag (Carag), and
MAC's President Armando David (David) (collectively,
respondents) are guilty of illegal closure and are solidarily liable
for the separation pay of MAC's rank and file employees. The
NLRC denied the motion to reduce bond filed by MAC and Carag.
The Facts
National Federation of Labor Unions (NAFLU) and Mariveles
Apparel Corporation Labor Union (MACLU) (collectively,
complainants), on behalf of all of MAC's rank and file employees,
filed a complaint against MAC for illegal dismissal brought about
by its illegal closure of business. In their complaint dated 12
August 1993, complainants alleged the following:
2. Complainant NAFLU is the sole and exclusive
bargaining agent representing all rank and file
employees of [MAC]. That there is an existing valid
Collective Bargaining Agreement (CBA) executed by the
parties and that at the time of the cause of action herein
below discussed happened there was no labor dispute
between the Union and Management except cases
pending in courts filed by one against the other.
3. That on July 8, 1993, without notice of any kind filed in
accordance with pertinent provisions of the Labor Code,
[MAC], for reasons known only by herself [sic] ceased
operations with the intention of completely closing its
shop or factory. Such intentions [sic] was manifested in a
letter, allegedly claimed by [MAC] as its notice filed only
on the same day that the operations closed.
4. That at the time of closure, employees who have
rendered one to two weeks work were not paid their
corresponding salaries/wages, which remain unpaid
until time [sic] of this writing.
5. That there are other benefits than those above-
mentioned which have been unpaid by [MAC] at the time
it decided to cease operations, benefits gained by the
workers both by and under the CBA and by operations
[sic] of law.
6. That the closure made by [MAC] in the manner and
style done is perce [sic] illegal, and had caused
tremendous prejudice to all of the employees, who
suffered both mental and financial anguish and who in
view thereof merits [sic] award of all damages (actual,
exemplary and moral), [illegible] to set [an] example to
firms who in the future will [illegible] the idea of simply
prematurely closing without complying [with] the basic
requirement of Notice of Closure.6 (Emphasis supplied)
Upon receipt of the records of the case, Arbiter Ortiguerra
summoned the parties to explore options for possible settlement.
The non-appearance of respondents prompted Arbiter
Ortiguerra to declare the case submitted for resolution "based on
the extant pleadings."
In their position paper dated 3 January 1994, complainants
moved to implead Carag and David, as follows:
x x x x In the present case, it is unfortunate for respondents that
the records and evidence clearly demonstrate that the individual
complainants are entitled to the reliefs prayed for in their
complaint. However, any favorable judgment the Honorable
Labor Arbiter may render in favor of herein complainants will go
to naught should the Office fails [sic] to appreciate the glaring
fact that the respondents [sic] corporation is no longer existing
as it suddenly stopped business operation since [sic] 8 July 1993.
Under this given circumstance, the complainants have no option
left but to implead Atty. ANTONIO CARAG, in his official capacity
as Chairman of the Board along with MR. ARMANDO DAVID as
President. Both are also owners of the respondent corporation
with office address at 10th Floor, Gamon Centre, Alfaro Street,
Salcedo Village[,] Makati[,] Metro Manila although they may be
collectively served with summons and other legal processes
through counsel of record Atty. Joshua Pastores of 8th Floor,
Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro Manila.
This inclusion of individual respondents as party respondents in
the present case is to guarantee the satisfaction of any judgment
award on the basis of Article 212(c) of the Philippine Labor Code,
as amended, which says:
"Employer includes any person acting in the interest of an
employer, directly or indirectly. It does not, however, include any
labor organization or any of its officers or agents except when
acting as employer."
The provision was culled from Section 2, Republic Act 602, the
Minimum Wage Act. If the employer is an artificial person, it
must have an officer who can be presumed to be the employer,
being "the person acting in the interest of the employer." The
corporation is the employer, only in the technical sense. (A.C.
Ransom Labor Union CCLU VS. NLRC, G.R. 69494, June 10, 1986).
Where the employer-corporation, AS IN THE PRESENT CASE, is
no longer existing and unable to satisfy the judgment in favor of
the employee, the officer should be held liable for acting on
behalf of the corporation. (Gudez vs. NLRC, G.R. 83023, March 22,
1990). Also in the recent celebrated case of Camelcraft
Corporation vs. NLRC, G.R. 90634-35 (June 6, 1990), Carmen
contends that she is not liable for the acts of the company,
assuming it had [acted] illegally, because Camelcraft in a distinct
and separate entity with a legal personality of its own. She claims
that she is only an agent of the company carrying out the
decisions of its board of directors, "We do not agree," said the
Supreme Court. "She is, in fact and legal effect, the corporation,
being not only its president and general manager but also its
owner." The responsible officer of an employer can be held
personally liable not to say even criminally liable for
nonpayment of backwages. This is the policy of the law. If it were
otherwise, corporate employers would have devious ways to
evade paying backwages. (A.C. Ransom Labor Union-CCLU V.
NLRC, G.R. 69494, June 10, 1986). If no definite proof exists as to
who is the responsible officer, the president of the corporation
who can be deemed to be its chief operation officer shall be
presumed to be the responsible officer. In Republic Act 602, for
example, criminal responsibility is with the "manager" or in his
default, the person acting as such (Ibid.)7 (Emphasis supplied)
Atty. Joshua L. Pastores (Atty. Pastores), as counsel for
respondents, submitted a position paper dated 21 February
1994 and stated that complainants should not have impleaded
Carag and David because MAC is actually owned by a consortium
of banks. Carag and David own shares in MAC only to qualify
them to serve as MAC's officers.
Without any further proceedings, Arbiter Ortiguerra rendered
her Decision dated 17 June 1994 granting the motion to implead
Carag and David. In the same Decision, Arbiter Ortiguerra
declared Carag and David solidarily liable with MAC to
complainants.
The Ruling of the Labor Arbiter
In her Decision dated 17 June 1994, Arbiter Ortiguerra ruled as
follows:
This is a complaint for illegal dismissal brought about by the
illegal closure and cessation of business filed by NAFLU and
Mariveles Apparel Corporation Labor Union for and in behalf of
all rank and file employees against respondents Mariveles
Apparel Corporation, Antonio Carag and Armando David [who
are] its owners, Chairman of the Board and President,
respectively.
This case was originally raffled to the sala of Labor Arbiter
Adolfo V. Creencia. When the latter went on sick leave, his cases
were re-raffled and the instant case was assigned to the sala of
the undersigned. Upon receipt of the record of the case, the
parties were summoned for them to be able to explore options
for settlement. The respondents however did not appear
prompting this Office to submit the case for resolution based on
extant pleadings, thus this decision.
The complainants claim that on July 8, 1993 without notice of
any kind the company ceased its operation as a prelude to a final
closing of the firm. The complainants allege that up to the
present the company has remained closed.
The complainants bewail that at the time of the closure,
employees who have rendered one to two weeks of work were
not given their salaries and the same have remained unpaid.
The complainants aver that respondent company prior to its
closure did not even bother to serve written notice to employees
and to the Department of Labor and Employment at least one
month before the intended date of closure. The respondents did
not even establish that its closure was done in good faith.
Moreover, the respondents did not pay the affected employees
separation pay, the amount of which is provided in the existing
Collective Bargaining Agreement between the complainants and
the respondents.
The complainants pray that they be allowed to implead Atty.
Antonio Carag and Mr. Armando David[,] owners and
responsible officer[s] of respondent company to assure the
satisfaction of the judgment, should a decision favorable to them
be rendered. In support of their claims, the complainants
invoked the ruling laid down by the Supreme Court in the case of
A.C. Ransom Labor Union CCLU vs. NLRC, G.R. No. 69494, June
10, 1986 where it was held that [a] corporate officer can be held
liable for acting on behalf of the corporation when the latter is no
longer in existence and there are valid claims of workers that
must be satisfied.
The complainants pray for the declaration of the illegality of the
closure of respondents' business. Consequently, their
reinstatement must be ordered and their backwages must be
paid. Should reinstatement be not feasible, the complainants
pray that they be paid their separation pay in accordance with
the computation provided for in the CBA. Computations of
separation pay due to individual complainants were adduced in
evidence (Annexes "C" to "C-44", Complainants' Position Paper).
The complainants also pray for the award to them of attorney's
fee[s].
The respondents on the other hand by way of controversion
maintain that the present complaint was filed prematurely. The
respondents deny having totally closed and insist that
respondent company is only on a temporary shut-down
occasioned by the pending labor unrest. There being no
permanent closure any claim for separation pay must not be
given due course.
Respondents opposed the impleader of Atty. Antonio C. Carag
and Mr. Armando David saying that they are not the owners of
Mariveles Apparel Corporation and they are only minority
stockholders holding qualifying shares. Piercing the veil of
corporate fiction cannot be done in the present case for such
remedy can only be availed of in case of closed or family owned
corporations.
Respondents pray for the dismissal of the present complaint and
the denial of complainants' motion to implead Atty. Antonio C.
Carag and Mr. Armando David as party respondents.
This Office is now called upon to resolve the following issues:
1. Whether or not the respondents are guilty of illegal
closure;
2. Whether or not individual respondents could be held
personally liable; and
3. Whether or not the complainants are entitled to an
award of attorney's fees.
After a judicious and impartial consideration of the record, this
Office is of the firm belief that the complainants must prevail.
The respondents described the cessation of operations in its
premises as a temporary shut-down. While such posturing may
have been initially true, it is not so anymore. The cessation of
operations has clearly exceeded the six months period fixed in
Article 286 of the Labor Code. The temporary shutdown has
ripened into a closure or cessation of operations for causes not
due to serious business losses or financial reverses.
Consequently, the respondents must pay the displaced
employees separation pay in accordance with the computation
prescribed in the CBA, to wit, one month pay for every year of
service. It must be stressed that respondents did not controvert
the verity of the CBA provided computation.
The complainants claim that Atty. Antonio Carag and Mr.
Armando David should be held jointly and severally liable with
respondent corporation. This bid is premised on the belief that
the impleader of the aforesaid officers will guarantee payment of
whatever may be adjudged in complainants' favor by virtue of
this case. It is a basic principle in law that corporations have
personality distinct and separate from the stockholders. This
concept is known as corporate fiction. Normally, officers acting
for and in behalf of a corporation are not held personally liable
for the obligation of the corporation. In instances where
corporate officers dismissed employees in bad faith or wantonly
violate labor standard laws or when the company had already
ceased operations and there is no way by which a judgment in
favor of employees could be satisfied, corporate officers can be
held jointly and severally liable with the company. This Office
after a careful consideration of the factual backdrop of the case is
inclined to grant complainants' prayer for the impleader of Atty.
Antonio Carag and Mr. Armando David, to assure that valid
claims of employees would not be defeated by the closure of
respondent company.
The complainants pray for the award to them of moral and
exemplary damages, suffice it to state that they failed to establish
their entitlement to aforesaid reliefs when they did not adduce
persuasive evidence on the matter.
The claim for attorney's fee[s] will be as it is hereby resolved in
complainants' favor. As a consequence of the illegal closure of
respondent company, the complainants were compelled to
litigate to secure benefits due them under pertinent laws. For
this purpose, they secured the services of a counsel to assist
them in the course of the litigation. It is but just and proper to
order the respondents who are responsible for the closure and
subsequent filing of the case to pay attorney's fee[s].
WHEREFORE, premises considered, judgment is hereby
rendered declaring respondents jointly and severally guilty of
illegal closure and they are hereby ordered as follows:
1. To pay complainants separation pay computed on the
basis of one (1) month for every year of service, a
fraction of six (6) months to be considered as one (1)
year in the total amount of ₱49,101,621.00; and
2. To pay complainants attorney's fee in an amount
equivalent to 10% of the judgment award.
The claims for moral, actual and exemplary damages are
dismissed for lack of evidence.
SO ORDERED.8 (Emphasis supplied)
MAC, Carag, and David, through Atty. Pastores, filed their
Memorandum before the NLRC on 26 August 1994. Carag,
through a separate counsel, filed an appeal dated 30 August 1994
before the NLRC. Carag reiterated the arguments in respondents'
position paper filed before Arbiter Ortiguerra, stating that:
2.1 While Atty. Antonio C. Carag is the Chairman of the
Board of MAC and Mr. Armando David is the President,
they are not the owners of MAC;
2.2 MAC is owned by a consortium of banks, as
stockholders, and Atty. Antonio C. Carag and Mr.
Armando David are only minority stockholders of the
corporation, owning only qualifying shares;
2.3 MAC is not a family[-]owned corporation, that in case
of a close [sic] corporation, piercing the corporate veil its
[sic] possible to hold the stockholders liable for the
corporation's liabilities;
2.4 MAC is a corporation with a distinct and separate
personality from that of the stockholders; piercing the
corporate veil to hold the stockholders liable for
corporate liabilities is only true [for] close corporations
(family corporations); this is not the prevailing situation
in MAC;
2.5 Atty. Antonio Carag and Mr. Armando David are
professional managers and the extension of shares to
them are just qualifying shares to enable them to occupy
subject position.9
Respondents also filed separate motions to reduce bond.
The Ruling of the NLRC
In a Resolution promulgated on 5 January 1995, the NLRC Third
Division denied the motions to reduce bond. The NLRC stated
that to grant a reduction of bond on the ground that the appeal is
meritorious would be tantamount to ruling on the merits of the
appeal. The dispositive portion of the Resolution of the NLRC
Third Division reads, thus:
PREMISES CONSIDERED, Motions to Reduce Bond for both
respondents are hereby DISMISSED for lack of merit.
Respondents are directed to post cash or surety bond in the
amount of forty eight million one hundred one thousand six
hundred twenty one pesos (₱48,101,621.00) within an
unextendible period of fifteen (15) days from receipt hereof.
No further Motions for Reconsideration shall be entertained.
SO ORDERED.10
Respondents filed separate petitions for certiorari before this
Court under Rule 65 of the 1964 Rules of Court. Carag filed his
petition, docketed as G.R. No. 118820, on 13 February 1995. In
the meantime, we granted MAC's prayer for the issuance of a
temporary restraining order to enjoin the NLRC from enforcing
Arbiter Ortiguerra's Decision. On 31 May 1995, we granted
complainants' motion for consolidation of G.R. No. 118820 with
G.R. No. 118839 (MAC v. NLRC, et al.) and G.R. No. 118880 (David
v. Arbiter Ortiguerra, et al.). On 12 July 1999, after all the parties
had filed their memoranda, we referred the consolidated cases to
the appellate court in accordance with our decision in St. Martin
Funeral Home v. NLRC.11 Respondents filed separate petitions
before the appellate court.
The Ruling of the Appellate Court
On 29 February 2000, the appellate court issued a joint decision
on the separate petitions. The appellate court identified two
issues as essential: (1) whether Arbiter Ortiguerra properly held
Carag and David, in their capacities as corporate officers, jointly
and severally liable with MAC for the money claims of the
employees; and (2) whether the NLRC abused its discretion in
denying the separate motions to reduce bond filed by MAC and
Carag.
The appellate court held that the absence of a formal hearing
before the Labor Arbiter is not a cause for Carag and David to
impute grave abuse of discretion. The appellate court found that
Carag and David, as the most ranking officers of MAC, had a
direct hand at the time in the illegal dismissal of MAC's
employees. The failure of Carag and David to observe the notice
requirement in closing the company shows malice and bad faith,
which justifies their solidary liability with MAC. The appellate
court also found that the circumstances of the present case do
not warrant a reduction of the appeal bond. Thus:
IN VIEW WHEREOF, the petitions are DISMISSED. The decision
of Labor Arbiter Isabel Panganiban-Ortiguerra dated June 17,
1994, and the Resolution dated January 5, 1995, issued by the
National Labor Relations Commission are hereby AFFIRMED. As
a consequence of dismissal, the temporary restraining order
issued on March 2, 1995, by the Third Division of the Supreme
Court is LIFTED. Costs against petitioners.
SO ORDERED.12 (Emphasis in the original)
The appellate court denied respondents' separate motions for
reconsideration.13
In a resolution dated 20 June 2001, this Court's First Division
denied the petition for Carag's failure to show sufficiently that
the appellate court committed any reversible error to warrant
the exercise of our discretionary appellate jurisdiction. Carag
filed a motion for reconsideration of our resolution denying his
petition. In a resolution dated 13 August 2001, this Court's First
Division denied Carag's reconsideration with finality.
Despite our 13 August 2001 resolution, Carag filed a second
motion for reconsideration with an omnibus motion for leave to
file a second motion for reconsideration. This Court's First
Division referred the motion to the Court En Banc. In a resolution
dated 25 June 2002, the Court En Banc resolved to grant the
omnibus motion for leave to file a second motion for
reconsideration, reinstated the petition, and required
respondents to comment on the petition. On 25 November 2003,
the Court En Banc resolved to suspend the rules to allow the
second motion for reconsideration. This Court's First Division
referred the petition to the Court En Banc on 14 July 2004, and
the Court En Banc accepted the referral on 15 March 2005.
The Issues
Carag questions the appellate court's decision of 29 February
2000 by raising the following issues before this Court:
1. Has petitioner Carag's right to due process been
blatantly violated by holding him personally liable for
over ₱50 million of the corporation's liability, merely as
board chairman and solely on the basis of the motion to
implead him in midstream of the proceedings as
additional respondent, without affording him the right to
present evidence and in violation of the accepted
procedure prescribed by Rule V of the NLRC Rules of
Procedure, as to render the ruling null and void?
2. Assuming, arguendo, that he had been accorded due
process, is the decision holding him solidarily liable
supported by evidence when the only pleadings (not
evidence) before the Labor Arbiter and that of the Court
of Appeals are the labor union's motion to implead him
as respondent and his opposition
thereto, without position papers, without evidence
submitted, and without hearing on the issue of personal
liability, and even when bad faith or malice, as the only
legal basis for personal liability, was expressly found
absent and wanting by [the] Labor Arbiter, as to render
said decision null and void?
3. Did the NLRC commit grave abuse of discretion in
denying petitioner's motion to reduce appeal bond?14
The Ruling of the Court
We find the petition meritorious.
On Denial of Due Process to Carag and David
Carag asserts that Arbiter Ortiguerra rendered her Decision of 17
June 1994 without issuing summons on him, without requiring
him to submit his position paper, without setting any hearing,
without giving him notice to present his evidence, and without
informing him that the case had been submitted for decision - in
violation of Sections 2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V of
The New Rules of Procedure of the NLRC.20
It is clear from the narration in Arbiter Ortiguerra's Decision that
she only summoned complainants and MAC, and not Carag, to a
conference for possible settlement. In her Decision, Arbiter
Ortiguerra stated that she scheduled the conference "upon
receipt of the record of the case." At the time of the conference,
complainants had not yet submitted their position paper which
contained the motion to implead Carag. Complainants could not
have submitted their position paper before the conference since
procedurally the Arbiter directs the submission of position
papers only after the conference.21 Complainants submitted their
position paper only on 10 January 1994, five months after filing
the complaint. In short, at the time of the conference, Carag was
not yet a party to the case. Thus, Arbiter Ortiguerra could not
have possibly summoned Carag to the conference.
Carag vigorously denied receiving summons to the conference,
and complainants have not produced any order of Arbiter
Ortiguerra summoning Carag to the conference. A thorough
search of the records of this case fails to show any order of
Arbiter Ortiguerra directing Carag to attend the conference.
Clearly, Arbiter Ortiguerra did not summon Carag to the
conference.
When MAC failed to appear at the conference, Arbiter Ortiguerra
declared the case submitted for resolution. In her Decision,
Arbiter Ortiguerra granted complainants' motion to implead
Carag and at the same time, in the same Decision, found Carag
personally liable for the debts of MAC consisting of ₱49,101,621
in separation pay to complainants. Arbiter Ortiguerra never
issued summons to Carag, never called him to a conference for
possible settlement, never required him to submit a position
paper, never set the case for hearing, never notified him to
present his evidence, and never informed him that the case was
submitted for decision - all in violation of Sections 2, 3, 4, 5(b),
and 11(c) of Rule V of The New Rules of Procedure of the NLRC.
Indisputably, there was utter absence of due process to Carag at
the arbitration level. The procedure adopted by Arbiter
Ortiguerra completely prevented Carag from explaining his side
and presenting his evidence. This alone renders Arbiter
Ortiguerra's Decision a nullity insofar as Carag is concerned.
While labor arbiters are not required to conduct a formal hearing
or trial, they have no license to dispense with the basic
requirements of due process such as affording respondents the
opportunity to be heard. In Habana v. NLRC,22 we held:
The sole issue to be resolved is whether private respondents
OMANFIL and HYUNDAI were denied due process when the
Labor Arbiter decided the case solely on the basis of the position
paper and supporting documents submitted in evidence by
Habana and De Guzman.
We rule in the affirmative. The manner in which this case was
decided by the Labor Arbiter left much to be desired in terms of
respect for the right of private respondents to due process -
First, there was only one conciliatory conference held in
this case. This was on 10 May 1996. During the
conference, the parties did not discuss at all the
possibility of amicable settlement due to petitioner's
stubborn insistence that private respondents be declared
in default.
Second, the parties agreed to submit their respective
motions - petitioner's motion to declare respondents in
default and private respondents' motion for bill of
particulars - for the consideration of the Labor Arbiter.
The Labor Arbitration Associate, one Ms. Gloria Vivar,
then informed the parties that they would be notified of
the action of the Labor Arbiter on the pending motions.
xxx
Third, since the conference on 10 May 1996 no order or
notice as to what action was taken by the Labor Arbiter
in disposing the pending motions was ever received by
private respondents. They were not declared in default
by the Labor Arbiter nor was petitioner required to
submit a bill of particulars.
Fourth, neither was there any order or notice requiring
private respondents to file their position paper, nor an
order informing the parties that the case was already
submitted for decision. What private respondents
received was the assailed decision adverse to them.
It is clear from the foregoing that there was an utter absence of
opportunity to be heard at the arbitration level, as the procedure
adopted by the Labor Arbiter virtually prevented private
respondents from explaining matters fully and presenting their
side of the controversy. They had no chance whatsoever to at
least acquaint the Labor Arbiter with whatever defenses they
might have to the charge that they illegally dismissed petitioner.
In fact, private respondents presented their position paper and
documentary evidence only for the first time on appeal to the
NLRC.
The essence of due process is that a party be afforded a
reasonable opportunity to be heard and to submit any evidence
he may have in support of his defense. Where, as in this case,
sufficient opportunity to be heard either through oral arguments
or position paper and other pleadings is not accorded a party to
a case, there is undoubtedly a denial of due process.
It is true that Labor Arbiters are not bound by strict rules of
evidence and of procedure. The manner by which Arbiters
dispose of cases before them is concededly a matter of
discretion. However, that discretion must be exercised regularly,
legally and within the confines of due process. They are
mandated to use every reasonable means to ascertain the facts of
each case, speedily, objectively and without regard to
technicalities of law or procedure, all in the interest of justice
and for the purpose of accuracy and correctness in adjudicating
the monetary awards.
In this case, Carag was in a far worse situation. Here, Carag was
not issued summons, not accorded a conciliatory conference, not
ordered to submit a position paper, not accorded a hearing, not
given an opportunity to present his evidence, and not notified
that the case was submitted for resolution. Thus, we hold that
Arbiter Ortiguerra's Decision is void as against Carag for utter
absence of due process. It was error for the NLRC and the Court
of Appeals to uphold Arbiter Ortiguerra's decision as against
Carag.
On the Liability of Directors for Corporate Debts
This case also raises this issue: when is a director personally
liable for the debts of the corporation? The rule is that a director
is not personally liable for the debts of the corporation, which
has a separate legal personality of its own. Section 31 of the
Corporation Code lays down the exceptions to the rule, as
follows:
Liability of directors, trustees or officers. - Directors or trustees
who wilfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation
or acquire any personal or pecuniary interest in conflict with
their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
xxxx
Section 31 makes a director personally liable for corporate debts
if he wilfully and knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31 also makes a
director personally liable if he is guilty of gross negligence or bad
faith in directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully
and knowingly voted for or assented to any patently unlawful act
of MAC. Complainants did not present any evidence showing that
Carag wilfully and knowingly voted for or assented to any
patently unlawful act of MAC. Neither did Arbiter Ortiguerra
make any finding to this effect in her Decision.
Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC.
Complainants did not present any evidence showing that Carag is
guilty of gross negligence or bad faith in directing the affairs of
MAC. Neither did Arbiter Ortiguerra make any finding to this
effect in her Decision.
Arbiter Ortiguerra stated in her Decision that:
In instances where corporate officers dismissed employees in
bad faith or wantonly violate labor standard laws or when the
company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with
the company.23
After stating what she believed is the law on the matter, Arbiter
Ortiguerra stopped there and did not make any finding that
Carag is guilty of bad faith or of wanton violation of labor
standard laws. Arbiter Ortiguerra did not specify what act of bad
faith Carag committed, or what particular labor standard laws he
violated.
To hold a director personally liable for debts of the corporation,
and thus pierce the veil of corporate fiction, the bad faith or
wrongdoing of the director must be established clearly and
convincingly.24 Bad faith is never presumed.25 Bad faith does not
connote bad judgment or negligence. Bad faith imports a
dishonest purpose. Bad faith means breach of a known duty
through some ill motive or interest. Bad faith partakes of the
nature of fraud.26 In Businessday Information Systems and
Services, Inc. v. NLRC,27 we held:
There is merit in the contention of petitioner Raul Locsin that the
complaint against him should be dismissed. A corporate officer is
not personally liable for the money claims of discharged
corporate employees unless he acted with evident malice and
bad faith in terminating their employment. There is no evidence
in this case that Locsin acted in bad faith or with malice in
carrying out the retrenchment and eventual closure of the
company (Garcia vs. NLRC, 153 SCRA 640), hence, he may not be
held personally and solidarily liable with the company for the
satisfaction of the judgment in favor of the retrenched
employees.
Neither does bad faith arise automatically just because a
corporation fails to comply with the notice requirement of labor
laws on company closure or dismissal of employees. The failure
to give notice is not an unlawful act because the law does not
define such failure as unlawful. Such failure to give notice is a
violation of procedural due process but does not amount to an
unlawful or criminal act. Such procedural defect is called illegal
dismissal because it fails to comply with mandatory procedural
requirements, but it is not illegal in the sense that it constitutes
an unlawful or criminal act.
For a wrongdoing to make a director personally liable for debts
of the corporation, the wrongdoing approved or assented to by
the director must be a patently unlawful act. Mere failure to
comply with the notice requirement of labor laws on company
closure or dismissal of employees does not amount to a patently
unlawful act. Patently unlawful acts are those declared unlawful
by law which imposes penalties for commission of such unlawful
acts. There must be a law declaring the act unlawful and
penalizing the act.
An example of a patently unlawful act is violation of Article 287
of the Labor Code, which states that "[V]iolation of this provision
is hereby declared unlawful and subject to the penal provisions
provided under Article 288 of this Code." Likewise, Article 288 of
the Labor Code on Penal Provisions and Liabilities, provides that
"any violation of the provision of this Code declared unlawful or
penal in nature shall be punished with a fine of not less than One
Thousand Pesos (₱1,000.00) nor more than Ten Thousand Pesos
(₱10,000.00), or imprisonment of not less than three months nor
more than three years, or both such fine and imprisonment at
the discretion of the court."
In this case, Article
28328 of the Labor Code, requiring a one-
month prior notice to employees and the Department of Labor
and Employment before any permanent closure of a company,
does not state that non-compliance with the notice is an unlawful
act punishable under the Code. There is no provision in any other
Article of the Labor Code declaring failure to give such notice an
unlawful act and providing for its penalty.
Complainants did not allege or prove, and Arbiter Ortiguerra did
not make any finding, that Carag approved or assented to any
patently unlawful act to which the law attaches a penalty for its
commission. On this score alone, Carag cannot be held personally
liable for the separation pay of complainants.
This leaves us with Arbiter Ortiguerra's assertion that "when the
company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with
the company." This assertion echoes the complainants' claim that
Carag is personally liable for MAC's debts to complainants "on
the basis of Article 212(e) of the Labor Code, as amended," which
says:
'Employer' includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except when
acting as employer. (Emphasis supplied)
Indeed, complainants seek to hold Carag personally liable for the
debts of MAC based solely on Article 212(e) of the Labor Code.
This is the specific legal ground cited by complainants, and used
by Arbiter Ortiguerra, in holding Carag personally liable for the
debts of MAC.
We have already ruled in McLeod v. NLRC29 and Spouses Santos
v. NLRC30 that Article 212(e) of the Labor Code, by itself, does not
make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors
for debts of the corporation is still Section 31 of the Corporation
Code. Thus, we explained in McLeod:
Personal liability of corporate directors, trustees or officers
attaches only when (1) they assent to a patently unlawful act of
the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of
interest resulting in damages to the corporation, its stockholders
or other persons; (2) they consent to the issuance of watered
down stocks or when, having knowledge of such issuance, do not
forthwith file with the corporate secretary their written
objection; (3) they agree to hold themselves personally and
solidarily liable with the corporation; or (4) they are made by
specific provision of law personally answerable for their
corporate action.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/
146667.htm -
xxx
The ruling in A.C. Ransom Labor Union-CCLU v.
NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPR
EME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/ja
n2007/146667.htm - which the Court of Appeals cited, does not
apply to this case. We quote pertinent portions of the ruling,
thus:
(a) Article 265 of the Labor Code, in part, expressly provides:
"Any worker whose employment has been terminated as a
consequence of an unlawful lockout shall be entitled to
reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article 265 of this
Code shall be punished by a fine of not exceeding five
hundred pesos and/or imprisonment for not less than one (1)
day nor more than six (6) months."
(b) How can the foregoing provisions be implemented when the
employer is a corporation? The answer is found in Article 212 (c)
of the Labor Code which provides:
"(c) 'Employer' includes any person acting in the interest of an
employer, directly or indirectly. The term shall not include any
labor organization or any of its officers or agents except when
acting as employer."
The foregoing was culled from Section 2 of RA 602, the Minimum
Wage Law. Since RANSOM is an artificial person, it must have an
officer who can be presumed to be the employer, being the
"person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held
personally, not to say even criminally, liable for non-payment of
back wages. That is the policy of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation
employer can have devious ways for evading payment of back
wages. In the instant case, it would appear that RANSOM, in
1969, foreseeing the possibility or probability of payment of
back wages to the 22 strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased out if the
22 strikers win their case. RANSOM actually ceased operations
on May 1, 1973, after the December 19, 1972 Decision of the
Court of Industrial Relations was promulgated against RANSOM.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/
146667.htm - (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President,
organized ROSARIO to evade payment of backwages to the 22
strikers. This situation, or anything similar showing malice or
bad faith on the part of Patricio, does not obtain in the present
case. In Santos v. NLRC,
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/
146667.htm - the Court held, thus:
It is true, there were various cases when corporate officers were
themselves held by the Court to be personally accountable for
the payment of wages and money claims to its employees. In A.C.
Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled
that under the Minimum Wage Law, the responsible officer of an
employer corporation could be held personally liable for
nonpayment of backwages for "(i)f the policy of the law were
otherwise, the corporation employer (would) have devious ways
for evading payment of backwages." In the absence of a clear
identification of the officer directly responsible for failure to pay
the backwages, the Court considered the President of the
corporation as such officer. The case was cited in Chua vs.
NLRC in holding personally liable the vice-president of the
company, being the highest and most ranking official of the
corporation next to the President who was dismissed for the
latter's claim for unpaid wages.
A review of the above exceptional cases would readily disclose
the attendance of facts and circumstances that could rightly
sanction personal liability on the part of the company officer.
In A.C. Ransom, the corporate entity was a family corporation
and execution against it could not be implemented because
of the disposition posthaste of its leviable assets evidently in
order to evade its just and due obligations. The doctrine of
"piercing the veil of corporate fiction" was thus clearly
appropriate. Chua likewise involved another family corporation,
and this time the conflict was between two brothers occupying
the highest ranking positions in the company. There were
incontrovertible facts which pointed to extreme personal
animosity that resulted, evidently in bad faith, in the easing out
from the company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Court's
pronouncement in Sunio vs. National Labor Relations Commission,
thus:
We come now to the personal liability of petitioner, Sunio, who
was made jointly and severally responsible with petitioner
company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional
Director's Decision failed to disclose the reason why he was
made personally liable. Respondents, however, alleged as
grounds thereof, his being the owner of one-half (½) interest of
said corporation, and his alleged arbitrary dismissal of private
respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity
as General Manager of petitioner corporation. There appears to
be no evidence on record that he acted maliciously or in bad faith
in terminating the services of private respondents. His act,
therefore, was within the scope of his authority and was a
corporate act.
It is basic that a corporation is invested by law with a personality
separate and distinct from those of the persons composing it as
well as from that of any other legal entity to which it may be
related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality. Petitioner Sunio, therefore,
should not have been made personally answerable for the
payment of private respondents' back
salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUP
REME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/j
an2007/146667.htm -
Thus, the rule is still that the doctrine of piercing the corporate
veil applies only when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime.
In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot
be made personally liable for corporate liabilities. Neither Article
212[e] nor Article 273 (now 272) of the Labor Code expressly
makes any corporate officer personally liable for the debts of the
corporation. As this Court ruled in H.L. Carlos Construction, Inc. v.
Marina Properties Corporation:
We concur with the CA that these two respondents are not liable.
Section 31 of the Corporation Code (Batas Pambansa Blg. 68)
provides:
"Section 31. Liability of directors, trustees or officers. - Directors
or trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith ... shall be liable jointly and
severally for all damages resulting therefrom suffered by the
corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only

when (a) they assent to a patently unlawful act of the
corporation; or (b) they are guilty of bad faith or gross
negligence in directing its affairs; or (c) they incur conflict of
interest, resulting in damages to the corporation, its stockholders
or other persons.31 (Boldfacing in the original; boldfacing with
underscoring supplied)

Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court
of Appeals to hold Carag personally liable for the separation pay
owed by MAC to complainants based alone on Article 212(e) of
the Labor Code. Article 212(e) does not state that corporate
officers are personally liable for the unpaid salaries or
separation pay of employees of the corporation. The liability of
corporate officers for corporate debts remains governed by
Section 31 of the Corporation Code.

WHEREFORE, we GRANT the petition. We SET ASIDE the

Decision dated 29 February 2000 and the Resolution dated 27
March 2001 of the Court of Appeals in CA-G.R. SP Nos. 54404-06
insofar as petitioner Antonio Carag is concerned.

SO ORDERED.
G.R. No. 201298 February 5, 2014
RAUL C. COSARE, Petitioner,
vs.
BROADCOM ASIA, INC. and DANTE AREVALO, Respondents.
DECISION
REYES, J.:
Before the Court is a petition for review on certiorari1 under Rule
45 of the Rules of Court, which assails the Decision2 dated
November 24, 2011 and Resolution3 dated March 26, 2012 of the
Court of Appeals (CA) in CA-G.R. SP. No. 117356, wherein the CA
ruled that the Regional Trial Court (RTC), and not the Labor
Arbiter (LA), had the jurisdiction over petitioner Raul C. Cosare's
(Cosare) complaint for illegal dismissal against Broadcom Asia,
Inc. (Broadcom) and Dante Arevalo (Arevalo), the President of
Broadcom (respondents).
The Antecedents
The case stems from a complaint4 for constructive dismissal,
illegal suspension and monetary claims filed with the National
Capital Region Arbitration Branch of the National Labor
Relations Commission (NLRC) by Cosare against the
respondents.
Cosare claimed that sometime in April 1993, he was employed as
a salesman by Arevalo, who was then in the business of selling
broadcast equipment needed by television networks and
production houses. In December 2000, Arevalo set up the
company Broadcom, still to continue the business of trading
communication and broadcast equipment. Cosare was named an
incorporator of Broadcom, having been assigned 100 shares of
stock with par value of ₱1.00 per share.5 In October 2001, Cosare
was promoted to the position of Assistant Vice President for
Sales (AVP for Sales) and Head of the Technical Coordination,
having a monthly basic net salary and average commissions of
₱18,000.00 and ₱37,000.00, respectively.6
Sometime in 2003, Alex F. Abiog (Abiog) was appointed as
Broadcom’s Vice President for Sales and thus, became Cosare’s
immediate superior. On March 23, 2009, Cosare sent a
confidential memo7 to Arevalo to inform him of the following
anomalies which were allegedly being committed by Abiog
against the company: (a) he failed to report to work on time, and
would immediately leave the office on the pretext of client visits;
(b) he advised the clients of Broadcom to purchase camera units
from its competitors, and received commissions therefor; (c) he
shared in the "under the-table dealings" or "confidential
commissions" which Broadcom extended to its clients’ personnel
and engineers; and (d) he expressed his complaints and disgust
over Broadcom’s uncompetitive salaries and wages and delay in
the payment of other benefits, even in the presence of office staff.
Cosare ended his memo by clarifying that he was not interested
in Abiog’s position, but only wanted Arevalo to know of the
irregularities for the corporation’s sake.
Apparently, Arevalo failed to act on Cosare’s accusations. Cosare
claimed that he was instead called for a meeting by Arevalo on
March 25, 2009, wherein he was asked to tender his resignation
in exchange for "financial assistance" in the amount of
₱300,000.00.8 Cosare refused to comply with the directive, as
signified in a letter9dated March 26, 2009 which he sent to
Arevalo.
On March 30, 2009, Cosare received from Roselyn Villareal
(Villareal), Broadcom’s Manager for Finance and Administration,
a memo10 signed by Arevalo, charging him of serious misconduct
and willful breach of trust, and providing in part:
1. A confidential memo was received from the VP for
Sales informing me that you had directed, or at the very
least tried to persuade, a customer to purchase a camera
from another supplier. Clearly, this action is a gross and
willful violation of the trust and confidence this company
has given to you being its AVP for Sales and is an attempt
to deprive the company of income from which you, along
with the other employees of this company, derive your
salaries and other benefits. x x x.
2. A company vehicle assigned to you with plate no. UNV
402 was found abandoned in another place outside of the
office without proper turnover from you to this office
which had assigned said vehicle to you. The vehicle was
found to be inoperable and in very bad condition, which
required that the vehicle be towed to a nearby auto
repair shop for extensive repairs.
3. You have repeatedly failed to submit regular sales
reports informing the company of your activities within
and outside of company premises despite repeated
reminders. However, it has been observed that you have
been both frequently absent and/or tardy without
proper information to this office or your direct
supervisor, the VP for Sales Mr. Alex Abiog, of your
whereabouts.
4. You have been remiss in the performance of your
duties as a Sales officer as evidenced by the fact that you
have not recorded any sales for the past immediate
twelve (12) months. This was inspite of the fact that my
office decided to relieve you of your duties as technical
coordinator between Engineering and Sales since June
last year so that you could focus and concentrate [on]
your activities in sales.11
Cosare was given forty-eight (48) hours from the date of the
memo within which to present his explanation on the charges.
He was also "suspended from having access to any and all
company files/records and use of company assets effective
immediately."12 Thus, Cosare claimed that he was precluded
from reporting for work on March 31, 2009, and was instead
instructed to wait at the office’s receiving section. Upon the
specific instructions of Arevalo, he was also prevented by
Villareal from retrieving even his personal belongings from the
office.
On April 1, 2009, Cosare was totally barred from entering the
company premises, and was told to merely wait outside the
office building for further instructions. When no such
instructions were given by 8:00 p.m., Cosare was impelled to
seek the assistance of the officials of Barangay San Antonio, Pasig
City, and had the incident reported in the barangay blotter.13
On April 2, 2009, Cosare attempted to furnish the company with
a Memo14 by which he addressed and denied the accusations
cited in Arevalo’s memo dated March 30, 2009. The respondents
refused to receive the memo on the ground of late filing,
prompting Cosare to serve a copy thereof by registered mail. The
following day, April 3, 2009, Cosare filed the subject labor
complaint, claiming that he was constructively dismissed from
employment by the respondents. He further argued that he was
illegally suspended, as he placed no serious and imminent threat
to the life or property of his employer and co-employees.15
In refuting Cosare’s complaint, the respondents argued that
Cosare was neither illegally suspended nor dismissed from
employment. They also contended that Cosare committed the
following acts inimical to the interests of Broadcom: (a) he failed
to sell any broadcast equipment since the year 2007; (b) he
attempted to sell a Panasonic HMC 150 Camera which was to be
sourced from a competitor; and (c) he made an unauthorized
request in Broadcom’s name for its principal, Panasonic USA, to
issue an invitation for Cosare’s friend, one Alex Paredes, to
attend the National Association of Broadcasters’ Conference in
Las Vegas, USA.16 Furthermore, they contended that Cosare
abandoned his job17 by continually failing to report for work
beginning April 1, 2009, prompting them to issue on April 14,
2009 a memorandum18 accusing Cosare of absence without leave
beginning April 1, 2009.
The Ruling of the LA
On January 6, 2010, LA Napoleon M. Menese (LA Menese)
rendered his Decision19 dismissing the complaint on the ground
of Cosare’s failure to establish that he was dismissed,
constructively or otherwise, from his employment. For the LA,
what transpired on March 30, 2009 was merely the respondents’
issuance to Cosare of a show-cause memo, giving him a chance to
present his side on the charges against him. He explained:
It is obvious that [Cosare] DID NOT wait for respondents’ action
regarding the charges leveled against him in the show-cause
memo. What he did was to pre-empt that action by filing this
complaint just a day after he submitted his written explanation.
Moreover, by specifically seeking payment of "Separation Pay"
instead of reinstatement, [Cosare’s] motive for filing this case
becomes more evident.20
It was also held that Cosare failed to substantiate by
documentary evidence his allegations of illegal suspension and
non-payment of allowances and commissions.
Unyielding, Cosare appealed the LA decision to the NLRC.
The Ruling of the NLRC
On August 24, 2010, the NLRC rendered its Decision21 reversing
the Decision of LA Menese. The dispositive portion of the NLRC
Decision reads:
WHEREFORE, premises considered, the DECISION is REVERSED
and the Respondents are found guilty of Illegal Constructive
Dismissal. Respondents BROADCOM ASIA, INC. and Dante
Arevalo are ordered to pay [Cosare’s] backwages, and separation
pay, as well as damages, in the total amount of ₱1,915,458.33,
per attached Computation.
SO ORDERED.22
In ruling in favor of Cosare, the NLRC explained that "due weight
and credence is accorded to [Cosare’s] contention that he was
constructively dismissed by Respondent Arevalo when he was
asked to resign from his employment."23The fact that Cosare was
suspended from using the assets of Broadcom was also
inconsistent with the respondents’ claim that Cosare opted to
abandon his employment.
Exemplary damages in the amount of ₱100,000.00 was awarded,
given the NLRC’s finding that the termination of Cosare’s
employment was effected by the respondents in bad faith and in
a wanton, oppressive and malevolent manner. The claim for
unpaid commissions was denied on the ground of the failure to
include it in the prayer of pleadings filed with the LA and in the
appeal.
The respondents’ motion for reconsideration was
denied.24 Dissatisfied, they filed a petition for certiorari with the
CA founded on the following arguments: (1) the respondents did
not have to prove just cause for terminating the employment of
Cosare because the latter’s complaint was based on an alleged
constructive dismissal; (2) Cosare resigned and was thus not
dismissed from employment; (3) the respondents should not be
declared liable for the payment of Cosare’s monetary claims; and
(4) Arevalo should not be held solidarily liable for the judgment
award.
In a manifestation filed by the respondents during the pendency
of the CA appeal, they raised a new argument, i.e., the case
involved an intra-corporate controversy which was within the
jurisdiction of the RTC, instead of the LA.25They argued that the
case involved a complaint against a corporation filed by a
stockholder, who, at the same time, was a corporate officer.
The Ruling of the CA
On November 24, 2011, the CA rendered the assailed
Decision26 granting the respondents’ petition. It agreed with the
respondents’ contention that the case involved an intra-
corporate controversy which, pursuant to Presidential Decree
No. 902-A, as amended, was within the exclusive jurisdiction of
the RTC. It reasoned:
Record shows that [Cosare] was indeed a stockholder of
[Broadcom], and that he was listed as one of its directors.
Moreover, he held the position of [AVP] for Sales which is listed
as a corporate office. Generally, the president, vice-president,
secretary or treasurer are commonly regarded as the principal
or executive officers of a corporation, and modern corporation
statutes usually designate them as the officers of the corporation.
However, it bears mentioning that under Section 25 of the
Corporation Code, the Board of Directors of [Broadcom] is
allowed to appoint such other officers as it may deem necessary.
Indeed, [Broadcom’s] By-Laws provides:
Article IV
Officer
Section 1. Election / Appointment – Immediately after their
election, the Board of Directors shall formally organize by
electing the President, the Vice-President, the Treasurer, and the
Secretary at said meeting.
The Board, may, from time to time, appoint such other officers as
it may determine to be necessary or proper. x x x
We hold that [the respondents] were able to present substantial
evidence that [Cosare] indeed held a corporate office, as
evidenced by the General Information Sheet which was
submitted to the Securities and Exchange Commission (SEC) on
October 22, 2009.27 (Citations omitted and emphasis supplied)
Thus, the CA reversed the NLRC decision and resolution, and
then entered a new one dismissing the labor complaint on the
ground of lack of jurisdiction, finding it unnecessary to resolve
the main issues that were raised in the petition. Cosare filed a
motion for reconsideration, but this was denied by the CA via the
Resolution28 dated March 26, 2012. Hence, this petition.
The Present Petition
The pivotal issues for the petition’s full resolution are as follows:
(1) whether or not the case instituted by Cosare was an intra-
corporate dispute that was within the original jurisdiction of the
RTC, and not of the LAs; and (2) whether or not Cosare was
constructively and illegally dismissed from employment by the
respondents.
The Court’s Ruling
The petition is impressed with merit.
Jurisdiction over the controversy
As regards the issue of jurisdiction, the Court has determined
that contrary to the ruling of the CA, it is the LA, and not the
regular courts, which has the original jurisdiction over the
subject controversy. An intra-corporate controversy, which falls
within the jurisdiction of regular courts, has been regarded in its
broad sense to pertain to disputes that involve any of the
following relationships: (1) between the corporation,
partnership or association and the public; (2) between the
corporation, partnership or association and the state in so far as
its franchise, permit or license to operate is concerned; (3)
between the corporation, partnership or association and its
stockholders, partners, members or officers; and (4) among the
stockholders, partners or associates, themselves.29 Settled
jurisprudence, however, qualifies that when the dispute involves
a charge of illegal dismissal, the action may fall under the
jurisdiction of the LAs upon whose jurisdiction, as a rule, falls
termination disputes and claims for damages arising from
employer-employee relations as provided in Article 217 of the
Labor Code. Consistent with this jurisprudence, the mere fact
that Cosare was a stockholder and an officer of Broadcom at the
time the subject controversy developed failed to necessarily
make the case an intra-corporate dispute.
In Matling Industrial and Commercial Corporation v. Coros,30 the
Court distinguished between a "regular employee" and a
"corporate officer" for purposes of establishing the true nature of
a dispute or complaint for illegal dismissal and determining
which body has jurisdiction over it. Succinctly, it was explained
that "[t]he determination of whether the dismissed officer was a
regular employee or corporate officer unravels the conundrum"
of whether a complaint for illegal dismissal is cognizable by the
LA or by the RTC. "In case of the regular employee, the LA has
jurisdiction; otherwise, the RTC exercises the legal authority to
adjudicate.31
Applying the foregoing to the present case, the LA had the
original jurisdiction over the complaint for illegal dismissal
because Cosare, although an officer of Broadcom for being its
AVP for Sales, was not a "corporate officer" as the term is defined
by law. We emphasized in Real v. Sangu Philippines, Inc.32 the
definition of corporate officers for the purpose of identifying an
intra-corporate controversy. Citing Garcia v. Eastern
Telecommunications Philippines, Inc.,33 we held:
" ‘Corporate officers’ in the context of Presidential Decree No.
902-A are those officers of the corporation who are given that
character by the Corporation Code or by the corporation’s by-
laws. There are three specific officers whom a corporation must
have under Section 25 of the Corporation Code. These are the
president, secretary and the treasurer. The number of officers is
not limited to these three. A corporation may have such other
officers as may be provided for by its by-laws like, but not
limited to, the vice-president, cashier, auditor or general
manager. The number of corporate officers is thus limited by law
and by the corporation’s by-laws."34 (Emphasis ours)
In Tabang v. NLRC,35 the Court also made the following
pronouncement on the nature of corporate offices:
It has been held that an "office" is created by the charter of the
corporation and the officer is elected by the directors and
stockholders. On the other hand, an "employee" usually occupies
no office and generally is employed not by action of the directors
or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such
employee.36 (Citations omitted)
As may be deduced from the foregoing, there are two
circumstances which must concur in order for an individual to be
considered a corporate officer, as against an ordinary employee
or officer, namely: (1) the creation of the position is under the
corporation’s charter or by-laws; and (2) the election of the
officer is by the directors or stockholders. It is only when the
officer claiming to have been illegally dismissed is classified as
such corporate officer that the issue is deemed an intra-
corporate dispute which falls within the jurisdiction of the trial
courts.
To support their argument that Cosare was a corporate officer,
the respondents referred to Section 1, Article IV of Broadcom’s
by-laws, which reads:
ARTICLE IV
OFFICER
Section 1. Election / Appointment – Immediately after their
election, the Board of Directors shall formally organize by
electing the President, the Vice-President, the Treasurer, and the
Secretary at said meeting.
The Board may, from time to time, appoint such other officers as
it may determine to be necessary or proper. Any two (2) or more
compatible positions may be held concurrently by the same
person, except that no one shall act as President and Treasurer
or Secretary at the same time.37 (Emphasis ours)
This was also the CA’s main basis in ruling that the matter was an
intra-corporate dispute that was within the trial courts’
jurisdiction.
The Court disagrees with the respondents and the CA. As may be
gleaned from the aforequoted provision, the only officers who
are specifically listed, and thus with offices that are created
under Broadcom’s by-laws are the following: the President, Vice-
President, Treasurer and Secretary. Although a blanket authority
provides for the Board’s appointment of such other officers as it
may deem necessary and proper, the respondents failed to
sufficiently establish that the position of AVP for Sales was
created by virtue of an act of Broadcom’s board, and that Cosare
was specifically elected or appointed to such position by the
directors. No board resolutions to establish such facts form part
of the case records. Further, it was held in Marc II Marketing, Inc.
v. Joson38 that an enabling clause in a corporation’s by-laws
empowering its board of directors to create additional officers,
even with the subsequent passage of a board resolution to that
effect, cannot make such position a corporate office. The board of
directors has no power to create other corporate offices without
first amending the corporate by-laws so as to include therein the
newly created corporate office.39 "To allow the creation of a
corporate officer position by a simple inclusion in the corporate
by-laws of an enabling clause empowering the board of directors
to do so can result in the circumvention of that constitutionally
well-protected right [of every employee to security of tenure]."40
The CA’s heavy reliance on the contents of the General
Information Sheets41, which were submitted by the respondents
during the appeal proceedings and which plainly provided that
Cosare was an "officer" of Broadcom, was clearly misplaced. The
said documents could neither govern nor establish the nature of
the office held by Cosare and his appointment thereto.
Furthermore, although Cosare could indeed be classified as an
officer as provided in the General Information Sheets, his
position could only be deemed a regular office, and not a
corporate office as it is defined under the Corporation Code.
Incidentally, the Court noticed that although the Corporate
Secretary of Broadcom, Atty. Efren L. Cordero, declared under
oath the truth of the matters set forth in the General Information
Sheets, the respondents failed to explain why the General
Information Sheet officially filed with the Securities and
Exchange Commission in 2011 and submitted to the CA by the
respondents still indicated Cosare as an AVP for Sales, when
among their defenses in the charge of illegal dismissal, they
asserted that Cosare had severed his relationship with the
corporation since the year 2009.
Finally, the mere fact that Cosare was a stockholder of Broadcom
at the time of the case’s filing did not necessarily make the action
an intra- corporate controversy. "Not all conflicts between the
stockholders and the corporation are classified as intra-
corporate. There are other facts to consider in determining
whether the dispute involves corporate matters as to consider
them as intra-corporate controversies."42 Time and again, the
Court has ruled that in determining the existence of an intra-
corporate dispute, the status or relationship of the parties and
the nature of the question that is the subject of the controversy
must be taken into account.43 Considering that the pending
dispute particularly relates to Cosare’s rights and obligations as a
regular officer of Broadcom, instead of as a stockholder of the
corporation, the controversy cannot be deemed intra-corporate.
This is consistent with the "controversy test" explained by the
Court in Reyes v. Hon. RTC, Br. 142,44 to wit:
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate.
The controversy must not only be rooted in the existence of an
intra-corporate relationship, but must as well pertain to the
enforcement of the parties’ correlative rights and obligations
under the Corporation Code and the internal and intra-corporate
regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no
intra-corporate controversy exists.45 (Citation omitted)
It bears mentioning that even the CA’s finding46 that Cosare was
a director of Broadcom when the dispute commenced was
unsupported by the case records, as even the General
Information Sheet of 2009 referred to in the CA decision to
support such finding failed to provide such detail.
All told, it is then evident that the CA erred in reversing the
NLRC’s ruling that favored Cosare solely on the ground that the
dispute was an intra-corporate controversy within the
jurisdiction of the regular courts.
The charge of constructive dismissal
Towards a full resolution of the instant case, the Court finds it
appropriate to rule on the correctness of the NLRC’s ruling
finding Cosare to have been illegally dismissed from
employment.
In filing his labor complaint, Cosare maintained that he was
constructively dismissed, citing among other circumstances the
charges that were hurled and the suspension that was imposed
against him via Arevalo’s memo dated March 30, 2009. Even
prior to such charge, he claimed to have been subjected to
mental torture, having been locked out of his files and records
and disallowed use of his office computer and access to personal
belongings.47While Cosare attempted to furnish the respondents
with his reply to the charges, the latter refused to accept the
same on the ground that it was filed beyond the 48-hour period
which they provided in the memo.
Cosare further referred to the circumstances that allegedly
transpired subsequent to the service of the memo, particularly
the continued refusal of the respondents to allow Cosare’s entry
into the company’s premises. These incidents were cited in the
CA decision as follows:
On March 31, 2009, [Cosare] reported back to work again. He
asked Villareal if he could retrieve his personal belongings, but
the latter said that x x x Arevalo directed her to deny his request,
so [Cosare] again waited at the receiving section of the office. On
April 1, 2009, [Cosare] was not allowed to enter the office
premises. He was asked to just wait outside of the Tektite (PSE)
Towers, where [Broadcom] had its offices, for further
instructions on how and when he could get his personal
belongings. [Cosare] waited until 8 p.m. for instructions but none
were given. Thus, [Cosare] sought the assistance of the officials
of Barangay San Antonio, Pasig who advised him to file a labor or
replevin case to recover his personal belongings. x x x.48 (Citation
omitted)
It is also worth mentioning that a few days before the issuance of
the memo dated March 30, 2009, Cosare was allegedly
summoned to Arevalo’s office and was asked to tender his
immediate resignation from the company, in exchange for a
financial assistance of ₱300,000.00.49 The directive was said to
be founded on Arevalo’s choice to retain Abiog’s employment
with the company.50 The respondents failed to refute these
claims.
Given the circumstances, the Court agrees with Cosare’s claim of
constructive and illegal dismissal. "[C]onstructive dismissal
occurs when there is cessation of work because continued
employment is rendered impossible, unreasonable, or unlikely as
when there is a demotion in rank or diminution in pay or when a
clear discrimination, insensibility, or disdain by an employer
becomes unbearable to the employee leaving the latter with no
other option but to quit."51 In Dimagan v. Dacworks United,
Incorporated,52 it was explained:
The test of constructive dismissal is whether a reasonable
person in the employee’s position would have felt compelled to
give up his position under the circumstances. It is an act
amounting to dismissal but is made to appear as if it were not.
Constructive dismissal is therefore a dismissal in disguise. The
law recognizes and resolves this situation in favor of employees
in order to protect their rights and interests from the coercive
acts of the employer.53(Citation omitted)
It is clear from the cited circumstances that the respondents
already rejected Cosare’s continued involvement with the
company. Even their refusal to accept the explanation which
Cosare tried to tender on April 2, 2009 further evidenced the
resolve to deny Cosare of the opportunity to be heard prior to
any decision on the termination of his employment. The
respondents allegedly refused acceptance of the explanation as it
was filed beyond the mere 48-hour period which they granted to
Cosare under the memo dated March 30, 2009. However, even
this limitation was a flaw in the memo or notice to explain which
only further signified the respondents’ discrimination, disdain
and insensibility towards Cosare, apparently resorted to by the
respondents in order to deny their employee of the opportunity
to fully explain his defenses and ultimately, retain his
employment. The Court emphasized in King of Kings Transport,
Inc. v. Mamac54 the standards to be observed by employers in
complying with the service of notices prior to termination:
[T]he first written notice to be served on the employees should
contain the specific causes or grounds for termination against
them, and a directive that the employees are given the
opportunity to submit their written explanation within a
reasonable period. "Reasonable opportunity" under the Omnibus
Rules means every kind of assistance that management must
accord to the employees to enable them to prepare adequately
for their defense. This should be construed as a period of at least
five (5) calendar days from receipt of the notice to give the
employees an opportunity to study the accusation against them,
consult a union official or lawyer, gather data and evidence, and
decide on the defenses they will raise against the complaint.
Moreover, in order to enable the employees to intelligently
prepare their explanation and defenses, the notice should
contain a detailed narration of the facts and circumstances that
will serve as basis for the charge against the employees. A
general description of the charge will not suffice. Lastly, the
notice should specifically mention which company rules, if any,
are violated and/or which among the grounds under Art. 282 is
being charged against the employees.55 (Citation omitted,
underscoring ours, and emphasis supplied)
In sum, the respondents were already resolute on a severance of
their working relationship with Cosare, notwithstanding the
facts which could have been established by his explanations and
the respondents’ full investigation on the matter. In addition to
this, the fact that no further investigation and final disposition
appeared to have been made by the respondents on Cosare’s
case only negated the claim that they actually intended to first
look into the matter before making a final determination as to
the guilt or innocence of their employee. This also manifested
from the fact that even before Cosare was required to present his
side on the charges of serious misconduct and willful breach of
trust, he was summoned to Arevalo’s office and was asked to
tender his immediate resignation in exchange for financial
assistance.
The clear intent of the respondents to find fault in Cosare was
also manifested by their persistent accusation that Cosare
abandoned his post, allegedly signified by his failure to report to
work or file a leave of absence beginning April 1, 2009. This was
even the subject of a memo56 issued by Arevalo to Cosare on
April 14, 2009, asking him to explain his absence within 48 hours
from the date of the memo. As the records clearly indicated,
however, Arevalo placed Cosare under suspension beginning
March 30, 2009. The suspension covered access to any and all
company files/records and the use of the assets of the company,
with warning that his failure to comply with the memo would be
dealt with drastic management action. The charge of
abandonment was inconsistent with this imposed suspension.
"Abandonment is the deliberate and unjustified refusal of an
employee to resume his employment. To constitute
abandonment of work, two elements must concur: ‘(1) the
employee must have failed to report for work or must have been
absent without valid or justifiable reason; and (2) there must
have been a clear intention on the part of the employee to sever
the employer- employee relationship manifested by some overt
act.’"57Cosare’s failure to report to work beginning April 1, 2009
was neither voluntary nor indicative of an intention to sever his
employment with Broadcom. It was illogical to be requiring him
to report for work, and imputing fault when he failed to do so
after he was specifically denied access to all of the company’s
assets. As correctly observed by the NLRC:
[T]he Respondent[s] had charged [Cosare] of abandoning his
employment beginning on April 1, 2009. However[,] the show-
cause letter dated March 3[0], 2009 (Annex "F", ibid) suspended
[Cosare] from using not only the equipment but the "assets" of
Respondent [Broadcom]. This insults rational thinking because
the Respondents tried to mislead us and make [it appear] that
[Cosare] failed to report for work when they had in fact had [sic]
placed him on suspension. x x x.58
Following a finding of constructive dismissal, the Court finds no
cogent reason to modify the NLRC's monetary awards in Cosare's
favor. In Robinsons Galleria/Robinsons Supermarket
Corporation v. Ranchez,59 the Court reiterated that an illegally or
constructively dismissed employee is entitled to: (1) either
reinstatement, if viable, or separation pay, if reinstatement is no
longer viable; and (2) backwages.60 The award of exemplary
damages was also justified given the NLRC's finding that the
respondents acted in bad faith and in a wanton, oppressive and
malevolent manner when they dismissed Cosare. It is also by
reason of such bad faith that Arevalo was correctly declared
solidarily liable for the monetary awards.
WHEREFORE, the petition is GRANTED. The Decision dated
November 24, 2011 and Resolution dated March 26, 2012 of the
Court of Appeals in CA-G.R. SP. No. 117356 are SET ASIDE. The
Decision dated August 24, 2010 of the National Labor Relations
Commission in favor of petitioner Raul C. Cosare is AFFIRMED.

SO ORDERED.
G.R. No.176897 December 11, 2013
ADVANCE PAPER CORPORATION and GEORGE HAW, in his
capacity as President of Advance Paper
Corporation, Petitioners,
vs.
ARMA TRADERS CORPORATION, MANUEL TING, CHENG GUI
and BENJAMIN NG, Respondents.
x-------------------------------------------------x
ANTONIO TAN and UY SENG KEE WILLY, Respondents.
DECISION
BRION, J.:
Before us is a Petition for Review1
seeking to set aside the
Decision of the Court of Appeals (CA) in CA-G.R. CV No. 71499
dated March 31, 2006 and the Resolution dated March 7,
2007.2 The Decision reversed and set aside the ruling of the
Regional Trial Court (RTC) of Manila, Branch 18 in Civil Case No.
94-72526 which ordered Arma Traders Corporation (Arma
Traders) to pay Advance Paper Corporation (Advance Paper) the
sum of ₱15,321,798.25 with interest, and ₱1,500,000.00 for
attorney’s fees, plus the cost of the suit.3
Factual Antecedents
Petitioner Advance Paper is a domestic corporation engaged in
the business of producing, printing, manufacturing, distributing
and selling of various paper products.4 Petitioner George Haw
(Haw) is the President while his wife, Connie Haw, is the General
Manager.5
Respondent Arma Traders is also a domestic corporation
engaged in the wholesale and distribution of school and office
supplies, and novelty products.6 Respondent Antonio Tan (Tan)
was formerly the President while respondent Uy Seng Kee Willy
(Uy) is the Treasurer of Arma Traders.7 They represented Arma
Traders when dealing with its supplier, Advance Paper, for about
14 years.8
On the other hand, respondents Manuel Ting, Cheng Gui and
Benjamin Ng worked for Arma Traders as Vice-President,
General Manager and Corporate Secretary, respectively.9
On various dates from September to December 1994, Arma
Traders purchased on credit notebooks and other paper
products amounting to ₱7,533,001.49 from Advance Paper. 10
Upon the representation of Tan and Uy, Arma Traders also
obtained three loans from Advance Paper in November 1994 in
the amounts of ₱3,380,171.82, ₱1,000,000.00, and ₱3,408,623.94
or a total of ₱7,788,796.76.11 Arma Traders needed the loan to
settle its obligations to other suppliers because its own
collectibles did not arrive on time.12 Because of its good business
relations with Arma Traders, Advance Paper extended the
loans.13
As payment for the purchases on credit and the loan
transactions, Arma Traders issued 82 postdated checks14payable
to cash or to Advance Paper. Tan and Uy were Arma Traders’
authorized bank signatories who signed and issued these checks
which had the aggregate amount of ₱15,130,636.87.15
Advance Paper presented the checks to the drawee bank but
these were dishonored either for "insufficiency of funds" or
"account closed." Despite repeated demands, however, Arma
Traders failed to settle its account with Advance Paper.16
On December 29, 1994, the petitioners filed a complaint17 for
collection of sum of money with application for preliminary
attachment against Arma Traders, Tan, Uy, Ting, Gui, and Ng.
Claims of the petitioners
The petitioners claimed that the respondents fraudulently issued
the postdated checks as payment for the purchases and loan
transactions knowing that they did not have sufficient funds with
the drawee banks.18
To prove the purchases on credit, the petitioners presented the
summary of the transactions and their corresponding sales
invoices as their documentary evidence.19
During the trial, Haw also testified that within one or two weeks
upon delivery of the paper products, Arma Traders paid the
purchases in the form of postdated checks. Thus, he personally
collected these checks on Saturdays and upon receiving the
checks, he surrendered to Arma Traders the original of the sales
invoices while he retained the duplicate of the invoices.20
To prove the loan transactions, the petitioners presented the
copies of the checks21 which Advance Paper issued in favor of
Arma Traders. The petitioners also filed a manifestation22 dated
June 14, 1995, submitting a bank statement from Metrobank
EDSA Kalookan Branch. This was to show that Advance Paper’s
credit line with Metrobank has been transferred to the account
of Arma Traders as payee from October 1994 to December 1994.
Moreover, Haw testified to prove the loan transactions. When
asked why he considered extending the loans without any
collateral and loan agreement or promissory note, and only on
the basis of the issuance of the postdated checks, he answered
that it was because he trusted Arma Traders since it had been
their customer for a long time and that none of the previous
checks ever bounced.23
Claims of the respondents
The respondents argued that the purchases on credit were
spurious, simulated and fraudulent since there was no delivery
of the ₱7,000,000.00 worth of notebooks and other paper
products.24
During the trial, Ng testified that Arma Traders did not purchase
notebooks and other paper products from September to
December 1994. He claimed that during this period, Arma
Traders concentrated on Christmas items, not school and office
supplies. He also narrated that upon learning about the
complaint filed by the petitioners, he immediately looked for
Arma Traders’ records and found no receipts involving the
purchases of notebooks and other paper products from Advance
Paper.25
As to the loan transactions, the respondents countered that
these were the personal obligations of Tan and Uy to Advance
Paper. These loans were never intended to benefit the
respondents.
The respondents also claimed that the loan transactions
were ultra vires because the board of directors of Arma Traders
did not issue a board resolution authorizing Tan and Uy to obtain
the loans from Advance Paper. They claimed that the borrowing
of money must be done only with the prior approval of the board
of directors because without the approval, the corporate officers
are acting in excess of their authority or ultra vires. When the
acts of the corporate officers are ultra vires, the corporation is
not liable for whatever acts that these officers committed in
excess of their authority. Further, the respondents claimed that
Advance Paper failed to verify Tan and Uy’s authority to transact
business with them. Hence, Advance Paper should suffer the
consequences.26
The respondents accused Tan and Uy for conspiring with the
petitioners to defraud Arma Traders through a series of
transactions known as rediscounting of postdated checks. In
rediscounting, the respondents explained that Tan and Uy would
issue Arma Traders’ postdated checks to the petitioners in
exchange for cash, discounted by as much as 7% to 10%
depending on how long were the terms of repayment. The
rediscounted percentage represented the interest or profit
earned by the petitioners in these transactions.27
Tan did not file his Answer and was eventually declared in
default.
On the other hand, Uy filed his Answer28 dated January 20, 1995
but was subsequently declared in default upon his failure to
appear during the pre-trial. In his Answer, he admitted that
Arma Traders together with its corporate officers have been
transacting business with Advance Paper.29 He claimed that he
and Tan have been authorized by the board of directors for the
past 13 years to issue checks in behalf of Arma Traders to pay its
obligations with Advance Paper.30 Furthermore, he admitted
that Arma Traders’ checks were issued to pay its contractual
obligations with Advance Paper.31 However, according to him,
Advance Paper was informed beforehand that Arma Traders’
checks were funded out of the ₱20,000,000.00 worth of
collectibles coming from the provinces. Unfortunately, the
expected collectibles did not materialize for unknown reasons.32
Ng filed his Answer33 and claimed that the management of Arma
Traders was left entirely to Tan and Uy. Thus, he never
participated in the company’s daily transactions.34
Atty. Ernest S. Ang, Jr. (Atty. Ang), Arma Traders’ Vice-President
for Legal Affairs and Credit and Collection, testified that he
investigated the transactions involving Tan and Uy and
discovered that they were financing their own business using
Arma Traders’ resources. He also accused Haw for conniving
with Tan and Uy in fraudulently making Arma Traders liable for
their personal debts. He based this conclusion from the
following: First, basic human experience and common sense tell
us that a lender will not agree to extend additional loan to
another person who already owes a substantial sum from the
lender – in this case, petitioner Advance Paper. Second, there was
no other document proving the existence of the loan other than
the postdated checks. Third, the total of the purchase and loan
transactions vis-à-vis the total amount of the postdated checks
did not tally. Fourth, he found out that the certified true copy of
Advance Paper’s report with the Securities and Exchange
Commission (SEC report) did not reflect the ₱15,000,000.00
collectibles it had with Arma Traders.35
Atty. Ang also testified that he already filed several cases of
estafa and qualified theft36 against Tan and Uy and that several
warrants of arrest had been issued against them.
In their pre-trial brief,37 the respondents named Sharow Ong, the
secretary of Tan and Uy, to testify on how Tan and Uy conspired
with the petitioners to defraud Arma Traders. However, the
respondents did not present her on the witness stand.
The RTC Ruling
On June 18, 2001, the RTC ruled that the purchases on credit and
loans were sufficiently proven by the petitioners. Hence, the RTC
ordered Arma Traders to pay Advance Paper the sum of
₱15,321,798.25 with interest, and ₱1,500,000.00 for attorney’s
fees, plus the cost of the suit.
The RTC held that the respondents failed to present hard,
admissible and credible evidence to prove that the sale invoices
were forged or fictitious, and that the loan transactions were
personal obligations of Tan and Uy. Nonetheless, the RTC
dismissed the complaint against Tan, Uy, Ting, Gui and Ng due to
the lack of evidence showing that they bound themselves, either
jointly or solidarily, with Arma Traders for the payment of its
account.38
Arma Traders appealed the RTC decision to the CA.
The CA Ruling
The CA held that the petitioners failed to prove by
preponderance of evidence the existence of the purchases on
credit and loans based on the following grounds:
First, Arma Traders was not liable for the loan in the absence of a
board resolution authorizing Tan and Uy to obtain the loan from
Advance Paper.39 The CA acknowledged that Tan and Uy were
Arma Traders’ authorized bank signatories. However, the CA
explained that this is not sufficient because the authority to sign
the checks is different from the required authority to contract a
loan.40
Second, the CA also held that the petitioners presented
incompetent and inadmissible evidence to prove the purchases
on credit since the sales invoices were hearsay.41 The CA pointed
out that Haw’s testimony as to the identification of the sales
invoices was not an exception to the hearsay rule because there
was no showing that the secretaries who prepared the sales
invoices are already dead or unable to testify as required by the
Rules of Court.42 Further, the CA noted that the secretaries were
not identified or presented in court.43
Third, the CA ruling heavily relied on Ng’s Appellant’s
Brief44 which made the detailed description of the "badges of
fraud." The CA averred that the petitioners failed to satisfactorily
rebut the badges of fraud45 which include the inconsistencies in:
(1) "Exhibit E-26," a postdated check, which was
allegedly issued in favor of Advance Paper but turned out
to be a check payable to Top Line, Advance Paper’s sister
company;46
(2) "Sale Invoice No. 8946," an evidence to prove the
existence of the purchases on credit, whose photocopy
failed to reflect the amount stated in the duplicate
copy,47 and;
(3) The SEC report of Advance Paper for the year ended
1994 reflected its account receivables amounting to
₱219,705.19 only – an amount far from the claimed
₱15,321,798.25 receivables from Arma Traders.48
Hence, the CA set aside the RTC’s order for Arma Traders to pay
Advance Paper the sum of ₱15,321,798.25, ₱1,500,000.00 for
attorney’s fees, plus cost of suit.49 It affirmed the RTC decision
dismissing the complaint against respondents Tan, Uy, Ting, Gui
and Ng.50 The CA also directed the petitioners to solidarily pay
each of the respondents their counterclaims of ₱250,000.00 as
moral damages, ₱250,000.00 as exemplary damages, and
₱250,000.00 as attorney’s fees.51
The Petition
The petitioners raise the following arguments.
First, Arma Traders led the petitioners to believe that Tan and Uy
had the authority to obtain loans since the respondents left the
active and sole management of the company to Tan and Uy since
1984. In fact, Ng testified that Arma Traders’ stockholders and
board of directors never conducted a meeting from 1984 to
1995. Therefore, if the respondents’ position will be sustained,
they will have the absurd power to question all the business
transactions of Arma Traders.52 Citing Lipat v. Pacific Banking
Corporation,53 the petitioners said that if a corporation
knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agent’s
authority.
Second, the petitioners argue that Haw’s testimony is not
hearsay. They emphasize that Haw has personal knowledge of
the assailed purchases and loan transactions because he dealt
with the customers, and supervised and directed the preparation
of the sales invoices and the deliveries of the goods.54 Moreover,
the petitioners stress that the respondents never objected to the
admissibility of the sales invoices on the ground that they were
hearsay.55
Third, the petitioners dispute the CA’s findings on the existence
of the badges of fraud. The petitioners countered:
(1) The discrepancies between the figures in the 15 out
of the 96 photocopies and duplicate originals of the sales
invoices amounting to ₱4,624.80 – an insignificant
amount compared to the total purchases of
₱7,533,001.49 – may have been caused by the failure to
put the carbon paper.56 Besides, the remaining 81 sales
invoices are uncontroverted. The petitioners also raise
the point that this discrepancy is a nonissue because the
duplicate originals were surrendered in the RTC.57
(2) The respondents misled Haw during the cross-
examination and took his answer out of context.58 The
petitioners argue that this maneuver is insufficient to
discredit Haw’s entire testimony.59
(3) Arma Traders should be faulted for indicating Top
Line as the payee in Exhibit E-26 or PBC check no.
091014. Moreover, Exhibit E-26 does not refer to PBC
check no. 091014 but to PBC check no. 091032 payable
to the order of cash.60
(4) The discrepancy in the total amount of the checks
which is ₱15,130,363.87 as against the total obligation
of ₱15,321,798.25 does not necessarily prove that the
transactions are spurious.61
(5) The difference in Advance Paper’s accounts
receivables in the SEC report and in Arma Traders’
obligation with Advance Paper was based on non-
existent evidence because Exhibit 294-NG does not
pertain to any balance sheet.62 Moreover, the term
"accounts receivable" is not synonymous with "cause of
action." The respondents cannot escape their liability by
simply pointing the SEC report because the petitioners
have established their cause of action – that the
purchases on credit and loan transactions took place, the
respondents issued the dishonored checks to cover their
debts, and they refused to settle their obligation with
Advance Paper.63
The Case for the Respondents
The respondents argue that the Petition for Review should be
dismissed summarily because of the following procedural
grounds: first, for failure to comply with A.M. No. 02-8-13-
SC;64 and second, the CA decision is already final and executory
since the petitioners filed their Motion for Reconsideration out of
time. They explain that under the rules of the CA, if the last day
for filing of any pleading falls on a Saturday not a holiday, the
same must be filed on said Saturday, as the Docket and Receiving
Section of the CA is open on a Saturday.65
The respondents argue that while as a general rule, a corporation
is estopped from denying the authority of its agents which it
allowed to deal with the general public; this is only true if the
person dealing with the agent dealt in good faith.66 In the present
case, the respondents claim that the petitioners are in bad faith
because the petitioners connived with Tan and Uy to make Arma
Traders liable for the non-existent deliveries of notebooks and
other paper products.67 They also insist that the sales invoices
are manufactured evidence.68
As to the loans, the respondents aver that these were Tan and
Uy’s personal obligations with Advance Paper.69Moreover, while
the three cashier’s checks were deposited in the account of Arma
Traders, it is likewise true that Tan and Uy issued Arma Traders’
checks in favor of Advance Paper. All these checks are evidence
of Tan, Uy and Haw’s systematic conspiracy to siphon Arma
Traders corporate funds.70
The respondents also seek to discredit Haw’s testimony on the
basis of the following. First, his testimony as regards the sales
invoices is hearsay because he did not personally prepare these
documentary evidence.71 Second, Haw suspiciously never had
any written authority from his own Board of Directors to lend
money. Third, the respondents also questioned why Advance
Paper granted the ₱7,000,000.00 loan without requiring Arma
Traders to present any collateral or guarantees.72
The Issues
The main procedural and substantive issues are:
I. Whether the petition for review should be dismissed
for failure to comply with A.M. No. 02-8-13-SC.
II. Whether the petition for review should be dismissed
on the ground of failure to file the motion for
reconsideration with the CA on time.
III. Whether Arma Traders is liable to pay the loans
applying the doctrine of apparent authority.
IV. Whether the petitioners proved Arma Traders’
liability on the purchases on credit by preponderance of
evidence.
The Court's Ruling
We grant the petition.
The procedural issues.
First, the respondents correctly cited A.M. No. 02-8-13-SC dated
February 19, 2008 which refer to the amendment of the 2004
Rules on Notarial Practice. It deleted the Community Tax
Certificate among the accepted proof of identity of the affiant
because of its inherent unreliability. The petitioners violated this
when they used Community Tax Certificate No. 05730869 in
their Petition for Review.73 Nevertheless, the defective jurat in
the Verification/Certification of Non-Forum Shopping is not a
fatal defect because it is only a formal, not a jurisdictional,
requirement that the Court may waive.74 Furthermore, we
cannot simply ignore the millions of pesos at stake in this case.
To do so might cause grave injustice to a party, a situation that
this Court intends to avoid.
Second, no less than the CA itself waived the rules on the period
to file the motion for reconsideration. A review of the CA
Resolution75 dated March 7, 2007, reveals that the petitioners’
Motion for Reconsideration was denied because the allegations
were a mere rehash of what the petitioners earlier argued – not
because the motion for reconsideration was filed out of time.
The substantive issues.
Arma Traders is liable to pay the
loans on the basis of the doctrine of
apparent authority.
The doctrine of apparent authority provides that a corporation
will be estopped from denying the agent’s authority if it
knowingly permits one of its officers or any other agent to act
within the scope of an apparent authority, and it holds him out to
the public as possessing the power to do those acts.76 The
doctrine of apparent authority does not apply if the principal did
not commit any acts or conduct which a third party knew and
relied upon in good faith as a result of the exercise of reasonable
prudence. Moreover, the agent’s acts or conduct must have
produced a change of position to the third party’s detriment.77
In Inter-Asia Investment Industries v. Court of Appeals,78 we
explained:
Under this provision [referring to Sec. 23 of the Corporation
Code], the power and responsibility to decide whether the
corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However,
just as a natural person who may authorize another to do
certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to
bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either
expressly or impliedly by habit, custom or acquiescence in
the general course of business, viz.:
A corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that
[the] authority to do so has been conferred upon him, and this
includes powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such
apparent powers as the corporation has caused person dealing
with the officer or agent to believe that it has conferred.
[A]pparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner
in which the corporation holds out an officer or agent as having
the power to act or, in other words the apparent authority to act
in general, with which it clothes him; or (2) the acquiescence in
his acts of a particular nature, with actual or constructive
knowledge thereof, within or beyond the scope of his
ordinary powers. It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of other
parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a
corporate officer with the power to bind the
corporation. [emphases and underscores ours]
In People’s Aircargo and Warehousing Co., Inc. v. Court of
Appeals,79 we ruled that the doctrine of apparent authority is
applied when the petitioner, through its president Antonio
Punsalan Jr., entered into the First Contract without first
securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus
"clothing" its president with the power to bind the corporation.
"Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict rule
that said officer has no inherent power to act for the corporation
is slowly giving way to the realization that such officer has
certain limited powers in the transaction of the usual and
ordinary business of the corporation."80 "In the absence of a
charter or bylaw provision to the contrary, the president is
presumed to have the authority to act within the domain of
the general objectives of its business and within the scope of
his or her usual duties."81
In the present petition, we do not agree with the CA’s findings
that Arma Traders is not liable to pay the loans due to the lack of
board resolution authorizing Tan and Uy to obtain the loans. To
begin with, Arma Traders’ Articles of Incorporation82 provides
that the corporation may borrow or raise money to meet the
financial requirements of its business by the issuance of
bonds, promissory notes and other evidence of
indebtedness. Likewise, it states that Tan and Uy are not just
ordinary corporate officers and authorized bank signatories
because they are also Arma Traders’ incorporators along with
respondents Ng and Ting, and Pedro Chao. Furthermore, the
respondents, through Ng who is Arma Traders’ corporate
secretary, incorporator, stockholder and director, testified
that the sole management of Arma Traders was left to Tan
and Uy and that he and the other officers never dealt with the
business and management of Arma Traders for 14 years. He
also confirmed that since 1984 up to the filing of the
complaint against Arma Traders, its stockholders and board
of directors never had its meeting.83
Thus, Arma Traders bestowed upon Tan and Uy broad powers by
allowing them to transact with third persons without the
necessary written authority from its non-performing board of
directors. Arma Traders failed to take precautions to prevent its
own corporate officers from abusing their powers. Because of its
own laxity in its business dealings, Arma Traders is now
estopped from denying Tan and Uy’s authority to obtain loan
from Advance Paper.
We also reject the respondents’ claim that Advance Paper,
through Haw, connived with Tan and Uy. The records do not
contain any evidence to prove that the loan transactions were
personal to Tan and Uy. A different conclusion might have been
inferred had the cashier’s checks been issued in favor of Tan and
Uy, and had the postdated checks in favor of Advance Paper been
either Tan and/or Uy’s, or had the respondents presented
convincing evidence to show how Tan and Uy conspired with the
petitioners to defraud Arma Traders.84 We note that the
respondents initially intended to present Sharow Ong, the
secretary of Tan and Uy, to testify on how Advance Paper
connived with Tan and Uy. As mentioned, the respondents failed
to present her on the witness stand.
The respondents failed to object to
the admissibility of the sales invoices
on the ground that they are hearsay
The rule is that failure to object to the offered evidence renders it
admissible, and the court cannot, on its own, disregard such
evidence.85 When a party desires the court to reject the evidence
offered, it must so state in the form of a timely objection and it
cannot raise the objection to the evidence for the first time on
appeal. Because of a party’s failure to timely object, the evidence
becomes part of the evidence in the case. Thereafter, all the
parties are considered bound by any outcome arising from the
offer of evidence properly presented.86
In Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberato M.
Ureta,87 however, we held:
[H]earsay evidence whether objected to or not cannot be given
credence for having no probative value.1âwphi1 This principle,
however, has been relaxed in cases where, in addition to the
failure to object to the admissibility of the subject
evidence, there were other pieces of evidence presented or
there were other circumstances prevailing to support the
fact in issue. (emphasis and underscore ours; citation omitted)
We agree with the respondents that with respect to the
identification of the sales invoices, Haw’s testimony was hearsay
because he was not present during its preparation88 and the
secretaries who prepared them were not presented to identify
them in court. Further, these sales invoices do not fall within the
exceptions to the hearsay rule even under the "entries in the
course of business" because the petitioners failed to show that
the entrant was deceased or was unable to testify.89
But even though the sales invoices are hearsay, nonetheless, they
form part of the records of the case for the respondents’ failure
to object as to the admissibility of the sales invoices on the
ground that they are hearsay.90Based on the records, the
respondents through Ng objected to the offer "for the purpose
[to] which they are being offered" only – not on the ground that
they were hearsay.91
The petitioners have proven their
claims for the unpaid purchases on
credit by preponderance of evidence.
We are not convinced by the respondents’ argument that the
purchases are spurious because no less than Uy admitted that
all the checks issued were in payments of the contractual
obligations of the Arma Traders with Advance
Paper.92 Moreover, there are other pieces of evidence to prove
the existence of the purchases other than the sales invoices
themselves. For one, Arma Traders’ postdated checks evince the
existence of the purchases on credit. Moreover, Haw testified
that within one or two weeks, Arma Traders paid the purchases
in the form of postdated checks. He personally collected these
checks on Saturdays and upon receiving the checks, he
surrendered to Arma Traders the original of the sales invoices
while he retained the duplicate of the invoices.93
The respondents attempted to impugn the credibility of Haw by
pointing to the inconsistencies they can find from the transcript
of stenographic notes. However, we are not persuaded that these
inconsistencies are sufficiently pervasive to affect the totality of
evidence showing the general relationship between Advance
Paper and Arma Traders.
Additionally, the issue of credibility of witnesses is to be resolved
primarily by the trial court because it is in the better position to
assess the credibility of witnesses as it heard the testimonies and
observed the deportment and manner of testifying of the
witnesses. Accordingly, its findings are entitled to great respect
and will not be disturbed on appeal in the absence of any
showing that the trial court overlooked, misunderstood, or
misapplied some facts or circumstances of weight and substance
which would have affected the result of the case.94
In the present case, the RTC judge took into consideration the
substance and the manner by which Haw answered each
propounded questions to him in the witness stand. Hence, the
minor inconsistencies in Haw’s testimony notwithstanding, the
RTC held that the respondents claim that the purchase and loan
transactions were spurious is "not worthy of serious
consideration." Besides, the respondents failed to convince us
that the RTC judge overlooked, misunderstood, or misapplied
some facts or circumstances of weight and substance which
would have affected the result of the case.

On the other hand, we agree with the petitioners that the

discrepancies in the photocopy of the sales invoices and its
duplicate copy have been sufficiently explained. Besides, this is
already a non-issue since the duplicate copies were surrendered
in the RTC.95 Furthermore, the fact that the value of Arma
Traders' checks does not tally with the total amount of their
obligation with Advance Paper is not inconsistent with the
existence of the purchases and loan transactions.

As against the case and the evidence Advance Paper presented,

the respondents relied on the core theory of an alleged
conspiracy between Tan, Uy and Haw to defraud Arma Traders.
However, the records are bereft of supporting evidence to prove
the alleged conspiracy. Instead, the respondents simply dwelled
on the minor inconsistencies from the petitioners' evidence that
the respondents appear to have magnified. From these
perspectives, the preponderance of evidence thus lies heavily in
the petitioners' favor as the RTC found. For this reason, we find
the petition meritorious.

WHEREFORE, premises considered, we GRANT the petition. The

decision dated March 31, 2006 and the resolution dated March 7,
2007 of the Court of Appeals in CA-G.R. CV No. 71499 are
REVERSED and SET ASIDE. The Regional Trial Court decision in
Civil Case No. 94-72526 dated June 18, 2001 is REINSTATED. No
costs.

SO ORDERED.