Topic: I. Formation and Organization of Corporations. A.

General Principles: Attributes of

Corporation, which includes discussion on the Doctrine of Limited Liability

Case No. 2

ALFREDO CHING VS. SECRETARY OF JUSTICE

G. R. No. 164317 February 6, 2006

FACTS:

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in
September to October 1980, PBMI, through petitioner, applied with the Rizal Commercial Banking
Corporation (respondent bank) for the issuance of commercial letters of credit to finance its
importation of assorted goods. Respondent bank approved the application, and irrevocable letters
of credit were issued in favor of petitioner. The goods were purchased and delivered in trust to
PBMI. Petitioner signed 13 trust receipts as surety, acknowledging delivery of the goods.

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to
sell but not by way of conditional sale, pledge or otherwise; and in case such goods were sold, to
turn over the proceeds thereof as soon as received, to apply against the relative acceptances and
payment of other indebtedness to respondent bank. In case the goods remained unsold within the
specified period, the goods were to be returned to respondent bank without any need of demand.
Thus, said "goods, manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification" were respondent bank’s
property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to
return their value despite demands. Thus, the bank filed a criminal complaint for estafa against
petitioner in the Office of the City Prosecutor of Manila. The City Prosecutor found probable cause
estafa under Article 315, paragraph 1(b) of the Revised Penal Code.

ISSUE:

Is Alfredo Ching, Senior Vice-President of PBMI, liable violation of P.D.115 in relation to estafa.

HELD:

There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the
thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense.
Since a corporation cannot be proceeded against criminally because it cannot commit crime in which
personal violence or malicious intent is required, criminal action is limited to the corporate agents
guilty of an act amounting to a crime and never against the corporation. Thus, the execution by
respondent of said receipts is enough to indict him as the official responsible for violation of PD 115.
Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice to the civil
liabilities arising from the criminal offense’ thus, the civil liability imposed on respondent in RCBC vs.
Court of Appeals case is clearly separate and distinct from his criminal liability under PD 115.

Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him
from any liability. Petitioner’s responsibility as the corporate official of PBM who received the goods
in trust is premised on Section 13 of P.D. No. 115. Petitioner having participated in the negotiations
for the trust receipts and having received the goods for PBM, it was inevitable that the petitioner is
the proper corporate officer to be proceeded against by virtue of the PBM’s violation of P.D. No. 115.
Topic: I. Formation and Organization of Corporations. B. Classification of Corporations.

Case No. 21

LIM TONG LIM VS. PHILIPPINE FISHING GEAR INDUSTRIES, INC.

G.R. No. 136448 November 3, 1999

FACTS:

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine
Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business
venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total
price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold
to the Corporation.

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment.

Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to
pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and
to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong
Lim, on the other hand, filed an Answer with Counterclaim and Cross-claim and moved for the lifting
of the Writ of Attachment.

The trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to the
Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in
a fishing business and may thus be held liable as a such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate court ruled: The evidence establishes that all the
defendants including herein appellant Lim Tong Lim undertook a partnership for a specific
undertaking that is for commercial fishing . Obviously, the ultimate undertaking of the defendants
was to divide the profits among themselves which is what a partnership essentially is.

ISSUE:

Is the doctrine of corporation by estoppel be imputed only to Chua and Lao.

HELD:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it
shall not be allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be
estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives
or agents do so without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered into or for other acts performed
as such agent.

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In
the first instance, an unincorporated association, which represented itself to be a corporation, will be
estopped from denying its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility
for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless
treated it as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However,
having reaped the benefits of the contract entered into by persons with whom he previously had an
existing relationship, he is deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel.
Topic: Doctrine of Separate Juridical Personality / Doctrine of Corporate Entity

Case No. 40

ANTONIO VAZQUEZ VS. FRANCISCO DE BORJA

G.R. No. L-48930 February 23, 1944

FACTS:

This action was commenced in the Court of First Instance of Manila by Francisco de Borja against
Antonio Vazquez and Fernando Busy to recover from them jointly and severally the total sum of
P4,702.70 upon three alleged causes of action. The defendant Antonio Vazquez answered the
complaint, denying having entered into the contract mentioned in the first cause of action in his own
individual and personal capacity, either alone or together with his codefendant Fernando Busuego,
and alleging that the agreement for the purchase of 4,000 cavans of palay and the payment of the
price of P8,400 were made by the plaintiff with and to the Natividad-Vasquez Sabani Development
Co., Inc., a corporation organized and existing under the laws of the Philippines, of which the
defendant Antonio Vazquez was the acting manager at the time of the transaction took place.

ISSUE:

Did the plaintiff entered into the contract with the defendant Antonio Vazquez in his personal
capacity or as manager of the Natividad-Vazquez Sabani Development Co., Inc.

HELD:

It is well known that a corporation is artificial being invested by law with a personality of its own,
separate and distinct from that of its stockholders and from that of its officers who manage and run
its affairs. The mere fact that its personality is owing to a legal fiction and that it has been necessary
to act on its agents, does not make the latter personally liable on a contract duly entered into, or for
an act lawfully performed, by them for an in its behalf The legal fiction by which the personality of a
corporation is created is a practical reality and necessity. Without it no corporate entities may exists
and no corporate business may be transacted. Such legal fiction may be disregarded only when an
attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No such thing has
been alleged or proven in this case. It has not been alleged or even intimated that Vazquez
personally benefited by the contract of sale in question and that he is merely invoking the legal
fiction to avoid personal liability. Neither is it contended that he entered into said contract for the
corporation in bad faith and with intent to defraud the plaintiff. We find no legal and factual basis
upon which to hold him liable on the contract either principally or subsidiary.

The fact that the corporation, acting thru Vazquez as its manager, was guilty of negligence in the
fulfillment of the contract, did not make Vazquez principally or even subsidiarily liable for such
negligence. Since it was the corporation's contract, its nonfulfillment, if due to negligence or fault to
any other cause, made the corporation and not its agent liable.
Topic: Doctrine of Piercing the Veil of Corporate Fiction
Case No. 78
FIRST PHILIPPINE INTERNATIONAL BANK VS. COURT OF APPEALS
G.R. No. 115849. January 24, 1996

FACTS:

In the course of its banking operations, the defendant Producer Bank of the Philippines acquired six
parcels of land. The original plaintiffs, Demetrio Demetria and Jose O. Janolo, wanted to purchase
the property and thus initiated negotiations for that purpose.

Negotiations happened between the parties. However, petitioner bank reneged their agreement
because it offered the same lot to different buyers. Plaintiffs then filed a suit for specific
performance with damages against the bank, its Manager Rivers and Acting Conservator
Encarnacion. The basis of the suit was that the transaction had with the bank resulted in a perfected
contract of sale.

Subsequently, Henry L. Co, filed a motion to intervene in the trial court, alleging that as owner of 80%
of the Bank's outstanding shares of stock, he had a substantial interest in resisting the complaint.
The trial court issued an order denying the motion to intervene on the ground that it was filed after
trial had already been concluded. Henry Co did not appeal the denial of his motion for intervention.

During the pendency of the proceedings in the Court of Appeals, Henry Co and several other
stockholders of the Bank, filed an action purportedly a "derivative suit" with the RTC Branch 134,
against Encarnacion, Demetria and Janolo to declare any perfected sale of the property as
unenforceable and to stop Ejercito from enforcing or implementing the sale. In his answer, Janolo
argued that the Second Case was barred by litis pendentia by virtue of the case then pending in the
Court of Appeals.

ISSUE:

Are the juridical personalities of the two corporations be pierced.

RULING:

Yes. In addition to the many cases where the corporate fiction has been disregarded, we now add
the instant case, and declare herewith that the corporate veil cannot be used to shield an otherwise
blatant violation of the prohibition against forum-shopping. Shareholders, whether suing as the
majority in direct actions or as the minority in a derivative suit, cannot be allowed to trifle with court
processes, particularly where, as in this case, the corporation itself has not been remiss in vigorously
prosecuting or defending corporate causes and in using and applying remedies available to it. To rule
otherwise would be to encourage corporate litigants to use their shareholders as fronts to
circumvent the stringent rules against forum shopping.
Topic: Doctrine of Piercing the Veil of Corporate Fiction; Test in Determining its Applicability
Case No. 97
LUISITO PADILLA AND PHOENIX-OMEGA DEVELOPMENT AND MANAGEMENT CORPORATION VS.
THE HONORABLE COURT OF APPEALS AND SUSANA REALTY, INC.
G.R. No. 123893 November 22, 2001

FACTS:
Susana Realty, Inc. (SRI), by a deed of absolute sale, sold to the Light Rail Transit Authority (LRTA)
several parcels of land located in Taft Avenue Extension, San Rafael District, Pasay City. Under
paragraph 7 of the deed of sale, SRI reserved to itself the right of first refusal to develop and/or
improve the property sold should the LRTA decide to lease and/or assign to any person the right to
develop and/or improve the property.

LRTA and Phoenix Omega Development and Management Corporation (Phoenix Omega) entered
into a Commercial Stall Concession Contract authorizing the latter to construct and develop
commercial stalls on a 90 sq. m. portion of the property bought from SRI. SRI opposed the
agreement as having violated the deed of sale it entered with LRTA. A tripartite agreement was later
concluded by the parties, however, whereby SRI agreed to honor the terms of the concession
contract and to lease to Phoenix Omega its (SRI's) property (remaining property) adjacent to the 90
sq. m. portion subject of the concession contract.1âwphi1.

A contract was thus entered into on July 28, 1988 between Phoenix Omega and SRI with LRTA
whereby Phoenix Omega undertook to construct commercial stalls on the 90-sq. m. property in
accordance with plans and specifications prepared by the latter, the construction to begin, however,
only upon SRI's approval of such plans and specifications.

SRI sold part of its remaining property to a third party. An amended contract of lease was thus
forged in January 1989 among SRI, PKA and Phoenix Omega, whereby the parties agreed to
substitute the already sold portion ,of SRI's remaining property with 2 parcels of land also belonging
to SRI. In this amended contract of lease, PKA was again represented by Padilla in his capacity as its
President and General Manager. And Phoenix Omega. which was not a party, to the July 28. 1988
lease contract sought to be amended but which was a party to the amended contract. was also
represented by Padilla as Chairman of the Board of Directors of Phoenix Omega.

Repeated requests for approval of its amended plans not having been heeded by SRI, PKA filed at
the court a quo the action at bar for rescission of contract of lease against SRI, alleging that SRI's
refusal to approve the plans without any justifiable reason deprived it of the use of the commercial
stalls, thereby incurring losses.

SRI, upon the other hand, claimed that it was PKA which violated the terms of their contract, alleging
that PKA failed to complete within six months the construction of the commercial stalls during which
period it was not paying any rentals and that PKA undertook the construction without first having its
plans approved.
The RTC rendered its decision declaring the rescission and termination of the Contract of Lease. The
Court of Appeals agreed with the RTC's finding that there is evidence on record to support the RTC's
conclusion that PKA and Phoenix-Omega are one and the same, or that the former is a mere conduit
of the latter. It pointed out that petitioner Padilla is both president and general manager of PKA and
at the same time chairman of the board of directors and controlling stockholder of Phoenix-Omega.
PKA and Phoenix-Omega also shared officers, laborers, and offices.

ISSUE:

Should the veil of corporate fiction be pierced.

HELD:

To begin with, it is clear that Padilla participated in the proceedings below as general manager of
PKA and not in any other capacity. The fact that at the same time he was the chairman of the board
of Phoenix-Omega cannot, by any stretch of reasoning, equate to participation by Phoenix- Omega in
the same proceedings.

The general rule is that a corporation is clothed with a personality separate and distinct from the
persons composing it. It may not be held liable for the obligations of the persons composing it, and
neither can its stockholders be held liable for its obligations.

This veil of corporate fiction may only be disregarded in cases where the corporate vehicle is being
used to defeat public convenience, justify wrong, protect fraud, or defend crime.PKA and Phoenix-
Omega are admittedly sister companies, and may be sharing personnel and resources, but we find in
the present case no allegation, much less positive proof, that their separate corporate personalities
are being used to defeat public convenience, justify wrong, protect fraud, or defend crime. "For the
separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
convincingly established. It cannot be There is no to justify piercing the corporate veil in this
instance.
Topic: Incorporation and Organization Proper: Articles of Incorporation

Case No. 116

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES

vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION
G.R. No. 131394 March 28, 2005

FACTS:

Philippine Merchant Marine School, Inc. (PMMSI) had seven hundred founders’ shares and seventy-
six common shares as its initial capital stock subscription reflected in the articles of incorporation.
However, private respondents and their predecessors who were in control of PMMSI registered the
company’s stock and transfer book for the first time in 1978, recording thirty-three (33) common
shares as the only issued and outstanding shares of PMMSI.

Sometime in 1979, a special stockholders’ meeting was called and held on the basis of what was
considered as a quorum of twenty-seven common shares, representing more than two-thirds of the
common shares issued and outstanding. In 1982, the heirs of one of the original incorporators, Juan
Acayan, filed a petition with the SEC for the registration of their property rights over one hundred
(120) founders’ shares and twelve (12) common shares owned by their father. The SEC held that the
heirs were entitled to the claimed shares and called for a special stockholders’ meeting to elect a
new set of officers. As a result, the shares of Acayan were recorded in the stock and transfer book.

A special stockholders’ meeting was held to elect a new set of directors. Private respondents
thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’
meeting, alleging that the quorum for the said meeting should not be based on the 165 issued and
outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock of
seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation.

ISSUE:

Is the basis of quorum for a stockholders’ meeting the outstanding capital stock as indicated in the
articles of incorporation.

RULING:

Yes. The stock and transfer book of PMMSI cannot be used as the sole basis for determining the
quorum as it does not reflect the totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares issued and outstanding as
compared to that listed in the stock and transfer book. A stock and transfer book is one which
records the names and addresses of all stockholders arranged alphabetically, the instalments paid
and unpaid on all stock for which subscription has been made, and the date of payment thereof; a
statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom
made; and such other entries as may be prescribed by law.
To base the computation of quorum solely on the deficient stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the articles of incorporation would
work injustice to the owners and/or successors in interest of the said shares.

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the
Stock and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even
reacquisition of the company of its own shares, in which it becomes treasury shares, would not
affect the total number of shares in the Stock and Transfer Book. All that will change are the entries
as to the owners of the shares but not as to the amount of shares already subscribed.
Topic: Incorporation and Organization Proper: Articles of Incorporation Contents: Principal Office /
Domicile
Case No. 135

YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA vs.

THE HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG ROXAS
G.R. No. 104175. June 25, 1993

FACTS:

On October 28, 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its
president, Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated Marketing &
Development Corporation (CMDC) to Roxas. The purchase price was P8,000,000.00 payable as
follows: a down payment of P4,000,000.00 and the balance of P4,000,000.00 in four postdated
checks of P1,000,000.00 each. The first check of P4, 000,000.00, representing the down payment,
was honored by the drawee bank but the four other checks representing the balance of P4,
000,000.00 were dishonored.

On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial Court, Branch 11,
Cebu City, praying that Roxas be ordered to pay petitioners the sum of P3, 400,000.00 or that full
control of the three markets be turned over to YASCO and Garcia. The complaint also prayed for the
forfeiture of the partial payment of P4, 600,000.00 and the payment of attorney's fees and costs.

ISSUE:

Is the proper venue is in Pasay City.

RULING:

No. The Court of Appeals erred in holding that the venue was improperly laid in Cebu City. Young
Auto Supply Co., Inc. ("YASCO") is a domestic corporation duly organized and existing under
Philippine laws with principal place of business at M.J. Cuenco Avenue, Cebu City. It also has a
branch office at 1708 Dominga Street, Pasay City, Metro Manila. The Article of Incorporation of
YASCO states that the place where the principal office of the corporation is to be established or
located is at Cebu City, Philippines.

A corporation has no residence in the same sense in which this term is applied to a natural person.
But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its
principal office is located as stated in the articles of incorporation. The Corporation Code precisely
requires each corporation to specify in its articles of incorporation the "place where the principal
office of the corporation is to be located which must be within the Philippines" The purpose of this
requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be
ambulatory. With the finding that the residence of YASCO for purposes of venue is in Cebu City,
where its principal place of business is located, it becomes unnecessary to decide whether Garcia is
also a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu
City as the venue. Hence, it should be in Cebu City.
Topic: Incorporation and Organization Proper: Adoption of By-Laws

Case No. 154

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC. vs.

HONORABLE COURT OF APPEALS
G.R. No. 117188 August 7, 1997

FACTS:

LGVHAI was organized as the association of homeowners and residents of the Loyola Grand Villas. It
was registered with the Home Financing Corporation. For unknown reasons, however, LGVHAI did
not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-
laws. They failed to do so. They later discovered that there were two other organizations within the
subdivision the North Association and the South Association. According to private respondents, a
non-resident and Soliven himself respectively headed these associations. They also discovered that
these associations had five (5) registered homeowners each who were also the incorporators,
directors and officers thereof. None of the members of the LGVHAI was listed as member of the
North Association while three (3) members of LGVHAI were listed as members of the South
Association. When they inquired as to the status of LGVHAI, the head of the legal department of the
HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not
submit its by-laws within the period required by the Corporation Code and, second, there was non-
user of corporate charter because HIGC had not received any report on the association's activities.
These prompted the LGVHAI to lodge complaint with HIGC questioning its act of revoking its
certificate of registration without due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and South Associations by reason of the
earlier issuance of a certificate of registration in favor of LGVHAI.

ISSUE:

Is the failure of a corporation to file its by-laws within one month from the date of its incorporation,
as mandated by Section 46 of the Corporation Code, result in its automatic dissolution.

RULING:

No. Although the Corporation Code requires the filing of by-laws, it does not expressly provide for
the consequences of the non-filing of the same within the period provided for in Section 46. Even
under the express grant of power and authority under Presidential Decree No. 902-A, there can be
no automatic corporate dissolution simply because the incorporators failed to abide by the required
filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" of
corporate existence. Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators must be given the
chance to explain their neglect or omission and remedy the same.
Topic: Corporate Powers: Power to Acquire, Dispose, Encumber Property

Case No. 173

THE DIRECTOR OF LANDS vs.

THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO
G.R. No. L-56613 March 14, 1988

FACTS:

On November 28, 1973, private respondent Iglesia ni Cristo filed an application for registration in its
name of a parcel of land with an area of 379 square meters located at Poblacion, Municipality of
Amadeo, Cavite. In its application, private respondent alleged inter alia that it was the owner in fee
simple of the land afore-described, having acquired title thereto by virtue of a Deed of Absolute Sale
executed in 1947 by Aquelina de la Cruz in its favor and that applicant. Private respondent prayed
that should the Land Registration Act not be applicable, the provisions of Chapter VIII of
Commonwealth Act No. 141, as amended by Republic Act No. 6236 be applied as applicant and its
predecessors-in-interest had been in possession of the land for more than thirty [30] years and had
introduced improvements thereon.

The Republic of the Philippines, represented by the Director of Lands, opposed the application on
the following grounds: 1] the applicant and its predecessors-in-interest did not possess sufficient title
to acquire ownership in fee simple of the parcel of land applied for; 2] neither the applicant nor its
predecessors-in-interest have been in open, continuous, exclusive and notorious possession and
occupation of the land in question; and, 3] the subject parcel of land is a portion of the public domain
not subject to private appropriation.

ISSUE:

Is the respondent prohibited from acquiring private land as provided under the Constitution.

RULING:

Yes. Taking the year 1936 as the reckoning point, the 30-year period of open, continuous, exclusive
and notorious possession and occupation required by law was completed in 1966. The completion by
private respondent of this statutory 30-year period has dual significance in the light of Section 48[b]
of Commonwealth Act No. 141, as amended and prevailing jurisprudence: [1] at this point, the land in
question ceased by operation of law to be part of the public domain; and [2] private respondent
could have its title thereto confirmed through the appropriate proceedings as under the Constitution
then in force, private corporations or associations were not prohibited from acquiring public lands,
but merely prohibited from acquiring, holding or leasing such type of land in excess of 1,024
hectares.

If in 1966, the land in question was converted ipso jure into private land, it remained so in 1974 when
the registration proceedings were commenced. This being the case, the prohibition under the 1973
Constitution would have no application. Otherwise construed, if in 1966, private respondent could
have its title to the land confirmed, then it had acquired a vested right thereto, which the 1973
Constitution can neither impair nor defeat.
Topic: Corporate Powers - Specific Powers: Power to deny pre-emptive rights.

Case No. 192

DATU TAGORANAO BENITO vs.

SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA, INC.
G.R. No. L-56655. July 25, 1983

FACTS:

On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc.
(originally Kamilol Islam Institute, Inc.) were filed with the Securities and Exchange Commission
(SEC) and were approved on December 14, 1962. The corporation had an authorized capital stock of
P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the authorized capital stock,
8,058 shares worth P80,580.00 were subscribed and fully paid for. Petitioner Datu Tagoranao Benito
subscribed to 460 shares worth P4,600.00.

On October 28, 1975, the respondent corporation filed a certificate of increase of its capital stock
from P200,000.00 to P1,000,000.00. Thus, P110,980.00 worth of shares were subsequently issued by
the corporation from the unissued portion of the authorized capital stock of P200,000.00. Of the
increased capital stock of P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs.
Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto.

Petitioner Datu Tagoranao filed a petition alleging that the additional issue (worth P110,980.00) of
previously subscribed shares of the corporation was made in violation of his pre-emptive right to said
additional issue and that the increase in the authorized capital stock of the corporation from
P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not
notified of the meeting wherein the proposed increase was in the agenda.

Respondents denied the material allegations of the petition and claimed that petitioner has no cause
of action and that the stock certificates covering the shares alleged to have been sold to petitioner
were only given to him as collateral for the loan of Domocao Alonto and Moki-in Alonto. The SEC
affirmed the sale.

ISSUE:

Was the issuance of the unissued shares subject to the pre-emptive right of the stockholders.

RULING:

No. The Court held that the questioned issuance of the unsubscribed portion of the capital stock
worth P110,980.00 is not invalid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in a corporation is lodged
in the board of directors and no stockholders' meeting is necessary to consider it because additional
issuance of shares of stocks does not need approval of the stockholders.

Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance, he
was not able to exercise his right of pre-emption over the unissued shares. However, the general rule
is that pre-emptive right is recognized only with respect to new issue of shares, and not with respect
to additional issues of originally authorized shares. This is on the theory that when a corporation at
its inception offers its first shares, it is presumed to have offered all of those which it is authorized to
issue. An original subscriber is deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares. When the shares left unsubscribed
are later re-offered, he cannot therefore claim a dilution of interest.
Topic: Corporate Powers - Specific Powers: Power to Declare Dividends: Limitations on Retention of
Surplus Profits

Case No. 211

COMMISSIONER OF INTERNAL REVENUE vs.

MANNING, MCDONALD, SIMMONS
G.R. No. L-28398. August 06, 1975

FACTS:

In 1952 the MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common
shares; 24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three
respondents.

In view of Reese's desire that upon his death MANTRASCO and its two subsidiaries, MANTRASCO
(Guam), Inc. and the Port Motors, Inc., would continue under the management of the respondents, a
trust agreement was executed by and among Reese, MANTRASCO ,the law firm of Ross, Selph,
Carrascoso and Jand ,and the respondents.

On October 19, 1954 Reese died. In 1955, after MANTRASCO made a partial payment of Reese's
shares, the certificate for the 24,700 shares in Reese's name was cancelled and a new certificate was
issued in the name of MANTRASCO, which was endorsed to the law firm of Ross, Selph, Carrascoso
and Janda, as trustees for and in behalf of MANTRASCO.

In 1963 the entire purchase price of Reese's interest in MANTRASCO was finally paid in full by the
latter, In 1964 the trust agreement was terminated and the trustees delivered to MANTRASCO all the
shares which they were holding in trust.

ISSUE:

Is the issuance of the notices of assessment for deficiency income taxes to the respondents for the
year 1958 was proper.

RULING:

Yes. “A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock
dividend is a conversion of surplus or undivided profits into capital stock, which is distributed to
stockholders in lieu of a cash dividend.' Congress itself has defined the term 'dividend' in No. 115(a)
of the Act as meaning any distribution made by a corporation to its shareholders, whether in money
or in other property, out of its earnings or profits.

The declaration by the respondents and Reese's trustees of MANTRASCO's alleged treasury stock
dividends in favor of the former, brings the ultimate purpose which the parties to the trust
instrument aimed to realize: to make the respondents the sole owners of Reese's interest in
MANTRASCO by utilizing the periodic earnings of that company and its subsidiaries to directly
subsidize their purchase of the said interests, and by making it appear outwardly, through the formal
declaration of non-existent stock dividends in the treasury, that they have not received any income
from those firms when, in fact, by that declaration they secured to themselves the means to turn
around as full owners of Reese's shares. In other words, the respondents, using the trust instrument
as a convenient technical device, bestowed unto themselves the full worth and value of Reese's
corporate holdings with the use of the very earnings of the companies. Such package device,
obviously not designed to carry out the usual stock dividend purpose of corporate expansion
reinvestment, e.g. the acquisition of additional facilities and other capital budget items, but
exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be allowed to
deflect the respondents' responsibilities toward our income tax laws. The conclusion is thus
ineluctable that whenever the companies involved herein parted with a portion of their earnings "to
buy" the corporate holdings of Reese, they were in ultimate effect and result making a distribution
of such earnings to the respondents.

All these amounts are consequently subject to income tax as being, in truth and in fact, a flow of
cash benefits to the respondents.
Topic: Corporate Powers - Specific Powers: Ultra Vires Acts

Case No. 230

EMILIO GANCAYCO vs.

CITY GOVERNMENT OF QUEZON CITY AND METRO MANILA DEVELOPMENT AUTHORITY
G.R. No. 177807 October 11, 2011

FACTS:

The consolidated petitions of Retired Justice Emilio Gancayco, City Government of Quezon City and
the Metro Manila Development Authority stemmed from a local ordinance pertaining to
Construction of Arcades, and the clearing of Public Obstructions. Gaycanco owns a property, of
which he was able to obtain a building permit for a two-storey commercial building, which was
situated along EDSA, in an area which was designated as part of a Business/Commercial Zone by the
Quezon City Council.

The Quezon City Council also issued Ordinance No. 2904, which orders the construction of Arcades
for Commercial Buildings. The ordinance was amended to not require the properties located at the
Quezon City - San Juan boundary, and commercial buildings from Balete - Seattle Street to construct
the arcades, moreover, Gancayco had been successful in his petition to have his property, already
covered by the amended ordinance, exempted from the ordinance.

MMDA on April 28, 2003, sent a notice to Gancayco, under Ordinance no. 2904, part of his property
had to be demolished, if he did not clear that part within 15 days, which Gancayco did not comply
with, and so the MMDA had to demolish the party wall, or “wing walls.”

Gancayco then filed a temporary restraining order and/or writ of preliminary injunction before the
RTC of Quezon City, seeking to prohibit the demolition of his property, without due process and just
compensation, claiming that Ordinance no. 2904 was discriminatory and selective. He sought the
declaration of nullity of the ordinance and payment for damages. MMDA contended that Gancayco
cannot seek nullification of an ordinance that he already violated, and that the ordinance had the
presumption of constitutionality, and it was approved by the Quezon City Council, taking to note that
the Mayor signed the ordinance.

The RTC, however, declared that the Ordinance was unconstitutional, invalid and void ab initio.
MMDA appealed to the Court of Appeals, and the CA partly granted the appeal, with the contention
that the ordinance was to be modified; it was constitutional because the intention of the ordinance
was to uplift the standard of living, and business in the commercial area, as well as to protect the
welfare of the general public passing by the area, however the injunction against the enforcement
and implementation of the ordinance is lifted. With that decision, the MMDA and Gancayco filed
Motions for Reconsideration, which the CA denied, as both parties have no new issues raised.
Therefore they petitioned to the Court.

ISSUE:

Was the demolition of the property of Gancayco within the powers of the MMDA.
HELD:

MMDA illegally demolished the property of Justice Gancayco.

MMDA alleges that by virtue of MMDA Resolution No. 02-28, Series of 2002, it is empowered to
demolish Justice Gancayco’s property. It insists that the Metro Manila Council authorized the MMDA
and the local government units to clear the sidewalks, streets, avenues, alleys, bridges, parks and
other public places in Metro Manila of all illegal structures and obstructions. It further alleges that it
demolished the property pursuant to the Building Code in relation to Ordinance No. 2904 as
amended.

However, the Building Code clearly provides the process by which a building may be demolished. The
authority to order the demolition of any structure lies with the Building Official.

The MMDA is, as termed in the charter itself, a "development authority". It is an agency created for
the purpose of laying down policies and coordinating with the various national government
agencies, people's organizations, non-governmental organizations and the private sector for the
efficient and expeditious delivery of basic services in the vast metropolitan area. All its functions are
administrative in nature and these are actually summed up in the charter itself. The power to enforce
the provisions of the Building Code was lodged in the Department of Public Works and Highways
(DPWH), not in MMDA, considering the law's following provision.

The powers referred to are those that include the power to declare, prevent and abate a
nuisance and to further impose the penalty of removal or demolition of the building or structure by
the owner or by the city at the expense of the owner.

MMDA’s argument does not hold water. There was no valid delegation of powers to the MMDA.
Contrary to the claim of the MMDA, the City Government of Quezon City washed its hands off the
acts of the former. In its Answer, the city government stated that "the demolition was undertaken
by the MMDA only, without the participation and/or consent of Quezon City." Therefore, the MMDA
acted on its own and should be held solely liable for the destruction of the portion of Justice
Gancayco’s building.
Topic: Board of Directors and Trustees: Filling of vacancies.

Case No. 249

VALLE VERDE COUNTRY CLUB, INC., et al. vs.

VICTOR AFRICA
G.R. No. 151969, September 4, 2009

FACTS:

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, Eduardo Makalintal, Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato
Dee, Augusto Sunico, and Ray Gamboa. 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. Two of the
said members resigned (Makalintal and Dinglasan). After the resignation of Dinglasan, Eric Roxas
was elected. Makalintal was replaced by Jose Ramirez.

Respondent 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.
Africa alleged that the election of Roxas was contrary to Section 29, in relation to Section 23, of the
Corporation Code of the Philippines. The respective trial courts ruled in favor of Africa.

ISSUE:

Were the elections were valid.

RULING:

Yes. Section 23 of the Corporation Code declares that "the board of directors shall 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
member’s election to the Board and until his successor’s election and qualification – is not part of the
director’s 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.

After the lapse of one year from his election as member of the VVCC Board in 1996, Makalintal’s 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. This holdover period, however, is not
to be considered as part of his term, which, as declared, had already expired.

With the expiration of Makalintal’s term of office, a vacancy resulted which, by the terms of Section
29of the Corporation Code, must be filled by the stockholders of VVCC in a regular or special meeting
called for the purpose. 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
Makalintal’s one-year term had already expired. Pursuant to law, the authority to fill in the vacancy
caused by Makalintal’s leaving lies with the VVCC’s stockholders, not the remaining members of its
board of directors.
Topic: Board of Directors and Trustees: Delegation of Authority to Corporate Officers

Case No. 268

ANDRES LAO vs.

COURT OF APPEALS, THE ASSOCIATED ANGLO-AMERICAN TOBACCO CORPORATION
G.R. No. 47013, February 17, 2000

FACTS:

On April 6, 1965, The Associated Anglo-American Tobacco Corporation entered into a "Contract of
Sales Agent" with Andres Lao. Under the contract, Lao agreed to sell cigarettes manufactured and
shipped by the Corporation to his business. Lao would in turn remit the sales proceeds to the
Corporation. For his services, Lao would receive commission depending on the kind of cigarettes
sold, fixed monthly salary, and operational allowance. For several months, Lao had religiously
complied with his obligations, however until about seven (7) months later, Lao failed to accomplish
his monthly sales report. Re was reminded of his enormous accounts and the difficulty of obtaining a
tally thereon despite Lao's avowal of regular remittances of his collections. Because of this he was
summoned to the office of the corporation where his liability amounted to P525,053.47. The
corporation stopped providing Lao with the products. Subsequently, Andres, Jose and Tomas Lao
brought a complaint for accounting and damages with writ of preliminary injunction against the
Corporation. The CFI rendered judgment in favor of petitioners. Meanwhile, on June 24, 1974 and
during the pendency of Civil Case No. 4452, Esteban Co, representing the Corporation as its new vice-
president, filed an affidavit of complaint alleging that Lao failed to remit the amount of P224,585.82
which he allegedly misappropriated and converted to his personal use, which resulted to the filing of
an estafa case against Lao. In turn Lao filed a case for malicious prosecution against the corporation.
In this case, Co was made liable solidarily with the corporation for malicious prosecution.

ISSUE:

Whether or not Co should be made liable solidarily with the corporation for malicious prosecution.

RULING:

Yes. Co asserted that he should not be held jointly and severally liable with the Corporation because
in filing the affidavit-complaint against respondent Lao, he was acting as the executive vice-president
of the Corporation and his action was within the scope of his authority as such corporate officer.
Based from the records, Co was the vice-president of the corporation when he filed the affidavit-
complaint. The corporation failed tomake an issue out of his authority to file said case. Upon well-
established principles of pleading, lack of authority of an officer of a corporation to bind it by
contract executed by him in its name, is a defense which should have been specially pleaded by the
Corporation

The Corporation's failure to interpose such a defense could only mean that the filing of the affidavit-
complaint by petitioner Co was with the consent and authority of the Corporation. In the same vein,
petitioner Co may not be held personally liable for acts performed in pursuance of an authority and
therefore, holding him solidarily liable with the Corporation for the damages awarded to respondent
Lao does accord with law and jurisprudence.
Topic: Board of Directors and Trustees - Delegation of Authority to Corporate Officers: Doctrine of
Apparent Authority
Case No. 287
NEW DURAWOOD CO., INC. vs.
COURT OF APPEALS, HON. FELIX S. CABALLES
G.R. No. 111732 February 20, 1996

FACTS:

A "Petition for Judicial Reconstitution of the Lost Owner's Duplicate Certificates of TCT Nos. 140486;
156454 and 140485"5 was filed in the Regional Trial Court, Branch LXXI, Antipolo, Rizal by petitioner-
corporation, "represented by its Branch Manager, Wilson M. Gaw. . ." Attached to said petition was an
"Affidavit of Loss" dated December 31, 1990 of respondent Orlando S. Bongat, one of the stockholders of
petitioner-corporation.

Finding the petition "to be sufficient in form and in substance," respondent Judge set the case for hearing
on March 18, 1991. On April 16, 1991, respondent Judge issued the questioned order.

Sometime in May, 1991, petitioner discovered that the original TCT Nos. N-140485, N-140486 and 156454
on file with the Register of Deeds of Rizal had been cancelled and, in lieu thereof, TCT Nos. 200100, 200101
and 200102 had been issued in the name of respondent Durawood Construction and Lumber Supply, Inc.
Surprised by this cancellation, petitioner - after investigation - found out about the reconstitution
proceeding in the respondent trial court. So, on July 17, 1991, petitioner filed7 suit in the Court of Appeals
docketed as CA-G.R. 25434 praying for the annulment of the assailed order in LRC Case No. 91-924 penned
by respondent Judge. It also prayed for the cancellation of the new certificates (TCT Nos. 200100, 200101
and 200102). On May 31, 1993, the respondent Court of Appeals rendered the assailed Decision and on
August 30, 1993, the Resolution denying the motion for reconsideration.

Petitioner claims that respondent Wilson Gaw had no authority to institute the petition for reconstitution
in the trial court because the Court of Appeals itself, in its questioned resolution stated that said board
resolution (authorizing Gaw) was passed without the required quorum. Hence, the present recourse to
the Supreme Court.

ISSUE:

Was the reconstitution of the said owner's duplicate certificates of title obtained through fraud?

HELD:

It is clear that, there having been no quorum present during the meeting in question, the board of
directors could not have validly given Gaw any express authority to file the petition. Upon the other hand,
the doctrine of "apparent authority" cannot apply as to Gaw because, being a mere branch manager, he
could not be looked upon as a corporate officer clothed with the implied or "apparent" power to file suit
for and in behalf of a corporation 11 . Neither will estoppel prevent the corporation from questioning Gaw's
acts. Precisely, these acts were hidden from the company and its top officers. Suffice it to say then, that
by his surreptitious filing of the petition for reconstitution without authority - express or implied - of his
employer, Gaw enabled respondent corporation to acquire the certificates of title in a manner contrary to
law.
Topic: Three-Fold Duties of Directors and Officers: Diligence, Loyalty and Obedience
Case No. 306

ALFREDO MONTELIBANO and ALEJANDRO MONTELIBANO

vs. BACOLOD-MURCIA MILLING COMPANY, INC.
GR. No. L-15092, May 18, 1962

FACTS:

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. The Board of
Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution granting further
concessions to the planters over and above those contained in the printed Amended Milling
Contract.

The appellants initiated the present action, contending that three Negros sugar centrals 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 the resolution
the appellee had become obligated to grant similar concessions to the plaintiffs.

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 vires and
beyond the powers of the corporate directors to adopt.

ISSUE:

Is the board resolution an ultra vires act and in effect a donation from the board of directors.

HELD:

No. 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. 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. 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. 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. The
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.
Topic: Three-Fold Duties of Directors and Officers: Personal Liability of Directors and Other Corporate
Officers

Case No. 325

DEVELOPMENT BANK OF THE PHILIPPINES vs.

COURT OF APPEALS, REMINGTON INDUSTRIAL SALES
GR 126200, 16 August 2001

FACTS:

Between July 1981 and April 1984, Marinduque Mining entered into 3 mortgage agreements with
PNB and DBP involving its real properties located in Surigao del Norte, Negros Occidental, and Rizal,
as well as its equipments located therein. Marinduque failed to pay its loans, causing the foreclosure
of the said mortgages. PNB and DBP thereafter gained control of the said properties.

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased and
caused to be delivered construction materials and other merchandise from Remington Industrial
Sales Corporation. The purchases remained unpaid as of August 1, 1984 when Remington filed a
complaint for a sum of money and damages against Marinduque Mining for the value of the unpaid
construction materials and other merchandise purchased by Marinduque Mining, as well as interest,
attorney’s fees and the costs of suit.

Remington’s original complaint was amended to include PNB, DBP, Maricalum Mining Corporation
and Island Cement Corporation as co-defendants. Remington asserted that Marinduque Mining,
PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and
the same entity by disregarding the veil of corporate fiction since the personnel, key officers and
rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement
creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that
practically there has only been a change of name for all legal purpose and intents.

ISSUE:

Is the take over of PNB and DBP over Marinduque Mining is in bad faith.

HELD:

No. Their actions are mandated under the law. Where the corporations have directors and officers in
common, there may be circumstances under which their interest as officers in one company may
disqualify them in equity from representing both corporations in transactions between the two.
Thus, where one corporation was ‘insolvent and indebted to another, it has been held that the
directors of the creditor corporation were disqualified, by reason of self-interest, from acting as
directors of the debtor corporation in the authorization of a mortgage or deed of trust to the former
to secure such indebtedness In the same manner that when the corporation is insolvent, its directors
who are its creditors cannot secure to themselves any advantage or preference over other creditors.
They cannot thus take advantage of their fiduciary relation and deal directly with themselves, to the
injury of others in equal right.
Directors of insolvent corporation, who are creditors of the company, can not secure to themselves
any preference or advantage over other creditors in the payment of their claims. It is not good
morals or good law. The governing body of officers thereof are charged with the duty of conducting
its affairs strictly in the interest of its existing creditors, and it would be a breach of such trust for
them to undertake to give any one of its members any advantage over any other creditors in
securing the payment of his debts in preference to all others. When validity of these mortgages, to
secure debts upon which the directors were indorsers, was questioned by other creditors of the
corporation, they should have been classed as instruments rendered void by the legal principle which
prevents directors of an insolvent corporation from giving themselves a preference over outside
creditors.
Topic: Three-Fold Duties of Directors and Officers: Solidary liabilities for damages

Case No. 344

HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy Lim) vs.

INTERNATIONAL EXCHANGE BANK
G.R. No. 166282 February 13, 2013

FACTS:

International Bank (iBank) granted loans to Hammer Garments Corporation (Hammer), covered by
promissory notes and deeds of assignment. The loans were secured by a 9-million-peso real estate
mortgage by Goldkey Development Corporation (Goldkey) and a 25-million-peso surety agreement
signed by Chua and his wife, Fe Tan Uy (Uy).

Hammer defaulted in the payment of the loans prompting iBank to foreclose the real estate
mortgage leaving an unpaid balance of almost 13.5 million pesos. For failure of Hammer to pay the
deficiency, iBank filed a complaint for sum of money against Hammer, Chua, Uy and Goldkey. Chua
and Hammer failed to file their answers and were declared in default. Uy claimed that she was not
liable to iBank because she never executed a surety agreement in favor of iBank

The lower court found that the surety agreement was a forgery. Nevertheless, it held Uy liable for
the outstanding obligation of Hammer because she was an officer, stockholder of the said
corporation.

ISSUE:

Was the lower court correct in holding that Uy is liable for the corporation because she was an
officer, stockholder thereof?

HELD:

No. Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a
legal personality separate and distinct from those acting for and in its behalf and, in general, from
the people comprising it. Following this principle, obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities. A director, officer or employee of
a corporation is generally not held personally liable for obligations incurred by the corporation.
Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues. This is consistent with the provisions of the Corporation Code of the
Philippines, which states:

Sec. 31. 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.
Solidary liability will then attach to the directors, officers or employees of the corporation in certain
circumstances, such as: 1. When directors and trustees or, in appropriate cases, the officers of a
corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or
with gross negligence in directing the corporate affairs; and (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or members, and other persons; 2. When a director or
officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written objection thereto; 3. When a director, trustee
or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with
the corporation; or 4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action.

Before a director or officer of a corporation can be held personally liable for corporate obligations,
however, the following requisites must concur: (1) the complainant must allege in the complaint that
the director or officer assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove
such unlawful acts, negligence or bad faith.

In this case, it was not alleged that Uy committed an act as an officer of Hammer that would permit
the piercing of the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank
did not demand that she be held liable for the obligations of Hammer because she was a corporate
officer who committed bad faith or gross negligence in the performance of her duties such that the
lifting of the corporate mask would be merited. What the complaint simply stated is that she,
together with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature
on the Surety Agreement which was later found by the RTC to have been forged.

Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the
aforementioned requisites for making a corporate officer, director or stockholder personally liable
for the obligations of a corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made
to answer for the unpaid debts of the corporation.
Topic: Three-Fold Duties of Directors and Officers: Derivative Suit: Remedies to Enforce Personal Liability

Case No. 363

COMMART PHILIPPINES, INC. vs.

SEC, ALICE MAGLUTAC
GR 85318 June 3, 1991

FACTS:

Commart (Phils.), Inc., (Commart for short) is a corporation organized by two brothers, Jesus and
Mariano Maglutac, to engage in the brokerage business for the importation of fertilizers and other
products/commodities.

Sometime in June 1984, the two brothers agreed to go their separate ways, with Mariano being
persuaded to sell to Jesus his shareholdings in Commart amounting to 25% of the outstanding capital
stock. As part of the deal, a "Cooperative Agreement" was signed, between Commart (represented
by Jesus) and Mariano, in which, among others, Commart ceded to Mariano or to an "acceptable
entity" he may create, a portion of its business, with a pledge of mutual cooperation for a certain
period so as to enable Mariano to get his own corporation off the ground, so to speak.
Mariano's wife, Alice M. Maglutac, has been for years a stockholder and director of Commart, did not
dispose of her shareholdings, and thus continued as such even after the sale of Mariano's equity.

As broker and indentor, Commart's principal income came from commissions paid to it in U.S. dollars
by foreign suppliers of fertilizers and other commodities imported by Planters Products, Inc. and
other local importers.

ISSUE:

Does Alice have the legal standing to file the derivative suit.

RULING:

Yes. A derivative suit has been the principal defense of the minority shareholder against abuses by
the majority. It is a remedy designed by equity for those situations where the management, through
fraud, neglect of duty, or other cause, declines to take the proper and necessary steps to assert the
corporation's rights. Indeed, to grant to Commart the light of withdrawing or dismissing the suit, at
the instance of majority stockholders and directors who themselves are the persons alleged to have
committed breaches of trust against the interest of the corporation, would be to emasculate the
right of minority stockholders to seek redress for the corporation. To consider the Notice of
Dismissal filed by Commart as quashing the complaint filed by Alice Maglutac in favor of the
corporation would be to defeat the very nature and function of a derivative suit and render the right
to institute the action illusory.