Corpo Cases

CASE No.
G.R. No. 175278. September 23, 2015.*
GSIS FAMILY BANK-THRIFT BANK [formerly Comsavings Bank, Inc.], petitioner, vs. BPI FAMILY BANK,
respondent.
Corporations; Corporate Names; In Philips Export B.V. v. Court of Appeals, 206 SCRA 457 (1992), the
Supreme Court (SC) ruled that to fall within the prohibition of the law on the right to the exclusive use of
a corporate name, two (2) requisites must be proven.—In Philips Export B.V. v. Court of Appeals, 206
SCRA 457 (1992), this Court ruled that to fall within the prohibition of the law on the right to the
exclusive use of a corporate name, two requisites must be proven, namely: (1) that the complainant
corporation acquired a prior right over the use of such corporate name; and (2) the proposed name is
either (a) identical; or (b) deceptive or confusingly similar to that of any existing corporation or to any
other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law.
Same; Same; Revised Guidelines in the Approval of Corporate and Partnership Names; Section 3 of the
Revised Guidelines in the Approval of Corporate and Partnership Names states that if there be identical,
misleading or confusingly similar name to one already registered by another corporation or partnership
with the Securities and Exchange Commission (SEC), the proposed name must contain at least one (1)
distinctive word different from the name of the company already registered.—Section 3 states that if
there be identical, misleading or confusingly similar name to one already registered by another
corporation or partnership with the SEC, the proposed name must contain at least one distinctive word
different from the name of the company already registered. To show contrast with respondent’s
corporate name, petitioner used the words “GSIS” and “thrift.” But these are not sufficiently distinct
words that differentiate petitioner’s corporate name from respondent’s. While “GSIS” is merely an
acronym of the proper name by which petitioner is identified, the word “thrift” is simply a classification
of the type of bank that petitioner is. Even if the classification of the bank as “thrift” is appended to
petitioner’s proposed corporate name, it will not make the said
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* THIRD DIVISION.
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VOL. 771, SEPTEMBER 23, 2015
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GSIS Family Bank-Thrift Bank [formerly Comsavings Bank, Inc.] vs. BPI Family Bank
corporate name distinct from respondent’s because the latter is likewise engaged in the banking
business.
Remedial Law; Civil Procedure; Appeals; Findings of fact of quasi-judicial agencies, like the Securities and
Exchange Commission (SEC), are generally accorded respect and even finality by this Court, if supported
by substantial evidence, in recognition of their expertise on the specific matters under their
consideration, more so if the same has been upheld by the appellate court, as in this case.—Findings of
fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by this
Court, if supported by substantial evidence, in recognition of their expertise on the specific matters
under their consideration, more so if the same has been upheld by the appellate court, as in this case.
Corporations; Corporate Names; “Arbitrary Marks” and “Suggestive Marks,” Distinguished.—Under the
facts of this case, the word “family” cannot be separated from the word “bank.” In asserting their claims
before the SEC up to the Court of Appeals, both petitioner and respondent refer to the phrase “Family
Bank” in their submissions. This coined phrase, neither being generic nor descriptive, is merely
suggestive and may properly be regarded as arbitrary. Arbitrary marks are “words or phrases used as a
mark that appear to be random in the context of its use. They are generally considered to be easily
remembered because of their arbitrariness. They are original and unexpected in relation to the products
they endorse, thus, becoming themselves distinctive.” Suggestive marks, on the other hand, “are marks
which merely suggest some quality or ingredient of goods. x x x The strength of the suggestive marks lies
on how the public perceives the word in relation to the product or service.”
Securities and Exchange Commission; Jurisdiction; It is the Securities and Exchange Commission’s (SEC’s)
duty to prevent confusion in the use of corporate names not only for the protection of the corporations
involved, but more so for the protection of the public.—The enforcement of the protection accorded by
Section 18 of the Corporation Code to corporate names is lodged exclusively in the SEC. The jurisdiction
of the SEC is not merely confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act, as amended. By express mandate, the SEC has absolute juris-
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SUPREME COURT REPORTS ANNOTATED
diction, supervision and control over all corporations. It is the SEC’s duty to prevent confusion in the use
of corporate names not only for the protection of the corporations involved, but more so for the
protection of the public. It has authority to de-register at all times, and under all circumstances
corporate names which in its estimation are likely to generate confusion.
Mercantile Law; Trademarks; The certificate of registration of a mark shall be prima facie evidence of
the validity of the registration, the registrant’s ownership of the mark, and of the registrant’s exclusive
right to use the same in connection with the goods or services and those that are related thereto
specified in the certificate.—Judicial notice may also be taken of the action of the IPO in approving
respondent’s registration of the trademark “BPI Family Bank” and its logo on October 17, 2008. The
certificate of registration of a mark shall be prima facie evidence of the validity of the registration, the
registrant’s ownership of the mark, and of the registrant’s exclusive right to use the same in connection
with the goods or services and those that are related thereto specified in the certificate.
Remedial Law; Civil Procedure; Verification; Certification of Non-Forum Shopping; In S.C. Megaworld
Construction and Development Corporation v. Parada, 705 SCRA 584 (2013), the Supreme Court (SC)
said that objections relating to noncompliance with the verification and certification of non-forum
shopping should be raised in the proceedings below, and not for the first time on appeal.—In S.C.
Megaworld Construction and Development Corporation v. Parada, 705 SCRA 584 (2013), this Court said
that objections relating to noncompliance with the verification and certification of non-forum shopping
should be raised in the proceedings below, and not for the first time on appeal. In that case, S.C.
Megaworld argued that the complaint for collection of sum of money should have been dismissed
outright by the trial court on account of an invalid non-forum shopping certification. It alleged that the
Special Power of Attorney granted to Parada did not specifically include an authority for the latter to
sign the verification and certification of non-forum shopping, thus rendering the complaint defective for
violation of Sections 4 and 5 of Rule 7 of the Rules of Court. On motion for reconsideration of the
decision of the Court of Appeals, petitioner raised for the first time, the issue of forum shopping.
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PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Benedicto & Associates for respondent.
JARDELEZA, J.:
This is a Petition for Review on Certiorari filed by GSIS Family Bank-Thrift Bank1 assailing the Court of
Appeals’ Decision2 dated March 29, 2006 (Decision) and Resolution3 dated October 23, 2006 which
denied petitioner’s petition for review of the Securities and Exchange Commission Decision dated
February 22, 2005 (SEC En Banc Decision). The SEC En Banc Decision4 prohibited petitioner from using
the word “Family” as part of its corporate name and ordered petitioner to delete the word from its
name.5
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1 Petitioner “GSIS Family Bank-Thrift Bank” is sometimes referred to as “Comsavings Bank, Inc.” as in SC
Resolution dated December 6, 2006, Rollo, p. 7; “GSIS Family Bank-A Thrift Bank (formerly Comsavings
Bank, Inc.)” as in SC Resolution dated February 5, 2007, id., at p. 117; “Comsavings Bank, Inc. (Operating
under the trade name GSIS Family Bank-A Thrift Bank)” as in Court of Appeals’ Decision dated March 29,
2006, and in SEC En Banc Decision dated February 22, 2005, id., at pp. 38 and 89, respectively. For
uniformity, we adopt the name “GSIS Family Bank-Thrift Bank” as used in the SC Resolutions dated
October 17, 2007 and January 28, 2008, id., at pp. 131 and 139, respectively.
2 Penned by Associate Justice Santiago Javier Ranada, with Associate Justices Roberto A. Barrios and
Mario L. Guariña III, concurring. Rollo, pp. 38-47.
3 Resolution denying petitioner’s Motion for Reconsideration of the Court of Appeals’ Decision dated
March 29, 2006. Id., at p. 49.
4 Id., at pp. 89-90.
5 Affirming the Decision of the SEC Company Registration and Monitoring Department (SEC CRMD)
dated May 19, 2003, id., at pp. 70, 89-90.
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Facts
Petitioner was originally organized as Royal Savings Bank and started operations in 1971. Beginning 1983
and 1984, petitioner encountered liquidity problems. On July 9, 1984, it was placed under receivership
and later temporarily closed by the Central Bank of the Philippines. Two (2) months after its closure,
petitioner reopened and was renamed Comsavings Bank, Inc. under the management of the Commercial
Bank of Manila.6
In 1987, the Government Service Insurance System (GSIS) acquired petitioner from the Commercial Bank
of Manila. Petitioner’s management and control was thus transferred to GSIS.7 To improve its
marketability to the public, especially to the members of the GSIS, petitioner sought Securities and
Exchange Commission (SEC) approval to change its corporate name to “GSIS Family Bank, a Thrift
Bank.”8 Petitioner likewise applied with the Department of Trade and Industry (DTI) and Bangko Sentral
ng Pilipinas (BSP) for authority to use “GSIS Family Bank, a Thrift Bank” as its business name. The DTI and
the BSP approved the applications.9 Thus, petitioner operates under the corporate name “GSIS Family
Bank-a Thrift Bank,” pursuant to the DTI Certificate of Registration No. 741375 and the Monetary Board
Circular approval.10
Respondent BPI Family Bank was a product of the merger between the Family Bank and Trust Company
(FBTC) and the Bank of the Philippine Islands (BPI).11 On June 27, 1969, the Gotianum family registered
with the SEC the corporate name “Family First Savings Bank,” which was amended to
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6 Petition for Review on Certiorari, id., at p. 13.
7 Id.
8 Petition for Review, id., at p. 94.
9 Id., at p. 95.
10 Id., at p. 38.
11 Id., at p. 39.
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“Family Savings Bank,” and then later to “Family Bank and Trust Company.”12 Since its incorporation,
the bank has been commonly known as “Family Bank.” In 1985, Family Bank merged with BPI, and the
latter acquired all the rights, privileges, properties, and interests of Family Bank, including the right to
use names, such as “Family First Savings Bank,” “Family Bank,” and “Family Bank and Trust Company.”
BPI Family Savings Bank was registered with the SEC as a wholly-owned subsidiary of BPI. BPI Family
Savings Bank then registered with the Bureau of Domestic Trade the trade or business name “BPI Family
Bank,” and acquired a reputation and goodwill under the name.13
Proceedings before the SEC
Eventually, it reached respondent’s attention that petitioner is using or attempting to use the name
“Family Bank.” Thus, on March 8, 2002, respondent petitioned the SEC Company Registration and
Monitoring Department (SEC CRMD) to disallow or prevent the registration of the name “GSIS Family
Bank” or any other corporate name with the words “Family Bank” in it. Respondent claimed exclusive
ownership to the name “Family Bank,” having acquired the name since its purchase and merger with
Family Bank and Trust Company way back 1985.14 Respondent also alleged that through the years, it
has been known as “BPI Family Bank” or simply “Family Bank” both locally and internationally. As such,
it has acquired a reputation and goodwill under the name, not only with clients here and abroad, but
also with correspondent and competitor banks, and the public in general.15
Respondent prayed the SEC CRMD to disallow or prevent the registration of the name “GSIS Family
Bank” or any other
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12 Id., at pp. 38-39.
13 Id., at p. 39.
14 Id., at p. 50.
15 Id., at p. 51.
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corporate name with the words “Family Bank” should the same be presented for registration.
Respondent likewise prayed the SEC CRMD to issue an order directing petitioner or any other
corporation to change its corporate name if the names have already been registered with the SEC.16
The SEC CRMD was thus confronted with the issue of whether the names BPI Family Bank and GSIS
Family Bank are confusingly similar as to require the amendment of the name of the latter corporation.
The SEC CRMD declared that upon the merger of FBTC with the BPI in 1985, the latter acquired the right
to the use of the name of the absorbed corporation. Thus, BPI Family Bank has a prior right to the use of
the name Family Bank in the banking industry, arising from its long and extensive nationwide use,
coupled with its registration with the Intellectual Property Office (IPO) of the name “Family Bank” as its
trade name. Applying the rule of “priority in registration” based on the legal maxim first in time, first in
right, the SEC CRMD concluded that BPI has the preferential right to the use of the name “Family Bank.”
More, GSIS and Comsavings Bank were then fully aware of the existence and use of the name “Family
Bank” by FBTC prior to the latter’s merger with BPI.17
The SEC CRMD also held that there exists a confusing similarity between the corporate names BPI Family
Bank and GSIS Family Bank. It explained that although not identical, the corporate names are
indisputably similar, as to cause confusion in the public mind, even with the exercise of reasonable care
and observation, especially so since both corporations are engaged in the banking business.18
In a decision19 dated May 19, 2003, the SEC CRMD said:
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16 Id.
17 SEC Decision, id., at pp. 67-68.
18 Id., at p. 68.
19 Id., at pp. 65-70.
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PREMISES CONSIDERED respondent GSIS FAMILY BANK is hereby directed to refrain from using the word
“Family” as part of its name and make good its commitment to change its name by deleting or dropping
the subject word from its corporate name within [thirty (30) days] from the date of actual receipt
hereof.20
Petitioner appealed21 the decision to the SEC En Banc, which denied the appeal, and upheld the SEC
CRMD in the SEC En Banc Decision.22 Petitioner elevated the SEC En Banc Decision to the Court of
Appeals, raising the following issues:
1. Whether the use by GSIS Family Bank of the words “Family Bank” is deceptively and confusingly
similar to the name BPI Family Bank;
2. Whether the use by Comsavings Bank of “GSIS Family Bank” as its business constitutes unfair
competition;
3. Whether BPI Family Bank is guilty of forum shopping;
4. Whether the approval of the DTI and the BSP of petitioner’s application to use the name GSIS Family
Bank constitutes its authority to the lawful and valid use of such trade name or trademark;
5. Whether the application of respondent BPI Family Bank for the exclusive use of the name “Family
Bank,” a generic name, though not yet approved by IPO of the Bureau of Patents, has barred the GSIS
Family Bank from using such trademark or name.23
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20 Id., at p. 70.
21 Id., at pp. 71-81.

22 Id., at p. 90.
23 Id., at pp. 41-42.
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Court of Appeals’ Ruling
The Court of Appeals ruled that the approvals by the BSP and by the DTI of petitioner’s application to
use the name “GSIS Family Bank” do not constitute authority for its lawful and valid use. It said that the
SEC has absolute jurisdiction, supervision and control over all corporations.24 The Court of Appeals held
that respondent was entitled to the exclusive use of the corporate name because of its prior adoption of
the name “Family Bank” since 1969.25 There is confusing similarity in the corporate names because
“[c]onfusion as to the possible association with GSIS might arise if we were to allow Comsavings Bank to
add its parent company’s acronym, ‘GSIS’ to ‘Family Bank.’ This is true especially considering both
companies belong to the banking industry. Proof of actual confusion need not be shown. It suffices that
confusion is probably or likely to occur.”26 The Court of Appeals also ruled out forum shopping because
not all the requirements of litis pendentia are present.27
The dispositive portion of the decision read:
WHEREFORE, the instant petition for review is hereby DISMISSED for lack of merit.28
After its Motion for Reconsideration was denied,29 petitioner brought the decision to this Court via a
Petition for Review on Certiorari.30
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24 Id., at pp. 42-43.
25 Id., at pp. 45-46.
26 Id., at p. 46.
27 Id., at pp. 43-44.
28 Id., at p. 47.
29 Resolution dated October 23, 2006, id., at p. 49.

30 Id., at pp. 9-36.
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Issues in the Petition
Petitioner raised the following issues in its petition:
I. The Court of Appeals gravely erred in affirming the SEC Resolution finding the word “Family” not
generic despite its unregistered status with the IPO of the Bureau of Patents and the use by GSIS-Family
Bank in its corporate name of the words “[F]amily [B]ank” as deceptive and [confusingly similar] to the
name BPI Family Bank;31
II. The Court of Appeals gravely erred when it ruled that the respondent is not guilty of forum shopping
despite the filing of three (3) similar complaints before the DTI and BSP and with the SEC without the
requisite certification of non-forum shopping attached thereto;32
III. The Court of Appeals gravely erred when it completely disregarded the opinion of the Bangko Sentral
ng Pilipinas that the use by the herein petitioner of the trade name GSIS Family Bank-Thrift Bank is not
similar or does not deceive or likely cause any deception to the public.33
Court’s Ruling
We uphold the decision of the Court of Appeals.
Section 18 of the Corporation Code provides:
Section 18. Corporate name.—No corporate name may be allowed by the Securities and Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently decep-
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31 Id., at p. 17.
32 Id., at p. 25.
33 Id., at p. 30.
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tive, confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the amended name.
In Philips Export B.V. v. Court of Appeals,34 this Court ruled that to fall within the prohibition of the law
on the right to the exclusive use of a corporate name, two requisites must be proven, namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either
(a) identical; or
(b) deceptive or confusingly similar to that of any existing corporation or to any other name already
protected by law; or
(c) patently deceptive, confusing or contrary to existing law.35
These two requisites are present in this case. On the first requisite of a prior right, Industrial Refractories
Corporation of the Philippines v. Court of Appeals (IRCP case)36 is instructive. In that case, Refractories
Corporation of the Philippines (RCP) filed before the SEC a petition to compel Industrial Refractories
Corporation of the Philippines (IRCP) to change its corporate name on the ground that its corporate
name is confusingly similar with that of RCP’s such that the public may be confused into believing that
they are one and the same corporation. The SEC and the Court of Appeals found for petitioner, and
ordered IRCP to delete or drop from its corporate name the word “Refractories.” Upon appeal of IRCP,
this Court upheld the decision of the CA.
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34 G.R. No. 96161, February 21, 1992, 206 SCRA 457.
35 Id., at p. 463.
36 G.R. No. 122174, October 3, 2002, 390 SCRA 252.

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Applying the priority of adoption rule to determine prior right, this Court said that RCP has acquired the
right to use the word “Refractories” as part of its corporate name, being its prior registrant. In arriving at
this conclusion, the Court considered that RCP was incorporated on October 13, 1976 and since then
continuously used the corporate name “Refractories Corp. of the Philippines.” Meanwhile, IRCP only
started using its corporate name “Industrial Refractories Corp. of the Philippines” when it amended its
Articles of Incorporation on August 23, 1985.37
In this case, respondent was incorporated in 1969 as Family Savings Bank and in 1985 as BPI Family
Bank. Petitioner, on the other hand, was incorporated as GSIS Family-Thrift Bank only in 2002,38 or at
least seventeen (17) years after respondent started using its name. Following the precedent in the IRCP
case, we rule that respondent has the prior right over the use of the corporate name.
The second requisite in the Philips Export case likewise obtains on two points: the proposed name is (a)
identical; or (b) deceptive or confusingly similar to that of any existing corporation or to any other name
already protected by law.
On the first point (a), the words “Family Bank” present in both petitioner and respondent’s corporate
name satisfy the requirement that there be identical names in the existing corporate name and the
proposed one. Respondent cannot justify its claim under Section 3 of the Revised Guidelines in the
Approval of Corporate and Partnership Names,39 to wit:
3. The name shall not be identical, misleading or confusingly similar to one already registered by
another corporation or partnership with the Commission or a sole proprietorship registered with the
Department of Trade and Industry.
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37 Id., at p. 260.
38 Rollo, p. 45.
39 SEC Memorandum Circular No. 14-2000.
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If the proposed name is similar to the name of a registered firm, the proposed name must contain at
least one distinctive word different from the name of the company already registered.
Section 3 states that if there be identical, misleading or confusingly similar name to one already
registered by another corporation or partnership with the SEC, the proposed name must contain at least
one distinctive word different from the name of the company already registered. To show contrast with
respondent’s corporate name, petitioner used the words “GSIS” and “thrift.” But these are not
sufficiently distinct words that differentiate petitioner’s corporate name from respondent’s. While
“GSIS” is merely an acronym of the proper name by which petitioner is identified, the word “thrift” is
simply a classification of the type of bank that petitioner is. Even if the classification of the bank as
“thrift” is appended to petitioner’s proposed corporate name, it will not make the said corporate name
distinct from respondent’s because the latter is likewise engaged in the banking business.
This Court used the same analysis in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa
Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan.40 In that case,
Iglesia ng Dios Kay Cristo Jesus filed a case before the SEC to compel Ang mga Kaanib sa Iglesia ng Dios
Kay Kristo Hesus to change its corporate name, and to prevent it from using the same or similar name
on the ground that the same causes confusion among their members as well as the public. Ang mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus claimed that it complied with SEC Memorandum Circular No.
14-2000 by adding not only two, but eight words to their registered name, to wit: “Ang Mga Kaanib” and
“Sa Bansang Pilipinas, Inc.,” which effectively distinguished it from Iglesia ng Dios Kay Cristo Jesus. This
Court rejected the argument, thus:
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40 G.R. No. 137592, December 12, 2001, 372 SCRA 171.

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The additional words “Ang Mga Kaanib” and “Sa Bansang Pilipinas, Inc.” in petitioner’s name are, as
correctly observed by the SEC, merely descriptive of and also referring to the members, or kaanib, of
respondent who are likewise residing in the Philippines. These words can hardly serve as an effective
differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner from
respondent. This is especially so, since both petitioner and respondent corporations are using the same
acronym — H.S.K.; not to mention the fact that both are espousing religious beliefs and operating in the
same place. x x x41
On the second point (b), there is a deceptive and confusing similarity between petitioner’s proposed
name and respondent’s corporate name, as found by the SEC.42 In determining the existence of
confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person
using ordinary care and discrimination.43 And even without such proof of actual confusion between the
two corporate names, it suffices that confusion is probable or likely to occur.44
Petitioner’s corporate name is “GSIS Family Bank-A Thrift Bank” and respondent’s corporate name is
“BPI Family Bank.” The only words that distinguish the two are “BPI,” “GSIS,” and “Thrift.” The first two
words are merely the acronyms of the proper names by which the two corporations identify themselves;
and the third word simply describes the classification of the bank. The overriding consideration in
determining whether a person, using ordinary care and discrimination, might be misled is the
circumstance that both petitioner and respondent are engaged in the same business
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41 Id., at p. 178.
42 Rollo, p. 68.
43 Industrial Refractories Corporation of the Philippines v. Court of Appeals, supra note 36 at p. 260.
44 Id., at p. 261.
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of banking. “The likelihood of confusion is accentuated in cases where the goods or business of one
corporation are the same or substantially the same to that of another corporation.”45
Respondent alleged that upon seeing a Comsavings Bank branch with the signage “GSIS Family Bank”
displayed at its premises, some of the respondent’s officers and their clients began asking questions.
These include whether GSIS has acquired Family Bank; whether there is a joint arrangement between
GSIS and Family Bank; whether there is a joint arrangement between BPI and GSIS regarding Family
Bank; whether Comsavings Bank has acquired Family Bank; and whether there is there an arrangement
among Comsavings Bank, GSIS, BPI, and Family Bank regarding BPI Family Bank and GSIS Family Bank.46
The SEC made a finding that “[i]t is not a remote possibility that the public may entertain the idea that a
relationship or arrangement indeed exists between BPI and GSIS due to the use of the term ‘Family
Bank’ in their corporate names.”47
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality
by this Court, if supported by substantial evidence, in recognition of their expertise on the specific
matters under their consideration, more so if the same has been upheld by the appellate court, as in this
case.48
Petitioner cannot argue that the word “family” is a generic or descriptive name, which cannot be
appropriated exclusively by respondent. “Family,” as used in respondent’s corporate name, is not
generic. Generic marks are commonly used as
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46 Rollo, pp. 56-57.
47 Id., at p. 68.
48 Nautica Canning Corporation v. Yumul, G.R. No. 164588, October 19, 2005, 473 SCRA 415, 423--424.
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the name or description of a kind of goods, such as “Lite” for beer or “Chocolate Fudge” for chocolate
soda drink. Descriptive marks, on the other hand, convey the characteristics, function, qualities or
ingredients of a product to one who has never seen it or does not know it exists, such as “Arthriticare”
for arthritis medication.49
Under the facts of this case, the word “family” cannot be separated from the word “bank.”50 In
asserting their claims before the SEC up to the Court of Appeals, both petitioner and respondent refer to
the phrase “Family Bank” in their submissions. This coined phrase, neither being generic nor descriptive,
is merely suggestive and may properly be regarded as arbitrary. Arbitrary marks are “words or phrases
used as a mark that appear to be random in the context of its use. They are generally considered to be
easily remembered because of their arbitrariness. They are original and unexpected in relation to the
products they endorse, thus, becoming themselves distinctive.”51 Suggestive marks, on the other hand,
“are marks which merely suggest some quality or ingredient of goods. x x x The strength of the
suggestive marks lies on how the public perceives the word in relation to the product or service.”52
In Ang v. Teodoro,53 this Court ruled that the words “Ang Tibay” is not a descriptive term within the
meaning of the Trademark Law but rather a fanciful or coined phrase.54 In so
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49 McDonald’s Corporation v. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004, 437 SCRA 10,
26.
50 Id.
51 Escaño, Eduardo C., Trademarks in the Philippines: A Legal Guide, p. 366 (2003), citing Elias, S.,
Patent, Copyright and Trademark, 2nd ed., p. 335 (1997).
52 Id., at p. 383, citing II J Thomas Mccarthy, Mccarthy on Trademarks and Unfair Competition, 11:62,
4th ed., pp. 11-121 (2001).
53 74 Phil. 50 (1942). Citations omitted.
54 See also, McDonald’s Corporation v. L.C. Big Mak Burger, Inc., supra.
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ruling, this Court considered the etymology and meaning of the Tagalog words, “Ang Tibay” to
determine whether they relate to the quality or description of the merchandise to which respondent
therein applied them as trademark, thus:
We find it necessary to go into the etymology and meaning of the Tagalog words “Ang Tibay” to
determine whether they are a descriptive term, i.e., whether they relate to the quality or description of
the merchandise to which respondent has applied them as a trademark. The word “ang” is a definite
article meaning “the” in English. It is also used as an adverb, a contraction of the word “anong” (what or
how). For instance, instead of saying, “Anong ganda!” (“How beautiful!”), we ordinarily say, “Ang
ganda!” Tibay is a root word from which are derived the verb magpatibay (to strengthen); the nouns
pagkamatibay (strength, durability), katibayan (proof, support, strength), katibaytibayan (superior
strength); and the adjectives matibay (strong, durable, lasting), napakatibay (very strong), kasintibay or
magkasintibay (as strong as, or of equal strength). The phrase “Ang Tibay” is an exclamation denoting
admiration of strength or durability. For instance, one who tries hard but fails to break an object
exclaims, “Ang tibay!” (“How strong!”) It may also be used in a sentence thus, “Ang tibay ng sapatos
mo!” (“How durable your shoes are!”) The phrase “ang tibay” is never used adjectively to define or
describe an object. One does not say, “ang tibay sapatos” or “sapatos ang tibay” to mean “durable
shoes,” but “matibay na sapatos” or “sapatos na matibay.”
From all of this we deduce that “Ang Tibay” is not a descriptive term within the meaning of the Trade-
Mark Law but rather a fanciful or coined phrase which may properly and legally be appropriated as a
trademark or trade-name. x x x55 (Underscoring supplied)
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55 Id., at p. 52.
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The word “family” is defined as “a group consisting of parents and children living together in a
household” or “a group of people related to one another by blood or marriage.”56 Bank, on the other
hand, is defined as “a financial establishment that invests money deposited by customers, pays it out
when requested, makes loans at interest, and exchanges currency.”57 By definition, there can be no
expected relation between the word “family” and the banking business of respondent. Rather, the
words suggest that respondent’s bank is where family savings should be deposited. More, as in the Ang
case, the phrase “family bank” cannot be used to define an object.
Petitioner’s argument that the opinion of the BSP and the certificate of registration granted to it by the
DTI constitute authority for it to use “GSIS Family Bank” as corporate name is also untenable.
The enforcement of the protection accorded by Section 18 of the Corporation Code to corporate names
is lodged exclusively in the SEC. The jurisdiction of the SEC is not merely confined to the adjudicative
functions provided in Section 5 of the SEC Reorganization Act,58 as amended.59 By express mandate,
the SEC has absolute jurisdiction, supervision and control over all corporations.60 It is the SEC’s duty to
prevent confusion in the use of corporate names not only for the protection of the corporations
involved, but more so for the protection of the
_______________
56 The New Oxford American Dictionary, 2nd ed., p. 607 (2005).

57 Id., at p. 127.
58 Presidential Decree (PD) No. 902-A (1976).
59 Industrial Refractories Corporation of the Philippines v. Court of Appeals, supra note 36 at p. 258.
60 Section 3, PD 902-A. The Commission shall have absolute jurisdiction, supervision and control over
all corporations, partnerships or associations, who are the grantees of primary franchise and/or a license
or permit issued by the government to operate in the Philippines; and in the exercise of its authority, it
shall have the power to enlist the aid and support of any and all enforcement agencies of the
government, civil or military.
302
302
public. It has authority to de-register at all times, and under all circumstances corporate names which in
its estimation are likely to generate confusion.61
The SEC62 correctly applied Section 18 of the Corporation Code, and Section 15 of SEC Memorandum
Circular No. 14-2000, pertinent portions of which provide:
In implementing Section 18 of the Corporation Code of the Philippines (BP 69), the following revised
guidelines in the approval of corporate and partnership names are hereby adopted for the information
and guidance of all concerned:
xxx
15. Registrant corporations or partnership shall submit a letter undertaking to change their corporate
or partnership name in case another person or firm has acquired a prior right to the use of the said firm
name or the same is deceptively or confusingly similar to one already registered unless this undertaking
is already included as one of the provisions of the articles of incorporation or partnership of the
registrant.
The SEC, after finding merit in respondent’s claims, can compel petitioner to abide by its commitment
“to change its corporate name in the event that another person, firm or entity has acquired a prior right
to use of said name or one similar to it.”63
Clearly, the only determination relevant to this case is that one made by the SEC in the exercise of its
express mandate
_______________
61 Industrial Refractories Corporation of the Philippines v. Court of Appeals, supra note 36 at p. 259,
citing Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. v. Iglesia ng
Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan, supra note 40.
62 Referring to both the SEC CRMD and the SEC En Banc.
63 Rollo, p. 69.
303
303
under the law. The BSP opinion invoked by petitioner even acknowledges that “the issue on whether a
proposed name is identical or deceptively similar to that of any of existing corporation is matter within
the official jurisdiction and competence of the SEC.”64
Judicial notice65 may also be taken of the action of the IPO in approving respondent’s registration of
the trademark “BPI Family Bank” and its logo on October 17, 2008. The certificate of registration of a
mark shall be prima facie evidence of the validity of the registration, the registrant’s ownership of the
mark, and of the registrant’s exclusive right to use the same in connection with the goods or services
and those that are related thereto specified in the certificate.66
Finally, we uphold the Court of Appeals’ finding that the issue of forum shopping was belatedly raised by
petitioner and, thus, cannot anymore be considered at the appellate stage of the proceedings.
Petitioner raised the issue of forum shopping for the first time only on appeal.67 Petitioner argued that
the complaints filed by respondent did not contain certi-
_______________
64 Id., at p. 115.
65 The IPO is subject to the supervision of the DTI (Republic Act No. 8293 [1997], The Intellectual
Property Code of the Philippines, Section 7), which belongs to the executive department of the
government. Official acts of the executive department can be taken judicial notice of under the Rule 129
of the Rules of Court, to wit:
Section 1. Judicial notice, when mandatory.—A court shall take judicial notice, without the
introduction of evidence, of the existence and territorial extent of states, their political history, forms of
government and symbols of nationality, the law of nations, the admiralty and maritime courts of the
world and their seals, the political constitution and history of the Philippines, the official acts of
legislative, executive and judicial departments of the Philippines, the laws of nature, the measure of
time, and the geographical divisions.
66 Republic Act No. 8293 (1997), Section 138.
67 Petition for Review, Rollo, p. 104.
304
304
fications against non-forum shopping, in violation of Section 5, Rule 7 of the Rules of Court.68
In S.C. Megaworld Construction and Development Corporation v. Parada,69 this Court said that
objections relating to noncompliance with the verification and certification of non-forum shopping
should be raised in the proceedings below, and not for the first time on appeal. In that case, S.C.
Megaworld argued that the complaint for collection of sum of money should have been dismissed
outright by the trial court on account of an invalid non-forum shopping certification. It alleged that the
Special Power of Attorney granted to Parada did not specifically include an authority for the latter to
sign the verification and certification of non-forum shopping, thus rendering the complaint defective for
violation of Sections 4 and 5 of Rule 7 of the Rules of Court. On motion for reconsideration of the
decision of the Court of Appeals, petitioner raised for the first time, the issue of forum shopping. The
Court ruled against S.C. Megaworld, thus:
It is well-settled that no question will be entertained on appeal unless it has been raised in the
proceedings be-
_______________
68 Section 5. Certification against forum shopping.—The plaintiff or principal party shall certify under
oath in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification
annexed thereto and simultaneously filed therewith:
(a) that he has not theretofore commenced any action or filed any claim involving the same issues in any
court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other action or claim is
pending therein;
(b) if there is such other pending action or claim, a complete statement of the present status thereof;
and
(c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he
shall report that fact within five (5) days therefrom to the court wherein his aforesaid complaint or
initiatory pleading has been filed. x x x
69 G.R. No. 183804, September 11, 2013, 705 SCRA 584.
305
305
low. Points of law, theories, issues and arguments not brought to the attention of the lower court,
administrative agency or quasi-judicial body, need not be considered by a reviewing court, as they
cannot be raised for the first time at that late stage. Basic considerations of fairness and due process
impel this rule. Any issue raised for the first time on appeal is barred by estoppel.70
In this case, the fact that respondent filed a case before the DTI was made known to petitioner71 long
before the SEC rendered its decision. Yet, despite its knowledge, petitioner failed to question the alleged
forum shopping before the SEC. The exceptions to the general rule that forum shopping should be raised
in the earliest opportunity, as explained in the cited case of Young v. Keng Seng,72 do not obtain in this
case.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated March 29, 2006 is
hereby AFFIRMED.
SO ORDERED.
_______________
70 Id., at p. 594, citations omitted. Emphasis in the original.
71 Appellee’s Reply Memorandum, Rollo, p. 85.
72 Cited by the Court of Appeals in its Decision, G.R. No. 143464, March 5, 2003, 398 SCRA 629.
As provided in this case —
In general, violation of the rule on forum shopping should be raised at the earliest opportunity in a
motion to dismiss or a similar pleading. Invoking it in the later stages of the proceedings or on appeal
may result in the dismissal of the action as an exception only if the violation arises from or will result in
(1) the loss of jurisdiction over the subject matter, (2) the pendency of another action between the same
parties for the same cause, (3) the barring of the action by prior judgement, or (4) the crossing of the
Statute of Limitations.
306
306
Velasco, Jr. (Chairperson), Peralta, Villarama, Jr. and Perez,** JJ., concur.
Petition denied, judgment affirmed.
Notes.—A trademark is any distinctive word, name, symbol, emblem, sign, or device, or any
combination thereof, adopted and used by a manufacturer or merchant on his goods to identify and
distinguish them from those manufactured, sold, or dealt by others. Inarguably, a trademark deserves
protection. (Prosource International, Inc. vs. Horphag Research Management SA, 605 SCRA 523 [2009])
It is the element of “likelihood of confusion” that is the gravamen of trademark infringement; In

trademark infringement cases, precedents must be evaluated in the light of each particular case. (Id.)
——o0o——
_______________
** Designated as acting member, in view of the leave of absence of Associate Justice Bienvenido L.
Reyes, per Special Order No. 2084 dated June 29, 2015.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. GSIS Family Bank-Thrift Bank [formerly
Comsavings Bank, Inc.] vs. BPI Family Bank, 771 SCRA 284, G.R. No. 175278 September 23, 2015
CASE No. 2
G.R. No. 167041. June 17, 2008.*
PROVIDENT INTERNATIONAL RESOURCES CORPORATION, represented by Edward T. Marcelo,

Constancio D. Francisco, Anna Melinda Marcelo-Revilla, Lydia J. Chuanico, Daniel T. Pascual, Linda J.
Marcelo, John Marcelo, Celia C. Caburnay and Celedonio P. Escaño, Jr., and CELEDONIO ESCAÑO, JR.,
petitioners, vs. JOAQUIN T. VENUS, JOSE MA. CARLOS L. ZUMEL, ALFREDO D. ROA III, LAZARO L.
MADARA and SANTIAGO ALVAREZ, JR., respondents.
Administrative Law; Securities and Exchange Commission (SEC); Authority of Securities and Exchange
Commission (SEC) Explained.—It can be said that the SEC’s regulatory authority over private
corporations encompasses a wide margin of areas, touching nearly all of a corporation’s concerns. This
authority more vividly springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state. Under its regulatory responsibilities, the SEC may pass upon
applications for, or may suspend or revoke (after due notice and hearing), certificates of registration of
corporations, partnerships and associations (excluding cooperatives, homeowners’ association, and
labor unions); compel legal and regulatory compliances; conduct inspections; and impose fines or other
penalties for violations of the Revised Securities Act, as well as implementing rules and directives of the
SEC, such as may be warranted.
Same; Same; As the administrative agency responsible for the registration and monitoring of Stock and
Transfer Books (STBs), it is the body cognizant of the STB registration procedures, and in possession of
the pertinent files, records and specimen signatures of authorized officers relating to the registration of
STBs.—Going to the particular facts of the instant case, we find that the SEC has the primary
competence and means to determine and verify whether the subject 1979 STB presented by the
incumbent assistant corporate secretary was indeed authentic, and duly registered by the SEC as early
as September 1979. As the administrative agency responsible for the registration and monitoring of
STBs, it is the body cognizant
_______________
* SECOND DIVISION.
541
VOL. 554, JUNE 17, 2008
541
Provident International Resources Corporation vs. Venus
of the STB registration procedures, and in possession of the pertinent files, records and specimen
signatures of authorized officers relating to the registration of STBs. The evaluation of whether a STB
was authorized by the SEC primarily requires an examination of the STB itself and the SEC files. This
function necessarily belongs to the SEC as part of its regulatory jurisdiction. Contrary to the allegations
of respondents, the issues involved in this case can be resolved without going into the intra-corporate
controversies brought up by respondents.
Same; Same; As the regulatory body, it is the Securities and Exchange Commission’s (SEC’s) duty to
ensure that there is only one set of Stock and Transfer Book (STB) for each corporation.—As the
regulatory body, it is the SEC’s duty to ensure that there is only one set of STB for each corporation. The
determination of whether or not the 1979-registered STB is valid and of whether to cancel and revoke
the August 6, 2002 certification and the registration of the 2002 STB on the ground that there already is
an existing STB is impliedly and necessarily within the regulatory jurisdiction of the SEC.
Angara, Castillo, Concepcion, Regala and Cruz for petitioners.
Rivera, Santos & Maranan for respondents.
QUISUMBING, J.:
For review on certiorari are the Decision1 dated December 13, 2004 and Resolution2 dated February 3,
2005 of the Court of Appeals in CA-G.R. SP No. 77672, which set aside the Or-
_______________
1 Rollo, pp. 43-50. Penned by Associate Justice Juan Q. Enriquez, Jr., with Associate Justices Salvador J.
Valdez, Jr. and Vicente Q. Roxas concurring.
2 Id., at pp. 52-53.

542
542
der3 dated May 27, 2003, of the Securities and Exchange Commission (SEC) En Banc in CRMD-AA-Case
No. 04-03-22.
The pertinent facts are as follows:
Petitioner Provident International Resources Corporation (PIRC) is a corporation duly organized under
Philippine law. It was registered with the SEC on September 20, 1979. Edward T. Marcelo, Constancio D.
Francisco, Lydia J. Chuanico, Daniel T. Pascual, and Jose A. Lazaro, collectively known as the Marcelo
group, were its incorporators, original stockholders, and directors.4
Another group, known as the Asistio group, composed of Luis A. Asistio, Lazaro L. Madara, Alfredo D.
Roa III, Joaquin T. Venus, and Jose Ma. Carlos L. Zumel, claimed that the Marcelo group acquired shares
in PIRC as mere trustees for the Asistio group. The Marcelo group allegedly executed a waiver of pre-
emptive right, blank deeds of assignment, and blank deeds of transfer; endorsed in blank their
respective stock certificates over all of the outstanding capital stock registered in their names; and
completed the blank deeds in 2002 to effect transfers to the Asistio group.
On August 6, 2002, the Company Registration and Monitoring Department (CRMD) of the SEC issued a
certification5 stating that verification made on the available records of PIRC showed failure to register
its stock and transfer book (STB). It also appears that on April 21, 1998, the Supervision and Monitoring
Department of the SEC had issued a show cause letter6 to PIRC for its supposed failure to register its
STB.
On August 7, 2002, the Asistio group registered PIRC’s STB. Upon learning of this, PIRC’s assistant
corporate secretary, Celedonio Escaño, Jr., requested the SEC for a certifica-
_______________
3 Id., at pp. 412-415.
4 Id., at pp. 54-60.
5 Id., at p. 588.
6 Id., at p. 348.
543
VOL. 554, JUNE 17, 2008
543
tion of the registration in 1979 of PIRC’s STB. Escaño presented the 1979-registered STB bearing the SEC
stamp and the signature of the officer in charge of book registration.
Meanwhile, on October 17, 2002, the Asistio group filed in the Regional Trial Court (RTC) of Muntinlupa
City, a complaint7 docketed as Civil Case No. 02-238 against the Marcelo group. The Asistio group
prayed that the Marcelo group be enjoined from acting as directors of PIRC, from physically holding
office at PIRC’s office, and from taking custody of PIRC’s corporate records.
Then, on October 30, 2002, the CRMD of the SEC issued a letter8 recalling the certification it had issued
on August 6, 2002 and canceling the 2002-registered STB. However, one Kennedy B. Sarmiento
requested the SEC not to cancel the 2002-registered STB. The SEC thus scheduled a conference to
determine which of the two STBs is valid. The parties were ordered to file their respective position
papers. On February 12, 2003, the hearing officer ruled:
“WHEREFORE, premises considered and finding the 1979 stock and transfer book authentic and duly
executed, the Commission hereby recall the certification issued on 6 August 2002 and cancel the stock
and transfer book registered on October 2002. Accordingly, the stock and transfer book registered on 25
September 1979 shall remain valid.
SO ORDERED.”9
The Asistio group appealed to the SEC Board of Commissioners. They claimed that the issue of which of
the two STBs is valid is intra-corporate in nature; hence, the RTC, not the SEC, has jurisdiction.
The SEC, in its assailed order, denied the appeal. The SEC ratiocinated that the determination of which
of the two STBs
_______________
7 Records, folder 17, pp. 143-149.
8 Rollo, pp. 276-277.

9 Id., at p. 359.
544
544
is valid calls for regulatory, not judicial power and is therefore within its exclusive jurisdiction.
The Asistio group elevated the case to the Court of Appeals, which ruled in their favor. The Court of
Appeals held that the issue of which of the two STBs is valid is intra-corporate and thus subject to the
jurisdiction of the RTC. The appellate court reversed the SEC ruling, to wit:
“WHEREFORE, premises considered, the instant petition is hereby GRANTED. The Order of the
Commission en banc dated May 27, 2003, is hereby ANNULLED and SET ASIDE.
SO ORDERED.”10
The motion for reconsideration of the aforequoted decision was denied for lack of merit. Aggrieved, the
Marcelo group filed the instant petition for review on certiorari raising the sole issue
WHETHER OR NOT THE SEC HAS THE JURISDICTION TO RECALL AND CANCEL A STOCK AND TRANSFER
BOOK WHICH IT ISSUED IN 2002 BECAUSE OF ITS MISTAKEN ASSUMPTION THAT NO STOCK AND
TRANSFER BOOK HAD BEEN PREVIOUSLY ISSUED IN 1979.11
Petitioners, consisting of the Marcelo group, contend that the Court of Appeals erred in ruling that the
SEC has no jurisdiction over the case. Petitioners insist the issue in this case is not an intra-corporate
dispute, but one that calls for the exercise of the SEC’s regulatory power over corporations. Petitioners
maintain that the recall and cancellation of the 2002-registered STB does not conflict with the
proceedings in the civil case so as to violate the sub judice rule. Petitioners point out that a judgment
has, in fact, been promulgated in the said civil case.
_______________
10 Id., at p. 50.
11 Id., at p. 660.
545
VOL. 554, JUNE 17, 2008
545

Respondents, composed of the Asistio group, counter that in resolving the question of which of the two
STBs is valid, the issues of (1) falsification by corporate officers of corporate records and (2) the
acquisition of shares by the Asistio group, must first be settled. Respondents thus claim that the real
issue is intra-corporate and that whether the 2002-registered STB should be recalled is a mere
consequence of the real controversies that should be heard by a regular court.
To resolve the issue of jurisdiction, it would be good to look at the powers and functions of the SEC.
The Securities Regulation Code (Republic Act No. 8799) provides:
“Sec. 5. Powers and Functions of the Commission.—5.1. The Commission shall act with transparency
and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, . . . . Pursuant thereto the Commission shall have, among others, the following
powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnerships or associations who are the
grantees of primary franchises and/or a license or permit issued by the Government;
(b) Formulate policies and recommendations in issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities market and propose legislation
and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and
registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other
SROs;
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant
thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide
guidance on and supervise compliance with such rules, regulations and order;
546
546
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government,
civil or military as well as any private institution, corporation, firm, association or person in the
implementation of its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing public;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or
members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all documents,
papers, files and records, tax returns, and books of accounts of any entity or person under investigation
as may be necessary for the proper disposition of the cases before it, subject to the provisions of
existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied from,
or which are necessary or incidental to the carrying out of, the express powers granted the Commission
to achieve the objectives and purposes of these laws.” (Italics supplied.)
From the above, it can be said that the SEC’s regulatory authority over private corporations
encompasses a wide margin of areas, touching nearly all of a corporation’s concerns.12 This authority
more vividly springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state.13 Under its regulatory responsibili-
_______________
12 Philippine Stock Exchange, Inc. v. The Honorable Court of Appeals, G.R. No. 125469, October 27,
1997, 281 SCRA 232, 246.
13 Id.
547
VOL. 554, JUNE 17, 2008
547
ties, the SEC may pass upon applications for, or may suspend or revoke (after due notice and hearing),
certificates of registration of corporations, partnerships and associations (excluding cooperatives,
homeowners’ association, and labor unions); compel legal and regulatory compliances; conduct
inspections; and impose fines or other penalties for violations of the Revised Securities Act, as well as
implementing rules and directives of the SEC, such as may be warranted.14
Considering that the SEC, after due notice and hearing, has the regulatory power to revoke the
corporate franchise—from which a corporation owes its legal existence—the SEC must likewise have the
lesser power of merely recalling and canceling a STB that was erroneously registered.
Going to the particular facts of the instant case, we find that the SEC has the primary competence and
means to determine and verify whether the subject 1979 STB presented by the incumbent assistant
corporate secretary was indeed authentic, and duly registered by the SEC as early as September 1979.
As the administrative agency responsible for the registration and monitoring of STBs, it is the body
cognizant of the STB registration procedures, and in possession of the pertinent files, records and
specimen signatures of authorized officers relating to the registration of STBs. The evaluation of
whether a STB was authorized by the SEC primarily requires an examination of the STB itself and the SEC
files. This function necessarily belongs to the SEC as part of its regulatory jurisdiction. Contrary to the
allegations of respondents, the issues involved in this case can be resolved without going into the intra-
corporate controversies brought up by respondents.
As the regulatory body, it is the SEC’s duty to ensure that there is only one set of STB for each
corporation. The determination of whether or not the 1979-registered STB is valid and of whether to
cancel and revoke the August 6, 2002 certi-
_______________
14 Securities and Exchange Commission v. Court of Appeals, G.R. Nos. 106425 & 106431-32, July 21,
1995, 246 SCRA 738, 740.
548
548
fication and the registration of the 2002 STB on the ground that there already is an existing STB is
impliedly and necessarily within the regulatory jurisdiction of the SEC.
Under the circumstances of the instant case, we find no error in the exercise of jurisdiction by the SEC.
All that the SEC was tasked to do, and which it actually did, was to evaluate the 1979 STB presented to
it. In ruling that the 1979 STB was validly registered the SEC Hearing Officer explained and ruled thus:
“After careful examination of the 1979 stock and transfer book, it has been observed that subject book
was properly presented and stamped received by the then SEC employee in charge of registration. It is
worthy to note that the signature of Ms. Nelly C. Gabriel appears to be genuine and validly executed on
25 September 1979 after comparing with Ms. Gabriel’s signature on the available records on file with
the Commission, existing stock and transfer books and other public documents.
This fact was further certified and attested by Ms. Angeli G. Villanueva, daughter of Ms. Nelly C. Gabriel,
who is currently working with the Commission that the signature appearing in the 1979 stock and
transfer book is unquestionably the signature of Ms. Gabriel.
xxxx
WHEREFORE, premises considered and finding the 1979 stock and transfer book authentic and duly
executed, the Commission hereby recall the certification issued on 6 August 2002 and cancel the stock
and transfer book registered on October 2002. Accordingly, the stock and transfer book registered on 25
September 1979 shall remain valid.
SO ORDERED.”15
We find the above ruling proper and within the SEC’s jurisdiction to make.
Noteworthy, during the pendency of the instant petition, a decision16 in the civil case was rendered by
the RTC. On April
_______________
15 Rollo, pp. 358-359.
16 Records, folder 17, pp. 44-80.
549
VOL. 554, JUNE 17, 2008
549

23, 2005, the RTC of Muntinlupa City, Branch 276, dismissed the claim of the Asistio group and declared
the Marcelo group the duly constituted officers of PIRC, thus upholding the validity of the 1979-
registered STB.
WHEREFORE, the petition is GRANTED. The assailed Decision dated December 13, 2004 and Resolution
dated February 3, 2005 of the Court of Appeals in CA-G.R. SP No. 77672, are REVERSED and SET ASIDE;
the Order dated May 27, 2003, of the Securities and Exchange Commission (SEC) En Banc in CRMD-AA-
Case No. 04-03-22 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Tinga, Reyes,** Leonardo-De Castro*** and Brion, JJ., concur.
Petition granted, assailed decision and resolution reversed and set aside. Order dated May 27, 2003 of
SEC en banc in CRMD-AA-Case No. 04-03-22 affirmed.
Note.—The SEC retained its administrative, regulatory and oversight powers over all corporations,
partnerships and associations who are grantees of primary franchises and/or a license or permit issued
by the government. (Orendain vs. BF Homes, Inc., 506 SCRA 318 [2006])
——o0o——
_______________
** Additional member in place of Associate Justice Presbitero J. Velasco, Jr. who is on official leave.
*** Additional member in place of Associate Justice Conchita Carpio-Morales who is on official leave.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Provident International Resources
Corporation vs. Venus, 554 SCRA 540, G.R. No. 167041 June 17, 2008
G.R. No. 183905. April 16, 2009.*
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner, vs. THE HON. COURT OF APPEALS, (8TH
DIVISION), ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO,
CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES PUNO, respondents.
G.R. No. 184275. April 16, 2009.*
SECURITIES AND EXCHANGE COMMISSION, COMMISSIONER JESUS ENRIQUE G. MARTINEZ IN HIS

CAPAC-
_______________
27 TSN, 27 January 2004, pp. 13-14, 16.
* SECOND DIVISION.
680
680
Government Service Insurance System vs. Court of Appeals (Eighth Division)

ITY AS OFFICER-IN-CHARGE OF THE SECURITIES AND EXCHANGE COMMISSION and HUBERT G. GUEVARA
IN HIS CAPACITY AS DIRECTOR OF THE COMPLIANCE AND ENFORCEMENT DEPT. OF SECURITIES,
petitioners, vs. ANTHONY V. ROSETE, MANUEL M. LOPEZ, FELIPE B. ALFONSO, JESUS F. FRANCISCO,
CHRISTIAN S. MONSOD, ELPIDIO L. IBAÑEZ, and FRANCIS GILES PUNO, respondents.
Appeals; Parties; Under Section 1 of Rule 45, which governs appeals by certiorari, the right to file the
appeal is restricted to “a party,” meaning that only the real parties-in-interest who litigated the petition
for certiorari before the Court of Appeals are entitled to appeal the same under Rule 45—the Securities
and Exchange Commission (SEC) and its two officers may have been designated as respondents in the
petition for certiorari filed with the Court of Appeals, but under Section 5 of Rule 65 they are not
entitled to be classified as real parties-in-interest.—The Court, through the Resolution of the Third
Division dated 2 September 2008, had resolved to treat the petition in G.R. No. 184275 as a petition for
review on certiorari, but withheld giving due course to it. Under Section 1 of Rule 45, which governs
appeals by certiorari, the right to file the appeal is restricted to “a party,” meaning that only the real
parties-in-interest who litigated the petition for certiorari before the Court of Appeals are entitled to
appeal the same under Rule 45. The SEC and its two officers may have been designated as respondents
in the petition for certiorari filed with the Court of Appeals, but under Section 5 of Rule 65 they are not
entitled to be classified as real parties-in-interest. Under the provision, the judge, court, quasi-judicial
agency, tribunal, corporation, board, officer or person to whom grave abuse of discretion is imputed
(the SEC and its two officers in this case) are denominated only as public respondents. The provision
further states that “public respondents shall not appear in or file an answer or comment to the petition
or any pleading therein.”
Corporation Law; Securities and Exchange Commission; Proxies; Words and Phrases; Proxy solicitation
involves the securing and submission of proxies, while proxy validation concerns the validation of such
secured and submitted proxies.—It is plain that proxy solicitation is a procedure that antecedes proxy
validation. The former involves the securing and submission of proxies, while the latter
681
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concerns the validation of such secured and submitted proxies. GSIS raises the sensible point that there
was no election yet at the time it filed its petition with the SEC, hence no proper election contest or
controversy yet over which the regular courts may have jurisdiction. And the point ties its cause of
action to alleged irregularities in the proxy solicitation procedure, a process that precedes either the
validation of proxies or the annual meeting itself.
Same; Same; Same; Same; Jurisdiction; It is possible that an intra-corporate controversy may animate a
disgruntled shareholder to complain to the Securities and Exchange Commission (SEC) a corporation’s
violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC
of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu
proprio basis.—Under Section 20.1, the solicitation of proxies must be in accordance with rules and
regulations issued by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the
discretion “to make such investigations as it deems necessary to determine whether any person has
violated” any rule issued by it, such as AIRR-SRC Rule 4. The investigatory power of the SEC established
by Section 53.1 is central to its regulatory authority, most crucial to the public interest especially as it
may pertain to corporations with publicly traded shares. For that reason, we are not keen on pursuing
private respondents’ insistence that the GSIS complaint be viewed as rooted in an intra-corporate
controversy solely within the jurisdiction of the trial courts to decide. It is possible that an intra-
corporate controversy may animate a disgruntled shareholder to complain to the SEC a corporation’s
violations of SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC
of its investigatory and regulatory powers, especially so since such powers are exercisable on a motu
proprio basis.
Same; Same; Same; Same; Same; The Securities and Exchange Commission’s (SEC’s) power to pass upon
the validity of proxies in relation to election controversies has effectively been withdrawn, tied as it is to
its abrogated jurisdictional powers.—There is an interesting point, which neither party raises, and it
concerns Section 6(g) of Presidential Decree No. 902-A, which states: xxx xxx As promulgated then,
the provision would confer on the SEC the power to adjudicate controversies relating not only to proxy
solicitation, but
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also to proxy validation. Should the proposition hold true up to the present, the position of GSIS would
have merit, especially since Section 6 of Presidential Decree No. 902-A was not expressly repealed or
abrogated by the SRC. Yet a closer reading of the provision indicates that such power of the SEC then
was incidental or ancillary to the “exercise of such jurisdiction.” Note that Section 6 is immediately
preceded by Section 5, which originally conferred on the SEC “original and exclusive jurisdiction to hear
and decide cases” involving “controversies in the election or appointments of directors, trustees,
officers or managers of such corporations, partnerships or associations.” The cases referred to in Section
5 were transferred from the jurisdiction of the SEC to the regular courts with the passage of the SRC,
specifically Section 5.2. Thus, the SEC’s power to pass upon the validity of proxies in relation to election
controversies has effectively been withdrawn, tied as it is to its abrogated jurisdictional powers.
Same; Same; Same; Same; Same; Courts; Evidently, the jurisdiction of the regular courts over so-called
election contests or controversies under Section 5(c) of P.D. No. 902-A does not extend to every
potential subject that may be voted on by shareholders, but only to the election of directors or trustees,
in which stockholders are authorized to participate under Section 24 of the Corporation Code; The
power of the Securities and Exchange Commission (SEC) to investigate violations of its rules on proxy
solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases
enumerated under Section 5 of Presidential Decree No. 902-A, but when proxies are solicited in relation
to the election of corporate directors, the resulting controversy, even if it ostensibly raised the violation
of the SEC rules on proxy solicitation, should be properly seen as an election controversy within the
original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.—Under Section 5(c) of Presidential Decree No. 902-A, in
relation to the SRC, the jurisdiction of the regular trial courts with respect to election-related
controversies is specifically confined to “controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships, or associations.” Evidently, the jurisdiction
of the regular courts over so-called election contests or controversies under Section 5(c) does not
extend to every potential subject that may be voted on by shareholders, but only to the election of
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directors or trustees, in which stockholders are authorized to participate under Section 24 of the
Corporation Code. This qualification allows for a useful distinction that gives due effect to the statutory
right of the SEC to regulate proxy solicitation, and the statutory jurisdiction of regular courts over
election contests or controversies. The power of the SEC to investigate violations of its rules on proxy
solicitation is unquestioned when proxies are obtained to vote on matters unrelated to the cases
enumerated under Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in
relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within
the original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A.
Same; Same; Same; Same; Same; Same; The fact that the jurisdiction of the regular courts under Section
5(c) is confined to the voting on election of officers, and not on all matters which may be voted upon by
stockholders, elucidates that the power of the Securities and Exchange Commission (SEC) to regulate
proxies remains extant and could very well be exercised when stockholders vote on matters other than
the election of directors.—Unlike either Section 20.1 or Section 53.1, which merely alludes to the rule-
making or investigatory power of the SEC, Section 5 of Pres. Decree No. 902-A sets forth a definitive rule
on jurisdiction, expressly granting as it does “original and exclusive jurisdiction” first to the SEC, and now
to the regular courts. The fact that the jurisdiction of the regular courts under Section 5(c) is confined to
the voting on election of officers, and not on all matters which may be voted upon by stockholders,
elucidates that the power of the SEC to regulate proxies remains extant and could very well be exercised
when stockholders vote on matters other than the election of directors.
Same; Same; Same; Securities Regulation Code (SRC); Cease and Desist Orders (CDOs); There are three
distinct bases for the issuance by the Securities and Exchange Commission (SEC) of the Cease and Desist
Order (CDO) under the Securities Regulation Code—the first, allocated by Section 5(I), is predicated on a
necessity “to prevent fraud or injury to the investing public,” the second basis,
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found in Section 53.3, involves a determination by the Securities and Exchange Commission (SEC) that
“any person has engaged or is about to engage in any act or practice constituting a violation of any
provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered
securities association, clearing agency or other self-regulatory organization,” and, the third basis for the
issuance of a Cease and Desist Order (CDO) is Section 64, a CDO founded on a determination of an act or
practice, which unless restrained, “will operate as a fraud on investors or is otherwise likely to cause
grave or irreparable injury or prejudice to the investing public.”—There are three distinct bases for the
issuance by the SEC of the CDO. The first, allocated by Section 5(i), is predicated on a necessity “to
prevent fraud or injury to the investing public.” No other requisite or detail is tied to this CDO authorized
under Section 5(i). The second basis, found in Section 53.3, involves a determination by the SEC that
“any person has engaged or is about to engage in any act or practice constituting a violation of any
provision of this Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered
securities association, clearing agency or other self-regulatory organization.” The provision additionally
requires a finding that “there is a reasonable likelihood of continuing [or engaging in] further or future
violations by such person.” The maximum duration of the CDO issued under Section 53.3 is ten (10)
days. The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of
an act or practice, which unless restrained, “will operate as a fraud on investors or is otherwise likely to
cause grave or irreparable injury or prejudice to the investing public.” Section 64.1 plainly provides three
segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent to the CDO may
file a formal request for the lifting thereof, which the SEC must hear within fifteen (15) days from filing
and decide within ten (10) days from the hearing.
Same; Same; Same; Same; Same; Notwithstanding the similarities between Section 5(i) and Section 64.1,
it remains clear that the Cease and Desist Order (CDO) issued under Section 53.3 is a distinct creation
from that under Section 64.—It appears that the CDO under Section 5(i) is similar to the CDO under
Section 64.1.
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Both require a common finding of a need to prevent fraud or injury to the investing public. At the same
time, no mention is made whether the CDO defined under Section 5(i) may be issued ex-parte, while the
CDO under Section 64.1 requires “grave and irreparable” injury, language absent in Section 5(i).
Notwithstanding the similarities between Section 5(i) and Section 64.1, it remains clear that the CDO
issued under Section 53.3 is a distinct creation from that under Section 64.
Same; Same; Same; Same; Same; A singular Cease and Desist Order (CDO) could not be founded on
Section 5.1, Section 53.3 and Section 64 collectively—at the very least, the CDO under Section 53.3 and
under Section 64 have their respective requisites and terms.—Noticeably, the CDO is not precisely clear
whether it was issued on the basis of Section 5.1, Section 53.3 or Section 64 of the SRC. The CDO
actually refers and cites all three provisions, yet it is apparent that a singular CDO could not be founded
on Section 5.1, Section 53.3 and Section 64 collectively. At the very least, the CDO under Section 53.3
and under Section 64 have their respective requisites and terms.
Same; Same; Same; Same; Same; Administrative Law; Injunction; Due Process; Considering that
injunctive relief generally avails upon the showing of a clear legal right to such relief, the inability or
unwillingness to lay bare the precise statutory basis for the prayer for injunction is an obvious
impediment to a successful application, though, nonetheless, the error of the Securities and Exchange
Commission (SEC) in granting the Cease and Desist Order (CDO) without stating which kind of CDO it was
issuing is more unpardonable, as it is an act that contravenes due process of law; In administrative
proceedings, it is required that the body or tribunal “in all controversial questions, render its decision in
such a manner that the parties to the proceeding can know the various issues involved, and the reason
for the decision rendered.”—GSIS was similarly cagey in its petition before the SEC, it demurring to state
whether it was seeking the CDO under Section 5.1, Section 53.3, or Section 64. Considering that
injunctive relief generally avails upon the showing of a clear legal right to such relief, the inability or
unwillingness to lay bare the precise statutory basis for the prayer for injunction is an obvious
impediment to a successful application. Nonetheless, the error of the SEC in granting the CDO without
stating which kind of
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CDO it was issuing is more unpardonable, as it is an act that contravenes due process of law. We have
particularly required, in administrative proceedings, that the body or tribunal “in all controversial
questions, render its decision in such a manner that the parties to the proceeding can know the various
issues involved, and the reason for the decision rendered.” This requirement is vital, as its fulfillment
would afford the adverse party the opportunity to interpose a reasoned and intelligent appeal that is
responsive to the grounds cited against it. The CDO extended by the SEC fails to provide the needed
reasonable clarity of the rationale behind its issuance.
Same; Same; Same; Same; Same; Same; Same; Same; It is legally impermissible for the Securities and
Exchange Commission (SEC) to have utilized both Section 53.3 and Section 64 as basis for the Cease and
Desist Order (CDO) at the same time—any respondent to a CDO which cites both Section 53.3 and
Section 64 would not have an intelligent or adequate basis to respond to the same; The veritable
mélange that the assailed Cease and Desist Order (CDO) is, with its jumbled mixture of premises and
conclusions, the antithesis of due process.—The citation in the CDO of Section 5.1, Section 53.3 and
Section 64 together may leave the impression that it is grounded on all three provisions, and that may
very well have been the intention of the SEC. Assuming that is so, it is legally impermissible for the SEC
to have utilized both Section 53.3 and Section 64 as basis for the CDO at the same time. The CDO under
Section 53.3 is premised on distinctly different requisites than the CDO under Section 64. Even more
crucially, the lifetime of the CDO under Section 53.3 is confined to a definite span of ten (10) days, which
is not the case with the CDO under Section 64. This CDO under Section 64 may be the object of a formal
request for lifting within five (5) days from its issuance, a remedy not expressly afforded to the CDO
under Section 53.3. Any respondent to a CDO which cites both Section 53.3 and Section 64 would not
have an intelligent or adequate basis to respond to the same. Such respondent would not know whether
the CDO would have a determinate lifespan of ten (10) days, as in Section 53.3, or would necessitate a
formal request for lifting within five (5) days, as required under Section 64.1. This lack of clarity is to the
obvious prejudice of the respondent, and is in clear defiance of the constitutional right to due process of
law. Indeed, the veritable mélange that the assailed CDO is, with its jumbled mixture of premises and
conclusions, the antithesis of due process.
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Same; Same; Same; Same; Same; Same; Same; Same; In view of the statutory differences among the
three Cease and Desist Orders (CDOs) under the Securities Regulation Code (SRC), it is essential that the
Securities and Exchange Commission (SEC), in issuing such injunctive relief, identify the exact provision
of the SRC on which the CDO is founded. Only by doing so could the adversely affected party be able to
properly evaluate whatever his responses under the law.—Had the CDO issued by the SEC expressed the
length of its term, perhaps greater clarity would have been offered on what Section of the SRC it is
based. However, the CDO is precisely silent as to its lifetime, thereby precluding much needed
clarification. In view of the statutory differences among the three CDOs under the SRC, it is essential
that the SEC, in issuing such injunctive relief, identify the exact provision of the SRC on which the CDO is
founded. Only by doing so could the adversely affected party be able to properly evaluate whatever his
responses under the law.
Same; Same; Same; Same; Same; Same; Same; Same; The fact that the Cease and Desist Order (CDO)
was signed, much less apparently deliberated upon, by only by one commissioner likewise renders the
order fatally infirm—the Securities and Exchange Commission (SEC) is a collegial body composed of a
Chairperson and four (4) Commissioners, in which the presence of at least three (3) Commissioners is
required to constitute a quorum to conduct business.—To make matters worse for the SEC, the fact that
the CDO was signed, much less apparently deliberated upon, by only by one commissioner likewise
renders the order fatally infirm. The SEC is a collegial body composed of a Chairperson and four (4)
Commissioners. In order to constitute a quorum to conduct business, the presence of at least three (3)
Commissioners is required. In the leading case of GMCR v. Bell, 271 SCRA 790 (1997) we definitively
explained the nature of a collegial body, and how the act of one member of such body, even if the head,
could not be considered as that of the entire body itself.
Same; Same; Same; Same; Same; Same; Same; Same; If it has not been clear to the Securities and
Exchange Commission (SEC) before, it should be clear now that its power to issue a Cease and Desist
Order (CDO) can not, under the Securities Regulation Code (SRC), be delegated to an individual
commissioner.—It is clear under Section 4.6 that the ability to delegate functions to a single
commissioner does not extend to the exercise of the review or appellate
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authority of the SEC. The issuance of the CDO is an act of the SEC itself done in the exercise of its original
jurisdiction to review actual cases or controversies. If it has not been clear to the SEC before, it should
be clear now that its power to issue a CDO can not, under the SRC, be delegated to an individual
commissioner.
Office of the Government Corporate Counsel (OGCC); Attorneys; Government Service Insurance System
(GSIS); The charter of Government Service Insurance System (GSIS) is unique among government owned
or controlled corporations with original charter in that it allocates a role for its internal legal counsel
that is in conjunction with or complementary to the Office of the Government Corporate Counsel
(OGCC), which is the statutory legal counsel for Government-Owned or -Controlled Corporations
(GOCCs).—We turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.
Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS is
unique among government owned or controlled corporations with original charter in that it allocates a
role for its internal legal counsel that is in conjunction with or complementary to the Office of the
Government Corporate Counsel (OGCC), which is the statutory legal counsel for GOCCs.
Same; Same; Same; Irrepealable Laws; Congress is not bound to retain the Office of the Government
Corporate Counsel (OGCC) as the primary or exclusive legal counsel of Government Service Insurance
System (GSIS) even if it performs such a role for other Government-Owned or -Controlled Corporations
(GOCCs)—to bind Congress to perform in that manner would be akin to elevating the Office of the
Government Corporate Counsel’s (OGCC’s) statutory role to irrepealable status, and it is basic that
Congress is barred from passing irrepealable laws.—The designation of the OGCC as the legal counsel for
GOCCs is set forth by statute, initially by Rep. Act No. 3838, then reiterated by the Administrative Code
of 1987. Given that the designation is statutory in nature, there is no impediment for Congress to
impose a different role for the OGCC with respect to particular GOCCs it may charter. Congress appears
to have done so with respect to GSIS, designating the OGCC as a “legal adviser and consultant,” rather
than as counsel to GSIS. Further, the law clearly vests unto GSIS the discretion, rather than the duty, to
assign cases to the OGCC for legal action, while designating the present legal services group of GSIS as
“in-house legal counsel.” This situates
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GSIS differently from the Land Bank of the Philippines, whose own in-house lawyers have persistently
argued before this Court to no avail on their alleged right to file petitions before us instead of the OGCC.
Nothing in the Land Bank charter vested it with the discretion to choose when to assign cases to the
OGCC, notwithstanding the establishment of its own Legal Department. Congress is not bound to retain
the OGCC as the primary or exclusive legal counsel of GSIS even if it performs such a role for other
GOCCs. To bind Congress to perform in that manner would be akin to elevating the OGCC’s statutory
role to irrepealable status, and it is basic that Congress is barred from passing irrepealable laws.
Courts; Judges; While due punishment has been meted on the errant magistrates, the corporate world
may very well be reminded that the members of the judiciary are not to be viewed or treated as mere
pawns or puppets in the internecine fights businessmen and their associates wage against other
businessmen in the quest for corporate dominance.—We close by acknowledging that the surrounding
circumstances behind these petitions are unfortunate, given the events as narrated in A.M. No. 08-8-11-
CA. While due punishment has been meted on the errant magistrates, the corporate world may very
well be reminded that the members of the judiciary are not to be viewed or treated as mere pawns or
puppets in the internecine fights businessmen and their associates wage against other businessmen in
the quest for corporate dominance. In the end, the petitions did afford this Court to clarify
consequential points of law, points rooted in principles which will endure long after the names of the
participants in these cases have been forgotten.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari and Prohibition.
Rodolfo R. Waga, Jr. for respondent Ibañez and Puno.
Villaraza, Cruz, Marcelo & Angangco and Quiason, Makalintal, Barot, Torres, Ibarra & Sison co-counsels
for respondents Anthony V. Rosete, et al.
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Tinga, J.:
These are the undisputed facts.
The annual stockholders’ meeting (annual meeting) of the Manila Electric Company (Meralco) was
scheduled on 27 May 2008.1 In connection with the annual meeting, proxies2 were required to be
submitted on or before 17 May 2008, and the proxy validation was slated for five days later, or 22 May.3
In view of the resignation of Camilo Quiason,4 the position of corporate secretary of Meralco became
vacant.5 On 15 May 2008, the board of directors of Meralco designated Jose Vitug6 to act as corporate
secretary for the annual meeting.7 However, when the proxy validation began on 22 May, the
proceedings were presided over by respondent Anthony Rosete (Rosete), assistant corporate secretary
and in-house chief legal counsel of Meralco.8 Private respondents nonetheless argue that Rosete was
the acting corporate secretary of Me-ralco.9 Petitioner Government Service Insurance System (GSIS), a
major shareholder in Meralco, was distressed over the proxy validation proceedings, and the resulting
certification of proxies in favor of the Meralco management.10
On 23 May 2008, GSIS filed a complaint with the Regional Trial Court (RTC) of Pasay City, docketed as R-
PSY-08-
_______________
1 Rollo (G.R. No. 183905) (hereinafter, “Rollo”), pp. 24, 884.
2 See Corporation Code, Sec. 58.
3 Rollo, pp. 24, 889.
4 Retired Associate Justice of the Supreme Court.

5 Rollo, pp. 24, 886.
6 Also a retired Associate Justice of this Court.
7 Rollo, pp. 24, 886.
8 Id., at pp. 24, 893. Petitioner alleges that Justice Vitug had tendered his resignation on the previous
day, 21 May 2008, see id., at p. 24, but that this was not formally accepted by the Meralco board of
directors until 26 May 2008, see id., at p. 25.
9 Id., at p. 893.
10 Id., at pp. 25-26, 893-896.
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05777-C4 seeking the declaration of certain proxies as invalid.11 Three days later, on 26 May, GSIS filed
a Notice with the RTC manifesting the dismissal of the complaint.12 On the same day, GSIS filed an
Urgent Petition13 with the Securities and Exchange Commission (SEC) seeking to restrain Rosete from
“recognizing, counting and tabulating, directly or indirectly, notionally or actually or in whatever way,
form, manner or means, or otherwise honoring the shares covered by” the proxies in favor of
respondents Manuel Lopez,14 Felipe Alfonso,15 Jesus Francisco,16 Oscar Lopez, Christian Monsod,17
Elpidio Ibañez,18 Francisco Giles-Puno19 “or any officer representing MERALCO Management,” and to
annul and declare invalid said proxies.20 GSIS also prayed for the issuance of a Cease and Desist Order
(CDO) to restrain the use of said proxies during the annual meeting scheduled for the following day.21 A
CDO22 to that effect signed by SEC Commissioner
_______________
11 Id., at pp. 26, 896.
12 Id., at pp. 159-160, 899.
13 The records do not show that the petition was given a docket number.
14 Chairman of the Board of Directors and Chief Executive Officer of Meralco. See Rollo, p. 20.
15 Identified by GSIS in its petition as President and Chief Operating Officer of Meralco, and also a
member of the Meralco board of directors. See id.
16 Also identified by GSIS in its petition as President and Chief Operating Officer of Meralco, and also a
member of the Meralco board of directors. See id.
17 A member of the board of directors of Meralco. See id., at p. 21.
18 President and Chief Operating Office of First Philippine Holdings Corporation. See id.
19 Chief Finance Officer, Treasurer, and Executive Vice President, First Philippine Holdings Corporation.
See id.
20 Id., at pp. 182-183. The available records do not indicate that the petition filed with the SEC was ever
supplied its own case number.
21 Id., at p. 193.
22 Id., at pp. 185-191.
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Jesus Martinez was issued on 26 May 2008, the same day the complaint was filed. During the annual
meeting held on the following day, Rosete announced that the meeting would push through, expressing
the opinion that the CDO is null and void.23
On 28 May 2008, the SEC issued a Show Cause Order (SCO)24 against private respondents, ordering
them to appear before the Commission on 30 May 2008 and explain why they should not be cited in
contempt. On 29 May 2008, respondents filed a petition for certiorari with prohibition25 with the Court
of Appeals, praying that the CDO and the SCO be annulled. The petition was docketed as CA-G.R. SP No.
103692.
Many developments involving the Court of Appeals’ handling of CA-G.R. SP No. 103692 and the conduct
of several of its individual justices are recounted in our Resolution dated 9 September 2008 in A.M. No.
08-8-11-CA (Re: Letter Of Presiding Justice Conrado M. Vasquez, Jr. On CA-G.R. SP No. 103692).26 On 23
July 2008, the Court of Appeals Eighth Division promulgated a decision in the case with the following
dispositive portion:
“WHEREFORE, premises considered, the May 26, 2008 complaint filed by GSIS in the SEC is hereby
DISMISSED due to SEC’s lack of jurisdiction, due to forum shopping by respondent GSIS, and due to
splitting of causes of action by respondent GSIS. Consequently, the SEC’s undated cease and desist order
and the SEC’s May 28, 2008 show cause order are hereby DECLARED VOID AB INITIO and without legal
effect and their implementation are hereby permanently restrained.
_______________
23 Id., at pp. 28, 903-905.
24 Id., at pp. 192-193.
25 Id., at pp. 194-251.
26 See http://sc.judiciary.gov.ph/jurisprudence/2008/october2008/08-8-11-CA.htm for Resolution as

published in the Supreme Court website.
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The May 26, 2008 complaint filed by GSIS in the SEC is hereby barred from being considered, out of
equitable considerations, as an election contest in the RTC, because the prescriptive period of 15 days
from the May 27, 2008 Meralco election to file an election contest in the RTC had already run its course,
pursuant to Sec. 3, Rule 6 of the interim Rules of Procedure Governing Intra-Corporate Controversies
under R.A. No. 8799, due to deliberate act of GSIS in filing a complaint in the SEC instead of the RTC.
Let seventeen (17) copies of this decision be officially TRANSMITTED to the Office of the Chief Justice
and three (3) copies to the Office of the Court Administrator:
(1) for sanction by the Supreme Court against the “GSIS LAW OFFICE” for unauthorized practice of law,
(2) for sanction and discipline by the Supreme Court of GSIS lawyers led by Atty. Estrella Elamparo-
Tayag, Atty. Marcial C. Pimentel, Atty. Enrique L. Tandan III, and other GSIS lawyers for violation of Sec.
27 of Rule 138 of the Revised Rules of Court, pursuant to Santayana v. Alampay, A.C. No. 5878, March
21, 2005 454 SCRA 1, and pursuant to Land Bank of the Philippines v. Raymunda Martinez, G.R. No.
169008, August 14, 2007, 530 SCRA 158:
(a) for violating express provisions of law and defying public policy in deliberately displacing the Office
of the Government Corporate Counsel (OGCC) from its duty as the exclusive lawyer of GSIS, a
government owned and controlled corporation (GOCC), by admittedly filing and defending cases as well
as appearing as counsel for GSIS, without authority to do so, the authority belonging exclusively to the
OGCC;
(b) for violating the lawyer’s oath for failing in their duty to act as faithful officers of the court by
engaging in forum shopping;
(c) for violating express provisions of law most especially those on jurisdiction which are mandatory;
and
(d) for violating Sec. 3, Rule 2 of the 1997 Rules of Civil Procedure by deliberately splitting causes of
action in order to file multiple complaints: (i) in the RTC of
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694
Pasay City and (ii) in the SEC, in order to ensure a favorable order.”27
The promulgation of the said decision provoked a searing controversy, as detailed in our Resolution in
A.M. No. 08-8-11-CA. Nonetheless, the appellate court’s decision spawned three different actions
docketed with their own case numbers before this Court. One of them, G.R. No. 183933, was initiated by
a Motion for Extension of Time to File Petition for Review filed by the Office of the Solicitor General
(OSG) in behalf of the SEC, Commissioner Martinez in his capacity as officer-in-charge of the SEC, and
Hubert Guevarra in his capacity as Director of the Compliance and Enforcement Department of the
SEC.28 However, the OSG did not follow through with the filing of the petition for review adverted to;
thus, on 19 January 2009, the Court resolved to declare G.R. No. 183933 closed and terminated.29
The two remaining cases before us are docketed as G.R. No. 183905 and 184275. G.R. No. 183905
pertains to a petition for certiorari and prohibition filed by GSIS, against the Court of Appeals, and
respondents Rosete, Lopez, Alfonso, Francisco, Monsod, Ibañez and Puno, all of whom serve in different
corporate capacities with Meralco or First Philippines Holdings Corporation, a major stockholder of
Meralco and an affiliate of the Lopez Group of Companies. This petition seeks of the Court to declare the
23 July 2008 decision of the Court of Appeals null and void, affirm the SEC’s jurisdiction over the petition
filed before it by GSIS, and pronounce that the CDO and the SCO orders are valid. This petition was filed
in behalf of GSIS by the “GSIS Law Office”; it was signed by the Chief Legal Counsel and Assistant Legal
Counsel of GSIS, and
_______________
27 Rollo, pp. 141-142.
28 See id., at p. 2200.

29 Id., at p. 2201.
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695
three self-identified “Attorney[s],” presumably holding lawyer positions in GSIS.30
The OSG also filed the other petition, docketed as G.R. No. 184275. It identifies as its petitioners the
SEC, Commissioner Martinez in his capacity as OIC of the SEC, and Hubert Guevarra in his capacity as
Director of the Compliance and Enforcement Department of the SEC—the same petitioners in the
aborted petition for review initially docketed as G.R. No. 183933. Unlike what was adverted to in the
motion for extension filed by the same petitioners in G.R. No. 183933, the petition in G.R. No. 184275 is
one for certiorari under Rule 65 as indicated on page 3 thereof,31 and not a petition for review.
Interestingly, save for the first page which leaves the docket number blank, all 86 pages of this petition
for certiorari carry a header wrongly identifying the pleading as the non-existent petition for review
under G.R. No. 183933. This petition seeks the “reversal” of the assailed decision of the Court of
Appeals, the recognition of the jurisdiction of the SEC over the petition of GSIS, and the affirmation of
the CDO and SCO.
I.
Private respondents seek the expunction of the petition filed by the SEC in G.R. No. 184275. We agree
that the petitioners therein, namely: the SEC, Commissioner Marquez and Guevarra, are not real parties-
in-interest to the dispute and thus bereft of capacity to file the petition. By way of simple illustration, to
argue otherwise is to say that the trial court judge, the National Labor Relations Commission, or any
quasi-judicial agency has the right to seek the review of an appellate court decision reversing any of
their rulings. That prospect, as any serious student of remedial law knows, is zero.
_______________
30 Id., at p. 80.
31 “This is a petition for certiorari under Rule 65 of the Revised Rules of Court x x x.” Rollo (G.R. No.
184275), p. 4.
696
696
The Court, through the Resolution of the Third Division dated 2 September 2008, had resolved to treat
the petition in G.R. No. 184275 as a petition for review on certiorari, but withheld giving due course to
it.32 Under Section 1 of Rule 45, which governs appeals by certiorari, the right to file the appeal is
restricted to “a party,” meaning that only the real parties-in-interest who litigated the petition for
certiorari before the Court of Appeals are entitled to appeal the same under Rule 45. The SEC and its
two officers may have been designated as respondents in the petition for certiorari filed with the Court
of Appeals, but under Section 5 of Rule 65 they are not entitled to be classified as real parties-in-
interest. Under the provision, the judge, court, quasi-judicial agency, tribunal, corporation, board, officer
or person to whom grave abuse of discretion is imputed (the SEC and its two officers in this case) are
denominated only as public respondents. The provision further states that “public respondents shall not
appear in or file an answer or comment to the petition or any pleading therein.”33 Justice Regalado
explains:
“[R]ule 65 involves an original special civil action specifically directed against the person, court, agency
or party a quo which had committed not only a mistake of judgment but an error of jurisdiction, hence
should be made public respondents in that action brought to nullify their invalid acts. It shall, however
be the duty of the party litigant, whether in an appeal under Rule 45 or in a special civil action in Rule
65, to defend in his behalf and the party whose adjudication is assailed, as he is the one interested in
sustaining the correctness of the disposition or the validity of the proceedings.
xxx The party interested in sustaining the proceedings in the lower court must be joined as a co-
respondent and he has the duty to defend in his own behalf and in behalf of the court which rendered
the questioned order. While there is nothing in the Rules that prohibit the presiding judge of the court
involved from filing his own answer and defending his questioned order, the Supreme Court
_______________
32 Id., at p. 377.
33 See Rule 65, Sec. 5.
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697
has reminded judges of the lower courts to refrain from doing so unless ordered by the Supreme
Court.[34] The judicial norm or mode of conduct to be observed in trial and appellate courts is now
prescribed in the second paragraph of this section.
xxx
A person not a party to the proceedings in the trial court or in the Court of Appeals cannot maintain an
action for certiorari in the Supreme Court to have the judgment reviewed.”35
Rule 65 does recognize that the SEC and its officers should have been designated as public respondents
in the petition for certiorari filed with the Court of Appeals. Yet their involvement in the instant petition
is not as original party-litigants, but as the quasi-judicial agency and officers exercising the adjudicative
functions over the dispute between the two contending factions within Meralco. From the onset,
neither the SEC nor Martinez or Guevarra has been considered as a real party-in-interest. Section 2, Rule
3 of the 1997 Rules of Civil Procedure provides that every action must be prosecuted or defended in the
name of the real party in interest, that is “the party who stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit.” It would be facetious to assume that
the SEC had any real interest or stake in the intra-corporate dispute within Meralco.
We find our ruling in Hon. Santiago v. Court of Appeals36 quite apposite to the question at hand.
Petitioner therein, a trial court judge, had presided over an expropriation case. The litigants had arrived
at an amicable settlement, but the judge refused to approve the same, even declaring it invalid.
_______________
34 Citing Turqueza v. Hernando, et al., G.R. No. 51626, 30 April 1980, 97 SCRA 483.
35 F. Regalado, I Remedial Law Compendium (1999 ed.) at pp. 723-724.
36 G.R. No. 46845, 27 April 1990, 184 SCRA 690.
698
698
The matter was elevated to the Court of Appeals, which promptly reversed the trial court and approved
the amicable settlement. The judge took the extraordinary step of filing in his own behalf a petition for
review on certiorari with this Court, assailing the decision of the Court of Appeals which had reversed
him. In disallowing the judge’s petition, the Court explained:
“While the issue in the Court of Appeals and that raised by petitioner now is whether the latter abused
his discretion in nullifying the deeds of sale and in proceeding with the expropriation proceeding, that
question is eclipsed by the concern of whether Judge Pedro T. Santiago may file this petition at all.
And the answer must be in the negative, Section 1 of Rule 45 allows a party to appeal by certiorari from
a judgment of the Court of Appeals by filing with this Court a petition for review on certiorari. But
petitioner judge was not a party either in the expropriation proceeding or in the certiorari proceeding in
the Court of Appeals. His being named as respondent in the Court of Appeals was merely to comply with
the rule that in original petitions for certiorari, the court or the judge, in his capacity as such, should be
named as party respondent because the question in such a proceeding is the jurisdiction of the court
itself (See Mayol v. Blanco, 61 Phil. 547 [19351, cited in Comments on the Rules of Court, Moran, Vol. II,
1979 ed., p. 471). “In special proceedings, the judge whose order is under attack is merely a nominal
party; wherefore, a judge in his official capacity, should not be made to appear as a party seeking
reversal of a decision that is unfavorable to the action taken by him. A decent regard for the judicial
hierarchy bars a judge from suing against the adverse opinion of a higher court,. . . .” (Alcasid v. Samson,
102 Phil. 785, 740 [1957])
ACCORDINGLY, this petition is DENIED for lack of legal capacity to sue by the petitioner.”37
_______________
37 Id., at pp. 692-693.
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Justice Isagani Cruz added, in a Concurring Opinion in Santiago: “The judge is not an active combatant in
such proceeding and must leave it to the parties themselves to argue their respective positions and for
the appellate court to rule on the matter without his participation.”38
Note that in Santiago, the Court recognized the good faith of the judge, who perceived the amicable
settlement “as a manifestly iniquitous and illegal contract.”39 The SEC could have similarly felt in good
faith that the assailed Court of Appeals decision had unduly impaired its prerogatives or caused some
degree of hurt to it. Yet assuming that there are rights or prerogatives peculiar to the SEC itself that the
appellate court had countermanded, these can be vindicated in the petition for certiorari filed by GSIS,
whose legal capacity to challenge the Court of Appeals decision is without question. There simply is no
plausible reason for this Court to deviate from a time-honored rule that preserves the purity of our
judicial and quasi-judicial offices to accommodate the SEC’s distrust and resentment of the appellate
court’s decision. The expunction of the petition in G.R. No. 184275 is accordingly in order.
At this point, only one petition remains—the petition for certiorari filed by GSIS in G.R. No. 183905.
Casting off the uncritical and unimportant aspects, the two main issues for adjudication are as follows:
(1) whether the SEC has jurisdiction over the petition filed by GSIS against private respondents; and (2)
whether the CDO and SCO issued by the SEC are valid.
II.
It is our resolute inclination that this case, which raises interesting questions of law, be decided solely on
the merits, without regard to the personalities involved or the well-
_______________
38 Id., at p. 693, J. Cruz, concurring.
39 Id., at p. 692.
700
700
reported drama preceding the petition. To that end, the Court has taken note of reports in the media
that GSIS and the Lopez group have taken positive steps to divest or significantly reduce their respective
interests in Meralco.40 These are developments that certainly ease the tension surrounding this case,
not to mention reason enough for the two groups to make an internal reassessment of their respective
positions and interests in relation to this case. Still, the key legal questions raised in the petition do not
depend at all on the identity of any of the parties, and would obtain the same denouement even if this
case was lodged by unknowns as petitioners against similarly obscure respondents.
With the objective to resolve the key questions of law raised in the petition, some of the issues raised
diminish as peripheral. For example, petitioners raise arguments tied to the behavior of individual
justices of the Court of Appeals, particularly former Justice Vicente Roxas, in relation to this case as it
was pending before the appellate court. The Court takes cognizance of our Resolution in A.M. No. 08-8-
11-CA dated 9 September 2008, which duly recited the various anomalous or unbecoming acts in
relation to this case performed by two of the justices who decided the case in behalf of the Court of
Appeals—former Justice Roxas (the ponente) and Justice Bienvenido L. Reyes (the Chairman of the 8th
Division)—as well as three other members of the Court of Appeals. At the same time, the consensus of
the Court as it deliberated on A.M. No. 08-8-11-CA was to reserve comment or conclusion on the
assailed decision of the Court of Appeals, in recognition of the reality that however stigmatized the
actions and motivations of Justice Roxas are, the decision is still the
_______________
40 See e.g., Philippine Star’s and Daily Inquirer’s issues of 28 October 2008, reporting that GSIS had sold
its remaining 27% stake in Meralco to San Miguel Corp. for P30 billion, and issues of 14 March 2009
reporting that the PLDT Group had acquired a 20% stake of the Lopez Group in Meralco for P20.07
billion increasing the former’s stake to 30.17% and reducing the latter’s stake to 13.4%.
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product of the Court of Appeals as a collegial judicial body, and not of one or some rogue justices. The
penalties levied by the Court on these appellate court justices, in our estimation, redress the
unwholesome acts which they had committed. At the same time, given the jurisprudential importance
of the questions of law raised in the petition, any result reached without squarely addressing such
questions would be unsatisfactory, perhaps derelict even.
III.
We now examine whether the SEC has jurisdiction over the petition filed by GSIS. To recall, SEC has
sought to enjoin the use and annul the validation, of the proxies issued in favor of several of the private
respondents, particularly in connection with the annual meeting.
A.
Jurisdiction is conferred by no other source but law. Both sides have relied upon provisions of Rep. Act
No. 8799, otherwise known as the Securities Regulation Code (SRC), its implementing rules (Amended
Implementing Rules or AIRR-SRC), and other related rules to support their competing contentions that
either the SEC or the trial courts has exclusive original jurisdiction over the dispute.
GSIS primarily anchors its argument on two correlated provisions of the SRC. These are Section 53.1 and
Section 20.1, which we cite:
“SEC. 53. Investigations, Injunctions and Prosecution of Offenses.—53.1. The Commission may, in its
discretion, make such investigations as it deems necessary to determine whether any person has
violated or is about to violate any provision of this Code, any rule, regulation or order thereunder, or any
rule of an Exchange, registered securities association, clearing agency, other self-regulatory
organization, and may require or permit any person to file with it a statement in writing,
702
702
under oath or otherwise, as the Commission shall determine, as to all facts and circumstances
concerning the matter to be investigated. The Commission may publish information concerning any such
violations, and to investigate any fact, condition, practice or matter which it may deem necessary or
proper to aid in the enforcement of the provisions of this Code, in the prescribing of rules and
regulations thereunder, or in securing information to serve as a basis for recommending further
legislation concerning the matters to which this Code relates: xxx (emphasis supplied)
SEC. 20. Proxy Solicitations.—20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;”
The argument, stripped of extravagance, is that since proxy solicitations following Section 20.1 have to
be made in accordance with rules and regulations issued by the SEC, it is the SEC under Section 53.1 that
has the jurisdiction to investigate alleged violations of the rules on proxy solicitations. The GSIS petition
invoked AIRR-SRC Rule 20, otherwise known as “The Proxy Rule,” which enumerates the requirements
as to form of proxy and delivery of information to security holders. According to GSIS, the information
statement Meralco had filed with the SEC in connection with the annual meeting did not contain any
proxy form as required under AIRR-SRC Rule 20.
On the other hand, private respondents argue before us that under Section 5.2 of the SRC, the SEC’s
jurisdiction over all cases enumerated in Section 5 of Presidential Decree No. 902-A was transferred to
the courts of general jurisdiction or the appropriate regional trial court. The two particular classes of
cases in the enumeration under Section 5 of Presidential Decree No. 902-A which private respondents
especially refer to are as follows:
“xxx
(2) Controversies arising out of intra-corporate, partnership, or association relations, between and
among stockholders, members,
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VOL. 585, APRIL 16, 2009
703
or associates; or association of which they are stockholders, members, or associates, respectively;

(3) Controversies in the election or appointment of directors, trustees, officers or managers of
corporations, partnerships, or associations;
xxx”
In addition, private respondents cite the Interim Rules on Intra-Corporate Controversies (Interim Rules)
promulgated by this Court in 2001, most pertinently, Section 2 of Rule 6 (on Election Contests), which
defines “election contests” as follows:
“SEC. 2. Definition.—An election contest refers to any controversy or dispute involving title or claim to
any elective office in a stock or nonstock corporation, the validation of proxies, the manner and validity
of elections and the qualifications of candidates, including the proclamation of winners, to the office of
director, trustee or other officer directly elected by the stockholders in a close corporation or by
members of a nonstock corporation where the articles of incorporation or bylaws so provide.”
(emphasis supplied)
The correct answer is not clear-cut, but there is one. In private respondents’ favor, the provisions of law
they cite pertain directly and exclusively to the statutory jurisdiction of trial courts acquired by virtue of
the transfer of jurisdiction following the passage of the SRC. In contrast, the SRC provisions relied upon
by GSIS do not immediately or directly establish that body’s jurisdiction over the petition, since it
necessitates the linkage of Section 20 to Section 53.1 of the SRC before the point can bear on us.
On the other hand, the distinction between “proxy solicitation” and “proxy validation” cannot be
dismissed offhand. The right of a stockholder to vote by proxy is generally established by the
Corporation Code,41 but it is the SRC which specifically
_______________
41 See Corporation Code, Sec. 24, which reads in part: “xxx In stock corporations, every stockholder
entitled to vote shall have the
704
704
regulates the form and use of proxies, more particularly the procedure of proxy solicitation, primarily
through Section 20.42 AIRR-SRC Rule 20 defines the terms solicit and solicitation:
“The terms solicit and solicitation include:
A. any request for a proxy whether or not accompanied by or included in a form of proxy
B. any request to execute or not to execute, or to revoke, a proxy; or
C. the furnishing of a form of proxy or other communication to security holders under circumstance
reasonably calculated to result in the procurement, withholding or revocation of a proxy.”
It is plain that proxy solicitation is a procedure that antecedes proxy validation. The former involves the
securing and submission of proxies, while the latter concerns the validation of such secured and
submitted proxies. GSIS raises the sensible point that there was no election yet at the time it filed its
petition with the SEC, hence no proper election contest or controversy yet over which the regular courts
may have jurisdiction. And the point ties its cause of action to alleged irregularities in the proxy
solicitation procedure, a process that precedes either the validation of proxies or the annual meeting
itself.
_______________
right to vote in person or by proxy the number of shares of stock standing xxx,” and Section 58, which
states: “Proxies.—Stockholders and members may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall be in writing, signed by the stockholder or member and field
before the scheduled meeting with the corporate secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time.
42 The now-abrogated Revised Securities Act had also imposed limitations on the use of proxies. See
Sec. 34, Revised Securities Act.
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Under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations issued
by the SEC, such as AIRR-SRC Rule 4. And by virtue of Section 53.1, the SEC has the discretion “to make
such investigations as it deems necessary to determine whether any person has violated” any rule
issued by it, such as AIRR-SRC Rule 4. The investigatory power of the SEC established by Section 53.1 is
central to its regulatory authority, most crucial to the public interest especially as it may pertain to
corporations with publicly traded shares. For that reason, we are not keen on pursuing private
respondents’ insistence that the GSIS complaint be viewed as rooted in an intra-corporate controversy
solely within the jurisdiction of the trial courts to decide. It is possible that an intra-corporate
controversy may animate a disgruntled shareholder to complain to the SEC a corporation’s violations of
SEC rules and regulations, but that motive alone should not be sufficient to deprive the SEC of its
investigatory and regulatory powers, especially so since such powers are exercisable on a motu proprio
basis.
At the same time, Meralco raises the substantial point that nothing in the SRC empowers the SEC to
annul or invalidate improper proxies issued in contravention of Section 20. It cites that the penalties
defined by the SEC itself for violation of Section 20 or AIRR-SRC Rule 20 are limited to a
reprimand/warning for the first offense, and pecuniary fines for succeeding offenses.43 Indeed, if the
SEC does not have the power to invalidate proxies solicited in violation of its promulgated rules, serious
questions may be raised whether it has the power to adjudicate claims of violation in the first place,
since the relief it may extend does not directly redress the cause of action of the complainant seeking
the exclusion of the proxies.
_______________
43 Rollo, p. 933; citing SEC Memorandum Circular No. 6, Series of 2005, which may also be found at
http://www.sec.gov.ph/circulars/cy,2005/sec-memo-6,s2005.pdf (Last visited, 8 April 2009).
706
706
There is an interesting point, which neither party raises, and it concerns Section 6(g) of Presidential
Decree No. 902-A, which states:
“SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following
powers:
xxx
(g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for absent
stockholders or members;
xxx”
As promulgated then, the provision would confer on the SEC the power to adjudicate controversies
relating not only to proxy solicitation, but also to proxy validation. Should the proposition hold true up
to the present, the position of GSIS would have merit, especially since Section 6 of Presidential Decree
No. 902-A was not expressly repealed or abrogated by the SRC.44
Yet a closer reading of the provision indicates that such power of the SEC then was incidental or ancillary
to the “exercise of such jurisdiction.” Note that Section 6 is immediately preceded by Section 5, which
originally conferred on the SEC “original and exclusive jurisdiction to hear and decide cases” involving
“controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.” The cases referred to in Section 5 were transferred from the
jurisdiction of the SEC to the regular courts with the passage of the SRC, specifically Section 5.2. Thus,
the SEC’s power to pass upon the validity of proxies in relation to election controversies has effectively
been withdrawn, tied as it is to its abrogated jurisdictional powers.
Based on the foregoing, it is evident that the linchpin in deciding the question is whether or not the
cause of action of GSIS before the SEC is intimately tied to an election contro-
_______________
44 See SRC, Sec. 76.
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versy, as defined under Section 5(c) of Presidential Decree No. 902-A. To answer that, we need to
properly ascertain the scope of the power of trial courts to resolve controversies in corporate elections.
B.
Shares of stock in corporations may be divided into voting shares and non-voting shares, which are
generally issued as “preferred” or “redeemable” shares.45 Voting rights are exercised during regular or
special meetings of stockholders; regular meetings to be held annually on a fixed date, while special
meetings may be held at any time necessary or as provided in the by-laws, upon due notice.46 The
Corporation Code provides for a whole range of matters which can be voted upon by stockholders,
including a limited set on which even non-voting stockholders are entitled to vote on.47 On any of these
matters which may be voted upon by stockholders, the proxy device is generally available.48
Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular
trial courts with respect to election-related controversies is specifically confined to “controversies in the
election or appointment of directors, trustees, officers or managers of corporations, partnerships, or
associations.” Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trus-
_______________
45 Corporation Code, Sec. 6.
47 See supra note 45.
48 See J. Campos & M. Campos, I Corporation Code of the Philippines (1990 ed.) at p. 515.
708
708
tees, in which stockholders are authorized to participate under Section 24 of the Corporation Code.49
This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to
regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under
Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the
election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the
SEC rules on proxy solicitation, should be properly seen as an election controversy within the original
and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c)
of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the
election of corporate directors must be seen as intended to confine to one body the adjudication of all
related claims and controversy arising from the election of such directors. For that reason, the afore-
_______________
49 This observation should be viewed as confined to Section 5(c) of Pres. Decree No. 902-A alone. We
are cognizant of potential arguments over the use of proxies in relation to non-election related matters
voted upon by the stockholders when such matters concern intra-corporate controversies as defined in
Section 5(a) of Pres. Decree No. 902-A. It is apparent that intra-corporate controversies fall within the
jurisdiction of the regular trial courts and that issues related to proxy voting that are intimately related
to intra-corporate controversies would necessarily fall within such jurisdiction as well. Nonetheless, the
precise jurisdictional parameters with respect to Section 5(a) proxy-related issues are not susceptible to
allocation through this case, which involves an election-related dispute under Section 5(c), and best
await a more suitable case or controversy.
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quoted Section 2, Rule 6 of the Interim Rules broadly defines the term “election contest” as
encompassing all plausible incidents arising from the election of corporate directors, including: (1) any
controversy or dispute involving title or claim to any elective office in a stock or nonstock corporation,
(2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of
candidates, including the proclamation of winners. If all matters anteceding the holding of such election
which affect its manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing
jurisdictions between that body and the regular courts becomes frighteningly real. From the language of
Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification
of voting shares, or the validity of votes cast in favor of a candidate for election to the board of directors
are properly cognizable and adjudicable by the regular courts exercising original and exclusive
jurisdiction over election cases. Questions relating to the proper solicitation of proxies used in such
election are indisputably related to such issues, yet if the position of GSIS were to be upheld, they would
be resolved by the SEC and not the regular courts, even if they fall within “controversies in the election”
of directors.
The Court recognizes that GSIS’s position flirts with the abhorrent evil of split jurisdiction,50 allowing as
it does both the SEC and the regular courts to assert jurisdiction over the same controversies
surrounding an election contest. Should the argument of GSIS be sustained, we would be perpetually
confronted with the spectacle of election controversies being heard and adjudicated by both the SEC
and the regular courts, made possible through a mere allegation that the
_______________
50 “[T]he Court has consistently refused to sanction split jurisdiction.” Southern Cross Cement
Corporation v. Philcemcor, G.R. No. 158540, 8 July 2004, 434 SCRA 65; citing Associated Labor Union v.
Gomez, et al., 125 Phil. 717, 722; 19 SCRA 304, 309 (1967).
710
710
anteceding proxy solicitation process was errant, but the competing cases filed with one objective in
mind—to affect the outcome of the election of the board of directors. There is no definitive statutory
provision that expressly mandates so untidy a framework, and we are disinclined to construe the SRC in
such a manner as to pave the way for the splitting of jurisdiction.
Unlike either Section 20.1 or Section 53.1, which merely
alludes to the rule-making or investigatory power of the SEC, Section 5 of Pres. Decree No. 902-A sets
forth a definitive rule on jurisdiction, expressly granting as it does “original and exclusive jurisdiction”
first to the SEC, and now to the regular courts. The fact that the jurisdiction of the regular courts under
Section 5(c) is confined to the voting on election of officers, and not on all matters which may be voted
upon by stockholders, elucidates that the power of the SEC to regulate proxies remains extant and could
very well be exercised when stockholders vote on matters other than the election of directors.
That the proxy challenge raised by GSIS relates to the election of the directors of Meralco is undisputed.
The controversy was engendered by the looming annual meeting, during which the stockholders of
Meralco were to elect the directors of the corporation. GSIS very well knew of that fact. On 17 March
2008, the Meralco board of directors adopted a board resolution stating:
“RESOLVED that the board of directors of the Manila Electric Company (MERALCO) delegate, as it hereby
delegates to the Nomination & Governance Committee the authority to approve and adopt appropriate
rules on: (1) nomination of candidates for election to the board of directors; (2) appreciation of ballots
during the election of members of the board of directors; and (3) validation of proxies for regular or
special meetings of the stockholders.”51
_______________
51 Rollo, p. 884. Emphasis supplied.
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In addition, the Information Statement/Proxy form filed by First Philippine Holdings Corporation with
the SEC pursuant to Section 20 of the SRC, states:
REASON FOR SOLICITATION OF VOTES
“The Solicitor is soliciting proxies from stockholders of the Company for the purpose of electing the
directors named under the subject headed ‘Directors’ in this Statement as well as to vote the matters in
the agenda of the meeting as provided for in the Information Statement of the Company. All of the
nominees are current directors of the Company.”52
Under the circumstances, we do not see it feasible for GSIS to posit that its challenge to the solicitation
or validation of proxies bore no relation at all to the scheduled election of the board of directors of
Meralco during the annual meeting. GSIS very well knew that the controversy falls within the
contemplation of an election controversy properly within the jurisdiction of the regular courts.
Otherwise, it would have never filed its original petition with the RTC of Pasay. GSIS may have
withdrawn its petition with the RTC on a new assessment made in good faith that the controversy falls
within the jurisdiction of the SEC, yet the reality is that the reassessment is precisely wrong as a matter
of law.
IV.
The lack of jurisdiction of the SEC over the subject matter of GSIS’s petition necessarily invalidates the
CDO and SDO issued by that body. However, especially with respect to the CDO, there is need for this
Court to squarely rule on the question pertaining to its validity, if only for jurisprudential value and for
the guidance of the SEC.
To recount the facts surrounding the issuance of the CDO, GSIS filed its petition with the SEC on 26 May
2008. The
_______________
52 Id., at p. 889. Emphasis supplied.
712
712

CDO, six (6) pages in all with three (3) pages devoted to the tenability of granting the injunctive relief,
was issued on the very same day, 26 May 2008, without notice or hearing. The CDO bore the signature
of Commissioner Jesus Martinez, identified therein as “Officer-in-Charge,” and nobody else’s.
The provisions of the SRC relevant to the issuance of a CDO are as follows:
“SEC. 5. Powers and Functions of the Commission.—5.1. The Commission shall act with transparency
and shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:
xxx
xxx
[SEC.] 53.3. Whenever it shall appear to the Commission that any person has engaged or is about to
engage in any act or practice constituting a violation of any provision of this Code, any rule, regulation or
order thereunder, or any rule of an Exchange, registered securities association, clearing agency or other
self-regulatory organization, it may issue an order to such person to desist from committing such act or
practice: Provided, however, That the Commission shall not charge any person with violation of the rules
of an Exchange or other self regulatory organization unless it appears to the Commission that such
Exchange or other self-regulatory organization is unable or unwilling to take action against such person.
After finding that such person has engaged in any such act or practice and that there is a reasonable
likelihood of continuing, further or future violations by such person, the Commission may issue ex parte
a cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance with such provision. The Commission may transmit such evidence as may be available
concerning any violation of any provision of this Code, or any rule, regulation or order thereunder, to
the Department of
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Justice, which may institute the appropriate criminal proceedings under this Code.
SEC. 64. Cease and Desist Order.—64.1. The Commission, after proper investigation or verification,
motu proprio, or upon verified complaint by any aggrieved party, may issue a cease and desist order
without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will
operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to
the investing public.
64.2. Until the Commission issues a cease and desist order, the fact that an investigation has been
initiated or that a complaint has been filed, including the contents of the complaint, shall be
confidential. Upon issuance of a cease and desist order, the Commission shall make public such order
and a copy thereof shall be immediately furnished to each person subject to the order.
64.3. Any person against whom a cease and desist order was issued may, within five (5) days from
receipt of the order, file a formal request for a lifting thereof. Said request shall be set for hearing by the
Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not
later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the
request within the time herein prescribed, the cease and desist order shall automatically be lifted.”
There are three distinct bases for the issuance by the SEC of the CDO. The first, allocated by Section 5(i),
is predicated on a necessity “to prevent fraud or injury to the investing public.” No other requisite or
detail is tied to this CDO authorized under Section 5(i).
The second basis, found in Section 53.3, involves a determination by the SEC that “any person has
engaged or is about to engage in any act or practice constituting a violation of any provision of this
Code, any rule, regulation or order thereunder, or any rule of an Exchange, registered securities
association, clearing agency or other self-regulatory organization.” The provision additionally requires a
finding that “there is a reasonable likelihood of continuing [or engaging in] further or future violations
by such person.” The maximum duration of the CDO issued under Section 53.3 is ten (10) days.
714
714
The third basis for the issuance of a CDO is Section 64. This CDO is founded on a determination of an act
or practice, which unless restrained, “will operate as a fraud on investors or is otherwise likely to cause
grave or irreparable injury or prejudice to the investing public.” Section 64.1 plainly provides three
segregate instances upon which the SEC may issue the CDO under this provision: (1) after proper
investigation or verification, (2) motu proprio, or (3) upon verified complaint by any aggrieved party.
While no lifetime is expressly specified for the CDO under Section 64, the respondent to the CDO may
file a formal request for the lifting thereof, which the SEC must hear within fifteen (15) days from filing
and decide within ten (10) days from the hearing.
It appears that the CDO under Section 5(i) is similar to the CDO under Section 64.1. Both require a
common finding of a need to prevent fraud or injury to the investing public. At the same time, no
mention is made whether the CDO defined under Section 5(i) may be issued ex parte, while the CDO
under Section 64.1 requires “grave and irreparable” injury, language absent in Section 5(i).
Notwithstanding the similarities between Section 5(i) and Section 64.1, it remains clear that the CDO
issued under Section 53.3 is a distinct creation from that under Section 64.
The Court of Appeals cited the CDO as having been issued in violation of the constitutional provision on
due process, which requires both prior notice and prior hearing.53 Yet interestingly, the CDO as
contemplated in Section 53.3 or in Section 64, may be issued “ex parte” (under Section 53.3) or “without
necessity of hearing” (under Section 64.1). Nothing in these provisions impose a requisite hearing before
the CDO may be issued thereunder. Nonetheless, there are identifiable requisite actions on the part of
the SEC that must be undertaken before the CDO may be issued either under Section 53.3 or Section 64.
In the case of Section 53.3, the SEC must
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53 Id., at p. 131.
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make two findings: (1) that such person has engaged in any such act or practice, and (2) that there is a
reasonable likelihood of continuing, (or engaging in) further or future violations by such person. In the
case of Section 64, the SEC must adjudge that the act, unless restrained, will operate as a fraud on
investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public.”
Noticeably, the CDO is not precisely clear whether it was issued on the basis of Section 5.1, Section 53.3
or Section 64 of the SRC. The CDO actually refers and cites all three provisions, yet it is apparent that a
singular CDO could not be founded on Section 5.1, Section 53.3 and Section 64 collectively. At the very
least, the CDO under Section 53.3 and under Section 64 have their respective requisites and terms.
GSIS was similarly cagey in its petition before the SEC, it demurring to state whether it was seeking the
CDO under Section 5.1, Section 53.3, or Section 64. Considering that injunctive relief generally avails
upon the showing of a clear legal right to such relief, the inability or unwillingness to lay bare the precise
statutory basis for the prayer for injunction is an obvious impediment to a successful application.
Nonetheless, the error of the SEC in granting the CDO without stating which kind of CDO it was issuing is
more unpardonable, as it is an act that contravenes due process of law.
We have particularly required, in administrative proceedings, that the body or tribunal “in all
controversial questions, render its decision in such a manner that the parties to the proceeding can
know the various issues involved, and the reason for the decision rendered.”54 This requirement is vital,
as its fulfillment would afford the adverse party the opportunity to interpose a reasoned and intelligent
appeal that is responsive to the grounds cited against it. The CDO extended
_______________
54 Ang Tibay v. Court of Industrial Relations, 69 Phil. 635, 642-644 (1940).
716
716
by the SEC fails to provide the needed reasonable clarity of the rationale behind its issuance.
The subject CDO first refers to Section 64, citing its provisions, then stating: “[p]rescinding from the
aforequoted, there can be no doubt whatsoever that the Commission is in fact mandated to take up, if
expeditiously, any verified complaint praying for the provisional remedy of a cease and desist order.”55
The CDO then discusses the nature of the right of GSIS to obtain the CDO, as well as “the urgent and
paramount necessity to prevent serious damage because the stockholders’ meeting is scheduled on May
28, 2008 x x x” Had the CDO stopped there, the unequivocal impression would have been that the order
is based on Section 64.
But the CDO goes on to cite Section 5.1, quoting paragraphs (i) and (n) in full, ratiocinating that under
these provisions, the SEC had “the power to issue cease and desist orders to prevent fraud or injury to
the public and such other measures necessary to carry out the Commission’s role as regulator.”56
Immediately thence, the CDO cites Section 53.3 as providing “that whenever it shall appear to the
Commission that nay person has engaged or is about to engage in any act or practice constituting a
violation of any provision, any rule, regulation or order thereunder, the Commission may issue ex parte
a cease and desist order for a maximum period of ten (10) days, enjoining the violation and compelling
compliance therewith.”57
The citation in the CDO of Section 5.1, Section 53.3 and Section 64 together may leave the impression
that it is grounded on all three provisions, and that may very well have been the intention of the SEC.
Assuming that is so, it is legally impermissible for the SEC to have utilized both Section 53.3 and Section
64 as basis for the CDO at the same time.
_______________
55 Rollo, pp. 186-187.
56 Id., at p. 187.
57 Id., at p. 188.
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The CDO under Section 53.3 is premised on distinctly different requisites than the CDO under Section
64. Even more crucially, the lifetime of the CDO under Section 53.3 is confined to a definite span of ten
(10) days, which is not the case with the CDO under Section 64. This CDO under Section 64 may be the
object of a formal request for lifting within five (5) days from its issuance, a remedy not expressly
afforded to the CDO under Section 53.3.
Any respondent to a CDO which cites both Section 53.3 and Section 64 would not have an intelligent or
adequate basis to respond to the same. Such respondent would not know whether the CDO would have
a determinate lifespan of ten (10) days, as in Section 53.3, or would necessitate a formal request for
lifting within five (5) days, as required under Section 64.1. This lack of clarity is to the obvious prejudice
of the respondent, and is in clear defiance of the constitutional right to due process of law. Indeed, the
veritable mélange that the assailed CDO is, with its jumbled mixture of premises and conclusions, the
antithesis of due process.
Had the CDO issued by the SEC expressed the length of its term, perhaps greater clarity would have
been offered on what Section of the SRC it is based. However, the CDO is precisely silent as to its
lifetime, thereby precluding much needed clarification. In view of the statutory differences among the
three CDOs under the SRC, it is essential that the SEC, in issuing such injunctive relief, identify the exact
provision of the SRC on which the CDO is founded. Only by doing so could the adversely affected party
be able to properly evaluate whatever his responses under the law.
To make matters worse for the SEC, the fact that the CDO was signed, much less apparently deliberated
upon, by only by one commissioner likewise renders the order fatally infirm.
The SEC is a collegial body composed of a Chairperson and four (4) Commissioners.58 In order to
constitute a quorum to
_______________
58 See SRC, Sec. 4.1.
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718
conduct business, the presence of at least three (3) Commissioners is required.59 In the leading case of
GMCR v. Bell,60 we definitively explained the nature of a collegial body, and how the act of one member
of such body, even if the head, could not be considered as that of the entire body itself. Thus:
“We hereby declare that the NTC is a collegial body requiring a majority vote out of the three members
of the commission in order to validly decide a case or any incident therein. Corollarily, the vote alone of
the chairman of the commission, as in this case, the vote of Commissioner Kintanar, absent the required
concurring vote coming from the rest of the membership of the commission to at least arrive at a
majority decision, is not sufficient to legally render an NTC order, resolution or decision.
Simply put, Commissioner Kintanar is not the National Telecommunications Commission. He alone does
not speak for and in behalf of the NTC. The NTC acts through a three-man body, and the three members
of the commission each has one vote to cast in every deliberation concerning a case or any incident
therein that is subject to the jurisdiction of the NTC. When we consider the historical milieu in which the
NTC evolved into the quasi-judicial agency it is now under Executive Order No. 146 which organized the
NTC as a three-man commission and expose the illegality of all memorandum circulars negating the
collegial nature of the NTC under Executive Order No. 146, we are left with only one logical conclusion:
the NTC is a collegial body and was a collegial body even during the time when it was acting as a one-
man regime.”61
We can adopt a virtually word-for-word observation with respect to former Commissioner Martinez and
the SEC. Simply put, Commissioner Martinez is not the SEC. He alone does not speak for and in behalf of
the SEC. The SEC acts through a five-person body, and the five members of the commission each has one
vote to cast in every deliberation
_______________
59 See SRC, Sec. 4.5.
60 G.R. No. 126496, 30 April 1997, 271 SCRA 790.
61 Id., at pp. 804-805.
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concerning a case or any incident therein that is subject to the jurisdiction of the SEC.
GSIS attempts to defend former Commissioner Martinez’s action, but its argument is without merit. It
cites SEC Order No. 169, Series of 2008, whereby Martinez was designated as “Officer-in-Charge of the
Commission for the duration of the official travel of the Chairperson to Paris, France, to attend the 33rd
Annual Conference of the [IOSCO] from May 26-30, 2008.”62 As officer-in-charge (OIC), Martinez was
“authorized to sign all documents and papers and perform all other acts and deeds as may be necessary
in the day-to-day operation of the Commission.”
It is clear that Martinez was designated as OIC because of the official travel of only one member,
Chairperson Fe Barin. Martinez was not commissioned to act as the SEC itself. At most, he was to act in
place of Chairperson Barin in the exercise of her duties as Chairperson of the SEC. Under Section 4.3 of
the SRC, the Chairperson is the chief executive officer of the SEC, and thus empowered to “execute and
administer the policies, decisions, orders and resolutions approved by the Commission,” as well as to
“have the general executive direction and supervision of the work and operation of the Commission.”63
It is in relation to the exercise of these duties of the Chairperson, and not to the functions of the
Commission, that Martinez was “authorized to sign all documents and papers and perform all other acts
and deeds as may be necessary in the day-to-day operation of the Commission.”
GSIS likewise cites, as authority for Martinez’s unilateral issuance of the CDO, Section 4.6 of the SRC,
which states that the SEC “may, for purposes of efficiency, delegate any of its functions to any
department or office of the Commission, an individual Commissioner or staff member of the
Commission except its review or appellate authority and its power to
_______________
62 Rollo, p. 63.
63 SRC, Sec. 4.3.
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720
adopt, alter and supplement any rule or regulation.” Reliance on this provision is inappropriate. First,
there is no convincing demonstration that the SEC had delegated to Martinez the authority to issue the
CDO. The SEC Order designating Martinez as OIC only authorized him to exercise the functions of the
absent Chairperson, and not of the Commission. If the Order is read as enabling Martinez to issue the
CDO in behalf of the Commission, it would be akin to conceding that the SEC Chairperson, acting alone,
can issue the CDO in behalf of the SEC itself. That again contravenes our holding in GMCR v. Bell.
In addition, it is clear under Section 4.6 that the ability to delegate functions to a single commissioner
does not extend to the exercise of the review or appellate authority of the SEC. The issuance of the CDO
is an act of the SEC itself done in the exercise of its original jurisdiction to review actual cases or
controversies. If it has not been clear to the SEC before, it should be clear now that its power to issue a
CDO can not, under the SRC, be delegated to an individual commissioner.
V.
In the end, even assuming that the events narrated in our Resolution in A.M. No. 08-8-11-CA constitute
sufficient basis to nullify the assailed decision of the Court of Appeals, still it remains clear that the
reliefs GSIS seeks of this Court have no basis in law. Notwithstanding the black mark that stains the
appellate court’s decision, the first paragraph of its fallo, to the extent that it dismissed the complaint of
GSIS with the SEC for lack of jurisdiction and consequently nullified the CDO and SDO, defies unbiased
scrutiny and deserves affirmation.
A.
In its dispositive portion, the Court of Appeals likewise pronounced that the complaint filed by GSIS with
the SEC should be barred from being considered “as an election contest
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721
in the RTC”, given that the fifteen (15) day prescriptive period to file an election contest with the RTC,
under Section 3, Rule 6 of the Interim Rules, had already run its course.64 Yet no such relief was
requested by private respondents in their petition for certiorari filed with the Court of Appeals.65
Without disputing the legal predicates surrounding this pronouncement, we note that its tenor, if not
the text, unduly suggests an unwholesome pre-emptive strike. Given our observations in A.M. No. 08-8-
11-CA of the “undue interest” exhibited by the author of the appellate court decision, such declaration is
best deleted. Nonetheless, we do trust that any court or tribunal that may be confronted with that
premise adverted to by the Court of Appeals would know how to properly treat the same.
B.
Finally, we turn to the sanction on the lawyers of GSIS imposed by the Court of Appeals.
Nonetheless, we find that as a matter of law the sanctions are unwarranted. The charter of GSIS66 is
unique among government owned or controlled corporations with original charter in that it allocates a
role for its internal legal counsel that is in conjunction with or complementary to the Office of the
Government Corporate Counsel (OGCC), which is the statutory legal counsel for GOCCs. Section 47 of
GSIS charter reads:
SEC. 47. Legal Counsel.—The Government Corporate Counsel shall be the legal adviser and consultant
of GSIS, but GSIS may assign to the Office of the Government Corporate Counsel (OGCC) cases for legal
action or trial, issues for legal opinions, preparation and review of contracts/agreements and others, as
GSIS may decide
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64 Rollo, p. 141.
65 Id., at p. 246.
66 P.D. No. 1146, as amended by Rep. Act No. 8291 (1997).
722
722
or determine from time to time: Provided, however, That the present legal services group in GSIS shall
serve as its in-house legal counsel.
The GSIS may, subject to approval by the proper court, deputize any personnel of the legal service group
to act as special sheriff in the enforcement of writs and processes issued by the court, quasi-judicial
agencies or administrative bodies in cases involving GSIS.”67
The designation of the OGCC as the legal counsel for GOCCs is set forth by statute, initially by Rep. Act
No. 3838, then reiterated by the Administrative Code of 1987.68 Given that the designation is statutory
in nature, there is no impediment for Congress to impose a different role for the OGCC with respect to
particular GOCCs it may charter. Congress appears to have done so with respect to GSIS, designating the
OGCC as a “legal adviser and consultant,” rather than as counsel to GSIS. Further, the law clearly vests
unto GSIS the discretion, rather than the duty, to assign cases to the OGCC for legal action, while
designating the present legal services group of GSIS as “in-house legal counsel.” This situates GSIS
differently from the Land Bank of the Philippines, whose own in-house lawyers have persistently argued
before this Court to no avail on their alleged right to file petitions before us instead of the OGCC.69
Nothing in the Land Bank charter70 vested it with the discretion to choose when to assign cases to the
OGCC, notwithstanding the establishment of its own Legal Department.71
_______________
67 P.D. No. 1146, Sec. 47, as amended by Rep. Act No. 8291 (1997).
68 See Phividec Industrial Authority v. Capitol Steel, 460 Phil. 493, 500-501; 414 SCRA 327, 330 (2003).
69 See e.g., the Resolutions dated 27 April 2005 & 13 July 2005, Land Bank v. Luciano, G.R. No. 165428.
70 Rep. Act No. 3844 (1963).
71 See Section 91, Rep. Act No. 3844 (1963). “SECTION 91. Legal Counsel.—The Secretary of Justice
shall be ex-officio legal adviser of the Bank. Any provision of law to the contrary notwithstanding, the
Land Bank shall have its own Legal Department, the
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723
Congress is not bound to retain the OGCC as the primary or exclusive legal counsel of GSIS even if it
performs such a role for other GOCCs. To bind Congress to perform in that manner would be akin to
elevating the OGCC’s statutory role to irrepealable status, and it is basic that Congress is barred from
passing irrepealable laws.72
C.
We close by acknowledging that the surrounding circumstances behind these petitions are unfortunate,
given the events as narrated in A.M. No. 08-8-11-CA. While due punishment has been meted on the
errant magistrates, the corporate world may very well be reminded that the members of the judiciary
are not to be viewed or treated as mere pawns or puppets in the internecine fights businessmen and
their associates wage against other businessmen in the quest for corporate dominance. In the end, the
petitions did afford this Court to clarify consequential points of law, points rooted in principles which
will endure long after the names of the participants in these cases have been forgotten.
WHEREFORE, the petition in G.R. No. 184275 is EXPUNGED for lack of capacity of the petitioner to bring
forth the suit.
The petition in G.R. No. 183905 is DISMISSED for lack of merit except that the second and third
paragraphs of the fallo of the assailed decision dated 23 July 2008 of the Court of Appeals, including
subparagraphs (1), (2), 2(a), 2(b), 2(c) and 2(d) under the second paragraph, are hereby DELETED.
_______________
chief and members of which shall be appointed by the Board of Trustees. The composition, budget and
operating expenses of the Office of the Legal Counsel and the salaries and traveling expenses of its
officers and employees shall be fixed by the Board of Trustees and paid by the Bank.”
72 See City of Davao v. Regional Trial Court of Davao City, Branch XII, G.R. No. 127383, 18 August 2005,
467 SCRA 280.
724
724
No pronouncements as to costs.
SO ORDERED.
Quisumbing (Chairperson), Carpio-Morales, Velasco, Jr. and Brion, JJ., concur.
Petition in G.R. No. 184275 expunged, while petition in G.R. No. 183905 dismissed.
Notes.—The PAB is the very agency of the government with the task of determining whether the
effluents of a particular industrial establishment comply with or violate applicable anti-pollution
statutory and regulatory provisions, with power to issue, ex parte, cease and desist orders. (Estrada vs.
Court of Appeals, 442 SCRA 117 [2004])
There are two essential requirements that must be complied with by the Securities and Exchange
Commission (SEC) before it may issue a cease and desist order—first, it must conduct proper
investigation or verification, and, second, there must be a finding that the act or practice, unless
restrained, will operate as a fraud on investors or is otherwise likely to cause grave or irreparable injury
or prejudice to the investing public. (Securities and Exchange Commission vs. Performance Foreign
Exchange Corporation, 495 SCRA 579 [2006])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Government Service Insurance System
vs. Court of Appeals (Eighth Division), 585 SCRA 679, G.R. No. 183905 April 16, 2009
348

Orendain vs. BF Homes, Inc.
G.R. No. 146313. October 31, 2006.*
FLORENCIO ORENDAIN, petitioner, vs. BF HOMES, INC., respondent.
Actions; Jurisdictions; Jurisdiction over the subject matter is conferred by law—the nature of an action,
as well as which court or body has jurisdiction over it, is determined based on the allegations contained
in the complaint of the plaintiff, irrespective of whether or not plaintiff is entitled to recover upon all or
some of the claims asserted therein.—In Speed Distributing Corp. v. Court of Appeals, 425 SCRA 691
(2004), we held that: Jurisdiction over the subject matter is conferred by law. The nature of an action, as
well as which court or body has jurisdiction over it, is determined based on the allegations contained in
the complaint of the plaintiff, irrespective of whether or not plaintiff is entitled to recover upon all or
some of the claims asserted therein. It cannot depend on the defenses set forth in the answer, in a
motion to dismiss, or in a motion for reconsideration by the defendant (citations omitted). In the case at
bench, the BF Homes’ Complaint for reconveyance was filed on January 23, 1996 against LSFSIPI and
Florencio B. Orendain, in Civil Case No. LP96-002.
Same; Same; The better policy in determining which body has jurisdiction over a case would be to
consider not only [1] the status or relationship of the parties but also [2] the nature of the question that
is the subject of the controversy.—The controversy involves matters purely civil in character and is
beyond the ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of Appeals, 191 SCRA
308 (1990), “[t]he better policy in determining which body has jurisdiction over a case would be to
consider not only [1] the status or relationship of the parties but also [2] the nature of the question that
is the subject of their controversy.”
Same; Same; Corporation Law; Civil Law; The determination of the validity of the sale to LSFSIPI will
necessitate the application of the provisions of the Civil Code on obligations and contracts, agency, and
other pertinent provisions.—Section 5 of PD No. 902-A
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* THIRD DIVISION.
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349
does not apply in the instant case. The LSFSIPI is neither an officer nor a stockholder of BF Homes, and
this case does not involve intracorporate proceedings. In addition, the seller, petitioner Orendain, is
being sued in his individual capacity for the unauthorized sale of the property in controversy. Hence, we
find no cogent reason to sustain petitioner’s manifestation that the resolution of the instant controversy
depends on the ratification by the SEC of the acts of its agent or the receiver because the act of
Orendain was allegedly not within the scope of his authority as receiver. Furthermore, the
determination of the validity of the sale to LSFSIPI will necessitate the application of the provisions of
the Civil Code on obligations and contracts, agency, and other pertinent provisions.
Same; Same; Jurisdiction over the case for reconveyance is clearly vested in the Regional Trial Courts as
provided in paragraph (2), Section 19, B.P. Blg. 129.—Jurisdiction over the case for reconveyance is
clearly vested in the RTC as provided in paragraph (2), Section 19, B.P. Blg. 129, to wit: Jurisdiction in
civil cases.—Regional Trial Courts shall exercise exclusive [and] original jurisdiction (1) In all civil actions
in which the subject of the litigation is incapable of pecuniary estimation; and (2) In all civil actions
which involve the title to, or possession of, real property or any interest therein, where the assessed
value of the property involved exceeds Twenty Thousand pesos (P20,000.00) or for civil actions in Metro
Manila, where such value exceeds Fifty Thousand pesos (P50,000.00) x x x
Judgments; Res Judicata; There are two (2) aspects of the doctrine of res judicata: the first is known as
“bar by prior judgment,” is the effect of a judgment as a bar to the prosecution of a second action upon
the same claim, demand or cause of action—the second, known as “conclusiveness of judgment,” issues
actually and directly resolved in a former suit cannot again be raised in any future case between the
same parties involving a different cause of action.—There are two (2) aspects to the doctrine of res
judicata: The first, known as “bar by prior judgment,” is the effect of a judgment as a bar to the
prosecution of a second action upon the same claim, demand or cause of action. The second, known as
“conclusiveness of judgment,” issues actually and directly resolved in a former suit cannot again be
raised in any future case between the same parties involving a different cause of action. A case is barred
by prior judgment when the follow-
350
350
ing requisites are present: “(1) the former judgment is final; (2) it is rendered by a court having
jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on the merits; and
(4) there is—between the first and second actions—identity of parties, of subject matter, and causes of
action.”
Same; Same; A judgment is “on the merits” when it amounts to a legal declaration of the respective
rights and duties of the parties based upon the disclosed facts.—While the said SEC order denied the
motion for intervention filed by intervenor Eduardo S. Rodriguez, it did not, however, resolve the issues
raised in the motion on the merits. A judgment is “on the merits when it amounts to a legal declaration
of the respective rights and duties of the parties based upon the disclosed facts (emphasis supplied and
citation omitted).” It is apparent that the SEC order in question merely acknowledged the Closing Report
for inclusion in the records of the case. It did not, however, pass upon the merits and veracity of the
report’s contents. As such, it cannot, in any wise, be considered as an adjudication of the rights and
obligations of the parties relating to the subject matter of the action.
Same; Same; “Conclusiveness of judgment” may operate to bar the second case even if there is no
identity of causes of action—the judgment is conclusive in the second case, only as to those matters
actually and directly controverted and determined, and not as to matters merely involved therein.—The
second type of res judicata is “conclusiveness of judgment.” In Francisco v. Co, 481 SCRA 241 (2006), this
Court elucidated the nature of this principle, thus: “Conclusiveness of judgment” operates as a bar even
if there is no identity as between the first and second causes of judgment. Under the doctrine, any right,
fact, or matter in issue directly adjudicated or necessarily involved in the determination of an action
before a competent court in which judgment is rendered on the merits is conclusively settled by the
judgment therein and cannot again be litigated between the parties and their privies whether or not the
claim, demand, purpose, or subject matter of the two actions is the same. Evidently, “conclusiveness of
judgment” may operate to bar the second case even if there is no identity of causes of action. The
judgment is conclusive in the second case, only as to those matters actually and directly controverted
and determined, and not as to matters merely involved therein.
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351
Same; Same; One of the general powers of a receiver under Rule 59, Section 6 of the Rules of Court is
the power to bring and defend suits in such capacity.—Petitioner argues that the Committee of
Receivers should have sought prior clearance from the SEC before instituting the action for
reconveyance before the RTC, because it does not have the legal capacity to sue. This is incorrect. One
of the general powers of a receiver under Rule 59, Section 6 of the Rules of Court is the power to bring
and defend suits in such capacity.
Actions; Receivership; The reason behind Rule 59, Section 6, which requires leave of court for all suits by
or against the present receiver, is to forestall any undue interference with the receiver’s performance of
duties through improvident suits.—The rule talks of the current receiver of the company and not the
previous receiver like petitioner Orendain. The reason behind Rule 59, Section 6, which requires leave of
court for all suits by or against the present receiver, is to forestall any undue interference with the
receiver’s performance of duties through improvident suits. Apparently, such situation cannot apply to
Orendain who is no longer BF Homes’ receiver.
Same; Same; Section 5.2 of RA 8799 transferred exclusive and original jurisdiction of the SEC over
actions involving intra-corporate controversies to the courts of general jurisdiction or the appropriate
Regional Trial Courts.—Section 5.2 of RA 8799 transferred exclusive and original jurisdiction of the SEC
over actions involving intracorporate controversies to the courts of general jurisdiction or the
appropriate RTC. In the transition, all intra-corporate cases pending in the SEC, which were not ripe for
adjudication as of August 8, 2000, were turned over to the RTC. Congress thereby recognized the
expertise and competence of the RTC to take cognizance of and resolve cases involving intra-corporate
controversies. Thus, “whether or not the issue is intra-corporate, it is now the [RTC] and no longer the
SEC that takes cognizance of [and resolves cases involving intracorporate controversies].”
Corporation Law; Securities and Exchange Commission (SEC); Regional Trial Courts (RTC); Jurisdictions; It
is unequivocal that the jurisdiction to try and decide cases originally assigned to the SEC under Section 5
of PD 902-A has been transferred to the Regional Trial Courts.—It is unequivocal that the jurisdiction to
try and decide cases originally assigned to the SEC under Section 5 of PD
352
352
902-A has been transferred to the RTC. For clarity, we quote those cases under Section 5, PD 902-A,
which now fall within the RTC’s jurisdiction, as follows: (a) Devices or schemes employed by or any acts
of the board of directors, business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or stockholders, partners,
members of associations registered with the Commission; (b) Controversies arising out of intra-
corporate or partnership relations, between and among stockholders, members, or associates; between
any or all of them and the corporation, partnership or association and the State insofar as it concerns
their individual franchise or right as such entity; (c) Controversies in the election or appointment of
directors, trustees, officers or managers of such corporations, partnerships, or associations; (d)
Petitioners of corporations, partnerships or associations to be declared in the state of suspension of
payment in cases where the corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they fall due or in cases where
the corporation, partnership or association has no sufficient assets to cover its liabilities but is under the
management of a rehabilitation receiver or management committee created pursuant to this Decree.
Same; Same; Same; Same; The SEC retained its administrative, regulatory, and oversight powers over all
corporations, partnerships, and associations who are grantees of primary franchises, and/or a license or
permit issued by the Government.—Juxtaposing the jurisdiction of the RTC under RA 8799 and the
powers that were retained by the SEC, it is clear that the SEC retained its administrative, regulatory, and
oversight powers over all corporations, partnerships, and associations who are grantees of primary
franchises, and/or a license or permit issued by the Government. However, the Securities Regulations
Code (SRC) is clear that when there is a controversy arising out of intra-corporate relations, between
and among stockholders, members or associates, and between, any, or all of them and the corporation,
it is the RTC, not SEC, which has jurisdiction over the case.
Same; Same; Same; Same; A cause of action involving a delict or wrongful act or omission committed by
a party in violation of the primary right of another, or an actual controversy involving rights which are
legally demandable or enforceable, the jurisdiction over
353
VOL. 506, OCTOBER 31, 2006
353

this complaint is lodged with the RTC and not with the SEC.—When the complaint involves “an active
antagonistic assertion of a legal right on one side and a denial thereof on the other concerning a real,
and not a mere theoretical question or issue,” a cause of action involving a delict or wrongful act or
omission committed by a party in violation of the primary right of another, or an actual controversy
involving rights which are legally demandable or enforceable, the jurisdiction over this complaint is
lodged with the RTC and not the SEC.
Alampay, Gatchalian, Mawis & Alampay for petitioner.
Antonio R. Bautista & Partners and Reyes, Imbong & Associates Law Offices for respondent BF
Homes, Inc.
VELASCO, JR., J.:
Before us is a Petition for Review on Certiorari praying for the reversal of the August 18, 2000 Decision
and December 6, 2000 Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 48263 entitled
Florencio B. Orendain v. Hon. Alfredo R. Enriquez, Presiding Judge of RTC-Br. 275, Las Piñas, and BF
Homes, Inc., which affirmed the December 4, 1996 and April 22, 1998 Orders of the Las Piñas RTC
finding that said court, not SEC, has jurisdiction over Civil Case No. LP-96-0022 for reconveyance of the
lot covered by TCT No. T-36482 to respondent BF Homes, Inc. (‘BF Homes’ for brevity).
BF Homes, Inc. is a domestic corporation operating under Philippine laws and organized primarily to
develop and sell residential lots and houses and other related realty business.1
Records show that respondent BF Homes had to avail itself of financial assistance from various sources
to enable it to buy
_______________
1 CA Rollo, pp. 63 & 227.
354
354
properties and convert them into residential subdivisions. This resulted in its incurring liabilities
amounting to PhP 1,542,805,068.232 as of July 31, 1984. On the other hand, during its business
operations, it was able to acquire properties and assets worth PhP 2,482,843,358.81 as of July 31, 1984,
which, if liquidated, were more than enough to pay all its creditors.3
Despite its solvent status, respondent filed a Petition for Rehabilitation and for Declaration in a State of
Suspension of Payments under Section 4 of PD No. 1758 before the Securities and Exchange Commission
(SEC) because of the following:
(a) the predatory acts of the Central Bank of trying to take over Banco Filipino and hand it cheap to its
unidentified principal and its buyer financing facility with Banco Filipino has been suspended such that it
cannot now consummate its sales transactions necessary for it to generate cash to service and/or
liquidate its various maturing obligations;
(b) the libelous [circulars] made by the Central Bank to banks under its supervision that its deposit
accounts and other transactions with them were being examined such that the creditors of [BF Homes]
have [begun] insisting on full liquidation under pain of foreclosure of their notes x x x; and
(c) the [liquidation] of [BF Homes’] assets cannot be made in such a short time as demanded by its
creditors.4
In the said petition, respondent prayed that—in the meantime it was continuing its business
operations—it be afforded time to pay its aforesaid obligations, freed from various proceedings either
judicially or extrajudicially against its assets and properties. Also, respondent highlighted the importance
of and prayed for a Rehabilitation Receiver in the petition.
_______________
2 Taken from the February 2, 1988 SEC Order, Records, pp. 86106, at p. 86.
3 Supra note 1, at pp. 63-64.
4 Id., at p. 64.
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355
Such receiver, according to respondent, was “imperative to oversee the management and operations of
[BF Homes] so that its business may not be paralyzed and the interest of the creditors may not be
prejudiced.” It further argued that “rehabilitation [was] feasible and imperative because otherwise, in
view of the extent of its involvement in the shelter program of the government and in the nation’s home
mortgage insurance system, which has a secured coverage for at least P900 M of [BF Homes’] P1.5 B
liabilities, not only [the] creditors, [buyers, and stockholders] of the petitioner corporation may suffer
but the public as well.”5
In SEC Case No. 2693, the SEC subsequently issued its March 18, 1985 Order which stated:
“WHEREFORE, in the interest of the parties-litigants, as well as the general public, and in order to
prevent [paralyzation] of business operation[s] of the B.F. Homes, Inc., a Management Committee is
hereby created composed of:
1. Atty. Florencio Orendain as Chairman
2. Representative of B.F. Homes, Inc.—member
3. Representative of Home Financing Commission—member
4. Two (2) representatives from the major creditors—members
xxxx
Accordingly, with the creation of the Management Committee, all actions for claims against B.F. Homes,
Inc. pending before the court, tribunal, board or body are hereby deemed suspended.”6
Thereafter, on February 2, 1988, the SEC ordered the appointment of a rehabilitation receiver, FBO
Management Networks, Inc., with petitioner Orendain as Chairman to prevent paralyzation of BF
Homes’ business operations.7
_______________
5 Id., at pp. 64-65.
6 Id., at pp. 66-67.
7 Supra note 2, at p. 103.
356
356
On October 8, 1993, a Deed of Absolute Sale8 was executed by and between BF Homes—represented by
petitioner Orendain—as absolute and registered owner, and the Local Superior of the Franciscan Sisters
of the Immaculate Phils., Inc. (LSFSIPI) over a parcel of land situated at Barangay Pasong Papaya, BF
International, Municipality of Las Piñas, Metro Manila, covered by Transfer Certificate of Title No. T-
36482.
The portion of land sold to LSFSIPI was 7,800 square meters, more or less, for Nineteen Million Five
Hundred Thousand Pesos (PhP 19,500,000.00).9
Meanwhile, on November 7, 1994, the SEC hearing panel released an Omnibus Order10 which admitted
and confirmed the Closing Report submitted by the receiver, petitioner Orendain. It further appointed a
new Committee of Receivers composed of the eleven (11) members of the Board of Directors of BF
Homes with Albert C. Aguirre as the Chairman of the Committee. Consequently, receiver Orendain was
relieved of his duties and responsibilities.
In its August 22, 1995 Order,11 the SEC denied BF Homes’ and the intervenor-derivative suitor Eduardo
S. Rodriguez’s motions for reconsideration of its November 7, 1994 Omnibus Order.
On January 23, 1996, BF Homes filed a Complaint before the Las Piñas RTC against LSFSIPI and petitioner
Orendain, in Civil Case No. LP-96-0022, for reconveyance of the property covered by TCT No. T-36482—
alleging, inter alia, that the LSFSIPI transacted with Orendain in his individual capacity and therefore,
neither FBO Management, Inc. nor Orendain had title to the property transferred. Moreover, BF Homes
averred that the selling price was grossly inadequate or insufficient amounting to fraud and conspiracy
with the
_______________
8 Records, pp. 14-16.
9 Id., at p. 14.
10 Records, pp. 108-130.
11 Records, pp. 131-132.
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357
LSFSIPI. BF Homes also stated that the total assessed value of the property was approximately PhP
802,330.00. Hence, it prayed in the Complaint that LSFSIPI reconvey the disputed property or, if
reconveyance was no longer feasible, pay the present value of the property.12
On March 21, 1996, the LSFSIPI filed its Answer with Compulsory Counterclaim,13 stating, among
others, that (1) the Complaint stated no cause of action since there was a valid sale with sufficient
consideration, and there was no fraud; (2) it was barred by a prior judgment of a tribunal with sufficient
jurisdiction over the matter, and BF Homes was liable for forum shopping; and (3) BF Homes could not
question its own acts by way of estoppel.
On June 14, 1996, Florencio B. Orendain filed a Motion to Dismiss stating that (1) the RTC had no
jurisdiction over the reconveyance suit; (2) the Complaint was barred by the finality of the November 7,
1994 Omnibus Order of the SEC hearing panel; and (3) BF Homes, acting through its Committee of
Receivers, had neither the interest nor the personality to prosecute the said action, in the absence of
SEC’s clear and actual authorization for the institution of the said suit.14
On July 15, 1996, BF Homes filed its Opposition15 to petitioner’s Motion to Dismiss, alleging that the
case was within the exclusive jurisdiction of the RTC, not the SEC, considering that the case was an
ordinary reconveyance suit. Likewise, BF Homes alleged that the cause of action was not barred by the
perceived finality of the SEC November 7, 1994 Omnibus Order, and that the general powers of a
receiver authorized BF Homes to institute actions to recover the property.
_______________
13 Rollo, pp. 23-24.
14 Records, p. 69.
15 Records, pp. 137-145.
358
358

On December 4, 1996, RTC Las Piñas, Branch 275 issued an Order denying the June 14, 1996 Motion to
Dismiss for lack of merit.16
However, on May 8, 1997, the SEC rendered its Order, as follows:
“WHEREFORE, premises considered, the decision of the hearing panel denying the motion for
intervention of Mr. Eduardo Rodriguez is hereby AFFIRMED. The Commission hereby receives and notes
the Closing Report of the Management Network and the Joaquin Cunanan Audit Report for inclusion in
the records of the case without going into the merits and veracity of the contents thereof; the order to
pay the attorney’s fees of Balgos and Perez is hereby SET ASIDE; the resolution of the issue on the
alleged payment of receiver’s fees of FBO Management Network is hereby deferred, and the order to
pay the additional fees of the receiver is hereby set aside until after the Commission en banc finally
clears and releases FBO Management Networks from its accountabilities in accordance with the policies
and orders of the Commission on the receivership.”17
On December 27, 1997, petitioner Orendain filed his Motion for Reconsideration18 of the RTC
December 4, 1996 Order. Consequently, BF Homes filed its January 17, 1997 Opposition19 to Orendain’s
Motion for Reconsideration; and on April 22, 1998, the RTC issued an Order denying the Motion for
Reconsideration for lack of merit and petitioner Orendain was directed to file his answer to the
Complaint within ten (10) days from receipt of the Order.20
Petitioner then filed his Answer Ex Abudante Ad Cautelam with Compulsory Counterclaims21 on May
29, 1998.
_______________
16 Records, pp. 229-233.
17 Records, pp. 179-180.

18 Records, pp. 237-257.
19 Records, pp. 289-296.
20 Records, p. 338.
21 Records, pp. 344-353.
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VOL. 506, OCTOBER 31, 2006
359
On July 13, 1998, petitioner filed before the CA a Petition for Certiorari and Prohibition with Prayer for
the Issuance of a Temporary Restraining Order and/or Bonded Writ of Preliminary Injunction22 which
sought to annul the RTC December 4, 1996 and April 22, 1998 Orders, denying petitioner’s Motion to
Dismiss and Motion for Reconsideration. Petitioner alleged that these motions were issued without
jurisdiction or with grave abuse of discretion amounting to lack or in excess of jurisdiction.
The Ruling of the Court of Appeals
In its August 18, 2000 Decision, the CA held that the action for reconveyance filed by BF Homes was
within the exclusive jurisdiction of the RTC. In the rehabilitation case, the LSFSIPI was not a party to the
said case and did not have any intra-corporate relation with petitioner at the time of the sale. The SEC
could not acquire jurisdiction over the Franciscan Sisters; while petitioner Orendain was sued in his
individual capacity and not in his official capacity as receiver.23
Moreover, the CA stated that at the time the assailed orders were issued, the subject SEC Order had not
yet attained finality; that there was no identity between the first and the second action with respect to
the parties; and that the SEC November 7, 1994 Omnibus Order relied on by Orendain was not a
decision on the merits of BF Homes’ Petition for Rehabilitation and for a Declaration in a State of
Suspension of Payments under Sec. 4 of P.D. No. 1758.
According to the CA:
“Although this Court is not oblivious to the fact that the SEC en banc in a Decision dated May 8, 1997,
affirmed the denial of the
_______________
22 Rollo, pp. 104-131.
23 The Decision was penned by Associate Justice Mercedes Gozo-Dadole, with Associate Justices Fermin
A. Martin, Jr. and Martin S. Villarama, Jr. concurring, Rollo, pp. 61-63.
360
360

intervention filed by Rodriguez, still the said order did not go into the merits of the intervention but
merely refused to give due recognition to the intervention as it was allegedly “untimely.” Therefore, the
contention of petitioner that the principle of res judicata is applicable in the case at bar does not hold
water.”24
The CA ultimately rendered its judgment in this wise:
“WHEREFORE, premises considered, the instant petition is DISMISSED for failure to clearly show grave
abuse of discretion and the assailed orders dated December 4, 1996 and April 22, 1998, are hereby
AFFIRMED in toto without costs to petitioner.”25
Hence, this petition is before us.
The Court’s Ruling
Petitioner avers that the CA erred in holding that (1) the complaint a quo is a simple reconveyance suit
and hence, can be heard and tried by the court a quo; (2) res judicata is inapplicable to the complaint a
quo; and (3) the Committee of Receivers may institute an action against a former receiver without prior
SEC approval.26
The petition is not meritorious.
Action for Reconvenyance in the RTC Does Not Involve
Intra-Corporate Dispute
The issue central to this petition is: which has jurisdiction over the action for reconveyance—the RTC or
SEC.
Petitioner Orendain argues that it is the SEC that has jurisdiction by virtue of Presidential Decree No.
902-A since BF Homes’ suit was instituted against him as its former receiver. He also avers that BF
Homes’ allegations were nothing more than protestations against the former receiver who entered
_______________
24 Id., at p. 65.
25 Id., at p. 66.
26 Rollo, pp. 16-17.
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361
into a transaction during BF Homes’ regime of rehabilitation; and that the assailed transaction was
consummated at the time the SEC had placed BF Homes under rehabilitation. Therefore, according to
petitioner, the SEC, which appointed the rehabilitation receiver, has the sole power to decide the issue
as to whether petitioner acted within the scope of the vested authority.
Petitioner also claims that the resolution of the instant controversy depends on the ratification by the
SEC of the acts of its agent, the receiver. Also, he asserts that for the RTC to insist on hearing and
deciding the case below is to dislodge the appointing body from reviewing, ratifying, confirming, or
overruling the acts of its appointee; and such would constitute undue interference on the jurisdiction of
the SEC by a court of equal jurisdiction. Further, petitioner claims that the questions of whether the
receiver of a company undergoing rehabilitation acted within the scope of his authority, and whether a
transaction consummated during the rehabilitation proceedings is impermissible, are matters not within
the province of a regular court acting on an ordinary reconveyance suit. Petitioner avers that the
undisputed fact is that at the time of the said transaction, respondent was operating under
rehabilitation whereby receivership places all matters arising from, incidental, or connected with the
implementation of said rehabilitation proceedings beyond the jurisdiction of regular courts. In addition,
petitioner avers that the property in question is one of the many properties which formed part of a pool
of assets placed under receivership and that he was the Chairman of the FBO Management, Inc.—the
SEC-appointed Rehabilitation Receiver at the time of the transaction.
WE hold OTHERWISE.
In Speed Distributing Corp. v. CA, we held that:
“Jurisdiction over the subject matter is conferred by law. The nature of an action, as well as which court
or body has jurisdiction over it, is determined based on the allegations contained in the complaint of the
plaintiff, irrespective of whether or not plaintiff is
362
362
entitled to recover upon all or some of the claims asserted therein. It cannot depend on the defenses set
forth in the answer, in a motion to dismiss, or in a motion for reconsideration by the defendant
(citations omitted).”27
In the case at bench, the BF Homes’ Complaint for reconveyance was filed on January 23, 1996 against
LSFSIPI and Florencio B. Orendain, in Civil Case No. LP-96-002.
In 1996, Section 5 of PD No. 902-A,28 which was approved on March 11, 1976, was still the law in
force—whereby the SEC still had original and exclusive jurisdiction to hear and decide cases involving:
“b) controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any and/or all of them and the corporation, partnership,
or association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity.”
Clearly, the controversy involves matters purely civil in character and is beyond the ambit of the limited
jurisdiction of the SEC. As held in Viray v. Court of Appeals, “[t]he better policy in determining which
body has jurisdiction over a case would be to consider not only [1] the status or relationship of the
parties but also [2] the nature of the question that is the subject of their controversy.”29
More so, in Speed Distributing Corp., we held that:
“The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the
_______________
27 G.R. No. 149351, March 17, 2004, 425 SCRA 691, 705.
28 Reorganization of the Securities and Exchange Commission with Additional Powers and Placing the
said Agency under the Administrative Supervision of the Office of the President (as amended by PD Nos.
1653, 1758, and 1799).
29 G.R. No. 92481, November 9, 1990, 191 SCRA 308, 323.

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363
parties and the corporation, partnership or association of which they are stockholders, members or
associates; between any or all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation, partnership or
association and the State insofar as it concerns their individual franchises. The second element requires
that the dispute among the parties be intrinsically connected with the regulation of the corporation. If
the nature of the controversy involves matters that are purely civil in character, necessarily, the case
does not involve an intra-corporate controversy. The determination of whether a contract is simulated
or not is an issue that could be resolved by applying pertinent provisions of the Civil Code (citations
omitted).”30
However, Section 5 of PD No. 902-A does not apply in the instant case. The LSFSIPI is neither an officer
nor a stockholder of BF Homes, and this case does not involve intracorporate proceedings. In addition,
the seller, petitioner Orendain, is being sued in his individual capacity for the unauthorized sale of the
property in controversy. Hence, we find no cogent reason to sustain petitioner’s manifestation that the
resolution of the instant controversy depends on the ratification by the SEC of the acts of its agent or
the receiver because the act of Orendain was allegedly not within the scope of his authority as receiver.
Furthermore, the determination of the validity of the sale to LSFSIPI will necessitate the application of
the provisions of the Civil Code on obligations and contracts, agency, and other pertinent provisions.
In addition, jurisdiction over the case for reconveyance is clearly vested in the RTC as provided in
paragraph (2), Section 19, B.P. Blg. 129, to wit:
“Jurisdiction in civil cases.—Regional Trial Courts shall exercise exclusive [and] original jurisdiction
(1) In all civil actions in which the subject of the litigation is incapable of pecuniary estimation; and
_______________
30 Supra note 27, at pp. 706-707.
364
364
(2) In all civil actions which involve the title to, or possession of, real property or any interest therein,
where the assessed value of the property involved exceeds Twenty Thousand pesos (P20,000.00) or for
civil actions in Metro Manila, where such value exceeds Fifty Thousand pesos (P50,000.00) x x x”
Likewise, in DMRC Enterprises v. Este del Sol Mountain Reserve, Inc., the Court said:
“Nowhere in said decree [PD 902-A] do we find even so much as an intimidation [sic] that absolute
jurisdiction and control is vested in the Securities and Exchange Commission in all matters affecting
corporations. To uphold the respondents’ arguments would remove without the legal imprimatur from
the regular courts all conflicts over matters involving or affecting corporations, regardless of the nature
of the transactions which give rise to such dispute. The courts would then be divested of jurisdiction not
by reason of the nature of the dispute submitted to them for adjudication, but solely for the reason that
the dispute involves a corporation. This cannot be done. To do so would not only be to encroach on the
legislative prerogative to grant and revoke jurisdiction of the courts but such a sweeping interpretation
may suffer constitutional infirmity. Neither can we reduce jurisdiction of the court by judicial fiat
([citing] Article X, Section 1, The [1973] Constitution).”31
Res Judicata Does Not Apply in the Action for Recon
veyance
According to petitioner, dismissal of the complaint is proper based on res judicata. He alleged that on
September 28, 1994, he filed a Petition for Rehabilitation and for Declaration in a State of Suspension of
Payments docketed as SEC Case No. 2693; and that sometime in 1994, FBO Management Network, Inc.
submitted its Closing Report to the SEC. In said report, the receiver disclosed the conveyance of the
prop-
_______________
31 G.R. No. L-57936, September 28, 1984, 132 SCRA 293, 299300.
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VOL. 506, OCTOBER 31, 2006
365
erty to the LSFSIPI. It is the same transaction which BF Homes seeks to nullify in the complaint a quo.
We are not persuaded.
There are two (2) aspects to the doctrine of res judicata:

“The first, known as “bar by prior judgment,” is the effect of a judgment as a bar to the prosecution of a
second action upon the same claim, demand or cause of action. The second, known as “conclusiveness
of judgment,” issues actually and directly resolved in a former suit cannot again be raised in any future
case between the same parties involving a different cause of action.”32
A case is barred by prior judgment when the following requisites are present: “(1) the former judgment
is final; (2) it is rendered by a court having jurisdiction over the subject matter and the parties; (3) it is a
judgment or an order on the merits; and (4) there is—between the first and second actions—identity of
parties, of subject matter, and causes of action.”33
Petitioner asserts that bar by prior judgment exists since the May 8, 1997 Order of the SEC en banc had
become final which would effectively preclude the adjudication of Civil Case No. LP-96-0022.
We DISAGREE.
While the said SEC order denied the motion for intervention filed by intervenor Eduardo S. Rodriguez, it
did not, however, resolve the issues raised in the motion on the merits. A judgment is “on the merits
when it amounts to a legal declaration of the respective rights and duties of the parties based upon the
disclosed facts (emphasis supplied and citation omitted).”34 It is apparent that the SEC order in question
merely
_______________
32 Francisco v. Co, G.R. No. 151339, January 31, 2006, 481 SCRA 241, 248.
33 Luzon Development Bank v. Conquilla, G.R. No. 163338, September 21, 2005, 470 SCRA 533, 545.
34 Id., at p. 550.
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366
acknowledged the Closing Report for inclusion in the records of the case. It did not, however, pass upon
the merits and veracity of the report’s contents. As such, it cannot, in any wise, be considered as an
adjudication of the rights and obligations of the parties relating to the subject matter of the action.
Likewise, it appears that between the first and second actions, there was no identity of parties, of
subject matter, and of cause of action. Hence, res judicata does not apply in the instant case.
The second type of res judicata is “conclusiveness of judgment.” In Francisco v. Co, this Court elucidated
the nature of this principle, thus:
“Conclusiveness of judgment” operates as a bar even if there is no identity as between the first and
second causes of judgment. Under the doctrine, any right, fact, or matter in issue directly adjudicated or
necessarily involved in the determination of an action before a competent court in which judgment is
rendered on the merits is conclusively settled by the judgment therein and cannot again be litigated
between the parties and their privies whether or not the claim, demand, purpose, or subject matter of
the two actions is the same.
Evidently, “conclusiveness of judgment” may operate to bar the second case even if there is no identity
of causes of action. The judgment is conclusive in the second case, only as to those matters actually and
directly controverted and determined, and not as to matters merely involved therein.”35
A perusal of the SEC case would show that reconveyance of the property in controversy was neither an
issue nor a relief sought by any party in the SEC proceedings. Evidently, the SEC November 7, 1994
Omnibus Order did not mention any reconveyance of property.36
_______________
35 Supra note 32, at pp. 249-250.
36 Supra note 10.
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367
Eduardo S. Rodriguez, the intervenor in the SEC case, did not demand the reversion of the disputed
property precisely because the SEC has no jurisdiction over the action for reconveyance. Assuming,
arguendo, that intervenor Rodriguez raised the issue on the validity of petitioner’s acts in his capacity as
receiver, still, the SEC November 7, 1994 Omnibus Order did not delve into the merits of the
intervention nor did the order give due course to the intervention as it was untimely.
Thus, there is no “conclusiveness of judgment” as the reconveyance of the lot sold to LSFSIPI was not
directly decided or necessarily involved and adjudicated in the said SEC order.
Furthermore, petitioner argues that the Committee of Receivers should have sought prior clearance
from the SEC before instituting the action for reconveyance before the RTC, because it does not have
the legal capacity to sue. This is incorrect. One of the general powers of a receiver under Rule 59,
Section 6 of the Rules of Court is the power to bring and defend suits in such capacity.
Petitioner also contends that an action filed by a successorreceiver against him as predecessor-receiver
is not allowed under Rule 59, Section 6 without leave of court which appointed him; as Section 6
provides that “no action may be filed by or against a receiver without leave of the court which
appointed him.” This is bereft of merit.
The rule talks of the current receiver of the company and not the previous receiver like petitioner
Orendain. The reason behind Rule 59, Section 6, which requires leave of court for all suits by or against
the present receiver, is to forestall any undue interference with the receiver’s performance of duties
through improvident suits. Apparently, such situation cannot apply to Orendain who is no longer BF
Homes’ receiver.
368
368
Moreover, the instant petition has been rendered moot and academic by the passage of RA 8799 or The
Securities Regulation Code which took effect on August 8, 2000.37
Section 5.2 of RA 8799 transferred exclusive and original jurisdiction of the SEC over actions involving
intra-corporate controversies to the courts of general jurisdiction or the appropriate RTC. In the
transition, all intra-corporate cases pending in the SEC, which were not ripe for adjudication as of August
8, 2000, were turned over to the RTC. Congress thereby recognized the expertise and competence of the
RTC to take cognizance of and resolve cases involving intracorporate controversies. Thus, “whether or
not the issue is intra-corporate, it is now the [RTC] and no longer the SEC that takes cognizance of [and
resolves cases involving intracorporate controversies].”38
Section 5.2 of RA 8799 explicitly provides:
“The Commission’s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No.
902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over the cases. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed”
(emphasis supplied).
Subsequently, on January 23, 2001, the Supreme Court issued Supplemental Administrative Circular No.
8-01 which ordered that effective March 1, 2000, “all SEC cases originally assigned or transmitted to the
regular RTC shall be trans-
_______________
37 Nautica Canning Corporation v. Yumul, G.R. No. 164588, October 19, 2005, 473 SCRA 415, 427.
38 Id.
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369
ferred to the branches of the regular RTC specially designated to hear such cases in accordance with AM
No. 00-11-03-SC.”
During the Bicameral Conference Committee’s discussions on the conflicting provisions of Senate Bill No.
1220 and House Bill No. 8015 on the “Amendments to the Securities, Regulations and Enforcement Act,”
former Senator Raul S. Roco rendered his report,39 as follows:
“The first major departure is as regards the Security Exchange Commission. The Securities and Exchange
Commission has been authorized under this proposal to reorganize itself. As an administrative agency,
we strengthened it and at the same time we take away the quasi-judicial functions. The quasi-judicial
functions are now given back to the courts of general jurisdiction——the Regional Trial Court, except for
two categories of cases (emphasis supplied).
In case of corporate disputes, only those that are now submitted for final determination of the SEC will
remain with the SEC. So, all those cases, both memos of the plaintiff and defendant, that have been
submitted for resolution will continue. At the same time, cases involving rehabilitation, bankruptcy,
suspension of payments and receiverships that were filed before June 30, 2000 will continue with the
SEC. In other words, we are avoiding the possibility, upon approval of this bill, of people filing cases with
the SEC, in a manner of speaking, to select their court.
x x x It is only right now with this bill that we clarify the independent functions, not only in terms of
monetary polity, by giving it to the Monetary Board, but in matters of commerce and securities and
capital formation, by giving them to the [SEC], with sufficient powers to monitor and regulate capital
formation in the Philippines.
That is the first major departure x x x in terms of the powers and responsibilities of the [SEC]. In
registration of securities, exempt transactions [and exempt securities], these are very technical and
there are modifications x x x The registration and monitoring of securities are basically the same as the
old law.
Pre-need plans x x x remain with the SEC. Originally we wanted the SEC to concentrate on commerce,
corporations and the
_______________
39 CP-SENATE, TSP, Nov. 24, 1998, p. 216.
370
370
securities regulation, but pre-need plan[s] under the Senate report was really with the SEC and under
the House report, it was recommended to remain with the SEC without prejudice to a subsequent law if
we should decide to do so to have the pre-need plans transferred to the Office of the Insurance
Commissioner. x x x”
Thus, it is unequivocal that the jurisdiction to try and decide cases originally assigned to the SEC under
Section 5 of PD 902-A has been transferred to the RTC. For clarity, we quote those cases under Section
5, PD 902-A, which now fall within the RTC’s jurisdiction, as follows:
“(a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or stockholders, partners, members of associations registered with the
Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation, partnership or
association and the State insofar as it concerns their individual franchise or right as such entity;
(c) Controversies in the election or appointment of directors, trustees, officers or managers of such
(d) Petitioners of corporations, partnerships or associations to be declared in the state of suspension of

payment in cases where the corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they fall due or in cases where
the corporation, partnership or association has no sufficient assets to cover its liabilities but is under the
management of a rehabilitation receiver or management committee created pursuant to this Decree.”
The remaining powers and functions of the SEC are enumerated in Section 5 of RA 8799, to wit:
“Powers and Functions of the Commission.—[5.1] The Commission shall act with transparency and shall
have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
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371
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing law[s].
Pursuant thereto the Commission shall have, among others, the following powers and functions:
grantees of primary franchises and/or a license or permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities marker and propose legislation
and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration statements, and registration
and licensing applications;
(d) Regulate, investigate and supervise the activities of persons to ensure compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other
SROs;
(f) Impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant
thereto;
(g) Prepare, approve, amend or repeal rules, regulations, and orders, and issue opinions and provide
guidance on and supervise compliance with such rules, regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government,
civil or military as well as any private institution, corporation, firm, associations or person in the
implementation of its powers and functions under this Code;
(j) Punish for contempt of the Commission, both direct and indirect, in accordance with the pertinent
provisions of and penalties prescribed by the Rules of Court;
(k) Compel the officers of any registered corporation or association to call meetings of stockholders or
members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission
and in appropriate cases, order the examination, search and seizure of all documents, papers, files and
records, tax returns, and books of accounts of any
372
372

entity or person under investigation as may be necessary for the proper disposition of the cases before
it, subject to the provision of existing laws;
(m) Suspend, or revoke, after notice and hearing the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as my be provided by law as well as those which may be implied from, or
which are necessary or incidental to the carrying out of, the express powers granted the Commission to
achieve the objectives and purposes of these laws.”
Juxtaposing the jurisdiction of the RTC under RA 8799 and the powers that were retained by the SEC, it
is clear that the SEC retained its administrative, regulatory, and oversight powers over all corporations,
partnerships, and associations who are grantees of primary franchises, and/or a license or permit issued
by the Government. However, the Securities Regulations Code (SRC) is clear that when there is a
controversy arising out of intra-corporate relations, between and among stockholders, members or
associates, and between, any, or all of them and the corporation, it is the RTC, not SEC, which has
jurisdiction over the case.
Thus, when the complaint involves “an active antagonistic assertion of a legal right on one side and a
denial thereof on the other concerning a real, and not a mere theoretical question or issue,”40 a cause
of action involving a delict or wrongful act or omission committed by a party in violation of the primary
right of another,41 or an actual controversy involving rights which are legally demandable or
enforceable,42 the jurisdiction over this complaint is lodged with the RTC but not the SEC.
_______________
40 Delumen v. Republic, G.R. No. L-5552, January 28, 1954, 94 Phil. 288, 288-289.
41 1997 RULES OF CIVIL PROCEDURE, Rule 2, Section 2; also cited in Joseph v. Bautista, G.R. No. 41423,
February 23, 1989, 170 SCRA 540, 544.
42 CONSTITUTION, Article VIII, Section 1.

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373
The passage of RA 8799 has put to rest petitioner Orendain’s claim that it is the SEC and not the RTC that
has jurisdiction over Civil Case No. LP-96-0022. At present, the instant petition has nothing to stand on
and perforce must fail.
WHEREFORE, the August 18, 2000 Decision and December 6, 2000 Resolution of the Court of Appeals in
CA-G.R. SP No. 48263 are hereby AFFIRMED IN TOTO.
SO ORDERED.
Quisumbing (Chairperson), Carpio, Carpio-Morales and Tinga, JJ., concur.
Judgment and resolution affirmed in toto.
Notes.—In an action for reconveyance, the decree of registration is respected as incontrovertible. What
is sought instead is the transfer of the property or its title which has been wrongfully or erroneously
registered in another person’s name, to its rightful or legal owner or to the one with a better right.
(Heirs of Pomposa Saludares vs. Court of Appeals, 420 SCRA 51 [2004])
A corporation and those who are officially responsible for the conduct of its affairs may be punished for
contempt in disobeying judgments, decrees, or orders of a court made in a case within its jurisdiction.
(Heirs of Trinidad De Leon vs. Court of Appeals, 422 SCRA 101 [2004])
——o0o——
374
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Orendain vs. BF Homes, Inc., 506 SCRA
348, G.R. No. 146313 October 31, 2006
G.R. No. 187702. October 22, 2014.*
SECURITIES AND EXCHANGE COMMISSION, petitioner, vs. THE HONORABLE COURT OF APPEALS, OMICO
CORPORATION, EMILIO S. TENG and TOMMY KIN HING TIA, respondents.
G.R. No. 189014. October 22, 2014.*
ASTRA SECURITIES CORPORATION, petitioner, vs. OMICO CORPORATION, EMILIO S. TENG and TOMMY
KIN HING TIA, respondents.
Mercantile Law; Securities and Exchange Commission; Securities Regulation Code; With the passage of
the Securities Regulation Code (SRC), the powers granted to Securities and Exchange Commission (SEC)
under Section 5 were withdrawn, together with the incidental and ancillary powers enumerated in
Section 6.—Section 6(g) of Presidential Decree No. (P.D.) 902-A dated 11 March 1976 conferred on SEC
the power “[t]o pass upon the validity of the issuance and use of proxies and voting trust agreements for
absent stockholders or members.” Section 6, however, opens thus: “In order to effectively exercise such
jurisdiction x x x.” This opening clearly refers to the preceding Section 5. The Court pointed out therein
that the power to pass upon the validity of proxies was merely incidental or ancillary to the powers
conferred on the SEC under Section 5 of the same decree. With the passage of the SRC, the powers
granted to SEC under Section 5 were withdrawn, together with the incidental and ancillary powers
enumerated in Section 6.
Same; Same; Jurisdiction; All matters affecting the manner and conduct of the election of directors are
properly cognizable by the regular courts. Otherwise, these matters may be brought before the
Securities and Exchange Commission (SEC) for resolution based on the regulatory powers it exercises
over corporations, partnerships and associations.—The Court explained that the power of the SEC to
_______________
* FIRST DIVISION.
100
100
Securities and Exchange Commission vs. Court of Appeals
regulate proxies remains in place in instances when stockholders vote on matters other than the
election of directors. The test is whether the controversy relates to such election. All matters affecting
the manner and conduct of the election of directors are properly cognizable by the regular courts.
Otherwise, these matters may be brought before the SEC for resolution based on the regulatory powers
it exercises over corporations, partnerships and associations.
Remedial Law; Civil Procedure; Appeals; Quasi-judicial agencies do not have the right to seek the review
of an appellate court decision reversing any of their rulings.—Calling to mind established jurisprudential
principles, the Court therein ruled that quasi-judicial agencies do not have the right to seek the review
of an appellate court decision reversing any of their rulings. This is because they are not real parties-in-
interest. Thus, the Court expunged the petition filed by the SEC for the latter’s lack of capacity to file the
suit. So it must be in the instant cases.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari; and PETITION for review on certiorari of the
decision and resolution of the Court of Appeals.

Zamora, Poblador, Vasquez and Bretana for Astra Securities Corp.
Jimenez, Gonzales, Bello, Valdez, Caluya & Fernandez (JGLAW) for Omico Corporation, et al.
SERENO, CJ.:
G.R. No. 187702 is a Petition for Certiorari under Rule 65 of the Rules of Court seeking to nullify the
Court of Appeals (CA) Decision1 dated 18 March 2009 in C.A.-G.R. S.P. No.
_______________
1 Rollo (G.R. No. 187702), pp. 43-55; penned by Associate Justice Myrna Dimaranan Vidal, with
Associate Justices Martin S. Villarama, Jr. (now a member of this Court) and Rosalinda Asuncion-Vicente,
concurring.
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VOL. 739, OCTOBER 22, 2014
101

106006. G.R. No. 189014 is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the same Decision, as well as the CA Resolution2 dated 9 July 2009. On 12 October 2009, the
Court resolved to consolidate the two cases.3
The CA Decision ruled that because controversies involving the validation of proxies are considered
election contests
under the Interim Rules of Procedure Governing Intra-Corporate Controversies, they are properly
cognizable by the regular courts, not by the Securities and Exchange Commission. The CA Resolution
denied the motion for reconsideration filed by Astra Securities Corporation.
Facts
Omico Corporation (Omico) is a company whose shares of stock are listed and traded in the Philippine
Stock Exchange, Inc.4 Astra Securities Corporation (Astra) is one of the stockholders of Omico owning
about 18% of the latter’s outstanding capital stock.5
Omico scheduled its annual stockholders’ meeting on 3 November 2008.6 It set the deadline for
submission of proxies on 23 October 2008 and the validation of proxies on 25 October 2008.
Astra objected to the validation of the proxies issued in favor of Tommy Kin Hing Tia (Tia), representing
about 38% of the outstanding capital stock of Omico.7 Astra also objected to the inclusion of the proxies
issued in favor of Tia and/or Mar-
_______________
2 Rollo (G.R. No. 189014), p. 42; penned by Associate Justice Myrna Dimaranan Vidal, with Associate
Justices Martin S. Villarama, Jr. (now a member of this Court) and Magdangal M. de Leon, concurring.
3 Id., at pp. 388-389.
4 Rollo (G.R. No. 187702), p. 110.
5 Id., at p. 60.
6 Id., at p. 44.
7 Id., at pp. 46, 133.
102
102
tin Buncio, representing about 2% of the outstanding capital stock of Omico.8
Astra maintained that the proxy issuers, who were brokers, did not obtain the required express written
authorization of their clients when they issued the proxies in favor of Tia. In so doing, the issuers were
allegedly in violation of SRC Rule 20(11)(b)(xviii)9 of the Amended Securities Regulation Code (SRC or
Republic Act No. 8799) Rules.10 Furthermore, the proxies issued in favor of Tia exceeded 19, thereby
giving rise to the presumption of solicitation thereof under SRC Rule 20(2)(B)(ii)(b)11 of the Amended
SRC Rules. Tia did not comply
_______________
8 Id.
9 SRC RULE 20. Disclosures to Stockholders Prior to Meeting (formerly, SRC Rule 20 – The Proxy Rule)
xxxx
11. Other Procedural Requirements.
xxxx
b. Proxy
xxxx
xviii. No member of the Stock Exchange and no broker/dealer shall give any proxy, consent or
authorization, in respect of any security carried for the account of a customer to a person other than the
customer, without the express written authorization of such customer. The proxy executed by the
broker shall be accompanied by a certification under oath stating that before the proxy was given to the
broker, he had duly obtained the written consent of the persons in whose account the shares are held.
(Emphasis supplied)
10 Rollo (G.R. No. 187702), p. 46.

11 SRC RULE 20. Disclosures to Stockholders Prior to Meeting (formerly, SRC Rule 20 – The Proxy
Rule).
xxxx
2. Definitions.
xxxx
B. Solicitation
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103
with the rules on proxy solicitation, in violation of Section 20.112 of the SRC.
Despite the objections of Astra, Omico’s Board of Inspectors declared that the proxies issued in favor of
Tia were valid.13
On 27 October 2008, Astra filed a Complaint14 before the Securities and Exchange Commission (SEC)
praying for the invalidation of the proxies issued in favor of Tia. Astra also prayed for the issuance of a
cease and desist order (CDO) enjoining the holding of Omico’s annual stockholders’ meeting until the
SEC had resolved the issues pertaining to the validation of proxies.
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i. The terms solicit and solicitation shall include:
a. any request for a proxy or authorization;
b. any request to execute or not to execute, or to revoke, a proxy or authorization; or
c. the furnishing of a form of proxy or other communication to security holders under a circumstance
reasonably calculated to result in the procurement, withholding or revocation of a proxy.
ii. The terms shall not apply to:
a. the performance by any person of ministerial acts on behalf of a person soliciting a proxy; or
b. any solicitation made otherwise than on behalf of the registrant where the total number of persons
solicited is not more than nineteen (19). (Emphasis supplied)
12 SECTION 20. Proxy Solicitations.—20.1. Proxies must be issued and proxy solicitation must be
made in accordance with rules and regulations to be issued by the Commission.
13 Rollo (G.R. No. 187702), p. 46.

14 Id., at pp. 59-71.
104
104
On 30 October 2008, SEC issued the CDO enjoining Omico from accepting and including the questioned
proxies in determining a quorum and in electing the members of the board of directors during the
annual stockholders’ meeting on 3 November 2008.15
Attempts to serve the CDO on 3 November 2008 failed, and the stockholders’ meeting proceeded as
scheduled with 52.3% of the outstanding capital stock of Omico present in person or by proxy.16 The
nominees for the board of directors were elected upon motion.17
Astra instituted before the SEC a Complaint18 for indirect contempt against Omico for disobedience of
the CDO. On the other hand, Omico filed before the CA a Petition for Certiorari and Prohibition19
imputing grave abuse of discretion on the part of the SEC for issuing the CDO.
Ruling of the CA
In the assailed Decision dated 18 March 2009, the CA declared the CDO null and void.20
The CA held that the controversy was an intra-corporate dispute.21 The SRC expressly transferred the
jurisdiction over actions involving intra-corporate controversies from the SEC to the regional trial
courts.22 Furthermore, Section 2, Rule 623
_______________
15 Id., at pp. 110-113.
16 Id., at p. 47; Rollo (G.R. No. 189014), p. 176.
17 Rollo (G.R. No. 189014), p. 177.
18 Id., at pp. 170-185.
19 Rollo (G.R. No. 187702), pp. 73-109.
20 Id., at p. 54.
21 Id., at p. 49.
22 Id., at pp. 49-50.
23 SECTION 2. Definition.—An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corporation, the validation of proxies, the manner and
validity of elections, and the qualifications
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105
of the Interim Rules of Procedure Governing Intra-Corporate Disputes,24 provides that any controversy
or dispute involving the validation of proxies is an election contest, the jurisdiction over which has also
been transferred by the SRC to the regular courts.25
Thus, according to the CA, the SEC committed grave abuse of discretion in taking cognizance of Astra’s
complaint.26 The CDO was a patent nullity, for an order issued without jurisdiction is no order at all.
Aggrieved by the CA Decision, the SEC filed before us the instant Petition for Certiorari docketed as G.R.
No. 187702.27 Meanwhile, Astra filed a Motion for Reconsideration before the CA,28 which
subsequently denied the motion in the assailed Resolution dated 9 July 2009.
On 14 September 2009, Astra filed the instant Petition for Review on Certiorari docketed as G.R. No.
189014.29 The Court consolidated the two petitions on 12 October 2009.30
Issue
Whether the SEC has jurisdiction over controversies arising from the validation of proxies for the
election of the directors of a corporation.
_______________
of candidates, including the proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by members of a non-stock corporation
where the articles of incorporation or bylaws so provide. (Emphasis supplied)
24 A.M. No. 01-2-04-SC, 13 March 2001.
25 Rollo (G.R. No. 187702), p. 51.
26 Id., at p. 52.
27 Id., at pp. 2-41.
28 Rollo (G.R. No. 189014), pp. 23-41.
29 Id., at pp. 45-92.
30 Id., at p. 388.
106
106
Our Ruling
About a month after the CA issued the assailed Decision, this Court promulgated GSIS v. CA,31 which
squarely answered the above issue in the negative.
In that case, we observed that Section 632(g) of Presidential
_______________
31 603 Phil. 676; 585 SCRA 679 (2009).
32 SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
a) To issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in

which it has jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply;
b) To issue writs of attachment in cases in which it has jurisdiction, in order to preserve the rights of
parties and in such cases the pertinent provisions of the Rules of Court shall apply;
c) To appoint one or more receivers of the property, real and personal, which is the subject of the action
pending before the Commission in accordance with the pertinent provisions of the Rules of Court in
such other cases whenever necessary in order to preserve the rights of the parties-litigants and/or
protect the interest of the investing public and creditors: Provided, however, That the Commission may,
in appropriate cases, appoint a rehabilitation receiver of corporations, partnerships or other
associations not supervised or regulated by other government agencies who shall have, in addition to
the powers of a regular receiver under the provisions of the Rules of Court, such functions and powers
as are provided for in the succeeding paragraph d) hereof: Provided, further, That the Commission may
appoint a rehabilitation receiver of corporations, partnerships or other associations supervised or
regulated by other government agencies, such as banks and insurance companies, upon request of the
government agency concerned: Provided, finally, That upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this De-
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107
Decree No. (P.D.) 902-A dated 11 March 1976 conferred on
_______________
cree, all actions for claims against corporations, partnerships or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly;
d) To create and appoint a management committee, board, or body upon petition or motu proprio to
undertake the management of corporations, partnerships or other associations not supervised or
regulated by other government agencies in appropriate cases when there is imminent danger of
dissipation, loss, wastage or destruction of assets or other properties of paralization of business
operations of such corporations or entities which may be prejudicial to the interest of minority
stockholders, parties-litigants or the general public: Provided, further, That the Commission may create
or appoint a management committee, board or body to undertake the management of corporations,
partnerships or other associations supervised or regulated by other government agencies, such as banks
and insurance companies, upon request of the government agency concerned.
The management committee or rehabilitation receiver, board or body shall have the power to take
custody of, and control over, all the existing assets and property of such entities under management; to
evaluate the existing assets and liabilities, earnings and operations of such corporations, partnerships or
other associations; to determine the best way to salvage and protect the interest of the investors and
creditors; to study, review and evaluate the feasibility of continuing operations and restructure and
rehabilitate such entities if determined to be feasible by the Commission. It shall report and be
responsible to the Commission until dissolved by order of the Commission: Provided, however, That the
Commission may, on the basis of the findings and recommendation of the management committee, or
rehabilitation receiver, board or body, or on its own findings, determine that the continuance in
business of such corporation or entity would not be feasible or profitable nor work to the
108
108
SEC the power “[t]o pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent
_______________
best interest of the stockholders, parties-litigants, creditors, or the general public, order the dissolution
of such corporation entity and its remaining assets liquidated accordingly. The management committee
or rehabilitation receiver, board or body may overrule or revoke the actions of the previous
management and board of directors of the entity or entities under management notwithstanding any
provision of law, articles of incorporation or bylaws to the contrary.
The management committee, or rehabilitation receiver, board or body shall not be subject to any action,
claim or demand for, or in connection with, any act done or omitted to be done by it in good faith in the
exercise of its functions, or in connection with the exercise of its power herein conferred.
e) To punish for contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of, and penalties prescribed by, the Rules of Court;
f) To compel the officers of any corporation or association registered by it to call meetings of

stockholders or members thereof under its supervision;
g) To pass upon the validity of the issuance and use of proxies and voting trust agreements for
absent stockholders or members;
h) To issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases order the examination, search and seizure of all documents,
papers, files and records, tax returns, and books of accounts of any entity or person under investigation
as may be necessary for the proper disposition of the cases before it, notwithstanding the provisions of
any law to the contrary;
i) To impose fines and/or penalties for violation of this Decree or any other laws being implemented
by the Commission, the pertinent rules and regulations, its orders, decisions and/or rulings;
109
stockholders or members.” Section 6, however, opens thus: “In order to effectively exercise such
jurisdiction x x x.” This
_______________
j) To authorize the establishment and operation of stock exchanges, commodity exchanges and such
other similar organization and to supervise and regulate the same; including the authority to determine
their number, size and location, in the light of national or regional requirements for such activities with
the view to promote, conserve or rationalize investment;
k) To pass upon, refuse or deny, after consultation with the Board of Investments, Department of
Industry, National Economic and Development Authority or any other appropriate government agency,
the application for registration of any corporation, partnership or association or any form of
organization falling within its jurisdiction, if their establishment, organization or operation will not be
consistent with the declared national economic policies;
l) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration
of corporations, partnerships or associations, upon any of the grounds provided by law, including the
following:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of
or damage to the general public;
3. Refusal to comply or defiance of any lawful order of the Commission restraining commission of
acts which would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5) years;
5. Failure to file bylaws within the required period;
6. Failure to file required reports in appropriate forms as determined by the Commission within the
prescribed period;
m) To exercise such powers as may be provided by law as well as those which may be implied from,
or which are necessary or incidental to the carrying out of, the express
110
opening clearly refers to the preceding Section 5.33 The Court
_______________
powers granted to the Commission to achieve the objectives and purposes of this Decree.
In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be
conducted by the Commission or by a Commissioner or by such other bodies, boards, committees
and/or any officer as may be created or designated by the Commission for the purpose. The decision,
ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be appealed
to the Commission sitting En Banc within thirty (30) days after receipt by the appellant of notice of such
decision, ruling or order. The Commission shall promulgate rules of procedures to govern the
proceedings, hearings and appeals of cases falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the Commission sitting En Banc to the
Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court.
(Emphasis supplied)
33 SECTION 5. 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:
a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
interest of the public and/or of the stockholder, partners, members of associations or organizations
registered with the Commission;
b) Controversies arising out of intra-corporate or partnership relations, between and among

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;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such

corporations, partnerships or associations;
111
pointed pointed out therein that the power to pass upon the validity of proxies was merely incidental or
ancillary to the powers conferred on the SEC under Section 5 of the same decree. With the passage of
the SRC, the powers granted to SEC under Section 5 were withdrawn, together with the incidental and
ancillary powers enumerated in Section 6.
While the regular courts now had the power to hear and decide cases involving controversies in the
election of directors, it was not clear whether the SRC also transferred to these courts the incidental and
ancillary powers of the SEC as enumerated in Section 6 of P.D. 902-A. Thus, in GSIS v. CA, it was
necessary for the Court to determine whether the action to invalidate the proxies was intimately tied to
an election controversy. Hence, the Court pronounced:
Under Section 5(c) of Presidential Decree No. 902-A, in relation to the SRC, the jurisdiction of the regular
trial courts with respect to election-related controversies is specifically confined to “controversies in the
election or appointment of directors, trustees, officers or managers of corporations, partnerships, or
associations.” Evidently, the jurisdiction of the regular courts over so-called election contests or
controversies under Section 5(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which stockholders are authorized to
participate under Section 24 of the Corporation Code.
_______________
d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of

payments in cases where the corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in
cases where the corporation, partnership or association has no sufficient assets to cover its liabilities,
but is under the management of a Rehabilitation Receiver or Management Committee created pursuant
to this Decree.
112
112

This qualification allows for a useful distinction that gives due effect to the statutory right of the SEC to
regulate proxy solicitation, and the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the cases enumerated under
Section 5 of Presidential Decree No. 902-A. However, when proxies are solicited in relation to the
election of corporate directors, the resulting controversy, even if it ostensibly raised the violation of the
SEC rules on proxy solicitation, should be properly seen as an election controversy within the original
and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to Section 5(c)
of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular courts over such controversies in the
election of corporate directors must be seen as intended to confine to one body the adjudication of all
related claims and controversy arising from the election of such directors. For that reason, the
aforequoted Section 2, Rule 6 of the Interim Rules broadly defines the term “election contest” as
encompassing all plausible incidents arising from the election of corporate directors, including: (1) any
controversy or dispute involving title or claim to any elective office in a stock or non-stock corporation,
(2) the validation of proxies, (3) the manner and validity of elections and (4) the qualifications of
candidates, including the proclamation of winners. If all matters anteceding the holding of such election
which affect its manner and conduct, such as the proxy solicitation process, are deemed within the
original and exclusive jurisdiction of the SEC, then the prospect of overlapping and competing
jurisdictions between that body and the regular courts becomes frighteningly real. From the language of
Section 5(c) of Presidential Decree No. 902-A, it is indubitable that controversies as to the qualification
of voting shares, or the validity of votes cast in favor of a candidate for election to the board of directors
are properly cogniza-
113
VOL. 739, OCTOBER 22, 2014
113

ble and adjudicable by the regular courts exercising original and exclusive jurisdiction over election
cases.34
x x x.
The ruling harmonizes the seeming conflict between the Amended SRC Rules promulgated by the SEC
and the Interim Rules of Procedure Governing Intra-Corporate Disputes promulgated by the Court.
SRC Rule 20(11)(b)(xxi) of the Amended SRC Rules provides:
SRC RULE 20.
Disclosures to Stockholders Prior to Meeting
(formerly, SRC Rule 20 – The Proxy Rule)
xxxx
11. Other Procedural Requirements.
xxxx
b. Proxy
xxxx
xxi. In the validation of proxies, a special committee of inspectors shall be designated or appointed by
the Board of Directors which shall be empowered to pass on the validity of proxies. Any dispute that
may arise pertaining thereto, shall be resolved by the Securities and Exchange Commission upon formal
complaint filed by the aggrieved party, or by the SEC officer supervising the proxy validation process.
(Emphasis supplied)
_______________
34 Supra note 31 at pp. 707-708; pp. 707-709.
114
114
On the other hand, these are the provisions of Section 1, Rule 1; and Section 2, Rule 6 of the Interim
Rules of Procedure Governing Intra-Corporate Disputes:
RULE 1
General Provisions
SECTION 1. (a) Cases Covered.—These Rules shall govern the procedure to be observed in civil cases
involving the following:
a) Devices or schemes employed by, or any act of, the board of directors, business associates, officers or
partners, amounting to fraud or misrepresentation which may be detrimental to the interest of the
public and/or of the stockholders, partners, or members of any corporation, partnership, or association;
b) Controversies arising out of intra-corporate, partnership, or association relations, between and

among stockholders, members, or associates; and between, any or all of them and the corporation,
partnership, or association of which they are stockholders, members, or associates, respectively;
c) Controversies in the election or appointment of directors, trustees, officers, or managers of

d) Derivative suits; and
e) Inspection of corporate books.
xxxx
RULE 6
Election Contests
xxxx
SECTION 2. Definition.—An election contest refers to any controversy or dispute involving title or
claim to any elective office in a stock or non-stock corpo-
115
VOL. 739, OCTOBER 22, 2014
115
ration, the validation of proxies, the manner and validity of elections, and the qualifications of
candidates, including the proclamation of winners, to the office of director, trustee or other officer
directly elected by the stockholders in a close corporation or by members of a non-stock corporation
where the articles of incorporation or bylaws so provide. (Emphases supplied)
The Court explained that the power of the SEC to regulate proxies remains in place in instances when
stockholders vote on matters other than the election of directors.35 The test is whether the controversy
relates to such election. All matters affecting the manner and conduct of the election of directors are
properly cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for
resolution based on the regulatory powers it exercises over corporations, partnerships and associations.
Astra endeavors to remove the instant case from the ambit of GSIS v. CA by arguing that 1) the
validation of proxies in this case relates to the determination of the existence of a quorum; and 2) no
actual voting for the members of the board of directors was conducted, as the directors were merely
elected by motion.
Indeed, the validation of proxies in this case relates to the determination of the existence of a quorum.
Nonetheless, it is a quorum for the election of the directors, and, as such, which requires the presence
— in person or by proxy — of the owners of the majority of the outstanding capital stock of Omico.36
Also, the fact that there was no actual voting did not make the election any less so, especially since Astra
had never denied that an election of directors took place.
We find no merit either in the proposal of Astra regarding the “two (2) viable, nonexclusive and
successive legal reme-
_______________
35 Id., at p. 709; p. 710.
36 The Corporation Code of the Philippines, Sec. 24.
116
116
dies to question the validity of proxies.”37 It suggests that the power to pass upon the validity of proxies
to determine the existence of a quorum prior to the conduct of the stockholders’ meeting should lie
with the SEC; but, after the stockholders’ meeting, questions regarding the use of invalid proxies in the
election of directors should be cognizable by the regular courts, since there was already an election to
speak of.
First, this interpretation is akin to the argument struck down by the Court in GSIS v. CA. If the Court
adopts the suggestion, “we would be perpetually confronted with the spectacle of election
controversies being heard and adjudicated by both the SEC and the regular courts, made possible
through a mere allegation that the anteceding x x x process was errant, but the competing cases [were]
filed with one objective in mind — to affect the outcome of the election of the board of directors.”38
Second, the validation of proxies serves a number of purposes, including determining the existence of a
quorum and ascertaining the authenticity of proxies to be used for the election of directors at the
stockholders’ meeting. Section 2, Rule 6, of the Interim Rules of Procedure Governing Intra-Corporate
Disputes provides that an election contest covers any controversy or dispute involving the validation of
proxies, in general. Thus, it can only refer to all the beneficial purposes that validation of proxies can
bring about when made in connection with a forthcoming election of directors. Thus, there is no point in
making distinctions between who has jurisdiction before and who has jurisdiction after the election of
directors, as all controversies related thereto — whether before, during or after — shall be passed upon
by regular courts as provided by law.
The Court closes with an observation.
_______________
37 Rollo (G.R. No. 189014), p. 66.
38 Supra note 31 at p. 709; pp. 709-710.
117
VOL. 739, OCTOBER 22, 2014
117
As in the instant cases, GSIS v. CA is a consolidation of two cases, one of which was filed by a private
party and the other by the SEC itself. In both cases, the parties were aggrieved by the CA ruling, so they
filed the cases seeking a pronouncement from the Court that it recognizes the jurisdiction of the SEC
over the controversy.
Calling to mind established jurisprudential principles, the Court therein ruled that quasi-judicial agencies
do not have the right to seek the review of an appellate court decision reversing any of their rulings.39
This is because they are not real parties-in-interest. Thus, the Court expunged the petition filed by the
SEC for the latter’s lack of capacity to file the suit. So it must be in the instant cases.
WHEREFORE, the petition in G.R. No. 187702 is EXPUNGED for lack of capacity of petitioner to file the
suit.
The petition in G.R. No. 189014 is DENIED. The Court of Appeals Decision dated 18 March 2009 and
Resolution dated 9 July 2009 in C.A.-G.R. S.P. No. 106006 are AFFIRMED.
SO ORDERED.
Leonardo-De Castro, Bersamin, Perez and Perlas-Bernabe, JJ., concur.
Petition in G.R. No. 187702 expunged for lack of capacity of petitioner to file suit; While petition in G.R.
No. 189014 denied, judgment and resolution therein affirmed.
Notes.—The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to common shares, and
not to the total outstanding capital stock comprising both common and nonvoting preferred shares.
(Gamboa vs. Teves, 652 SCRA 690 [2011])
_______________
39 Id., at p. 696; p. 695.
118
118
Section 5(d), PD 902-A vested jurisdiction upon the Securities and Exchange Commission (SEC) over
petitions for rehabilitation. Later, RA 8799 or the Securities Regulation Code, amended Section 5(d) of
PD 902-A by transferring SEC’s jurisdiction over said petitions to the Regional Trial Court. (Express
Investments III Private Ltd. vs. Bayan Telecommunications, Inc., 687 SCRA 50 [2012])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Securities and Exchange Commission vs.
Court of Appeals, 739 SCRA 99, G.R. No. 189014 October 22, 2014
Case no. 3
89
Montelibano vs. Bacolod-Murcia Milling Co., Inc.
No. L-15092. September 29, 1962.
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants, vs. BACOLOD-MURCIA MILLING CO., INC.,

defendant-appellee.
Remedial Law; Appeal; Piecemeal appeals are discouraged.—The delay in the administration of justice
and the clogging of court dockets have been a constant source of complaints, in our country, and the
policy of the Supreme Court has ever been to discourage piecemeal appeals. Thus, this Court has
consistently ruled that a party defendant who demurs to the evidence
90
90
presented by the plaintiff, and obtains a dismissal on the basis of its insufficiency, should not, in case the
dismissal is reversed on appeal, be allowed to submit evidence in its behalf.
Same; Court of Appeals; Rule on waiver of claim in excess of the jurisdiction of the Court of Appeals;
Purpose.—A party who allows an appeal to be considered and decided by the Court of Appeals must be
deemed to have waived so much of its claim as is in excess of the jurisdiction of the Court of Appeals in
order to discourage the practice of accepting a decision, if favorable, and attacking it for lack of
jurisdiction when adverse.
RESOLUTION on a motion to reconsider a Supreme Court decision.
The facts are stated in the resolution of the Court.
RESOLUTION ON THE
MOTION TO RECONSIDER
REYES, J.B.L., J.:
The appellee Bacolod-Murcia Milling Company has filed two motions to reconsider, urging that our
decision be set aside to give way for the consideration of the issues of fact raised in its original answer to
appellants’ complaints, and for their resolution either by the court a quo or by the Court of Appeals.
We can not see our way clear to granting the motions, taking into account that the court of first
instance, in its appealed decision dismissing the complaint, limited itself exclusively to the questions of
law posited by the defendant Company, now appellee, and ignored all its other defenses based on
questions of fact. The appellee Company, in turn, even when made aware of the intention of the
plaintiffs to appeal to this Court, did not ask the court below to make any findings on the issues of fact
raised by its other defenses. Neither has it called our attention, during the period of more than two
years that the appeal has been pending in this Court, to the necessity of considering such factual
defenses. Indeed, appellee’s brief has been limited to argue the issue of law that was raised by it and
which was upheld by the court of origin.
91
91
During the pendency of the appeal, the appellee had more than ample opportunity to point out to the
Court that the resolution of the issues of law would not bar its other defenses. Even more, as appellee, it
could have discussed, under the Court’s doctrines, its other defenses in its brief, by way of support of
the dismissal made by the court of first instance. As pointed out in several decisions, an appellee, who is
not an appellant, may even assign errors in his brief where his purpose is only to maintain the judgment
on other grounds, although not to have the judgment modified or reversed.1 In fact, appellee could
have asked this Court to refer the case to the Court of Appeals for resolution of the issues of fact.
Appellee has taken none of these various options. Instead, it submitted the case for decision exclusively
on the issue of law, and has called attention to the issues of fact only when the decision went against it.
Now it wants the case remanded for another trial, another decision, and in all probability, another
appeal, with all the attendant delays.
Plainly, the course suggested can not be countenanced. The delay in the administration of justice and
the clogging of court dockets have been a constant source of complaints in our country, and the policy
of this Court has ever been to discourage piecemeal appeals. Thus, this Court has consistently ruled that
a party defendant who demurs to the evidence presented by the plaintiff, and obtains a dismissal on the
basis of its insufficiency, should not, in case that the dismissal is reversed on appeal, be allowed to
submit evidence in its own behalf. As ruled in Moody, Aronson & Company vs. Hotel Bilbao, 50 Phil. 198
(followed in many subsequent cases),
“The efforts of the courts should be concentrated on providing rules which will avoid lengthy and
expensive litigation, and which will assist in the speedy disposition of cases.”2
Again, by resolution of 23 March 1956, this Court re-

_______________
1 See cases collected in I Moran, Comments on the Rules of Court, p. 712, footnotes 19 and 20.
2 See Arroyo vs. Azur, 76 Phil. 499; Demeterio vs. Lopez, 50 Phil. 45; Abriol vs. Homeres, 84 Phil. 531.
92
92
fused to entertain a claim that a decision rendered by the Court of Appeals was void for lack of
jurisdiction over the amount in issue, ruling that a party who allows an appeal to be considered and
decided by the Court of Appeals must be deemed to have waived so much of its claim as is in excess of
the jurisdiction of the Court of Appeals in order to discourage the practice of accepting a decision, if
favorable, and attacking it for lack of jurisdiction when adverse.3
Consistently with these precedents, the appellee in the case at bar, having submitted the case on its
legal issue without adverting to its factual defenses until the case was decided, despite ample
opportunity to do so, must be regarded as having waived all such defenses. Its inaction, in fact, is
evidence of its intention to so waive.
Finally, the appellee Company contends that our judgment is illegal in that the precise amount of sugar
to which appellants are entitled is not determined. This argument is untenable, for the Court has fixed
the additional percentages of sugar that under the contract appellants ought to have received in each of
the crop years specified in the decision, so that the exact amount of piculs due becomes a matter of
arithmetical computation on the basis of the production records for each year. This determination, like
that of the interest on the market value of the sugar improperly withheld by the milling Company, to run
from the time the various quantities of sugar should have been delivered, can be ascertained by the
court of origin in supplementary proceedings in aid of execution under Rule 34, paragraph 3, of the
Rules of Court (Buenaventura vs. Fernan, G.R. No. L-14282, December 29, 1959; Deliva vs. Surtida, 48
O.G. (10) 4339; Villones vs. Nable, 85 Phil. 43). Such supplementary proceedings in aid of execution are
neither a new trial nor a rehearing of the original case (Villones vs. Nable, ante).
WHEREFORE, the motions for reconsideration are denied.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
_______________
3 L-10096, Tyson Tan vs. Filipinas Cia Seguros.
93
93
Wang I Fu vs. Republic
Regala and Makalintal, JJ., took no part.
Motions denied.
_______________
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Montelibano vs. Bacolod-Murcia Milling
Co., Inc., 6 SCRA 89, No. L-15092 September 29, 1962
Case no. 4
434
Hutchison Ports Philippines Limited vs.
Subic Bay Metropolitan Authority
G.R. No. 131367. August 31, 2000.*
HUTCHISON PORTS PHILIPPINES LIMITED, petitioner, vs. SUBIC BAY METROPOLITAN AUTHORITY,
INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., ROYAL PORT SERVICES, INC. and the EXECUTIVE
SECRETARY, respondents.
Actions; Injunction; An application for the injunctive writ is only a provisional remedy, a mere adjunct to
the main suit; The Supreme Court has a bounden duty to resolve the matters before it in a manner that
gives essence to justice, equity and good conscience.—At the outset, the application for the injunctive
writ is only a provisional remedy, a mere adjunct to the main suit. Thus, it is not uncommon that the
issues in the main action are closely intertwined, if not identical, to the allegations and counter
allegations propounded by the opposing parties in support of their contrary positions concerning the
propriety or impropriety of the injunctive writ. While it is not our intention to preempt the trial court’s
determination of the issues in the main action for specific performance, this Court has a bounden duty
to perform; that is, to resolve the matters before this Court in a manner that gives essence to justice,
equity and good conscience.
Same; Same; Requisites.—For an injunctive writ to be issued, the following requisites must be proven:
First. That the petitioner/applicant must have a clear and unmistakable right. Second. That there is a
material and substantial invasion of such right. Third. That there is an urgent and permanent necessity
for the writ to prevent serious damage.
Same; Same; Presidency; Power of Control; Subic Bay Metropolitan Authority (SBMA); The SBMA Board
of Directors and other officers are subject to the control and supervision of the Office of the President—
all projects undertaken by SBMA require the approval of the President of the Philippines under Letter of
Instruction No. 620, which places the SBMA under its ambit as an instrumentality.—To our mind,
petitioner HPPL has not sufficiently shown that it has a clear and unmistakable right to be declared the
winning bidder with finality, such that the SBMA can be compelled to negotiate a Concession Contract.
Though the SBMA Board of Directors, by resolution, may have declared HPPL as the winning bidder, said
award cannot be said to be final and unassailable. The SBMA Board
________________
* FIRST DIVISION.
435
VOL. 339, AUGUST 31, 2000
435

of Directors and other officers are subject to the control and supervision of the Office of the President.
All projects undertaken by SBMA require the approval of the President of the Philippines under Letter of
Instruction No. 620, which places the SBMA under its ambit as an instrumentality, defined in Section 10
thereof as an “agency of the national government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually through a charter. This term
includes regulatory agencies, chartered institutions and government owned and controlled
corporations.”
Same; Same; Same; Same; Bids and Bidding; Judicial Review; It is well-established that the discretion to
accept or reject any bid, or even recall the award thereof, is of such wide latitude that the courts will not
generally interfere with the exercise thereof by the executive department.—As a chartered institution,
the SBMA is always under the direct control of the Office of the President, particularly when contracts
and/or projects undertaken by the SBMA entail substantial amounts of money. Specifically, Letter of
Instruction No. 620 dated October 27, 1997 mandates that the approval of the President is required in
all contracts of the national government offices, agencies and instrumentalities, including
governmentowned or controlled corporations involving two million pesos (P2,000,000.00) and above,
awarded through public bidding or negotiation. The President may, within his authority, overturn or
reverse any award made by the SBMA Board of Directors for justifiable reasons. It is wellestablished that
the discretion to accept or reject any bid, or even recall the award thereof, is of such wide latitude that
the courts will not generally interfere with the exercise thereof by the executive department, unless it is
apparent that such exercise of discretion is used to shield unfairness or injustice. When the President
issued the memorandum setting aside the award previously declared by the SBMA in favor of HPPL and
directing that a rebidding be conducted, the same was within the authority of the President and was a
valid exercise of his prerogative. Consequently, petitioner HPPL acquired no clear and unmistakable
right as the award announced by the SBMA prior to the President’s revocation thereof was not final and
binding.
Corporation Law; “Doing Business”; Bids and Bidding; Participating in the bidding process constitutes
“doing business” because it shows the foreign corporation’s intention to engage in business here.—
Participating in the bidding process constitutes “doing business” because it shows the foreign
corporation’s intention to engage in business here. The bidding for the concession contract is but an
exercise of the corporation’s reason for
436
436
creation or existence. Thus, it has been held that “a foreign company invited to bid for IBRD and ADB
international projects in the Philippines will be considered as doing business in the Philippines for which
a license is required.” In this regard, it is the performance by a foreign corporation of the acts for which
it was created, regardless of volume of business, that determines whether a foreign corporation needs a
license or not.
Same; Same; Conflict of Laws; The primary purpose of the license requirement is to compel a foreign
corporation desiring to do business within the Philippines to submit itself to the jurisdiction of the courts
and to enable the government to exercise jurisdiction over them for the regulation of their activities in
this country.—The primary purpose of the license requirement is to compel a foreign corporation
desiring to do business within the Philippines to submit itself to the jurisdiction of the courts of the state
and to enable the government to exercise jurisdiction over them for the regulation of their activities in
this country. If a foreign corporation operates a business in the Philippines without a license, and thus
does not submit itself to Philippine laws, it is only just that said foreign corporation be not allowed to
invoke them in our courts when the need arises. “While foreign investors are always welcome in this
land to collaborate with us for our mutual benefit, they must be prepared as an indispensable condition
to respect and be bound by Philippine law in proper cases, as in the one at bar.” The requirement of a
license is not intended to put foreign corporations at a disadvantage, for the doctrine of lack of capacity
to sue is based on considerations of sound public policy. Accordingly, petitioner HPPL must be held to be
incapacitated to bring this petition for injunction before this Court for it is a foreign corporation doing
business in the Philippines without the requisite license.
ORIGINAL ACTION in the Supreme Court. Injunction.

Fortun, Narvasa & Salazar for petitioner.
Manuel Quijano and Ferdinand Aristorenas for Subic Bay Metropolitan Authority.
Bautista, Picazo, Buyco, Tan & Fider for respondent ICTSI.
Angara, Abello, Concepcion, Regala & Cruz for respondent RPSI.
437
VOL. 339, AUGUST 31, 2000
437
YNARES-SANTIAGO, J.:
On February 12, 1996, the Subic Bay Metropolitan Authority (or SBMA) advertised in leading national
daily newspapers and in one international publication,1 an invitation offering to the private sector the
opportunity to develop and operate a modern marine container terminal within the Subic Bay Freeport
Zone. Out of seven bidders who responded to the published invitation, three were declared by the
SBMA as qualified bidders after passing the pre-qualification evaluation conducted by the SBMA’s
Technical Evaluation Committee (or SBMA-TEC). These are: (1) International Container Terminal
Services, Inc. (or ICTSI); (2) a consortium consisting of Royal Port Services, Inc. and HPC Hamburg Port
Consulting GMBH (or RPSI); and (3) Hutchison Ports Philippines Limited (or HPPL), representing a
consortium composed of HPPL, Guoco Holdings (Phils.), Inc. and Unicol Management Services, Inc. All
three qualified bidders were required to submit their respective formal bid package on or before July 1,
1996 by the SBMA’s Pre-qualification, Bids and Awards Committee (or SBMAPBAC).
Thereafter, the services of three (3) international consultants2 recommended by the World Bank for
their expertise were hired by SBMA to evaluate the business plans submitted by each of the bidders,
and to ensure that there would be a transparent and comprehensive review of the submitted bids. The
SBMA also hired the firm of Davis, Langdon and Seah Philippines, Inc. to assist in the evaluation of the
bids and in the negotiation process after the winning bidder is chosen. All the consultants, after such
review and
________________
1 Annex “A”; Rollo, p. 16; February 12, 1996 issues of the Philippine Daily Inquirer, Business World,
Lloyd’s list and 2 newspapers of local circulation in Olongapo City.
2 The consultants were:
(i) Mr. Gustave de Monie, former Operations and Commercial Manager, Noordnatie, Port of Antwerp,
Belgium;
(ii) Mr. W. Don Welch, Executive Director and CEO, South Carolina State Ports Authority, USA;
(iii) Mr. Thong Yoy Chuan, General Manager for Operations, Container Terminal of Penang, Malaysia.
438
438

evaluation unanimously concluded that HPPL’s Business Plan was “far superior to that of the two other
bidders.”3
However, even before the sealed envelopes containing the bidders’ proposed royalty fees could be
opened at the appointed time and place, RPSI formally protested that ICTSI is legally barred from
operating a second port in the Philippines based on Executive Order No. 212 and Department of
Transportation and Communication (DOTC) Order 95-863. RPSI thus requested that the financial bid of
ICTSI should be set aside.4
Nevertheless, the opening of the sealed financial bids proceeded “under advisement” relative to the
protest signified by RPSI. The financial bids, more particularly the proposed royalty fee of each bidder,
was as follows:
ICTSI
...........................
US$57.80 TEU
HPPL
............................
US$20.50 TEU
RPSI
.............................
US$15.08 TEU
The SBMA-PBAC decided to suspend the announcement of the winning bid, however, and instead gave
ICTSI seven (7) days within which to respond to the letter-protest lodged by RPSI. The HPPL joined in
RPSI’s protest, stating that ICTSI should be disqualified because it was already operating the Manila
International Container Port (or MICP), which would give rise to inevitable conflict of interest between
the MICP and the Subic Bay Container Terminal facility.5
On August 15, 1996, the SBMA-PBAC issued a resolution rejecting the bid of ICTSI because “said bid does
not comply with the requirements of the tender documents and the laws of the Philippines.” The said
resolution also declared that:
RESOLVED FURTHER, that the winning bid be awarded to HUTCHISON PORTS PHILIPPINES LIMITED
(HPPL) and that negotiations commence immediately with HPPL (HUTCHISON) with a view to
_______________
3 Annexes “C,” “D,” “E,” “F”; Rollo, pp. 22-80.
4 Annex “G”; Rollo, p. 82.
5 Supra, Rollo, p. 82.
439
VOL. 339, AUGUST 31, 2000

439
concluding an acceptable agreement within 45 days of this date failing which negotiations with RPSI
(ROYAL) will commence with a view to concluding an acceptable agreement within 45 days thereafter
failing which there will be declared a failure of bids.6 (Italics supplied)
The following day, ICTSI filed a letter-appeal with SBMA’s Board of Directors requesting the nullification
and reversal of the above-quoted resolution rejecting ICTSI’s bid while awarding the same to HPPL. But
even before the SBMA Board could act on the appeal, ICTSI filed a similar appeal before the Office of the
President.7 On August 30, 1996, then Chief Presidential Legal Counsel (CPLC) Renato L. Cayetano
submitted a memorandum to then President Fidel V. Ramos, containing the following
recommendations:
We therefore suggest that the President direct SBMA Chairman Gordon to consider option number 4—
that is to re-evaluate the financial bids submitted by the parties, taking into consideration all the
following factors:
1. Reinstate ICTSI’s bid;
2. Disregard all arguments relating to “monopoly”;
3. The re-evaluation must be limited to the parties’ financial bids.
3.1 Considering that the parties’ business have been accepted (passed), strictly follow the criteria for bid
evaluation provided for in pars, (c) and (d), Part B (1) of the Tender Document.
4.In the re-evaluation, the COA should actively participate to determine which of the financial bids is
more advantageous.
5. In addition, all the parties should be given ample opportunity to elucidate or clarify the
components/justification for their respective financial bids in order to ensure fair play and transparency
in the proceedings.
6. The President’s authority to review the final award shall remain.8 (Italics supplied)
The recommendation of CPLC Cayetano was approved by President Ramos, and a copy of President
Ramos’ handwritten approval
________________
6 Supra, Rollo, p. 84.
7 Annex “A”; Rollo, pp. 230-232.
8 Annex “B”; Rollo, pp. 233-236.
440
440
was sent to the SBMA Board of Directors. Accordingly, the SBMA Board, with the concurrence of
representatives of the Commission on Audit, agreed to focus the reevaluation of the bids in accordance
with the evaluation criteria and the detailed components contained in the Tender Document, including
all relevant information gleaned from the bidding documents, as well as the reports of the three
international experts and the consultancy firm hired by the SBMA.
On September 19, 1996, the SBMA Board issued a Resolution, declaring:
NOW, THEREFORE, IT IS HEREBY RESOLVED that the bid that conforms to the Invitation to Tender, that
has a realistic Business Plan offering the greatest financial return to SBMA, the best possible offer and
the most advantageous to the government is that of HPPL and HPPL is accordingly selected as the
winning bidder and is hereby awarded the concession for the operation and development of the Subic
Bay Container Terminal.9 (Italics supplied)
In a letter dated September 24, 1996, the SBMA Board of Directors submitted to the Office of the
President the results of the reevaluation of the bid proposals, to wit:
SBMA, through the unanimous vote of all the Board Members, excluding the Chairman of the Board who
voluntarily inhibited himself from participating in the re-evaluation, selected the HPPL bid as the
winning bid, being: the conforming bid with a realistic Business Plan offering the greatest financial
return to the SBMA; the best possible offer in the market, and the most advantageous to the
government in accordance with the Tender Document.10
Notwithstanding the SBMA Board’s recommendations and action awarding the project to HPPL, then
Executive Secretary Ruben Torres submitted a memorandum to the Office of the President
recommending that another rebidding be conducted.11 Consequently, the Office of the President issued
a Memorandum direct-
________________
9 Annex “J”; Rollo, pp. 89-90.
10 Annex “17” of SBMA’s Answer to the Complaint.
11 Annex E; Rollo, p 240

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441
ing the SBMA Board of Directors to refrain from signing the Concession Contract with HPPL and to
conduct a rebidding of the project.12
In the meantime, the Resident Ombudsman for the DOTC filed a complaint against members of the
SBMA-PBAC before the Office of the Ombudsman for alleged violation of Section 3(e) of Republic Act
No. 3019 for awarding the contract to HPPL. On April 16, 1997, the Evaluation and Preliminary
Investigation Bureau of the Office of the Ombudsman issued a Resolution absolving the members of the
SBMA-PBAC of any liability and dismissing the complaint against them, ruling thus:
After an assiduous study of the respective contentions of both parties, we are inclined to hold, as it is
hereby held, that there is no proof on record pinpointing respondents to have acted in excess of their
discretion when they awarded the bid to HPPL. Records revealed that respondents, in the exercise of
their discretion in determining the financial packages offered by the applicants, were guided by the
expert report of Davis, Langdon and Seah (DLS) that fairly evaluated which of the bidders tender the
greatest financial return to the government. There is no showing that respondents had abused their
prerogatives. As succinctly set forth in the DLS report it stated, among others, that, “in assessing the full
financial return to SBMA offered by the bidders, it is necessary to consider the following critical matters:
1. Royalty fees
2. Volume of TEU’s as affected by:
a. Tariff rates;
b. Marketing strategy;
c. Port facilities; and
d. Efficient reliable services.
With the preceding parameters for the evaluation of bidder’s business plan, the respondents were fairly
guided by, as they aligned their judgment in congruence with, the opinion of the panel of experts and
the SBMA’s Technical Evaluation Committee to the effect that HPPL’s business is superior while that of
ICTSI’s appeared to be unrealistically high which may eventually hinder the competitiveness of the
SBMA port with the rest of the world. Respondents averred that the panel of World Bank
________________
12 Annex “D”; Rollo, p. 239; Memorandum dated January 2, 1997.
442
442
experts noted that ICTSI’s high tariff rates at U.S. $119.00 per TEU is already higher by 37% through
HPPL, which could further increase by 20% in the first two (2) years and by 5% hike thereafter. In short,
high tariffs would discourage potential customers which may be translated into low cargo volume that
will eventually reduce financial return to SBMA. Respondents asserted that HPPL’s business plan offers
the greatest financial return which could be equated that over the five years, HPPL offers 1.25 billion
pesos while ICTSI offers P0.859 billion, and RPSI offers P.420 billion. Over the first ten years HPPL gives
P2.430 billion, ICTSI tenders P2.197 billion and RPSI has P1.632 billion.
Viewed from this perspective alongside with the evidence on record, the undersigned panel does not
find respondents to have exceeded their discretion in awarding the bid to HPPL. Consequently, it could
not be said that respondents’ act had placed the government at a grossly disadvantageous plight that
could have jeopardized the interest of the Republic of the Philippines.13
On July 7, 1997, the HPPL, feeling aggrieved by the SBMA’s failure and refusal to commence negotiations
and to execute the Concession Agreement despite its earlier pronouncements that HPPL was the
winning bidder, filed a complaint14 against SBMA before the Regional Trial Court (RTC) of Olongapo
City, Branch 75, for specific performance, mandatory injunction and damages. In due time, ICTSI, RPSI
and the Office of the President filed separate Answers-in-Intervention15 to the complaint opposing the
reliefs sought by complainant HPPL.
Complainant HPPL alleged and argued therein that a binding and legally enforceable contract had been
established between HPPL and defendant SBMA under Article 1305 of the Civil Code, considering that
SBMA had repeatedly declared and confirmed that HPPL was the winning bidder. Having accepted
HPPL’s offer to operate and develop the proposed container terminal, defendant SBMA is duty-bound to
comply with its obligation by commencing negotiations and drawing up a Concession Agreement with
plaintiff HPPL. HPPL also pointed out that the bidding procedure fol-
________________
13 Annex “2”; Rollo, pp. 304-312.
14 Annex “M”; Rollo, pp. 93-100, Civil Case No. 243-0-97.
15 Annex “P”; Rollo, pp. 113-121; Annex “13”; Rollo, pp. 427-433; Annex “14”; Rollo, pp. 435-438.
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VOL. 339, AUGUST 31, 2000

443
lowed by the SBMA faithfully complied with existing laws and rules established by SBMA itself; thus,
when HPPL was declared the winning bidder it acquired the exclusive right to negotiate with the SBMA.
Consequently, plaintiff HPPL posited that SBMA should be: (1) barred from conducting a re-bidding of
the proposed project and/or performing any such acts relating thereto; and (2) prohibited from
negotiating with any party other than plaintiff HPPL until negotiations between HPPL and SBMA have
been concluded or in the event that no acceptable agreement could be arrived at. Plaintiff HPPL also
alleged that SBMA’s continued refusal to negotiate the Concession Contract is a substantial infringement
of its proprietary rights, and caused damage and prejudice to plaintiff HPPL.
Hence, HPPL prayed that:
(1) Upon the filing of this complaint, hearings be scheduled to determine the propriety of plaintiff’s
mandatory injunction application which seeks to order defendant or any of its appropriate officers or
committees to forthwith specify the date as well as to perform any and all such acts (e.g. laying the
ground rules for discussion) for the commencement of negotiations with plaintiff with the view to
signing at the earliest possible time a Concession Agreement for the development and operation of the
Subic Bay Container Terminal.
(2) Thereafter, judgment be rendered in favor of plaintiff and against defendant:
2.1. Making permanent the preliminary mandatory injunction it had issued;
2.2. Ordering defendant to implement the Concession Agreement it had executed with plaintiff in
respect of the development and operation of the proposed Subic Bay Container Terminal;
2.3. Ordering defendant to pay for the cost of plaintiff’s attorney’s fees in the amount of P500,000.00, or
as otherwise proven during the trial.
Plaintiff prays for other equitable reliefs.16

During the pre-trial hearing, one of the issues raised and submitted for resolution was whether or not
the Office of the President
_______________
16 Complain, Rollo, p. 99.
444
444
can set aside the award made by SBMA in favor of plaintiff HPPL and if so, can the Office of the
President direct the SBMA to conduct a re-bidding of the proposed project.
While the case before the trial court was pending litigation, on August 4, 1997, the SBMA sent notices to
plaintiff HPPL, ICTSI and RPSI requesting them to declare their interest in participating in a rebidding of
the proposed project.17 On October 20, 1997, plaintiff HPPL received a copy of the minutes of the pre-
bid conference which stated that the winning bidder would be announced on December 5, 1997.18
Then on November 4, 1997, plaintiff HPPL learned that the SBMA had accepted the bids of ICTSI and
RPSI who were the only bidders who qualified.
In order to enjoin the rebidding while the case was still pending, plaintiff HPPL filed a motion for
maintenance of the status quo19 on October 28, 1997. The said motion was denied by the court a quo in
an Order dated November 3, 1997, to wit:
Plaintiff maintains that by voluntarily participating in this proceedings, the defendant and the
intervenors “have unqualifiedly agreed to submit the issue of the propriety, legality and validity of the
Office of the President’s directive that the SBMA effect a rebidding” of its concession contract or the
operation of the Subic Bay Container Terminal. As such, the status quo must be maintained in order not
to thwart the court’s ability to resolve the issues presented. Further, the ethics of the profession require
that counsel should discontinue any act which tends to render the issues academic.
The Opposition is anchored on lack of jurisdiction since the issuance of a cease-and-desist order would
be tantamount to the issuance of a Temporary Restraining Order or a Writ of Injunction which this Court
cannot do in light of the provision of Section 21 of R.A. 7227 which states:
Section 21. Injunction and Restraining Order.—The implementation of the projects for the conversion
into alternative productive uses of the military reservations are urgent and necessary and shall not be
restrained or enjoined except by an order issued by the Supreme Court of the Philippines.
_______________
17 Annex “Q”; Rollo, p. 122.
18 Annex “R”; Rollo, pp. 123-128.
19 Annex “S”; Rollo, pp. 129-132.
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VOL. 339, AUGUST 31, 2000
445
During the hearing on October 30, 1997, SBMA’s counsel revealed that there is no law or administrative
rule or regulation which requires that a bidding be accomplished within a definite time frame.
Truly, the matter of the deferment of the re-bidding on November 4, 1997 rests on the sound discretion
of the SBMA. For this Court to issue a cease-and-desist order would be tantamount to an issuance of a
Temporary Restraining Order or a Writ of Preliminary Injunction. (Prado v. Veridiano II, G.R. No. 98118,
December 6, 1991).
The Court notes that the Office of the President has not been heard fully on the issues. Moreover, one
of the intervenors is of the view that the issue of jurisdiction must be resolved first, ahead of all the
other issues.
WHEREFORE, and viewed from the foregoing considerations, plaintiff’s motion is DENIED.
SO ORDERED.20 (Italics supplied)
Hence, this petition filed by petitioner (plaintiff below) HPPL against respondents SBMA, ICTSI, RPSI and
the Executive Secretary seeking to obtain a prohibitory injunction. The grounds relied upon by petitioner
HPPL to justify the filing of the instant petition are summed up as follows:
29. It is respectfully submitted that to allow or for this Honorable Court to otherwise refrain from
restraining SBMA, during the pendency of this suit, from committing the aforementioned act(s) which
will certainly occur on 5 December 1997 such action (or inaction) will work an injustice upon petitioner
which has validly been announced as the winning bidder for the operation of the Subic Bay Container
Terminal.
30. To allow or for this Honorable Court to otherwise refrain from restraining SBMA, during the
pendency of this suit, from committing the aforementioned threatened acts would be in violation of
petitioner’s rights in respect of the action it had filed before the RTC of Olongapo City in Civil Case No.
243-0-97, and could render any judgment which may be reached by said Court moot and ineffectual. As
stated, the legal issues raised by the parties in that proceedings are of far reaching importance to the
national pride and prestige, and they impact on the integrity of government agencies engaged in
international bidding of privatization projects. Its resolution on the merits by the trial court below and,
thereafter,
________________
20 Annex “T”; Rollo, pp. 133-134.
446
446
any further action to be taken by the parties before the appellate courts will certainly benefit
respondents and the entire Filipino people.21
WHEREFORE, petitioner HPPL sought relief praying that:
a) Upon the filing of this petition, the same be given due course and a temporary restraining order
and/or writ of preliminary injunction be issued ex parte, restraining SBMA or any of its committees, or
other persons acting under its control or direction or upon its instruction, from declaring any winner on
5 December 1997 or at any other date thereafter, in connection with the rebidding for the privatization
of the Subic Bay Container Terminal and/or for any, some or all of the respondents to perform any such
act(s) in pursuance thereof, until further orders from this Honorable Court;
a) After appropriate proceedings, judgment be rendered in favor of petitioner and against

respondents—
(1) Ordering SBMA to desist from conducting any rebidding or in declaring the winner of any such
rebidding in respect of the development and operation of the Subic Bay Container Terminal until the
judgment which the RTC of Olongapo City may render in Civil Case No. 243-0-97 is resolved with finality;
(2) Declaring null and void any award which SBMA may announce or issue on 5 December 1997; and
(3) Ordering respondents to pay for the cost of suit.
Petitioner prays for other equitable reliefs.22
The instant petition seeks the issuance of an injunctive writ for the sole purpose of holding in abeyance
the conduct by respondent SBMA of a rebidding of the proposed SBICT project until the case for specific
performance is resolved by the trial court. In other words, petitioner HPPL prays that the status quo be
preserved until the issues raised in the main case are litigated and finally determined. Petitioner was
constrained to invoke this Court’s exclusive jurisdiction and authority by virtue of the above-quoted
Republic Act 7227, Section 21.
________________
21 Petition, Rollo, p. 10.
22 Petition, Rollo, p. 11.
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447
On December 3, 1997, this Court granted petitioner HPPL’s application for a temporary restraining order
“enjoining the respondent SBMA or any of its committees, or other persons acting under its control or
direction or upon its instruction, from declaring any winner on December 5, 1997 or at any other date
thereafter, in connection with the rebidding for the privatization of the Subic Bay Container Terminal
and/or for any, some or all of the respondents to perform any such act or acts in pursuance thereof.”23
There is no doubt that since this controversy arose, precious time has been lost and a vital infrastructure
project has in essense been “mothballed” to the detriment of all parties involved, not the least of which
is the Philippine Government, through its officials and agencies, who serve the interest of the nation. It
is, therefore, imperative that the issues raised herein and in the court a quo be resolved without further
delay so as not to exacerbate an already untenable situation.
At the outset, the application for the injunctive writ is only a provisional remedy, a mere adjunct to the
main suit.24 Thus; it is not uncommon that the issues in the main action are closely intertwined, if not
identical, to the allegations and counter allegations propounded by the opposing parties in support of
their contrary positions concerning the propriety or impropriety of the injunctive writ. While it is not our
intention to preempt the trial court’s determination of the issues in the main action for specific
performance, this Court has a bounden duty to perform; that is, to resolve the matters before this Court
in a manner that gives essence to justice, equity and good conscience.
While our pronouncements are for the purpose only of determining whether or not the circumstances
warrant the issuance of the writ of injunction, it is inevitable that it may have some impact on the main
action pending before the trial court. Nevertheless, without delving into the merits of the main case, our
findings herein shall be confined to the necessary issues attendant to the application for an injunctive
writ.
_________________
23 Supreme Court Resolution, Rollo, p. 144.
24 PAL, Inc. v. NLRC, 287 SCRA 672, 680 (1998).
448
448
For an injunctive writ to be issued, the following requisites must be proven:
First. That the petitioner/applicant must have a clear and unmistakable right.
Second. That there is a material and substantial invasion of such right.
Third. That there is an urgent and permanent necessity for the writ to prevent serious damage.25
To our mind, petitioner HPPL has not sufficiently shown that it has a clear and unmistakable right to be
declared the winning bidder with finality, such that the SBMA can be compelled to negotiate a
Concession Contract. Though the SBMA Board of Directors, by resolution, may have declared HPPL as
the winning bidder, said award cannot be said to be final and unassailable. The SBMA Board of Directors
and other officers are subject to the control and supervision of the Office of the President. All projects
undertaken by SBMA require the approval of the President of the Philippines under Letter of Instruction
No. 620, which places the SBMA under its ambit as an instrumentality, defined in Section 10 thereof as
an “agency of the national government, not integrated within the department framework, vested with
special functions or jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This term includes
regulatory agencies, chartered institutions and government owned and controlled corporations.”26
(Italics supplied)
As a chartered institution, the SBMA is always under the direct control of the Office of the President,
particularly when contracts and/or projects undertaken by the SBMA entail substantial amounts of
money. Specifically, Letter of Instruction No. 620 dated October 27, 1997 mandates that the approval of
the President is required in all contracts of the national government offices, agencies and
instrumentalities, including government-owned or con-
________________
25 Versoza v. CA, 299 SCRA 100, 108 (1998); Arcega v. CA, 275 SCRA 176, 180 (1997); Teotico v. Agda,
Sr., 197 SCRA 675, 696 (1991).
26 Rollo, pp. 633-634.
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VOL. 339, AUGUST 31, 2000
449

trolled corporations involving two million pesos (P2,000,000.00) and above, awarded through public
bidding or negotiation. The President may, within his authority, overturn or reverse any award made by
the SBMA Board of Directors for justifiable reasons. It is well-established that the discretion to accept or
reject any bid, or even recall the award thereof, is of such wide latitude that the courts will not generally
interfere with the exercise thereof by the executive department, unless it is apparent that such exercise
of discretion is used to shield unfairness or injustice. When the President issued the memorandum
setting aside the award previously declared by the SBMA in favor of HPPL and directing that a rebidding
be conducted, the same was within the authority of the President and was a valid exercise of his
prerogative. Consequently, petitioner HPPL acquired no clear and unmistakable right as the award
announced by the SBMA prior to the President’s revocation thereof was not final and binding.
There being no clear and unmistakable right on the part of petitioner HPPL, the rebidding of the
proposed project can no longer be enjoined as there is no material and substantial invasion to speak of.
Thus, there is no longer any urgent or permanent necessity for the writ to prevent any perceived serious
damage. In fine, since the requisites for the issuance of the writ of injunction are not present in the
instant case, petitioner’s application must be denied for lack of merit.27
Finally, we focus on the matter of whether or not petitioner HPPL has the legal capacity to even seek
redress from this Court. Admittedly, petitioner HPPL is a foreign corporation, organized and existing
under the laws of the British Virgin Islands. While the actual bidder was a consortium composed of
petitioner, and two other corporations, namely, Guoco Holdings (Phils.), Inc. and Unicol Management
Services, Inc., it is only petitioner HPPL that has brought the controversy before the Court, arguing that it
is suing only on an isolated transaction to evade the legal requirement that foreign corporations must be
licensed to do business in the Philip-
_______________
27 Inter-Asia Services Corp. (International) v. CA, 263 SCRA 408, 419 (1996).
450
450
pines to be able to file and prosecute an action before Philippines courts.
The maelstrom of this issue is whether participating in the bidding is a mere isolated transaction, or did
it constitute “engaging in” or “transacting” business in the Philippines such that petitioner HPPL needed
a license to do business in the Philippines before it could come to court.
There is no general rule or governing principle laid down as to what constitutes “doing” or “engaging in”
or “transacting” business in the Philippines. Each case must be judged in the light of its peculiar
circumstances.28 Thus, it has often been held that a single act or transaction may be considered as
“doing business” when a corporation performs acts for which it was created or exercises some of the
functions for which it was organized. The amount or volume of the business is of no moment, for even a
singular act cannot be merely incidental or casual if it indicates the foreign corporation’s intention to do
business.29
Participating in the bidding process constitutes “doing business” because it shows the foreign
corporation’s intention to engage in business here. The bidding for the concession contract is but an
exercise of the corporation’s reason for creation or existence. Thus, it has been held that “a foreign
company invited to bid for IBRD and ADB international projects in the Philippines will be considered as
doing business in the Philippines for which a license is required.” In this regard, it is the performance by
a foreign corporation of the acts for which it was created, regardless of volume of business, that
determines whether a foreign corporation needs a license or not.30
The primary purpose of the license requirement is to compel a foreign corporation desiring to do
business within the Philippines to submit itself to the jurisdiction of the courts of the state and to enable
the government to exercise jurisdiction over them for the
________________
28 Mentholatum Co. v. Mangaliman, 72 Phil. 524, 528 (1941).
29 Avon Insurance PLC v. CA, 273 SCRA 312, 321 (1997).
30 Granger Associates v. Microwave Systems, Inc., 189 SCRA 631, 640 (1990).
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VOL. 339, AUGUST 31, 2000
451
regulation of their activities in this country.31 If a foreign corporation operates a business in the
Philippines without a license, and thus does not submit itself to Philippine laws, it is only just that said
foreign corporation be not allowed to invoke them in our courts when the need arises. “While foreign
investors are always welcome in this land to collaborate with us for our mutual benefit, they must be
prepared as an indispensable condition to respect and be bound by Philippine law in proper cases, as in
the one at bar.”32 The requirement of a license is not intended to put foreign corporations at a
disadvantage, for the doctrine of lack of capacity to sue is based on considerations of sound public
policy.33 Accordingly, petitioner HPPL must be held to be incapacitated to bring this petition for
injunction before this Court for it is a foreign corporation doing business in the Philippines without the
requisite license.
WHEREFORE, in view of all the foregoing, the instant petition is hereby DISMISSED for lack of merit.
Further, the temporary restraining order issued on December 3, 1997 is LIFTED and SET ASIDE. No costs.
SO ORDERED.
Puno, Kapunan and Pardo, JJ., concur.
Davide, Jr. (C.J., Chairman), In the result.
Petition dismissed, temporary restraining order lifted and set aside.
Notes.—To constitute a failed bidding under COA Circular No. 89-296, all the offerors must be
disqualified. (Bagatsing vs. Committee on Privatization, 246 SCRA 334 [1995])
Since the Filipino First Policy provision of the Constitution bestows preference on qualified Filipinos, the
mere tending of the highest bid is not an assurance that the highest bidder will be declared the winning
bidder. (Manila Prince Hotel vs. Government Service Insurance System, 267 SCRA 408 [1997])
________________
31 Eriks Pte., Ltd. v. CA, 267 SCRA 567, 580 (1997).
32 Granger Associates v. Microwave Systems, Inc., supra, p. 642.
33 National Sugar Trading Corp. v. CA, 246 SCRA 465, 470 (1995).
452
452
People vs. Gutierrez
The effect of an unqualified acceptance of the offer or proposal of the bidder is to perfect a contract,
upon notice of the award to the bidder. (City of Cebu vs. Heirs of Candido Rubi, 306 SCRA 408 [1999])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Hutchison Ports Philippines Limited
vs.<br/>Subic Bay Metropolitan Authority , 339 SCRA 434, G.R. No. 131367 August 31, 2000
246
European Resources and Technologies, Inc. vs. Ingenieuburo Birkhahn + Nolte, Ingeniurgesellschaft
mbh
G.R. No. 159586. July 26, 2004.*
EUROPEAN RESOURCES AND TECHNOLOGIES, INC. and DELFIN J. WENCESLAO, petitioners, vs.
INGENIEUBURO BIRKHAHN + NOLTE, Ingeniurgesellschaft mbh and HEERS & BROCKSTEDT GMBH &
CO., respondents.
Corporation Law; Conflict of Laws; Bids and Bidding; Words and Phrases; There is no general rule or
governing principle laid down as to what constitutes “doing” or “engaging in” or “transacting”
business in the Philippines; A foreign consortium, by participating in the bidding for the operation of a
waste management center, exhibited its intent to transact business in the Philippines and is thus
considered doing business in the Philippines.—There is no general rule or governing principle laid
down as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines.
Thus, it has often been held that a single act or transaction may be considered as “doing business”
when a corporation performs acts for which it was created or exercises some of the functions for
which it was organized. We have held that the act of participating in a bidding process constitutes
“doing business” because it shows the foreign corporation’s intention to engage in business in the
Philippines. In this regard, it is the performance by a foreign corporation of the acts for which it was
created, regardless of volume of business, that determines whether a foreign corporation needs a
license or not. Consequently, the German Consortium is doing business in the Philippines without the
appropriate license as required by our laws. By participating in the bidding conducted by the CDC for
the operation of the waste management center, the German Consortium exhibited its intent to
transact business in the Philippines. Although the Contract for Services provided for the establishment
of a local corporation to serve as respondents’ representative, it is clear from the other provisions of
the Contract for Services as well as the letter by the CDC containing the disapproval that it will be the
German Consortium which shall manage and conduct the operations of the waste management center
for at least twenty-five years. Moreover, the German Consortium was allowed to transact with other
entities outside the CSEZ for solid waste collection. Thus, it is clear that the local corporation to be
established will merely act as a conduit or extension of the German Consortium.
Same; Same; Actions; As a general rule, unlicensed foreign non-resident corporations cannot file suits
in the Philippines—a corporation has legal status only within the state or territory in which it was
organized.—As a general rule, unlicensed foreign non-resident corporations
_______________
* FIRST DIVISION.
247
VOL. 435, JULY 26, 2004

247
mbh
cannot file suits in the Philippines. Section 133 of the Corporation Code specifically provides: SECTION
133. No foreign corporation transacting business in the Philippines without a license, or its successors
or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines, but such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals on any valid cause of action recognized under
Philippine laws. A corporation has legal status only within the state or territory in which it was
organized. For this reason, a corporation organized in another country has no personality to file suits
in the Philippines. In order to subject a foreign corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license from the Securities and Exchange Commission (SEC)
and appoint an agent for service of process. Without such license, it cannot institute a suit in the
Philippines.
Same; Same; Same; Exceptions; Estoppel; A party is estopped from questioning the capacity of a
foreign corporation to institute an action where it had obtained benefits from its dealing with such
foreign corporation and thereafter committed a breach of or sought to renege on its obligations.—
However, there are exceptions to this rule. In a number of cases, we have declared a party estopped
from challenging or questioning the capacity of an unlicensed foreign corporation from initiating a suit
in our courts. In the case of Communication Materials and Design, Inc. v. Court of Appeals, a foreign
corporation instituted an action before our courts seeking to enjoin a local corporation, with whom it
had a “Representative Agreement,” from using its corporate name, letter heads, envelopes, sign
boards and business dealings as well as the foreign corporation’s trademark. The case arose when the
foreign corporation discovered that the local corporation has violated certain contractual
commitments as stipulated in their agreement. In said case, we held that a foreign corporation doing
business in the Philippines without license may sue in Philippine Courts a Philippine citizen or entity
that had contracted with and benefited from it. Hence, the party is estopped from questioning the
capacity of a foreign corporation to institute an action in our courts where it had obtained benefits
from its dealings with such foreign corporation and thereafter committed a breach of or sought to
renege on its obligations. The rule relating to estoppel is deeply rooted in the axiom of commodum ex
injuria sua non habere debet—no person ought to derive any advantage from his own wrong.
Same; Same; Same; Same; To rule that a foreign corporation has the capacity to institute an action
against a domestic corporation even when the latter has not committed any breach of its obligation
would be tantamount to an unlicensed foreign corporation gaining access to our courts for protection
and redress—the foreign corporation is merely prevented from being in a position where it takes the
good without accepting the bad.—To
248
248
mbh
rule that the German Consortium has the capacity to institute an action against petitioners even when
the latter have not committed any breach of its obligation would be tantamount to an unlicensed
foreign corporation gaining access to our courts for protection and redress. We cannot allow this
without violating the very rationale for the law prohibiting a foreign corporation not licensed to do
business in the Philippines from suing or maintaining an action in Philippine courts. The object of
requiring a license is not to prevent the foreign corporation from performing single acts, but to
prevent it from acquiring domicile for the purpose of business without taking the steps necessary to
render it amenable to suits in the local courts. In other words, the foreign corporation is merely
prevented from being in a position where it takes the good without accepting the bad.
Actions; Alternative Dispute Resolution; Arbitration; Arbitration agreements are valid, binding,
enforceable and not contrary to public policy such that when there obtains a written provision for
arbitration which is not complied with, the trial court should suspend the proceedings and order the
parties to proceed to arbitration in accordance with the terms of their agreement; Even if there is an
arbitration clause, there are instances when referral to arbitration does not appear to be the most
prudent action, such as when the issue could not be speedily and efficiently resolved in its entirety if
the Court allowed simultaneous arbitration proceedings and trial, or suspension of trial pending
arbitration.—We have ruled in several cases that arbitration agreements are valid, binding,
enforceable and not contrary to public policy such that when there obtains a written provision for
arbitration which is not complied with, the trial court should suspend the proceedings and order the
parties to proceed to arbitration in accordance with the terms of their agreement. In the case at bar,
the MOA between petitioner ERTI and respondent German Consortium provided: 17. Should there be
a disagreement between or among the Parties relative to the interpretation or implementation of this
Agreement and the collateral documents including but not limited to the Contract for Services
between GERMAN CONSORTIUM and CDC and the Parties cannot resolve the same by themselves, the
same shall be endorsed to a panel of arbitrators which shall be convened in accordance with the
process ordained under the Arbitration Law of the Republic of the Philippines. Indeed, to brush aside
a contractual agreement calling for arbitration in case of disagreement between parties would be a
step backward. But there are exceptions to this rule. Even if there is an arbitration clause, there are
instances when referral to arbitration does not appear to be the most prudent action. The object of
arbitration is to allow the expeditious determination of a dispute. Clearly, the issue before us could
not be speedily and efficiently resolved in its entirety if we allow simultaneous arbitration
proceedings and trial, or suspension of trial pending arbitration.
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Same; Same; Same; Where an arbitration decision will not be binding on an entity who is a non-party
to the arbitration or agreement, or where the arbitration panel will not be able to completely dispose
of all the issues of the case without including such entity in its proceedings, the interest of justice
would only be served if the trial court hears and adjudicates the case in a single and complete
proceeding.—As discussed earlier, the dispute between respondent German Consortium and
petitioners involves the disapproval by the CDC of the assignment by the German Consortium of its
rights under the Contract for Services to petitioner ERTI. Admittedly, the arbitration clause is
contained in the MOA to which only the German Consortium and petitioner ERTI were parties. Even if
the case is brought before an arbitration panel, the decision will not be binding upon CDC who is a
non-party to the arbitration agreement. What is more, the arbitration panel will not be able to
completely dispose of all the issues of this case without including CDC in its proceedings. Accordingly,
the interest of justice would only be served if the trial court hears and adjudicates the case in a single
and complete proceeding.
Same; Injunction; Before an injunctive writ can be issued, it is essential that the following requisites
are present, namely, (1) there must be a right in esse or the existence of a right to be protected, and
(2) the act against which injunction is to be directed is a violation of such right.—Before an injunctive
writ can be issued, it is essential that the following requisites are present: (1) there must be a right in
esse or the existence of a right to be protected; and (2) the act against which injunction to be directed
is a violation of such right. The onus probandi is on movant to show that there exists a right to be
protected, which is directly threatened by the act sought to be enjoined. Further, there must be a
showing that the invasion of the right is material and substantial and that there is an urgent and
paramount necessity for the writ to prevent a serious damage.
Ponce Enrile, Reyes and Manalastas for petitioners.
Ricardo M. Sagmit, Jr. for respondents.
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Assailed in this Petition for Review under Rule 45 of the Rules of Court is the Decision1 of the Court of
Appeals dated May 15, 2003, which sustained the Order of the Regional Trial Court of Angeles City,
Branch 61, dated June 28, 2001, and its subsequent Resolution dated August 3, 2003 denying
petitioner’s motion for reconsideration.
European Resources and Technologies Inc. (hereinafter “ERTI”), a corporation organized and existing
under the laws of the Republic of the Philippines, is joined by Delfin J. Wenceslao as petitioner in this
case. Ingenieuburo Birkhahn + Nolte Ingiurgesellschaft mbh and Heers & Brockstedt Gmbh & Co. are
German corporations who are respondents in this case and shall be collectively referred to as the
“German Consortium”.
The German Consortium tendered and submitted its bid to the Clark Development Corporation
(“CDC”) to construct, operate and manage the Integrated Waste Management Center at the Clark
Special Economic Zone (“CSEZ”). CDC accepted the German Consortium’s bid and awarded the
contract to it. On October 6, 1999, CDC and the German Consortium executed the Contract for
Services2 which embodies the terms and conditions of their agreement.
The Contract for Services provides that the German Consortium shall be empowered to enter into a
contract or agreement for the use of the integrated waste management center by corporations, local
government units, entities, and persons not only within the CSEZ but also outside. For waste collected
within the CSEZ, the German Consortium may impose a “tipping fee” per ton of waste collected from
locators and residents of the CSEZ, which fees shall be subject to the schedule agreed upon by the
parties and specified in the Contract for Services. For its operations outside of the CSEZ, the German
Consortium shall pay CDC US$1.50 per ton of non-hazardous solid waste collected.3 The CDC shall
guarantee that nineteen thousand eighteen hundred (19,800) tons per year of solid waste volume
shall be collected from inside and outside the
_______________
1 Penned by Justice Renato A. Dacudao as concurred in by Justices Godardo A. Jacinto and Danilo B.
Pine of the Fourth Division of the Court of Appeals.
2 Annex “C”, Rollo, p. 63.
3 Article VII, Section 1.
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CSEZ.4 The contract has a term of twenty-five (25) years,5 during which time the German Consortium
shall operate the waste management center on a day-to-day basis.6
Article VIII, Section 7 of the Contract for Services provides that the German Consortium shall
undertake to organize a local corporation as its representative for this project. On April 18, 2000, the
German Consortium entered into a Joint Venture with D.M. Wenceslao and Associates, Inc.
(“DMWAI”) and Ma. Elena B. Villarama (doing business as LBV and Associates), embodied in a
Memorandum of Understanding7 (“MOU”) signed by the parties. Under the MOU, the parties agreed
to jointly form a local corporation to which the German Consortium shall assign its rights under the
Contract for Services. Pursuant to this agreement, petitioner European Resources and Technologies,
Inc. was incorporated. The parties likewise agreed to prepare and finalize a Shareholders’ Agreement
within one (1) month from the execution of the MOU, which shall provide that the German
Consortium shall own fifteen percent (15%) of the equity in the joint venture corporation, DMWAI
shall own seventy percent (70%) and LBV&A shall own fifteen percent (15%). In the event that the
parties fail to execute the Shareholders’ Agreement, the MOU shall be considered null and void.8
On August 1, 2000, without the Shareholders’ Agreement having been executed, the German
Consortium and petitioner ERTI entered into a Memorandum of Agreement (MOA)9 whereby the
German Consortium ceded its rights and obligations under the Contract for Services in favor of ERTI
and assigned unto ERTI, among others, “its license from CDC to engage in the business of providing
environmental services needed in the CSEZ in connection with the waste management within the CSEZ
and other areas.”10 Likewise, the parties agreed that should there be a disagreement between or
among them relative to the interpretation or implementation of the MOA and the collateral
documents including but not limited to the
_______________
4 Article IX, Section 7.
5 Article XII, Section 1.
6 Article V, Section 1(b)(vi).
7 Annex “D”, Rollo, p. 77.
8 Paragraph 8.
9 Annex “E”, Rollo, p. 82.
10 Paragraphs 1 and 2(a).
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Contract for Services between the German Consortium and CDC, the dispute shall be referred to a
panel of arbitrators.11
On December 11, 2000, ERTI received a letter from BN Consultants Philippines, Inc., signed by Mr.
Holger Holst for and on behalf of the German Consortium,12 stating that the German Consortium’s
contract with DMWAI, LBV&A and ERTI has been terminated or extinguished on the following
grounds: (a) the CDC did not give its approval to the Consortium’s request for the approval of the
assignment or transfer by the German Consortium in favor of ERTI of its rights and interests under the
Contract for Services; (b) the parties failed to prepare and finalize the Shareholders’ Agreement
pursuant to the provision of the MOU; (c) there is no more factual or legal basis for the joint venture
to continue; and (d) with the termination of the MOU, the MOA is also deemed terminated or
extinguished.
Attached to the letter was a copy of the letter of the CDC,13 stating that the German Consortium’s
assignment of an eighty-five percent (85%) majority interest to another party violated its
representation to undertake both the financial and technical aspects of the project. The dilution of the
Consortium’s interest in ERTI is a substantial modification of the Consortium’s representations which
were used as bases for the award of the project to it.
On February 20, 2001, petitioner ERTI, through counsel, sent a letter to CDC requesting for the
reconsideration of its disapproval of the agreement between ERTI and the German Consortium.
Before CDC could act upon petitioner ERTI’s letter, the German Consortium filed a complaint for
injunction against herein petitioners before the Regional Trial Court of Angeles City, Branch 61,
docketed as Civil Case No. 10049. The German Consortium claimed that petitioner ERTI’s continued
misrepresentation as to their right to accept solid wastes from third parties for processing at the
waste management center will cause irreparable damage to the Consortium and its exclusive right to
operate the waste management center at the CSEZ. Moreover, petitioner ERTI’s acts destroy the
Consortium’s credibility and undermine customer confidence in it. Hence, the German Consortium
prayed that a writ of
_______________
11 Paragraph 17.
12 Annex “F”, Rollo, p. 89.
13 Rollo, p. 91.
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temporary restraining order be issued against petitioner ERTI and, after hearing, a writ of preliminary
injunction be likewise issued ordering petitioner ERTI to cease and desist from misrepresenting to
third parties or the public that it has any right or interest in the waste management center at CSEZ.14
Petitioners filed their Opposition to the application for preliminary injunction on February 7, 2001.
The following day, February 8, 2001, petitioners sent respondents, through Mr. Holger Holst, a letter
demanding that the parties proceed to arbitration in accordance with Section 17 of the MOA. At the
hearings on the application for injunction, petitioners objected to the presentation of evidence on the
ground that the trial court had no jurisdiction over the case since the German Consortium was
composed of foreign corporations doing business in the country without a license. Moreover, the
MOA between the parties provides that the dispute should be referred to arbitration.
The trial court overruled the objection and proceeded with the hearing. On June 28, 2001, the trial
court issued an Order granting the writ of preliminary injunction.15 Petitioners filed a motion for
reconsideration, which was denied in a Resolution dated November 21, 2001.
On January 17, 2002, petitioners filed a petition for certiorari and prohibition under Rule 65 of the
Rules of Court before the Court of Appeals, assailing the trial court’s Orders dated June 28, 2001 and
November 21, 2001.
Meanwhile, on February 11, 2002, the temporary restraining order issued was lifted in view of
respondents’ failure to file sufficient bond.16 On September 6, 2002, all proceedings in Civil Case No.
10049 were suspended until the petition for certiorari pending before the Court of Appeals shall have
been resolved.17
On May 15, 2003, the Court of Appeals dismissed the petition for certiorari. Petitioners’ Motion for
Reconsideration was denied in a Resolution dated August 25, 2003.
Hence, this petition arguing that the Court of Appeals committed reversible error in:
_______________
14 Complaint, Annex “I”, Rollo, p. 98.
15 Annex “B”, Rollo, p. 57.

16 Annex “J”, Rollo, p. 108.
17 Annex “K”, Rollo, p. 109.
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(a) Ruling that petitioners are estopped from assailing the capacity of the respondents to institute the
suit for injunction.
(b) Ruling that respondents are entitled to an injunctive writ.
(c) Not holding that the dispute is covered by the arbitration clause in the memorandum of
agreement.
(d) Issuing the writ of preliminary injunction that is tantamount to a decision of the case on the
merits.18
The petition is partly meritorious.
There is no general rule or governing principle laid down as to what constitutes “doing” or “engaging
in” or “transacting” business in the Philippines. Thus, it has often been held that a single act or
transaction may be considered as “doing business” when a corporation performs acts for which it was
created or exercises some of the functions for which it was organized.19 We have held that the act of
participating in a bidding process constitutes “doing business” because it shows the foreign
corporation’s intention to engage in business in the Philippines. In this regard, it is the performance by
a foreign corporation of the acts for which it was created, regardless of volume of business, that
determines whether a foreign corporation needs a license or not.20
Consequently, the German Consortium is doing business in the Philippines without the appropriate
license as required by our laws. By participating in the bidding conducted by the CDC for the operation
of the waste management center, the German Consortium exhibited its intent to transact business in
the Philippines. Although the Contract for Services provided for the establishment of a local
corporation to serve as respondents’ representative, it is clear from the other provisions of the
Contract for Services as well as the letter by the CDC containing the disapproval that it will be the
German Consortium which shall manage and conduct the operations of the waste management center
for at least twenty-five years. Moreover, the German Consortium was allowed to transact with other
entities outside the CSEZ for solid waste collection.
_______________
18 Rollo, pp. 22-23.
19 Communication Materials and Design, Inc. v. Court of Appeals, G.R. No. 102223, 22 August 1996,
260 SCRA 673.
20 Hutchison Ports Philippines Limited v. Subic Bay Metropolitan Authority, G.R. No. 131367, 31
August 2000, 339 SCRA 434.
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Thus, it is clear that the local corporation to be established will merely act as a conduit or extension of
the German Consortium.
As a general rule, unlicensed foreign non-resident corporations cannot file suits in the Philippines.
Section 133 of the Corporation Code specifically provides:
SECTION 133. No foreign corporation transacting business in the Philippines without a license, or its
successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in
any court or administrative agency of the Philippines, but such corporation may be sued or proceeded
against before Philippine courts or administrative tribunals on any valid cause of action recognized
under Philippine laws.
A corporation has legal status only within the state or territory in which it was organized. For this
reason, a corporation organized in another country has no personality to file suits in the Philippines.
In order to subject a foreign corporation doing business in the country to the jurisdiction of our courts,
it must acquire a license from the Securities and Exchange Commission (SEC) and appoint an agent for
service of process. Without such license, it cannot institute a suit in the Philippines.21
However, there are exceptions to this rule. In a number of cases,22 we have declared a party
estopped from challenging or questioning the capacity of an unlicensed foreign corporation from
initiating a suit in our courts. In the case of Communication Materials and Design, Inc. v. Court of
Appeals,23 a foreign corporation instituted an action before our courts seeking to enjoin a local
corporation, with whom it had a “Representative Agreement”, from using its corporate name, letter
heads, envelopes, sign boards and business dealings as well as the foreign corporation’s trademark.
The case arose when the foreign corporation discovered that the local corporation has violated
certain contractual commitments as
_______________
21 Subic Bay Metropolitan Authority v. Universal International Group of Taiwan, G.R. No. 131680, 14
September 2000, 340 SCRA 359, citing Communication Materials and Design v. Court of Appeals,
supra.
22 Asia Banking Corporation v. Standard Products, 46 Phil. 144 (1924); Antam Consolidated v. Court of
Appeals, G.R. No. L-61523, 31 July 1986, 143 SCRA 288; Merril Lynch Futures v. Court of Appeals, G.R.
No. 97816, 24 July 1992, 211 SCRA 824; Georg Grotjahn GMBH & Co. v. Isnani, G.R. No. 109272, 10
August 1994, 235 SCRA 216.
23 G.R. No. 102223, 22 August 1996, 260 SCRA 673.
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stipulated in their agreement. In said case, we held that a foreign corporation doing business in the
Philippines without license may sue in Philippine Courts a Philippine citizen or entity that had
contracted with and benefited from it.
Hence, the party is estopped from questioning the capacity of a foreign corporation to institute an
action in our courts where it had obtained benefits from its dealings with such foreign corporation
and thereafter committed a breach of or sought to renege on its obligations. The rule relating to
estoppel is deeply rooted in the axiom of commodum ex injuria sua non habere debet—no person
ought to derive any advantage from his own wrong.
In the case at bar, petitioners have clearly not received any benefit from its transactions with the
German Consortium. In fact, there is no question that petitioners were the ones who have expended a
considerable amount of money and effort preparatory to the implementation of the MOA. Neither do
petitioners seek to back out from their obligations under both the MOU and the MOA by challenging
respondents’ capacity to sue. The reverse could not be any more accurate. Petitioners are insisting on
the full validity and implementation of their agreements with the German Consortium.
To rule that the German Consortium has the capacity to institute an action against petitioners even
when the latter have not committed any breach of its obligation would be tantamount to an
unlicensed foreign corporation gaining access to our courts for protection and redress. We cannot
allow this without violating the very rationale for the law prohibiting a foreign corporation not
licensed to do business in the Philippines from suing or maintaining an action in Philippine courts. The
object of requiring a license is not to prevent the foreign corporation from performing single acts, but
to prevent it from acquiring domicile for the purpose of business without taking the steps necessary
to render it amenable to suits in the local courts.24 In other words, the foreign corporation is merely
prevented from being in a position where it takes the good without accepting the bad.
On the issue of whether the respondents were entitled to the injunctive writ, the petitioners claim
that respondents’ right is not in esse but is rather a future right which is contingent upon a judicial
declaration that the MOA has been validly rescinded. The Court of
_______________
24 Marshall-Wells Co. v. Elser and Co., 46 Phil. 70 (1924).
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Appeals, in its decision, held that the MOA should be deemed subject to a suspensive condition, that
is, that CDC’s prior written consent must be obtained for the validity of the assignment.
This issue must be resolved in a separate proceeding. It must be noted that the hearing conducted in
the trial court was merely a preliminary hearing relating to the issuance of the injunctive writ. In order
to fully appreciate the facts of this case and the surrounding circumstances relating to the agreements
and contract involved, further proof should be presented for consideration of the court. Likewise,
corollary matters, such as whether either of the parties is liable for damages and to what extent,
cannot be resolved with absolute certainty, thus rendering any decision we might make incomplete as
to fully dispose of this case.
More importantly, it is evident that CDC must be made a proper party in any case which seeks to
resolve the effectivity or ineffectivity of its disapproval of the assignment made between petitioners
and respondent German Consortium. Where, as in the instant case, CDC is not impleaded as a party,
any decision of the court which will inevitably affect or involve CDC cannot be deemed binding on it.
For the same reason, petitioners’ assertion that the instant case should be referred to arbitration
pursuant to the provision of the MOA is untenable.
We have ruled in several cases that arbitration agreements are valid, binding, enforceable and not
contrary to public policy such that when there obtains a written provision for arbitration which is not
complied with, the trial court should suspend the proceedings and order the parties to proceed to
arbitration in accordance with the terms of their agreement.25 In the case at bar, the MOA between
petitioner ERTI and respondent German Consortium provided:
17. Should there be a disagreement between or among the Parties relative to the interpretation or
implementation of this Agreement and the
_______________
25 Mindanao Portland Cement Corporation v. McDonough Construction Company of Florida, 126 Phil.
78; 19 SCRA 808 (1967); Chung Fu Industries (Phils.), Inc. v. Court of Appeals, G.R. No. 96283, 25
February 1992, 206 SCRA 545; Puromines, Inc. v. Court of Appeals, G.R. No. 91228, 22 March 1993, 220
SCRA 281; National Power Corporation v. Court of Appeals, G.R. No. 107631, 26 February 1996, 254
SCRA 116.
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collateral documents including but not limited to the Contract for Services between GERMAN
CONSORTIUM and CDC and the Parties cannot resolve the same by themselves, the same shall be
endorsed to a panel of arbitrators which shall be convened in accordance with the process ordained
under the Arbitration Law of the Republic of the Philippines.26
Indeed, to brush aside a contractual agreement calling for arbitration in case of disagreement
between parties would be a step backward.27 But there are exceptions to this rule. Even if there is an
arbitration clause, there are instances when referral to arbitration does not appear to be the most
prudent action. The object of arbitration is to allow the expeditious determination of a dispute.
Clearly, the issue before us could not be speedily and efficiently resolved in its entirety if we allow
simultaneous arbitration proceedings and trial, or suspension of trial pending arbitration.28
As discussed earlier, the dispute between respondent German Consortium and petitioners involves
the disapproval by the CDC of the assignment by the German Consortium of its rights under the
Contract for Services to petitioner ERTI. Admittedly, the arbitration clause is contained in the MOA to
which only the German Consortium and petitioner ERTI were parties. Even if the case is brought
before an arbitration panel, the decision will not be binding upon CDC who is a non-party to the
arbitration agreement. What is more, the arbitration panel will not be able to completely dispose of
all the issues of this case without including CDC in its proceedings. Accordingly, the interest of justice
would only be served if the trial court hears and adjudicates the case in a single and complete
proceeding.
Lastly, petitioners question the propriety of the issuance of writ of preliminary injunction claiming
that such is already tantamount to granting the main prayer of respondents’ complaint without the
benefit of a trial. Petitioners point out that the purpose of a preliminary injunction is to prevent
threatened or continuous irremediable injury to some of the parties before their claims can be thor-
_______________
26 Rollo, p. 86.
27 BF Corporation v. Court of Appeals, G.R. No. 120105, 27 March 1998, 288 SCRA 267.
28 Del Monte Corporation-USA v. Court of Appeals, G.R. No. 136154, 7 February 2001, 351 SCRA 373;
see also Agan, Jr. v. Philippine International Air Terminals Co., Inc., G.R. No. 155001, 5 May 2003, 402
SCRA 612.
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oughly studied and decided. It cannot be used to railroad the main case and seek a judgment without
a full-blown trial as in the instant case.
The Court of Appeals ruled that since petitioners did not raise this issue during the hearing on the
application for preliminary injunction before the trial court, the same cannot be raised for the first
time on appeal and even in special civil actions for certiorari as in this case.
At the outset, it must be noted that with the finding that the German Consortium is without any
personality to file the petition with the trial court, the propriety of the injunction writ issued is
already moot and academic. Even assuming for the sake of argument that respondents have the
capacity to file the petition, we find merit in the issue raised by petitioners against the injunction writ
issued.
Before an injunctive writ can be issued, it is essential that the following requisites are present: (1)
there must be a right in esse or the existence of a right to be protected; and (2) the act against which
injunction to be directed is a violation of such right.29 The onus probandi is on movant to show that
there exists a right to be protected, which is directly threatened by the act sought to be enjoined.
Further, there must be a showing that the invasion of the right is material and substantial and that
there is an urgent and paramount necessity for the writ to prevent a serious damage.30
Thus, it is clear that for the issuance of the writ of preliminary injunction to be proper, it must be
shown that the invasion of the right sought to be protected is material and substantial, that the right
of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the
writ to prevent serious damage.31 At the time of its application for an injunctive writ, respondents’
right to operate and manage the waste management
_______________
29 Philippine Sinter Corporation and Phividec Industrial Authority v. Cagayan Electric Power And Light
Co., Inc., G.R. No. 127371, 25 April 2002, 381 SCRA 582; see also Public Estates Authority v. Court of
Appeals, G.R. No. 112172, 20 November 2000, 345 SCRA 96.
30 Gustilo v. Real, Sr., A.M. No. MTJ-00-1250, 28 February 2001, 353 SCRA 1.
31 Zabat v. Court of Appeals, G.R. No. 122089, 23 August 2000, 338 SCRA 551.
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center, to the exclusion of or without any participation by petitioner ERTI, cannot be said to be clear
and unmistakable. The MOA executed between respondents and petitioner ERTI has not yet been
judicially declared as rescinded when the complaint was lodged in court.32 Hence, a cloud of doubt
exists over respondent German Consortium’s exclusive right relating to the waste management
center.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No. 68923 dated May 15, 2003 is
REVERSED and SET ASIDE. The Orders of the trial court dated June 28, 2001 and November 21, 2001
are ANNULLED and SET ASIDE and Civil Case No. 10049 is DISMISSED for lack of legal capacity of
respondents to institute the action. Costs against respondents.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Quisumbing, Carpio and Azcuna, JJ., concur.
Assailed decision reversed and set aside.

Notes.—The license requirement was imposed to subject the foreign corporation doing business in
the Philippines to the jurisdiction of its courts, not to favor domestic corporations who enter into
solitary transactions with unwary foreign firms and then repudiate their obligations simply because
the latter are not licensed to do business. (National Sugar Trading Corporation vs. Court of Appeals,
246 SCRA 465 [1995])
Injunction is accepted as the “strong arm of equity or a transcendent remedy” to be used cautiously,
as it affects the respective rights of the parties, and only upon full conviction on the part of the court
of its extreme necessity. (Cagayan de Oro City Landless Residents Association, Inc. [COCLAI] vs. Court
of Appeals, 254 SCRA 220 [1996])
——o0o——
_______________
32 Article 1191 of the Civil Code of the Philippines.
261
© Copyright 2018 Central Book Supply, Inc. All rights reserved. European Resources and Technologies,
Inc. vs. Ingenieuburo Birkhahn + Nolte, Ingeniurgesellschaft mbh, 435 SCRA 246, G.R. No. 159586 July
26, 2004
VOL. 523, MAY 28, 2007
233
B. Van Zuiden Bros., Ltd. vs. GTVL Manufacturing Industries, Inc.
G.R. No. 147905. May 28, 2007.*
B. VAN ZUIDEN BROS., LTD., petitioner, vs. GTVL MANUFACTURING INDUSTRIES, INC., respondent.
Corporation Law; Actions; An unlicensed foreign corporation doing business in the Philippines cannot
sue before Philippine courts; An unlicensed foreign corporation not doing business in the Philippines
can sue before Philippine courts.—An unlicensed foreign corporation doing business in the Philippines
cannot sue before Philippine courts. On the other hand, an unlicensed foreign corporation not doing
business in the Philippines can sue before Philippine courts. In the present controversy, petitioner is a
foreign corporation which
_______________
* SECOND DIVISION.
234
234
claims that it is not doing business in the Philippines. As such, it needs no license to institute a
collection suit against respondent before Philippine courts.
Same; Same; What is included in the phrase “doing business."—Under Section 3(d) of Republic Act No.
7042 (RA 7042) or “The Foreign Investments Act of 1991,” the phrase “doing business” includes: x x x
soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
appointing representatives or distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that imply a continuity of commercial
dealings or arrangements, and contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to, and in progressive prosecution of, commercial
gain or of the purpose and object of the business organization: Provided, however, That the phrase
“doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity
in domestic corporations duly registered to do business, and/or the exercise of rights as such investor;
nor having a nominee director or officer to represent its interests in such corporation; nor appointing
a representative or distributor domiciled in the Philippines which transacts business in its own name
and for its own account.
Same; Same; An essential condition to be considered as “doing business” in the Philippines is the
actual performance of specific commercial acts within the territory of the Philippines for the plain
reason that the Philippines has no jurisdiction over commercial acts performed in foreign
territories.—The series of transactions between petitioner and respondent cannot be classified as
“doing business” in the Philippines under Section 3(d) of RA 7042. An essential condition to be
considered as “doing business” in the Philippines is the actual performance of specific commercial acts
within the territory of the Philippines for the plain reason that the Philippines has no jurisdiction over
commercial acts performed in foreign territories. Here, there is no showing that petitioner performed
within the Philippine territory the specific acts of doing business mentioned in Section 3(d) of RA
7042. Petitioner did not also open an office here in the Philip-
235
VOL. 523, MAY 28, 2007
235
pines, appoint a representative or distributor, or manage, supervise or control a local business. While
petitioner and respondent entered into a series of transactions implying a continuity of commercial
dealings, the perfection and consummation of these transactions were done outside the Philippines.
Same; The mere act of exporting from one’s own country, without doing any specific commercial act
within the territory of the importing country, cannot be deemed as doing business in the importing
country.—An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would constitute doing
business in the importing countries. The mere act of exporting from one’s own country, without doing
any specific commercial act within the territory of the importing country, cannot be deemed as doing
business in the importing country. The importing country does not acquire jurisdiction over the
foreign exporter who has not performed any specific commercial act within the territory of the
importing country. Without jurisdiction over the foreign exporter, the importing country cannot
compel the foreign exporter to secure a license to do business in the importing country.
Same; To be doing or “transacting business in the Philippines” for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the Philippines, that is,
perform specific business transactions within the Philippine territory on a continuing basis in its own
name and for its own account.—To be doing or “transacting business in the Philippines” for purposes
of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory on a
continuing basis in its own name and for its own account. Actual transaction of business within the
Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to secure a Philippine business license. If a
foreign corporation does not transact such kind of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation to
secure a Philippine business license.
236
236
PETITION for review on certiorari of a decision of the Court of Appeals.
Alberto B. Guevarra, Jr. for petitioner.
Numeriano F. Rodriguez, Jr. for respondent.
CARPIO, J.:
The Case
Before the Court is a petition for review1 of the 18 April 2001 Decision2 of the Court of Appeals in CA-
G.R. CV No. 66236. The Court of Appeals affirmed the Order3 of the Regional Trial Court, Branch 258,
Parañaque City (trial court) dismissing the complaint for sum of money filed by B. Van Zuiden Bros.,
Ltd. (petitioner) against GTVL Manufacturing Industries, Inc. (respondent).
The Facts
On 13 July 1999, petitioner filed a complaint for sum of money against respondent, docketed as Civil
Case No. 990249. The pertinent portions of the complaint read:
“1. Plaintiff, ZUIDEN, is a corporation, incorporated under the laws of Hong Kong. x x x ZUIDEN is not
engaged in business in the Philippines, but is suing before the Philippine Courts, for the reasons
hereinafter stated.
xxxx
_______________
1 Under Rule 45 of the Rules of Court.
2 Rollo, pp. 24-33. Penned by Associate Justice Fermin A. Martin, Jr., with Associate Justices Portia
Aliño-Hormachuelos and Mercedes Gozo-Dadole, concurring.
3 Id., at p. 34. Penned by Judge Raul E. De Leon.
237
VOL. 523, MAY 28, 2007
237
3. ZUIDEN is engaged in the importation and exportation of several products, including lace products.
4. On several occasions, GTVL purchased lace products from [ZUIDEN].
5. The procedure for these purchases, as per the instructions of GTVL, was that ZUIDEN delivers the
products purchased by GTVL, to a certain Hong Kong corporation, known as Kenzar Ltd. (KENZAR), x x
x and the products are then considered as sold, upon receipt by KENZAR of the goods purchased by
GTVL.
KENZAR had the obligation to deliver the products to the Philippines and/or to follow whatever
instructions GTVL had on the matter.
Insofar as ZUIDEN is concerned, upon delivery of the goods to KENZAR in Hong Kong, the transaction
is concluded; and GTVL became obligated to pay the agreed purchase price.
xxxx
7. However, commencing October 31, 1994 up to the present, GTVL has failed and refused to pay the
agreed purchase price for several deliveries ordered by it and delivered by ZUIDEN, as
abovementioned.
xxxx
9. In spite [sic] of said demands and in spite [sic] of promises to pay and/or admissions of liability,
GTVL has failed and refused, and continues to fail and refuse, to pay the overdue amount of
U.S.$32,088.02 [inclusive of interest].”4
Instead of filing an answer, respondent filed a Motion to Dismiss5 on the ground that petitioner has
no legal capacity to sue. Respondent alleged that pe titioner is doing business in the Philippines
without securing the required license. Accordingly, petitioner cannot sue before Philippine courts.
_______________
4 Records, pp. 1-3.
5 Id., at pp. 47-56.
238
238
After an exchange of several pleadings6 between the parties, the trial court issued an Order on 10
November 1999 dismissing the complaint.
On appeal, the Court of Appeals sustained the trial court’s dismissal of the complaint.
Hence, this petition.
The Court of Appeals’ Ruling
In affirming the dismissal of the complaint, the Court of Appeals relied on Eriks Pte., Ltd. v. Court of
Appeals.7 In that case, Eriks, an unlicensed foreign corporation, sought to collect US$41,939.63 from a
Filipino businessman for goods which he purchased and received on several occasions from January to
May 1989. The transfers of goods took place in Singapore, for the Filipino’s account, F.O.B. Singapore,
with a 90-day credit term. Since the transactions involved were not isolated, this Court found Eriks to
be doing business in the Philippines. Hence, this Court upheld the dismissal of the complaint on the
ground that Eriks has no capacity to sue.
The Court of Appeals noted that in Eriks, while the deliveries of the goods were perfected in
Singapore, this Court still found Eriks to be engaged in business in the Philippines. Thus, the Court of
Appeals concluded that the place of delivery of the goods (or the place where the transaction took
place) is not material in determining whether a foreign corporation is doing business in the
Philippines. The Court of Appeals held that what is material are the proponents to the transaction, as
well as the parties to be benefited and obligated by the transaction.
In this case, the Court of Appeals found that the parties entered into a contract of sale whereby
petitioner sold lace
_______________
6 The last pleading filed was a sur-rejoinder.
7 G.R. No. 118843, 6 February 1997, 267 SCRA 567.
239
VOL. 523, MAY 28, 2007
239
products to respondent in a series of transactions. While petitioner delivered the goods in Hong Kong
to Kenzar, Ltd. (Kenzar), another Hong Kong company, the party with whom petitioner transacted was
actually respondent, a Philippine corporation, and not Kenzar. The Court of Appeals believed Kenzar is
merely a shipping company. The Court of Appeals concluded that the delivery of the goods in Hong
Kong did not exempt petitioner from being considered as doing business in the Philippines.
The Issue
The sole issue in this case is whether petitioner, an unlicensed foreign corporation, has legal capacity
to sue before Philippine courts. The resolution of this issue depends on whether petitioner is doing
business in the Philippines.
The Ruling of the Court
The petition is meritorious.
“Doing business without license.—No foreign corporation transacting business in the Philippines
without a license, or its successors or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.”
The law is clear. An unlicensed foreign corporation doing business in the Philippines cannot sue before
Philippine courts. On the other hand, an unlicensed foreign corporation not doing business in the
Philippines can sue before Philippine courts.
In the present controversy, petitioner is a foreign corporation which claims that it is not doing
business in the Philip-
240
240
pines. As such, it needs no license to institute a collection suit against respondent before Philippine
courts.
Respondent argues otherwise. Respondent insists that petitioner is doing business in the Philippines
without the required license. Hence, petitioner has no legal capacity to sue before Philippine courts.
Under Section 3(d) of Republic Act No. 7042 (RA 7042) or “The Foreign Investments Act of 1991,” the
phrase “doing business” includes:
“x x x soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
and for its own account.”
The series of transactions between petitioner and respondent cannot be classified as “doing business”
in the Philippines under Section 3(d) of RA 7042. An essential condition to be considered as “doing
business” in the Philippines is the actual performance of specific commercial acts within the territory
of the Philippines for the plain reason that the Philippines has no jurisdiction over commercial acts
performed in foreign territories. Here, there is no showing that petitioner performed within the
Philippine territory the specific acts of
241
VOL. 523, MAY 28, 2007
241
doing business mentioned in Section 3(d) of RA 7042. Petitioner did not also open an office here in the
Philippines, appoint a representative or distributor, or manage, supervise or control a local business.
While petitioner and respondent entered into a series of transactions implying a continuity of
commercial dealings, the perfection and consummation of these transactions were done outside the
Philippines.8
In its complaint, petitioner alleged that it is engaged in the importation and exportation of several
products, including lace products. Petitioner asserted that on several occasions, respondent
purchased lace products from it. Petitioner also claimed that respondent instructed it to deliver the
purchased goods to Kenzar, which is a Hong Kong company based in Hong Kong. Upon Kenzar’s
receipt of the goods, the products were considered sold. Kenzar, in turn, had the obligation to deliver
the lace products to the Philippines. In other words, the sale of lace products was consummated in
Hong Kong.
As earlier stated, the series of transactions between petitioner and respondent transpired and were
consummated in Hong Kong.9 We also find no single activity which petitioner performed here in the
Philippines pursuant to its purpose and object as a business organization.10 Moreover, petitioner’s
desire to do business within the Philippines is not discernible from the allegations of the complaint or
from its attachments. Therefore, there is no basis for ruling that petitioner is doing business in the
Philippines.
In Eriks, respondent therein alleged the existence of a distributorship agreement between him and
the foreign corporation. If duly established, such distributorship agreement could support
respondent’s claim that petitioner was indeed doing
_______________
8 See Villanueva, PHILIPPINE CORPORATE LAW 813 (2001).
9 See Pacific Vegetable Oil Corporation v. Singzon, G.R. No. L7917, 29 April 1955 (unreported).
10 See Communication Materials and Design, Inc. v. Court of Appeals, G.R. No. 102223, 22 August
1996, 260 SCRA 673.
242
242
business in the Philippines. Here, there is no such or similar agreement between petitioner and
respondent.
We disagree with the Court of Appeals’ ruling that the proponents to the transaction determine
whether a foreign corporation is doing business in the Philippines, regardless of the place of delivery
or place where the transaction took place. To accede to such theory makes it possible to classify, for
instance, a series of transactions between a Filipino in the United States and an American company
based in the United States as “doing business in the Philippines,” even when these transactions are
negotiated and consummated only within the United States.
An exporter in one country may export its products to many foreign importing countries without
performing in the importing countries specific commercial acts that would constitute doing business
in the importing countries. The mere act of exporting from one’s own country, without doing any
specific commercial act within the territory of the importing country, cannot be deemed as doing
Otherwise, Philippine exporters, by the mere act alone of exporting their products, could be
considered by the importing countries to be doing business in those countries. This will require
Philippine exporters to secure a business license in every foreign country where they usually export
their products, even if they do not perform any specific commercial act within the territory of such
importing countries. Such a legal concept will have a deleterious effect not only on Philippine exports,
but also on global trade.
243
VOL. 523, MAY 28, 2007
243
To be doing or “transacting business in the Philippines” for purposes of Section 133 of the Corporation
Code, the foreign corporation must actually transact business in the Philippines, that is, perform
specific business transactions within the Philippine territory on a continuing basis in its own name and
for its own account. Actual transaction of business within the Philippine territory is an essential
requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus require the
foreign corporation to secure a Philippine business license. If a foreign corporation does not transact
such kind of business in the Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corporation to secure a Philippine business
license.
Considering that petitioner is not doing business in the Philippines, it does not need a license in order
to initiate and maintain a collection suit against respondent for the unpaid balance of respondent’s
purchases.
WHEREFORE, we GRANT the petition. We REVERSE the Decision dated 18 April 2001 of the Court of
Appeals in CAG.R. CV No. 66236. No costs.
SO ORDERED.
Quisumbing (Chairperson), Tinga and Velasco, Jr., JJ., concur.
Carpio-Morales, J., On Official Leave.
Petition granted, judgment reversed.
Note.—A foreign corporation without a license is not ipso facto incapacitated from bringing an action
in the Philippine courts. License is necessary only if a foreign corporation is transacting or doing
business in the country. (Agilent Technologies Singapore [Pte.] Ltd. vs. Integrated Silicon Technology
Philippines Corporation, 427 SCRA 593 [2004])
——o0o——
244
© Copyright 2018 Central Book Supply, Inc. All rights reserved. B. Van Zuiden Bros., Ltd. vs. GTVL
Manufacturing Industries, Inc., 523 SCRA 233, G.R. No. 147905 May 28, 2007
Case no. 5
VOL. 523, MAY 28, 2007
233

G.R. No. 147905. May 28, 2007.*
B. VAN ZUIDEN BROS., LTD., petitioner, vs. GTVL MANUFACTURING INDUSTRIES, INC., respondent.
Corporation Law; Actions; An unlicensed foreign corporation doing business in the Philippines cannot
sue before Philippine courts; An unlicensed foreign corporation not doing business in the Philippines
can sue before Philippine courts.—An unlicensed foreign corporation doing business in the Philippines
cannot sue before Philippine courts. On the other hand, an unlicensed foreign corporation not doing
business in the Philippines can sue before Philippine courts. In the present controversy, petitioner is a
foreign corporation which
_______________
* SECOND DIVISION.
234
234
claims that it is not doing business in the Philippines. As such, it needs no license to institute a
collection suit against respondent before Philippine courts.
Same; Same; What is included in the phrase “doing business."—Under Section 3(d) of Republic Act No.
7042 (RA 7042) or “The Foreign Investments Act of 1991,” the phrase “doing business” includes: x x x
soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
and for its own account.
Same; Same; An essential condition to be considered as “doing business” in the Philippines is the
actual performance of specific commercial acts within the territory of the Philippines for the plain
reason that the Philippines has no jurisdiction over commercial acts performed in foreign
territories.—The series of transactions between petitioner and respondent cannot be classified as
“doing business” in the Philippines under Section 3(d) of RA 7042. An essential condition to be
considered as “doing business” in the Philippines is the actual performance of specific commercial acts
within the territory of the Philippines for the plain reason that the Philippines has no jurisdiction over
commercial acts performed in foreign territories. Here, there is no showing that petitioner performed
within the Philippine territory the specific acts of doing business mentioned in Section 3(d) of RA
7042. Petitioner did not also open an office here in the Philip-
235
VOL. 523, MAY 28, 2007
235
pines, appoint a representative or distributor, or manage, supervise or control a local business. While
petitioner and respondent entered into a series of transactions implying a continuity of commercial
dealings, the perfection and consummation of these transactions were done outside the Philippines.
Same; The mere act of exporting from one’s own country, without doing any specific commercial act
within the territory of the importing country, cannot be deemed as doing business in the importing
country.—An exporter in one country may export its products to many foreign importing countries
without performing in the importing countries specific commercial acts that would constitute doing
business in the importing countries. The mere act of exporting from one’s own country, without doing
any specific commercial act within the territory of the importing country, cannot be deemed as doing
Same; To be doing or “transacting business in the Philippines” for purposes of Section 133 of the
Corporation Code, the foreign corporation must actually transact business in the Philippines, that is,
perform specific business transactions within the Philippine territory on a continuing basis in its own
name and for its own account.—To be doing or “transacting business in the Philippines” for purposes
of Section 133 of the Corporation Code, the foreign corporation must actually transact business in the
Philippines, that is, perform specific business transactions within the Philippine territory on a
continuing basis in its own name and for its own account. Actual transaction of business within the
Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to secure a Philippine business license. If a
foreign corporation does not transact such kind of business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no jurisdiction to require such foreign corporation to
secure a Philippine business license.
236
236
Alberto B. Guevarra, Jr. for petitioner.
Numeriano F. Rodriguez, Jr. for respondent.
CARPIO, J.:
The Case
Before the Court is a petition for review1 of the 18 April 2001 Decision2 of the Court of Appeals in CA-
G.R. CV No. 66236. The Court of Appeals affirmed the Order3 of the Regional Trial Court, Branch 258,
Parañaque City (trial court) dismissing the complaint for sum of money filed by B. Van Zuiden Bros.,
Ltd. (petitioner) against GTVL Manufacturing Industries, Inc. (respondent).
The Facts
On 13 July 1999, petitioner filed a complaint for sum of money against respondent, docketed as Civil
Case No. 990249. The pertinent portions of the complaint read:
“1. Plaintiff, ZUIDEN, is a corporation, incorporated under the laws of Hong Kong. x x x ZUIDEN is not
engaged in business in the Philippines, but is suing before the Philippine Courts, for the reasons
hereinafter stated.
xxxx
_______________
2 Rollo, pp. 24-33. Penned by Associate Justice Fermin A. Martin, Jr., with Associate Justices Portia
Aliño-Hormachuelos and Mercedes Gozo-Dadole, concurring.
3 Id., at p. 34. Penned by Judge Raul E. De Leon.
237
VOL. 523, MAY 28, 2007
237
3. ZUIDEN is engaged in the importation and exportation of several products, including lace products.
4. On several occasions, GTVL purchased lace products from [ZUIDEN].
5. The procedure for these purchases, as per the instructions of GTVL, was that ZUIDEN delivers the
products purchased by GTVL, to a certain Hong Kong corporation, known as Kenzar Ltd. (KENZAR), x x
x and the products are then considered as sold, upon receipt by KENZAR of the goods purchased by
GTVL.
KENZAR had the obligation to deliver the products to the Philippines and/or to follow whatever
instructions GTVL had on the matter.
Insofar as ZUIDEN is concerned, upon delivery of the goods to KENZAR in Hong Kong, the transaction
is concluded; and GTVL became obligated to pay the agreed purchase price.
xxxx
7. However, commencing October 31, 1994 up to the present, GTVL has failed and refused to pay the
agreed purchase price for several deliveries ordered by it and delivered by ZUIDEN, as
abovementioned.
xxxx
9. In spite [sic] of said demands and in spite [sic] of promises to pay and/or admissions of liability,
GTVL has failed and refused, and continues to fail and refuse, to pay the overdue amount of
U.S.$32,088.02 [inclusive of interest].”4
Instead of filing an answer, respondent filed a Motion to Dismiss5 on the ground that petitioner has
no legal capacity to sue. Respondent alleged that pe titioner is doing business in the Philippines
without securing the required license. Accordingly, petitioner cannot sue before Philippine courts.
_______________
4 Records, pp. 1-3.
5 Id., at pp. 47-56.
238
238
After an exchange of several pleadings6 between the parties, the trial court issued an Order on 10
November 1999 dismissing the complaint.
On appeal, the Court of Appeals sustained the trial court’s dismissal of the complaint.
The Court of Appeals’ Ruling
In affirming the dismissal of the complaint, the Court of Appeals relied on Eriks Pte., Ltd. v. Court of
Appeals.7 In that case, Eriks, an unlicensed foreign corporation, sought to collect US$41,939.63 from a
Filipino businessman for goods which he purchased and received on several occasions from January to
May 1989. The transfers of goods took place in Singapore, for the Filipino’s account, F.O.B. Singapore,
with a 90-day credit term. Since the transactions involved were not isolated, this Court found Eriks to
be doing business in the Philippines. Hence, this Court upheld the dismissal of the complaint on the
ground that Eriks has no capacity to sue.
The Court of Appeals noted that in Eriks, while the deliveries of the goods were perfected in
Singapore, this Court still found Eriks to be engaged in business in the Philippines. Thus, the Court of
Appeals concluded that the place of delivery of the goods (or the place where the transaction took
place) is not material in determining whether a foreign corporation is doing business in the
Philippines. The Court of Appeals held that what is material are the proponents to the transaction, as
well as the parties to be benefited and obligated by the transaction.
In this case, the Court of Appeals found that the parties entered into a contract of sale whereby
petitioner sold lace
_______________
6 The last pleading filed was a sur-rejoinder.
239
VOL. 523, MAY 28, 2007
239
products to respondent in a series of transactions. While petitioner delivered the goods in Hong Kong
to Kenzar, Ltd. (Kenzar), another Hong Kong company, the party with whom petitioner transacted was
actually respondent, a Philippine corporation, and not Kenzar. The Court of Appeals believed Kenzar is
merely a shipping company. The Court of Appeals concluded that the delivery of the goods in Hong
Kong did not exempt petitioner from being considered as doing business in the Philippines.
The Issue
The sole issue in this case is whether petitioner, an unlicensed foreign corporation, has legal capacity
to sue before Philippine courts. The resolution of this issue depends on whether petitioner is doing
business in the Philippines.
The petition is meritorious.

“Doing business without license.—No foreign corporation transacting business in the Philippines
without a license, or its successors or assigns, shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on
any valid cause of action recognized under Philippine laws.”
The law is clear. An unlicensed foreign corporation doing business in the Philippines cannot sue before
Philippine courts. On the other hand, an unlicensed foreign corporation not doing business in the
Philippines can sue before Philippine courts.
In the present controversy, petitioner is a foreign corporation which claims that it is not doing
business in the Philip-
240
240
pines. As such, it needs no license to institute a collection suit against respondent before Philippine
courts.
Respondent argues otherwise. Respondent insists that petitioner is doing business in the Philippines
without the required license. Hence, petitioner has no legal capacity to sue before Philippine courts.
Under Section 3(d) of Republic Act No. 7042 (RA 7042) or “The Foreign Investments Act of 1991,” the
phrase “doing business” includes:
“x x x soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches;
and for its own account.”
The series of transactions between petitioner and respondent cannot be classified as “doing business”
in the Philippines under Section 3(d) of RA 7042. An essential condition to be considered as “doing
business” in the Philippines is the actual performance of specific commercial acts within the territory
of the Philippines for the plain reason that the Philippines has no jurisdiction over commercial acts
performed in foreign territories. Here, there is no showing that petitioner performed within the
Philippine territory the specific acts of
241
VOL. 523, MAY 28, 2007
241

doing business mentioned in Section 3(d) of RA 7042. Petitioner did not also open an office here in the
Philippines, appoint a representative or distributor, or manage, supervise or control a local business.
While petitioner and respondent entered into a series of transactions implying a continuity of
commercial dealings, the perfection and consummation of these transactions were done outside the
Philippines.8
In its complaint, petitioner alleged that it is engaged in the importation and exportation of several
products, including lace products. Petitioner asserted that on several occasions, respondent
purchased lace products from it. Petitioner also claimed that respondent instructed it to deliver the
purchased goods to Kenzar, which is a Hong Kong company based in Hong Kong. Upon Kenzar’s
receipt of the goods, the products were considered sold. Kenzar, in turn, had the obligation to deliver
the lace products to the Philippines. In other words, the sale of lace products was consummated in
Hong Kong.
As earlier stated, the series of transactions between petitioner and respondent transpired and were
consummated in Hong Kong.9 We also find no single activity which petitioner performed here in the
Philippines pursuant to its purpose and object as a business organization.10 Moreover, petitioner’s
desire to do business within the Philippines is not discernible from the allegations of the complaint or
from its attachments. Therefore, there is no basis for ruling that petitioner is doing business in the
Philippines.
In Eriks, respondent therein alleged the existence of a distributorship agreement between him and
the foreign corporation. If duly established, such distributorship agreement could support
respondent’s claim that petitioner was indeed doing
_______________
8 See Villanueva, PHILIPPINE CORPORATE LAW 813 (2001).
9 See Pacific Vegetable Oil Corporation v. Singzon, G.R. No. L7917, 29 April 1955 (unreported).
10 See Communication Materials and Design, Inc. v. Court of Appeals, G.R. No. 102223, 22 August
1996, 260 SCRA 673.
242
242
business in the Philippines. Here, there is no such or similar agreement between petitioner and
respondent.
We disagree with the Court of Appeals’ ruling that the proponents to the transaction determine
whether a foreign corporation is doing business in the Philippines, regardless of the place of delivery
or place where the transaction took place. To accede to such theory makes it possible to classify, for
instance, a series of transactions between a Filipino in the United States and an American company
based in the United States as “doing business in the Philippines,” even when these transactions are
negotiated and consummated only within the United States.
An exporter in one country may export its products to many foreign importing countries without
performing in the importing countries specific commercial acts that would constitute doing business
in the importing countries. The mere act of exporting from one’s own country, without doing any
specific commercial act within the territory of the importing country, cannot be deemed as doing
Otherwise, Philippine exporters, by the mere act alone of exporting their products, could be
considered by the importing countries to be doing business in those countries. This will require
Philippine exporters to secure a business license in every foreign country where they usually export
their products, even if they do not perform any specific commercial act within the territory of such
importing countries. Such a legal concept will have a deleterious effect not only on Philippine exports,
but also on global trade.
243
VOL. 523, MAY 28, 2007
243
To be doing or “transacting business in the Philippines” for purposes of Section 133 of the Corporation
Code, the foreign corporation must actually transact business in the Philippines, that is, perform
specific business transactions within the Philippine territory on a continuing basis in its own name and
for its own account. Actual transaction of business within the Philippine territory is an essential
requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus require the
foreign corporation to secure a Philippine business license. If a foreign corporation does not transact
such kind of business in the Philippines, even if it exports its products to the Philippines, the
Philippines has no jurisdiction to require such foreign corporation to secure a Philippine business
license.
Considering that petitioner is not doing business in the Philippines, it does not need a license in order
to initiate and maintain a collection suit against respondent for the unpaid balance of respondent’s
purchases.
WHEREFORE, we GRANT the petition. We REVERSE the Decision dated 18 April 2001 of the Court of
Appeals in CAG.R. CV No. 66236. No costs.
SO ORDERED.
Carpio-Morales, J., On Official Leave.
Petition granted, judgment reversed.
Note.—A foreign corporation without a license is not ipso facto incapacitated from bringing an action
in the Philippine courts. License is necessary only if a foreign corporation is transacting or doing
business in the country. (Agilent Technologies Singapore [Pte.] Ltd. vs. Integrated Silicon Technology
Philippines Corporation, 427 SCRA 593 [2004])
——o0o——
244
© Copyright 2018 Central Book Supply, Inc. All rights reserved. B. Van Zuiden Bros., Ltd. vs. GTVL
Manufacturing Industries, Inc., 523 SCRA 233, G.R. No. 147905 May 28, 2007
Cse no. 5
G.R. No. 152580. June 26, 2008.*
CONSUELO METAL CORPORATION, petitioner, vs. PLANTERS DEVELOPMENT BANK and ATTY. JESUSA
PRADO-MANINGAS, in her capacity as Ex-officio Sheriff of Manila, respondents.
Corporation Law; Securities and Exchange Commission (SEC); Jurisdictions; Republic Act No. 8799
transferred to the appropriate regional trial courts the SEC’s jurisdiction defined under Section 5(d) of
Presidential Decree No. 902-A.—Republic Act No. 8799 (RA 8799) transferred to the appropriate
regional trial courts the SEC’s jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A.
Section 5.2 of RA 8799 provides: The Commission’s jurisdiction over all cases enumerated under Sec. 5
of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority
may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted
for final resolution which should be resolved within one (1) year from the enactment of this Code. The
Commission shall retain jurisdiction over pending suspen-
_______________
* FIRST DIVISION.
466
466
Consuelo Metal Corporation vs. Planters Development Bank
sion of payments/reha-bilitation cases filed as of 30 June 2000 until finally disposed. (Emphasis
supplied)
Same; Same; Same; Corporate Liquidation; While the SEC has jurisdiction to order the dissolution of a
corporation, jurisdiction over the liquidation of the corporation now pertains to the appropriate
regional trial courts—the liquidation of a corporation requires the settlement of claims for and against
the corporation, which clearly falls under the jurisdiction of the regular courts.—The SEC’s jurisdiction
does not extend to the liquidation of a corporation. While the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over the liquidation of the corporation now pertains to the
appropriate regional trial courts. This is the reason why the SEC, in its 29 November 2000 Omnibus
Order, directed that “the proceedings on and implementation of the order of liquidation be
commenced at the Regional Trial Court to which this case shall be transferred.” This is the correct
procedure because the liquidation of a corporation requires the settlement of claims for and against
the corporation, which clearly falls under the jurisdiction of the regular courts. The trial court is in the
best position to convene all the creditors of the corporation, ascertain their claims, and determine
their preferences.
Same; Rehabilitation of Corporations; Preference of Credits; If rehabilitation is no longer feasible and

the assets of the corporation are finally liquidated, secured creditors shall enjoy preference over
unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of
credits.—In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, 320 SCRA 279
(1999), we held that if rehabilitation is no longer feasible and the assets of the corporation are finally
liquidated, secured creditors shall enjoy preference over unsecured creditors, subject only to the
provisions of the Civil Code on concurrence and preference of credits. Creditors of secured obligations
may pursue their security interest or lien, or they may choose to abandon the preference and prove
their credits as ordinary claims.
Same; Same; Same; Mortgages; Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of the immovable or real right to
which the preference refers.—Section 2248 of the Civil Code provides:
467
VOL. 555, JUNE 26, 2008
467
Those credits which enjoy preference in relation to specific real property or real rights, exclude all
others to the extent of the value of the immovable or real right to which the preference refers.
Same; Same; Same; Same; A creditor-mortgagee has the right to foreclose the mortgage over a
specific real property whether or not the debtor-mortgagor is under insolvency or liquidation
proceedings.—In this case, Planters Bank, as a secured creditor, enjoys preference over a specific
mortgaged property and has a right to foreclose the mortgage under Section 2248 of the Civil Code.
The creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether
or not the debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose
such mortgage is merely suspended upon the appointment of a management committee or
rehabilitation receiver or upon the issuance of a stay order by the trial court. However, the creditor-
mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation
proceedings or upon the lifting of the stay order.
Same; Same; Same; Same; Foreclosure proceedings have in their favor the presumption of regularity
and the burden of evidence to rebut the same is on the party that seeks to challenge the
proceedings.—Foreclosure proceedings have in their favor the presumption of regularity and the
burden of evidence to rebut the same is on the party that seeks to challenge the proceedings. CMC’s
challenge to the foreclosure proceedings has no merit. The notice of sale clearly specified that the
auction sale will be held “at 10:00 o’clock in the morning or soon thereafter, but not later than 2:00
o’clock in the afternoon.” The Sheriff’s Minutes of the Sale stated that “the foreclosure sale was
actually opened at 10:00 A.M. and commenced at 2:30 P.M.” There was nothing irregular about the
foreclosure proceedings.
Jesus C. Nalupta, Jr. and Manuel D. Yngson, Jr. for petitioner.
468
468

Raymundo, Santos, Senga & Associates for respondent Planters Development Bank.
CARPIO, J.:
The Case
This is a petition for review1 seeking to reverse the 14 December 2001 Decision2 and the 6 March
2002 Resolution3 of the Court of Appeals in CA-G.R. SP No. 65069. In its 14 December 2001 Decision,
the Court of Appeals dismissed petitioner Consuelo Metal Corporation’s (CMC) petition for certiorari
and affirmed the 25 April 2001 Order4 of the Regional Trial Court, Branch 46, Manila (trial court). In its
6 March 2002 Resolution, the Court of Appeals partially granted CMC’s motion for reconsideration
and remanded the case to the Securities and Exchange Commission (SEC) for further proceedings.
The Facts
On 1 April 1996, CMC filed before the SEC a petition to be declared in a state of suspension of
payment, for rehabilitation, and for the appointment of a rehabilitation receiver or management
committee under Section 5(d) of Presidential Decree No. 902-A.5 On 2 April 1996, the SEC, finding the
_______________
1 Under Rule 45 of the 1997 Rules of Civil Procedure.
2 Rollo, pp. 49-56. Penned by Associate Justice Alicia L. Santos, with Associate Justices Buenaventura
J. Guerrero and Marina L. Buzon, concurring.
3 Id., at pp. 57-59.

4 CA Rollo, pp. 32-35. Penned by Judge Artemio S. Tipon.
5 Section 5(d) of Presidential Decree No. 902-A provides:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
expressly granted under existing laws and de-
469
VOL. 555, JUNE 26, 2008
469
petition sufficient in form and substance, declared that “all actions for claims against CMC pending
before any court, tribunal, office, board, body and/or commission are deemed suspended
immediately until further order” from the SEC.6
In an Order dated 13 September 1999, the SEC directed the creation of a management committee to
undertake CMC’s rehabilitation and reiterated the suspension of all actions for claims against CMC.7
On 29 November 2000, upon the management committee’s recommendation,8 the SEC issued an
Omnibus Order directing the dissolution and liquidation of CMC.9 The SEC also directed that “the
proceedings on and implementation of the order of liquidation be commenced at the Regional Trial
Court to which this case shall be transferred.”10
Thereafter, respondent Planters Development Bank (Planters Bank), one of CMC’s creditors,
commenced the extra-judicial foreclosure of CMC’s real estate mortgage. Public auctions were
scheduled on 30 January 2001 and 6 February 2001.
_______________
crees, it shall have original and exclusive jurisdiction to hear and decide cases involving x x x x
(d) Petitions of corporations, partnerships or associations to be declared in a state of suspension of

payments in cases where the corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in
cases where the corporation, partnership or association has no sufficient assets to cover its liabilities
but is under the management of a Rehabilitation Receiver or Management Committee.
6 CA Rollo, p. 61.
7 Rollo, pp. 102-107.
8 CA Rollo, pp. 68-70.
9 Rollo, pp. 108-113.
10 Id., at p. 113.
470
470
CMC filed a motion for the issuance of a temporary restraining order and a writ of preliminary
injunction with the SEC to enjoin the foreclosure of the real estate mortgage. On 29 January 2001, the
SEC issued a temporary restraining order to maintain the status quo and ordered the immediate
transfer of the case records to the trial court.11
The case was then transferred to the trial court. In its 25 April 2001 Order, the trial court denied
CMC’s motion for issuance of a temporary restraining order. The trial court ruled that since the SEC
had already terminated and decided on the merits CMC’s petition for suspension of payment, the trial
court no longer had legal basis to act on CMC’s motion.
On 28 May 2001, the trial court denied CMC’s motion for reconsideration.12 The trial court ruled that
CMC’s petition for suspension of payment could not be converted into a petition for dissolution and
liquidation because they covered different subject matters and were governed by different rules. The
trial court stated that CMC’s remedy was to file a new petition for dissolution and liquidation either
with the SEC or the trial court.
CMC filed a petition for certiorari with the Court of Appeals. CMC alleged that the trial court acted
with grave abuse of discretion amounting to lack of jurisdiction when it required CMC to file a new
petition for dissolution and liquidation with either the SEC or the trial court when the SEC clearly
retained jurisdiction over the case.
On 13 June 2001, Planters Bank extrajudicially foreclosed the real estate mortgage.13
_______________
11 Id., at pp. 114-116.
12 CA Rollo, pp. 36-37.
13 Id., at pp. 130-132.
471
VOL. 555, JUNE 26, 2008
471
On 14 December 2001, the Court of Appeals dismissed the petition and upheld the 25 April 2001
Order of the trial court. The Court of Appeals held that the trial court correctly denied CMC’s motion
for the issuance of a temporary restraining order because it was only an ancillary remedy to the
petition for suspension of payment which was already terminated. The Court of Appeals added that,
under Section 121 of the Corporation Code,14 the SEC has jurisdiction to hear CMC’s petition for
dissolution and liquidation.
CMC filed a motion for reconsideration. CMC argued that it does not have to file a new petition for
dissolution and liquidation with the SEC but that the case should just be remanded to the SEC as a
continuation of its jurisdiction over the petition for suspension of payment. CMC also asked that
Planters Bank’s foreclosure of the real estate mortgage be declared void.
In its 6 March 2002 Resolution, the Court of Appeals partially granted CMC’s motion for
reconsideration and ordered that the case be remanded to the SEC under Section 121 of the
Corporation Code. The Court of Appeals also ruled that since the SEC already ordered CMC’s
dissolution and liquidation, Planters Bank’s foreclosure of the real estate mortgage was in order.
Planters Bank filed a motion for reconsideration questioning the remand of the case to the SEC. In a
resolution dated 19 July 2002, the Court of Appeals denied the motion for reconsideration.
_______________
14 Section 121 of the Corporation Code provides:
Sec. 121. Involuntary dissolution.—A corporation may be dissolved by the Securities and Exchange
Commission upon the filing of a verified complaint and after proper notice and hearing on grounds
provided by existing laws, rules and regulations.
472
472
Not satisfied with the 6 March 2002 Resolution, CMC filed this petition for review on certiorari.
The Issues
CMC raises the following issues:

1. Whether the present case falls under Section 121 of the Corporation Code, which refers to the
SEC’s jurisdiction over CMC’s dissolution and liquidation, or is only a continuation of the SEC’s
jurisdiction over CMC’s petition for suspension of payment; and
2. Whether Planters Bank’s foreclosure of the real estate mortgage is valid.
The petition has no merit.
The SEC has jurisdiction to order CMC’s dissolution
but the trial court has jurisdiction over CMC’s liquidation.
While CMC agrees with the ruling of the Court of Appeals that the SEC has jurisdiction over CMC’s
dissolution and liquidation, CMC argues that the Court of Appeals remanded the case to the SEC on
the wrong premise that the applicable law is Section 121 of the Corporation Code. CMC maintains that
the SEC retained jurisdiction over its dissolution and liquidation because it is only a continuation of
the SEC’s jurisdiction over CMC’s original petition for suspension of payment which had not been
“finally disposed of as of 30 June 2000.”
On the other hand, Planters Bank insists that the trial court has jurisdiction over CMC’s dissolution
and liquidation. Planters Bank argues that dissolution and liquidation are entirely new proceedings for
the termination of the existence of the corporation which are incompatible with a petition for
473
VOL. 555, JUNE 26, 2008

473
suspension of payment which seeks to preserve corporate existence.
Republic Act No. 8799 (RA 8799)15 transferred to the appropriate regional trial courts the SEC’s
jurisdiction defined under Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:
“The Commission’s jurisdiction over all cases enumerated under Sec. 5 of Presidential Decree No. 902-
A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial
Court branches that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until
finally disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMC’s petition for suspension of payment and issued a suspension
order on 2 April 1996 after it found CMC’s petition to be sufficient in form and substance. While CMC’s
petition was still pending with the SEC as of 30 June 2000, it was finally disposed of on 29 November
2000 when the SEC issued its Omnibus Order directing the dissolution of CMC and the transfer of the
liquidation proceedings before the appropriate trial court. The SEC finally disposed of CMC’s petition
for suspension of payment when it determined that CMC could no longer be successfully
rehabilitated.
However, the SEC’s jurisdiction does not extend to the liquidation of a corporation. While the SEC has
jurisdiction to order the dissolution of a corporation,16 jurisdiction over the
_______________
15 Also known as “The Securities Regulation Code” which took effect on 8 August 2000.
16 Sections 119 and 121 of the Corporation Code.
474
474
liquidation of the corporation now pertains to the appropriate regional trial courts. This is the reason
why the SEC, in its 29 November 2000 Omnibus Order, directed that “the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial Court to which this
case shall be transferred.” This is the correct procedure because the liquidation of a corporation
requires the settlement of claims for and against the corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is in the best position to convene all the creditors of
the corporation, ascertain their claims, and determine their preferences.
Foreclosure of real estate mortgage is valid.
CMC maintains that the foreclosure is void because it was undertaken without the knowledge and
previous consent of the liquidator and other lien holders. CMC adds that the rules on concurrence and
preference of credits should apply in foreclosure proceedings. Assuming that Planters Bank can
foreclose the mortgage, CMC argues that the foreclosure is still void because it was conducted in
violation of Section 15, Rule 39 of the Rules of Court which states that the sale “should not be earlier
than nine o’clock in the morning and not later than two o’clock in the afternoon.”
On the other hand, Planters Bank argues that it has the right to foreclose the real estate mortgage
because of non-payment of the loan obligation. Planters Bank adds that the rules on concurrence and
preference of credits and the rules on insolvency are not applicable in this case because CMC has been
not been declared insolvent and there are no insolvency proceedings against CMC.
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court,17 we held that if

rehabilitation is no longer feasible and the assets of the corporation are finally liquidated, secured
creditors shall enjoy preference over unsecured
_______________
17 378 Phil. 10; 320 SCRA 279, 294 (1999).
475
VOL. 555, JUNE 26, 2008
475
creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits.
Creditors of secured obligations may pursue their security interest or lien, or they may choose to
abandon the preference and prove their credits as ordinary claims.18
Moreover, Section 2248 of the Civil Code provides:
“Those credits which enjoy preference in relation to specific real property or real rights, exclude all
others to the extent of the value of the immovable or real right to which the preference refers.”
In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged
property and has a right to foreclose the mortgage under Section 2248 of the Civil Code. The creditor-
mortgagee has the right to foreclose the mortgage over a specific real property whether or not the
debtor-mortgagor is under insolvency or liquidation proceedings. The right to foreclose such mortgage
is merely suspended upon the appointment of a management committee or rehabilitation receiver19
or upon the issuance of a stay order by the trial court.20 However, the creditor-mortgagee may
exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or
upon the lifting of the stay order.21
Foreclosure proceedings have in their favor the presumption of regularity and the burden of evidence
to rebut the same is on the party that seeks to challenge the proceedings.22 CMC’s challenge to the
foreclosure proceedings has no merit.
_______________
18 Vitug, J., Commercial Laws and Jurisprudence, 557 (Volume 1 ed. 2006).
19 Section 6(c) of Presidential Decree No. 902-A.
20 Section 6, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation.
21 Section 12, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation.
22 Union Bank of the Philippines v. Court of Appeals, G.R. No. 164910, 30 September 2005, 471 SCRA
751.
476
476
The notice of sale clearly specified that the auction sale will be held “at 10:00 o’clock in the morning
or soon thereafter, but not later than 2:00 o’clock in the afternoon.”23 The Sheriff’s Minutes of the
Sale stated that “the foreclosure sale was actually opened at 10:00 A.M. and commenced at 2:30
P.M.”24 There was nothing irregular about the foreclosure proceedings.
WHEREFORE, we DENY the petition. We REINSTATE the 29 November 2000 Omnibus Order of the
Securities and Exchange Commission directing the Regional Trial Court, Branch 46, Manila to
immediately undertake the liquidation of Consuelo Metal Corporation. We AFFIRM the ruling of the
Court of Appeals that Planters Development Bank’s extra-judicial foreclosure of the real estate
mortgage is valid.
SO ORDERED.
Puno (C.J., Chairperson), Corona, Azcuna and Leonardo-De Castro, JJ., concur.
Notes.—A court action is ipso jure suspended only upon the appointment of a management
committee or a rehabilitation receiver. (Barotac Sugar Mills, Inc. vs. Court of Appeals, 275 SCRA 497
[1997])
The purchaser in an extrajudicial foreclosure sale may apply for a writ of possession during the
redemption period by filing for that purpose an ex parte motion under oath, in the corresponding
registration or cadastral proceeding in the case of a property with a Torrens title. (Samson vs. Rivera,
428 SCRA 759 [2004])
——o0o——
_______________
23 CA Rollo, p. 130.
24 Rollo, p. 62.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Consuelo Metal Corporation vs.
Planters Development Bank, 555 SCRA 465, G.R. No. 152580 June 26, 2008
Case no. 6
Ching Bee Trading Corp.
Case No. 7
500
Poliand Industrial Limited vs. National Development Company

G.R. No. 143866. August 22, 2005.*
POLIAND INDUSTRIAL LIMITED, petitioner, vs. NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT

BANK OF THE PHILIPPINES, and THE HONORABLE COURT OF APPEALS (Fourteenth Division),
respondents.
G.R. No. 143877. August 22, 2005.*
NATIONAL DEVELOPMENT COMPANY, petitioner, vs. POLIAND INDUSTRIAL LIMITED, respondent.
Presidency; Letters of Instruction (LOIs); Control Power; Legislative Power; Obligations; As a general
rule, letters of instructions are simply directives of the President, issued in the exercise of his
administrative power of control, to heads of departments and/or officers under the executive branch
of the government for observance by the
_______________
* SECOND DIVISION.
501
VOL. 467, AUGUST 22, 2005
501

officials and/or employees thereof—and, being administrative in nature, they do not have the force
and effect of a law and, thus, cannot be a valid source of obligation; Paramount considerations
compelled the grant of extraordinary legislative power to the President at that time when the nation
was beset with threats to public order and the purpose for which the authority was granted was
specific to meet the exigencies of that period.—As a general rule, letters of instructions are simply
directives of the President of the Philippines, issued in the exercise of his administrative power of
control, to heads of departments and/or officers under the executive branch of the government for
observance by the officials and/or employees thereof. Being administrative in nature, they do not
have the force and effect of a law and, thus, cannot be a valid source of obligation. However, during
the period when then President Marcos exercised extraordinary legislative powers, he issued certain
decrees, orders and letters of instruction which the Court has declared as having the force and effect
of a statute. As pointed out by the Court in Legaspi v. Minister of Finance, paramount considerations
compelled the grant of extraordinary legislative power to the President at that time when the nation
was beset with threats to public order and the purpose for which the authority was granted was
specific to meet the exigencies of that period, thus: True, without loss of time, President Marcos made
it clear that there was no military take-over of the government, and that much less was there being
established a revolutionary government, even as he declared that said martial law was of a double-
barrelled type, unfamiliar to traditional constitutionalists and political scientists—for two basic and
transcendental objectives were intended by it: (1) the quelling of nation-wide subversive activities
characteristic not only of a rebellion but of a state of war fanned by a foreign power of a different
ideology from ours, and not excluding the stopping effectively of a brewing, if not a strong separatist
movement in Mindanao, and (2) the establishment of a New Society by the institution of disciplinary
measures designed to eradicate the deep-rooted causes of the rebellion and elevate the standards of
living, education and culture of our people, and most of all the social amelioration of the poor and
underprivileged in the farms and in the barrios, to the end that hopefully insurgency may not rear its
head in this country again.
Same; Same; Same; Same; To form part of the law of the land, the LOI must be issued by the President
in the exercise of his extraor-
502
502
dinary power of legislation as contemplated in Section 6 of the 1976 amendments to the 1973
Constitution, whenever in his judgment, there exists a grave emergency or threat or imminence
thereof, or whenever the interim Batasan Pambansa or the regular National Assembly fails or is
unable to act adequately on any matter for any reason that in his judgment requires immediate
action.—Before a letter of instruction is declared as having the force and effect of a statute, a
determination of whether or not it was issued in response to the objectives stated in Legaspi is
necessary. Parong, et al. v. Minister Enrile differentiated between LOIs in the nature of mere
administrative issuances and those forming part of the law of the land. The following conditions must
be established before a letter of instruction may be considered a law: To form part of the law of the
land, the decree, order or LOI must be issued by the President in the exercise of his extraordinary
power of legislation as contemplated in Section 6 of the 1976 amendments to the Constitution,
whenever in his judgment, there exists a grave emergency or threat or imminence thereof, or
whenever the interim Batasan Pambansa or the regular National Assembly fails or is unable to act
adequately on any matter for any reason that in his judgment requires immediate action. Only when
issued under any of the two circumstances will a decree, order, or letter be qualified as having the
force and effect of law. The decree or instruction should have been issued either when there existed a
grave emergency or threat or imminence or when the Legislature failed or was unable to act
adequately on the matter. The qualification that there exists a grave emergency or threat or
imminence thereof must be interpreted to refer to the prevailing peace and order conditions because
the particular purpose the President was authorized to assume legislative powers was to address the
deteriorating peace and order situation during the martial law period.
Same; Same; Same; Same; Although LOI No. 1155 was undoubtedly issued at the time when the
President exercised legislative powers, the language and purpose of LOI No. 1155 precludes the
Supreme Court from declaring that said LOI had the force and effect of law in the absence of any of
the conditions set out in Parong v. Enrile, 121 SCRA 472 (1983)—there is nothing that suggests that it
was issued to address the security of the nation; LOI No. 1155 was in the nature of a mere
administrative issuance directed to NDC, DBP and MARINA to undertake a policy measure, that is, to
rehabilitate a private corporation.—Although LOI No. 1155 was undoubtedly is-
503
VOL. 467, AUGUST 22, 2005
503
sued at the time when the President exercised legislative powers granted under Amendment No. 6 of
the 1973 Constitution, the language and purpose of LOI No. 1155 precludes this Court from declaring
that said LOI had the force and effect of law in the absence of any of the conditions set out in Parong.
The subject matter of LOI No. 1155 is not connected, directly or remotely, to a grave emergency or
threat to the peace and order situation of the nation in particular or to the public interest in general.
Nothing in the language of LOI No. 1155 suggests that it was issued to address the security of the
nation. Obviously, LOI No. 1155 was in the nature of a mere administrative issuance directed to NDC,
DBP and MARINA to undertake a policy measure, that is, to rehabilitate a private corporation.
Corporation Law; Mergers; Ordinarily, in the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined business, while the rest are dissolved
and all their rights, properties and liabilities are acquired by the surviving corporation; The merger
shall only be effective upon the issuance of a certificate of merger by the Securities and Exchange
Commission (SEC), subject to its prior determination that the merger is not inconsistent with
Corporation Code.—The Court cannot accept POLIAND’s theory that with the effectivity of LOI No.
1155, NDC ipso facto acquired the interests in GALLEON without disregarding applicable statutory
requirements governing the acquisition of a corporation. Ordinarily, in the merger of two or more
existing corporations, one of the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the
surviving corporation. The merger, however, does not become effective upon the mere agreement of
the constituent corporations. As specifically provided under Section 79 of said Code, the merger shall
only be effective upon the issuance of a certificate of merger by the Securities and Exchange
Commission (SEC), subject to its prior determination that the merger is not inconsistent with the Code
or existing laws. Where a party to the merger is a special corporation governed by its own charter, the
Code particularly mandates that a favorable recommendation of the appropriate government agency
should first be obtained. The issuance of the certificate of merger is crucial because not only does it
bear out SEC’s approval but also marks the moment whereupon the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed
504
504
4 corporation ceases to exist but its rights, and properties as well as liabilities shall be taken and
deemed transferred to and vested in the surviving corporation.
Same; Same; In the absence of SEC approval, there is no effective transfer of the shareholdings in one
corporation to another.—The records do not show SEC approval of the merger. POLIAND cannot
assert that no conditions were required prior to the assumption by NDC of ownership of GALLEON and
its subsisting loans. Compliance with the statutory requirements is a condition precedent to the
effective transfer of the shareholdings in GALLEON to NDC. In directing NDC to acquire the
shareholdings in GALLEON, the President could not have intended that the parties disregard the
requirements of law. In the absence of SEC approval, there was no effective transfer of the
shareholdings in GALLEON to NDC. Hence, NDC did not acquire the rights or interests of GALLEON,
including its liabilities.
Obligations and Contracts; Letters of Instructions (LOIs); Being a mere administrative issuance, LOI No.
1155 cannot be a valid source of obligation because it does not create privity of contract between the
Development Bank of the Philippines (DBP) and POLIAND or its predecessors-in-interest.—The Court
affirms the appellate court’s ruling that POLIAND does not have any cause of action against DBP under
LOI No. 1155. Being a mere administrative issuance, LOI No. 1155 cannot be a valid source of
obligation because it did not create any privity of contract between DBP and POLIAND or its
predecessors-in-interest. At best, the directive in LOI No. 1155 was in the nature of a grant of
authority by the President on DBP to enter into certain transactions for the satisfaction of GALLEON’s
obligations. There is, however, nothing from the records of the case to indicate that DBP had acted as
surety or guarantor, or had otherwise accommodated GALLEON’s obligations to POLIAND or its
predecessors-in-interest.
Actions; Appeals; Assignment of Errors; Pleadings and Practice; Generally, an appellate court may only
pass upon errors assigned; Exceptions.—POLIAND contends that NDC can no longer raise the issue on
the latter’s liability for the payment of the maritime lien considering that upon appeal to the Court of
Appeals, NDC did not assign it as an error. Generally, an appellate court may only pass upon errors
assigned. However, this rule is not without excep-
505
VOL. 467, AUGUST 22, 2005
505
tions. In the following instances, the Court ruled that an appellate court is accorded a broad
discretionary power to waive the lack of assignment of errors and consider errors not assigned: (a)
Grounds not assigned as errors but affecting the jurisdiction of the court over the subject matter; (b)
Matters not assigned as errors on appeal but are evidently plain or clerical errors within
contemplation of law; (c) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of the case or to serve the interests of
a justice or to avoid dispensing piecemeal justice; (d) Matters not specifically assigned as errors on
appeal but raised in the trial court and are matters of record having some bearing on the issue
submitted which the parties failed to raise or which the lower court ignored; (e) Matters not assigned
as errors on appeal but closely related to an error assigned; (f) Matters not assigned as errors on
appeal but upon which the determination of a question properly assigned, is dependent.
Same; Same; Maritime Law; Maritime Lien; The issue on maritime lien is a matter of record having
been adequately ventilated before and passed upon by the trial court and the appellate court, thus by
way of exception, a party is not precluded from again raising the issue before the Supreme Court even
if it did not specifically assign the matter as an error before the Court of Appeals; The Supreme Court
is clothed with ample authority to review matters, even if they are not assigned as errors in the
appeal if it finds that their consideration is necessary in arriving at a just decision of the case.—The
records, however, reveal that the issue on the liability on the preferred maritime lien had been
properly raised and argued upon before the Court of Appeals not by NDC but by DBP who was also
adjudged liable thereon by the trial court. DBP’s appellant’s brief pointed out POLIAND’s failure to
present convincing evidence to prove its alternative cause of action, which POLIAND disputed in its
appellee’s brief. The issue on the maritime lien is a matter of record having been adequately
ventilated before and passed upon by the trial court and the appellate court. Thus, by way of
exception, NDC is not precluded from again raising the issue before this Court even if it did not
specifically assign the matter as an error before the Court of Appeals. Besides, this Court is clothed
with ample authority to review matters, even if they are not assigned as errors in the appeal if it finds
that their consideration is necessary in arriving at a just decision of the case.
506
506
Code of Commerce; Ship Mortgage Decree of 1978 (P.D. No. 1521); Article 578 of the Code of
Commerce is not relevant to the facts in the instant case because it governs the sale of vessels in a
foreign port.—NDC cites Articles 578 and 580 of the Code of Commerce to bolster its argument that
the foreclosure of the vessels extinguished all claims against the vessels including POLIAND’s claim.
Article 578 of the Code of Commerce is not relevant to the facts of the instant case because it governs
the sale of vessels in a foreign port. Said provision outlines the formal and registration requirements
in order that a sale of a vessel on voyage or in a foreign port becomes effective as against third
persons. On the other hand, the resolution of the instant case depends on the determination as to
which creditor is entitled to the proceeds of the foreclosure sale of the vessels. Clearly, Article 578 of
the Code of Commerce is inapplicable.
Same; Same; Article 580 of the Code of Commerce had been repealed by the pertinent provisions of
PD 1521, otherwise known as the Ship Mortgage Decree of 1978.—Article 580, while providing for the
order of payment of creditors in the event of sale of a vessel, had been repealed by the pertinent
provisions of Presidential Decree (P.D.) No. 1521, otherwise known as the Ship Mortgage Decree of
1978. In particular, Article 580 provides that in case of the judicial sale of a vessel for the payment of
creditors, the debts shall be satisfied in the order specified therein. On the other hand, Section 17 of
P.D. No. 1521 also provides that in the judicial or extrajudicial sale of a vessel for the enforcement of a
preferred mortgage lien constituted in accordance with Section 2 of P.D. No. 1521, such preferred
mortgage lien shall have priority over all pre-existing claims against the vessel, save for those claims
enumerated under Section 17, which have preference over the preferred mortgage lien in the order
stated therein. Since P.D. No. 1521 is a subsequent legislation and since said law in Section 17 thereof
confers on the preferred mortgage lien on the vessel superiority over all other claims, thereby
engendering an irreconcilable conflict with the order of preference provided under Article 580 of the
Code of Commerce, it follows that the Code of Commerce provision is deemed repealed by the
provision of P.D. No. 1521, as the posterior law.
Same; Same; If the mortgage of vessel is constituted for the purpose under Section 2 of P.D. No. 1521,
the mortgage obtains a preferred status provided the formal requisites enumerated under Section 4
of the same law are complied with.—If the mortgage on the
507
VOL. 467, AUGUST 22, 2005
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vessel is constituted for the purpose stated under Section 2, the mortgage obtains a preferred status
provided the formal requisites enumerated under Section 4 are complied with. Upon enforcement of
the preferred mortgage and eventual foreclosure of the vessel, the proceeds of the sale shall be first
applied to the claim of the mortgage creditor unless there are superior or preferential liens, as
enumerated under Section 17.
Same; Same; A mortgage constituted for the purpose of financing the construction, acquisition,
purchase of vessels or initial operation of vessels, or to facilitate the acquisition of the funds
necessary for the purchase of the vessels, may be characterized as a preferred mortgage under
Section 2 of P.D. No. 1521.—There is no question that the mortgage executed in favor of DBP is
covered by P.D. No. 1521. Contrary to NDC’s assertion, the mortgage constituted on GALLEON’s
vessels in favor of DBP may appropriately be characterized as a preferred mortgage under Section 2,
P.D. No. 1521 because GALLEON constituted the same for the purpose of financing the construction,
acquisition, purchase of vessels or initial operation of vessels. While it is correct that GALLEON
executed the mortgage in consideration of DBP’s guarantee of the prompt payment of GALLEON’s
obligations to the Japanese lenders, DBP’s undertaking to pay the Japanese banks was a condition
sine qua non to the acquisition of funds for the purchase of the GALLEON vessels. Without DBP’s
guarantee, the Japanese lenders would not have provided the funds utilized in the purchase of the
GALLEON vessels. The mortgage in favor of DBP was therefore constituted to facilitate the acquisition
of funds necessary for the purchase of the vessels.
Ship Mortgage Decree of 1978 (P.D. 1521); Concurrence and Preference of Credits; Statutory
Construction; General legislation must give way to special legislation on the same subject, and
generally so interpreted as to embrace only cases in which the special provisions are not applicable.—
The provision of P.D. No. 1521 on the order of preference in the satisfaction of the claims against the
vessel is the more applicable statute to the instant case compared to the Civil Code provisions on the
concurrence and preference of credit. General legislation must give way to special legislation on the
same subject, and generally be so interpreted as to embrace only cases in which the special provisions
are not applicable.
508
508

Same; Same; Maritime Lien; Mortgage Lien; Under Section 17, PD 1521, a maritime lien arising prior in
time to the recording of the preferred mortgage is considered to be superior to the preferred
mortgage lien.—Before POLIAND’s claim may be classified as superior to the mortgage constituted on
the vessel, it must be shown to be one of the enumerated claims which Section 17, P.D. No. 1521
declares as having preferential status in the event of the sale of the vessel. One of such claims
enumerated under Section 17, P.D. No. 1521 which is considered to be superior to the preferred
mortgage lien is a maritime lien arising prior in time to the recording of the preferred mortgage. Such
maritime lien is described under Section 21, P.D. No. 1521, which reads: SECTION 21. Maritime Lien
for Necessaries; persons entitled to such lien.—Any person furnishing repairs, supplies, towage, use of
dry dock or marine railway, or other necessaries to any vessel, whether foreign or domestic, upon the
order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien
on the vessel, which may be enforced by suit in rem, and it shall be necessary to allege or prove that
credit was given to the vessel.
Same; Same; Same; Words and Phrases; As long as an expense on a vessel is indispensable to
maintenance and navigation of the vessel, it may properly be treated as a maritime lien for
necessaries under Section 21, PD 1521.—The trial court also found that the advances from Asian
Hardwood were spent for ship modification cost and the crew’s salary and wages. DBP contends that
a ship modification cost is omitted under Section 17, P.D. No. 1521, hence, it does not have a status
superior to DBP’s preferred mortgage lien. As stated in Section 21, P.D. No. 1521, a maritime lien may
consist in “other necessaries spent for the vessel.” The ship modification cost may properly be
classified under this broad category because it was a necessary expenses for the vessel’s navigation.
As long as an expense on the vessel is indispensable to the maintenance and navigation of the vessel,
it may properly be treated as a maritime lien for necessaries under Section 21, P.D. No. 1521.
Same; Maritime Lien; Evidence; Appeals; The determination of the existence and amount of the
maritime lien is a finding of fact which is within the province of the courts below—such findings of
fact of the lower courts are deemed conclusive and binding upon the Supreme Court.—All told, the
determination of the existence and the amount of POLIAND’s claim for maritime lien is a finding of
fact
509
VOL. 467, AUGUST 22, 2005
509
which is within the province of the courts below. Findings of fact of lower courts are deemed
conclusive and binding upon the Supreme Court except when the findings are grounded on
speculation, surmises or conjectures; when the inference made is manifestly mistaken, absurd or
impossible; when there is grave abuse of discretion in the appreciation of facts; when the factual
findings of the trial and appellate courts are conflicting; when the Court of Appeals, in making its
findings, has gone beyond the issues of the case and such findings are contrary to the admissions of
both appellant and appellee; when the judgment of the appellate court is premised on a
misapprehension of facts or when it has failed to notice certain relevant facts which, if properly
considered, will justify a different conclusion; when the findings of fact are conclusions without
citation of specific evidence upon which they are based; and when findings of fact of the Court of
Appeals are premised on the absence of evidence but are contradicted by the evidence on record. The
Court finds no sufficient justification to reverse the findings of the trial court and the appellate court
in respect to the existence and amount of maritime lien.
Same; Same; Subrogation; A person, though not a sailor entitled to wages, can still make a claim for
the advances spent for the salary and wages of the crew under the principle of legal subrogation—a
third person who satisfies the obligation to an original maritime lienor may claim from the debtor
because the third person is subrogated to the rights of the maritime lienor over the vessel.—In its
defense, DBP reiterates the following arguments: (1) The salary and crew’s wages cannot be claimed
by POLIAND or its predecessors-in-interest because none of them is a sailor or mariner; (2) Even if
conceded, POLIAND’s preferred maritime lien is unenforceable pursuant to Article 1403 of the Civil
Code; and (3) POLIAND’s claim is barred by prescription and laches. The first argument is absurd.
Although POLIAND or its predecessors-in-interest are not sailors entitled to wages, they can still make
a claim for the advances spent for the salary and wages of the crew under the principle of legal
subrogation. As explained in Philippine National Bank v. Court of Appeals, a third person who satisfies
the obligation to an original maritime lienor may claim from the debtor because the third person is
subrogated to the rights of the maritime lienor over the vessel.
Same; Same; Prescription; Statute of Frauds; The reliance on Statute of Frauds is misplaced, where the
party hinges its claim on the maritime lien based on LOI No. 1195 and P.D. No. 1521, and not
510
510
to any contract or agreement.—DBP’s reliance on the Statute of Frauds is misplaced. Article 1403 (2)
of the Civil Code, which enumerates the contracts covered by the Statue of Frauds, is inapplicable. To
begin with, there is no privity of contract between POLIAND or its predecessors-in-interest, on one
hand, and DBP, on the other. POLIAND hinges its claim on the maritime lien based on LOI No. 1195
and P.D. No. 1521, and not on any contract or agreement.
Same; Same; Same; Laches; The prescriptive period is tolled when a written demand is made for the
satisfaction of the obligation before the lapse of the ten-year prescriptive period; Laches does not lie
where there was no unreasonable delay on the part of a party in asserting its rights.—Neither can DBP
invoke prescription or laches against POLIAND. Under Article 1144 of the Civil Code, an action upon an
obligation created by law must be brought within ten years from the time the right of action accrues.
The right of action arose after January 15, 1982, when NDC partially paid off GALLEON’s obligations to
POLIAND’s predecessor-in-interest, Asian Hardwood. At that time, the prescriptive period for the
enforcement by action of the balance of GALLEON’s outstanding obligations had commenced.
Prescription could not have set in because the prescriptive period was tolled when POLIAND made a
written demand for the satisfaction of the obligation on September 24, 1991, or before the lapse of
the ten-year prescriptive period. Laches also does not lie because there was no unreasonable delay on
the part of POLIAND in asserting its rights. Indeed, it instituted the instant suit seasonably.
Same; Same; Actions; Words and Phrases; A maritime lien is akin to a mortgage lien that in spite of
the transfer of ownership, the lien is not extinguished; The enforcement of a maritime lien is in the
nature and character of a proceeding quasi in rem; The expression “action in rem” is, in its narrow
application, used only with reference to certain proceedings in courts of admiralty wherein the
property alone is treated responsible for the claim or the obligation upon which the proceedings are
based.—All things considered, however, the Court finds that only NDC is liable for the payment of the
maritime lien. A maritime lien is akin to a mortgage lien in that in spite of the transfer of ownership,
the lien is not extinguished. The maritime lien is inseparable from the vessel and until discharged, it
follows the vessel. Hence, the enforcement of a maritime lien is in the nature and character of a
proceeding quasi in rem. The expression “action in rem” is, in its narrow application, used only with
reference
511
VOL. 467, AUGUST 22, 2005
511
to certain proceedings in courts of admiralty wherein the property alone is treated as responsible for
the claim or obligation upon which the proceedings are based. Considering that DBP subsequently
transferred ownership of the vessels to NDC, the Court holds the latter liable on the maritime lien.
Notwithstanding the subsequent transfer of the vessels to NDC, the maritime lien subsists.
Same; Same; Bad Faith; The institution of the extrajudicial foreclosure proceedings was tainted with
bad faith, considering that at that time National Development Company (NDC) had already assumed
the management and operations of the debtor company and NDC could not have pleaded ignorance
over the existence of a prior or preferential lien on the vessels subject of the foreclosure—considering
that NDC was in a position to know or discover the financial condition of debtor company when it
took over its management, the lack of notice to the latter’s creditors suggests that the extrajudicial
foreclosure was effected to prejudice the rights of the other creditors.—On this note, the Court
believes and so holds that the institution of the extrajudicial foreclosure proceedings was tainted with
bad faith. It took place when NDC had already assumed the management and operations of GALLEON.
NDC could not have pleaded ignorance over the existence of a prior or preferential lien on the vessels
subject of foreclosure. As aptly held by the Court of Appeals: x x x Thus, NDC cannot claim that it was
a subsequent purchaser in good faith because it had knowledge that the vessels were subject to
various liens. At the very least, to evince good faith, NDC could have inquired as to the existence of
other claims against the vessels apart from DBP’s mortgage lien. Considering that NDC was also in a
position to know or discover the financial condition of GALLEON when it took over its management,
the lack of notice to GALLEON’s creditors suggests that the extrajudicial foreclosure was effected to
prejudice the rights of GALLEON’s other creditors.
Same; Same; Same; NDC cannot rely on Administrative Order No. 64 which directed the transfer of
the vessels to the Asset Privatization Trust (APT) since the latter is a mere conduit through which the
assets acquired by National Government are provisionally held and managed until their eventual
disposal or privatization—APT merely holds the vessels in trust for NDC until the same are disposed.—
NDC also cannot rely on Administrative Order No. 64, which directed the transfer of the vessels to the
APT, on its hypothe-
512
512
sis that such transfer extinguished the lien. APT is a mere conduit through which the assets acquired
by the National Government are provisionally held and managed until their eventual disposal or
privatization. Administrative Order No. 64 did not divest NDC of its ownership over the GALLEON
vessels because APT merely holds the vessels in trust for NDC until the same are disposed. Even if
ownership was transferred to APT, that would not be sufficient to discharge the maritime lien and
deprive POLIAND of its recourse based on the lien. Such denouement would smack of denial of due
process and taking of property without just compensation.
Damages; Attorney’s Fees; Attorney’s fees may be awarded inter alia when the defendants’ act or
omission has compelled the plaintiff to incur expenses to protect his interests or in any other case
where the court deems it just and equitable that the attorney’s fees and expenses of litigation be
recovered.—The lower court awarded attorney’s fees to POLIAND in the amount of P1,000,000.00 on
account of the amount involved in the case and the protracted character of the litigation. The award
was affirmed by the Court of Appeals as against NDC only. This Court finds no reversible error with the
award as upheld by the appellate court. Under Article 2208 of the Civil Code, attorney’s fees may be
awarded inter alia when the defendant’s act or omission has compelled the plaintiff to incur expenses
to protect his interest or in any other case where the court deems it just and equitable that attorney’s
fees and expenses of litigation be recovered.
Judgments; Dispositive Portions; Words and Phrases; The general rule is that where there is conflict
between the dispositive portion or the fallo and the body of the decision, the fallo controls, a rule
which rests on the theory that fallo is the final order while the opinion in the body is merely a
statement ordering nothing; Where the inevitable conclusion from the body of the decision is so clear
as to show that there was a mere mistake in the dispositive portion, the body of the decision will
prevail.—One final note. There is a discrepancy between the dispositive portion of the Court of
Appeals’ Decision and the body thereof with respect to the amount of the maritime lien in favor of
POLIAND. The dispositive portion ordered NDC to pay POLIAND “the amount of US$1,920,298.56” plus
interest despite a finding that NDC’s liability to POLIAND represents the maritime lien which according
to the complaint is the alternative cause of action of POLIAND in the smaller amount of
513
VOL. 467, AUGUST 22, 2005
513

US$1,193,298.56, as prayed for by POLIAND in its complaint. The general rule is that where there is
conflict between the dispositive portion or the fallo and the body of the decision, the fallo controls.
This rule rests on the theory that the fallo is the final order while the opinion in the body is merely a
statement ordering nothing. However, where the inevitable conclusion from the body of the decision
is so clear as to show that there was a mistake in the dispositive portion, the body of the decision will
prevail. In the instant case, it is clear from the trial court records and the Court of Appeals’ Rollo that
the bigger amount awarded in the dispositive portion of the Court of Appeals’ Decision was a
typographical mistake. Considering that the appellate court’s Decision merely affirmed the trial
court’s finding with respect to the amount of maritime lien, the bigger amount stated in the
dispositive portion of the Court of Appeals’ Decision must have been awarded through indavertence.
PETITIONS for review on certiorari of the decision and resolution of the Court of Appeals.
Villaraza and Angcangco Law Offices for respondent.
TINGA, J.:
Before this Court are two Rule 45 consolidated petitions for review seeking the review of the
Decision1 of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 53257, which modified the
Decision of the Regional Trial Court, Branch 61, Makati City in Civil Case No. 91-2798. Upon motion of
the Development Bank of the Philippines (DBP), the two petitions were consolidated since both assail
the same Decision of the Court of Appeals.
In G.R. No. 143866, petitioner Poliand Industrial Limited (POLIAND) seeks judgment declaring the
National Development Company (NDC) and the DBP solidarily liable in the
_______________
1 Penned by Justice Conchita Carpio-Morales, Chairman, Fourth Division, now Associate Justice of the
Court, and concurred in by JJ. Teodoro Regino and Mercedes Gozo-Dadole.
514
514
amount of US$2,315,747.32, representing the maritime lien in favor of POLIAND and the net amount
of loans incurred by Galleon Shipping Corporation (GALLEON). It also prays that NDC and DBP be
ordered to pay the attorney’s fees and costs of the proceedings as solidary debtors. In G.R. No.
143877, petitioner NDC seeks the reversal of the Court of Appeals’ Decision ordering it to pay
POLIAND the amount of One Million Nine Hundred Twenty Thousand Two Hundred Ninety-Eight and
56/100 United States Dollars (US$1,920,298.56), corresponding to the maritime lien in favor of
POLIAND, plus interest.
ANTECEDENTS
The following factual antecedents are matters of record.
Between October 1979 and March 1981, Asian Hardwood Limited (Asian Hardwood), a Hong Kong
corporation, extended credit accommodations in favor of GALLEON totaling US$3,317,747.32.2 At that
time, GALLEON, a domestic corporation organized in 1977 and headed by its president, Roberto
Cuenca, was engaged in the maritime transport of goods. The advances were utilized to augment
GALLEON’s working capital depleted as a result of the purchase of five new vessels and two second-
hand vessels in 1979 and competitiveness of the shipping industry. GALLEON had incurred an
obligation in the total amount of US$3,391,084.91 in favor of Asian Hardwood.
To finance the acquisition of the vessels, GALLEON obtained loans from Japanese lenders, namely,
Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd. and Marubeni Benelux. On October 10, 1979, GALLEON,
through Cuenca, and DBP executed a Deed of Undertaking3 whereby DBP guaranteed the prompt and
punctual payment of GALLEON’s borrowings from the Japanese lenders. To secure DBP’s guarantee
under
_______________
2 CA Decision, p. 1; G.R. No. 143877, Rollo, p. 60.
3 G.R. No. 143877, Rollo, pp. 127-139.
515
VOL. 467, AUGUST 22, 2005
515
the Deed of Undertaking, GALLEON promised, among others, to secure a first mortgage on the five
new vessels and on the second-hand vessels. Thus, GALLEON executed on January 25, 1982 a
mortgage contract over five of its vessels namely, M/V “Galleon Honor,” M/V “Galleon Integrity,”
M/V “Galleon Dignity,” M/V “Galleon Pride,” and M/V “Galleon Trust” in favor of DBP.4
Meanwhile, on January 21, 1981, President Ferdinand Marcos issued Letter of Instruction (LOI) No.
1155, directing NDC to acquire the entire shareholdings of GALLEON for the amount originally
contributed by its shareholders payable in five (5) years without interest cost to the government. In
the same LOI, DBP was to advance to GALLEON within three years from its effectivity the principal
amount and the interest thereon of GALLEON’s maturing obligations.
On August 10, 1981, GALLEON, represented by its president, Cuenca, and NDC, represented by
Minister of Trade Roberto Ongpin, forged a Memorandum of Agreement,5 whereby NDC and
GALLEON agreed to execute a share purchase agreement within sixty days for the transfer of
GALLEON’s shareholdings. Thereafter, NDC assumed the management and operations of GALLEON
although Cuenca remained president until May 9, 1982.6 Using its own funds, NDC paid Asian
Hardwood on January 15, 1982 the amount of US$1,000,000.00 as partial settlement of GALLEON’s
obligations.7
On February 10, 1982, LOI No. 1195 was issued directing the foreclosure of the mortgage on the five
vessels. For failure of GALLEON to pay its debt despite repeated demands from DBP, the vessels were
extrajudicially foreclosed on various dates and acquired by DBP for the total amount of
_______________
4 Id., at p. 140.
5 Id., at pp. 123-126.
6 G.R. No. 143866, Rollo, p. 1658.
7 Id., at pp. 821-837.
516
516
P539,000,000.00. DBP subsequently sold the vessels to NDC for the same amount.8
On April 22, 1982, the Board of Directors of GALLEON amended the Articles of Incorporation changing
the corporate name from Galleon Shipping Corporation to National Galleon Shipping Corporation and
increasing the number of directors from seven to nine.9
Asian Hardwood assigned its rights over the outstanding obligation of GALLEON of US$2,315,747.32 to
World Universal Trading and Investment Company, S.A. (World Universal), embodied in a Deed of
Assignment executed on April 29, 1989.10 World Universal, in turn, assigned the credit to petitioner
POLIAND sometime in July 1989.11
On March 24, 1988, then President Aquino issued Administrative Order No. 64, directing NDC and
Philippine Export and Foreign Loan Guarantee Corporation (now Trade and Investment Development
Corporation of the Philippines) to transfer some of their assets to the National Government, through
the Asset Privatization Trust (APT) for disposition. Among those transferred to the APT were the five
GALLEON vessels sold at the foreclosure proceedings.
On September 24, 1991, POLIAND made written demands on GALLEON, NDC, and DBP for the
satisfaction of the outstanding balance in the amount of US$2,315,747.32.12 For failure to heed the
demand, POLIAND instituted a collection suit against NDC, DBP and GALLEON filed on October 10,
1991 with the Regional Trial Court, Branch 61, Makati City. POLIAND claimed that under LOI No. 1155
and the Memorandum of Agreement between GALLEON and NDC, defendants GALLEON, NDC, and
DBP were solidarily liable to
_______________
8 Id., at p. 70.
9 Id., at pp. 694-695.

10 G.R. No. 143866, Rollo, pp. 294-297.
11 Id., at p. 297-A.
12 Id., at pp. 311-312.
517
VOL. 467, AUGUST 22, 2005
517
POLIAND as assignee of the rights of the credit advances/ loan accommodations to GALLEON.
POLIAND also claimed that it had a preferred maritime lien over the proceeds of the extrajudicial
foreclosure sale of GALLEON’s vessels mortgaged by NDC to DBP. The complaint prayed for judgment
ordering NDC, DBP, and GALLEON to pay POLIAND jointly and severally the balance of the credit
advances/loan accommodations in the amount of US$2,315,747.32 and attorney’s fees of P100,000.00
plus 20% of the amount recovered. By way of an alternative cause of action, POLIAND sought
reimbursement from NDC and DBP for the preferred maritime lien of US$1,193,298.56.13
In its Answer with Compulsory Counterclaim and Cross-claim, DBP denied being a party to any of the
alleged loan transactions. Accordingly, DBP argued that POLIAND’s complaint stated no cause of
action against DBP or was barred by the Statute of Frauds because DBP did not sign any memorandum
to act as guarantor for the alleged credit advances/ loan accommodations in favor of POLIAND. DBP
also denied any liability under LOI No. 1155, which it described as immoral and unconstitutional, since
it was rescinded by LOI No. 1195. By way of its Affirmative Allegations and Defenses, DBP countered
that it was unaware of the maritime lien on the five vessels mortgaged in its favor and that as far as
GALLEON’s foreign borrowings are concerned, DBP agreed to act as guarantor thereof only under the
conditions laid down under the Deed of Undertaking. DBP prayed for the award of actual, moral and
exemplary damages and attorney’s fees against POLIAND as compulsory counterclaim. In the event
that it be adjudged liable for the payment of the loan accommodations and the maritime liens, DBP
prayed that its co-defendant GALLEON be ordered to indemnify DBP for the full amount.14
_______________
13 Id., at pp. 85-94.
14 Id., at pp. 105-119.
518
518
For its part, NDC denied any participation in the execution of the loan accommodations/credit
advances and acquisition of ownership of GALLEON, asserting that it acted only as manager of
GALLEON. NDC specifically denied having agreed to the assumption of GALLEON’s liabilities because
no purchase and sale agreement was executed and the delivery of the required shares of stock of
GALLEON did not take place.15
Upon motion by POLIAND, the trial court dropped GALLEON as a defendant, despite vigorous
oppositions from NDC and DBP. At the pre-trial conference on April 29, 1993, the trial court issued an
Order limiting the issues to the following: (1) whether or not GALLEON has an outstanding obligation
in the amount of US$2,315,747.32; (2) whether or not NDC and DBP may be held solidarily liable
therefor; and (3) whether or not there exists a preferred maritime lien of P1,000,000.00 in favor of
POLIAND.16
After trial on the merits, the court a quo rendered a decision on August 9, 1996 in favor of POLIAND.
Finding that GALLEON’s loan advances/credit accommodations were duly established by the evidence
on record, the trial court concluded that under LOI No. 1155, DBP and NDC are liable for those
obligations. The trial court also found NDC liable for GALLEON’s obligations based on the
Memorandum of Agreement dated August 1981 executed between GALLEON and NDC, where it was
provided that NDC shall prioritize repayments of GALLEON’s valid and subsisting liabilities subject of a
meritorious lawsuit or which have been arranged and guaranteed by Cuenca. The trial court was of
the opinion that despite the subsequent issuance of LOI No. 1195, NDC and DBP’s obligation under LOI
No. 1155 subsisted because “vested rights of the parties have arisen therefrom.” Accordingly, the trial
court interpreted LOI No. 1195’s directive to “limit and protect” to mean that “DBP and NDC should
not
_______________
15 Id., at pp. 122-130.
16 G.R. No. 143877, Rollo, p. 97.
519
VOL. 467, AUGUST 22, 2005
519
assume or incur additional exposure with respect to GALLEON.”17

The trial court dismissed NDC’s argument that the Memorandum of Agreement was merely a
preliminary agreement, noting that under paragraph nine thereof, the only condition for the payment
of GALLEON’s subsisting loans by NDC was the determination by the latter that those obligations were
incurred in the ordinary course of GALLEON’s business. The trial court did not regard the non-
execution of the stock purchase agreement as fatal to POLIAND’s cause since its non-happening was
solely attributable to NDC. The trial court also ruled that POLIAND had preference to the maritime lien
over the proceeds of the extrajudicial foreclosure sale of GALLEON’s vessels since the loan
advances/credit accommodations utilized for the payment of expenses on the vessels were obtained
prior to the constitution of the mortgage in favor of DBP.
In sum, NDC and DBP were ordered to pay POLIAND as follows:
“WHEREFORE, premises above considered, judgment is hereby rendered for plaintiff as against
defendants DBP and NDC, who are hereby ORDERED as follows:
1. To jointly and severally PAY plaintiff POLIAND the amount of TWO MILLION THREE HUNDRED
FIFTEEN THOUSAND SEVEN HUNDRED FORTY SEVEN AND 21/100 [sic] United States Dollars
(US$2,315,747.32) computed at the official exchange rate at the time of payment, plus interest at the
rate of 12% per annum from 25 September 1991 until fully paid;
2. To PAY the amount of ONE MILLION (P1,000,000.) Pesos, Philippine Currency, for and as attorney’s
fees; and
3. To PAY the costs of the proceedings.
SO ORDERED.”18
_______________
17 G.R. No. 143866, Rollo, pp. 1085-1106.
18 Id., at p. 1106.
520
520
Both NDC and DBP appealed the trial court’s decision.
The Court of Appeals rendered a modified judgment, absolving DBP of any liability in view of
POLIAND’s failure to clearly prove its action against DBP. The appellate court also discharged NDC of
any liability arising from the credit advances/loan obligations obtained by GALLEON on the ground
that NDC did not acquire ownership of GALLEON but merely assumed control over its management
and operations. However, NDC was held liable to POLIAND for the payment of the preferred maritime
lien based on LOI No. 1195 which directed NDC to “discharge such maritime liens as may be necessary
to allow the foreclosed vessels to engage on the international shipping business,” as well as attorney’s
fees and costs of suit. The dispositive portion of the Decision reads:
“WHEREFORE, the assailed decision is MODIFIED, in accordance with the foregoing findings, as
follows:
The case against defendant-appellant DBP is hereby DISMISSED.
Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee POLIAND the amount of

US$1,920,298.56 plus legal interest effective September 12, 1984.
The award of attorney’s fees and cost of suit is addressed only against NDC.
Costs against defendant-appellant NDC.
SO ORDERED.”19
Not satisfied with the modified judgment, both POLIAND and NDC elevated it to this Court via two
separate petitions for review on certiorari. In G.R. No. 143866 filed on August 21, 2000, petitioner
POLIAND raises the following arguments:
RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERRORS IN ITS QUESTIONED
DECISION DATED
_______________
19 G.R. No. 143877, Rollo, p. 23.
521
VOL. 467, AUGUST 22, 2005
521
29 JUNE 2000 AND DECIDED QUESTIONS CONTRARY TO LAW AND THE APPLICABLE DECISIONS OF THE
HONORABLE COURT WHEN IT MODIFIED THE DECISION DATED 09 AUGUST 1996 RENDERED BY THE
REGIONAL TRIAL COURT (BRANCH 61) CONSIDERING THAT:
A.
CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, RESPONDENT NDC NOT ONLY
TOOK OVER TOTALLY THE MANAGEMENT AND CONTROL OF GALLEON BUT ALSO ASSUMED
OWNERSHIP OF GALLEON PURSUANT TO LOI NO. 1155 AND THE MEMORANDUM OF AGREEMENT
DATED 10 AUGUST 1981; THUS, RESPONDENT NDC’S ACQUISITION OF FULL OWNERSHIP AND
CONTROL OF GALLEON CARRIED WITH IT THE ASSUMPTION OF THE LATTER’S LIABILITIES TO THIRD
PARTIES SUCH AS ASIAN HARDWOOD, PETITIONER POLIAND’S PREDECESSOR-IN-INTEREST.
B.
RESPONDENT COURT OF APPEALS, IN VIOLATION OF THE CONSTITUTION AND THE RULES OF COURT,
DISMISSED THE CASE AGAINST RESPONDENT DBP WITHOUT STATING CLEARLY AND DISTINCTLY THE
REASONS FOR SUCH A DISMISSAL.
C.
CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, PETITIONER POLIAND WAS ABLE
TO ESTABLISH THAT RESPONDENT DBP IS SOLIDARILY LIABLE, TOGETHER WITH RESPONDENT NDC,
WITH RESPECT TO THE NET TOTAL AMOUNT OWING TO PETITIONER POLIAND.
D.
RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN NOT FINDING THAT RESPONDENT DBP IS
JOINTLY AND SOLIDARILY LIABLE WITH RESPONDENT NDC FOR THE PAYMENT OF MARITIME LIENS
PLUS INTEREST PURSUANT TO SECTION 17 OF PRESIDENTIAL DECREEE 1521.20
_______________
20 G.R. No. 143866, Rollo, pp. 40-41.

522
522
On August 25, 2000, NDC filed its petition, docketed as G.R. No. 143877, imputing the following errors
to the Court of Appeals:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER NDC IS LIABLE TO PAY GALLEON’S
OUTSTANDING OBLIGATION TO RESPONDENT POLIAND IN THE AMOUNT OF US$ 1,920,298.56, TO
SATISFY THE PREFERRED MARITIME LIENS OVER THE PROCEEDS OF THE FORECLOSURE SALE OF THE
FIVE GALLEON VESSELS.
(A) PRESIDENTIAL DECREE NO. 1521 OTHERWISE KNOWN AS THE ‘SHIP MORTGAGE DECREE OF 1978 IS
NOT APPLICABLE IN THE CASE AT BAR.
(B) PETITIONER NDC DOES NOT HOLD THE PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE (5)
GALLEON VESSELS.
(C) THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS EXTINGUISHES ALL CLAIMS AGAINST
THE VESSELS.
II.
THE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES TO RESPONDENT POLIAND.21

The two petitions were consolidated considering that both petitions assail the same Court of Appeals’
Decision, although on different fronts. In G.R. No. 143866, POLIAND questions the appellate court’s
finding that neither NDC nor DBP can be held liable for the loan accommodations to GALLEON. In G.R.
No. 143877, NDC asserts that it is not liable to POLIAND for the preferred maritime lien.
_______________
21 G.R. No. 143877, Rollo, p. 14.
523
VOL. 467, AUGUST 22, 2005
523
ISSUES
The bone of contention revolves around two main issues, namely: (1) Whether NDC or DBP or both
are liable to POLIAND on the loan accommodations and credit advances incurred by GALLEON, and (2)
Whether POLIAND has a maritime lien enforceable against NDC or DBP or both.
RULING of the COURT
I. Liability on loan accommodations
and credit advances incurred by GALLEON

The Court of Appeals reversed the trial court’s conclusion that NDC and DBP are both liable to
POLIAND for GALLEON’s debts on the basis of LOI No. 1155 and the Memorandum of Agreement. It
ratiocinated thus:
“With respect to appellant NDC, resolution of the matters raised in its assignment of errors hinges on
whether or not it acquired the shareholdings of GALLEON as directed by LOI 1155; and if in the
negative, whether or not it is liable to pay GALLEON’s outstanding obligation.
The Court answers the issue in the negative. The MOA executed by GALLEON and NDC following the
issuance of LOI 1155 called for the execution of a “formal share purchase agreement and the transfer
of all the shareholdings of seller to Buyer.” Since no such execution and consequent transfer of
shareholdings took place, NDC did not acquire ownership of GALLEON. It merely assumed “actual
control over the management and operations” of GALLEON in the exercise of which it, on January 15,
1982, after being satisfied of the existence of GALLEON’s obligation to ASIAN HARDWOOD, partially
paid the latter One Million ($1,000,000.00) US dollars.22
....
With respect to defendant-appellant DBP, POLIAND failed to clearly prove its cause of action against
it. This leaves it unnecessary
_______________
22 G.R. No. 143877, Rollo, p. 21.
524
524

to dwell on DBP’s other assigned errors, including that bearing on its claim for damages and attorney’s
fees which does not persuade.”23
POLIAND’s cause of action against NDC is premised on the theory that when NDC acquired all the
shareholdings of GALLEON, the former also assumed the latter’s liabilities, including the loan
advances/credit accommodations obtained by GALLEON from POLIAND’s predecessors-in-interest. In
G.R. No. 143866, POLIAND argues that NDC acquired ownership of GALLEON pursuant to paragraphs 1
and 2 of LOI No. 1155, which was implemented through the execution of the Memorandum of
Agreement. It believes that no conditions were required prior to the assumption by NDC of GALLEON’s
ownership and subsisting loans. Even assuming that conditions were set, POLIAND opines that the
conditions were deemed fulfilled pursuant to Article 1186 of the Civil Code because of NDC’s apparent
intent to prevent the execution of the share purchase agreement.24
On the other hand, NDC asserts that it could not have acquired GALLEON’s equity and, consequently,
its liabilities because LOI No. 1155 had been rescinded by LOI No. 1195, and therefore, became
inoperative and non-existent. Moreover, NDC, relying on the pronouncements in Philippine
Association of Service Exporters, Inc., et al. v. Ruben D. Torres 25 and Parong, et al. v. Minister
Enrile,26 is of the opinion that LOI No. 1155 does not have the force and effect of law and cannot be a
valid source of obligation.27 NDC denies POLIAND’s contention that it deliberately prevented the
execution of the share purchase agreement considering that Cuenca remained GALLEON’s president
seven months after the sign-
_______________
23 Id., at p. 22.
24 G.R. No. 143866, Rollo, pp. 44-46.
25 G.R. No. 98472, August 19, 1993, 225 SCRA 417.

26 206 Phil. 393; 121 SCRA 472 (1983).
27 G.R. No. 143866, Rollo, pp. 1642-1643.
525
VOL. 467, AUGUST 22, 2005
525
ing of the Memorandum of Agreement.28 NDC contends that the Memorandum of Agreement was a
mere preliminary agreement between Cuenca and Ongpin for the intended purchase of GALLEON’s
equity, prescribing the manner, terms and conditions of said purchase.29
NDC, not liable under LOI No. 1155
As a general rule, letters of instructions are simply directives of the President of the Philippines,
issued in the exercise of his administrative power of control, to heads of departments and/or officers
under the executive branch of the government for observance by the officials and/or employees
thereof.30 Being administrative in nature, they do not have the force and effect of a law and, thus,
cannot be a valid source of obligation. However, during the period when then President Marcos
exercised extraordinary legislative powers, he issued certain decrees, orders and letters of instruction
which the Court has declared as having the force and effect of a statute. As pointed out by the Court
in Legaspi v. Minister of Finance,31 paramount considerations compelled the grant of extraordinary
legislative power to the President at that time when the nation was beset with threats to public order
and the purpose for which the authority was granted was specific to meet the exigencies of that
period, thus:
“True, without loss of time, President Marcos made it clear that there was no military take-over of the
government, and that much less was there being established a revolutionary government, even as he
declared that said martial law was of a double-barrelled type, unfamiliar to traditional
constitutionalists and political scientists—for two basic and transcendental objectives were intended
by it: (1) the quelling of nation-wide subversive activities characteristic
_______________
28 Ibid.
29 Id., at p. 1645.
30 People v. Court of First Instance of Bulacan, G.R. Nos. L-53674-75, July 6, 1988, 163 SCRA 430, 433.
31 201 Phil. 8; 115 SCRA 418 (1982).
526
526
not only of a rebellion but of a state of war fanned by a foreign power of a different ideology from
ours, and not excluding the stopping effectively of a brewing, if not a strong separatist movement in
Mindanao, and (2) the establishment of a New Society by the institution of disciplinary measures
designed to eradicate the deep-rooted causes of the rebellion and elevate the standards of living,
education and culture of our people, and most of all the social amelioration of the poor and
underprivileged in the farms and in the barrios, to the end that hopefully insurgency may not rear its
head in this country again.”32
Thus, before a letter of instruction is declared as having the force and effect of a statute, a
determination of whether or not it was issued in response to the objectives stated in Legaspi is
necessary. Parong, et al. v. Minister Enrile 33 differentiated between LOIs in the nature of mere
administrative issuances and those forming part of the law of the land. The following conditions must
be established before a letter of instruction may be considered a law:
“To form part of the law of the land, the decree, order or LOI must be issued by the President in the
exercise of his extraordinary power of legislation as contemplated in Section 6 of the 1976
amendments to the Constitution, whenever in his judgment, there exists a grave emergency or threat
or imminence thereof, or whenever the interim Batasan Pambansa or the regular National Assembly
fails or is unable to act adequately on any matter for any reason that in his judgment requires
immediate action.”34
Only when issued under any of the two circumstances will a decree, order, or letter be qualified as
having the force and effect of law. The decree or instruction should have been issued either when
there existed a grave emergency or threat or imminence or when the Legislature failed or was unable
to act adequately on the matter. The qualification that there
_______________
32 Id., at p. 24.
33 206 Phil. 392; 121 SCRA 472 (1983).
34 Id., at p. 428.
527
VOL. 467, AUGUST 22, 2005
527
exists a grave emergency or threat or imminence thereof must be interpreted to refer to the
prevailing peace and order conditions because the particular purpose the President was authorized to
assume legislative powers was to address the deteriorating peace and order situation during the
martial law period.
There is no doubt that LOI No. 1155 was issued on July 21, 1981 when then President Marcos was
vested with extraordinary legislative powers. LOI No. 1155 was specifically directed to DBP, NDC and
the Maritime Industry Authority to undertake the following tasks:
LETTER OF INSTRUCTIONS NO. 1155
DEVELOPMENT BANK OF THE PHILIPPINES
NATIONAL DEVELOPMENT COMPANY
MARITIME INDUSTRY AUTHORITY
DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING CORPORATION
....
1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its present
owners for the amount of P46.7 million which is the amount originally contributed by the present
shareholders, payable after five years with no interest cost.
2. NDC to immediately infuse P30 million into Galleon Shipping Corporation in lieu of is previously
approved subscription to Philippine National Lines. In addition, NDC is to provide additional equity to
Galleon as may be required.
3. DBP to advance for a period of three years from date hereof both the principal and the interest on
Galleon’s obligations falling due and to convert such advances into 12% preferred shares in Galleon
Shipping Corporation.
4. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of Galleon.
5. MARINA to provide assistance to Galleon by mandating a rational liner shipping schedule

considering existing freight volumes and to immediately negotiate a bilateral agreement with the
United States in accordance with UNCTAD resolutions.
528
528
....
Although LOI No. 1155 was undoubtedly issued at the time when the President exercised legislative
powers granted under Amendment No. 6 of the 1973 Constitution, the language and purpose of LOI
No. 1155 precludes this Court from declaring that said LOI had the force and effect of law in the
absence of any of the conditions set out in Parong. The subject matter of LOI No. 1155 is not
connected, directly or remotely, to a grave emergency or threat to the peace and order situation of
the nation in particular or to the public interest in general. Nothing in the language of LOI No. 1155
suggests that it was issued to address the security of the nation. Obviously, LOI No. 1155 was in the
nature of a mere administrative issuance directed to NDC, DBP and MARINA to undertake a policy
measure, that is, to rehabilitate a private corporation.
NDC, not liable under the Corporation Code
The Court cannot accept POLIAND’s theory that with the effectivity of LOI No. 1155, NDC ipso facto
acquired the interests in GALLEON without disregarding applicable statutory requirements governing
the acquisition of a corporation. Ordinarily, in the merger of two or more existing corporations, one of
the combining corporations survives and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are acquired by the surviving corporation.35
The merger, however, does not become effective upon the mere agreement of the constituent
corporations.36
_______________
35 Associated Bank v. Court of Appeals, 353 Phil. 702, 712; 291 SCRA 511, 520 (1998).
36 Ibid.
529
VOL. 467, AUGUST 22, 2005
529
As specifically provided under Section 7937 of said Code, the merger shall only be effective upon the
issuance of a certificate of merger by the Securities and Exchange Commission (SEC), subject to its
prior determination that the merger is not inconsistent with the Code or existing laws. Where a party
to the merger is a special corporation governed by its own charter, the Code particularly mandates
that a favorable recommendation of the appropriate government agency should first be obtained. The
issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval but
also marks the moment whereupon the consequences of a merger take place. By operation of law,
upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights, and
properties as well as liabilities shall
_______________
37 SEC. 79. Securities and Exchange Commission’s approval and effectivity of merger and
consolidation.—The articles of merger or of consolidation, signed and certified as hereinabove
required, shall be submitted to the Securities and Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or consolidation of banks or banking institutions,
building and loan associations, trust companies, insurance companies, public utilities, educational
institutions and other special corporations governed by special laws, the favorable recommendation
of the appropriate government agency shall first be obtained. Where the commission is satisfied that
the merger or consolidation of the corporations concerned is not inconsistent with the provisions of
this Code and existing laws, it shall issue a certificate of merger or of consolidation, as the case may
be, at which time the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time and place of said hearing shall be given to each constituent
corporation at least two (2) weeks before said hearing. The Commission shall thereafter proceed as
provided in this Code.”
530
530

be taken and deemed transferred to and vested in the surviving corporation.38
The records do not show SEC approval of the merger. POLIAND cannot assert that no conditions were
required prior to the assumption by NDC of ownership of GALLEON and its subsisting loans.
Compliance with the statutory requirements is a condition precedent to the effective transfer of the
shareholdings in GALLEON to NDC. In directing NDC to acquire the shareholdings in GALLEON, the
President could not have intended that the parties disregard the requirements of law. In the absence
of SEC approval, there was no effective transfer of the shareholdings in GALLEON to NDC. Hence, NDC
did not acquire the rights or interests of GALLEON, including its liabilities.
DBP, not liable under LOI No. 1155
POLIAND argues that paragraph 3 of LOI No. 1155 unequivocally obliged DBP to advance the
obligations of GALLEON.39 DBP argues that POLIAND has no cause of action against it under LOI No.
1155 which is void and unconstitutional.40
The Court affirms the appellate court’s ruling that POLIAND does not have any cause of action against
DBP under LOI No. 1155. Being a mere administrative issuance, LOI No. 1155 cannot be a valid source
of obligation because it did not create any privity of contract between DBP and POLIAND or its
predecessors-in-interest. At best, the directive in LOI No. 1155 was in the nature of a grant of
authority by the President on DBP to enter into certain transactions for the satisfaction of GALLEON’s
obligations. There is, however, nothing from the records of the case to indicate that DBP had acted as
surety or guarantor, or had otherwise accommodated GAL-
_______________
38 Section 80, Corporation Code.
39 G.R. No. 143866, Rollo, p. 55.

40 Id., at p. 1679.
531
VOL. 467, AUGUST 22, 2005
531
LEON’s obligations to POLIAND or its predecessors-in-interest.
II. Liability on maritime lien
On the second issue of whether or not NDC is liable to POLIAND for the payment of maritime lien, the
appellate court ruled in the affirmative, to wit:
“Non-acquisition of ownership of GALLEON notwithstanding, NDC is liable to pay ASIAN

HARDWOOD’s successor-in-interest POLIAND the equivalent of US$1,930,298.56 representing the
proceeds of the loan from Asian Hardwood which were spent by GALLEON for ship modification and
salaries of crew, to satisfy the preferred maritime liens over the proceeds of the foreclosure sale of
the 5 vessels.”41
POLIAND contends that NDC can no longer raise the issue on the latter’s liability for the payment of
the maritime lien considering that upon appeal to the Court of Appeals, NDC did not assign it as an
error.42 Generally, an appellate court may only pass upon errors assigned. However, this rule is not
without exceptions. In the following instances, the Court ruled that an appellate court is accorded a
broad discretionary power to waive the lack of assignment of errors and consider errors not assigned:
(a) Grounds not assigned as errors but affecting the jurisdiction of the court over the subject matter;
(b) Matters not assigned as errors on appeal but are evidently plain or clerical errors within
contemplation of law;
(c) Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a
just decision and complete resolution of the case or to serve the interests of a justice or to avoid
dispensing piecemeal justice;
_______________
41 G.R. No. 143877, Rollo, pp. 21-22.
42 Id., at p. 217.
532
532
(d) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of
record having some bearing on the issue submitted which the parties failed to raise or which the
lower court ignored;
(e) Matters not assigned as errors on appeal but closely related to an error assigned;
(f) Matters not assigned as errors on appeal but upon which the determination of a question properly
assigned, is dependent.43
It is noteworthy that the question of NDC and DBP’s liability on the maritime lien had been raised by
POLIAND as an alternative cause of action against NDC and DBP and was passed upon by the trial
court. The Court of Appeals, however, reversed the trial court’s finding that NDC and DBP are liable to
POLIAND for the payment of the credit advances and loan accommodations and instead found NDC to
be solely liable on the preferred maritime lien although NDC did not assign it as an error.
The records, however, reveal that the issue on the liability on the preferred maritime lien had been
properly raised and argued upon before the Court of Appeals not by NDC but by DBP who was also
adjudged liable thereon by the trial court. DBP’s appellant’s brief44 pointed out POLIAND’s failure to
present convincing evidence to prove its alternative cause of action, which POLIAND disputed in its
appellee’s brief.45 The issue on the maritime lien is a matter of record having been adequately
ventilated before and passed upon by the trial court and the appellate court. Thus, by way of
exception, NDC is not precluded from again raising the issue before this Court even if it did not
specifically assign the matter as an error before the Court of Appeals. Besides, this Court is clothed
_______________
43 Diamonon v. Department of Labor and Employment, et al., 384 Phil. 15, 22-23; 327 SCRA 283, 288-
289 (2000), cited cases omitted.
44 G.R. No. 143866, Rollo, pp. 1294-1332.
45 Id., at p. 1334.
533
VOL. 467, AUGUST 22, 2005
533

with ample authority to review matters, even if they are not assigned as errors in the appeal if it finds
that their consideration is necessary in arriving at a just decision of the case.46
Articles 578 and 580 of the Code
of Commerce, not applicable
NDC cites Articles 57847 and 58048 of the Code of Commerce
_______________
46 Soco v. Militante, 208 Phil. 151, 170; 123 SCRA 160 (1983).
47 ARTICLE 578. If the vessel being on a voyage or in a foreign port, its owner or owners should
voluntarily alienate it, either to Filipinos or to foreigners domiciled in the capital or in a port of
another country, the bill of sale shall be executed before the consul of the Republic of the Philippines
at the port where it terminates its voyage and said instrument shall produce no effect with respect to
third persons if it is not inscribed in the registry of the consulate. The consul shall immediately
forward a true copy of the instrument of purchase and sale of the vessel to the registry of vessels of
the port where said vessel is inscribed and registered.
In every case the alienation of the vessel must be made to appear with a statement of whether the
vendor receives its price in whole or in part, or whether he preserves in whole or in part any claim on
said vessel. In case the sale is made to a Filipino, this fact shall be stated in the certificate of
navigation.
When a vessel, being on a voyage, shall be rendered useless for navigation, the captain shall apply to
the competent judge on court of the port of arrival, should it be in the Philippines; and should it be in
a foreign country, to the consul of the Republic of the Philippines, should there be one, or, where
there is none, to the judge or court or to the local authority; and the consul, or the judge or court,
shall order an examination of the vessel to be made.
If the consignee or the insurer should reside at said port, or should have representatives there, they
must be cited in order that they may take part in the proceedings on behalf of whoever may be
concerned.
48 ARTICLE 580. In all judicial sales of any vessel for the payment of creditors, the following shall have
preference in the order stated:
534
534
Poliand Industrial Limited vs. NationalDevelopment Company
to bolster its argument that the foreclosure of the vessels extinguished all claims against the vessels
including PO-
_______________
1. The credit in favor of the public treasury proven by means of an official certificate of competent
authority.
2. The judicial costs of the proceedings, according to an appraisement approved by the judge or court.
3. The pilotage charges, tonnage dues, and the other sea or port charges, proven by means of proper
certificates of the officers intrusted with the collection thereof.
4. The salaries of the depositaries and keepers of the vessel and any other expenses for its
preservation from the time of arrival at the port until the sale, which appear to have been paid or be
due by virtue of an account verified and approved by the judge or court.
5. The rent of the warehouse where the rigging and stores of the vessel have been taken care of,
according to contract.
6. The salaries due the captain and crew during its last voyage, which shall be verified by means of the
liquidation to be made in view of the lists and of the books of account of the vessel, approved by the
chief of the Bureau of Merchant Marine, where there is one, and in his absence by the consul or judge
or court.
7. The reimbursement for the goods of the freight which the captain may have sold in order to repair
the vessel, provided that the sale has been ordered through a judicial proceedings held with the
formalities required in such cases, and recorded in the certificate of registry of the vessel.
8. The part of the price which has not been paid to the said vendor, the unpaid credits for materials
and labor in the construction of the vessel, when it has not navigated, and those arising from the
repair and equipment of the vessels and from its provisioning with victuals and fuel during the last
voyage.
In order that the credits provided for in this subdivision may enjoy this preference, they must appear
by contracts recorded in the registry of vessels, or if they were contracted for the vessel while on a
voyage and said vessel has not returned to the port where it is registered, they must be made with
the authorization required for such cases and annotated in the certificate of registration of the vessel.
535
VOL. 467, AUGUST 22, 2005
535
Poliand Industrial Limited vs. NationalDevelopment Company
LIAND’s claim.49 Article 578 of the Code of Commerce is not relevant to the facts of the instant case
because it governs the sale of vessels in a foreign port. Said provision outlines the formal and
registration requirements in order that a sale of a vessel on voyage or in a foreign port becomes
effective as against third persons. On the other hand, the resolution of the instant case depends on
the determination as to which creditor is entitled to the proceeds of the foreclosure sale of the
vessels. Clearly, Article 578 of the Code of Commerce is inapplicable.
Article 580, while providing for the order of payment of creditors in the event of sale of a vessel, had
been repealed by the pertinent provisions of Presidential Decree (P.D.) No. 1521, otherwise known as
the Ship Mortgage Decree of 1978. In particular, Article 580 provides that in case of the judicial sale of
a vessel for the payment of creditors, the debts shall be satisfied in the order specified therein. On the
other hand, Section 17 of P.D. No. 152150 also provides that in the judicial
_______________
9. The amount borrowed on bottomry on the hull, keel, tackle, and stores of the vessel before its
departure, proven by means of the contract executed according to law and recorded in the registry of
vessels; those borrowed during the voyage with the authorization mentioned in the preceding
subdivision, satisfying the same requisites; and the insurance premium, proven by the insurance
policy or a certificate taken from the books of the broker.
10. The indemnity due the shipper for the value of the goods shipped which were not delivered to the
consignees, or for averages suffered for which the vessel is liable, provided that either appear in a
judicial or arbitration decision.
49 G.R. No. 143877, Rollo, p. 51.
50 SECTION 17. Preferred Maritime Lien, Priorities, Other Liens.—(a) Upon the sale of any mortgaged
vessel in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in
admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing claims in the
vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of
Section 16 of this Decree, shall be held terminated and
536
536
or extrajudicial sale of a vessel for the enforcement of a preferred mortgage lien constituted in
accordance with Section 2 of P.D. No. 1521, such preferred mortgage lien shall have priority over all
pre-existing claims against the vessel, save for those claims enumerated under Section 17, which have
preference over the preferred mortgage lien in the order stated therein. Since P.D. No. 1521 is a
subsequent legislation and since said law in Section 17 thereof confers on the preferred mortgage lien
on the vessel superiority over all other claims, thereby engendering an irreconcilable conflict with the
order of preference provided under Article 580 of the Code of Commerce, it follows that the Code of
Commerce provision is deemed repealed by the provision of P.D. No. 1521, as the posterior law.51
_______________
shall thereafter attach in like amount and in accordance with the priorities established herein to the
proceeds of the sale. The preferred mortgage lien shall have priority over all claims against the vessel,
except the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the
court and taxes due to the Government; (2) crew’s wages; (3) general average; (4) salvage; including
contract salvage; (5) maritime liens arising prior in time to the recording of the preferred mortgage;
(6) damages arising out of tort; and (7) preferred mortgage registered prior in time.
(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or
grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or partially
shall subsist as ordinary credits enforceable by personal action against the debtor. The record of
judicial sale or sale by public auction shall be recorded in the Record of Transfers and Encumbrances
of Vessels in the port of documentation.
51 P.D. No. 1521, SECTION 29. Repealing Clause.—The provisions of the New Civil Code, the Code of
Commerce, the Chattel Mortgage Law, the Revised Rules of Court and of such other laws, decrees,
executive orders, rules and regulations which are in conflict or inconsistent with the provisions of this
Decree are hereby repealed, amended or modified accordingly. If for any reason, any section,
subsection, sentence, clauses or term of this Decree is held to
537
VOL. 467, AUGUST 22, 2005
537
P.D. No. 1521 is applicable, not the
Civil Code provisions on concurrence/
Preference of credits
Whether or not the order of preference under Section 17, P.D. No. 1521 may be properly applied in
the instant case depends on the classification of the mortgage on the GALLEON vessels, that is, if it
falls within the ambit of Section 2, P.D. No. 1521, defining how a preferred mortgage is constituted.
NDC and DBP both argue that POLIAND’s claim cannot prevail over DBP’s mortgage credit over the
foreclosed vessels because the mortgage executed in favor of DBP pursuant to the October 10, 1979
Deed of Undertaking signed by GALLEON and DBP was an ordinary ship mortgage and not a preferred
one, that is, it was not given in connection with the construction, acquisition, purchase or initial
operation of the vessels, but for the purpose of guaranteeing GALLEON’s foreign borrowings.52
Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage on a vessel, to wit:
SECTION 2. Who may Constitute a Ship Mortgage.—Any citizen of the Philippines, or any association
or corporation organized under the laws of the Philippines, at least sixty per cent of the capital of
which is owned by citizens of the Philippines may, for the purpose of financing the construction,
acquisition, purchase of vessels or initial operation of vessels, freely constitute a mortgage or any
other lien or encumbrance on his or its vessels and its equipment with any bank or other financial
institutions, domestic or foreign.
If the mortgage on the vessel is constituted for the purpose stated under Section 2, the mortgage
obtains a preferred
_______________
be unconstitutional such decision shall not affect the validity of the other provisions of this Decree.
52 G.R. No. 143877, Rollo, pp. 44-45.
538
538
status provided the formal requisites enumerated under Section 453 are complied with. Upon
enforcement of the preferred
_______________
53 SECTION 4. Preferred Mortgages.—(a) A valid mortgage which at the time it is made includes the
whole of any vessel of domestic ownership shall have, in respect to such vessel and as of the date of
recordation, the preferred status given by the provisions of Section 17 hereof, if—
(1) The mortgage is recorded as provided in Section 3 hereof;
(2) An affidavit is filed with the record of such mortgage to the effect that the mortgage is made in
good faith and without any design to hinder, delay, or defraud any existing or future creditor of the
mortgagor or any lien or of the mortgaged vessel;
(3) The mortgage does not stipulate that the mortgagee waives the preferred status thereof.
(b) Any mortgage which complies with the above conditions is hereafter called a “preferred
mortgage.” For purposes of this Decree, a vessel holding a Provisional Certificate of Philippine Registry
is considered a vessel of domestic ownership such that it can be subject of preferred mortgage. The
Philippine Coast Guard is hereby authorized to enter a vessel holding a Provisional Certificate of
Philippine Registry in the Registry of Vessels and to record any mortgage executed thereon. Such
mortgage shall have the preferred status as of the date of recordation upon compliance with the
above conditions.
(c) There shall be endorsed upon the documents of a vessel covered by a preferred mortgage—
(1) The names of the mortgagor and mortgagee;
(2) The time and date the endorsement is made;
(3) The amount and date of maturity of the mortgage; and
(4) Any amount required to be endorsed by the provisions of paragraphs (e) or (f) of this Section.
(d) Such endorsement shall be made (1) by the Coast Guard District or Station Commander of the port
of documentation of the mortgaged vessel, or (2) by the Coast Guard District or Station Commander of
any port in which the vessel is found, if such Coast
539
VOL. 467, AUGUST 22, 2005
539
mortgage and eventual foreclosure of the vessel, the proceeds of the sale shall be first applied to the
claim of the mortgage creditor unless there are superior or preferential liens, as enumerated under
Section 17, namely:
_______________
Guard District or Station Commander is directed to make the endorsement by the Coast Guard District
or Station Commander of the port of documentation. The Coast Guard District or Station Commander
of the port of documentation shall give such direction by wire or letter at the request of the
mortgagee and upon the tender of the cost of communication of such direction. Whenever any new
document is issued for the vessel, such endorsement shall be transferred to and endorsed upon the
new document by the Coast Guard District or Station Commander.
In the case of a vessel holding a provincial certificate of Philippine Registry, the endorsement shall be
made by the Philippine consul abroad upon direction by wire or letter from the Maritime Industry
Authority at the request of the mortgagee and upon tender of the cost of communication of such
direction. A certificate of such endorsement, giving the place, time and description of the
endorsement, shall be recorded with the records of registration to be maintained at the Philippine
Consulate.
(e) A mortgage which includes property other than a vessel shall not be held a preferred mortgage
unless the mortgage provides for the separate discharge of such property by the payment of a
specified portion of the mortgage indebtedness. If a preferred mortgage so provides for the separate
discharge, the amount of the portion of such payment shall be endorsed upon the documents of the
vessel.
(f) A preferred mortgage includes more than one vessel and provides for the separate discharge of
each vessel by the payment of a portion of mortgage indebtedness, the amount of such portion of
such payment shall be endorsed upon the documents of the vessel. In case such mortgage does not
provide for the separate discharge of a vessel and the vessel is to be sold upon the order of a district
court of the Philippines in a suit in rem in admiralty, the court shall determine the portion of the
mortgage indebtedness increased by 20 per centum (1) which, in the opinion of the court, the
approximate value of all the vessels covered by the mortgage, and (2) upon the payment of which the
vessel shall be discharged from the mortgage.
540
540
SECTION 17. Preferred Maritime Lien, Priorities, Other Liens.—(a) Upon the sale of any mortgaged
vessel in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in
admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing claims in the
vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of
Section 16 of this Decree, shall be held terminated and shall thereafter attach in like amount and in
accordance with the priorities established herein to the proceeds of the sale. The preferred mortgage
lien shall have priority over all claims against the vessel, except the following claims in the order
stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government;
(2) crew’s wages; (3) general average; (4) salvage including contract salvage; (5) maritime liens arising
prior in time to the recording of the preferred mortgage; (6) damages arising out of tort; and (7)
preferred mortgage registered prior in time.
(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or
grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or partially
shall subsist as ordinary credits enforceable by personal action against the debtor. The record of
judicial sale or sale by public auction shall be recorded in the Record of Transfers and Encumbrances
of Vessels in the port of documentation. (Emphasis supplied.)
There is no question that the mortgage executed in favor of DBP is covered by P.D. No. 1521. Contrary
to NDC’s assertion, the mortgage constituted on GALLEON’s vessels in favor of DBP may appropriately
be characterized as a preferred mortgage under Section 2, P.D. No. 1521 because GALLEON
constituted the same for the purpose of financing the construction, acquisition, purchase of vessels or
initial operation of vessels. While it is correct that GALLEON executed the mortgage in consideration
of DBP’s guarantee of the prompt payment of GALLEON’s obligations to the Japanese lenders, DBP’s
undertaking to pay the Japanese banks was a condition sine qua non to the acquisition of funds for
the purchase of the GALLEON vessels. Without DBP’s guarantee,
541
VOL. 467, AUGUST 22, 2005
541
the Japanese lenders would not have provided the funds utilized in the purchase of the GALLEON
vessels. The mortgage in favor of DBP was therefore constituted to facilitate the acquisition of funds
necessary for the purchase of the vessels.
NDC adds that being an ordinary ship mortgage, the Civil Code provisions on concurrence and
preference of credits and not P.D. No. 1521 should govern. NDC contends that under Article 2246, in
relation to Article 2241 of the Civil Code, the credits guaranteed by a chattel mortgage upon the thing
mortgaged shall enjoy preference (with respect to the thing mortgaged), to the exclusion of all others
to the extent of the value of the personal property to which the preference exists.54 Following NDC’s
theory, DBP’s mortgage credit, which is fourth in the order of preference under Article 2241, is
superior to POLIAND’s claim, which enjoys no preference.
NDC’s argument does not persuade the Court.
The provision of P.D. No. 1521 on the order of preference in the satisfaction of the claims against the
vessel is the more applicable statute to the instant case compared to the Civil Code provisions on the
concurrence and preference of credit. General legislation must give way to special legislation on the
same subject, and generally be so interpreted as to embrace only cases in which the special provisions
are not applicable.55
POLIAND’s alternative cause of action for the payment of maritime liens is based on Sections 17 and
21 of P.D. No. 1521. POLIAND also contends that by virtue of the directive in LOI No. 1195 on NDC to
discharge maritime liens to allow the vessels to engage in international business, NDC is liable
therefor.56
_______________
54 G.R. No. 143877, Rollo, p. 47.
55 Leveriza v. Intermediate Appellate Court, G.R. No. L-66614, January 25, 1988, 157 SCRA 282, 294.
56 G.R. No. 143877, Rollo, pp. 232-235.
542
542
POLIAND’s maritime lien is superior
to DBP’s mortgage lien
Before POLIAND’s claim may be classified as superior to the mortgage constituted on the vessel, it
must be shown to be one of the enumerated claims which Section 17, P.D. No. 1521 declares as
having preferential status in the event of the sale of the vessel. One of such claims enumerated under
Section 17, P.D. No. 1521 which is considered to be superior to the preferred mortgage lien is a
maritime lien arising prior in time to the recording of the preferred mortgage. Such maritime lien is
described under Section 21, P.D. No. 1521, which reads:
SECTION 21. Maritime Lien for Necessaries; persons entitled to such lien.—Any person furnishing
repairs, supplies, towage, use of dry dock or marine railway, or other necessaries to any vessel,
whether foreign or domestic, upon the order of the owner of such vessel, or of a person authorized by
the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it shall
be necessary to allege or prove that credit was given to the vessel.
Under the aforequoted provision, the expense must be incurred upon the order of the owner of the
vessel or its authorized person and prior to the recording of the ship mortgage. Under the law, it must
be established that the credit was extended to the vessel itself.57
The trial court found that GALLEON’s advances obtained from Asian Hardwood were used to cover for
the payment of bunker oil/fuel, unused stores and oil, bonded stores, provisions, and repair and
docking of the GALLEON vessels.58 These expenses clearly fall under Section 21, P.D. No. 1521.
The trial court also found that the advances from Asian Hardwood were spent for ship modification
cost and the
_______________
57 K.K. Shell Sekiyu Osaka Hatsubaisho, et al. v. Court of Appeals, et al., G.R. Nos. 90306-07, July 30,
1990, 188 SCRA 145, 152.
58 G.R. No. 143877, Rollo, p. 119.
543
VOL. 467, AUGUST 22, 2005
543
crew’s salary and wages. DBP contends that a ship modification cost is omitted under Section 17, P.D.
No. 1521, hence, it does not have a status superior to DBP’s preferred mortgage lien.
As stated in Section 21, P.D. No. 1521, a maritime lien may consist in “other necessaries spent for the
vessel.” The ship modification cost may properly be classified under this broad category because it
was a necessary expenses for the vessel’s navigation. As long as an expense on the vessel is
indispensable to the maintenance and navigation of the vessel, it may properly be treated as a
maritime lien for necessaries under Section 21, P.D. No. 1521.
With respect to the claim for salary and wages of the crew, there is no doubt that it is also one of the
enumerated claims under Section 17, P.D. No. 1521, second only to judicial costs and taxes due the
government in preference and, thus, having a status superior to DBP’s mortgage lien.
All told, the determination of the existence and the amount of POLIAND’s claim for maritime lien is a
finding of fact which is within the province of the courts below. Findings of fact of lower courts are
deemed conclusive and binding upon the Supreme Court except when the findings are grounded on
speculation, surmises or conjectures; when the inference made is manifestly mistaken, absurd or
impossible; when there is grave abuse of discretion in the appreciation of facts; when the factual
findings of the trial and appellate courts are conflicting; when the Court of Appeals, in making its
findings, has gone beyond the issues of the case and such findings are contrary to the admissions of
both appellant and appellee; when the judgment of the appellate court is premised on a
misapprehension of facts or when it has failed to notice certain relevant facts which, if properly
considered, will justify a different conclusion; when the findings of fact are conclusions without
citation of specific evidence upon which they are based; and when findings of fact of the Court of
Appeals are premised on the absence of evidence but are contradicted by
544
544
the evidence on record.59 The Court finds no sufficient justification to reverse the findings of the trial
court and the appellate court in respect to the existence and amount of maritime lien.
Only NDC is liable on the maritime lien
POLIAND maintains that DBP is also solidarily liable for the payment of the preferred maritime lien
over the proceeds of the foreclosure sale by virtue of Section 17, P.D. No. 1521. It claims that since the
lien was incurred prior to the constitution of the mortgage on January 25, 1982, the preferred
maritime lien attaches to the proceeds of the sale of the vessels and has priority over all claims
against the vessels in accordance with Section 17, P.D. No. 1521.60
In its defense, DBP reiterates the following arguments: (1) The salary and crew’s wages cannot be
claimed by POLIAND or its predecessors-in-interest because none of them is a sailor or mariner;61 (2)
Even if conceded, POLIAND’s preferred maritime lien is unenforceable pursuant to Article 1403 of the
Civil Code; and (3) POLIAND’s claim is barred by prescription and laches.62
The first argument is absurd. Although POLIAND or its predecessors-in-interest are not sailors entitled
to wages, they can still make a claim for the advances spent for the salary and wages of the crew
under the principle of legal subrogation. As explained in Philippine National Bank v. Court of
Appeals,63 a third person who satisfies the obligation to an original maritime lienor may claim from
the debtor because
_______________
59 Solid Homes, Inc. v. Court of Appeals, 341 Phil. 261, 275; 275 SCRA 267, 279 (1997).
60 G.R. No. 143866, Rollo, p. 57.
61 Id., at p. 1683.
62 Id., at pp. 1684-1687.
63 G.R. No. 128661, August 8, 2000, 337 SCRA 381.
545
VOL. 467, AUGUST 22, 2005
545
the third person is subrogated to the rights of the maritime lienor over the vessel. The Court explained
as follows:
“From the foregoing, it is clear that the amount used for the repair of the vessel M/V “Asean Liberty”
was advanced by Citibank and was utilized for the purpose of paying off the original maritime lienor,
Hong Kong United Dockyards, Ltd. As a person not interested in the fulfillment of the obligation
between PISC and Hong Kong United Dockyards, Ltd., Citibank was subrogated to the rights of Hong
Kong United Dockyards, Ltd. as a maritime lienor over the vessel, by virtue of Article 1302, par. 2 of
the New Civil Code. By definition, subrogation is the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. Considering that Citibank paid off the debt of PISC to
Hong Kong United Dockyards, Ltd. it became the transferee of all the rights of Hong Kong Dockyards,
Ltd. as against PISC, including the maritime lien over the vessel M/V “Asian Liberty.”64
DBP’s reliance on the Statute of Frauds is misplaced. Article 1403 (2) of the Civil Code, which
enumerates the contracts covered by the Statue of Frauds, is inapplicable. To begin with, there is no
privity of contract between POLIAND or its predecessors-in-interest, on one hand, and DBP, on the
other. POLIAND hinges its claim on the maritime lien based on LOI No. 1195 and P.D. No. 1521, and
not on any contract or agreement.
Neither can DBP invoke prescription or laches against POLIAND. Under Article 1144 of the Civil Code,
an action upon an obligation created by law must be brought within ten years from the time the right
of action accrues. The right of action arose after January 15, 1982, when NDC partially paid off
GALLEON’s obligations to POLIAND’s predecessor-in-interest, Asian Hardwood. At that time, the
prescriptive period for the enforcement by action of the balance of GALLEON’s outstanding
obligations had commenced. Prescription could not have set in because the prescriptive period was
tolled
_______________
64 Id., at p. 404.
546
546

when POLIAND made a written demand for the satisfaction of the obligation on September 24, 1991,
or before the lapse of the ten-year prescriptive period. Laches also do not lie because there was no
unreasonable delay on the part of POLIAND in asserting its rights. Indeed, it instituted the instant suit
seasonably.
All things considered, however, the Court finds that only NDC is liable for the payment of the
maritime lien. A maritime lien is akin to a mortgage lien in that in spite of the transfer of ownership,
the lien is not extinguished. The maritime lien is inseparable from the vessel and until discharged, it
follows the vessel. Hence, the enforcement of a maritime lien is in the nature and character of a
proceeding quasi in rem.65 The expression “action in rem” is, in its narrow application, used only with
reference to certain proceedings in courts of admiralty wherein the property alone is treated as
responsible for the claim or obligation upon which the proceedings are based.66 Considering that DBP
subsequently transferred ownership of the vessels to NDC, the Court holds the latter liable on the
maritime lien. Notwithstanding the subsequent transfer of the vessels to NDC, the maritime lien
subsists.
This is a unique situation where the extrajudicial foreclosure of the GALLEON vessels took place
without the intervention of GALLEON’s other creditors including POLIAND’s predecessors-in-interest
who were apparently left in the dark about the foreclosure proceedings. At that time, GALLEON was
already a failing corporation having borrowed large sums of money from banks and financial
institutions. When GALLEON defaulted in the payment of its obligations to DBP, the latter foreclosed
on its mortgage over the GALLEON ships. The other creditors, including POLIAND’s predecessors-in-
interest who apparently had earlier or superior rights over
_______________
65 Quasha & Associates v. Hon. Juan, et al., 204 Phil. 141, 153-154; 118 SCRA 505, 517 (1982).
66 El Banco Español-Filipino v. Palanca, 37 Phil. 921, 928 (1918).

547
VOL. 467, AUGUST 22, 2005
547
the foreclosed vessels, could not have participated as they were unaware and were not made parties
to the case.
On this note, the Court believes and so holds that the institution of the extrajudicial foreclosure
proceedings was tainted with bad faith. It took place when NDC had already assumed the
management and operations of GALLEON. NDC could not have pleaded ignorance over the existence
of a prior or preferential lien on the vessels subject of foreclosure. As aptly held by the Court of
Appeals:
NDC’s claim that even if maritime liens existed over the proceeds of the foreclosure sale of the vessels
which it subsequently purchased from DBP, it is not liable as it was a purchaser in good faith fails,
given the fact that in its “actual control over the management and operations” of GALLEON, it was put
on notice of the various obligations of GALLEON including those secured from ASIAN HARDWOOD as
in fact it even paid ASIAN HARDWOOD US$1,000,000.00 in partial settlement of GALLEON’s
obligations, before it (NDC) mortgaged the 5 vessels to DBP on January 25, 1982.
Parenthetically, LOI 1195 directed NDC to “discharge such maritime liens as may be necessary to allow
the foreclosed vessels to engage on the international shipping business.”
In fine, it is with respect to POLIAND’s claim for payment of US$1,930,298.56 representing part of the
proceeds of GALLEON’s loan which was spent by GALLEON “for ship modification and salaries of crew”
that NDC is liable.67
Thus, NDC cannot claim that it was a subsequent purchaser in good faith because it had knowledge
that the vessels were subject to various liens. At the very least, to evince good faith, NDC could have
inquired as to the existence of other claims against the vessels apart from DBP’s mortgage lien.
Considering that NDC was also in a position to know or discover the financial condition of GALLEON
when it took over its management, the lack of notice to GALLEON’s creditors
_______________
67 G.R. No. 143877, Rollo, p. 22.
548
548
suggests that the extrajudicial foreclosure was effected to prejudice the rights of GALLEON’s other
creditors.
NDC also cannot rely on Administrative Order No. 64,68 which directed the transfer of the vessels to
the APT, on its hypothesis that such transfer extinguished the lien. APT is a mere conduit through
which the assets acquired by the National Government are provisionally held and managed until their
eventual disposal or privatization. Administrative Order No. 64 did not divest NDC of its ownership
over the GALLEON vessels because APT merely holds the vessels in trust for NDC until the same are
disposed. Even if ownership was transferred to APT, that would not be sufficient to discharge the
maritime lien and deprive POLIAND of its recourse based on the lien. Such denouement would smack
of denial of due process and taking of property without just compensation.
NDC’s liability for attorney’s fees
The lower court awarded attorney’s fees to POLIAND in the amount of P1,000,000.00 on account of
the amount involved in the case and the protracted character of the litiga-tion.69 The award was
affirmed by the Court of Appeals as against NDC only.70
This Court finds no reversible error with the award as upheld by the appellate court. Under Article
220871 of the Civil
_______________
68 ENTITLED “APPROVING THE IDENTIFICATION OF AND TRANSFER TO THE NATIONAL GOVERNMENT

OF CERTAIN ASSETS AND LIABILITIES OF THE PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION AND THE NATIONAL DEVELOPMENT COMPANY.”
69 G.R. No. 143877, Rollo, p. 120.
70 Id., at p. 23.
71 Art. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than
judicial costs, cannot be recovered except:
....
549
VOL. 467, AUGUST 22, 2005

549
Code, attorney’s fees may be awarded inter alia when the defendant’s act or omission has compelled
the plaintiff to incur expenses to protect his interest or in any other case where the court deems it just
and equitable that attorney’s fees and expenses of litigation be recovered.
One final note. There is a discrepancy between the dispositive portion of the Court of Appeals’
Decision and the body thereof with respect to the amount of the maritime lien in favor of POLIAND.
The dispositive portion ordered NDC to pay POLIAND “the amount of US$1,920,298.56” plus
interest72 despite a finding that NDC’s liability to POLIAND represents the maritime lien73 which
according to the complaint74 is
_______________
(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or
to incur expenses to protect his interest;
....
(11) In any other case where the court deems it just and equitable that attorney’s fees and expenses
of litigation should be recovered.
In all cases, the attorney’s fees and expenses of litigation must be reasonable.
72 G.R. No. 143877, Rollo, p. 23; Court of Appeals’ Decision, p. 17.
73 Id., at p. 8; Court of Appeals’ Decision, p. 2.
74 Id., at pp. 78-87. Paragraph of the Complaint, reads:

4.7. Assuming that defendants NDC and DBP are not liable for the total obligation of Two Million
Three Hundred Fifteen Thousand Seven Hundred Forty Seven and 32/100 United States Dollars
(US$2,315,747.32) under the First Cause Of Action, they are still liable for the amount of One Million
One Hundred Ninety Three Thousand Two Hundred Ninety Eight and 56/100 United States Dollars
(US$1,193,298.56) under the Second Cause Of Action. Id., at p. 85.
The pertinent part of the prayer of the Complaint reads:
WHEREFORE, it is most respectfully prayed that judgment be rendered in favor of plaintiff Poliand
Industrial Limited ordering:
....
550
550
the alternative cause of action of POLIAND in the smaller amount of US$1,193,298.56, as prayed for
by POLIAND in its complaint.
The general rule is that where there is conflict between the dispositive portion or the fallo and the
body of the decision, the fallo controls. This rule rests on the theory that the fallo is the final order
while the opinion in the body is merely a statement ordering nothing. However, where the inevitable
conclusion from the body of the decision is so clear as to show that there was a mistake in the
dispositive portion, the body of the decision will prevail.75 In the instant case, it is clear from the trial
court records and the Court of Appeals’ Rollo that the bigger amount awarded in the dispositive
portion of the Court of Appeals’ Decision was a typographical mistake. Considering that the appellate
court’s Decision merely affirmed the trial court’s finding with respect to the amount of maritime lien,
the bigger amount stated in the dispositive
_______________
2. Defendants National Development Company, Development Bank of the Philippines to pay plaintiff
Poliand Industrial Limited the equivalent in Philippine currency of the amount of One Million One
Hundred Ninety Three Thousand Two Hundred Ninety Eight and 56/100 United States Dollars
(US$1,193,298.56), plus legal interest accruing after the dates of foreclosure, to satisfy the preferred
maritime liens over the proceeds of the foreclosure sale of the five (5) vessels of defendant National
Galleon Shipping Corporation which were assigned to Poliand Industrial Limited, in the event that this
Honorable Court rules that defendants National Development Company and Development Bank of the
Philippines are not liable for the amount of Two Million Three Hundred Fifteen Thousand Seven
Hundred Forty Seven and 32/100 United States Dollars (US$2,315,747.32) under the First Cause of
Action; . . . .
75 Asian Center for Career v. National Labor Relations Commission, 358 Phil. 380, 386; 297 SCRA 727,
731-732 (1998).
551
VOL. 467, AUGUST 22, 2005
551
portion of the Court of Appeals’ Decision must have been awarded through indavertence.
WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 53257 is MODIFIED to the extent that National Development
Company is liable to Poliand Industrial Limited for the amount of One Million One Hundred Ninety
Three Thousand Two Hundred Ninety Eight US Dollars and Fifty-Six US Cents (US$ 1,193,298.56), plus
interest of 12% per annum computed from 25 September 1991 until fully paid. In other respects, said
Decision is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
Petitions denied, judgment modified.
Notes.—During the past dictatorship, every presidential issuance, by whatever name it was called,
had the force and effect of law because it came from President Marcos. (Association of Small
Landowners in the Philippines, Inc. vs. Secretary of Agrarian Reform, 175 SCRA 343 [1989])
LOI 1190 simply imposes a presidential review of the authority of the Minister of Labor and
Employment to grant licenses, hence, directed to him alone. Since this is undoubtedly an
administrative action, LOI 1190 should properly be treated as an administrative issuance. Unlike
Presidential Decrees which by usage have gained acceptance as laws promulgated by the President,
Letters of Instruction are presumed to be mere administrative issuances except when the conditions
set out in Garcia-Padilla v. Enrile exist. Consequently, to be considered part of the law of the land,
petitioners must establish that LOI 1190 was issued in response to “a grave emergency or a threat or
imminence thereof, or when-
552
552
Torralba vs. People
ever the interim Batasan Pambansa or the regular National Assembly fails or is unable to act
adequately on any matter.” The conspicuous absence of any of these conditions fortifies the opinion
that LOI 1190 cannot be any more than a mere administrative issuance. (Philippine Association of
Service Exporters, Inc. vs. Torres, 225 SCRA 417 [1993])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Poliand Industrial Limited vs. National
Development Company, 467 SCRA 500, G.R. No. 143866, G.R. No. 143877 August 22, 2005
G.R. No. 143866. May 19, 2006.*
POLIAND INDUSTRIAL LIMITED, petitioner, vs. NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT

BANK OF THE PHILIPPINES, and THE HONORABLE COURT OF APPEALS (Fourteenth Division),
respondents.
G.R. No. 143877. May 19, 2006.*
NATIONAL DEVELOPMENT COMPANY, petitioner, vs. POLIAND INDUSTRIAL LIMITED, respondent.
Civil Procedure; Factual findings of the trial court duly supported as it is by the evidence on record,
deserves great weight and respect and is binding on the court.—The finding of the trial court that an
extrajudicial demand was made by Poliand on September 25, 1991 on NDC for the payment of a
determinate amount equivalent to its maritime lien, unmodified as it was by the appellate court,
constitutes adequate basis to conclude that as of said date, Poliand’s claim was already due and
demandable. Such factual finding of the trial court, duly supported as it is by the evidence on record,
deserves great weight and respect and is binding on the Court.
MOTION For Leave to File And To Admit The Attached Second Motion For Partial Reconsideration in
the Supreme Court.
The facts are stated in the resolution of the Court.
Villaraza & Angangco Law Office for Poliand Industrial Ltd.
Office of the Government Corporate Counsel for respondent.
_______________
* SPECIAL SECOND DIVISION.
10
10
RESOLUTION
TINGA, J.:
For resolution is the “Motion For Leave to File And To Admit The Attached Second Motion For Partial
Reconsideration” filed by Poliand Industrial Limited (POLIAND), seeking the partial review of the
Court’s Resolution dated November 23, 2005. Poliand is the petitioner in G.R. No. 143866 and the
respondent in G.R. No. 143877. On August 22, 2005, the Court promulgated a consolidated Decision in
G.R. Nos. 143866 & 143877, the dispositive portion of which reads:
“WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are DENIED. The Decision of the
Court of Appeals in CA-G.R. CV No. 53257 is MODIFIED to the extent that National Development
Company is liable to Poliand Industrial Limited for the amount of One Million One Hundred Ninety
Three Thousand Two Hundred Ninety Eight US Dollars and Fifty Six US Cents (US$1,193,298.56), plus
interest of 12% per annum computed from 25 September 1991 until fully paid. In other respects, said
Decision is AFFIRMED. No pronouncement as to costs.
SO ORDERED.”
Both POLIAND and National Development Company (NDC) separately filed motions for partial
reconsideration. Poliand, for its part, asserted that the computation of interest should be reckoned
from September 12, 1984, the date of the last foreclosure sale of the vessels, in conformity with the
dispositive portion of the Court of Appeals’ Decision. The Court denied the separate motions of
Poliand and NDC in its November 23, 2005 Resolution. More than simply denying Poliand’s motion for
reconsideration, said Resolution passed upon for the first time the issue on the computation of
interest and, thus, modified the August 22, 2005 Decision by reckoning the computation of interest
from the date of the finality of judgment. Not satisfied with the Court’s ruling, Poliand filed the
instant subsequent motion for reconsideration with
11
VOL. 490, MAY 19, 2006
11

leave of court, praying in the alternative that the interest rate should be computed from September
25, 1991, the date of extrajudicial demand, that is, in conformity with the tack ordered in the Decision
dated August 22, 2005.
Ordinarily, no second motion for reconsideration of a judgment or final resolution by the same party
shall be entertained.1 Essentially, however, the instant motion is not a second motion for
reconsideration since the viable relief it seeks calls for the review, not of the Decision dated August
22, 2005, but the November 23, 2005 Resolution which delved for the first time on the issue of the
reckoning date of the computation of interest. In resolving the instant motion, the Court will be
reverting to the Decision dated August 22, 2005. In so doing, the Court will be shunning further delay
so as to ensure that finis is written to this controversy and the adjudication of this case attains finality
at the earliest possible time as it should.
After going over the instant motion, the Court is persuaded to take a fresh scrutiny of the facts and
circumstances obtaining herein and accordingly modify its finding that Poliand’s claim cannot be
considered due and demandable until the finality of the Court’s Decision. Indeed, there are certain
factual premises which the Court glossed over in arriving at such pronouncement. First, the trial court
had already made a factual finding to the effect that extrajudicial demands had been made by Poliand
on September 25, 1991 on NDC, Galleon Shipping Corporation and Development Bank of the
Philippines, not only with respect to the alleged loan accommodations granted to Galleon but also, in
the alternative, with respect to the maritime lien. Second, the extrajudicial demand on NDC for the
payment of the maritime lien was for a specified amount, which was the same amount prayed for in
the complaint and eventually upheld by the trial court. This
_______________
1 Rule 52, Section 2, in relation to Rule 56, Section 4, of the 1997 Rules of Court.
12
12

fact indicates that upon extrajudicial demand, Poliand’s claim for the satisfaction of the maritime lien
had already been ascertained. An account that has been “liquidated” can also mean that the item has
been made certain as to what, and how much, is deemed to be owing.2 The amount claimed and the
date of demand being both certain, to arrive at the liquidated amount would merely be a matter of
mathematical computation.3
The finding of the trial court that an extrajudicial demand was made by Poliand on September 25,
1991 on NDC for the payment of a determinate amount equivalent to its maritime lien, unmodified as
it was by the appellate court, constitutes adequate basis to conclude that as of said date, Poliand’s
claim was already due and demandable. Such factual finding of the trial court, duly supported as it is
by the evidence on record, deserves great weight and respect and is binding on the Court.
Poliand’s main stance that the interest payment on its maritime lien should be reckoned from the
date of the last foreclosure sale of the vessels has no merit, apart from being barred by the rule
against second motions for reconsideration.
Poliand contends that the Court’s finding that the institution of the extrajudicial foreclosure
proceedings was tainted with bad faith provides the basis to reckon the computation of legal interest
from the date of the foreclosure sale. Suffice it to say, this theory has no basis in law. An act done in
bad faith may be the basis of some other award but not the award of legal interest.
Next, Poliand argues that the payment of legal interest should be reckoned from the date of the last
foreclosure sale of the vessels or on September 12, 1984 on the basis of Section
_______________
2 Diaz v. Sandiganbayan, G.R. No. 125213, January 26, 1999, 302 SCRA 118.
3 Tropical Homes, Inc. v. Court of Appeals, G.R. No. 111858, May 14, 1997, 272 SCRA 428.
13
VOL. 490, MAY 19, 2006
13
17 (a) of Presidential Decree No. 1521.4 The provision is inapplicable to the question of interest
payment as it merely enumerates the prioritized liens which are entitled to satisfaction upon the sale
of a mortgaged vessel.
WHEREFORE, the instant “second” Motion for Partial Reconsideration dated December 30, 2005 is
GRANTED. The dispositive portion of the Decision dated August 22, 2005 in G.R. No. 143866 and G.R.
No. 143877 is REINSTATED in full.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
Second motion for partial reconsideration granted.
Note.—The Supreme Court is not a trier of facts—it is confined to the review of errors of law ascribed
to the Court of Appeals. (Lanuza vs. Muñoz, 429 SCRA 562 [2004])
——o0o——
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4 Sec. 17. Preferred Maritime Lien, Priorities, Other Liens.—(a) Upon the sale of any mortgaged vessel
in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in admiralty
for the enforcement of a preferred mortgaged lien thereon, all pre-existing claims in the vessel,
including any possessory common-law lien of which a lienor is deprived under the provisions of
Section 16 of this Decree, shall be held terminated and shall thereafter attach, in like amount and in
accordance with the priorities established therein to the proceeds of the sale. The preferred mortgage
lien shall have priority over all claims against the vessel, except the following claims in the order
stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government;
(2) crew’s wages; (3) general average; (4) salvage, including contract salvage; (5) maritime liens arising
prior in time to the recording of the preferred mortgage; (6) damages arising out of tort; and (7)
preferred mortgage registered prior in time.
14
14
Transfield Philippines, Inc. vs. Luzon Hydro Corporation
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Poliand Industrial Limited vs. National
Development Company, 490 SCRA 9, G.R. No. 143866, G.R. No. 143877 May 19, 2006
B
G.R. No. 195615. April 21, 2014.*
BANK OF COMMERCE, petitioner, vs. RADIO PHILIPPINES NETWORK, INC., INTERCONTINENTAL

BROADCASTING CORPORATION, and BANAHAW BROADCASTING CORPORATION, THRU BOARD OF
ADMINISTRATOR, and SHERIFF BIENVENIDO S. REYES, JR., Sheriff, Regional Trial Court of Quezon City,
Branch 98, respondents.
Remedial Law; Special Civil Actions; Certiorari; Motion for Reconsideration; Since a motion for
reconsideration is generally regarded as a plain, speedy, and adequate remedy, the failure to first take
recourse to is usually regarded as fatal omission.—Section 1, Rule 65 of the Rules of Court provides
that a petition for certiorari may only be filed when there is no plain, speedy, and adequate remedy in
the course of law. Since a motion for reconsideration is generally regarded as a plain, speedy, and
adequate remedy, the failure to first take recourse to is usually regarded as fatal omission.
Mercantile Law; Corporations; Mergers; Words and Phrases; Merger is a reorganization of two or
more corporations that results in their consolidating into a single corporation, which is one of the
constituent corporations, one disappearing or dissolving and the other surviving.—Merger is a
reorganization of two or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the
other surviving. To put it another way, merger is the absorption of one or more corporations by
another existing corporation, which retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing
corporation continues its existence while the life or lives of the other corporation(s) is or are
terminated.
Same; Same; Same; A merger does not become effective upon the mere agreement of the constituent
corporations; Section 79 of the Corporation Code further provides that the merger shall be effective
_______________
* THIRD DIVISION.
521
only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger.—
Indubitably, it is clear that no merger took place between Bancommerce and TRB as the requirements
and procedures for a merger were absent. A merger does not become effective upon the mere
agreement of the constituent corporations. All the requirements specified in the law must be
complied with in order for merger to take effect. Section 79 of the Corporation Code further provides
that the merger shall be effective only upon the issuance by the Securities and Exchange Commission
(SEC) of a certificate of merger.
Same; Same; Same; De Facto Merger; Words and Phrases; The idea of a de facto merger came about
because, prior to the present Corporation Code, no law authorized the merger or consolidation of
Philippine Corporations, except insurance companies, railway corporations, and public utilities.—The
idea of a de facto merger came about because, prior to the present Corporation Code, no law
authorized the merger or consolidation of Philippine Corporations, except insurance companies,
railway corporations, and public utilities. And, except in the case of insurance corporations, no
procedure existed for bringing about a merger. Still, the Supreme Court held in Reyes v. Blouse, 91
Phil. 305 (1952), that authority to merge or consolidate can be derived from Section 28½ (now Section
40) of the former Corporation Law which provides, among others, that a corporation may “sell,
exchange, lease or otherwise dispose of all or substantially all of its property and assets” if the board
of directors is so authorized by the affirmative vote of the stockholders holding at least two-thirds of
the voting power. The words “or otherwise dispose of,” according to the Supreme Court, is very broad
and in a sense, covers a merger or consolidation.
Same; Same; Same; Same; A de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stock of the
acquiring corporation.—In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that
under the Corporation Code, “a de facto merger can be pursued by one corporation acquiring all or
substantially all of the properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with the business enterprise of the
target corporation; whereas, the target corporation would end up
522
with basically its only remaining assets being the shares of stock of the acquiring corporation.”
(Emphasis supplied) No de facto merger took place in the present case simply because the TRB owners
did not get in exchange for the bank’s assets and liabilities an equivalent value in Bancommerce
shares of stock. Bancommerce and TRB agreed with BSP approval to exclude from the sale the TRB’s
contingent judicial liabilities, including those owing to RPN, et al.
Velasco, Jr., J., Concurring Opinion:
Constitutional Law; Due Process; View that every person must be heard and given his day in court
before a judgment may be enforced against him.—Every person must be heard and given his day in
court before a judgment may be enforced against him. This rule is so elementary and basic that it is
enshrined in the first section of the Bill of Rights of our Constitution: SECTION 1. No person shall be
deprived of life, liberty or property without due process of law, nor shall any person be denied the
equal protection of the laws.
Remedial Law; Evidence; Res Inter Alios Acta Rule; Parties; View that the Supreme Court has ruled
that execution may issue only upon a person who is a party to the action, and not against one who did
not have his day in court.—This Court has ruled that execution may issue only upon a person who is a
party to the action, and not against one who did not have his day in court. In Atilano v. Asaali, 680
SCRA 345 (2012), We held thus: It is well-settled that no man shall be affected by any proceeding to
which he is a stranger, and strangers to a case are not bound by a judgment rendered by the court.
Execution of a judgment can only be issued against one who is a party to the action, and not against
one who, not being a party thereto, did not have his day in court. Due process dictates that a court
decision can only bind a party to the litigation and not against innocent third parties.
Same; Civil Procedure; Jurisdiction; View that jurisdiction over the person still requires the existence
of a coercive process issued by the court to such party or its voluntary submission to the court.
Neither had been done in this case.—Jurisdiction over the person still requires the existence of a
coercive process issued by the court to such party or its voluntary submission to the court. Neither
had been done in this case. Note that Bancom made its entry to the case
523
but by way of special appearance precisely to question the trial court’s jurisdiction over its person.
Thus, without any summons issued by the trial court, jurisdiction over Bancom’s person had never
been obtained by the trial court in this case. Any pronouncement against it is void for lack of
jurisdiction.
Same; Same; Judgments; Finality of Judgments; View that upon finality of the judgment, the courts
lose the jurisdiction to amend, modify or alter the same.—In the execution of final and executory
judgments, the trial court is bound by the terms of the decision. Thus, to order the execution against a
non-party to an already concluded action is beyond the powers of the trial court and ergo illegal. It
needs to be emphasized that once a judgment becomes final and executory, that judgment may not
be amended. Upon finality of the judgment, however, the courts lose the jurisdiction to amend,
modify or alter the same. The judgment can neither be amended nor altered after it has become final
and executory. This is the principle of immutability of final judgment, which We emphasized in Fermin
v. Esteves, 549 SCRA 424 (2008): The generally accepted principle is that no man shall be affected by
any proceeding to which he is a stranger, and strangers to a case are not bound by a judgment
rendered by the court. Execution of a judgment can only be issued against one who is a party to the
action, and not against one who, not being a party in the case, did not have his day in court. Due
process requires that a court decision can only bind a party to the litigation and not against one who
did not have his day in court.
Mercantile Law; Corporations; Mergers; De Facto Mergers; View that to find the existence of a de
facto merger, this Court must at least ascertain the presence of the most essential element of a
merger apart from compliance with the legalities set forth under the law: the dissolution of the
separate judicial personality of the target corporation in fact, if not in law.—To find the existence of a
de facto merger, this Court must at least ascertain the presence of the most essential element of a
merger apart from compliance with the legalities set forth under the law: the dissolution of the
separate judicial personality of the target corporation in fact, if not in law. It bears to stress that while
this Court has recognized the existence of a de facto merger in this jurisdiction resulting from the
transfer of assets and assumption of the liabilities of one corporation by another, the rec-
524
ognition had been made through the rubric of piercing the veil of corporate fiction, i.e., control over
both corporations is lodged in the same person/s and that control is used to commit fraud or wrong.
This is usually done by the transfer of all the assets of a corporation in exchange for the stocks of
another corporation.
Same; Same; Same; View that it is axiomatic that he who alleges an affirmative event, like the
existence of the supposed merger in this case, must show proof in support thereof.—It is axiomatic
that he who alleges an affirmative event, like the existence of the supposed merger in this case, must
show proof in support thereof. Here, the burden to explain and to prove or disprove the existence of
the merger should be with private respondents. If a shift of the burden of proof is at all justified, the
shift should be taken against TRB, not Bancom, as it was TRB that advanced the existence of this
supposed “supervening event” and it is TRB that will in effect be exonerated from satisfying the
judgment against it.
Remedial Law; Civil Procedure; Judgments; Doctrine of Stare Decisis; View that under the doctrine of
stare decisis, when the Supreme Court has once laid down a principle of law as applicable to a certain
state of facts, it will adhere to that principle, and apply it to all future cases, where facts are
substantially the same.—In Chinese Young Men’s Christian Association of The Philippine Islands Doing
Business Under The Name Of Manila Downtown YMCA v. Remington Steel Corporation, 550 SCRA 180
(2008), this Court explained the concept of stare decisis et non quieta movere, thus: Under the
doctrine, when the Supreme Court has once laid down a principle of law as applicable to a certain
state of facts, it will adhere to that principle, and apply it to all future cases, where facts are
substantially the same. The doctrine of stare decisis is based upon the legal principle or rule involved
and not upon judgment which results therefrom. In this particular sense stare decisis differs from res
judicata which is based upon the judgment. The doctrine of stare decisis is one of policy grounded on
the necessity for securing certainty and stability of judicial decisions, thus: Time and again, the court
has held that it is a very desirable and necessary judicial practice that when a court has laid down a
principle of law as applicable to a certain state of facts, it will adhere to that principle and apply it to
all future cases in which the facts are substantially the same. Stare decisis et non quieta movere.
Stand by the decisions and dis-
525
turb not what is settled. Stare decisis simply means that for the sake of certainty, a conclusion
reached in one case should be applied to those that follow if the facts are substantially the same, even
though the parties may be different. It proceeds from the first principle of justice that, absent any
powerful countervailing considerations, like cases ought to be decided alike. Thus, where the same
questions relating to the same event have been put forward by the parties similarly situated as in a
previous case litigated and decided by a competent court, the rule of stare decisis is a bar to any
attempt to relitigate the same issue.
Mendoza, J., Dissenting Opinion:
Remedial Law; Special Civil Actions; Certiorari; Motions For Reconsideration; View that unless a
motion for reconsideration has been filed, immediate resort to a petition for certiorari will not lie
because there is still an adequate remedy available to the aggrieved party.—One of the requirements
for the filing of a petition for certiorari is that there be no appeal or any plain, speedy and adequate
remedy available in the ordinary course of law. The “plain,” “speedy” and “adequate remedy”
referred to in Section 1, Rule 65 of the Rules of Court is a motion for reconsideration of the
questioned order or resolution. It means that unless a motion for reconsideration has been filed,
immediate resort to a petition for certiorari will not lie because there is still an adequate remedy
available to the aggrieved party. The Court is consistent in ruling that a motion for reconsideration is a
condition sine qua non for the filing of a petition for certiorari. The said mandatory and jurisdictional
procedure is meant to give the lower court or tribunal the opportunity to correct its assigned errors.
Failure to file the motion before availing oneself of the special civil action for certiorari is a fatal
infirmity.
Same; Same; Same; Same; View that though the rule is mandatory, the Supreme Court recognizes
exceptional circumstances which may justify the dispensing of a prior motion for reconsideration.—
Though the rule is mandatory, the Court recognizes exceptional circumstances which may justify the
dispensing of a prior motion for reconsideration. These exceptions are: (a) where the order is a patent
nullity, as where the court a quo has no jurisdiction; (b) where the questions raised in the certiorari
proceedings have been duly raised and passed upon by the lower court, or are the same as those
raised
526
and passed upon in the lower court; (c) where there is an urgent necessity for the resolution of the
question and any further delay would prejudice the interests of the Government or of the petitioner
or the subject matter of the petition is perishable; (d) where, under the circumstances, a motion for
reconsideration would be useless; (e) where petitioner was deprived of due process and there is
extreme urgency for relief; (f) where, in a criminal case, relief from an order of arrest is urgent and the
granting of such relief by the trial court is improbable; (g) where the proceedings in the lower court
are a nullity for lack of due process; (h) where the proceeding was ex parte or in which the petitioner
had no opportunity to object; and, (i) where the issue raised is one purely of law or public interest is
involved.
Same; Same; Same; View that a writ of certiorari is a prerogative writ, never demandable as a matter
of right, never issued except in the exercise of judicial discretion.—It is of my considered view that
Bancommerce failed to satisfactorily prove before the CA that indeed, its noncompliance with the
mandatory and jurisdictional requirement of a prior motion for reconsideration was justified. The
Court, in Republic v. Pantranco North Express, Inc., 666 SCRA 199 (2012), reiterated its long-standing
ruling that: It must be emphasized that a writ of certiorari is a prerogative writ, never demandable as
a matter of right, never issued except in the exercise of judicial discretion. Hence, he who seeks a writ
of certiorari must apply for it only in the manner and strictly in accordance with the provisions of the
law and the Rules. Petitioner may not arrogate to himself the determination of whether a motion for
reconsideration is necessary or not. To dispense with the requirement of filing a motion for
reconsideration, petitioner must show a concrete, compelling, and valid reason for doing so, which
petitioner failed to do. Thus, the Court of Appeals correctly dismissed the petition.
Mercantile Law; Corporations; Mergers; Consolidations; View that under the Philippine Law, “two or
more corporations may merge into a single corporation which shall be one of the constituent
corporations or may consolidate into a new single corporation which shall be the consolidated
corporation.”—A merger is “a combination of two things, especially companies, into one.” Merriam
Webster Dictionary defines it as “the absorption by a corporation of one or more others.” Under the
Philippine Law, “two or more corporations may merge
527
into a single corporation which shall be one of the constituent corporations or may consolidate into a
new single corporation which shall be the consolidated corporation.”
Same; Same; Same; Same; View that there are steps necessary to accomplish a merger or
consolidation as provided for in Sections 76, 77, 78 and 79 of the Corporation Code.—There are
requirements and procedures to follow before a merger takes place. The steps necessary to
accomplish a merger or consolidation, as provided for in Sections 76, 77, 78 and 79 of the Corporation
Code, are: (1) The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment, if necessary, to the articles of incorporation of the surviving
corporation, or in case of consolidation, all the statements required in the articles of incorporation of
a corporation. (2) Submission of plan to stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or
members, personally or by registered mail. A summary of the plan must be attached to the notice.
Vote of two-thirds of the members or of stockholders representing two-thirds of the outstanding
capital stock will be needed. Appraisal rights, when proper, must be respected. (3) Execution of the
formal agreement, referred to as the articles of merger or consolidation, by the corporate officers of
each constituent corporation. These take the place of the articles of incorporation of the consolidated
corporation, or amend the articles of incorporation of the surviving corporation. (4) Submission of
said articles of merger or consolidation to the SEC for approval. (5) If necessary, the SEC shall set a
hearing, notifying all corporations concerned at least two weeks before. (6) Issuance of certificate of
merger or consolidation.
Same; Same; Same; Same; View that the sale or disposition of all or substantially all of the corporate
assets may have the effect of a merger or consolidation.—Section 40 of the Corporation Code laid out
the procedure and requirements when a corporation sells or otherwise disposes of all or substantially
all of its assets. It provides that a sale or other disposition shall be deemed to cover substantially all
the corporate property and assets, if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purposes for which it was incorporated. The sale or
disposition of all of substantially all of the corporate assets may have the effect of a merger or
consolidation. Corolla-
528
rily, Section 40 will not apply if the sale was necessary in the usual and regular course of business. The
facts obtaining in the case, however, clearly showed that the sale was not in pursuance of the usual
and regular banking business of TRB. The sale, in fact, rendered TRB incapable of carrying out the
purpose of its organization. While there may be no merger/consolidation in its strictest sense, it is my
studied opinion that the end result of the affair that took place between TRB and Bancommerce
amounted to a merger of assets where the existence of TRB as a banking entity ceased while that of
Bancommerce continued. Essentially, Bancommerce is continuing the operations of the former.
Remedial Law; Evidence; Res Inter Alios Acta Rule; Execution of Judgments; View that it has been the
consistent ruling of the Supreme Court that although it is true that a writ of execution can only be
issued against a party and not against one who did not have his day in court, one who is privy or a
successor-in-interest of the judgment debtor can be reached by the order of execution.—It has been
the consistent ruling of the Court that although it is true that a writ of execution can only be issued
against a party and not against one who did not have his day in court, one who is privy or a successor-
in-interest of the judgment debtor can be reached by the order of execution. The specific words in the
two cases read: No man shall be affected by any proceeding to which he is a stranger. Strangers to a
case are not bound by judgment rendered by the court. In the same manner, an execution can be
issued only against a party and not against one who did not have his day in court. Only real parties in
an action are bound by judgment therein and by writs of execution and demolition issued pursuant
thereto. However, one who is a privy to the judgment debtor can be reached by an order of
execution.
Same; Provisional Remedies; Garnishment; Parties; View that the Rules of Court do not require that
the garnishee be served with summons or impleaded in the case in order to make him liable; All that
is necessary for the trial court lawfully to bind the person of the garnishee or any person who has in
his possession credits belonging to the judgment debtor is service upon him of the writ of
garnishment.—Bancommerce cannot insist that TRB’s assets in its custody and possession cannot be
the subject of an execution on the flimsy excuse that it is not a party. Granting that there has been no
de
529
facto merger or consolidation, the undeniable fact is that Bancommerce has TRB’s assets, commingled
or not, and the rules provide that these can be reached by levy or garnishment. The Rules of Court,
moreover, do not require that the garnishee be served with summons or impleaded in the case in
order to make him liable. In the case of Perla Compania de Seguros v. H. Ramolete, 203 SCRA 487
(1991), it was clearly written: In order that the trial court may validly acquire jurisdiction to bind the
person of the garnishee, it is not necessary that summons be served upon him. The garnishee need
not be impleaded as a party to the case. All that is necessary for the trial court lawfully to bind the
person of the garnishee or any person who has in his possession credits belonging to the judgment
debtor is service upon him of the writ of garnishment.
Same; Civil Procedure; Execution of Judgments; View that in the event that the judgment obligor
cannot pay the monetary judgment in cash, the court, through the sheriff, may levy or attach
properties belonging to the judgment obligor to secure the judgment.—The rule is that “(e)very
prevailing party to a suit enjoys the corollary right to the fruits of the judgment and, thus, court rules
provide a procedure to ensure that every favorable judgment is fully satisfied. This procedure can be
found in Rule 39 of the Revised Rules of Court on execution of judgment. The said Rule provides that
in the event that the judgment obligor cannot pay the monetary judgment in cash, the court, through
the sheriff, may levy or attach properties belonging to the judgment obligor to secure the judgment.”
Section 9(b), Rule 39 of the Revised Rules of Court, which provides: Section 9(b). Satisfaction by
levy.—If the judgment obligor cannot pay all or part of the obligation in cash, certified bank check or
other mode of payment acceptable to the judgment obligee, the officer shall levy upon the properties
of the judgment obligor of every kind and nature whatsoever which may be disposed of for value and
not otherwise exempt from execution giving the latter the option to immediately choose which
property or part thereof may be levied upon, sufficient to satisfy the judgment. If the judgment
obligor does not exercise the option, the officer shall first levy on the personal properties, if any, and
then on the real properties if the personal properties are insufficient to answer for the judgment. The
sheriff shall sell only a sufficient portion of the personal or real property of the judgment obligor
which has been levied upon. When there is more property of the judgment obligor than is sufficient to
530
satisfy the judgment and lawful fees, he must sell only so much of the personal or real property as is
sufficient to satisfy the judgment and lawful fees.
Same; Same; Same; View that the option under Section 9(b), Rule 39 of the Revised Rules of Court is
granted to a judgment obligor before the sheriff levies its properties and not after.—“The option
under Section 9(b), Rule 39 of the Revised Rules of Court is granted to a judgment obligor before the
sheriff levies its properties and not after.” “(T)he sheriff is required to first demand of the judgment
obligor the immediate payment of the full amount stated in the writ of execution before a levy can be
made. The sheriff shall demand such payment either in cash, certified bank check or any other mode
of payment acceptable to the judgment obligee. If the judgment obligor cannot pay by these methods
immediately or at once, he can exercise his option to choose which of his properties can be levied
upon. If he does not exercise this option immediately or when he is absent or cannot be located, he
waives such right, and the sheriff can now first levy his personal properties, if any, and then the real
properties if the personal properties are insufficient to answer for the judgment.”
Mercantile Law; Corporations; Mergers; View that generally, where one corporation sells or otherwise
transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of
the transferor; Exceptions.—Generally, where one corporation sells or otherwise transfers all of its
assets to another corporation, the latter is not liable for the debts and liabilities of the transferor,
except: 1) where the purchaser expressly or impliedly agrees to assume such debts; 2) where the
transaction amounts to a consolidation or merger of the corporations; 3) where the purchasing
corporation is merely a continuation of the selling corporation; and 4) where the transaction is
entered into fraudulently in order to escape liability for such debts.
Remedial Law; Civil Procedure; Judgments; View that once a judgment has become final, the winning
party be not, through a mere subterfuge, deprived of the fruits of the verdict.—Once a judgment has
become final, the winning party be not, through a mere subterfuge, deprived of the fruits of the
verdict. Courts must guard against any scheme calculated to bring about that result and must frown
531
upon any attempt to prolong controversies. As the Court has written in the case of Anama v. Court of
Appeals, 664 SCRA 293 (2012), Just as a losing party has the right to file an appeal within the
prescribed period, the winning party also has the correlative right to enjoy the finality of the
resolution of his case by the execution and satisfaction of the judgment, which is the “life of the law.”
To frustrate it by dilatory schemes on the part of the losing party is to frustrate all the efforts, time
and expenditure of the courts. It is in the interest of justice that this Court should write finis to this
litigation.
Leonen, J., Dissenting Opinion:

Mercantile Law; Corporations; View that a corporation which purchases all or substantially all of the
assets of another corporation should be liable to satisfy the execution of a judgment debt against the
seller corporation when it impliedly accepts such obligations.—A corporation which purchases all or
substantially all of the assets of another corporation should be liable to satisfy the execution of a
judgment debt against the seller corporation when it impliedly accepts such obligations. The
obligation is impliedly accepted if the purchasing corporation made it appear to third parties that it
stepped into the shoes of the seller corporation. This is especially true in the case of banks that take
on the license of a predecessor bank. This is required by equity to safeguard against fraud of creditors
as well as the principle of economy of judgments.
Same; Same; View that when a corporation sells or transfers all of its assets to another, the purchaser
corporation is not liable for the debts of the seller as a general rule; Exceptions.—When a corporation
sells or transfers all of its assets to another, the purchaser corporation is not liable for the debts of the
seller as a general rule. Article 1311 of the Civil Code provides that “[c]ontracts take effect only
between the parties, their assigns and heirs x x x.” This principle of relativity explains the general rule
that the purchaser corporation is not liable for the debts of the seller corporation. However, before
this general rule can apply, we have to first determine whether any of the exceptions are present and
have been established. In 1965, Edward J. Nell Company v. Pacific Farms, Inc., 15 SCRA 415, discussed
this rule as follows: Generally where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the transferor, except: (1)
532
where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction
amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is
merely a continuation of the selling corporation; and (4) where the transaction is entered into
fraudulently in order to escape liability for such debts. This rule was reiterated in the 2002 case of
Philippine National Bank v. Andrada Electric & Engineering Company, 381 SCRA 244 and the 2007 case
of McLeod v. National Labor Relations Commission, 512 SCRA 222, where this court held that “a
corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where the purchaser expressly or
impliedly agrees to assume the debts.
Same; Same; Guaranty; Suretyship; View that a non-party to an existing contract becomes (1) a
guarantor when he voluntarily “binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so” or (2) a surety when he “binds himself solidarily with the
principal debtor.”—Under the first exception, the purchaser corporation has agreed to assume the
seller corporation’s liabilities. This may be based on Article 2047 of the Civil Code such that a non-
party to an existing contract becomes (1) a guarantor when he voluntarily “binds himself to the
creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so” or (2) a
surety when he “binds himself solidarily with the principal debtor.” Moreover, “[s]ubstitution of the
person of the debtor may be effected by delegacion [where] the debtor offers, and the creditor
(delegatario), accepts a third person who consents to the substitution and assumes the obligation.
Thus, the consent of [all] three persons is necessary.”
Same; Banks and Banking; View that the banking industry is imbued with great trust and confidence
not only by its clients but by the general public.—The present case involves a bank that transferred all
or substantially all of its assets, including its branching licenses, to petitioner Bancommerce — the
bank that will now continue its operations as recognized by the Bangko Sentral ng Pilipinas. The
banking industry is imbued with great trust and confidence not only by its clients but by the general
public. When banks make mistakes, the wrongful dishonor of a check for example, this causes
533
“embarrassment if not also financial loss and perhaps even civil and criminal litigation” on the part of
the depositor. Consequently, those in the banking business are heavily regulated, burdened with the
highest standards of integrity and performance. This court has awarded exemplary damages to
plaintiffs who have suffered from the failure of banks to exercise such level of diligence in its affairs,
considering that “[t]he business of banking is impressed with public interest and great reliance is
made on the bank’s sworn profession of diligence and meticulousness in giving irreproachable
service.”
Same; Corporations; Mergers; Consolidation; View that the Supreme Court has held that a sale of
assets is legally distinct from a merger or consolidation.—This court has held that a sale of assets is
legally distinct from a merger or consolidation. Section 76 of the Corporation Code expressly
authorizes two or more corporations to merge into a single corporation, which shall be one of the
constituent corporations, or to consolidate into a new single corporation, which shall be the
consolidated corporation. A merger or consolidation “does not become effective upon the mere
agreement of the constituent corporations.” These corporations that seek to merge or consolidate
must first comply with the required procedure under the Corporation Code.
Same; Same; Same; Same; View that one of the legal effects of a merger or consolidation under
Section 80 of the Corporation Code is the assumption ipso jure by the surviving or consolidated
corporation of the dissolved corporation’s liabilities; Thus, a judgment creditor can no doubt seek
payment from the surviving or consolidated corporation if it can prove that a merger or consolidation
has taken place.—One of the legal effects of a merger or consolidation under Section 80 of the
Corporation Code is the assumption ipso jure by the surviving or consolidated corporation of the
dissolved corporation’s liabilities: x x x x 5. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and obligations of each of the constituent corporations in
the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of
creditors or liens upon the property of any of such constituent corporations shall not be impaired by
such merger or consolidation. Thus,
534
a judgment creditor can no doubt seek payment from the surviving or consolidated corporation if it
can prove that a merger or consolidation has taken place.
Same; Same; View that under Section 40 of the Corporation Code, when the transaction amounts to a
sale of “all or substantially all of [the corporation’s] property and assets,” the ratificatory vote of the
stockholders representing at least two-thirds of the outstanding capital stock is required.—Under
Section 40 of the Corporation Code, when the transaction amounts to a sale of “all or substantially all
of [the corporation’s] property and assets,” the ratificatory vote of the stockholders representing at
least two-thirds of the outstanding capital stock is required. This transaction involves a transfer of the
entire business enterprise as no such ratificatory vote is required “if the proceeds of the sale or other
disposition of such property and assets [would] be appropriated for the conduct of its remaining
business.” In such transactions, the purchaser corporation is now the one continuing the seller
corporation’s original business. Consequently, as far as the selling corporation is concerned, there is
no more business remaining.
PETITION for review on certiorari of the resolutions of the Court of Appeals.

Rodrigo, Berenguer & Guno for petitioner.
Siguion Reyna, Montecillo & Ongsiako collaborating counsel for petitioner.
Mercado, Aguillardo and Aceron Law Firm for respondents.
ABAD, J.:
In late 2001 the Traders Royal Bank (TRB) proposed to sell to petitioner Bank of Commerce
(Bancommerce) for P10.4 billion its banking business consisting of specified assets and liabilities.
Bancommerce agreed subject to prior Bangko Sentral ng Pilipinas’ (BSP’s) approval of their Purchase
and As-
535
sumption (P & A) Agreement. On November 8, 2001 the BSP approved that agreement subject to the
condition that Bancommerce and TRB would set up an escrow fund of P50 million with another bank
to cover TRB liabilities for contingent claims that may subsequently be adjudged against it, which
liabilities were excluded from the purchase.
Specifically, the BSP Monetary Board Min. No. 58 (MB Res. 58) decided as follows:
1. To approve the revised terms sheet as finalized on September 21, 2001 granting certain incentives
pursuant to Circular No. 237, series of 2000 to serve as a basis for the final Purchase and Assumption
(P & A) Agreement between the Bank of Commerce (BOC) and Traders Royal Bank (TRB); subject to
inclusion of the following provision in the P & A:
The parties to the P & A had considered other potential liabilities against TRB, and to address these
claims, the parties have agreed to set up an escrow fund amounting to Fifty Million Pesos
(P50,000,000.00) in cash to be invested in government securities to answer for any such claim that
shall be judicially established, which fund shall be kept for 15 years in the trust department of any
other bank acceptable to the BSP. Any deviation therefrom shall require prior approval from the
Monetary Board.
xxxx
Following the above approval, on November 9, 2001 Bancommerce entered into a P & A Agreement
with TRB and acquired its specified assets and liabilities, excluding liabilities arising from judicial
actions which were to be covered by the BSP-mandated escrow of P50 million.
To comply with the BSP mandate, on December 6, 2001 TRB placed P50 million in escrow with
Metropolitan Bank and Trust Co. (Metrobank) to answer for those claims and
536
liabilities that were excluded from the P & A Agreement and remained with TRB. Accordingly, the BSP
finally approved such agreement on July 3, 2002.
Shortly after or on October 10, 2002, acting in G.R. 138510, Traders Royal Bank v. Radio Philippines
Network (RPN), Inc., this Court ordered TRB to pay respondents RPN, Intercontinental Broadcasting
Corporation, and Banahaw Broadcasting Corporation (collectively, RPN, et al.) actual damages of
P9,790,716.87 plus 12% legal interest and some amounts. Based on this decision, RPN, et al., filed a
motion for execution against TRB before the Regional Trial Court (RTC) of Quezon City. But rather than
pursue a levy in execution of the corresponding amounts on escrow with Metrobank, RPN, et al., filed
a Supplemental Motion for Execution1 where they described TRB as “now Bank of Commerce” based
on the assumption that TRB had been merged into Bancommerce.
On February 20, 2004, having learned of the supplemental application for execution, Bancommerce
filed its Special Appearance with Opposition to the same2 questioning the jurisdiction of the RTC over
Bancommerce and denying that there was a merger between TRB and Bancommerce. On August 15,
2005 the RTC issued an Order3 granting and issuing the writ of execution to cover any and all assets of
TRB, “including those subject of the merger/consolidation in the guise of a Purchase and Sale
Agreement with Bank of Commerce, and/or against the Escrow Fund established by TRB and Bank of
Commerce with the Metropolitan Bank and Trust Company.”
This prompted Bancommerce to file a petition for certiorari with the Court of Appeals (CA) in C.A.-G.R.
S.P. No. 91258
_______________
1 Rollo, pp. 111-115.
2 Id., at pp. 116-118.
3 Id., at pp. 119-127.
537
assailing the RTC’s Order. On December 8, 2009 the CA4 denied the petition. The CA pointed out that
the Decision of the RTC was clear in that Bancommerce was not being made to answer for the
liabilities of TRB, but rather the assets or properties of TRB under its possession and custody.5
In the same Decision, the CA modified the Decision of the RTC by deleting the phrase that the P & A
Agreement between TRB and Bancommerce is a farce or “a mere tool to effectuate a merger and/or
consolidation between TRB and BANCOM.” The CA Decision partly reads:
xxxx
We are not prepared though, unlike the respondent Judge, to declare the PSA between TRB and
BANCOM as a farce or “a mere tool to effectuate a merger and/or consolidation” of the parties to the
PSA. There is just a dearth of conclusive evidence to support such a finding, at least at this point.
Consequently, the statement in the dispositive portion of the assailed August 15, 2005 Order referring
to a merger/consolidation between TRB and BANCOM is deleted.6
xxxx
WHEREFORE, the herein consolidated Petitions are DENIED. The assailed Orders dated August 15,
2005 and February 22, 2006 of the respondent Judge, are AFFIRMED with the MODIFICATION that the
pronouncement of respondent Judge in the August 15, 2005 Order that the PSA between TRB and
BANCOM is a farce or “a mere tool to effectuate a merger and/or consolidation between TRB and
BANCOM” is DELETED.
_______________
4 Penned by Associate Justice Francisco P. Acosta, with Associate Justices Juan Q. Enriquez, Jr.,
Priscilla Baltazar-Padilla and Michael P. Elbinias, Concurring and Associate Justice Pampio Abarintos,
Dissenting; id., at pp. 98-110.
5 Id., at pp. 107-108.
6 Id., at p. 108.
538
SO ORDERED.7
On January 8, 2010 RPN, et al., filed with the RTC a motion to cause the issuance of an alias writ of
execution against Bancommerce based on the CA Decision. The RTC granted8 the motion on February
19, 2010 on the premise that the CA Decision allowed it to execute on the assets that Bancommerce
acquired from TRB under their P & A Agreement.
On March 10, 2010 Bancommerce sought reconsideration of the RTC Order considering that the
December 8, 2009 CA Decision actually declared that no merger existed between TRB and
Bancommerce. But, since the RTC had already issued the alias writ on March 9, 2010 Bancommerce
filed on March 16, 2010 a motion to quash the same, followed by supplemental motion9 on April 29,
2010.
On August 18, 2010 the RTC issued the assailed Order10 denying Bancommerce pleas and, among
others, directing the release to the Sheriff of Bancommerce’s “garnished monies and shares of stock
or their monetary equivalent” and for the sheriff to pay 25% of the amount “to the respondents’
counsel representing his attorney’s fees and P200,000.00 representing his appearance fees and
litigation expenses” and the balance to be paid to the respondents after deducting court dues.
Aggrieved, Bancommerce immediately elevated the RTC Order to the CA via a petition for certiorari
under Rule 65 to assail the Orders dated February 19, 2010 and August 18, 2010. On November 26,
2010 the CA11 dismissed the petition outright for the supposed failure of Bancommerce to file a
_______________
7 Id., at p. 109.
8 Id., at pp. 136-138.
9 Id., at pp. 180-188.
10 Id., at pp. 208-220.
11 Penned by Associate Justice Celia C. Librea-Leagogo, with Associate Justices Remedios A. Salazar-
Fernando and Michael P. Elbinias, concurring; id., at pp. 59-62.
539
motion for reconsideration of the assailed order. The CA denied Bancommerce’s motion for
reconsideration on February 9, 2011, prompting it to come to this Court.
The issues this case presents are:

1. Whether or not the CA gravely erred in holding that Bancommerce had no valid excuse in failing
to file the required motion for reconsideration of the assailed RTC Order before coming to the CA; and
2. Whether or not the CA gravely erred in failing to rule that the RTC’s Order of execution against
Bancommerce was a nullity because the CA Decision of December 8, 2009 in C.A.-G.R. S.P. No. 91258
held that TRB had not been merged into Bancommerce as to make the latter liable for TRB’s judgment
debts.
Direct filing of the petition for cer-
tiorari by Bancommerce
Section 1, Rule 65 of the Rules of Court provides that a petition for certiorari may only be filed when
there is no plain, speedy, and adequate remedy in the course of law. Since a motion for
reconsideration is generally regarded as a plain, speedy, and adequate remedy, the failure to first take
recourse to is usually regarded as fatal omission.
But Bancommerce invoked certain recognized exceptions to the rule.12 It had to forego the filing of
the required motion for reconsideration of the assailed RTC Order because a) there was an urgent
necessity for the CA to resolve the questions it raised and any further delay would prejudice its
interests; b) under the circumstances, a motion for reconsideration would have been useless; c)
Bancommerce had been deprived of its right to due process when the RTC issued the challenged
_______________
12 See Republic v. Bayao, G.R. No. 179492, June 5, 2013, 697 SCRA 313, 323.
540
order ex parte, depriving it of an opportunity to object; and d) the issues raised were purely of law.
In this case, the records amply show that Bancommerce’s action fell within the recognized exceptions
to the need to file a motion for reconsideration before filing a petition for certiorari.
First. The filing of a motion for reconsideration would be redundant since actually the RTC’s August
18, 2010 Order amounts to a denial of Bancommerce motion for reconsideration of the February 19,
2010 Order which granted the application for the issuance of the alias writ. Significantly, the alias writ
of execution itself, the quashal of which was sought by Bancommerce two times (via a motion to
quash the writ and a supplemental motion to quash the writ) derived its existence from the RTC’s
February 19, 2010 Order. Another motion for reconsideration would have been superfluous. The RTC
had not budge on those issues in the preceding incidents. There was no point in repeatedly asking it to
reconsider.
Second. An urgent necessity for the immediate resolution of the case by the CA existed because any
further delay would have greatly prejudiced Bancommerce. The Sheriff had been resolute and
relentless in trying to execute the judgment and dispose of the levied assets of Bancommerce. Indeed,
on April 22, 2010 the Sheriff started garnishing Bancommerce’s deposits in other banks, including
those in Banco de Oro-Salcedo-Legaspi Branch and in the Bank of the Philippine Islands Ayala Paseo
Branch.
Further, the Sheriff forcibly levied on Bancommerce’s Lipa Branch cash on hand amounting to
P1,520,000.00 and deposited the same with the Landbank. He also seized the bank’s computers,
printers, and monitors, causing the temporary cessation of its banking operations in that branch and
putting the bank in an unwarranted danger of a run. Clearly, Bancommerce had valid justifications for
skipping the technical requirement of a motion for reconsideration.
541
Merger and De Facto Merger
Merger is a reorganization of two or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the
other surviving. To put it another way, merger is the absorption of one or more corporations by
another existing corporation, which retains its identity and takes over the rights, privileges,
franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing
corporation continues its existence while the life or lives of the other corporation(s) is or are
terminated.13
The Corporation Code requires the following steps for merger or consolidation:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or
in case of consolidation, all the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks’ notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-
thirds of the members or of stockholders representing two-thirds of the outstanding capital stock will
be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by
the corpo-
_______________
13 Agpalo, Ruben E., Comments on the Corporation Code of the Philippines (1993), citing SEC Opinion
dated June 11, 1986, The SEC Quarterly Bulletin, Vol. XX, Nos. 1 and 2, March-June 1986, pp. 97-98.
542
rate officers of each constituent corporation. These take the place of the articles of incorporation of
the consolidated corporation, or amend the articles of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks
before.
(6) Issuance of certificate of merger or consolidation.14

Indubitably, it is clear that no merger took place between Bancommerce and TRB as the requirements
and procedures for a merger were absent. A merger does not become effective upon the mere
agreement of the constituent corporations.15 All the requirements specified in the law must be
complied with in order for merger to take effect. Section 79 of the Corporation Code further provides
that the merger shall be effective only upon the issuance by the Securities and Exchange Commission
(SEC) of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with distinct corporate personalities.
What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in
consideration of Bancommerce’s assumption of identified recorded liabilities of TRB including booked
contingent accounts. There is no law that prohibits this kind of transaction especially when it is done
openly and with appropriate government approval. Indeed, the dissenting opinions of Justices Jose
Catral Mendoza and Marvic Mario Victor F. Leonen are of the same opinion. In strict sense, no merger
or consolidation took place as the records do not show
_______________
14 Mindanao Savings and Loan Association, Inc. v. Willkom, G.R. No. 178618, October 20, 2010, 634
SCRA 291, 302.
15 Associated Bank v. Court of Appeals, 353 Phil. 702, 712; 291 SCRA 511, 520 (1998).
543
any plan or articles of merger or consolidation. More importantly, the SEC did not issue any certificate
of merger or consolidation.
The dissenting opinion of Justice Mendoza finds, however, that a “de facto” merger existed between
TRB and Bancommerce considering that (1) the P & A Agreement between them involved
substantially all the assets and liabilities of TRB; (2) in an Ex Parte Petition for Issuance of Writ of
Possession filed in a case, Bancommerce qualified TRB, the petitioner, with the words “now known as
Bancommerce”; and (3) the BSP issued a Circular Letter (series of 2002) advising all banks and
nonbank financial intermediaries that the banking activities and transaction of TRB and Bancommerce
were consolidated and that the latter continued the operations of the former.
The idea of a de facto merger came about because, prior to the present Corporation Code, no law
authorized the merger or consolidation of Philippine Corporations, except insurance companies,
railway corporations, and public utilities.16 And, except in the case of insurance corporations, no
procedure existed for bringing about a merger.17 Still, the Supreme Court held in Reyes v. Blouse,18
that authority to merge or consolidate can be derived from Section 28½ (now Section 40) of the
former Corporation Law which provides, among others, that a corporation may “sell, exchange, lease
or otherwise dispose of all or substantially all of its property and assets” if the board of directors is so
authorized by the affirmative vote of the stockholders holding at least two-thirds of the voting power.
The words “or otherwise dispose of,” according to the Supreme Court, is very broad and in a sense,
covers a merger or consolidation.
_______________
16 Campos, Jose Jr., The Corporation Code: Comments, Notes and Selected Cases (1990).
17 Id.
18 91 Phil. 305 (1952).
544
But the facts in Reyes show that the Board of Directors of the Corporation being dissolved clearly
intended to be merged into the other corporations. Said this Court:
It is apparent that the purpose of the resolution is not to dissolve the [company] but merely to
transfer its assets to a new corporation in exchange for its corporation stock. This intent is clearly
deducible from the provision that the [company] will not be dissolved but will continue existing until
its stockholders decide to dissolve the same. This comes squarely within the purview of Section 28½ of
the corporation law which provides, among others, that a corporation may sell, exchange, lease, or
otherwise dispose of all its property and assets, including its good will, upon such terms and
conditions as its Board of Directors may deem expedient when authorized by the affirmative vote of
the shareholders holding at least 2/3 of the voting power. [The phrase] “or otherwise dispose of” is
very broad and in a sense covers a merger or consolidation.”19
In his book, Philippine Corporate Law,20 Dean Cesar Villanueva explained that under the Corporation
Code, “a de facto merger can be pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the acquiring corporation. The
acquiring corporation would end up with the business enterprise of the target corporation; whereas,
the target corporation would end up with basically its only remaining assets being the shares of stock
of the acquiring corporation.” (Emphasis supplied)
No de facto merger took place in the present case simply because the TRB owners did not get in
exchange for the bank’s assets and liabilities an equivalent value in Bancommerce shares of stock.
Bancommerce and TRB agreed with
_______________
19 Id., at p. 309.
20 2001 ed., p. 616.
545
BSP approval to exclude from the sale the TRB’s contingent judicial liabilities, including those owing to
RPN, et al.21
The Bureau of Internal Revenue (BIR) treated the transaction between the two banks purely as a sale
of specified assets and liabilities when it rendered its opinion22 on the tax consequences of the
transaction given that there is a difference in tax treatment between a sale and a merger or
consolidation.
Indubitably, since the transaction between TRB and Bancommerce was neither a merger nor a de
facto merger but a mere “sale of assets with assumption of liabilities,” the next question before the
Court is whether or not the RTC could regard Bancommerce as RPN, et al.’s judgment debtor.
It is pointed out that under common law,23 if one corporation sells or otherwise transfers all its assets
to another corporation, the latter is not liable for the debts and liabilities of the transferor if it has
acted in good faith and has paid adequate consideration for the assets, except: (1) where the
purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in
order to escape liability for such debts.24
But, in the first place, common law has no application in this jurisdiction where existing statutes
governing the situation are in place. Secondly, none of the cited exceptions apply to this case.
1. Bancommerce agreed to assume those liabilities of TRB that are specified in their P & A
Agreement. That agreement specifically excluded TRB’s contingent liabilities that the
_______________
21 Rollo, pp. 93-97.
22 Id.
23 Supra note 16.
24 Edward J. Nell Company v. Pacific Farms, Inc., 122 Phil. 825, 827; 15 SCRA 415, 417 (1965).
546
latter might have arising from pending litigations in court, including the claims of respondent RPN, et
al. The pertinent provision of the P & A provides:
Article II
CONSIDERATION: ASSUMPTION OF LIABILITIES
In consideration of the sale of identified recorded assets and properties covered by this Agreement,
BANCOMMERCE shall assume identified recorded TRB’s liabilities including booked contingent
liabilities as listed and referred to in its Consolidated Statement of Condition as of August 31, 2001, in
the total amount of PESOS: TEN BILLION FOUR HUNDRED ONE MILLION FOUR HUNDRED THIRTY SIX
THOUSAND (P10,410,436,000.00), provided that the liabilities so assumed shall not include:
xxxx
2. Items in litigation, both actual and prospective, against TRB which include but not limited to the
following:
2.1. Claims of sugar planters for alleged undervaluation of sugar export sales x x x;
2.2. Claims of the Republic of the Philippines for peso-denominated certificates supposed to have
been placed by the Marcos family with TRB;
2.3. Other liabilities not included in said Consolidated Statement of Condition; and
2.4. Liabilities accruing after the effectivity date of this Agreement that were not incurred in the
ordinary course of business.25 (Underscoring supplied)
_______________
25 Rollo, pp. 80-81.
547
2. As already pointed out above, the sale did not amount to merger or de facto merger of
Bancommerce and TRB since the elements required of both were not present.
3. The evidence in this case fails to show that Bancommerce was a mere continuation of TRB. TRB
retained its separate and distinct identity after the purchase. Although it subsequently changed its
name to Traders Royal Holding’s, Inc. such change did not result in its dissolution. “The changing of
the name of a corporation is no more than creation of a corporation than the changing of the name of
a natural person is the begetting of a natural person. The act, in both cases, would seem to be what
the language which we use to designate it imports — a change of name and not a change of being.”26
As such, Bancommerce and TRB remained separate corporations.
4. To protect contingent claims, the BSP directed Bancommerce and TRB to put up P50 million in
escrow with another bank. It was the BSP, not Bancommerce that fixed the amount of the escrow.
Consequently, it cannot be said that the latter bank acted in bad faith with respect to the excluded
liabilities. They did not enter into the P & A Agreement to enable TRB to escape from its liability to
creditors with pending court cases.
Further, even without the escrow, TRB continued to be liable to its creditors although under its new
name. Parenthetically, the P & A Agreement shows that Bancommerce acquired greater amount of
TRB liabilities than assets. Article II of the P & A Agreement shows that Bancommerce assumed total
liabilities of P10,401,436,000.00 while it received total assets of only P10,262,154,000.00. This proves
the arms- length quality of the transaction.
The dissenting opinion of Justice Mendoza cites certain instances indicating the existence of a de facto
merger in this
_______________
26 Philippine First Insurance Co., Inc. v. Hartigan, No. L-26370, July 31, 1970, 34 SCRA 252, 266.
548
case. One of these is the fact that the P & A Agreement involved substantially all the assets and
liabilities of TRB. But while this is true, such fact alone would not prove the existence of a de facto
merger because a corporation “does not really lose its juridical entity”27 on account of such sale.
Actually, the law allows a corporation to “sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its properties and assets including its goodwill” to another
corporation.28 This is not merger because it recognizes the separate existence of the two
corporations that transact the sale.
The dissenting opinion of Justice Mendoza claims that another proof of a de facto merger is that in a
case, Bancommerce qualified TRB in its Ex Parte Petition for Issuance of Writ of Possession with the
words “now known as Bancommerce.” But paragraph 3 of the Ex Parte Petition shows the context in
which such qualification was made. It reads:29
3. On November 09, 2001, Bank of Commerce and Traders Royal Bank executed and signed a
Purchase and Sale Agreement. The account of the mortgagor was among those acquired under the
agreement. Photocopy of the agreement is hereto attached as Annex “A.”
It is thus clear that the phrase “now known as Bank of Commerce” used in the petition served only to
indicate that Bancommerce is now the former property owner’s creditor that filed the petition for
writ of possession as a result of the P & A Agreement. It does not indicate a merger.
Lastly, the dissenting opinion of Justice Mendoza cited the Circular Letter (series of 2002) issued by
the BSP advising all banks and non-bank financial intermediaries that the banking activities and
transaction of TRB and Bancommerce were
_______________
27 Supra note 20 at p. 246.
28 Corporation Code of the Philippines, Art. 40.
29 CA Rollo (C.A.-G.R. S.P. No. 91258), p. 233.

549
consolidated and that the latter continued the operations of the former as an indication of a de facto
merger. The Circular Letter30 reads:
CIRCULAR LETTER
(Series of 2002)
TO: ALL BANK AND NON-
BANK FINANCIAL INTER-
MEDIARIES
The Securities and Exchange Commission approved on August 15, 2002 the Amendment of the Articles
of Incorporation and By-Laws of Traders Royal Bank on the deletion of the term “banks” and
“banking” from the corporate name and purpose, pursuant to the purchase of assets and assumption
of liabilities of Traders Royal Bank by Bank of Commerce. Accordingly, the bank franchise of Traders
Royal Bank has been automatically revoked and Traders Royal Bank has ceased to operate as a
banking entity.
Effective July 3, 2002, the banking activities and transactions of Bank of Commerce and Traders Royal
Bank have been consolidated and the former has carried their operations since then.
For your information and guidance.
(Sgd.)
ALBERTO V. REYES
Deputy Governor
Indeed, what was “consolidated” per the above letter was the banking activities and transactions of
Bancommerce and TRB, not their corporate existence. The BSP did not remotely suggest a merger of
the two corporations. What controls the relationship between those corporations cannot be the BSP
letter circular, which had been issued without their participa-
_______________
30 Id., at p. 20.
550
tion, but the terms of their P & A Agreement that the BSP approved through its Monetary Board.
Also, in a letter dated November 2, 2005 Atty. Juan De Zuñiga, Jr., Assistant Governor and General
Counsel of the BSP, clarified to the RTC the use of the word “merger” in their January 29, 2003 letter.
According to him, the word “merger” was used “in a very loose sense x x x and merely repeated, for
convenience” the term used by the RTC.31 It further stated that “Atty. Villanueva did not issue any
legal pronouncement in the said letter, which is merely transmittal in nature. Thus it cannot, by any
stretch of construction, be considered as binding on the BSP. What is binding to the BSP is MB Res. 58
referring to the aforementioned transaction between TRB and Bancommerce as a purchase and
assumption agreement.”32
Since there had been no merger, Bancommerce cannot be considered as TRB’s successor-in-interest
and against which the Court’s Decision of October 10, 2002 in G.R. 138510 may be enforced.
Bancommerce did not hold the former TRBs assets in trust for it as to subject them to garnishment for
the satisfaction of the latter’s liabilities to RPN, et al. Bancommerce bought and acquired those assets
and thus, became their absolute owner.
The CA Decision in
C.A.-G.R. S.P. No. 91258
According to the dissenting opinion of Justice Mendoza, the CA Decision dated December 8, 2009 did
not reverse the RTC’s Order causing the issuance of a writ of execution against Bancommerce to
enforce the judgment against TRB. It also argues that the CA did not find grave abuse of discretion on
the RTC’s part when it issued its August 15, 2005 Order granting the issuance of a writ of execution. In
fact, it
_______________
31 Id., at pp. 259-260.
32 Id.
551
affirmed that order. Moreover, it argued that the CA’s modification of the RTC Order merely deleted
an opinion there expressed and not reversed such order.
But it should be the substance of the CA’s modification of the RTC Order that should control, not some
technical flaws that are taken out of context. Clearly, the RTC’s basis for holding Bancommerce liable
to TRB was its finding that TRB had been merged into Bancommerce, making the latter liable for TRB’s
debts to RPN, et al. The CA clearly annulled such finding in its December 8, 2009 Decision in C.A.-G.R.
S.P. No. 91258, thus:
pronounce-ment of respondent Judge in the August 15, 2005 Order that the PSA between TRB and
SO ORDERED.33
Thus, the CA was careful in its decision to restrict the enforcement of the writ of execution only to
“TRB’s properties found in Bancommerce’s possession.” Indeed, the CA clearly said in its decision that
it was not Bancommerce that the RTC Order was being made to answer for TRB’s judgment credit but
“the assets/properties of TRB in the hands of BANCOM.” The CA then went on to state that it is not
prepared, unlike the RTC, to declare the P & A Agreement but a farce or a “mere tool to effectuate a
merger and/or consolidation.” Thus, the CA deleted the RTC’s reliance on such supposed merger or
consolidation between the two as a basis for its questioned order.
_______________
33 Rollo, p. 109.
552
The enforcement, therefore, of the decision in the main case should not include the assets and
properties that Bancommerce acquired from TRB. These have ceased to be assets and properties of
TRB under the terms of the BSP-approved P & A Agreement between them. They are not TRB assets
and properties in the possession of Bancommerce. To make them so would be an unwarranted
departure from the CA’s Decision in C.A.-G.R. S.P. No. 91258.
WHEREFORE, the petition is GRANTED. The assailed Resolution of November 26, 2010 and the
Resolution of February 9, 2011 of the Court of Appeals both in C.A.-G.R. S.P. No. 116704 are REVERSED
and SET ASIDE. Accordingly, the assailed Orders dated February 19, 2010 and August 18, 2010, the
Alias Writ of Execution dated March 9, 2010, all issued by the Regional Trial Court and all orders,
notices of garnishment/levy, or notices of sale and any other action emanating from the Orders dated
February 19, 2010 and August 18, 2010 in Civil Case Q-89-3580 are ANNULLED and SET ASIDE. The
Temporary Restraining Order issued by this Court on April 13, 2011 is hereby made PERMANENT.
SO ORDERED.
Peralta, J., concur.

Velasco, Jr. (Chairperson), J., Please see Concurring Opinion.
Mendoza, J., I dissent. See Dissenting Opinion.
Leonen, J., I dissent. See Separate Opinion.
553
CONCURRING OPINION
VELASCO, JR., J.:
I concur in the ponencia of our esteemed colleague Justice Roberto A. Abad.
The nascent complaint with the Quezon City Regional Trial Court was filed by private respondents
Radio Philippines Network, Inc. (RPN), Intercontinental Broadcasting Corporation (IBC) and Banahaw
Broadcasting Corporation (BBC) against Traders Royal Bank (TRB) and Security Bank and Trust
Company, Inc. (SBTC). On February 17, 1995, the trial court rendered a Decision holding both
defendants liable to the private respondents.
On appeal, the CA absolved SBTC from any liability and held TRB solely liable to private respondents
for damages and costs of suit. The dispositive portion of the April 30, 1999 Decision of the CA in C.A.-
G.R. CV No. 54656 reads, thus:
WHEREFORE, the appealed decision is AFFIRMED with modification in the sense that appellant SBTC is
hereby absolved from any liability. Appellant TRB is solely liable to the appellees for the damages and
costs of suit specified in the dispositive portion of the appealed decision. Costs against appellant TRB.
(Emphasis and underscoring supplied.)
TRB assailed the CA Decision by way of Petition for Review on Certiorari filed before this Court,
entitled Traders Royal Bank v. Radio Philippines Network, Inc., Intercontinental Broadcasting
Corporation and Banahaw Broadcasting Corporation, through the Board of Administrators, and
Security Bank and Trust Company, and docketed as G.R. No. 138510.
554
Pending the resolution of the Petition for Review, TRB entered into a Purchase and Sale Agreement
(PSA) with Bank of Commerce (Bancom) on November 9, 2001.1 Under the PSA, Bancom acquired
identified assets of TRB valued at P10,262,154,000.00 in consideration of Bancom’s assumption of
TRB’s identified liabilities amounting to P10,410,436,000.00. Articles II and III of the PSA read:
ARTICLE II
liabilities as listed and referred to in its Consolidated Statement of Conditions as of August 31, 2001 in
1. Liability for the payment of compensation, retirement pay, separation benefits and any labor
benefit whatsoever arising from incidental to, or connected with employment in, or rendition of
employee services to TRB, whether permanent, regular, temporary, casual or contractual.
2. Items in litigation, both actual and prospective, against TRB which include but are not limited to the
following:
2.1. (Portion of the machine copy submitted to the Court unreadable) x x x particularly the case
entitled Lopez, et al. vs. Traders Royal Bank, et al., docketed as Civil Case No. 00 (unreadable), Bacolod
Regional Trial Court, Branch 41, and Lacson, et al. vs. Benedicto, et al.,
_______________
1 Rollo, pp. 79-92.
555
originally docketed as Civil Case No. 95-9137, Bacolod Regional Trial Court, Branch 44 now pending
appeal before the Supreme Court under S.C. G.R. No. 141508, and other related cases which might be
filed in connection therewith;
2.4. Liabilities accruing after the effectivity date of this Agreement that were not incurred in the
ordinary course of business.
ARTICLE III
EFFECTS AND CONSEQUENCES
The effectivity of this Agreement shall have the following effects and consequences:
1. BANCOMMERCE and TRB shall continue to exist as separate corporations with distinct
personalities;
2. With the transfer of its branching licenses to BANCOMMERCE and upon surrender of its commercial
license to BSP, TRB shall exist as an ordinary corporation placed outside the supervisory jurisdiction of
BSP. To this end, TRB shall cause the amendment of its articles and by-laws to delete the terms “bank”
and “banking” from its corporate name and purpose;
3. There shall be no employer-employee relationship between BANCOMMERCE and the personnel and
officers of TRB.2
_______________
2Id., at pp. 80-81; emphasis supplied.
556
The Bangko Sentral ng Pilipinas (BSP) approved the PSA on the condition that, to answer for any claim
that shall be judicially established, the parties must set up an escrow fund amounting to P50 million to
be kept for 15 years. In compliance with the condition, TRB deposited P50 million with the
Metropolitan Bank and Trust Company (Metrobank) to answer for claims and liabilities of TRB not
covered by its PSA with Bancom.
Further, pursuant to the terms of the PSA, TRB amended its articles of incorporation to change its
name to Royal Traders Holding Co. Inc. (RTH) and to delete the business of banking in its enumerated
purposes.3
On October 10, 2002, this Court rendered a Decision in G.R. No. 138510 and modified the CA Decision
in C.A.-G.R. CV No. 54656 by deleting the award of exemplary damages in favor of private
respondents but granting them attorney’s fees. Otherwise, all other aspects of the CA Decision were
retained and affirmed. The Decision became final and executory on April 9, 2003. Significantly, there
was absolutely no mention of Bancom as the party liable to pay the judgment debt.
In moving for the execution of the final judgment on July 18, 2003, however, private respondents
captioned its motion for execution with “Radio Philippines Network Inc., Intercontinental
Broadcasting Corporation, and Banahaw Broadcasting Corporation, thru Board Administrator vs.
Traders Royal Bank (TRB) [now Bank of Commerce] and Security Bank and Trust Company (SBTC).”4
RTH opposed the execution contending that the execution of the final judgment should be stayed
because, as admitted by the private respondents’ counsel in open court, TRB has no
_______________
3 Id., at pp. 253-266, Certificate of Filing of Amended Articles of Incorporation dated August 15, 2002.
4 Id., at pp. 111-115, Supplemental Motion for Execution dated January 20, 2004; emphasis supplied.
557
more assets and had been merged with Bancom. For its part, Bancom filed a Special Appearance5
similarly opposing the motion for execution on the grounds that (1) the trial court has no jurisdiction
over it as it was only in the title of the Motion for Execution that it was included as a party; and (2)
there was no merger between TRB and Bancom as the latter only acquired certain assets and assumed
certain liabilities of TRB.
Learning of the escrow fund set up with Metrobank, private respondents also moved for the issuance
of a subpoena duces tecum requiring Metrobank to bring the statement of the escrow fund that was
established by TRB. The trial court granted the motion. In compliance with the subpoena, Metrobank
submitted a Cash Transaction Report showing that the fund had already been depleted as of August
2003 with five (5) withdrawals of practically the entire fund made on the same day — June 20, 2003.
On October 1, 2004, the trial court issued a subpoena directing (1) Bancom to bring “the list of
assumed identified recorded assets and liabilities of TRB” under the PSA; and (2) Metrobank to bring
any and all documents relative to the alleged withdrawals from the Escrow Fund.
Bancom and Metrobank separately filed a motion to quash the subpoena. On August 15, 2005, the
trial court issued an Order6 granting private respondents’ motion for execution. It reads:
WHEREFORE, premises considered, plaintiffs’ [RPN, IBC and BBC’s] motion for execution dated 18 July
2003 and supplemental motion for execution dated 20 January 2004, are GRANTED. Accordingly, let a
Writ of Execution be issued to execute the judgment, as modified, against any and all assets of TRB
found anywhere in the Philippines, including those subject
_______________
5 Id., at pp. 116-118.
6 Id., at pp. 119-127.
558
of the merger/consolidation in the guise of the Purchase and Sale Agreement with Bank of Commerce,
and/or against the Escrow Fund established by TRB and Bank of Commerce with the Metropolitan
Bank and Trust Company.
SO ORDERED.40
Assailing the August 15, 2005 Order, Bancom and Metrobank filed separate petitions for certiorari
with the Court of Appeals docketed as C.A.-G.R. S.P. No. 91258 and C.A.-G.R. S.P. No. 94171,
respectively. The petitions were consolidated by the appellate court.
On December 8, 2009, the Court of Appeals rendered a Decision41 holding, viz.:
x x x The Order was so worded that it was not BANCOM itself that was being made to answer but the
assets/properties of TRB in the hands of BANCOM.
We are not prepared though, unlike respondent Judge, to declare the PSA between TRB and BANCOM
as a farce or “a mere tool to effectuate a merger and/or consolidation” of the parties to the PSA.
There is just a dearth of conclusive evidence to support such finding, at least at this point.
Consequently, the statement in the dispositive portion of the assailed August 15, 2005 Order referring
to a merger/
consolidation between TRB and BANCOM be deleted.
With the failure of petitioners METROBANK and BANCOM to prove that the P50 million Escrow Fund
established by TRB was disbursed pursuant to the conditions of the Escrow Agreement, private
respondents RPN, IBC and BBC, as judgment creditors as TRB, had
_______________
7 Id., at p. 127.
8 Id., at pp. 98-109. Penned by Associate Justice Francisco P. Acosta, with Justices Juan Q. Enriquez,
Pampio A. Abarintos, Priscilla Baltazar-Padilla, and Michael P. Elbinias, concurring, Division of Five of
the Tenth Division.
559
the right to claim that the Escrow Fund exists and remained undiminished. There can be no legal
objection then to the August 15, 2005 Order of the respondent Judge directing the issuance of a writ
of execution against the Escrow Fund with which private respondents can proceed to fully satisfy the
judgment in their favor.
xxxx
2005 and February 22, 2006 of the respondent Judge, are AFFIRMED with MODIFICATION that the
Bancom is a “farce or a mere tool to effectuate a merger and/or consolidation between TRB and
BANCOM” is deleted.9
While Metrobank assailed the foregoing CA Decision via a petition for review on certiorari docketed
as G.R. No. 190517 with this Court, Bancom did not pursue a further review of the CA Decision.
Thus, as to be expected, the private respondents filed with the RTC an Ex Parte Urgent Motion (for
issuance of an Alias Writ of Execution) on January 8, 2010.
On February 19, 2010, the RTC granted the Ex Parte Urgent Motion10 and ordered the issuance of an
Alias Writ of Execution in favor of private respondents.
On March 2, 2010, Bancom received a copy of the granting order and so filed an Urgent Motion for
Reconsideration on March 10, 2010.11
It appears, however, that an Alias Writ of Execution had already been issued on March 9, 2010.12
Thus, Bancom filed a Motion to Quash the Alias Writ of Execution on March 16,
_______________
9 Id., at pp. 108-109; emphasis supplied.
10 Id., at pp. 136-138; pp. 149-151.
11 Id., at pp. 139-143.
12 Id., at pp. 144-146.
560
201013 and Supplemental Motion (to Motion to Quash Alias Writ of execution) on April 19, 2010.14
On November 3, 2010, Bancom received a copy of the August 18, 2010 Order15 of the RTC denying
Bancom’s Urgent Motion for Reconsideration, Motion to Quash and Supplemental Motion to Quash.
Bancom forthwith filed a petition for certiorari16 with the CA assailing the February 19, 2010 and
August 18, 2010 Orders of the trial court.
In a Resolution dated November 26, 2010,17 however, the appellate court dismissed Bancom’s
petition outright for its supposed failure to file a motion for reconsideration.18 Its motion for
reconsideration having been denied by the appellate court,19 Bancom came to this Court on a
petition for review claiming that the CA erred in dismissing its petition for certiorari outright and in
sustaining the orders of the trial court allowing the final judgment rendered against TRB to be
executed against Bancom, a stranger to the original case.
The assailed resolutions of the Court of Appeals should be overturned and the execution of the final
judgment against Bancom should be invalidated, as the ponencia did.
Every person must be heard and given his day in court before a judgment may be enforced against
him. This rule is so elementary and basic that it is enshrined in the first section of the Bill of Rights of
our Constitution:
_______________
13 Id., at pp. 152-156.
14 Id., at pp. 180-187.
15 Id., at pp. 208-221.
16 Id., at pp. 221-249.
17 Id., at pp. 59-62. Penned by Associate Justice Celia C. Librea-Leagogo with Associate Justices
Remedios A. Salazar-Fernando and Michael P. Elbinias, concurring, Second Division.
18 Id., at pp. 63-72.
19 Id., at pp. 74-78, in a Resolution dated February 9, 2011.
561
SECTION 1. No person shall be deprived of life, liberty or property without due process of law, nor
shall any person be denied the equal protection of the laws. (Emphasis supplied.)
Thus, the Rules of Court, in obvious fidelity to the imperatives of due process guarantee, permits only
the execution of judgments against the judgment obligor and his properties, as plainly provided in
Rule 39 of the Rules of Court:
SECTION 8. Issuance, form, and contents of a writ of execution.—The writ of execution shall: (1)
issue in the name of the Republic of the Philippines from the court which granted the motion; (2) state
the name of the court, the case number and title, the dispositive part of the subject judgment or
order; and (3) require the sheriff or other proper officer to whom it is directed to enforce the writ
according to its terms, in the manner hereinafter provided:
(a) If the execution be against the property of the judgment obligor, to satisfy the judgment, with
interest, out of the real or personal property of such judgment obligor;
(b) If it be against real or personal property in the hand of personal representatives, heirs,
devisees, legatees, tenants, or trustees, of the judgment obligor, to satisfy the judgment, with
interest, out of such property;
xxxx
SECTION 9. Execution of judgments for money, how enforced.—(a) Immediate payment on

demand.—The officers shall enforce an execution of a judgment for money by demanding from the
judgment obligor the immediate payment of the full amount stated in the writ of execution and all
lawful fees. The judgment obligor shall pay in cash, certified bank check payable to the judgment
obligee, or any other form of payment acceptable to the latter, the amount of the judgment debt
under
562
proper receipt directly to the judgment obligee or his authorized representative if present at the time
of payment. x x x
If the judgment obligee or his authorized representative is not present to receive payment, the
judgment obligor shall deliver the aforesaid payment to the executing sheriff. x x x
xxxx
(b) Satisfaction by levy.—If the judgment obligor cannot pay all or part of the obligation in cash,
certified bank check or other mode of payment acceptable to the judgment obligee, the officer shall
levy upon the properties of the judgment obligor of every kind and nature whatsoever which may be
disposed of for value and otherwise exempt from execution x x x.
(c) Garnishment of debts and credits.—The officer may levy on debts due the judgment obligor and
other credits, including bank deposits, financial interests, royalties, commissions and other personal
property not capable of manual delivery in the possession or control of third parties. x x x (emphasis
supplied)
Thus, this Court has ruled that execution may issue only upon a person who is a party to the action,
and not against one who did not have his day in court. In Atilano v. Asaali,53 We held thus:
It is well-settled that no man shall be affected by any proceeding to which he is a stranger, and
strangers to a case are not bound by a judgment rendered by the court. Execution of a judgment can
only be issued against
_______________
20 G.R. No. 174982, September 10, 2012, 680 SCRA 345, 351; citing Fermin v. Hon. Antonio Esteves,
G.R. No. 147977, March 26, 2008, 549 SCRA 424, 428; Panotes v. City Townhouse Development
Corporation, G.R. No. 154739, January 23, 2007, 512 SCRA 269; Mariculum Mining Corporation v.
Brion, G.R. Nos. 157696-97, February 9, 2006, 482 SCRA 8.
563
one who is a party to the action, and not against one who, not being a party thereto, did not have his
day in court. Due process dictates that a court decision can only bind a party to the litigation and not
against innocent third parties.
At present, it is plain from the foregoing recitation of facts that petitioner Bancom was never a party
to the original case. It was not the respondent, not the judgment obligor, and not the person found by
this Court liable to pay for any indebtedness to the private respondents. To hold Bancom liable upon
execution for a liability charged against another existing entity is the height of injustice.
It is best to recall that Bancom was dragged into this affray after the Decision of this Court in G.R. No.
138510 attained finality when private respondents conveniently, but without much of an explanation,
inserted the bracketed phrase “now Bank of Commerce” after TRB’s name on the caption of its
motion for execution. Needless to state, this is not the lawful manner under the Rules of Court in
impleading a person to a case. Jurisdiction over the person still requires the existence of a coercive
process issued by the court to such party or its voluntary submission to the court. Neither had been
done in this case.21 Note that Bancom made its entry to the case but by way of special appearance
precisely to question the trial court’s jurisdiction over its person. Thus, without any summons issued
by the trial court, jurisdiction over Bancom’s person had never been obtained by the trial court in this
case. Any pronouncement against it is void for lack of jurisdiction.
What is more, with respect to the liability owing to private respondents, what had attained finality
and had been rendered executory is the judgment of this Court declaring TRB liable to private
respondents. By the principle of the finality
_______________
21 Veneracion v. Mancilla, G.R. No. 158238, July 20, 2006, 495 SCRA 712, 726.
564
of judgment, this is what the trial court should have executed. Nothing more.
In the execution of final and executory judgments, the trial court is bound by the terms of the
decision.22 Thus, to order the execution against a nonparty to an already concluded action is beyond
the powers of the trial court and ergo illegal.It needs to be emphasized that once a judgment becomes
final and executory, that judgment may not be amended. Upon finality of the judgment, however, the
courts lose the jurisdiction to amend, modify or alter the same. The judgment can neither be
amended nor altered after it has become final and executory.23 This is the principle of immutability of
final judgment, which We emphasized in Fermin v. Esteves:24
The generally accepted principle is that no man shall be affected by any proceeding to which he is a
stranger, and strangers to a case are not bound by a judgment rendered by the court. Execution of a
judgment can only be issued against one who is a party to the action, and not against one who, not
being a party in the case, did not have his day in court. Due process requires that a court decision can
only bind a party to the litigation and not against one who did not have his day in court.
xxxx
The Court recognizes the finality of the trial court’s Decision in Civil Case No. 925-R x x x. Since
petitioners are not parties to Civil Case No. 925-R, respondent has to file the proper action against
petitioners to enforce his property rights within the bounds of the law and our
_______________
22 Doliente v. Blanco, No. L-3525, November 29, 1950.

23 Aguila v. Baldovizo, G.R. No. 163186, February 28, 2007, 517 SCRA 91, 97.
24 G.R. No. 147977, March 26, 2008, 549 SCRA 424, 428-429, 431-432.
565
rules. Petitioner’s right to possession, if any, should be threshed out in a proper court proceeding.
Private respondents had impudently tried to circumvent the above principle by the simple expedience
of changing the caption of its motion for execution. This simply cannot, and should not, be allowed.
It is now up to this Court to correct the procedural misstep taken by the trial court when it allowed
the crafty inclusion of a non-party to a final judgment that led to a breach of a constitutional rule on
due process. This Court is duty-bound to ensure that the execution of a final decision is made within
the confines of its pronouncements. In QBE Insurance v. Laviña,25 this Court admonished the
respondent for issuing a writ of execution beyond the bounds of the decision and against a stranger to
a case, viz.:
It must be noted that QBE Insurance was not a party to Civil Case No. 68287 wherein the writ of
execution was issued. Neither was it included in the Writ of Execution issued by Judge Laviña.
Generally accepted is the principle that no man shall be affected by any proceeding to which he is a
stranger, and strangers to a case are not bound by judgment rendered by the court. In the same
manner an execution can be issued only against a party and not against one who did not have his day
in court. In Lorenzana v. Cayetano, http://sc.judiciary.gov.ph/jurisprudence/2007/october2007/RTJ-
06-1971.htm-_ftn16 this Court held that only real parties-in-interest in an action are bound by
judgment therein and by writs of execution and demolition issued pursuant thereto.
Indeed, a judgment cannot bind persons who are not parties to the action. It is elementary that
strangers to a case are not bound by the judgment rendered by the court and such judgment is not
available as an adjudica-
_______________
25 A.M. No. RTJ-06-1971, October 17, 2007, 536 SCRA 372.
566
tion either against or in favor of such other person. A decision of a court will not operate to divest the
rights of a person who has not and has never been a party to a litigation, either as plaintiff or as
defendant. Verily, execution of a judgment can only be issued against one who is a party to the action,
and not against one who, not being a party to the action, has not yet had his day in court. That
execution may only be effected against the property of the judgment debtor, who must necessarily be
a party to the case.
The writ of execution must conform to the judgment which is to be executed, as it may not vary the
terms of the judgment it seeks to enforce. Nor may it go beyond the terms of the judgment which is
sought to be executed. Where the execution is not in harmony with the judgment which gives it life
and exceeds it, it has pro tanto no validity. To maintain otherwise would be to ignore the
constitutional provision against depriving a person of his property without due process of law.26
In this case, to repeat for added emphasis, this Court found TRB liable to private respondents. Now,
TRB still exists, albeit as Royal Traders Holding Co. Inc. There is, therefore, no rhyme or reason for
looking elsewhere for the satisfaction of its liability.
It should be noted, however, that the said PSA was executed by TRB and Bancom in November 2001,
more than a year before the finality of this Court’s judgment against TRB. The private respondents
had all the opportunity to apprise this Court of the existence of such PSA and the consequences it may
have. Private respondents also had more than adequate time to annotate its claim on the properties
of TRB that were the subject of the PSA. It did neither of these things. Instead, after the execution of
the PSA, its approval
_______________
26 Id., at pp. 385-386; emphasis supplied.
567
by the BSP and the Bureau of Internal Revenue (BIR), and the finality of the judgment against TRB, the
private respondents simply inserted the phrase “Traders Royal Bank (TRB) [now Bank of Commerce]”
on the caption of its motion for execution. Even this phrase is not accurate.
First, as stated before, Traders Royal Bank still exists and is now known as Royal Traders Holding Co.
Inc., not Bank of Commerce. Second, the terms of the PSA do not justify a finding that TRB is “now
Bank of Commerce.” It is clear from the provisions of the PSA that “BANCOMMERCE and TRB shall
continue to exist as separate corporations with distinct personalities.” Third, the still standing rule is
that where one corporation sells or transfers its assets to another corporation, the latter is not liable
for the debts and liabilities of the transfer.27 A corporation has a personality separate and distinct
from any other legal entity. Being separate entities, neither the properties nor liabilities of one can be
considered the properties or liabilities of the other.
Indeed, the rule against the transfer of liabilities to the purchaser corporation does not apply when
any of the following conditions exists: (1) the purchaser corporation expressly or impliedly agrees to
assume the debts, (2) where the transaction amounts to a consolidation or merger of the
corporations, (3) when the corporation is merely a continuation of the selling corporation, and (4)
where the transaction is fraudulently entered into in order to escape liability for those debts.28
Even if this Court is inclined to verify the existence of these circumstances (in violation of the principle
of immutability of
_______________
27 Philippine National Bank and National Sugar Development Corporation v. Andrada Electric and
Engineering Company, G.R. No. 142936, April 17, 2002, 381 SCRA 244; Jiao, et al. v. NLRC, G.R. No.
182331, April 18, 2012, 670 SCRA 184.
28 The Edward J. Nell Company v. Pacific Farms, Inc., No. L-20850, November 29, 1965, 15 SCRA 415,
417; citing Fletcher Cyclopedia Corporations, Vol. XV, Sec. 7122, pp. 160-161.
568
judgments, in disregard of the trial court’s want of jurisdiction over Bancom, and contrary to the
principle that this Court is not a trier of facts), a closer look will reveal that none of these exceptional
circumstances is availing.
The absence of the first circumstance, the supposed assumption of debts made by Bancom, can
readily be verified from the terms of the PSA concluded by TRB and Bancom. Unlike in Caltex (Phils.),
Inc. v. PNOC Shipping & Transport Corp.,29 where the agreement entered by PNOC Shipping &
Transport Corporation (PSTC) with LUSTEVECO “specifically mentions the case between LUSTEVECO
and Caltex, docketed as C.A.-G.R. CV No. 62613, then pending before the IAC,” under the PSA, Bancom
categorically assumed only identified and limited liabilities. Among those clearly excluded from the
assumed liabilities are “[i]tems in litigation, both actual and prospective, against TRB.” At the time of
the execution of the PSA, the liability of TRB to private respondents was the subject of an actual
litigation. It is, therefore, excluded from the liabilities assumed by Bancom. At best, it is more
plausible to conclude that the liability owing to private respondents is covered by the escrow fund set
up by TRB with Metrobank.
To find the existence of a de facto merger, this Court must at least ascertain the presence of the most
essential element of a merger apart from compliance with the legalities set forth under the law: the
dissolution of the separate judicial personality of the target corporation in fact, if not in law. It bears
to stress that while this Court has recognized the existence of a de facto merger in this jurisdiction
resulting from the transfer of assets and assumption of the liabilities of one corporation by another,
the recognition had been made through the rubric of piercing the veil of corporate fiction,30 i.e.,
control over both
_______________
29 530 Phil. 149, 158; 498 SCRA 400, 410 (2006).
30 Aquino, Timoteo B., Philippine Corporate Law Compendium, 2006 ed., p. 375.
569
corporations is lodged in the same person/s and that control is used to commit fraud or wrong.31 This
is usually done by the transfer of all the assets of a corporation in exchange for the stocks of another
corporation.32
In this case, there is no indication, and the private respondents adduced no proof, that TRB and
Bancom are subject to the same control and that their corporate personalities are mere instruments
in committing a wrong. In fact, private respondents did not allege grounds, or ask the courts to
declare the need for piercing the separate corporate veils of TRB and Bancom.
It is axiomatic that he who alleges an affirmative event, like the existence of the supposed merger in
this case, must show proof in support thereof. Here, the burden to explain and to prove or disprove
the existence of the merger should be with private respondents. If a shift of the burden of proof is at
all justified, the shift should be taken against TRB, not Bancom, as it was TRB that advanced the
existence of this supposed “supervening event” and it is TRB that will in effect be exonerated from
satisfying the judgment against it.
In Pacific Mills, Inc. v. NLRC,33 this Court directed the party alleging a supervening event that may
affect the execution of a judgment to prove the same by sufficient evidence:
There can be no question that the supervening events cited by petitioner would certainly affect the
computation of the award in the decision of the NLRC. It is the duty of the NLRC to consider the same
and inquire
_______________
31 See “G” Holdings, Inc. v. National Mines and Allied Workers Union Local 103, G.R. No. 160236,
October 16, 2009, 604 SCRA 73; citing Concept Builders, Inc. v. National Labor Relations Commission,
G.R. No. 108734, May 29, 1996, 257 SCRA 149, 159.
32 See Philippine National Bank v. Hydro Resources Contractors Corporation, G.R. Nos. 167530,
167561 & 167603, March 13, 2013, 693 SCRA 294.
33 206 Phil. 135, 137-138; 181 SCRA 130, 132 (1990).
570
into the correctness of the execution, as such supervening events may affect such execution.
xxxx
WHEREFORE, the petition is GRANTED. The questioned orders of the National Labor Relations
Commission dated May 5, 1989 and June 20, 1989 are both set aside. The said Commissioner is
directed to immediately give petitioner its day in court to present its evidence on the supervening
events that would affect the award and thereafter to immediately recompute the award for private
respondents on the basis of the judgment which should be promptly satisfied. No costs. (emphasis
supplied)
As neither private respondents nor TRB proffered any evidence or alleged any ground to justify the
application of the doctrine of piercing the corporate veils as conduit to finding a de facto merger
between TRB and Bancom, there is no basis to justify doing so.
In fact, in Our November 13, 2013 Decision in G.R. No. 180529 entitled Commissioner of Internal
Revenue v. Bank of Commerce,34 where the same PSA between TRB and Bancom had been
scrutinized to resolve the issue of whether Bancom can be held liable for the liabilities of TRB,
sustaining the findings of the BIR and Court of Tax Appeals (CTA), this Court categorically ruled in the
negative, viz.:
As the CTA En Banc stated in its Amended Decision, the issue boils down to whether or not BOC is
liable for the deficiency DST of TRB for taxable year 1999.
[T]he CTA 1st Division’s Resolution in Traders Royal Bank, explicitly addressed the issue of merger
between BOC and TRB. The CTA 1st Division, relying on the provisions in both the Purchase and Sale
Agreement and the Tax Code, determined that the agreement did not result in a merger, to wit:
_______________
34 G.R. No. 180529, November 13, 2013, 709 SCRA 390.

571
xxxx
Thus, when the CTA En Banc took into consideration the above ruling in its Amended Decision, it
necessarily affirmed the findings of the CTA 1st Division and found them to be correct. This Court
likewise finds the foregoing ruling to be correct. The CTA 1st Division was spot on when it interpreted
the Purchase and Sale Agreement to be just that and not a merger.
The Purchase and Sale Agreement, the document that is supposed to have tied BOC and TRB together,
was replete with provisions that clearly stated the intent of the parties and the purpose of its
execution, viz.:
1. Article I of the Purchase and Sale Agreement set the terms of the assets sold to BOC, while Article
II was about the consideration for those assets. Moreover, it was explicitly stated that liabilities not
included in the Consolidated Statement of Condition were excluded from the liabilities BOC was to
assume, to wit:
xxxx
Moreover, the second whereas clause, which served as the premise for the subsequent terms in the
agreement, stated that the sale of TRB’s assets to BOC were in consideration of BOC’s assumption of
some of TRB’s liabilities, viz.:
xxxx
The clear terms of the above agreement did not escape the CIR itself when it issued BIR Ruling No. 10-
2006, wherein it was concluded that the Purchase and Sale Agreement did not result in a merger
between BOC and TRB.
xxxx
A perusal of BIR Ruling No. 10-2006 will show that the CIR ruled on the issue of merger without any
reference to TRB’s subject tax liabilities. The relevant portions of such ruling are quoted below:
572
One distinctive characteristic for a merger to exist under the second part of [Section 40(C)(b) of the
1997 NIRC] is that, it is not enough for a corporation to acquire all or substantially all the properties of
another corporation but it is also necessary that such acquisition is solely for stock of the absorbing
corporation. Stated differently, the acquiring corporation will issue a block of shares equal to the net
asset value transferred, which stocks are in turn distributed to the stockholders of the absorbed
corporation in proportion to the respective share.
After a careful perusal of the facts presented as well as the details of the instant case, it is observed by
this Office that the transaction was purely concerning acquisition and assumption by [BOC] of the
recorded liabilities of TRB. The [Purchase and Sale] Agreement did not mention with respect to the
issuance of shares of stock of [BOC] in favor of the stockholders of TRB. Such transaction is absent of
the requisite of a stock transfer and same belies the existence of a merger. As such, this Office
considers the Agreement between [BOC] and TRB as one of “a sale of assets with an assumption of
liabilities rather than ‘merger.’”
xxxx
Clearly, the CIR, in BIR Ruling No. 10-2006, ruled on the issue of merger without taking into
consideration TRB’s pending tax deficiencies. The ruling was based on the Purchase and Sale
Agreement, factual evidence on the status of both companies, and the Tax Code provision on merger.
The CIR’s knowledge then of TRB’s tax deficiencies would not be material as to affect the CIR’s ruling.
The resolution of the issue on merger depended on the agreement between TRB and BOC, as detailed
in the Purchase and Sale Agreement, and not contingent on TRB’s tax liabilities.
573
In Chinese Young Men’s Christian Association of The Philippine Islands Doing Business Under The
Name Of Manila Downtown YMCA v. Remington Steel Corporation,35 this Court explained the
concept of stare decisis et non quieta movere, thus:
Under the doctrine, when the Supreme Court has once laid down a principle of law as applicable to a
certain state of facts, it will adhere to that principle, and apply it to all future cases, where facts are
substantially the same.
The doctrine of stare decisis is based upon the legal principle or rule involved and not upon judgment
which results therefrom. In this particular sense stare decisis differs from res judicata which is based
upon the judgment.
The doctrine of stare decisis is one of policy grounded on the necessity for securing certainty and
stability of judicial decisions, thus:
Time and again, the court has held that it is a very desirable and necessary judicial practice that when
a court has laid down a principle of law as applicable to a certain state of facts, it will adhere to that
principle and apply it to all future cases in which the facts are substantially the same. Stare decisis et
non quieta movere. Stand by the decisions and disturb not what is settled. Stare decisis simply means
that for the sake of certainty, a conclusion reached in one case should be applied to those that follow
if the facts are substantially the same, even though the parties may be different. It proceeds from the
first principle of justice that, absent any powerful countervailing considerations, like cases ought to be
de-
_______________
35 G.R. No. 159422, March 28, 2008, 550 SCRA 180, 197-198.
574
cided alike. Thus, where the same questions relating to the same event have been put forward by the
parties similarly situated as in a previous case litigated and decided by a competent court, the rule of
stare decisis is a bar to any attempt to relitigate the same issue.
Based on the foregoing, the issue of existence of merger, whether de jure or de facto, between TRB
and Bancom under the PSA is now foreclosed. As the issue in G.R. No. 180529 is substantially similar,
if not identical, to the issue in the present case, Our ruling therein bars, following the stare decisis
rule, any attempt to relitigate the issue already decided therein.
The third exception to the rule on the nonaccountability of a purchasing corporation is similarly
nonexistent in the present case. Once again, TRB still exists albeit under a different name — RTH.
Bancom could not, therefore, be considered to have continued TRB when TRB still exists as RTH. It is
axiomatic that as a corporation is imbued with legal personality, it has the right of succession and it
incurs its own liabilities and is legally responsible for payment of its obligations.36
As to the fourth exception, We need only recall that the PSA had been given the stamp of approval by
both the BSP and the BIR37 as a valid agreement that We cannot plausibly conclude that the same
had been entered to defraud creditors.
_______________
36 Philippine National Bank v. Hydro Resources Contractors Corporation, G.R. Nos. 167530, 167561 &
167603, March 13, 2013, 693 SCRA 294; citing Rands, William, Domination of a Subsidiary by a Parent,
32 Ind. L. Rev. 421, 423 (1999), citing Philip I. Blumberg, Limited Liability and Corporate Groups, 11 J.
Corp. L. 573, 575-576 (1986) and Stephen Presser, Thwarting the Killing of the Corporation: Limited
Liability, Democracy and Economics, 87 NW. U. L. Rev. 148, 155 (1992).
37 Rollo, pp. 93-97. See BIR Revenue Ruling 4010-2006 dated October 6, 2006.
575
More importantly, by the very terms of the PSA, the transfer of the assets from TRB to Bancom had
not been exchanged for assets of equal or more value. Rather, the transfer of assets had been
executed precisely in exchange for the assumption of identified debts and liabilities and not to escape
liability. That by itself negates the existence of the fourth exception, i.e., the PSA had been entered
into to escape the payment of debts.
Considering the absence of any of the recognized circumstances that would justify the execution of a
final judgment against a non-party to the case, it is my considered view that the CA should have
exercised its sound judicial discretion when it dismissed petitioner’s certiorari action. The appellate
court should have carefully weighed the issues presented and grievances presented by petitioner vis-
à-vis the supposed procedural defect of its petition. The CA should have ruled in the interest of
substantial justice and petitioner’s constitutionally-guaranteed right to due process and relaxed the
general rule requiring the filing of a motion for reconsideration in order to prevent an apparent
mockery of justice in this case.
In fact, the CA need not have resorted to the exceptions to the rule requiring the filing of a motion for
reconsideration because petitioner did file a motion for reconsideration. A scrutiny of the records will
immediately reveal that the petition for certiorari interposed with the appellate court principally
questioned the February 19, 2010 order of the trial court, which granted the private respondents’ ex
parte urgent motion for the issuance of an alias writ of execution. Before filing a petition for certiorari
immediately assailing this order, Bancom filed an Urgent Motion for Reconsideration, which was in
turn denied by the trial court’s August 18, 2010 Order. There was, therefore, no need for Bancom to
file yet another motion for reconsideration before it can lodge a petition for certiorari with the
appellate court.
For all the foregoing, I vote to GRANT the petition, SET ASIDE the November 26, 2010 and February 9,
2011 Resolu-
576
tions of the Court of Appeals, and NULLIFY the Alias Writ of Execution issued by the Regional Trial
Court as mandated in its February 19, 2010 and August 18, 2010 Orders.
DISSENTING OPINION
MENDOZA, J.:
With all due respect to my colleagues, I register my dissent from the majority decision that the writ of
execution may not be enforced against petitioner Bancommerce.
It is my considered view that an injustice has been committed against the respondents, Radio
Philippines Network, Inc., Intercontinental Broadcasting Corporation, and Banahaw Broadcasting
Corporation (respondent networks).
The Facts
The petition stemmed from the decision of the Court in G.R. No. 138510, dated October 10, 2002,
entitled Traders Royal Bank v. Radio Philippines Network, Inc., Intercontinental Broadcasting
Corporation and Banahaw Broadcasting Corporation, through the Board of Administrators, and
Security Bank and Trust Company,1 which became final and executory on April 9, 2003. As recited by
the Court in the said case, the facts are as follows:
On April 15, 1985, the Bureau of Internal Revenue (BIR) assessed plaintiffs Radio Philippines Network,
Inc., (RPN), Intercontinental Broadcasting Corporation (IBC) and Banahaw Broadcasting Corporation
(BBC) of their tax obligations for the taxable years 1978 to 1983.
On March 25, 1987, Mrs. Lourdes C. Vera (Mrs. Vera), plaintiffs’ comptroller, sent a letter to
_______________
1 439 Phil. 475-486; 390 SCRA 608 (2002).
577
the BIR requesting settlement of the plaintiff’s tax obligations.
The BIR granted the request and, accordingly, on June 26, 1986, plaintiffs purchased from defendant
Traders Royal Bank (TRB) three (3) manager’s checks to be used as payment for their tax liabilities, to
wit:
Check Number Amount

30652 P4,155,835.00
30650 P3,949,406.12
30796 P1,685,475.75
Defendant TRB, through Aida Nuñez, TRB Branch Manager at Broadcast City Branch, turned over the
checks to Mrs. Vera who was supposed to deliver the same to the BIR in payment of plaintiffs’ taxes.
Sometime in September 1988, the BIR again assessed plaintiffs for their tax liabilities for the years
1979-82. It was then they discovered that the three (3) manager’s checks (Nos. 30652, 30650 and
30796) intended as payment for their taxes were never delivered nor paid to the BIR by Mrs. Vera.
Instead, the checks were presented for payment by unknown persons to defendant Security Bank and
Trust Company (SBTC), Taytay Branch, as shown by the bank’s routing symbol transit number (BRSTN
01140027) or clearing code stamped on the reverse sides of the checks.
Meanwhile, for failure of the plaintiffs to settle their obligations, the BIR issued warrants of levy,
distraint and garnishment against them. Thus, they were constrained to
578
enter into a compromise and paid BIR P18,962,225.25 in settlement of their unpaid deficiency taxes.
Thereafter, plaintiffs sent letters to both defendants, demanding that the amounts covered by the
checks be reimbursed or credited to their account. The defendants refused, hence, the instant suit.2
On February 17, 1995, the Regional Trial Court, Branch 98, Quezon City (RTC), rendered its judgment in
Civil Case No. Q-89-3580, entitled Radio Philippines Network, Inc., et al. v. Traders Royal Bank, et al.
favoring the plaintiffs Radio Philippines Network, Inc. (RPN), International Broadcasting Corporation
(IBC) and Banahaw Broadcasting Corporation (BBC) and adjudging the defendants, Traders Royal Bank
(TRB) and Security Bank and Trust Company (SBTC), liable in the total amount of P9,790,716.87 plus
12% legal interest among others. The dispositive portion reads:
WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered in favor of

plaintiffs and against the defendants by:
a) Condemning the defendant Traders Royal Bank to pay actual damages in the sum of Nine Million
Seven Hundred Ninety Thousand and Seven Hundred Sixteen Pesos and Eighty Seven Centavos
(P9,790,716.87) broken down as follows:
1) To plaintiff RPN-9 – P4,155,835.00
2) To plaintiff IBC-13 – P3,949,406.12
3) To plaintiff BBC-2 – P1,685,475.75
plus interest at the legal rate from the filing of this case in court;
_______________
2 Id., at pp. 479-480; p. 612.
579
b) Condemning the defendant Security Bank and Trust Company, being the collecting bank, to
reimburse the defendant Traders Royal Bank, all the amounts which the latter would pay to the
aforenamed plaintiffs;
c) Condemning both defendants to pay to each of the plaintiffs the sum of Three Hundred Thousand
(P300,000.00) Pesos as exemplary damages and attorney’s fees equivalent to twenty-five percent of
the total amount recovered; and
d) Costs of suit.
SO ORDERED.3
On appeal, the CA, in its April 30, 1999 Decision affirmed with modification the RTC decision by
declaring TRB solely liable for damages and costs of the suit and absolving SBTC from liability.4
The Court, in its October 10, 2002 Decision, modified the CA decision by deleting the award of
exemplary damages, but granting the prayer for the payment of attorney’s fees. The Court ruled that
“where a check is drawn payable to the order of one person, and is presented for payment by another
and purports upon its face to have been duly indorsed by the payee of the check, it is the primary duty
of petitioner (TRB) to know that the check was duly indorsed by the original payee and, where it pays
the amount of the check to a third person who has forged the signature of the payee, the loss falls
upon petitioner (TRB) who cashed the check. Its only remedy is against the person to whom it paid the
money.”5
The Court likewise noted that one of the subject checks was crossed, hence, TRB was duty-bound to
ascertain the in-
_______________
3 As quoted in the RTC Order, dated August 15, 2005, Rollo, pp. 119-127.
4 Id., at p. 99.
5 Traders Royal Bank v. Radio Philippines Network, Inc., supra note 1 at p. 482; p. 614.
580
dorser’s title to the check or the nature of his possession.6 By encashing, in favor of unknown persons,
the checks which on their face were payable to the BIR, a government agency which could only act
through its agents, TRB did so at its peril and must suffer the consequences of the unauthorized or
wrongful endorsement.7
Meanwhile, on November 9, 2001, petitioner Bancommerce and TRB entered into a purchase and sale
agreement (PSA).8 Bancommerce acquired identified assets and assumed identified liabilities of TRB
(later known as Royal Traders Holding Co., Inc.) in the total amount of P10,410,436,000.00. The
Bangko Sentral ng Pilipinas (BSP) approved the PSA on the condition, among others, that the parties
would set up an escrow fund amounting to P50 million to be kept for 15 years in the trust department
of any other bank acceptable to the BSP. To comply therewith, TRB executed the Escrow Agreement
whereby it deposited the amount of P50 million to Metropolitan Bank and Trust Co. (Metrobank) to
answer for any claims and liabilities of TRB which were not covered by the PSA. On July 3, 2002, the
BSP finally approved the PSA.
After the October 10, 2002 decision of the Court became final and executory on April 9, 2003, RPN, IBC
and BBC filed a motion for execution of judgment with the RTC followed by a Supplemental Motion
for Execution79 wherein the name of TRB was captioned “now Bank of Commerce” based on the
assumption that TRB and Bancommerce had merged.
On February 20, 2004, Bancommerce filed its Special Appearance with Opposition to the
Supplemental Motion for Execution10 questioning the jurisdiction of the RTC over Ban-
_______________
6 Id., at p. 483; p. 614.
7 Id.
8 Rollo, pp. 79-92.
9 Id., at pp. 111-115.
10 Id., at pp. 116-118.

581
commerce and denying the merger or consolidation between TRB and Bancommerce.
On August 15, 2005, the RTC issued the Order11 granting and issuing the writ of execution to execute
the judgment against any and all assets of TRB, including those subject of the merger/consolidation
between TRB and Bancommerce. The RTC, in effect, stated that there was a merger between TRB and
Bancommerce.
Bancommerce elevated the matter to the CA via consolidated petitions for certiorari. The CA, in its
Decision,12 dated December 8, 2009, denied the petition. It ruled that the RTC did not commit grave
abuse of discretion when it issued the subpoena directing Bancommerce to bring to the court the list
of the assumed identified assets and liabilities of TRB under the PSA. The CA stated that the order was
clear that it was not Bancommerce which was being made to answer for the liabilities of TRB, but the
assets/properties of TRB under its possession and custody. The dispositive portion reads:
WHEREFORE, the herein consolidated petitions are DENIED. The assailed Orders dated August 15,
SO ORDERED.13
_______________
11 Id., at pp. 119-127.
12 Penned by Associate Justice Francisco P. Acosta, with Associate Justices Juan Q. Enriquez, Jr.,
Priscilla Baltazar-Padilla and Michael P. Elbinias, concurring and Associate Justice Pampio A.
Abarintos, Dissenting. Id., at pp. 98-110.
13 Id., at p. 109.
582
Thereafter, RPN, IBC and BBC filed their Ex Parte Motion for Issuance of an Alias Writ of Execution
which was granted by the RTC in its Order,14 dated February 19, 2010.
On March 10, 2010, Bancommerce filed its Urgent Motion for Reconsideration,15 dated March 9,
2010, contending that the RTC could not issue a writ of execution against it inasmuch as the December
8, 2009 Decision of the CA had declared that there was no merger and/or consolidation between
Bancommerce and TRB. An alias writ of execution,16 however, had already been issued on March 9,
2010.
Bancommerce filed the Motion to Quash Alias Writ of Execution17 and its Supplemental Motion18 on
March 16, 2010 and April 29, 2010, respectively.
On August 18, 2010, the RTC issued the assailed order,19 the dispositive portion of which reads:
WHEREFORE, premises considered, this Court hereby resolves to:
1. DENY the Urgent Motion for Reconsideration (of the Order dated February 19, 2010) filed by the
Bank of Commerce on March 10, 2010;
2. DENY the Motion to Quash Alias Writ of Execution filed by the BOC on March 16, 2010 and
Supplemental Motion filed on April 29, 2010; and
3. GRANT the Urgent Motion to Quash Alias Writ of Execution filed by Metrobank and Trust
Company (MBTC for brevity) on March 12, 2010.
4. TAKES NOTE and GRANTS the Urgent Ex Parte Manifestation and Motion (re: Notice of Attorney’s
Lien),
_______________
14 Id., at pp. 136-138.
15 Id., at pp. 139-141.
16 Id., at pp. 144-146.
17 Id., at pp. 152-156.
18 Id., at pp. 180-188.
19 Id., at pp. 208-220.
583
Ex Parte Urgent Omnibus Motion and its Supplement filed by the plaintiffs’ counsel on April 7, 2010,
May 7, 2010 and May 31, respectively.
Accordingly, this Court now directs the following banks to release the garnished monies and shares of
stock or their monetary equivalent due to the plaintiffs to Mr. Bienvenido Reyes, Jr., Sheriff of this
Court, who shall deposit the same with the Office of the Clerk of Court, Regional Trial Court, Quezon
City:
a. Bank of the Philippine Islands — Paseo de Roxas Branch — Account No. 0033-2032-09 — Two
Million Five Hundred Forty Two Thousand Nine Hundred Eleven Pesos and Twenty Four Centavos
(P2,542,911.24);
b. Banco de Oro — Salcedo-Legaspi Sts. Branch — Nine Million Eight Hundred Ninety Thousand
Seven Hundred Sixteen Pesos and Eighty Seven [centavos] (P9,890,716.87); and
c. Hongkong Shanghai Banking Corporation — The Fort Branch — 3909 PLDT Shares of Stock — Nine
Million Seven Hundred Ninety Two Thousand Forty Five Pesos (P9,792,045.00).
Further, the Clerk of Court of the Regional Trial Court, Quezon City, is directed to release the
aforementioned amounts in the following manner:
a. To plaintiffs’ counsel, twenty five percent (25%) thereof, representing his attorney’s fees and
P200,000.00 representing his appearance fees and litigation expenses, as set forth in the Notice of
Lien, dated August 29, 2007, and Manifestation and Motion, dated March 25, 2010; and
b. To the plaintiffs, the balance of the said garnished amounts, less any and all fees which by law
may be due to the court or the Branch Sheriff.
SO ORDERED.20
_______________
20Id., at pp. 218-220.
584
Bancommerce elevated the matter to the CA via a petition for certiorari, with prayer for the issuance
of a temporary restraining order and/or a writ of preliminary injunction under Rule 65 of the Rules of
Court, seeking to annul and set aside the Orders, dated February 19, 2010 and August 18, 2010, issued
by the RTC in Civil Case No. Q-89-3580. In the assailed Resolution, dated November 26, 2010, the CA
outrightly dismissed the petition for failure to file a motion for reconsideration of the assailed orders,
which was a condition sine qua non for the filing of a petition for certiorari.
Bancommerce filed a motion for reconsideration which the CA subsequently denied in its Resolution,
dated February 9, 2011. The CA said that Bancommerce failed to show that its immediate filing of the
petition for certiorari fell under any of the exceptions to the rule requiring the filing of a motion for
reconsideration and that there was a concrete, compelling and valid reason to dispense with the filing
of the said motion. Moreover, the CA added:
At any rate, We take note that as stated in the Decision dated 08 December 2009 of this Court
(Division of Five of the Tenth Division) entitled “Bank of Commerce vs. Hon. Evelyn Corpus-Cabochan,
etc. et al.; Metropolitan Bank and Trust Co. v. Hon. Evelyn Corpus-Cabochan, etc. et al.,” docketed as
C.A.-G.R. S.P. Nos. 91258 & 94171, which has become final on 27 December 2009 as averred by herein
petitioner, viz.:
“The High Court’s Decision in G.R. No. 138510 in favor of the private respondents had become final
and executory as early as April 9, 2003. After more than six (6) years, the said judgment still await
implementation. This is so unfortunate. Execution of a judgment is the fruit and end of the suit, and is
585
the life of the law. It is in the interest of justice that we write finis to this litigation.”21
[Italicization in the original]
Hence, the petition of Bancommerce presenting the following:
ISSUES
1. THE COURT OF APPEALS DECIDED IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR WITH THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT DISMISSED BANCOMMERCE’S PETITION
FOR CERTIORARI UNDER RULE 65 BASED ON TECHNICAL AND MISTAKEN NOTION THAT
BANCOMMERCE FAILED TO FILE A MOTION FOR RECONSIDERATION OF THE RTC ORDERS THEREIN
ASSAILED;
2. THE COURT OF APPEALS DECIDED IN A WAY PROBABLY NOT IN ACCORD WITH LAW OR WITH THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT WHEN IT DISREGARDED THE MERITS OF
BANCOMMERCE’S CAUSE, TO WIT:
A. THE RTC, IN ISSUING ITS 19 FEBRUARY 2010 AND 18 AUGUST 2010 ORDERS AND 9 MARCH 2010
ALIAS WRIT OF EXECUTION, DEPRIVED BANCOMMERCE, WITHOUT LEGAL BASIS, OF ITS
PROPERTIES/ASSETS WITHOUT DUE PROCESS OF LAW CONSIDERING THAT BANCOMMERCE’S SAID
PROPERTIES/ASSETS CANNOT INDISCRIMINATELY BE EXECUTED UPON TO PAY TRB’S JUDGMENT
DEBT;
_______________
21 Id., at p. 77.
586
B. FURTHER, THE RTC, IN ISSUING SAID ORDERS AND ALIAS WRIT, DEPRIVED BANCOMMERCE,
WITHOUT LEGAL BASIS, OF ITS PROPERTIES/ASSETS ACQUIRED PURSUANT TO ITS PURCHASE AND
SALE AGREEMENT (PSA) WITH TRB, WITHOUT DUE PROCESS OF LAW, CONSIDERING THAT THE
VALIDITY OF THIS PSA HAS BEEN CONFIRMED BY THE BIR, BSP AND THE COURT OF APPEALS WITH
FINALITY; AND
C. FINALLY, THE RTC IN SAID ORDERS AND ALIAS WRIT ACTED WITHOUT AUTHORITY WHEN IT
IGNORED THE MODIFICATION AND VARIED THE WELL-DEFINED PARAMETERS OF THE EXECUTION OF
THE MAIN CASE (AS RULED BY THE COURT OF APPEALS IN ITS 8 DECEMBER 2009 DECISION IN C.A.-G.R.
S.P. NOS. 91258) ADJUDGING THAT ONLY TRB ASSETS CAN BE THE SUBJECT OF EXECUTION.
Synthesized, the fundamental issues to be resolved by the Court are as follows:

1. Whether or not Bancommerce’s immediate filing of the petition for certiorari before the CA was
justified.
2. Whether or not a merger/consolidation took place between TRB and Bancommerce.
3. Whether or not the CA reversed the decision of the trial court.
4. Whether or not the RTC committed grave abuse of discretion in issuing the August 18, 2010 Order.
My positions on the foregoing issues are the following:
A] Procedural Issue
Rule 65 of the Rules of Court provides that:
587
SECTION 1. Petition for certiorari.—When any tribunal, board or officer exercising judicial or quasi-
judicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and
adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified
petition in the proper court, alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings of such tribunal, board or officer, and granting such incidental
reliefs as law and justice may require.
One of the requirements for the filing of a petition for certiorari is that there be no appeal or any
plain, speedy and adequate remedy available in the ordinary course of law. The “plain,” “speedy” and
“adequate remedy” referred to in Section 1, Rule 65 of the Rules of Court is a motion for
reconsideration of the questioned order or resolution.22 It means that unless a motion for
reconsideration has been filed, immediate resort to a petition for certiorari will not lie because there
is still an adequate remedy available to the aggrieved party.
The Court is consistent in ruling that a motion for reconsideration is a condition sine qua non for the
filing of a petition for certiorari. The said mandatory and jurisdictional procedure23 is meant to give
the lower court or tribunal the opportunity to correct its assigned errors.24 Failure to file the
_______________
22 Metro Transit Organization, Inc. v. Piglas NFWU-KMU, 574 Phil. 481; 551 SCRA 326 (2008).
23 Salinas v. Digital Telecommunications Philippines, Inc., 545 Phil. 670, 674; 517 SCRA 67, 71 (2007),
citing Escorpizo v. University of Baguio, 366 Phil. 166; 306 SCRA 497 (1999).
24 Ermita v. Aldecoa-Delorino, G.R. No. 177130, June 7, 2011, 651 SCRA 128, 138, citing People v.
Duca, G.R. No. 171175, October 30, 2009, 603 SCRA 159.
588
motion before availing oneself of the special civil action for certiorari is a fatal infirmity.25
Though the rule is mandatory, the Court recognizes exceptional circumstances which may justify the
dispensing of a prior motion for reconsideration. These exceptions are:
(a) where the order is a patent nullity, as where the court a quo has no jurisdiction;
(b) where the questions raised in the certiorari proceedings have been duly raised and passed upon by
the lower court, or are the same as those raised and passed upon in the lower court;
(c) where there is an urgent necessity for the resolution of the question and any further delay would
prejudice the interests of the Government or of the petitioner or the subject matter of the petition is
perishable;
(d) where, under the circumstances, a motion for reconsideration would be useless;
(e) where petitioner was deprived of due process and there is extreme urgency for relief;
(f) where, in a criminal case, relief from an order of arrest is urgent and the granting of such relief by
the trial court is improbable;
(g) where the proceedings in the lower court are a nullity for lack of due process;
(h) where the proceeding was ex parte or in which the petitioner had no opportunity to object; and,
(i) where the issue raised is one purely of law or public interest is involved.26
_______________
25 Republic v. Pantranco North Express, Inc., G.R. No. 178593, February 15, 2012, 666 SCRA 199, 207.
26 Id., citing Sim v. National Labor Relations Commission, 560 Phil. 762; 534 SCRA 515 (2007).
589
Bancommerce admitted in its petition27 before the CA that it failed to file a motion for
reconsideration of the assailed August 18, 2010 Order for reasons stated as follows:
1. there is an urgent necessity for the resolution of the questions raised in this petition and any
further delay would prejudice the interests of the petitioner;
2. under the circumstances, a motion for reconsideration would be useless;
3. petitioner was deprived of due process and there is extreme urgency for relief;
4. the proceedings was ex parte or one in which the petitioner had no opportunity to object; and
5. the issues raised are purely of law.28
It is of my considered view that Bancommerce failed to satisfactorily prove before the CA that indeed,
its noncompliance with the mandatory and jurisdictional requirement of a prior motion for
reconsideration was justified. The Court, in Republic v. Pantranco North Express, Inc.,29 reiterated its
long-standing ruling that:
It must be emphasized that a writ of certiorari is a prerogative writ, never demandable as a matter of
right, never issued except in the exercise of judicial discretion. Hence, he who seeks a writ of certiorari
must apply for it only in the manner and strictly in accordance with the provisions of the law and the
Rules. Petitioner may not arrogate to himself the determination of whether a motion for
reconsideration is necessary or not. To dispense with the requirement of filing a motion for
reconsideration, petitioner must show a concrete, compelling, and valid reason for doing so, which
peti-
_______________
27 Rollo, pp. 221-252.
28 Id., at pp. 224-225.

29 Supra note 25.
590
tioner failed to do. Thus, the Court of Appeals correctly dismissed the petition.30
Therefore, the CA did not commit any reversible error when it outrightly dismissed Bancommerce’s
petition for certiorari for nonfiling of a prior motion for reconsideration of the assailed August 18,
2010 Order of the RTC. As correctly ruled by the CA, Bancommerce could not arrogate to itself the
determination of whether a motion for reconsideration was necessary or not.31 It needed to
expressly, clearly and satisfactorily prove that its claim fell under any of the recognized exceptions. To
dispense with the requirement, there had to be a concrete, compelling and valid reason excusing it
from compliance therewith.32
Despite the same, the CA resolved the petitioner’s Motion for Reconsideration by covering its merits
and consequently refused to grant it, taking into account the fact that as of that time, 6 years had
already elapsed since the Court’s decision became final and executory, without it having been
executed.33
B] Substantive Issue
Existence of Merger
Bancommerce insists that it has not merged with TRB. It avers that the BIR issued a ruling stating that
its office considered the PSA between Bancommerce and TRB as “a sale of assets with an assumption
of liabilities” rather than a “merger.”34 Further, it points out that the December 8, 2009
_______________
30 Id., citing Sim v. National Labor Relations Commission, 560 Phil. 762; 534 SCRA 515 (2007), citing
Cervantes v. Court of Appeals, 512 Phil. 210; 475 SCRA 562 (2005).
31 Rollo, p. 60.
32 Id., at p. 76.
33 Id., at p. 77.
34 Id., at p. 34.
591
CA decision ordered the deletion in the RTC decision of the statement that the PSA was a farce and a
mere tool to effectuate a merger. The specific words in the dispositive portion of the said decision
state:
x x x the pronouncement of respondent Judge in the August 15, 2005 Order that the PSA between TRB
and BANCOM is a farce or “a mere tool to effectuate a merger and/or consolidation between TRB and
Bancommerce is of the view that, with the deletion of the abovementioned phrase, the CA, in effect,
overturned the RTC. Thus, Bancommerce concludes that the writ of execution issued by the RTC could
not be enforced against it.
It also banks on the opinion of the Commission of Internal Revenue (CIR), which it claims is entitled to
respect,35 as stated in Protectors Services, Inc. v. Court of Appeals,36 which, in part, reads:
These rulings were made by the CIR in the exercise of his power to “make judgments or opinions in
connection with the implementation of the provisions of the internal revenue code.” The opinions
and rulings of officials of the government called upon to execute or implement administrative laws,
command respect and weight.
In a letter,37 dated October 6, 2006, the CIR replied to the letter of Bancommerce requesting for a
ruling on its taxability relative to the PSA with TRB. The CIR then ruled that the PSA was one of sale of
assets with assumption of liabilities rather than a merger. It stated that “the transaction between
_______________
35 Id., at p. 690.
36 386 Phil. 611, 626; 330 SCRA 404, 418 (2000).
37 Rollo, pp. 93-97.
592
TRB and Bancommerce is not a merger within the contemplation of Section 40(C)(6)(b) of the Tax
Code of 1997.”38
It should be noted, however, that the judgment or opinion was issued only for purposes of
determining the tax liability of Bancommerce. It did not, in any way, conclusively rule that, the
transaction between TRB and Bancommerce, by virtue of the PSA, was a sale. In fact, the CIR ruling
itself expressly stated that:
This ruling is being issued on the basis of the foregoing facts as represented. However, if upon
investigation, it will be disclosed that the facts are different, then this ruling shall be considered null
and void.39 [Emphases supplied]
Bancommerce, therefore, cannot rely on the CIR ruling in arguing that there was no merger. The
determination of whether or not the transaction was a sale is not within the competence of the CIR. It
is ultimately the courts which have jurisdiction over actions involving such issues.40
The question now is: was there a merger between TRB and Bancommerce?
A merger is “a combination of two things, especially companies, into one.”41 Merriam Webster
Dictionary defines it as “the absorption by a corporation of one or more others.”42 Under the
Philippine Law, “two or more corporations may merge into a single corporation which shall be one of
the constituent corporations or may consolidate into a new single corporation which shall be the
consolidated corporation.”43
_______________
38 Id., at p. 97.
39 Id.
40 Batas Pambansa Blg. 129, as amended.
41 Oxford Dictionaries, http://oxforddictionaries.com/definition/english/merger.
42 Merriam Webster Dictionary, http://www.merriam-webster.com/dictionary/merger.
43 Sec. 76, Corporation Code of the Philippines.
593
There are, however, requirements and procedures to follow before a merger takes place. The steps
necessary to accomplish a merger or consolidation, as provided for in Sections 76, 77, 78 and 79 of the
Corporation Code, are:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or
in case of consolidation, all the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least two (2) weeks’ notice must be sent to all stockholders or members,
personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-
thirds of the members or of stockholders representing two-thirds of the outstanding capital stock will
be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger or consolidation, by the
corporate officers of each constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving
corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks
before.
(6) Issuance of certificate of merger or consolidation.44
_______________
44Mindanao Savings and Loan Association, Inc. v. Willkom, G.R. No. 178618, October 20, 2010, 634
SCRA 291, 301-302.
594
Only after these requirements have been complied with and a certificate of merger or consolidation
has been issued by the SEC shall the merger or consolidation be effective.45
Guided by the foregoing, I submit that, in a strict sense, no merger or consolidation took place.
Records do not show any plan or articles of merger or consolidation. More importantly, there was no
issuance by the SEC of any certificate of merger or consolidation in favor of Bancommerce. What TRB
and Bancommerce executed was a “Purchase and Sale Agreement.” There can be no issuance of a
merger certificate by virtue of a sale agreement. If only for those facts alone, indeed, TRB and
Bancommerce did not merge or consolidate.
It is incumbent, however, to reflect and analyze why the RTC found the existence of a merger while
the CA opined that there was “just a dearth of conclusive evidence to support such a finding.”
After a careful scrutiny of the records, the surrounding circumstances in the case show that, in effect,
although without an outright declaration of such, a “de facto” merger existed between TRB and
Bancommerce.
First, the PSA involved substantially all the assets and liabilities of TRB. The PSA clearly included TRB’s
banking goodwill, its bank premises, its licenses to operate its head office and branches, its leasehold
rights, patents, trademarks or copyrights used in connection with its business or products.46
Second, in one of the cases it initiated with respect to the rights and interests of TRB, an Ex Parte
Petition for Issuance of Writ of Possession, before the same RTC, Branch 98, Bancommerce qualified
TRB with the words “now known as Bancommerce.”47 Justice and fair play dictate that Ban-
_______________
45 Id.
46 Rollo, p. 80.
47 LRC Case No. Q-16457, id., at pp. 354-356 and pp. 564-565.
595
commerce is estopped from denying that it did identify TRB as such. Nobody but Bancommerce itself
inserted the description. It would be unfair to allow Bancommerce to avail of such description or
qualification when it would be to its advantage, and to disavow it when it would be no longer
convenient.
Third, the BSP, through its Deputy Governor Alberto V. Reyes, even issued the Circular Letter (Series
of 2002) advising all banks and non-bank financial intermediaries that the banking activities and
transactions of TRB and Bancommerce were consolidated and that the latter continued the operations
of the former.48
Section 40 of the Corporation Code laid out the procedure and requirements when a corporation sells
or otherwise disposes of all or substantially all of its assets. It provides that a sale or other disposition
shall be deemed to cover substantially all the corporate property and assets, if thereby the
corporation would be rendered incapable of continuing the business or accomplishing the purposes
for which it was incorporated. The sale or disposition of all of substantially all of the corporate assets
may have the effect of a merger or consolidation.49 Corollarily, Section 40 will not apply if the sale
was necessary in the usual and regular course of business.50 The facts obtaining in the case, however,
clearly showed that the sale was not in pursuance of the usual and regular banking business of TRB.
The sale, in fact, rendered TRB incapable of carrying out the purpose of its organization. While there
may be no merger/consolidation in its strictest sense, it is my studied opinion that the end result of
the affair that took place between TRB and Bancommerce amounted to a merger of assets where the
existence of TRB as a banking entity ceased while that of Bancommerce contin-
_______________
48 Id., at p. 123.
49 Ladia, Ruben C., The Corporation Code of the Philippines (2007), p. 266.
50 Id.
596
ued. Essentially, Bancommerce is continuing the operations of the former.

Enforcement of Writ of Execution
Bancommerce contends that it is not the judgment debtor, but TRB, and that it was only arbitrarily
dragged into the execution proceedings. Such being the case, execution may not be enforced against
it.
The ponencia fails to persuade.
It has been established that the existence of TRB as a banking entity ceased by virtue of the PSA. It
cannot be denied either that Bancommerce has continued its operations as early as July 2002. Thus,
even though Bancommerce was not a party in the main case, the writ of execution may be enforced
against it. It has been the consistent ruling of the Court that although it is true that a writ of execution
can only be issued against a party and not against one who did not have his day in court, one who is
privy or a successor-in-interest of the judgment debtor can be reached by the order of execution.51
The specific words in the two cases read:
No man shall be affected by any proceeding to which he is a stranger. Strangers to a case are not
bound by judgment rendered by the court. In the same manner, an execution can be issued only
against a party and not against one who did not have his day in court. Only real parties in an action
are bound by judgment therein and by writs of execution and demolition issued pursuant thereto.
However, one who is a privy to the judgment debtor can be reached by an order of execution . . .
[Emphases and underscoring supplied]
_______________
51Church Assistance Program, Inc. v. Hon. Sibulo, 253 Phil. 404, 410; 171 SCRA 408, 414 (1989); and
Vda. de Medina v. Judge Cruz, 244 Phil. 40; 161 SCRA 36 (1988).
597
Further, attention is directed to the pronouncement of the CA in its December 8, 2009 Decision that
the RTC order was so worded that it was not Bancommerce itself “that was being made to answer but
the assets/properties of TRB in the hands of BANCOM.”52 The CA made it crystal clear that
Bancommerce was not being made liable for TRB’s obligations.
This is so because when the RTC issued a subpoena duces tecum, it required Bancommerce to merely
bring the list of assumed identified assets and liabilities of TRB under the PSA. Bancommerce, instead
of complying with the order, filed a motion to quash the subpoena on the specious ground that the
respondent networks failed to show the relevancy of the said list. As correctly ruled by the CA, had
Bancommerce just complied with the subpoena, it could have cleared the issue of whether TRB’s
liability to the respondent networks was not among those that Bancommerce assumed under the
PSA.53 From Bancommerce’s adamant refusal to comply with the order of the trial court, a
presumption arises that a disclosure of the identified assets and liabilities would be prejudicial to its
interests. The RTC, thus, cannot be faulted for granting and issuing the writ of execution.
More importantly, it cannot be argued that the assets and properties of TRB, which were transferred
to Bancommerce, ceased to be such under the terms of the BSP-approved PSA between them.124
There was nothing in the PSA which provided that said assets and properties of TRB would cease to
exist. Assets do not simply evaporate. In case of transfers, they remain part and parcel of the assets of
the transferee, whether commingled or not. In other words, they represent a certain percentage of
the transferee’s assets.
_______________
52 Rollo, p. 108.
53 Id., at p. 107.
54 Ponencia, p. 552.
598
It is to be emphasized that the October 10, 2002 Decision of the Court in Traders Royal Bank v. RPN,
which was the subject of the RTC Order of Execution, dated August 15, 2005, was already final and
executory. The CA even reiterated such fact in its December 8, 2009 decision affirming with
modification the said RTC order, which likewise became final and executory.
Bancommerce cannot insist that TRB’s assets in its custody and possession cannot be the subject of an
execution on the flimsy excuse that it is not a party. Granting that there has been no de facto merger
or consolidation, the undeniable fact is that Bancommerce has TRB’s assets, commingled or not, and
the rules provide that these can be reached by levy or garnishment. The Rules of Court, moreover, do
not require that the garnishee be served with summons or impleaded in the case in order to make him
liable. In the case of Perla Compania de Seguros v. H. Ramolete,55 it was clearly written:
In order that the trial court may validly acquire jurisdiction to bind the person of the garnishee, it is
not necessary that summons be served upon him. The garnishee need not be impleaded as a party to
the case. All that is necessary for the trial court lawfully to bind the person of the garnishee or any
person who has in his possession credits belonging to the judgment debtor is service upon him of the
writ of garnishment.56 [Emphases supplied]
Further, Section 19, Rule 3 of the Rules of Court provides that:
Sec. 19. Transfer of interest.—In case of any transfer of interest, the action may be continued by or
against the original party, unless the court upon motion directs the person to whom the interest is
trans-
_______________
55 No. L-60887, November 13, 1991, 203 SCRA 487.
56 Id., at p. 491.
599
ferred to be substituted in the action or joined with the original party.

Bancommerce became TRB’s successor-in-interest. The PSA clearly led to a transfer of interest from
TRB to Bancommerce. As previously mentioned, Bancommerce acquired assets from TRB, which
conveyance was effected while the case was pending and which transaction appears not to have been
made known to TRB’s creditors. These properties can still be reached by execution to satisfy the
judgment in favor of the respondent networks. The Court, in NPC Drivers and Mechanics Association
v. NPC,57 explained that:
On PSALM’s contention that since it was not a party to the case and that the petitioners are not its
employees, the properties that it acquired from NPC cannot be levied, is untenable. The issue here is
about PSALM’s assets that were acquired from NPC. As explained above, PSALM took ownership over
most of NPC’s assets. There was indeed a transfer of interest over these assets — from NPC to PSALM
— by operation of law. These properties may be used to satisfy our judgment. This being the case,
petitioners may go after such properties. The fact that PSALM is a nonparty to the case will not
prevent the levying of the said properties, including their fruits and proceeds. However, PSALM
should not be denied due process. The levying of said properties and their fruits/proceeds, if still
needed in case NPC’s properties are insufficient to satisfy our judgment, is without prejudice to
PSALM’s participation in said proceedings. Its participation therein is necessary to prevent the levying
of properties other than that it had acquired from NPC. Such a proceeding is to be conducted in the
proper forum where petitioners may take the appropriate action.
Section 19, Rule 3 of the 1997 Revised Rules of Civil Procedure reads:
_______________
57 G.R. No. 156208, December 2, 2009, 606 SCRA 409.
600
Sec. 19. Transfer of interest.—In case of any transfer of interest, the action may be continued by or
against the original party, unless the court upon motion directs the person to whom the interest is
transferred to be substituted in the action or joined with the original party.
Under this section, the Court may, upon motion, direct the person to whom the interest is transferred
to be substituted in the action or joined with the original party. In petitioners’ Manifestation with
Urgent Omnibus Motions dated 9 February 2009, they prayed that the properties acquired by PSALM
from NPC be also levied/garnished. We consider this prayer to be tantamount to a motion to join
PSALM as a party-respondent in this case in so far as to the properties, and any income arising
therefrom, that PSALM acquired from NPC. It is in this light that we order the Clerk of Court of this
division to implead or join PSALM as a party-respondent in this case. As above-explained, PSALM shall
not be denied due process for it can participate in the proper forum by preventing the levying of
properties other than that it had acquired from NPC.58
Also, the Court, in Col. Francisco Dela Merced v. GSIS,59 reiterated the principle that a final judgment
against a party is binding on his privies and successors-in-interest. It went on further saying that:
In Cabresos v. Judge Tiro,60 the Court upheld the respondent judge’s issuance of an alias writ of
execution against the successors-in-interest of the losing litigant despite the fact that these
successors-in-interest were not mentioned in the judgment and were
_______________
58 Id., at pp. 438-440.
59 G.R. No. 167140, November 23, 2011, 661 SCRA 83.
60 248 Phil 633; 166 SCRA 400 (1988).
601
never parties to the case. The Court explained that an action is binding on the privies of the litigants
even if such privies are not literally parties to the action. Their inclusion in the writ of execution does
not vary or exceed the terms of the judgment.
Moreover, granting that Bancommerce is not a party in the case between TRB and the respondent
networks, the sale between TRB and Bancommerce should and must not, in any way, prejudice any
creditors of the former. In the case cited by Justice Leonen in his separate dissenting opinion, Caltex
(Philippines), Inc. vs. PNOC Shipping and Transport Corporation,61 it was ruled:
While the Corporation Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer
can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor’s liabilities, unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud. To allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and without
requiring the assignee to assume the assignor’s obligations will defraud the creditors. The assignment
will place the assignor’s assets beyond the reach of its creditors.62
_______________
61 G.R. No. 150711, 530 Phil. 149; 498 SCRA 400 (2006).
62 Id.
602
Royal Traders Holding Co., Inc.
The ponencia stressed that TRB still exists, albeit a change of name into Royal Traders Holding Co., Inc.
(RTHCI). Granting that it is so and that RTHCI has identifiable assets, which claim does not clearly
appear on record as all of TRB’s assets have been transferred to Bancommerce, respondent networks
can still proceed against the assets of TRB in Bancommerce or in the hands of other entities. The rule
is that “(e)very prevailing party to a suit enjoys the corollary right to the fruits of the judgment and,
thus, court rules provide a procedure to ensure that every favorable judgment is fully satisfied. This
procedure can be found in Rule 39 of the Revised Rules of Court on execution of judgment. The said
Rule provides that in the event that the judgment obligor cannot pay the monetary judgment in cash,
the court, through the sheriff, may levy or attach properties belonging to the judgment obligor to
secure the judgment.”63 Section 9(b), Rule 39 of the Revised Rules of Court, which provides:
Section 9(b). Satisfaction by levy.—If the judgment obligor cannot pay all or part of the obligation in
cash, certified bank check or other mode of payment acceptable to the judgment obligee, the officer
shall levy upon the properties of the judgment obligor of every kind and nature whatsoever which
may be disposed of for value and not otherwise exempt from execution giving the latter the option to
immediately choose which property or part thereof may be levied upon, sufficient to satisfy the
judgment. If the judgment obligor does not exercise the option, the officer shall first levy on the
personal properties, if any, and then on the real properties if the personal properties are insufficient
to answer for the judgment.
_______________
63Solar Resources, Inc. v. Inland Trailways, Inc., 579 Phil. 548; 557 SCRA 277 (2008).
603
The sheriff shall sell only a sufficient portion of the personal or real property of the judgment obligor
which has been levied upon.
When there is more property of the judgment obligor than is sufficient to satisfy the judgment and
lawful fees, he must sell only so much of the personal or real property as is sufficient to satisfy the
judgment and lawful fees.
“The option under Section 9(b), Rule 39 of the Revised Rules of Court is granted to a judgment obligor
before the sheriff levies its properties and not after.”64 “(T)he sheriff is required to first demand of
the judgment obligor the immediate payment of the full amount stated in the writ of execution
before a levy can be made. The sheriff shall demand such payment either in cash, certified bank check
or any other mode of payment acceptable to the judgment obligee. If the judgment obligor cannot
pay by these methods immediately or at once, he can exercise his option to choose which of his
properties can be levied upon. If he does not exercise this option immediately or when he is absent or
cannot be located, he waives such right, and the sheriff can now first levy his personal properties, if
any, and then the real properties if the personal properties are insufficient to answer for the
judgment.”65
In this case, as the records show, Bancommerce (TRB is “now known as Bancommerce”)66 refuses to
cooperate and disclose TRB’s assets in its possession, erroneously asserting that it is a stranger. In this
situation, as transferee of all
_______________
64 Id.
65 Villarin v. Munasque, 587 Phil. 257; 565 SCRA 483 (2008).
66 LRC Case No. Q-16457, Rollo, pp. 354-356 and 564-565. In one of the cases Bancommerce initiated
with respect to the rights and interests of TRB, an Ex Parte Petition for Issuance of Writ of Possession,
before the same RTC, Branch 98, it qualified TRB with the words “now known as Bancommerce.”
604
the rights and assets of TRB, Bancommerce is deemed to have waived that right and the choice shall
be exercised by the judgment obligees, which in this case are the respondent networks. In this
connection, it must be remembered that the PSA involved substantially all the assets and liabilities of
TRB. The PSA clearly included TRB’s banking goodwill, its bank premises, its licenses to operate its
head office and branches, its leasehold rights, patents, trademarks or copyrights used in connection
with its business or products.67
Under the PSA, Bancommerce is the entity continuing the original banking business of TRB. It is not
RTHCI. It is simply unacceptable that TRB merely changed its name to RTHCI. The changing of name
was due to the fact that the nature and purpose for which TRB was originally incorporated already
ceased. It must be stressed that the BSP even issued the Circular Letter (Series of 2002) advising all
banks and non-bank financial intermediaries that the banking activities and transactions of TRB and
Bancommerce were consolidated and that the latter continued the operations of the former.68
For said reason, the writ of execution can be enforced against it. Generally, where one corporation
sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts
and liabilities of the transferor, except: 1) where the purchaser expressly or impliedly agrees to
assume such debts; 2) where the transaction amounts to a consolidation or merger of the
corporations; 3) where the purchasing corporation is merely a continuation of the selling corporation;
and 4) where the transaction is entered into fraudulently in order to escape liability for such debts.69
_______________
67 Rollo, p. 80.
68 Rollo, p. 123.
69 Edward J. Nell Company vs. Pacific Farms, Inc., 122 Phil. 825, 827; 15 SCRA 415, 417 (1965).
605
No Reversal by the CA
Consequently, once a judgment becomes final and executory, all the issues between the parties are
deemed resolved and laid to rest. All that remains is the execution of the decision which is a matter of
right. The prevailing party is entitled to a writ of execution, the issuance of which is the trial court’s
ministerial duty.70
The CA decision, dated December 8, 2009, which Bancommerce itself claimed to be already final and
executory, stated that it did not find grave abuse of discretion on the part of the RTC in issuing the
August 15, 2005 Order granting the issuance of a writ of execution. In fact, it affirmed the said order
of the trial court. The modification made by the CA was a mere deletion of an opinion and not a
reversal of the RTC ruling. Otherwise, the CA could have so expressly stated in no uncertain terms. The
deletion of the said pronouncement did not affect the RTC order of execution against any and all
assets of TRB found anywhere in the Philippines, including those subject of the PSA.
Justice Denied
Bancommerce has done nothing but forestall the execution of a final and executory decision by
incessantly carping that it is a stranger to the case. It cannot resist the execution by availing of the
stranger theory as a shield to protect what TRB owned and which it now owns. Its dilatory tactics
resulted in the frustration of the respondent networks. Bancommerce should have observe honesty
and good faith by cooperating and informing the trial court of the assets of TRB, where they are and
their status — whether commingled or set
_______________
70 Anama v. Court of Appeals, G.R. No. 187021, January 25, 2012, 664 SCRA 293, 307, citing National
Power Corporation v. Spouses Lorenzo L. Laohoo, G.R. No. 151973, July 23, 2009, 593 SCRA 564, 580.
606
aside. Because of its obstinate refusal, the RTC could only assume that they have been commingled.
Verily, by the unjustified delay in the execution of a final judgment in their favor, the respondent
networks have suffered an injustice. The Court views with disfavor the tactics employed by
Bancommerce to frustrate the execution of a final decision and order. Once a judgment has become
final, the winning party be not, through a mere subterfuge, deprived of the fruits of the verdict.71
Courts must guard against any scheme calculated to bring about that result and must frown upon any
attempt to prolong controversies.72 As the Court has written in the case of Anama v. Court of
Appeals,73
Just as a losing party has the right to file an appeal within the prescribed period, the winning party
also has the correlative right to enjoy the finality of the resolution of his case by the execution and
satisfaction of the judgment, which is the “life of the law.” To frustrate it by dilatory schemes on the
part of the losing party is to frustrate all the efforts, time and expenditure of the courts. It is in the
interest of justice that this Court should write finis to this litigation.
In view of the foregoing, I vote to DENY the petition as well as to LIFT the Temporary Restraining
Order issued by the Court on April 13, 2011.
_______________
71 University of the Philippines v. Hon. Dizon, G.R. No. 171182, August 23, 2012, 679 SCRA 54, 84.
72 Marmosy Trading, Inc. v. Court of Appeals, G.R. No. 170515, May 6, 2010, 620 SCRA 315, 326.
73 Supra note 70 at p. 308, citing Bernardo De Leon v. Public Estates Authority, G.R. No. 181970,
August 3, 2010, 626 SCRA 547, 565-566.
607
DISSENTING OPINION
LEONEN, J.:
A corporation which purchases all or substantially all of the assets of another corporation should be
liable to satisfy the execution of a judgment debt against the seller corporation when it impliedly
accepts such obligations. The obligation is impliedly accepted if the purchasing corporation made it
appear to third parties that it stepped into the shoes of the seller corporation. This is especially true in
the case of banks that take on the license of a predecessor bank. This is required by equity to
safeguard against fraud of creditors as well as the principle of economy of judgments.
The petition1 arises from this court’s final and executory decision dated October 10, 2002 in Traders
Royal Bank v. Radio Philippines Network, Inc., Intercontinental Broadcasting Corporation and
Banahaw Broadcasting Corporation, through the Board of Administrators, and Security Bank and Trust
Company, docketed as G.R. No. 138510.
Respondents sought the execution of the judgment claim against petitioner Bancommerce with
pleading entitled “Radio Philippines Network, Inc., Intercontinental Broadcasting Corporation and
Banahaw Corporation thru Board of Administrators versus Traders Royal Bank (TRB) [now Bank of
Commerce] and Security Bank and Trust Corporation (SBTC).”2 In a pleading for another case involving
the rights of Traders Royal Bank, petitioner Bancommerce also qualified Traders Royal Bank with the
phrase, “now known as Bancommerce.”3
_______________
1 The petition was filed pursuant to Rule 45 of the Rules of Court.

2 Rollo, p. 100, Court of Appeals Decision.
3 LRC Case No. Q-16457, Rollo, pp. 354-356 and pp. 564-565.
608
For its part, petitioner Bancommerce denied the existence of any merger with Traders Royal Bank. It
also questioned the trial court’s jurisdiction over its person.4
The trial court granted respondents’ motion for execution on August 15, 2005.5 It later denied
petitioner Bancommerce’s urgent motion for reconsideration, motion to quash alias writ of execution,
and supplemental motion.6 The Court of Appeals outrightly dismissed petitioner Bancommerce’s
petition for certiorari for failure to file a motion for reconsideration. Hence, the present petition was
filed.
Petitioner Bancommerce contends that “[it] was arbitrarily dragged in the execution proceedings”7
when respondents named it as Traders Royal Bank’s successor-in-interest.8 It argues, among others,
that “no merger/consolidation has been settled both at the administrative level [Bureau of Internal
Revenue] and at the judicial level.”9
Respondents counter that “petitioner refused to divulge the assets taken and liabilities assumed, even
when subpoenaed, producing the presumption that they are adverse to petitioner if produced
x x x.”10 Moreover, petitioner Bancommerce admitted its obligation when it offered in settlement a
real property in Parañaque valued at P35,200,000.00.11
I disagree with the ponencia in its finding that respondents may not enforce the execution of its
judgment claim against petitioner Bancommerce.
_______________
4 Rollo, p. 100, Court of Appeals Decision.

5 Id., at p. 102.
6 Id., at pp. 218-220, Regional Trial Court Order dated August 18, 2010.
7 Id., at p. 688, Petitioner’s Memorandum.
8 Id., at p. 689.
9 Id.
10 Id., at p. 616, Respondent’s Memorandum.
11 Id., at p. 618.
609
When a corporation sells or transfers all of its assets to another, the purchaser corporation is not
liable for the debts of the seller as a general rule.
Article 1311 of the Civil Code provides that “[c]ontracts take effect only between the parties, their
assigns and heirs x x x.” This principle of relativity explains the general rule that the purchaser
corporation is not liable for the debts of the seller corporation.12 However, before this general rule
can apply, we have to first determine whether any of the exceptions are present and have been
established.
In 1965, Edward J. Nell Company v. Pacific Farms, Inc.13 discussed this rule as follows:
Generally where one corporation sells or otherwise transfers all of its assets to another corporation,
the latter is not liable for the debts and liabilities of the transferor, except: (1) where the purchaser
expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a
consolidation or merger of the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the transaction is entered into fraudulently in
order to escape liability for such debts.14
This rule was reiterated in the 2002 case of Philippine National Bank v. Andrada Electric & Engineering
Company15 and the 2007 case of McLeod v. National Labor Relations Commission16 where this court
held that “a corporation that
_______________
12 See also C. Villanueva, Philippine Corporate Law, p. 678 (2010).
13 122 Phil. 825; 15 SCRA 415 (1965) [Per J. Concepcion, En Banc].
14 Id., at p. 827; p. 417.
15 430 Phil. 882, 893; 381 SCRA 244, 253 (2002) [Per J. Panganiban, Third Division].
16 541 Phil. 214; 512 SCRA 222 (2007) [Per J. Carpio, Second Division].
610
purchases the assets of another will not be liable for the debts of the selling corporation, provided the
former acted in good faith and paid adequate consideration for such assets, except when any of the
following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume
the debts; x x x.”17
According to the ponencia, this is common law which cannot apply in our jurisdiction, and none of the
exceptions are present in this case.18
I disagree.
Under the first exception, the purchaser corporation has agreed to assume the seller corporation’s
liabilities.
This may be based on Article 2047 of the Civil Code such that a non-party to an existing contract
becomes (1) a guarantor when he voluntarily “binds himself to the creditor to fulfill the obligation of
the principal debtor in case the latter should fail to do so”19 or (2) a surety when he “binds himself
solidarily with the principal debtor.”20 Moreover, “[s]ubstitution of the person of the debtor may be
effected by delegacion [where] the debtor offers, and the creditor (delegatario), accepts a third
person who consents to the substitution and assumes the obligation. Thus, the consent of [all] three
persons is necessary.”21
_______________
17 Id., at p. 234; p. 240.
19 Id.
20 Id.
21 Aquintey v. Spouses Tibong, 540 Phil. 422, 444; 511 SCRA 414, 436 (2006) [Per J. Callejo, Sr., First
Division], citing Garcia v. Llamas, 462 Phil. 779, 789; 417 SCRA 292, 300 (2003) [Per J. Panganiban, First
Division]. See also Article 1293 of the Civil Code: “Novation which consists in substituting a new
debtor in the place of the original one, may be made even without the knowledge or against the will
of the latter, but not without the consent of the creditor. x x x.”
611
In Caltex (Phils.), Inc. v. PNOC Shipping & Transport Corp.,22 Caltex received a final and executory
judgment against LUSTEVECO, but the judgment was not satisfied. Caltex later learned that
LUSTEVECO and PNOC Shipping and Transport Corporation (PSTC) entered into an Agreement of
Assumption of Obligations. Thus, it sent its demands to PSTC. This court held that Caltex may recover
the judgment debt from PSTC under the terms of the Agreement of Assumption of Obligations.23
In the present case, Article II of the Purchase and Sale Agreement24 between petitioner
Bancommerce and Traders Royal Bank enumerates the liabilities assumed by petitioner Bancommerce
and those which are not:
ARTICLE II
liabilities as listed and referred to in its Consolidated Statement of Condition as of August 31, 2001, in
1. Liability for the payment of compensation, retirement pay, separation benefits and any labor
benefit whatsoever arising from incidental to, or connected with employment in, or rendition of
_______________
22 530 Phil. 149; 498 SCRA 400 (2006) [Per J. Carpio, Third Division].
23 Id., at pp. 156-158; p. 410.
24 Rollo, pp. 79-92. A copy was attached as Annex D of the petition.
612
employee services to TRB, whether permanent, regular, temporary, casual or contractual.
2. Items in litigation, both actual and prospective, against TRB which include but are not limited to the
following:
2.1. [x x x photocopy partly blurred]; particularly the case entitled Lopez, et al. vs. Traders Royal Bank,
et al., docketed as Civil Case No. 00-11178, Bacolod Regional Trial Court, Branch 41 and Lacson, et al.
vs. Benedicto, et al., originally docketed as Civil Case 95-9137, Bacolod Regional Trial Court, Branch 44
now pending appeal before the Supreme Court under S.C. G.R. No. 141508, and other related cases
which might be filed in connection therewith;
2.4. Liabilities accruing after the effectivity date of this Agreement that were not in-
613
curred in the ordinary course of business.25

The Court of Appeals found that the lower court judge “acted correctly [in issuing] the subpoena
dated October 1, 2004 directing BANCOM to bring to court the list of the assumed identified assets
and liabilities of TRB under the PSA.”26 However, petitioner Bancommerce did not comply with this
directive and filed a motion to quash the subpoena.27 While, it is uncertain whether respondents’
claim was explicitly assumed by petitioner Bancommerce under the Purchase and Sale Agreement, the
circumstances of this case point to no other conclusion than an implied assumption of all liabilities by
purchaser corporation, petitioner Bancommerce.
Unlike the jurisprudence cited earlier, the present case involves a bank that transferred all or
substantially all of its assets, including its branching licenses, to petitioner Bancommerce — the bank
that will now continue its operations as recognized by the Bangko Sentral ng Pilipinas.28
The banking industry is imbued with great trust and confidence not only by its clients but by the
general public.29 When banks make mistakes, the wrongful dishonor of a check for example, this
causes “embarrassment if not also financial loss and perhaps even civil and criminal litigation”30 on
the part of
_______________
25 Id., at pp. 80-81, Article II of the Purchase and Sale Agreement.
26 Id., at p. 107, Court of Appeals Decision, emphasis in the original.
27 Id.
28 Rollo, p. 123.
29 Citibank, N.A. v. Dinopol, G.R. No. 188412, November 22, 2010, 635 SCRA 649, 659 [Per J. Mendoza,
Second Division].
30 Prudential Bank v. Court of Appeals, 384 Phil. 817, 825; 328 SCRA 264, 270 (2000) [Per J.
Quisumbing, Second Division], citing Simex International (Manila), Inc. v. Court of Appeals, 262 Phil.
387, 396; 183 SCRA 360, 367 (1990) [Per J. Cruz, First Division] and Bank of the Philippine Islands v.
Intermediate Appellate Court, G.R.
614
the depositor. Consequently, those in the banking business are heavily regulated, burdened with the
highest standards of integrity and performance.31 This court has awarded exemplary damages to
plaintiffs who have suffered from the failure of banks to exercise such level of diligence in its affairs,
considering that “[t]he business of banking is impressed with public interest and great reliance is
made on the bank’s sworn profession of diligence and meticulousness in giving irreproachable
service.”32
On this note, a purchaser bank which has made it appear to third parties that it has stepped into the
shoes of the seller bank must be deemed to have assumed the debts and liabilities of such seller bank.
By presenting itself as the former Traders Royal Bank, petitioner Bancommerce impliedly novated
existing contracts of Traders Royal Bank by admitting to the parties involved and the public in general
that it is now the entity to reckon with.
The second exception is on mergers and consolidations.
This court has held that a sale of assets is legally distinct from a merger or consolidation.33 Section 76
of the Corporation
_______________
No. 69162, February 21, 1992, 206 SCRA 408, 412-413 [Per J. Griño-Aquino, First Division].
31 Section 2 of Republic Act No. 8791, otherwise known as the General Banking Law of 2000, provides
that “[t]he state recognizes the vital role of banks in providing an environment conducive to the
sustained development of the national economy and the fiduciary nature of banking that requires
high standards of integrity and performance. x x x.” See also Philippine Commercial International Bank
v. Court of Appeals, 403 Phil. 361, 388; 350 SCRA 446, 472 (2001) [Per J. Quisumbing, Second Division].
32 Citibank, N.A. v. Dinopol, G.R. No. 188412, November 22, 2010, 635 SCRA 649, 658 [Per J. Mendoza,
Second Division], citing Solidbank Corporation/Metropolitan Bank and Trust Co. v. Sps. Tan, 548 Phil.
672, 678; 520 SCRA 123, 129 (2007) [Per J. Corona, First Division].
33 China Banking Corporation v. Dyne-Sem Electronics Corporation, 527 Phil. 74; 494 SCRA 493 (2006)
[Per J. Corona, Second
615
Code expressly authorizes two or more corporations to merge into a single corporation, which shall be
one of the constituent corporations, or to consolidate into a new single corporation, which shall be
the consolidated corporation. A merger or consolidation “does not become effective upon the mere
agreement of the constituent corporations.”177 These corporations that seek to merge or consolidate
must first comply with the required procedure under the Corporation Code.
One of the legal effects of a merger or consolidation under Section 80 of the Corporation Code is the
assumption ipso jure by the surviving or consolidated corporation of the dissolved corporation’s
liabilities:
xxxx
_______________
Division]. See footnote no. 32 in 527 Phil. 74, 82; 494 SCRA 493, 501 (2006) in that:
“[t]he Court of Appeals differentiated merger from sale of assets in this wise: (1) In merger, a sale of
assets is always involved, while in the latter, the former is not always involved; (2) In the former,
there is automatic assumption by the surviving corporation of the liabilities of the constituent
corporations, while in the latter, the purchasing corporation is not generally liable for the debts and
liabilities of the selling corporation; (3) In the former, there is a continuance of the enterprise and of
the stockholders therein though in the altered form, while in the latter, the selling corporation
ordinarily contemplates liquidation of the enterprise; (4) In the former, the title to the assets of the
constituent corporations is by operation of law transferred to the new corporation, while in the latter,
the transfer of title is by virtue of contract; and (5) In the former, the constituent corporations are
automatically dissolved, while in the latter, the selling corporation is not dissolved by the mere
transfer of all its property. (citing De Leon, The Corporation Code of the Philippines Annotated, 1989
edition, pp. 509-510.)” (Emphasis supplied)
34 PNB v. Andrada Electric & Engineering Company, 430 Phil. 882, 899; 381 SCRA 244, 259 (2002) [Per
J. Panganiban, Third Division].
616
5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim,
action or proceeding brought by or against any of such constituent corporations may be prosecuted by
or against the surviving or consolidated corporation. The rights of creditors or liens upon the property
of any of such constituent corporations shall not be impaired by such merger or consolidation.
Thus, a judgment creditor can no doubt seek payment from the surviving or consolidated corporation
if it can prove that a merger or consolidation has taken place.
The ponencia discussed that no merger took place in this case as the requirements under the
Corporation Code were not met.35 In Justice Mendoza’s dissenting opinion, he agreed that “in a strict
sense, no merger or consolidation took place.”36 The Securities and Exchange Commission did not
issue any certificate of merger or consolidation in favor of petitioner Bancommerce.37 Justice
Mendoza then discussed how the Purchase and Sale Agreement involved substantially all of the assets
and liabilities of Traders Royal Bank, and the end result “amounted to a merger of assets where the
existence of [Traders Royal Bank] as a banking entity ceased while that of Bancommerce
continued.”38
This brings us to the third exception “where the purchasing corporation is merely a continuation of
the selling corporation.”39
_______________
36 Dissenting Opinion of Justice Mendoza, p. 594.
37 Id.
38 Id., at pp. 595-596.
39 Edward J. Nell Company v. Pacific Farms, Inc., 122 Phil. 825, 827; 15 SCRA 415, 417 (1965) [Per J.
Concepcion, En Banc];
617
Under Section 40 of the Corporation Code, when the transaction amounts to a sale of “all or
substantially all of [the corporation’s] property and assets,”40 the ratificatory vote of the stockholders
representing at least two-thirds of the outstanding capital stock is required. This transaction involves
a transfer of the entire business enterprise41 as no such ratificatory vote is required “if the proceeds
of the sale or other disposition of such property and assets [would] be appropriated for the conduct of
its remaining business.”42 In such transactions, the purchaser corporation is now the one continuing
the seller corporation’s original business. Consequently, as far as
_______________
McLeod v. National Labor Relations Commission, 541 Phil. 214, 234; 512 SCRA 222, 241 (2007) [Per J.
Carpio, Second Division].

41 See C. Villanueva, Philippine Corporate Law, pp. 679-680, 682, 692-693 (2010) for its discussion on
the three levels of Corporate Acquisitions and Transfers, namely: (1) pure assets-only transfer; (2)
transfer of the business enterprise; and (3) equity transfer. It discussed that in a pure assets-only
transfer, “the purchaser is only interested in the ‘raw’ assets and properties of the business, perhaps
to be used to establish its own business enterprise or to be used for its on-going business enterprise.”
In a transfer of business enterprise, “[t]he purchaser’s primary interest is to obtain the ‘earning
capability’ of the venture.” An equity transfer is when “[t]he purchaser takes control and ownership
of the business by purchasing the controlling shareholdings of the corporate owner.” In this case,
“[t]he control of the business enterprise is therefore indirect [as] the corporate owner remains the
direct owner of the business, and what the purchaser has actually purchased is the ability to elect the
members of the Board of Directors of the corporation which runs the business.”
For the first and third type, the transferee shall not be liable for the debts and liabilities of the
transferor except where the transferee expressly or impliedly agrees to assume such debts. The
second type, the transfer of business enterprise, makes the transferee liable for the transferor’s
liabilities.
42 Corporation Code, Sec. 40; emphasis supplied.
618
the selling corporation is concerned, there is no more business remaining.
This was partly discussed in Caltex (Phils.), Inc. v. PNOC Shipping & Transport Corp.,43 when this court
went on to rule that even without the Agreement of Assumption of Obligations, PSTC is still liable as
“[t]he acquisition by the assignee of all or substantially all of the assets of the assignor necessarily
includes the assumption of the assignor’s liabilities, unless the creditors who did not consent to the
transfer choose to rescind the transfer on the ground of fraud.”44
In the present case, Article III of the Purchase and Sale Agreement provides that petitioner
Bancommerce and Traders Royal Bank shall continue to exist as separate corporations:
ARTICLE III
EFFECTS AND CONSEQUENCES
The effectivity of this Agreement shall have the following effects and consequences:
1) BANCOMMERCE and TRB shall continue to exist as separate corporations with distinct corporate
personalities;
2) With the transfer of its branching licenses to BANCOMMERCE and upon surrender of its commercial
banking license to BSP, TRB shall exist as an ordinary corporation placed outside the supervisory
jurisdiction of BSP. To this end, TRB shall cause the amendment of its articles and by-laws to delete
the terms “bank” and “banking” from its corporate name and purpose;
_______________
43 530 Phil. 149; 498 SCRA 400 (2006) [Per J. Carpio, Third Division].
44 Id., at pp. 159-160; p. 412.
619
3) There shall be no employer-employee relationship between BANCOMMERCE and the personnel and
officers of TRB.45
The ponencia discussed that after the purchase, TRB retained its separate and distinct identity, and
“although it subsequently changed its name to Traders Royal Holding’s Inc. (TRHI), such change did
not result in its dissolution.”46 It quoted the following statement from Phil. First Insurance Co., Inc. v.
Hartigan, et al.,47 citing the American case, Pacific Bank v. De Ro:
The changing of the name of a corporation is no more [than] the creation of a corporation than the
changing of the name of a natural person is the begetting of a natural person. The act, in both cases,
would seem to be what the language which we use to designate it imports — a change of name, and
not a change of being.48
The case is about an insurance corporation named “The Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.,” which amended its articles of incorporation changing its name to “Philippine First Insurance Co.,
Inc.”49 In a civil case for sum of money filed by Philippine First Insurance Co., Inc., the defendants
argued that “they signed said [indemnity] agreement in favor of the Yek Tong Lin Fire and Marine
Insurance Co., Ltd. and not in favor of the plaintiff.”50 The facts involved only a change of corporate
name. The new corporate name indicated that the corporation remained an insurance company.
_______________
45 Rollo, p. 81, Article III of the Purchase and Sale Agreement.
46 Ponencia, p. 547. A copy of the Amended Articles of Incorporation was attached as Annex W of the
petition, Rollo, p. 253.
47 145 Phil. 310; 34 SCRA 252 (1970) [Per J. Barredo, En Banc].
48 Id., at p. 327; p. 266, citing Pacific Bank v. De Ro, 37 Cal. 538.
49 Id., at pp. 313-314; pp. 266-267.
50 Id., at p. 314; p. 254.
620
The same cannot be said of the facts in the present case.

As seen in Article III, paragraph 2 of the Purchase and Sale Agreement quoted above, Traders Royal
Bank transferred its branching licenses to petitioner Bancommerce and surrendered its commercial
banking license to Bangko Sentral ng Pilipinas. In fact, Bangko Sentral issued a circular letter, series of
2002, “advising all banks and non-bank financial intermediaries that the banking activities and
transactions of TRB and Bancommerce were consolidated and that the latter continued the operations
of the former.”51
Thus, Traders Royal Bank no longer exists as a commercial bank while petitioner Bancommerce to
whom Traders Royal Bank transferred substantially all of its assets including its branching licenses52
will continue its operations. While Traders Royal Bank continues to exist as a separate corporation, it
is no longer doing its original business of commercial banking. It is now a holding company, and it is
petitioner Bancommerce that is continuing its original banking business.
Thus, the first and third exceptions apply to petitioner Bancommerce.
The reason why a purchaser corporation in this type of transaction is made liable may be related to
the fourth and last exception on fraud against creditors of the seller corporation. This was discussed in
Caltex (Phils.), Inc. v. PNOC Shipping & Transport Corp.196 as follows:
_______________
51 Rollo, p. 123.
52 See Article I of the Purchase and Sale Agreement, Rollo, p. 80.
“Said assets and properties shall be inclusive of the banking goodwill of TRB, its bank premises and
licenses to operate its head office and branches, its leasehold rights, patents, trademarks or
copyrights used in connection with its business or products.”
53 Caltex (Phils.), Inc. v. PNOC Shipping & Transport Corp., 530 Phil. 149; 498 SCRA 400 (2006) [Per J.
Carpio, Third Division].
621
x x x To allow an assignor to transfer all its business, properties and assets without the consent of its
creditors and without requiring the assignee to assume the assignor’s obligations will defraud the
creditors. The assignment will place the assignor’s assets beyond the reach of its creditors.
xxxx
In Oria v. McMicking, the Court enumerated the badges of fraud as follows:
1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of the
above circumstances.
7. The failure of the vendee to take exclusive possession of all the property.54 (Emphasis supplied)
_______________
54Id., at pp. 160-161; p. 413 citing Oria v. McMicking, 21 Phil. 243, 250-251 (1912) [Per J. Moreland, En
Banc].
622
Article 1313 of the Civil Code on the general provisions for contracts clearly states that “[c]reditors are
protected in cases of contracts intended to defraud them.”
Since the first and third exceptions have been shown to apply against petitioner Bancommerce, it is
liable to pay respondents.
Moreover, this conclusion supports the principle of economy of judgments. A remand will only result
in the parties being left with no more recourse, and it will prolong this case with its back and forth
turn among the different levels of courts. Parties should be allowed to reasonably expect an end to
their suits. Thus, courts must work toward the efficient and expeditious dispatch of cases filed before
it while providing justice for the parties.
It is for these reasons that I vote to deny the petition.
Petition granted, resolutions reversed and set aside.
Notes.—It is more in keeping with the dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles of merger or the
merger plan. (Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter–Federation of
Unions in BPI Unibank, 658 SCRA 828 [2011])
It is worthy to note that in the Joint Stipulation of Facts and Issues submitted by the parties, it was
explicitly stated that both Bank of Commerce and Traders Royal Bank continued to exist as separate
corporations with distinct corporate personalities, despite the effectivity of the Purchase and Sale
Agreement. (Commissioner of Internal Revenue vs. Bank of Commerce, 709 SCRA 390 [2013])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Bank of Commerce vs. Radio
Philippines Network, Inc., 722 SCRA 520, G.R. No. 195615 April 21, 2014
Case No. 8
G.R. No. 159355. August 9, 2010.*
GABRIEL C. SINGSON, ANDRE NAVATO, EDGARDO P. ZIALCITA, ARACELI E. VILLANUEVA, TYRONE M.

REYES, JOSE CLEMENTE, JR., FEDERICO PASCUAL, ALEJANDRA C. CLEMENTE, ALBERT P. FENIX, JR., and
MELPIN A. GONZAGA, petitioners, vs. COMMISSION ON AUDIT, respondent.
Corporation Law; Board of Directors; Compensation; Per Diems; The directors of a corporation shall
not receive any compensation for being members of the board of directors, except for reasonable per
diems; Exceptions.—In construing the said provision, it bears stressing that the directors of a
corporation shall not receive any compensation for being members of the board of directors, except
for reasonable per diems. The two instances where the directors are to be entitled to compensation
shall be when it is fixed by the corporation’s
_______________
* EN BANC.
37
VOL. 627, AUGUST 9, 2010
37
Singson vs. Commission on Audit
by-laws or when the stockholders, representing at least a majority of the outstanding capital stock,
vote to grant the same at a regular or special stockholder’s meeting, subject to the qualification that,
in any of the two situations, the total yearly compensation of directors, as such directors, shall in no
case exceed ten (10%) percent of the net income before income tax of the corporation during the
preceding year.
Same; Same; Same; Same; No other compensation may be given to them, except only when they
serve the corporation in another capacity.—The nomenclature for the compensation of the directors
used herein is per diems, and not salary or any other words of similar import. Thus, petitioners are
allowed to receive only per diems of P1,000.00 for every meeting that they actually attended.
However, the Board of Directors may increase or decrease the amount of per diems, when the
prevailing circumstances shall warrant. No other compensation may be given to them, except only
when they serve the corporation in another capacity.
Same; Same; Same; Representation and Transportation Allowance (RATA); What National
Compensation Circular (NCC) No. 67 seeks to prevent is the dual collection of Representation and
Transportation Allowance (RATA) by a national official from the budgets of “more than one national
agency.”—In Leynes v. Commission on Audit, 418 SCRA 180 (2003), the Court clarified that what
National Compensation Circular (NCC) No. 67 seeks to prevent is the dual collection of RATA by a
national official from the budgets of “more than one national agency.” In the said case, the
interpretation was that NCC No. 67 cannot be construed as nullifying the power of therein local
government units to grant allowances to judges under the Local Government Code of 1991. Further,
NCC No. 67 applies only to the national funds administered by the DBM, not the local funds of the
local government units.
Same; Same; Same; Same; Unlike salary which is paid for services rendered, the Representation and
Transportation Allowance (RATA) is a form of allowance intended to defray expenses deemed
unavoidable in the discharge of office; The Representation and Transportation Allowance (RATA) is
paid only to certain officials who, by the nature of their offices, incur representation and
transportation expenses.—Section 6 of Republic Act No. 7653 (The New Central Bank Act) defines that
the powers and functions of the BSP
38
38
shall be exercised by the BSP Monetary Board, which is composed of seven (7) members appointed by
the President of the Philippines for a term of six (6) years. MB Resolution No. 15, dated January 5,
1994, as amended by MB Resolution No. 34, dated January 12, 1994, are valid corporate acts of
petitioners that became the bases for granting them additional monthly RATA of P1,500.00, as
members of the Board of Directors of PICCI. The RATA is distinct from salary (as a form of
compensation). Unlike salary which is paid for services rendered, the RATA is a form of allowance
intended to defray expenses deemed unavoidable in the discharge of office. Hence, the RATA is paid
only to certain officials who, by the nature of their offices, incur representation and transportation
expenses.
The General Counsel of the Bangko Sentral ng Pilipinas for petitioners.
The Solicitor General for respondent.
PERALTA, J.:
Before the Court is a petition for certiorari seeking to set aside Decision No. 2002-081,1 dated April
23, 2002, of the Commission on Audit (COA), which affirmed the Decision No. 2000-008,2 dated June
1, 2000, and the Resolution in CAO I
_______________
1 Entitled Re: Petition for Review of Mr. Gabriel C. Singson, et al. of CAO I Decision No. 2000-008
dated June 1, 2000, Affirming the Disallowance of the Representation and Transportation Allowance
(RATA) under Notice of Disallowance No. 99-001-101 (96-98) dated June 7, 1999 in the Amount of
P1,565,000.00; the signatories were Chairman Guillermo N. Carague (abstain) and Commissioners Raul
C. Flores and Emmanuel M. Dalman; Rollo, pp. 24-28.
2 Entitled Re: Lifting of the Disallowance on the Payments of Representation and Travel [should be
Transportation] Allowance to the Members of the Board of Directors of PICCI; per Director Crescencio
S. Sunico, Corporate Audit Officer I; id., at pp. 74-76.
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Decision No. 2000-012,3 dated August 11, 2000, of the Corporate Audit Office I, and the COA
Resolution No. 2003-115,4 dated July 31, 2003, which denied petitioners’ motion for reconsideration
thereof and upheld the disallowance of petitioners’ Representation and Transportation Allowance
(RATA) in the total amount of P1,565,000.00 under Notice of Disallowance No. 99-001-101 (96-96)
dated June 7, 1999.
The antecedents are as follows:
The Philippine International Convention Center, Inc. (PICCI) is a government corporation whose sole
stockholder is the Bangko Sentral ng Pilipinas (BSP). Petitioner Araceli E. Villanueva was then a
member of the PICCI Board of Directors and Officer-in-Charge (OIC) of PICCI, while co-petitioners
Gabriel C. Singson, Andre Navato, Edgardo P. Zialcita, and Melpin A. Gonzaga, Alejandra C. Clemente,
Jose Clemente, Jr., Federico Pascual, Albert P. Fenix, Jr., and Tyrone M. Reyes were then members of
the PICCI Board of Directors and officials of the BSP. By virtue of the PICCI By-Laws, petitioners were
authorized to receive P1,000.00 per diem each for every meeting attended. Pursuant to its Monetary
Board (MB) Resolution No. 155 dated January 5, 1994, as amended by MB Resolution No. 34 dated
January 12, 1994, the BSP MB granted additional monthly RATA, in the amount of P1,500.00, to each
of the petitioners, as members of
_______________
3 Entitled Motion for Reconsideration from CAO I Decision No. 2000-008 Affirming the Disallowance
on the Payments of Representation and Travel [should be Transportation] Allowance to the Members
of the Board of Directors of PICCI; per Director Crescencio S. Sunico; id., at p. 80.
4 Entitled Motion of Ms. Araceli Villanueva, General Manager, Philippine International Convention
Center, Inc. (PICCI), Manila, et al. for Reconsideration of COA Decision No. 2002-081 dated April 23,
2002; the signatories were Chairman Guillermo N. Carague and Commissioners Raul C. Flores and
Emmanuel M. Dalman; id., at pp. 29-32.
5 Rollo, p. 72.
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the Board of Directors of PICCI. Consequently, from January 1996 to December 1998, petitioners
received their corresponding RATA in the total amount of P1,565,000.00.
On June 7, 1999, then PICCI Corporate Auditor Adelaida A. Aldovino issued Notice of Disallowance No.
99-001-101 (96-98),6 addressed to petitioner Araceli E. Villanueva (through then OIC Susan M. Galang
of the Accounting Division of PICCI), disallowing in audit the payment of petitioners’ RATA in the total
amount of P1,565,000.00,7 and directing them to settle immediately the said disallowances, due to
the following reasons: (a) As to petitioner Araceli E. Villanueva, there was double payment of RATA to
her as member of the PICCI Board and as OIC of PICCI, which was in violation of Section 8, Article IX-B
of the 1987 Constitution and, moreover, Compensation Policy Guideline No. 6 provides that an official
already granted commutable RATA and designated by competent authority to perform duties in
concurrent capacity as OIC of another position whether or not in the same agency and entitled to
similar benefits, shall not be granted said similar benefits, except where said similar allowances are
higher in rates than those of his regular position, in which case he may be allowed to collect the
difference thereof; and (b) As to petitioners Gabriel Singson, Andre Navato, Edgardo Zialcita, Melpin
Gonzaga, Alejandra Clemente, Jose Clemente, Jr., Federico Pascual, Albert P. Fenix, Jr., and Tyrone M.
Reyes, there was double payment of RATA to them as members of the PICCI Board and as officers of
BSP, which
_______________
6 Id., at p. 50.
7 Id., at pp. 50-57; per audit by Corporate Auditor Adelaida A. Aldovino of the disbursement
transactions on a selective basis for the period 1996-1998, the following amounts received by the
petitioners have been disallowed in audit: A. E. Villanueva (P165,000.00), G. C. Singson (P165,000.00),
Andre Navato (P120,000.00), E. Zialcita (P165,000.00), M. Gonzaga (P165,000.00), A. Clemente
(P60,000.00), J. Clemente, Jr. (P65,000.00), F. Pascual (P105,000.00), A. P. Fenix, Jr. (P50,000.00), and
T. Reyes (P157,500.00).
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was in violation of Section 8, Article IX-B of the 1987 Constitution and PICCI By-laws and, further, the
contemplation of the constitutional provisions which authorized double compensation is construed to
mean statutes passed by the national legislative body and does not include resolutions passed by
governing boards, i.e., Section 229 of the Government Accounting and Auditing Manual.
In a letter8 dated September 27, 1999, petitioners, through Board Member and OIC of PICCI Araceli E.
Villanueva, sought reconsideration of the Notice of Disallowance No. 99-001-01 (96-98) dated June 7,
1999.
In a letter9 dated October 14, 1999, PICCI Corporate Auditor Aldovino denied petitioners’ motion for
reconsideration and, on February 18, 2000, petitioners filed their Notice of Appeal10 and Appeal
Memorandum.11
On June 1, 2000, Director Crescencio S. Sunico of the Corporate Audit Office I, COA, rendered a
Decision in CAO I Decision No. 2000-208 affirming the disallowance of the RATA received by
petitioners in their capacity as Directors of the PICCI Board. He stated that except for per diems,
Section 8, Article III of the PICCI By-Laws prohibits the payment of salary to directors in the form of
compensation or reimbursement of expenses, based upon the principle expression unius est exclusio
alterius (the express mention of one thing in a law means the exclusion of others not expressly
mentioned). Neither can the payment of RATA be legally founded on Section 30 of the Corporation
Code which states that 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
_______________
8 Rollo, pp. 58-60.
9 Id., at pp. 61-63.
10 Id., at p. 64.
11 Id., at pp. 65-71.
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42
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. The power to fix the compensation which the
directors shall receive, if any, is left to the corporation, to be determined in its by-laws or by the vote
of stockholders. The PICC By-Laws allows only the payment of per diem to the directors. Thus, the BSP
board resolution granting RATA of P1,500.00 to petitioners violated the PICCI By-Laws. Director Sunico
also explained that although MB Resolution No. 15, dated January 5, 1994, as amended by MB
Resolution No. 34, dated January 12, 1994, would have the effect of amending the PICCI By-laws, and
may render the grant of RATA valid, such amendment, however, had no effect because it failed to
comply with the procedural requirements set forth under Section 48 of the Corporation Code.12
_______________
12 Sec. 48. Amendments to by-laws.—The board of directors or trustees, by a majority vote thereof,
and the owners of at least a majority of the outstanding capital stock, or a least a majority of the
members of a non-stock corporation, at a regular or special meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the outstanding
capital stock or two-thirds (2/3) of the members in a non-stock corporation may delegate to the board
of directors or trustees the power to amend or repeal any by-laws or adopt new by-laws: Provided,
That any power delegated to the board of directors or trustees to amend or repeal any by-laws or
adopt new by-laws shall be considered as revoked whenever stockholders owning or representing a
majority of the outstanding capital stock or a majority of the members in non-stock corporations, shall
so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such amendment or new by-laws shall be
attached to the original by-laws in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors or trustees, shall be filed with
the Securities and Exchange Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the Securities and Exchange
Commission of a certifica-
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43
On August 11, 2000, Director Sunico issued a Resolution in CAO I Decision No. 2000-012, affirming the
disallowance of the RATA received by the petitioners in their capacity as directors in the total amount
of P1,565,000.00.
On petition for review by petitioners, the COA rendered the assailed COA Decision No. 2002-081
dated April 23, 2002, affirming CAO I Decision No. 2000-008 dated June 1, 2000 and Notice of
Disallowance No. 99-001-101 (96-98) dated June 7, 1999. It also directed the Auditor to determine the
amounts to be refunded by petitioners and to enforce and monitor their settlement. It ruled that
petitioners’ receipt of the P1,500.00 RATA from the BSP for every meeting they attended as members
of the PICCI Board of Directors was not valid.
In COA Decision No. 2003-115, dated July 31, 2003, the COA issued a Resolution denying petitioners’
motion for reconsideration and upheld the disallowance of the petitioners’ RATA amounting to
P1,565,000.00.
Hence, this present petition for certiorari raising the following grounds:
I.
THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN FINDING THAT THE
PETITIONERS VIOLATED ITS BY-LAWS WHEN SECTION 30 OF THE CORPORATION CODE AUTHORIZES
THE STOCKHOLDERS TO GRANT COMPENSATION TO ITS DIRECTORS.
II.
THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN FINDING THAT THE PAYMENT
OF RATA TO BSP OFFICIALS WHO ARE MEMBERS OF THE PICCI BOARD VIOLATED ITEM NO. 4 OF
NATIONAL COMPENSATION CIRCULAR (NCC) NO. 67 DATED JANUARY, 1992 ISSUED BY THE
DEPARTMENT OF BUDGET AND MANAGEMENT (DBM) AS SAID
_______________
tion that the same are not inconsistent with this Code. (22a and 23a).
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NCC SPECIFICALLY APPLIES ONLY TO “NATIONAL GOVERNMENT OFFICIALS AND EMPLOYEES.”
III.
THE RESPONDENT COA COMMITTED GRAVE ABUSE OF DISCRETION IN DIRECTING THE AUDITOR TO
ENFORCE REFUND OF THE PAYMENTS TO THE PETITIONERS [WHO ARE] DIRECTORS AS THE
PETITIONERS ENJOY THE PRESUMPTION OF GOOD FAITH AND ARE CONVINCED THAT THEY ARE
LEGALLY ENTITLED THERETO IN THE LIGHT OF THE SUPREME COURT DECISION IN ASSOCIATION OF
DEDICATED EMPLOYEES OF THE PHILIPPINE TOURISM AUTHORITY (ADEPT) VS. COA, 295 SCRA 366.13
Petitioners contend that since PICCI was incorporated with the Securities and Exchange Commission
(SEC) (SEC Regulation No. 68840) and has no original charter, it should be governed by Section 30 of
the Corporation Code. According to petitioners, their receipt of RATA as directors of PICCI was
sanctioned by PICCI’s sole stockholder, BSP (through its own governing body, the Monetary Board),
per MB Resolution No. 15 dated January 5, 1994, as amended by MB Resolution No. 34 dated January
12, 1994.
Respondent counters that said provision does not apply to petitioners as Section 8 of the PICCI By-
laws provides that the compensation of the members of the PICCI Board of Directors shall be given
only through per diems.
Section 30 of the Corporation Code, which authorizes the stockholders to grant compensation to its
directors, states:
“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
_______________
13 Rollo, pp. 12-13.
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45
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.”
In construing the said provision, it bears stressing that the directors of a corporation shall not receive
any compensation for being members of the board of directors, except for reasonable per diems. The
two instances where the directors are to be entitled to compensation shall be when it is fixed by the
corporation’s by-laws or when the stockholders, representing at least a majority of the outstanding
capital stock, vote to grant the same at a regular or special stockholder’s meeting, subject to the
qualification that, in any of the two situations, the total yearly compensation of directors, as such
directors, shall in no case exceed ten (10%) percent of the net income before income tax of the
corporation during the preceding year.
Section 8 of the Amended By-Laws of PICCI,14 in consonance with Section 30 of the Corporation Code,
restricted the scope of petitioners’ compensation by fixing their per diem at P1,000.00:
“Sec. 8. Compensation.—Directors, as such, shall not receive any salary for their services but shall
receive a per diem of one thousand pesos (P1,000.00) per meeting actually attended; Provided, that
the Board of Directors at a regular and special meeting may increase and decrease, as circumstances
shall warrant, such per diems to be received. Nothing herein contained shall be construed to preclude
_______________
14 Per S.E.C. Registration No. 68840, the amendment to Section 8, Article III of the PICCI By-Laws was
approved by the PICCI Board at a regular meeting held on February 22, 1994, and the Amendment to
the By-Laws of the PICCI was signed on March 29, 1994 by Chairman Gabriel C. Singson, Members of
the Board Edgardo P. Zialcita, Andre Navato, Roberto Y. Garcia, Herman M. Montenegro, Jose S.
Clemente, Jr., and Dennis D. Decena, and Corporate Secretary Luis S. Cachero, with an attached
notarized Director’s Certificate.
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46

any director from serving the Corporation in any capacity and receiving compensation therefor.”15
The nomenclature for the compensation of the directors used herein is per diems, and not salary or
any other words of similar import. Thus, petitioners are allowed to receive only per diems of
P1,000.00 for every meeting that they actually attended. However, the Board of Directors may
increase or decrease the amount of per diems, when the prevailing circumstances shall warrant. No
other compensation may be given to them, except only when they serve the corporation in another
capacity.
Petitioners justify their entitlement to P1,500.00 RATA from the PICCI, on the theory that:
“[T]he purpose in issuing NCC No. 67 is to ensure uniformity and consistency of actions on claims for
RATA which is granted by law to national government officials and employees to cover expenses
incurred in the discharge or performance of their duties and responsibilities. Moreover, Item 2 of NCC
67 enumerated the national government officials and employees that are covered by the Circular, to
wit:
[1] Those whose positions are listed under Service Code 18 of the Index of Occupational Services
issued by the Department of Budget and Management (DBM), pursuant to NCC No. 57, except for the
positions of the President, Vice-President, Lupon Member and Lupon Chairman and positions under
the Local Executives Group;
[2] Those whose positions are identified as chiefs of division in the Personal Services Itemization;
[3] Those whose positions are determined by the DBM to be of equivalent rank with the officials
and employees enumerated under Section 2.1 and 2.2 hereof x x x; and
[4] Those who are duly designated by competent authority to perform the full-time duties and
responsibilities,
_______________
15 Underscoring supplied.
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47
whether or not in concurrent capacity, as Officers-in-Charge for one (1) final calendar month or more
of the positions enumerated in Sections 2.1, 2.2 and 2.3 hereof.
The PICCI is not an originally chartered corporation, but a subsidiary corporation of BSP organized in
accordance with the Corporation Code of the Philippines. The Articles of Incorporation of PICCI was
registered on July 29, 1976 in the Securities and Exchange Commission. As such, PICCI does not fall
within the coverage of NCC No. 67. As a matter of fact, by virtue of P.D. [No.] 520, PICCI is exempt
from the coverage of the civil service law and regulations (and Constitution defining coverage of civil
service as limited to those with original [charter] (TUCP v. NHA, G.R. No. 49677, May 4, 1089, Article
IX-B, Sec. 1). Certainly, if PICCI is not part of the National Government, but a mere subsidiary of a
government-owned and/or controlled corporation (BSP), its officers, and more importantly, its
directors, are not covered by the term “national government officials and employees” to which NCC
No. 67 finds application.
Even the BSP, which is the sole stockholder of PICCI, is not covered by NCC No. 67, not only for the
same reasons stated above but for the reason that it enjoys fiscal and administrative autonomy,
which is defined as the “guarantee of full flexibility to allocate and utilize their resources with the
wisdom and dispatch that their needs require” (Bengzon v. Drilon, 208 SCRA 133).”16
Respondent maintains that petitioners’ receipt of RATA from PICCI, in addition to their per diem of
P1,000 per meeting, and another RATA from BSP, violates the rule against double compensation; that
as former officers of the BSP, petitioners Gabriel P. Singson, Araceli E. Villanueva, Andre Navato,
Edgardo P. Zialcita, and Melpin A. Gonzaga were also receiving RATA from the BSP, in addition to the
RATA granted to them as PICCI Directors; that there is double payment of RATA, since petitioners’
membership in the PICCI Board is a mere adjunct of their positions as BSP officials; that double
compensation refers to two sets of compensations for two different offices held concurrently by one
officer; and that while there is no general prohibition against
_______________
16 Petitioners’ Memorandum, pp. 8-9.
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48
holding two offices which are not incompatible, when an officer accepts a second office, he can draw
the salary attached to such second office only when he is specifically authorized by law which does
not exist in the present case.
In her letter, dated October 14, 1999, to petitioner Araceli E. Villanueva, Corporate Auditor Adelaida
A. Aldovino reiterated her decision disallowing disbursements for RATA of PICCI directors for the
reasons set forth in Notice of Disallowance No. 99-001-101 (96-98). Thus,
“Moreover, while the directors are not strictly speaking Officers-in-Charge, but because they are doing
duties in concurrent capacities and are already receiving RATA from their principal office, Budget
Compensation Policy Guideline No. 6, dated September 1, 1982, is applicable.
No. 3.0 of the guideline provides:
3.1 An Official/employee already entitled/granted commutable transportation/representation

allowances and designated by competent authority to perform duties and responsibilities in
concurrent capacity as Officer-in-Charge of another position(s), whether CES or non-CES, whether or
not in the same ministry/bureau/office or agency and entitled to similar benefits/allowances,
whether commutable or reimbursable, except where similar allowances are higher in rates than those
of his regular position, in which case he may be allowed to collect the difference thereof, provided the
period of his temporary stewardship is not less than one month on a reimbursable basis.
In view of the foregoing, we are reiterating our decision disallowing disbursement for RATA of PICCI
directors for reasons stated in our Notice of Disallowance No. 99-001-01 (96-98).
Further, please be reminded that disallowance not appealed within six (6) months as prescribed under
Section 48, 50 and 51 of PD 1445 shall become final and executory.”17
In COA Decision No. 2002-081 dated April 23, 2002, respondent concluded that the payment of RATA
to petitioners
_______________
17 Rollo, pp. 62-63.
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49
violated Item No. 4 of National Compensation Circular (NCC) No. 67, dated January 1, 1992, issued by
the DBM, as the petitioners were already drawing RATA from their mother agencies and, hence, their
receipt of RATA from PICCI was without legal basis and constituted double compensation of RATA
which is prohibited under the Constitution. It also explained that under the By-Laws of PICCI, the
compensation of its directors should be in the form of per diem and not RATA, and as the By-Laws
have the same force and effect of law as the corporate charter, its directors and officers are under
obligation to comply therewith.
Section 8, Article IX-B of the Constitution provides that no elective or appointive public officer or
employee shall receive additional, double or indirect compensation, unless specifically authorized by
law, nor accept without the consent of the Congress, any present emolument, office or title of any
kind from any foreign government. Pensions and gratuities shall not be considered as additional,
double or indirect compensation.
This provision, however, does not apply to the present case as there was no double compensation of
RATA to the petitioners.
In Leynes v. Commission on Audit,18 the Court clarified that what National Compensation Circular
(NCC) No. 67 seeks to prevent is the dual collection of RATA by a national official from the budgets of
“more than one national agency.” In the said case, the interpretation was that NCC No. 67 cannot be
construed as nullifying the power of therein local government units to grant allowances to judges
under the Local Government Code of 1991. Further, NCC No. 67 applies only to the national funds
administered by the DBM, not the local funds of the local government units. Thus,
_______________
18 463 Phil. 557; 418 SCRA 180 (2003).
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50
“The pertinent provisions of NCC No. 67 read:
3. Rules and Regulations:
3.1.1 Payment of RATA, whether commutable or reimbursable, shall be in accordance with the rates
prescribed for each of the following officials and employees and those of equivalent ranks, and the
conditions enumerated under the pertinent sections of the General Provisions of the annual General
Appropriations Act (GAA):
xxx xxx xxx
4. Funding Source:
In all cases, commutable and reimbursable RATA shall be paid from the amount appropriated for the
purpose and other personal services savings of the agency or project from where the officials and
employees covered under this Circular draw their salaries. No one shall be allowed to collect RATA
from more than one source. (Italics ours)
In construing NCC No. 67, we apply the principle in statutory construction that force and effect should
not be narrowly given to isolated and disjoined clauses of the law but to its spirit, broadly taking all its
provisions together in one rational view. Because a statute is enacted as a whole and not in parts or
sections, that is, one part is as important as the others, the statute should be construed and given
effect as a whole. A provision or section which is unclear by itself may be clarified by reading and
construing it in relation to the whole statute.
Taking NCC No. 67 as a whole then, what it seeks to prevent is the dual collection of RATA by a
national official from the budgets of “more than one national agency.” We emphasize that the other
source referred to in the prohibition is another national agency. This can be gleaned from the fact that
the sentence “no one shall be allowed to collect RATA from more than one source” (the controversial
prohibition) immediately follows the sentence that RATA shall be paid from the budget of the national
agency where the concerned national officials and employees draw their salaries. The fact that the
other source is another national agency is supported by RA 7645 (the GAA of 1993) invoked by
respondent COA itself and, in fact, by all subsequent GAAs for that matter, because the GAAs all
essentially provide that (1) the RATA of national officials shall be payable from the budgets of their
respective national agencies and (2) those
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51

officials on detail with other national agencies shall be paid their RATA only from the budget of their
parent national agency:
xxx xxx xxx
Clearly therefore, the prohibition in NCC No. 67 is only against the dual or multiple collection of RATA
by a national official from the budgets of two or more national agencies. Stated otherwise, when a
national official is on detail with another national agency, he should get his RATA only from his parent
national agency and not from the other national agency he is detailed to.”19 (Italics supplied.)
Moreover, Section 6 of Republic Act No. 7653 (The New Central Bank Act) defines that the powers and
functions of the BSP shall be exercised by the BSP Monetary Board, which is composed of seven (7)
members appointed by the President of the Philippines for a term of six (6) years. MB Resolution No.
15,20 dated January 5, 1994, as amended by
_______________
19 Id., at pp. 572-574.
20 Min. No. 1— January 5, 1994
15. Philippine International Convention Center.—Decision to authorize the representation and

transportation allowance of the Members of its Board of Directors.
ACTION TAKEN
The Board decided as follows:

1. To authorize the representation and transportation allowance in the amount of P1,500.00 a
month of the Members of the Board of Directors of the Philippine International Convention Center
(PICC);
2. To approve the actual expenditure for 1993;
3. To approve the actual expenses for 1992 incurred by PICC, not covered by the original budget,
subject to existing Commission [on] Audit rules and regulations; and
4. To instruct PICC Management to prepare and submit proposal for 1994 within two (2) months
from date of receipt.
(Signed)
FE B. BARIN
Secretary
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MB Resolution No. 34, dated January 12, 1994, are valid corporate acts of petitioners that became the
bases for granting them additional monthly RATA of P1,500.00, as members of the Board of Directors
of PICCI. The RATA is distinct from salary (as a form of compensation). Unlike salary which is paid for
services rendered, the RATA is a form of allowance intended to defray expenses deemed unavoidable
in the discharge of office. Hence, the RATA is paid only to certain officials who, by the nature of their
offices, incur representation and transportation expenses.21 Indeed, aside from the RATA that they
have been receiving from the BSP, the grant of P1,500.00 RATA to each of the petitioners for every
board meeting they attended, in their capacity as members of the Board of Directors of PICCI, in
addition to their P1,000.00 per diem, does not run afoul the constitutional proscription against double
compensation.
Petitioners invoke the ruling of ADEPT v. COA22 whereby the Court took into consideration the good
faith of therein petitioners and, thus, allowed them to retain the incentive benefits they had received
for the year 1992.
Respondent points out that the records of the case do not support petitioners’ claim of good faith,
because they themselves were the authors of the By-Laws of PICCI which prohibit the receipt of
compensation other than per diems and, therefore, should have been conversant with the
constitutional prohibition on double compensation.
The Court upholds the findings of respondent that petitioners’ right to compensation as members of
the PICCI Board of Directors is limited only to per diem of P1,000.00 for every meeting attended, by
virtue of the PICCI By-Laws. In the
_______________
21 Department of Budget and Management, represented by Sec. Emilia T. Boncodin v. Olivia D.

Leones, G.R. No. 169726, March 18, 2010.
22 G.R. No. 119597, companion case of Blaquera v. Alcala, G.R. No. 109406, September 11, 1998, 356
Phil. 678; 295 SCRA 366.
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53
same vein, we also clarify that there has been no double compensation despite the fact that, apart
from the RATA they have been receiving from the BSP, petitioners have been granted the RATA of
P1,500.00 for every board meeting they attended, in their capacity as members of the Board of
Directors of PICCI, pursuant to MB Resolution No. 1523 dated January 5, 1994, as amended by MB
Resolution No. 34 dated January 12, 1994, of the Bangko Sentral ng Pilipinas. In this regard, we take
into consideration the good faith of petitioners.
The ruling in Blaquera, to which the cited case of ADEPT v. COA was consolidated with, is applicable to
the present case as petitioners acted in good faith. The disposition in De Jesus v. Commission on
Audit,24 which cited Blaquera, is instructive:
“Nevertheless, our pronouncement in Blaquera v. Alcala25 supports petitioners’ position on the

refund of the benefits they received. In Blaquera, the officials and employees of several government
departments and agencies were paid incentive benefits which the COA disallowed on the ground that
Administrative Order No. 29 dated 19 January 1993 prohibited payment of these benefits. While the
Court sustained the COA on the disallowance, it nevertheless declared that:
Considering, however, that all the parties here acted in good faith, we cannot countenance the refund
of subject incentive benefits for the year 1992, which amounts the petitioners have already received.
Indeed, no indicia of bad faith can be detected under the attendant facts and circumstances. The
officials and chiefs of offices concerned disbursed such incentive benefits in the honest belief that the
amounts given were due to the recipients and the latter accepted the same with gratitude, confident
that they richly deserve such benefits.
_______________
23 Rollo, p. 72.
24 451 Phil. 812; 403 SCRA 666 (2003).
25 Supra note 22.
54
54
This ruling in Blaquera applies to the instant case. Petitioners here received the additional allowances
and bonuses in good faith under the honest belief that LWUA Board Resolution No. 313 authorized
such payment. At the time petitioners received the additional allowances and bonuses, the Court had
not yet decided Baybay Water District [v. Commission on Audit].26 Petitioners had no knowledge that
such payment was without legal basis. Thus, being in good faith, petitioners need not refund the
allowances and bonuses they received but disallowed by the COA.”27
In subsequent cases,28 the Court took into account the good faith of the recipients of the allowances,
bonuses, and other benefits disallowed by respondent and ruled that they need not refund the same.
As petitioners believed in good faith that they are entitled to the RATA of P1,500.00 for every board
meeting they attended, in their capacity as members of the Board of Directors of PICCI, pursuant to
MB Resolution No. 1529 dated January 5, 1994, as amended by MB Resolution No. 34 dated January
12, 1994, of the BSP, the Court sees no need for them to refund their RATA respectively, in the total
amount of P1,565,000.00, covering the period from 1996-1998.
WHEREFORE, the petition is DISMISSED. Decision No. 2002-081, dated April 23, 2002, of the
Commission on Audit and its Resolution No. 2003-115, dated July 31, 2003, which denied petitioners’
motion for reconsideration thereof and upheld the disallowance of petitioners’ Representation and
_______________
26 425 Phil. 326; 374 SCRA 482 (2000).
27 De Jesus v. COA, supra note 24, at pp. 823-824.
28 Molen, Jr. v. Commission on Audit, G.R. No. 150222, March 18, 2005, 453 SCRA 769; Querubin v.
Regional Cluster Director, Legal and Adjudication Office, COA Regional Office VI, Pavia, Iloilo City, G.R.
No. 159299, July 7, 2004, 433 SCRA 769; De Jesus v. Commission on Audit, G.R. No. 156641, February
5, 2004, 422 SCRA 287; Philippine International Trading Corporation v. Commission on Audit, 461 Phil.
737; 416 SCRA 245 (2003).
29 Rollo, p. 72.
55
VOL. 627, AUGUST 9, 2010

55
Transportation Allowance (RATA) in the total amount of P1,565,000.00 under Notice of Disallowance
No. 99-001-101 (96-96) dated June 7, 1999, are AFFIRMED WITH MODIFICATION. Petitioners need not
refund the Representation and Transportation Allowance (RATA) they received pursuant to Monetary
Board Resolution No. 1530 dated January 5, 1994, as amended by Monetary Board Resolution No. 34
dated January 12, 1994, of the Bangko Sentral ng Pilipinas granting each of them an additional
monthly RATA of P1,500.00, for every meeting attended, in their capacity as members of the Board of
Directors of Philippine International Convention Center, Inc. (PICCI), or in the total amount of
P1,565,000.00, covering the period from 1996-1998.
SO ORDERED.
Carpio, Carpio-Morales, Nachura, Leonardo-De Castro, Bersamin, Del Castillo, Abad, Villarama, Jr.,
Perez and
Mendoza, JJ., concur.
Corona (C.J.), No part.
Velasco, Jr., J., On Official Leave.
Brion, J., On Leave.
Petition dismissed, judgment and resolution affirmed with modification.

Note.—The Commission on Audit (COA) is endowed with enough latitude to determine, prevent and
disallow irregular, unnecessary, excessive, extravagant or unconscionable expenditures of
government funds. (Sanchez vs. Commission on Audit, 552 SCRA 471 [2008])
——o0o——
30 Rollo, p. 72.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Singson vs. Commission on Audit, 627
SCRA 36, G.R. No. 159355 August 9, 2010
Case No. 9
G.R. No. 157479. November 24, 2010.*
PHILIP TURNER and ELNORA TURNER, petitioners, vs. LORENZO SHIPPING CORPORATION, respondent.
Corporation Law; Words and Phrases; Right of Appraisal; A stockholder who dissents from certain
corporate actions has the right to demand payment of the fair value of his or her shares.—A
stockholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section
81 of the Corporation Code.
Same; Same; The right of appraisal may be exercised when there is a fundamental change in the
charter or articles of incorporation substantially prejudicing the rights of the stockholders.—The right
of appraisal may be exercised when there is a fundamental change in the charter or articles of
incorporation substantially prejudicing the rights of the stockholders. It does not vest unless
objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder
to have his interests purchased and to retire from the corporation.
Same; Same; A corporation can now purchase its own shares, provided payment is made out of
surplus profits and the acquisition is for a legitimate corporate purpose.—Now, however, a
corporation can purchase its own shares, provided payment is made out of surplus profits and the
acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied in
Section 41 of the Corporation Code.
Same; No payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover the payment—if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his voting and dividend rights shall
immediately be restored.—Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover
the payment. In case the corporation has no available unrestricted retained earnings in its
_______________
* THIRD DIVISION.
14
14
Turner vs. Lorenzo Shipping Corporation
books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the
value of his shares within 30 days after the award, his voting and dividend rights shall immediately be
restored.
Same; Same; Trust Fund Doctrine; Under the doctrine, the capital stock, property, and other assets of
a corporation are regarded as equity in trust for the payment of corporate creditors, who are
preferred in the distribution of corporate assets.—The trust fund doctrine backstops the requirement
of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors, who are preferred in the
distribution of corporate assets. The creditors of a corporation have the right to assume that the
board of directors will not use the assets of the corporation to purchase its own stock for as long as
the corporation has outstanding debts and liabilities. There can be no distribution of assets among the
stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets
to the prejudice of creditors is null and void.
Remedial Law; Actions; Cause of Action; A cause of action is the act or omission by which a party
violates a right of another; Essential Elements of a Cause of Action.—A cause of action is the act or
omission by which a party violates a right of another. The essential elements of a cause of action are:
(a) the existence of a legal right in favor of the plaintiff; (b) a correlative legal duty of the defendant to
respect such right; and (c) an act or omission by such defendant in violation of the right of the plaintiff
with a resulting injury or damage to the plaintiff for which the latter may maintain an action for the
recovery of relief from the defendant. Although the first two elements may exist, a cause of action
arises only upon the occurrence of the last element, giving the plaintiff the right to maintain an action
in court for recovery of damages or other appropriate relief.
Same; Same; Same; A complaint whose cause of action has not yet accrued cannot be cured by an
amended or supplemental pleading alleging the existence or accrual of a cause of action during the
pendency of the action.—Neither did the subsequent existence of unrestricted retained earnings after
the filing of the complaint cure the
15
VOL. 636, NOVEMBER 24, 2010
15

lack of cause of action in Civil Case No. 01-086. The petitioners’ right of action could only spring from
an existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be
cured by an amended or supplemental pleading alleging the existence or accrual of a cause of action
during the pendency of the action. For, only when there is an invasion of primary rights, not before,
does the adjective or remedial law become operative. Verily, a premature invocation of the court’s
intervention renders the complaint without a cause of action and dismissible on such ground. In short,
Civil Case No. 01-086, being a groundless suit, should be dismissed.
Beltran, Beltran, Rubrico, Koa & Mendoza for petitioners.
Herrera, Teehankee, Faylona & Cabrera for respondent.
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.
In the stockholders’ suit to recover the value of their shareholdings from the corporation, the Regional
Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation,
herein respondent, to pay. Execution was partially carried out against the respondent. On the
respondent’s petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and
dismissed the petitioners’ suit on the ground that their cause of action for collection had not yet
accrued due to the lack of unrestricted retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on March
4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon.
16
16
Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila,
et al.1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders’ pre-emptive rights to newly issued shares of stock. Feeling
that the corporate move would be prejudicial to their interest as stockholders, the petitioners voted
against the amendment and demanded payment of their shares at the rate of P2.276/share based on
the book value of the shares, or a total of P2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or P0.41/share (or a total of P414,100.00), considering that its shares were
listed in the Philippine Stock Exchange, and that the payment could be made only if the respondent
had unrestricted retained earnings in its books to cover the value of the shares, which was not the
case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal committee
pursuant to Section 82 of the Corporation Code, each of them nominating a representative, who
together then nominated the third member who would be chairman of the appraisal committee.
Thus, the appraisal committee came to be made up of Reynaldo Yatco, the petitioners’ nominee; Atty.
Antonio Acyatan, the respondent’s nominee; and Leo Anoche of the Asian Appraisal Company, Inc.,
the third member/chairman.
_______________
1 Rollo, pp. 20-35; penned by Associate Justice Portia Aliño-Hormachuelos, with Associate Justice Jose
L. Sabio, Jr. (retired) and Associate Justice Amelita G. Tolentino, concurring.
17
17
On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for an aggregate
value of P2,565,400.00 for the petitioners.2
Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee,
plus 2%/month penalty from the date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to the appraisers.3
In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’
demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising
their appraisal rights could be paid only when the corporation had unrestricted retained earnings to
cover the fair value of the shares, but that it had no retained earnings at the time of the petitioners’
demand, as borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of
P72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and damages
in the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially
assigned to Branch 132.5
On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION NINE
HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS, Philippine
Currency, evidenced by its Financial Statement as of the Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final, that
the same cannot be disputed xxx
_______________
2 Id., p. 127.
3 Id., p. 100.
4 Id., pp. 118-119.
5 Id., pp. 120-124.
18
18
9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a matter
of right, to a summary judgment. xxx 6
The respondent opposed the motion for partial summary judgment, stating that the determination of
the unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and
that the petitioners did not have a cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the Presiding Judge of
Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s special
commercial courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case
No. 01-086 was re-raffled to Branch 142.
Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was
ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,7 pursuant
to the Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-
corporate cases to be brought in the RTC exercising jurisdiction over the place where the principal
office of the corporation was found. After the conference in Civil Case No. 01-086 set on October 23,
2002, which the petitioners’ counsel did not attend, Judge Tipon issued an order,8 granting the
petitioners’ motion for partial summary judgment, stating:
“As to the motion for partial summary judgment, there is no question that the 3-man committee
mandated to appraise the shareholdings of plaintiff submitted its recommendation on October 27,
2000 fixing the fair value of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of
the Corporation Code:
_______________
6 Id., pp 151-152.
7 Already retired.
8 Rollo, pp. 91-93.
19
19
“The findings of the majority of the appraisers shall be final, and the award shall be paid by the
corporation within thirty (30) days after the award is made.”
“The only restriction imposed by the Corporation Code is—”
“That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earning in its books to cover such payment.”
The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the
Securities and Exchange Commission, the defendant has retained earnings of P11,975,490 as of March
21, 2002. This is not disputed by the defendant. Its only argument against paying is that there must be
unrestricted retained earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say
that the unrestricted retained earnings must exist at the time of the demand. Even if there are no
retained earnings at the time the demand is made if there are retained earnings later, the fair value of
such stocks must be paid. The only restriction is that there must be sufficient funds to cover the
creditors after the dissenting stockholder is paid. No such allegations have been made by the
defendant.”9
On November 12, 2002, the respondent filed a motion for reconsideration.
On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners
filed a motion for immediate execution and a motion to strike out motion for reconsideration. In the
latter motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the
Interim Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration
and granted the petitioners’ motion for immediate execution.10
_______________
9 Id., p. 92.
10 Id., pp. 94-96.
20
20

Subsequently, on November 28, 2002, the RTC issued a writ of execution.11
Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the
two aforecited orders of Judge Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE
SPOUSES TURNER, BECAUSE AT THE TIME THE “COMPLAINT” WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE
SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY RETAINED
EARNINGS MADE A YEAR AFTER THE “COMPLAINT” WAS FILED ARE IRRELEVANT TO THE SPOUSES
TURNER’S RIGHT TO RECOVER UNDER THE “COMPLAINT”, BECAUSE THE WELL-SETTLED RULE,
REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS “IF NO RIGHT EXISTED AT THE TIME (T)HE
ACTION WAS COMMENCED THE SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION
MAY HAVE ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS DISCRETION,
WHEN HE GRANTED AND ISSUED THE QUESTIONED “WRIT OF EXECUTION” DIRECTING THE
EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES TURNER, BECAUSE
THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF COURT
AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE SUPREME COURT’S CATEGORICAL
HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining the
petitioners, and
_______________
11 Id., p. 97.
21
21
their agents and representatives from enforcing the writ of execution. By then, however, the writ of
execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:
“However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal
condition that no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment. Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are regarded
as equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation
are preferred over the stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying corporate creditors. Hence, any
disposition of corporate funds to the prejudice of creditors is null and void. Creditors of a corporation
have the right to assume that so long as there are outstanding debts and liabilities, the board of
directors will not use the assets of the corporation to purchase its own stock.
In the instant case, it was established that there were no unrestricted retained earnings when the
Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that
payment of their shares could only be made if it had unrestricted earnings in its books to cover the
same. Petitioner reiterated this in a letter dated 2 January 2001 which further informed the Turners
that its Financial Statement for fiscal year 1999 shows that its retained earnings ending December 31,
1999 was at a deficit in the amount of P72,973,114.00, a matter which has not been disputed
_______________
12 Id., pp. 20-35.
22
22
by private respondents. Hence, in accordance with the second paragraph of sec. 82, BP 68 supra, the
Turners’ right to payment had not yet accrued when they filed their Complaint on January 22, 2001,
albeit their appraisal right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared
that:
Now, before an action can properly be commenced all the essential elements of the cause of action
must be in existence, that is, the cause of action must be complete. All valid conditions precedent to
the institution of the particular action, whether prescribed by statute, fixed by agreement of the
parties or implied by law must be performed or complied with before commencing the action, unless
the conduct of the adverse party has been such as to prevent or waive performance or excuse non-
performance of the condition.
It bears restating that a right of action is the right to presently enforce a cause of action, while a cause
of action consists of the operative facts which give rise to such right of action. The right of action does
not arise until the performance of all conditions precedent to the action and may be taken away by
the running of the statute of limitations, through estoppel, or by other circumstances which do not
affect the cause of action. Performance or fulfillment of all conditions precedent upon which a right of
action depends must be sufficiently alleged, considering that the burden of proof to show that a party
has a right of action is upon the person initiating the suit.
The Turners’ right of action arose only when petitioner had already retained earnings in the amount
of P11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001 when
they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc. vs. Harris, the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by law, an action commenced
before the cause of action has accrued is prematurely brought and should be dismissed. The fact that
the cause of action accrues after the action is commenced and while it is pending is of no moment. It
is a rule of law to which there is, perhaps, no exception, either at law or in equity, that to recover at
all there must be some
23
23
cause of action at the commencement of the suit. There are reasons of public policy why there should
be no needless haste in bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned before the public tribunals to
answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless
the plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect
cannot be cured or remedied by the acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such after-accrued cause of action is not
permissible.
The afore-quoted ruling was reiterated in Young vs. Court of Appeals and Lao vs. Court of Appeals.
The Turners’ apprehension that their claim for payment may prescribe if they wait for the petitioner
to have unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of prescription. Stated otherwise, the
prescriptive period is to be reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein
Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside
the limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that the
act although within the general power of the judge, is not authorized and therefore void, with respect
to the particular case, because the conditions which authorize the exercise of his general power in
that particular case are wanting, and hence, the judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding
Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED without
prejudice to refiling by the private respondents of the action for enforcement of their right to
payment as withdrawing stockholders.
SO ORDERED.”
24
24
The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION FOR
CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS JURISDICTION
AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL SUMMARY
JUDGMENT AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE DISMISSAL OF
THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE ANNULMENT OF THE ORDER
GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING THE
MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE
DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH LAW
OR WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners’
complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of
execution.
25
25
A.
Stockholder’s Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to demand payment of the
fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code, to wit:
“Section 81. Instances of appraisal right.—Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior
to those of outstanding shares of any class, or of extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)”
Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken.13 It serves the purpose of enabling the dissenting
stockholder to have his interests purchased and to retire from the corporation.14
Under the common law, there were originally conflicting views on whether a corporation had the
power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to
purchase its issued stocks because such purchase was an indirect method of reducing capital (which
was
_______________
13 18 CJS, Corporations, §314, pp. 641-642.
14 Ibid.
26
26
statutorily restricted), aside from being inconsistent with the privilege of limited liability to
creditors.15 Only a few American jurisdictions adopted by decision or statute the strict English rule
forbidding a corporation from purchasing its own shares. In some American states where the English
rule used to be adopted, statutes granting authority to purchase out of surplus funds were enacted,
while in others, shares might be purchased even out of capital provided the rights of creditors were
not prejudiced.16 The reason underlying the limitation of share purchases sprang from the necessity
of imposing safeguards against the depletion by a corporation of its assets and against the impairment
of its capital needed for the protection of creditors.17
Now, however, a corporation can purchase its own shares, provided payment is made out of surplus
profits and the acquisition is for a legitimate corporate purpose.18 In the Philippines, this new rule is
embodied in Section 41 of the Corporation Code, to wit:
“Section 41. Power to acquire own shares.—A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to
the following cases: Provided, That the corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription,

in a delinquency sale, and to purchase delinquent shares sold during said sale; and
_______________
15 Ballantine, Law of Corporations, Revised Edition, Callaghan and Co., Chicago, 1946, p. 603.
16 Id., p. 604.
17 Id., p. 605.
18 II Campos Jr., The Corporation Code, Comments, Notes and Selected Cases (1990).
27
27
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code.” (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the
right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate
action by making a written demand on the corporation within 30 days after the date on which the
vote was taken for the payment of the fair value of his shares. The failure to make the demand within
the period is deemed a waiver of the appraisal right.19
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares
within a period of 60 days from the date the stockholders approved the corporate action, the fair
value shall be determined and appraised by three disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and the third by the two thus chosen. The findings
and award of the majority of the appraisers shall be final, and the corporation shall pay their award
within 30 days after the award is made. Upon payment by the corporation of the agreed or awarded
price, the stockholder shall forthwith transfer his or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights,
shall be suspended from the time of demand for the payment of the fair value of the shares until
either the abandonment of the corporate action involved or the purchase of the shares by the
corporation, except the right of such stockholder to receive payment of the fair value of the shares.21
_______________
19 Section 82, Corporation Code.
20 Ibid.
21 Id., Section 83.
28
28

4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon that
such shares are dissenting shares. A failure to do so shall, at the option of the corporation, terminate
his rights under this Title X of the Corporation Code. If shares represented by the certificates bearing
such notation are transferred, and the certificates are consequently canceled, the rights of the
transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend distributions that would have accrued on such shares
shall be paid to the transferee.22
5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.23
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the
corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation
Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after
the award, his voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment of
_______________
22 Id., Section 86.
23 Id., Section 82.
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29
corporate creditors, who are preferred in the distribution of corporate assets.24 The creditors of a
corporation have the right to assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has outstanding debts and
liabilities.25 There can be no distribution of assets among the stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is
null and void.26
B.
Petitioners’ cause of action was premature
That the respondent had indisputably no unrestricted retained earnings in its books at the time the
petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s legal
obligation to pay the value of the petitioners’ shares did not yet arise. Thus, the CA did not err in
holding that the petitioners had no cause of action, and in ruling that the RTC did not validly render
the partial summary judgment.
_______________
24 Boman Environment Development Corporation v. Court of Appeals, G.R. No. L-77860, November
22, 1988, 167 SCRA 540, 541; citing Steinberg v. Velasco, 52 Phil. 953 (1929).
According to 42A, Words and Phrases, Trust Fund Doctrine, p. 445, the “trust fund doctrine” is a “rule
that the property of a corporation is a trust fund for the payment of creditors, but such property can
be called a trust fund ‘only by way of analogy or metaphor.’ As between the corporation itself and its
creditors it is a simple debtor, and as between its creditors and stockholders its assets are in equity a
fund for the payment of its debts” (citing McIver v. Young Hardware Co., 57 S.E. 169, 171, 144 N.C.
478, 119 Am. St. Rep. 970; Gallagher v. Asphalt Co. of America, 55 A. 259, 262, 65 N.J. Eq. 258).
25 Boman Environment Development Corporation v. Court of Appeals, supra.
26 Id.
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30
A cause of action is the act or omission by which a party violates a right of another.27 The essential
elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a
correlative legal duty of the defendant to respect such right; and (c) an act or omission by such
defendant in violation of the right of the plaintiff with a resulting injury or damage to the plaintiff for
which the latter may maintain an action for the recovery of relief from the defendant.28 Although the
first two elements may exist, a cause of action arises only upon the occurrence of the last element,
giving the plaintiff the right to maintain an action in court for recovery of damages or other
appropriate relief.29
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a
cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being
without any cause of action.
The RTC concluded that the respondent’s obligation to pay had accrued by its having the unrestricted
retained earnings after the making of the demand by the petitioners. It based its conclusion on the
fact that the Corporation Code did not provide that the unrestricted retained earnings must already
exist at the time of the demand.
The RTC’s construal of the Corporation Code was unsustainable, because it did not take into account
the petitioners’ lack of a cause of action against the respondent. In order to give rise to any obligation
to pay on the part of the respon-
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27 Section 2, Rule 2, Rules of Court.
28 Rebollido v. Court of Appeals, G.R. No. 81123, February 28, 1989, 170 SCRA 800; Heirs of Ildefonso
Coscolluela v. Rico General Insurance Corporation, G.R. No. 84628, November 16, 1989, 179 SCRA 511;
Nabus v. Court of Appeals, G.R. No. 91670, February 7, 1990, 193 SCRA 732; Mathay v. Consolidated
Bank, G.R. No. L-23136, August 26, 1974, 58 SCRA 559; Leberman Realty Corporation v. Typingco, G.R.
No. 126647, July 29, 1998, 293 SCRA 316.
29 Swagman Hotels and Travel, Inc. v. Court of Appeals, G.R. No. 161135, April 8, 2005, 455 SCRA 175.
31
31

dent, the petitioners should first make a valid demand that the respondent refused to pay despite
having unrestricted retained earnings. Otherwise, the respondent could not be said to be guilty of any
actionable omission that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after the filing of the
complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners’ right of action
could only spring from an existing cause of action. Thus, a complaint whose cause of action has not
yet accrued cannot be cured by an amended or supplemental pleading alleging the existence or
accrual of a cause of action during the pendency of the action.30 For, only when there is an invasion
of primary rights, not before, does the adjective or remedial law become operative.31 Verily, a
premature invocation of the court’s intervention renders the complaint without a cause of action and
dismissible on such ground.32 In short, Civil Case No. 01-086, being a groundless suit, should be
dismissed.
Even the fact that the respondent already had unrestricted retained earnings more than sufficient to
cover the petitioners’ claims on June 26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the time of the commencement of Civil
Case No. 01-086. The motion for partial summary judgment, being a mere application for relief other
than by a pleading,33 was not the same as the complaint in Civil Case No. 01-086. Thereby, the
petitioners did not meet the requirement of the Rules of Court that a cause of action must
_______________
30 Lao v. Court of Appeals, G.R. No. 47013, February 17, 2000, 325 SCRA 694.
31 Id.
32 Estrada v. Court of Appeals, G.R. No. 137862, November 11, 2004, 442 SCRA 117.
33 Section 1, Rule 15, Rules of Court.

32
32
exist at the commencement of an action, which is “commenced by the filing of the original complaint
in court.”34
The petitioners claim that the respondent’s petition for certiorari sought only the annulment of the
assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for
immediate execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the motion
for partial summary judgment and the motion for immediate execution, the CA’s directive for the
dismissal of Civil Case No. 01-086 was not an abuse of discretion, least of all grave, because such
dismissal was the only proper thing to be done under the circumstances. According to Surigao Mine
Exploration Co., Inc. v. Harris:35
“Subject to certain qualification, and except as otherwise provided by law, an action commenced
before the cause of action has accrued is prematurely brought and should be dismissed. The fact that
the cause of action accrues after the action is commenced and while the case is pending is of no
moment. It is a rule of law to which there is, perhaps no exception, either in law or in equity, that to
recover at all there must be some cause of action at the commencement of the suit. There are reasons
of public policy why there should be no needless haste in bringing up litigation, and why people who
are in no default and against whom there is as yet no cause of action should not be summoned before
the public tribunals to answer complaints which are groundless. An action prematurely brought is a
groundless suit. Unless the plaintiff has a valid and subsisting cause of action at the time his action is
commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the
action is pending, and a
_______________
34 Section 5, Rule 1, Rules of Court; A.G. Development Corporation v. Court of Appeals, G.R. No.
111662, October 23, 1997, 281 SCRA 155.
35 68 Phil. 113 (1939).
33
33
supplemental complaint or an amendment setting up such after-accrued cause of action is not

permissible.”
Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was the
wrong remedy, in view of the fact that the granting of the motion for partial summary judgment
constituted only an error of law correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it
exceeded its jurisdiction by taking cognizance of the complaint that was not based on an existing
cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.
Carpio-Morales (Chairperson), Brion, Villarama, Jr. and Sereno, JJ., concur.
Petition denied.
Note.—The cause of action is determined from the allegations of a complaint, not from its caption.
(Philippine Crop Insurance Corporation vs. Court of Appeals, 567 SCRA 1 [2008])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Turner vs. Lorenzo Shipping
Corporation, 636 SCRA 13, G.R. No. 157479 November 24, 2010
Case No. 10
G.R. No. 171993. December 12, 2011.*
MARC II MARKETING, INC. and LUCILA V. JOSON, petitioners, vs. ALFREDO M. JOSON, respondent.
Labor Law; Illegal Dismissals; Corporation Law; Intra-corporate Controversies; The dismissal of a
corporate officer is always regarded as a corporate and/or an intra-corporate controversy; Intra-
corporate controversies also includes controversies in the election or appointments of directors,
trustees, officers or managers of such corporations, partnerships or associations.—While Article
217(a)2 of the Labor Code, as amended, provides that it is the Labor Arbiter who has the original and
exclusive jurisdiction over cases involving termination or dismissal of workers when the person
dismissed or terminated is a corporate officer, the case automatically falls within the province of the
RTC. The dismissal of a corporate officer is always regarded as a corporate act and/or an intra-
corporate controversy. Under Section 5 of Presidential Decree No. 902-A, intra-corporate
controversies are those 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. It also includes controversies in the election or
appointments of directors, trustees, officers or managers of such corporations, partnerships or
associations.
_______________
* SECOND DIVISION.
36
36

Marc II Marketing, Inc. vs. Joson
Same; Same; Same; Same; Corporate Officers; Corporate officers are those officers of a corporate who
are given that character either by the Corporation Code or by the corporation’s by-laws.—In Easycall
Communications Phils., Inc. v. King, 478 SCRA 102 (2005), this Court held that in the context of
Presidential Decree No. 902-A, corporate officers are those officers of a corporation who are given
that character either by the Corporation Code or by the corporation’s by-laws. Section 25 of the
Corporation Code specifically enumerated who are these corporate officers, to wit: (1) president; (2)
secretary; (3) treasurer; and (4) such other officers as may be provided for in the by-laws.
Same; Same; Same; Same; Same; The phrase “such other officers as may be provided for in the by–
laws” clarified and elaborated in Matling Industrial and Commercial Corporation vs. Coros, 633 SCRA
12 (2010).—The aforesaid Section 25 of the Corporation Code, particularly the phrase “such other
officers as may be provided for in the by-laws,” has been clarified and elaborated in this Court’s
recent pronouncement in Matling Industrial and Commercial Corporation v. Coros, 633 SCRA 12
(2010), where it held, thus: Conformably with Section 25, a position must be expressly mentioned in
the [b]y-[l]aws in order to be considered as a corporate office. Thus, the creation of an office pursuant
to or under a [b]y-[l]aw enabling provision is not enough to make a position a corporate office. [In]
Guerrea v. Lezama [citation omitted] the first ruling on the matter, held that the only officers of a
corporation were those given that character either by the Corporation Code or by the [b]y-[l]aws; the
rest of the corporate officers could be considered only as employees or subordinate officials. Thus, it
was held in Easycall Communications Phils., Inc. v. King [citation omitted]: An “office” is created by
the charter of the corporation and the officer is elected by the directors or stockholders. On the other
hand, an employee occupies no office and generally is employed not by the 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. x x x x This interpretation is the correct application of Section 25 of the
Corporation Code, which plainly states that the corporate officers are the President, Secretary,
Treasurer and such other officers as may be provided for in the [b]y-[l]aws. Accordingly, the corporate
officers in the context of PD No. 902-A are exclusively those who are given that character either by the
Corporation Code or by the corporation’s [b]y[l]aws.
37
VOL. 662, DECEMBER 12, 2011
37
Same; Same; Same; Same; Same; Corporate officers are composed of (1) Chairman; (2) President; (3)
One or more Vice-President; (4) Treasurer; and (5) Secretary.—A careful perusal of petitioner
corporation’s by-laws, particularly paragraph 1, Section 1, Article IV, would explicitly reveal that its
corporate officers are composed only of: (1) Chairman; (2) President; (3) one or more Vice-President;
(4) Treasurer; and (5) Secretary. The position of General Manager was not among those enumerated.
Same; Same; Same; Same; Same; 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.—With the given circumstances and in conformity with Matling Industrial and
Commercial Corporation v. Coros, 633 SCRA 12 (2010), this Court rules that respondent was not a
corporate officer of petitioner corporation because his position as General Manager was not
specifically mentioned in the roster of corporate officers in its corporate by-laws. The enabling clause
in petitioner corporation’s by-laws empowering its Board of Directors to create additional officers,
i.e., General Manager, and the alleged subsequent passage of a board resolution to that effect cannot
make such position a corporate office. Matling clearly enunciated that 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. Though the board of directors may create appointive
positions other than the positions of corporate officers, the persons occupying such positions cannot
be viewed as corporate officers under Section 25 of the Corporation Code.
Same; Same; Same; Same; Same; The corporate officers enumerated in the by-laws are the exclusive
officers of the corporation while the rest could only be regarded as mere employees or subordinate
officials.—It is also of no moment that respondent, being petitioner corporation’s General Manager,
was given the functions of a managing director by its Board of Directors. As held in Matling, the only
officers of a corporation are those given that character either by the Corporation Code or by the
corporate by-laws. It follows then that the corporate officers enumerated in the by-laws are the
exclusive officers of the corporation while the rest could only be regarded as mere employees or
subordinate officials. Respondent, in this case, though occupying a high ranking and vital position in
petitioner corporation but which position was not specifically enumerated or mentioned in the
latter’s by-laws, can only be regarded as its employee or subordinate official.
Same; Same; Same; Same; Same; Not all conflicts between the stockholders and the corporation are
classified as intra-corporate; Other factors
38
38
such as the status or relationship of the parties and the nature of the question that is the subject of
the controversy must be considered in determining whether the dispute involves corporate matters
so as to regard them as intra-corporate controversies.—That respondent was also a director and a
stockholder of petitioner corporation will not automatically make the case fall within the ambit of
intra-corporate controversy and be subjected to RTC’s jurisdiction. To reiterate, not all conflicts
between the stockholders and the corporation are classified as intra-corporate. Other factors such as
the status or relationship of the parties and the nature of the question that is the subject of the
controversy must be considered in determining whether the dispute involves corporate matters so as
to regard them as intra-corporate controversies. As previously discussed, respondent was not a
corporate officer of petitioner corporation but a mere employee thereof so there was no intra-
corporate relationship between them. With regard to the subject of the controversy or issue involved
herein, i.e., respondent’s dismissal as petitioner corporation’s General Manager, the same did not
present or relate to an intra-corporate dispute.
Same; Same; Same; Same; Same; Respondent’s dismissal as petitioner corporation’s General Manager
did not amount to an intra-corporate controversy.—With all the foregoing, this Court is fully
convinced that, indeed, respondent, though occupying the General Manager position, was not a
corporate officer of petitioner corporation rather he was merely its employee occupying a high-
ranking position. Accordingly, respondent’s dismissal as petitioner corporation’s General Manager did
not amount to an intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor
Arbiter and not with the RTC.
Same; Same; In termination cases, the burden of proving just and valid cause for dismissing an
employee from his employment rests upon the employer.—In termination cases, the burden of
proving just and valid cause for dismissing an employee from his employment rests upon the
employer. The latter’s failure to discharge that burden would necessarily result in a finding that the
dismissal is unjustified.
Same; Same; The closure or cessation of operations of establishment or undertaking may either be
due to serious business losses or financial reverses or otherwise.—Under Article 283 of the Labor
Code, as amended, one of the authorized causes in terminating the employment of an employee is the
closing or cessation of operation of the establishment or undertaking. From the afore-quoted
provision, the closure or cessation of operations of establishment or undertaking may either be due to
seri-
39
39
ous business losses or financial reverses or otherwise. If the closure or cessation was due to serious
business losses or financial reverses, it is incumbent upon the employer to sufficiently and
convincingly prove the same. If it is otherwise, the employer can lawfully close shop anytime as long
as it was bona fide in character and not impelled by a motive to defeat or circumvent the tenurial
rights of employees and as long as the terminated employees were paid in the amount corresponding
to their length of service.
Same; Same; Three Requisites for a Valid Cessation of Business Operations.—Under Article 283 of the
Labor Code, as amended, there are three requisites for a valid cessation of business operations: (a)
service of a written notice to the employees and to the Department of Labor and Employment (DOLE)
at least one month before the intended date thereof; (b) the cessation of business must be bona fide
in character; and (c) payment to the employees of termination pay amounting to one month pay or at
least one-half month pay for every year of service, whichever is higher.
Same; Same; Due Process; The requirement of due process shall be deemed complied with upon
service of a written notice to the employee and the appropriate Regional Office of the Department of
Labor and Employment at least thirty days before effectivity of the termination, specifying the ground
or grounds for termination.—As previously discussed, respondent’s dismissal was due to an
authorized cause, however, petitioner corporation failed to observe procedural due process in
effecting such dismissal. In Culili v. Eastern Telecommunications Philippines, Inc., 642 SCRA 338
(2011), this Court made the following pronouncements, thus: x x x x For termination of employment
as defined in Article 283 of the Labor Code, the requirement of due process shall be deemed complied
with upon service of a written notice to the employee and the appropriate Regional Office of the
Department of Labor and Employment at least thirty days before effectivity of the termination,
specifying the ground or grounds for termination.
Same; Same; Same; The necessary consequence for such failure to comply with the one-month prior
written notice rule which constitutes a violation of an employee’s right to statutory due process is the
payment of indemnity in the form of nominal damages.—The records of this case disclosed that there
was absolutely no written notice given by petitioner corporation to the respondent and to the DOLE
prior to the cessation of its business operations. This is evident from the fact that petitioner
corporation effected respondent’s dismissal on the same date that it decided to stop and cease its
business
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operations. The necessary consequence of such failure to comply with the one-month prior written
notice rule, which constitutes a violation of an employee’s right to statutory due process, is the
payment of indemnity in the form of nominal damages.
Corporate Officers; Corporate Liability; Corporate officers are not personally liable for their official
acts unless it is shown that they have exceeded their authority.—As a rule, corporation has a
personality separate and distinct from its officers, stockholders and members such that corporate
officers are not personally liable for their official acts unless it is shown that they have exceeded their
authority. However, this corporate veil can be pierced when the notion of the legal entity is used as a
means to perpetrate fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to
confuse legitimate issues. Under the Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon the guilty officer or officers of the
corporation.
Aguirre, Abaño, Pamfilo, Paras, Pineda & Agustin Law Offices for petitioners.
Edilberto G. Carmelo for respondent.
PEREZ, J.:
In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, herein petitioners Marc II
Marketing, Inc. and Lucila V. Joson assailed the Decision1 dated 20 June 2005 of the Court of Appeals
in CA-G.R. SP No. 76624 for reversing and setting aside the Resolution2 of the National Labor
Relations Commission (NLRC)
_______________
1 Penned by Associate Justice Salvador J. Valdez, Jr. with Associate Justices Mariano C. Del Castillo
(now a member of this Court) and Magdangal M. De Leon, concurring. Rollo, pp. 34-52.
2 Penned by Commissioner Victoriano R. Calaycay with Presiding Commissioner Raul T. Aquino and
Commissioner Angelita A. Gacutan, concurring. Id., at pp. 124-133.
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41
dated 15 October 2002, thereby affirming the Labor Arbiter’s Decision3 dated 1 October 2001 finding
herein respondent Alfredo M. Joson’s dismissal from employment as illegal. In the questioned
Decision, the Court of Appeals upheld the Labor Arbiter’s jurisdiction over the case on the basis that
respondent was not an officer but a mere employee of petitioner Marc II Marketing, Inc., thus, totally
disregarding the latter’s allegation of intra-corporate controversy. Nonetheless, the Court of Appeals
remanded the case to the NLRC for further proceedings to determine the proper amount of monetary
awards that should be given to respondent.
Assailed as well is the Court of Appeals Resolution4 dated 7 March 2006 denying their Motion for
Reconsideration.
Petitioner Marc II Marketing, Inc. (petitioner corporation) is a corporation duly organized and existing
under and by virtue of the laws of the Philippines. It is primarily engaged in buying, marketing, selling
and distributing in retail or wholesale for export or import household appliances and products and
other items.5 It took over the business operations of Marc Marketing, Inc. which was made non-
operational following its incorporation and registration with the Securities and Exchange Commission
(SEC). Petitioner Lucila V. Joson (Lucila) is the President and majority stockholder of petitioner
corporation. She was also the former President and majority stockholder of the defunct Marc
Marketing, Inc.
Respondent Alfredo M. Joson (Alfredo), on the other hand, was the General Manager, incorporator,
director and stockholder of petitioner corporation.
The controversy of this case arose from the following factual milieu:
_______________
3 Penned by Labor Arbiter Pablo C. Espiritu, Jr. Id., at pp. 81-88.
4 Penned by Associate Justice Magdangal M. De Leon with Associate Justices Edgardo P. Cruz and
Mariano C. Del Castillo (now a Member of this Court), concurring. Id., at pp. 54-55.
5 Articles of Incorporation of Marc II Marketing, Inc. Id., at p. 59.
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42
Before petitioner corporation was officially incorporated,6 respondent has already been engaged by
petitioner Lucila, in her capacity as President of Marc Marketing, Inc., to work as the General Manager
of petitioner corporation. It was formalized through the execution of a Management Contract7 dated
16 January 1994 under the letterhead of Marc Marketing, Inc.8 as petitioner corporation is yet to be
incorporated at the time of its execution. It was explicitly provided therein that respondent shall be
entitled to 30% of its net income for his work as General Manager. Respondent will also be granted
30% of its net profit to compensate for the possible loss of opportunity to work overseas.9
Pending incorporation of petitioner corporation, respondent was designated as the General Manager
of Marc Marketing, Inc., which was then in the process of winding up its business. For occupying the
said position, respondent was among its corporate officers by the express provision of Section 1,
Article IV10 of its by-laws.11
On 15 August 1994, petitioner corporation was officially incorporated and registered with the SEC.
Accordingly, Marc Marketing, Inc. was made non-operational. Respondent continued to discharge his
duties as General Manager but this time under petitioner corporation.
Pursuant to Section 1, Article IV12 of petitioner corporation’s by-laws,13 its corporate officers are as
follows: Chairman, President, one or more Vice-President(s), Treasurer and Secretary. Its Board of
Directors, however, may, from time to time, appoint such other officers as it may determine to be
necessary or proper.
_______________
6 As evidenced by its Certificate of Incorporation bearing S.E.C. Reg. No. AS094-007318. Id., at p. 58.
7 Id., at pp. 56-57.
8 It was incorporated on 24 July 1984 as evidenced by its Certificate of Incorporation bearing S.E.C.
Reg. No. 121722. CA Rollo, p. 228.
9 Per Management Contract dated 16 January 1994. Rollo, pp. 56-57.
11 Id., at pp. 235-242.

12 Id., at p. 183.
13 Id., at pp. 177-190.
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43
Per an undated Secretary’s Certificate,14 petitioner corporation’s Board of Directors conducted a

meeting on 29 August 1994 where respondent was appointed as one of its corporate officers with the
designation or title of General Manager to function as a managing director with other duties and
responsibilities that the Board of Directors may provide and authorized.15
Nevertheless, on 30 June 1997, petitioner corporation decided to stop and cease its operations, as
evidenced by an Affidavit of Non-Operation16 dated 31 August 1998, due to poor sales collection
aggravated by the inefficient management of its affairs. On the same date, it formally informed
respondent of the cessation of its business operation. Concomitantly, respondent was apprised of the
termination of his services as General Manager since his services as such would no longer be
necessary for the winding up of its affairs.17
Feeling aggrieved, respondent filed a Complaint for Reinstatement and Money Claim against
petitioners before the Labor Arbiter which was docketed as NLRC NCR Case No. 00-03-04102-99.
In his complaint, respondent averred that petitioner Lucila dismissed him from his employment with
petitioner corporation due to the feeling of hatred she harbored towards his family. The same was
rooted in the filing by petitioner Lucila’s estranged husband, who happened to be respondent’s
brother, of a Petition for Declaration of Nullity of their Marriage.18
For the parties’ failure to settle the case amicably, the Labor Arbiter required them to submit their
respective position papers. Respondent complied but petitioners opted to file a Motion to Dismiss
grounded on the Labor Arbiter’s lack of jurisdiction as the case involved an intra-corporate
controversy, which jurisdiction belongs to
_______________
14 Per Secretary’s Certificate. Rollo, p. 69.
15 Id.
16 Id., at p. 70.
17 NLRC Resolution dated 15 October 2002. CA Rollo, p. 20.
18 Court of Appeals Decision dated 20 June 2005. Rollo, p. 39.
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44

the SEC [now with the Regional Trial Court (RTC)].19 Petitioners similarly raised therein the ground of
prescription of respondent’s monetary claim.
On 5 September 2000, the Labor Arbiter issued an Order20 deferring the resolution of petitioners’
Motion to Dismiss until the final determination of the case. The Labor Arbiter also reiterated his
directive for petitioners to submit position paper. Still, petitioners did not comply. Insisting that the
Labor Arbiter has no jurisdiction over the case, they instead filed an Urgent Motion to Resolve the
Motion to Dismiss and the Motion to Suspend Filing of Position Paper.
In an Order21 dated 15 February 2001, the Labor Arbiter denied both motions and declared final the
Order dated 5 September 2000. The Labor Arbiter then gave petitioners a period of five days from
receipt thereof within which to file position paper, otherwise, their Motion to Dismiss will be treated
as their position paper and the case will be considered submitted for decision.
Petitioners, through counsel, moved for extension of time to submit position paper. Despite the
requested extension, petitioners still failed to submit the same. Accordingly, the case was submitted
for resolution.
_______________
19 This is pursuant to Section 5.2 of Republic Act No. 8799, known as “Securities Regulation Code,”
which was signed into law on 19 July 2000. It expressly provides that: “The Commission’s jurisdiction
over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby transferred to
the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the Regional Trial Court branches that shall
exercise jurisdiction over the cases. The Commission shall retain jurisdiction over pending cases
involving intra-corporate disputes submitted for final resolution which should be resolved within one
(1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending
suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed. [Emphasis
supplied.]
20 Penned by Labor Arbiter Pablo C. Espiritu, Jr. CA Rollo, pp. 191-192.
21 Id., at pp. 193-194.
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45
On 1 October 2001, the Labor Arbiter rendered his Decision in favor of respondent. Its decretal
portion reads as follows:
“WHEREFORE, premises considered, judgment is hereby rendered declaring [respondent’s] dismissal

from employment illegal. Accordingly, [petitioners] are hereby ordered:
1. To reinstate [respondent] to his former or equivalent position without loss of seniority rights,
benefits, and privileges;
2. Jointly and severally liable to pay [respondent’s] unpaid wages in the amount of P450,000.00 per
month from [26 March 1996] up to time of dismissal in the total amount of P6,300,000.00;
3. Jointly and severally liable to pay [respondent’s] full backwages in the amount of P450,000.00 per
month from date of dismissal until actual reinstatement which at the time of promulgation amounted
to P21,600,000.00;
4. Jointly and severally liable to pay moral damages in the amount of P100,000.00 and attorney’s
fees in the amount of 5% of the total monetary award.”22 [Emphasis supplied.]
In the aforesaid Decision, the Labor Arbiter initially resolved petitioners’ Motion to Dismiss by finding
the ground of lack of jurisdiction to be without merit. The Labor Arbiter elucidated that petitioners
failed to adduce evidence to prove that the present case involved an intra-corporate controversy.
Also, respondent’s money claim did not arise from his being a director or stockholder of petitioner
corporation but from his position as being its General Manager. The Labor Arbiter likewise held that
respondent was not a corporate officer under petitioner corporation’s by-laws. As such, respondent’s
complaint clearly arose from an employer-employee relationship, thus, subject to the Labor Arbiter’s
jurisdiction.
The Labor Arbiter then declared respondent’s dismissal from employment as illegal. Respondent,
being a regular employee of petitioner corporation, may only be dismissed for a valid cause and upon
proper compliance with the requirements of due process. The records, though, revealed that
petitioners failed to present any evidence to justify respondent’s dismissal.
_______________
22 Labor Arbiter’s Decision dated 1 October 2001. Rollo, pp. 87-88.
46
46
Aggrieved, petitioners appealed the aforesaid Labor Arbiter’s Decision to the NLRC.
In its Resolution dated 15 October 2002, the NLRC ruled in favor of petitioners by giving credence to
the Secretary’s Certificate, which evidenced petitioner corporation’s Board of Directors’ meeting in
which a resolution was approved appointing respondent as its corporate officer with designation as
General Manager. Therefrom, the NLRC reversed and set aside the Labor Arbiter’s Decision dated 1
October 2001 and dismissed respondent’s Complaint for want of jurisdiction.23
The NLRC enunciated that the validity of respondent’s appointment and termination from the position
of General Manager was made subject to the approval of petitioner corporation’s Board of Directors.
Had respondent been an ordinary employee, such board action would not have been required. As
such, it is clear that respondent was a corporate officer whose dismissal involved a purely intra-
corporate controversy. The NLRC went further by stating that respondent’s claim for 30% of the net
profit of the corporation can only emanate from his right of ownership therein as stockholder,
director and/or corporate officer. Dividends or profits are paid only to stockholders or directors of a
corporation and not to any ordinary employee in the absence of any profit sharing scheme. In
addition, the question of remuneration of a person who is not a mere employee but a stockholder and
officer of a corporation is not a simple labor problem. Such matter comes within the ambit of
corporate affairs and management and is an intra-corporate controversy in contemplation of the
Corporation Code.24
When respondent’s Motion for Reconsideration was denied in another Resolution25 dated 23 January
2003, he filed a Petition for Cer-
_______________
23 Id., at p. 132.
24 NLRC Resolution dated 15 October 2002. CA Rollo, pp. 23-24.
25 Penned by Presiding Commissioner Victoriano R. Calaycay with Presiding Commissioner Raul T.

Aquino and Commissioner Angelita A. Gacutan, concurring. Id., at pp. 27-28.
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47
tiorari with the Court of Appeals ascribing grave abuse of discretion on the part of the NLRC.
On 20 June 2005, the Court of Appeals rendered its now assailed Decision declaring that the Labor
Arbiter has jurisdiction over the present controversy. It upheld the finding of the Labor Arbiter that
respondent was a mere employee of petitioner corporation, who has been illegally dismissed from
employment without valid cause and without due process. Nevertheless, it ordered the records of the
case remanded to the NLRC for the determination of the appropriate amount of monetary awards to
be given to respondent. The Court of Appeals, thus, decreed:
“WHEREFORE, the petition is by us PARTIALLY GRANTED. The Labor Arbiter is DECLARED to have
jurisdiction over the controversy. The records are REMANDED to the NLRC for further proceedings to
determine the appropriate amount of monetary awards to be adjudged in favor of [respondent].
Costs against the [petitioners] in solidum.”26
Petitioners moved for its reconsideration but to no avail.27
Petitioners are now before this Court with the following assignment of errors:
I.
THE COURT OF APPEALS ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN DECIDING THAT
THE NLRC HAS THE JURISDICTION IN RESOLVING A PURELY INTRA-CORPORATE MATTER WHICH IS
COGNIZABLE BY THE SECURITIES AND EXCHANGE COMMISSION/REGIONAL TRIAL COURT.
II.
ASSUMING, GRATIS ARGUENDO, THAT THE NLRC HAS JURISDICTION OVER THE CASE, STILL THE COURT
OF APPEALS SERIOUSLY ERRED IN NOT RULING THAT THERE IS NO EMPLOYER-EMPLOYEE
RELATIONSHIP BETWEEN [RESPONDENT] ALFREDO M. JOSON AND MARC II MARKETING, INC.
[PETITIONER CORPORATION].
_______________
26 Rollo, pp. 51-52.
27 Per Court of Appeals Resolution dated 7 March 2006. Id., at pp. 54-55.
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48
III.
ASSUMING GRATIS ARGUENDO THAT THE NLRC HAS JURISDICTION OVER THE CASE, THE COURT OF
APPEALS ERRED IN NOT RULING THAT THE LABOR ARBITER COMMITTED GRAVE ABUSE OF
DISCRETION IN AWARDING MULTI-MILLION PESOS IN COMPENSATION AND BACKWAGES BASED ON
THE PURPORTED GROSS INCOME OF [PETITIONER CORPORATION].
IV.
THE COURT OF APPEALS SERIOUSLY ERRED AND COMMITTED GRAVE ABUSE OF DISCRETION IN NOT
MAKING ANY FINDINGS AND RULING THAT [PETITIONER LUCILA] SHOULD NOT BE HELD SOLIDARILY
LIABLE IN THE ABSENCE OF EVIDENCE OF MALICE AND BAD FAITH ON HER PART.28
Petitioners fault the Court of Appeals for having sustained the Labor Arbiter’s finding that respondent
was not a corporate officer under petitioner corporation’s by-laws. They insist that there is no need to
amend the corporate by-laws to specify who its corporate officers are. The resolution issued by
petitioner corporation’s Board of Directors appointing respondent as General Manager, coupled with
his assumption of the said position, positively made him its corporate officer. More so, respondent’s
position, being a creation of petitioner corporation’s Board of Directors pursuant to its by-laws, is a
corporate office sanctioned by the Corporation Code and the doctrines previously laid down by this
Court. Thus, respondent’s removal as petitioner corporation’s General Manager involved a purely
intra-corporate controversy over which the RTC has jurisdiction.
Petitioners further contend that respondent’s claim for 30% of the net profit of petitioner corporation
was anchored on the purported Management Contract dated 16 January 1994. It should be noted,
however, that said Management Contract was executed at the time petitioner corporation was still
nonexistent and had no juridical personality yet. Such being the case, respondent cannot invoke any
legal right therefrom as it has no legal and binding effect on petitioner
_______________
28 Petition for Review. Id., at pp. 10-11.
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49
corporation. Moreover, it is clear from the Articles of Incorporation of petitioner corporation that
respondent was its director and stockholder. Indubitably, respondent’s claim for his share in the profit
of petitioner corporation was based on his capacity as such and not by virtue of any employer-
employee relationship.
Petitioners further avow that even if the present case does not pose an intra-corporate controversy,
still, the Labor Arbiter’s multi-million peso awards in favor of respondent were erroneous. The same
was merely based on the latter’s self-serving computations without any supporting documents.
Finally, petitioners maintain that petitioner Lucila cannot be held solidarily liable with petitioner
corporation. There was neither allegation nor iota of evidence presented to show that she acted with
malice and bad faith in her dealings with respondent. Moreover, the Labor Arbiter, in his Decision,
simply concluded that petitioner Lucila was jointly and severally liable with petitioner corporation
without making any findings thereon. It was, therefore, an error for the Court of Appeals to hold
petitioner Lucila solidarily liable with petitioner corporation.
From the foregoing arguments, the initial question is which between the Labor Arbiter or the RTC, has
jurisdiction over respondent’s dismissal as General Manager of petitioner corporation. Its resolution
necessarily entails the determination of whether respondent as General Manager of petitioner
corporation is a corporate officer or a mere employee of the latter.
While Article 217(a)229 of the Labor Code, as amended, provides that it is the Labor Arbiter who has
the original and exclusive juris-
_______________
29 Article 217. Jurisdiction of the Labor Arbiters and the Com-mission.—(a) Except as otherwise
provided under this Code, the Labor Arbiters shall have original and exclusive jurisdiction to hear and
decide, within thirty (30) calendar days after the submission of the case by the parties for decision
without extension, even in the absence of stenographic notes, the following cases involving all
workers, whether agricultural or non-agricultural:
1. x x x.
2. Termination disputes; [Emphasis supplied.]
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50
diction over cases involving termination or dismissal of workers when the person dismissed or
terminated is a corporate officer, the case automatically falls within the province of the RTC. The
dismissal of a corporate officer is always regarded as a corporate act and/or an intra-corporate
controversy.30
Under Section 531 of Presidential Decree No. 902-A, intra-corporate controversies are those
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
corporation, partnership or association and the State insofar as it concerns their individual franchise
or right to exist as such entity. It also includes controversies
_______________
30 Easycall Communications Phils., Inc. v. King, 514 Phil. 296, 302; 478 SCRA 102, 109 (2005).
31 Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its
officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholder, partners, members of associations or organizations
registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between and among
corporation, partnership or association and the state insofar as it concerns their individual franchise
or right to exist as such entity; and
(c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations.
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51
in the election or appointments of directors, trustees, officers or managers of such corporations,

partnerships or associations.32
Accordingly, in determining whether the SEC (now the RTC) has jurisdiction over the controversy, the
status or relationship of the parties and the nature of the question that is the subject of their
controversy must be taken into consideration.33
In Easycall Communications Phils., Inc. v. King, this Court held that in the context of Presidential
Decree No. 902-A, corporate officers are those officers of a corporation who are given that character
either by the Corporation Code or by the corporation’s by-laws. Section 2534 of the Corporation Code
specifically enumerated who are these corporate officers, to wit: (1) president; (2) secretary; (3)
_______________
32 Matling Industrial and Commercial Corporation v. Coros, G.R. No. 157802, 13 October 2010, 633
SCRA 12, 21-22.
33 Nacpil v. Intercontinental Broadcasting Corporation, 429 Phil. 410, 416; 379 SCRA 653, 659 (2002);
Union Motors Corporation v. The National Labor Relations Commission, 373 Phil. 310, 319; 314 SCRA
531, 538-539 (1999).
34 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. Any two (2) or more positions may be
held concurrently by the same person, except that no one shall act as president and secretary or as
president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties enjoined on them by law
and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate business, and every decision
of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers which shall require the vote of a majority
of all the members of the board.
Directors or trustees cannot attend or vote by proxy at board meetings.
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52
treasurer; and (4) such other officers as may be provided for in the by-laws.35
The aforesaid Section 25 of the Corporation Code, particularly the phrase “such other officers as may
be provided for in the by-laws,” has been clarified and elaborated in this Court’s recent
pronouncement in Matling Industrial and Commercial Corporation v. Coros, where it held, thus:
“Conformably with Section 25, a position must be expressly mentioned in the [b]y-[l]aws in order to
be considered as a corporate office. Thus, the creation of an office pursuant to or under a [b]y-[l]aw
enabling provision is not enough to make a position a corporate office. [In] Guerrea v. Lezama
[citation omitted] the first ruling on the matter, held that the only officers of a corporation were those
given that character either by the Corporation Code or by the [b]y-[l]aws; the rest of the corporate
officers could be considered only as employees or subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King [citation omitted]:
An “office” is created by the charter of the corporation and the officer is elected by the directors or
stockholders. On the other hand, an employee occupies no office and generally is employed not by
the 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.
xxxx
This interpretation is the correct application of Section 25 of the Corporation Code, which plainly
states that the corporate officers are the President, Secretary, Treasurer and such other officers as
may be provided for in the [b]y-[l]aws. Accordingly, the corporate officers in the context of PD No.
902-A are exclusively those who are given that character either by the Corporation Code or by the
corporation’s [b]y[l]aws.
A different interpretation can easily leave the way open for the Board of Directors to circumvent the
constitutionally guaranteed security of tenure of the employee by the expedient inclusion in the
_______________
35 Easycall Communications Phils., Inc. v. King, supra note 30 at p. 302; p. 109.
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53
[b]y-[l]aws of an enabling clause on the creation of just any corporate officer position.
It is relevant to state in this connection that the SEC, the primary agency administering the
Corporation Code, adopted a similar interpretation of Section 25 of the Corporation Code in its
Opinion dated November 25, 1993 [citation omitted], to wit:
Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are the
corporate officers enumerated in the by-laws are the exclusive Officers of the corporation and the
Board has no power to create other Offices without amending first the corporate [b]y-laws. However,
the Board may create appointive positions other than the positions of corporate Officers, but the
persons occupying such positions are not considered as corporate officers within the meaning of
Section 25 of the Corporation Code and are not empowered to exercise the functions of the corporate
Officers, except those functions lawfully delegated to them. Their functions and duties are to be
determined by the Board of Directors/Trustees.”36 [Emphasis supplied.]
A careful perusal of petitioner corporation’s by-laws, particularly paragraph 1, Section 1, Article IV,37
would explicitly reveal that its corporate officers are composed only of: (1) Chairman; (2) President;
(3) one or more Vice-President; (4) Treasurer; and (5) Secretary.38 The
_______________
36 Matling Industrial and Commercial Corporation v. Coros, supra note 32 at 26-27.
37 ARTICLE IV
OFFICERS
Section 1. Election/Appointment.—Immediately after their election, the Board of Directors shall

formally organize by electing the Chairman, the President, one or more 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 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.
38 CA Rollo, pp. 183-186.
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54
position of General Manager was not among those enumerated.
Paragraph 2, Section 1, Article IV of petitioner corporation’s by-laws, empowered its Board of

Directors to appoint such other officers as it may determine necessary or proper.39 It is by virtue of
this enabling provision that petitioner corporation’s Board of Directors allegedly approved a
resolution to make the position of General Manager a corporate office, and, thereafter, appointed
respondent thereto making him one of its corporate officers. All of these acts were done without first
amending its by-laws so as to include the General Manager in its roster of corporate officers.
With the given circumstances and in conformity with Matling Industrial and Commercial Corporation
v. Coros, this Court rules that respondent was not a corporate officer of petitioner corporation
because his position as General Manager was not specifically mentioned in the roster of corporate
officers in its corporate by-laws. The enabling clause in petitioner corporation’s by-laws empowering
its Board of Directors to create additional officers, i.e., General Manager, and the alleged subsequent
passage of a board resolution to that effect cannot make such position a corporate office. Matling
clearly enunciated that 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.
Though the board of directors may create appointive positions other than the positions of corporate
officers, the persons occupying such positions cannot be viewed as corporate officers under Section
25 of the Corporation Code.40 In view thereof, this Court holds that unless and until petitioner
corporation’s by-laws is amended for the inclusion of General Manager in the list of its corporate
officers, such position cannot be considered as a corporate office within the realm of Section 25 of the
Corporation Code.
_______________
39 Id.
40 Matling Industrial and Commercial Corporation v. Coros, supra note 32 at p. 27.
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55
This Court considers that the interpretation of Section 25 of the Corporation Code laid down in
Matling safeguards the constitutionally enshrined right of every employee to security of tenure. 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.41
It is also of no moment that respondent, being petitioner corporation’s General Manager, was given
the functions of a managing director by its Board of Directors. As held in Matling, the only officers of a
corporation are those given that character either by the Corporation Code or by the corporate by-
laws. It follows then that the corporate officers enumerated in the by-laws are the exclusive officers
of the corporation while the rest could only be regarded as mere employees or subordinate
officials.42 Respondent, in this case, though occupying a high ranking and vital position in petitioner
corporation but which position was not specifically enumerated or mentioned in the latter’s by-laws,
can only be regarded as its employee or subordinate official. Noticeably, respondent’s compensation
as petitioner corporation’s General Manager was set, fixed and determined not by the latter’s Board
of Directors but simply by its President, petitioner Lucila. The same was not subject to the approval of
petitioner corporation’s Board of Directors. This is an indication that respondent was an employee
and not a corporate officer.
To prove that respondent was petitioner corporation’s corporate officer, petitioners presented before
the NLRC an undated Secretary’s Certificate showing that corporation’s Board of Directors approved a
resolution making respondent’s position of General Manager a corporate office. The submission,
however, of the said undated Secretary’s Certificate will not change the fact that respondent was an
employee. The certification does not amount to an amendment of the by-laws which is needed to
make the position of General Manager a corporate office.
_______________
41 Id., at p. 27.
42 Id.
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Moreover, as has been aptly observed by the Court of Appeals, the board resolution mentioned in
that undated Secretary’s Certificate and the latter itself were obvious fabrications, a mere
afterthought. Here we quote with conformity the Court of Appeals findings on this matter stated in
this wise:
“The board resolution is an obvious fabrication. Firstly, if it had been in existence since [29 August
1994], why did not [herein petitioners] attach it to their [M]otion to [D]ismiss filed on [26 August
1999], when it could have been the best evidence that [herein respondent] was a corporate officer?
Secondly, why did they report the [respondent] instead as [herein petitioner corporation’s] employee
to the Social Security System [(SSS)] on [11 October 1994] or a later date than their [29 August 1994]
board resolution? Thirdly, why is there no indication that the [respondent], the person concerned
himself, and the [SEC] were furnished with copies of said board resolution? And, lastly, why is the
corporate [S]ecretary’s [C]ertificate not notarized in keeping with the customary procedure? That is
why we called it manipulative evidence as it was a shameless sham meant to be thrown in as a wild
card to muddle up the [D]ecision of the Labor Arbiter to the end that it be overturned as the latter
had firmly pointed out that [respondent] is not a corporate officer under [petitioner corporation’s by-
laws]. Regrettably, the [NLRC] swallowed the bait hook-line-and sinker. It failed to see through its
nature as a belatedly manufactured evidence. And even on the assumption that it were an authentic
board resolution, it did not make [respondent] a corporate officer as the board did not first and
properly create the position of a [G]eneral [M]anager by amending its by-laws.
(2) The scope of the term “officer” in the phrase “and such other officers as may be provided for in
the by-laws[“] (Sec. 25, par. 1), would naturally depend much on the provisions of the by-laws of the
corporation. (SEC Opinion, [4 December 1991.]) If the by-laws enumerate the officers to be elected by
the board, the provision is conclusive, and the board is without power to create new offices without
amending the by-laws. (SEC Opinion, [19 October 1971.])
(3) If, for example, the general manager of a corporation is not listed as an officer, he is to be
classified as an employee although he has always been considered as one of the principal officers of a
corporation [citing De
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Leon, H. S., The Corporation Code of the Philippines Annotated, 1993 Ed., p. 215.]”43 [Emphasis
supplied.]
That respondent was also a director and a stockholder of petitioner corporation will not automatically
make the case fall within the ambit of intra-corporate controversy and be subjected to RTC’s
jurisdiction. To reiterate, not all conflicts between the stockholders and the corporation are classified
as intra-corporate. Other factors such as the status or relationship of the parties and the nature of the
question that is the subject of the controversy44 must be considered in determining whether the
dispute involves corporate matters so as to regard them as intra-corporate controversies.45 As
previously discussed, respondent was not a corporate officer of petitioner corporation but a mere
employee thereof so there was no intra-corporate relationship between them. With regard to the
subject of the controversy or issue involved herein, i.e., respondent’s dismissal as petitioner
corporation’s General Manager, the same did not present or relate to an intra-corporate dispute. To
note, there was no evidence submitted to show that respondent’s removal as petitioner corporation’s
General Manager carried with it his removal as its director and stockholder. Also, petitioners’
allegation that respondent’s claim of 30% share of petitioner corporation’s net profit was by reason of
his being its director and stockholder was without basis, thus, self-serving. Such an allegation was
tantamount to a mere speculation for petitioners’ failure to substantiate the same.
In addition, it was not shown by petitioners that the position of General Manager was offered to
respondent on account of his being petitioner corporation’s director and stockholder. Also, in contrast
to NLRC’s findings, neither petitioner corporation’s by-laws nor the Management Contract stated that
respondent’s appointment and
_______________
43 Rollo, pp. 48-49.
44 Nacpil v. Intercontinental Broadcasting Corporation, supra note 33 at p. 416; p. 658; Union Motors
Corporation v. The National Labor Relations Commission, supra note 33 at p. 319; pp. 538-539.
45 Real v. Sangu Philippines, Inc. and/or Kiichi Abe, G.R. No. 168757, 19 January 2011, 640 SCRA 67.
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58
termination from the position of General Manager was subject to the approval of petitioner
corporation’s Board of Directors. If, indeed, respondent was a corporate officer whose termination
was subject to the approval of its Board of Directors, why is it that his termination was effected only
by petitioner Lucila, President of petitioner corporation? The records are bereft of any evidence to
show that respondent’s dismissal was done with the conformity of petitioner corporation’s Board of
Directors or that the latter had a hand on respondent’s dismissal. No board resolution whatsoever
was ever presented to that effect.
With all the foregoing, this Court is fully convinced that, indeed, respondent, though occupying the
General Manager position, was not a corporate officer of petitioner corporation rather he was merely
its employee occupying a high-ranking position.
Accordingly, respondent’s dismissal as petitioner corporation’s General Manager did not amount to
an intra-corporate controversy. Jurisdiction therefor properly belongs with the Labor Arbiter and not
with the RTC.
Having established that respondent was not petitioner corporation’s corporate officer but merely its
employee, and that, consequently, jurisdiction belongs to the Labor Arbiter, this Court will now
determine if respondent’s dismissal from employment is illegal.
It was not disputed that respondent worked as petitioner corporation’s General Manager from its
incorporation on 15 August 1994 until he was dismissed on 30 June 1997. The cause of his dismissal
was petitioner corporation’s cessation of business operations due to poor sales collection aggravated
by the inefficient management of its affairs.
In termination cases, the burden of proving just and valid cause for dismissing an employee from his
employment rests upon the employer. The latter’s failure to discharge that burden would necessarily
result in a finding that the dismissal is unjustified.46
_______________
46 Eastern Overseas Employment Center, Inc. v. Bea, 512 Phil. 749, 759; 476 SCRA 384, 394 (2005).
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59

Under Article 283 of the Labor Code, as amended, one of the authorized causes in terminating the
employment of an employee is the closing or cessation of operation of the establishment or
undertaking. Article 283 of the Labor Code, as amended, reads, thus:
“ART. 283. Closure of establishment and reduction of personnel.—The employer may also
terminate the employment of any employee due to the installation of labor saving-devices,
redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the provisions of
this Title, by serving a written notice on the workers and the Department of Labor and Employment at
least one (1) month before the intended date thereof. x x x In case of retrenchment to prevent losses
and in cases of closures or cessation of operations of establishment or undertaking not due to serious
business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or to
at least one-half (1/2) month pay for every year of service, whichever is higher. A fraction of at least
six (6) months shall be considered one (1) whole year.” [Emphasis supplied.]
From the afore-quoted provision, the closure or cessation of operations of establishment or

undertaking may either be due to serious business losses or financial reverses or otherwise. If the
closure or cessation was due to serious business losses or financial reverses, it is incumbent upon the
employer to sufficiently and convincingly prove the same. If it is otherwise, the employer can lawfully
close shop anytime as long as it was bona fide in character and not impelled by a motive to defeat or
circumvent the tenurial rights of employees and as long as the terminated employees were paid in the
amount corresponding to their length of service.47
Accordingly, under Article 283 of the Labor Code, as amended, there are three requisites for a valid
cessation of business operations: (a) service of a written notice to the employees and to the
Department of Labor and Employment (DOLE) at least
_______________
47 Industrial Timber Corporation v. Ababon, 515 Phil. 805, 819; 480 SCRA 171, 183-184 (2006).
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60
one month before the intended date thereof; (b) the cessation of business must be bona fide in
character; and (c) payment to the employees of termination pay amounting to one month pay or at
least one-half month pay for every year of service, whichever is higher.
In this case, it is obvious that petitioner corporation’s cessation of business operations was not due to
serious business losses. Mere poor sales collection, coupled with mismanagement of its affairs does
not amount to serious business losses. Nonetheless, petitioner corporation can still validly cease or
close its business operations because such right is legally allowed, so long as it was not done for the
purpose of circumventing the provisions on termination of employment embodied in the Labor
Code.48 As has been stressed by this Court in Industrial Timber Corporation v. Ababon, thus:
“Just as no law forces anyone to go into business, no law can compel anybody to continue the same. It
would be stretching the intent and spirit of the law if a court interferes with management’s
prerogative to close or cease its business operations just because the business is not suffering from
any loss or because of the desire to provide the workers continued employment.”49
A careful perusal of the records revealed that, indeed, petitioner corporation has stopped and ceased
business operations beginning 30 June 1997. This was evidenced by a notarized Affidavit of Non-
Operation dated 31 August 1998. There was also no showing that the cessation of its business
operations was done in bad faith or to circumvent the Labor Code. Nevertheless, in doing so,
petitioner corporation failed to comply with the one-month prior written notice rule. The records
disclosed that respondent, being petitioner corporation’s employee, and the DOLE were not given a
written notice at least one month before petitioner corporation ceased its business operations.
Moreover, the records clearly show that respondent’s dismissal was effected on the same date that
petitioner corporation decided to stop
_______________
48 Id., at p. 818; pp. 182-183.
49 Id., at p. 819; p. 184. See also Alabang Country Club, Inc. v. National Labor Relations Commission,
503 Phil. 937, 952-953; 466 SCRA 329, 345 (2005).
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61
and cease its operation. Similarly, respondent was not paid separation pay upon termination of his
employment.
As respondent’s dismissal was not due to serious business losses, respondent is entitled to payment
of separation pay equivalent to one month pay or at least one-half month pay for every year of
service, whichever is higher. The rationale for this was laid down in Reahs Corporation v. National
Labor Relations Commission,50 thus:
“The grant of separation pay, as an incidence of termination of employment under Article 283, is a
statutory obligation on the part of the employer and a demandable right on the part of the employee,
except only where the closure or cessation of operations was due to serious business losses or
financial reverses and there is sufficient proof of this fact or condition. In the absence of such proof of
serious business losses or financial reverses, the employer closing his business is obligated to pay his
employees and workers their separation pay.
The rule, therefore, is that in all cases of business closure or cessation of operation or undertaking of
the employer, the affected employee is entitled to separation pay. This is consistent with the state
policy of treating labor as a primary social economic force, affording full protection to its rights as well
as its welfare. The exception is when the closure of business or cessation of operations is due to
serious business losses or financial reverses duly proved, in which case, the right of affected
employees to separation pay is lost for obvious reasons.”51 [Emphasis supplied.]
As previously discussed, respondent’s dismissal was due to an authorized cause, however, petitioner
corporation failed to observe procedural due process in effecting such dismissal. In Culili v. Eastern
Telecommunications Philippines, Inc.,52 this Court made the following pronouncements, thus:
“x x x there are two aspects which characterize the concept of due process under the Labor Code: one
is substantive—whether the termination of employment was based on the provision of the Labor
Code or in
_______________
50 G.R. No. 117473, 15 April 1997, 271 SCRA 247.
51 Id., at p. 254.
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62

accordance with the prevailing jurisprudence; the other is procedural—the manner in which the
dismissal was effected.”
Section 2(d), Rule I, Book VI of the Rules Implementing the Labor Code provides:
(d) In all cases of termination of employment, the following standards of due process shall be
substantially observed:
xxxx
For termination of employment as defined in Article 283 of the Labor Code, the requirement of due
process shall be deemed complied with upon service of a written notice to the employee and the
appropriate Regional Office of the Department of Labor and Employment at least thirty days before
effectivity of the termination, specifying the ground or grounds for termination.
In Mayon Hotel & Restaurant v. Adana, [citation omitted] we observed:
“The requirement of law mandating the giving of notices was intended not only to enable the
employees to look for another employment and therefore ease the impact of the loss of their jobs and
the corresponding income, but more importantly, to give the Department of Labor and Employment
(DOLE) the opportunity to ascertain the verity of the alleged authorized cause of termination.”53
[Emphasis supplied].
The records of this case disclosed that there was absolutely no written notice given by petitioner
corporation to the respondent and to the DOLE prior to the cessation of its business operations. This is
evident from the fact that petitioner corporation effected respondent’s dismissal on the same date
that it decided to stop and cease its business operations. The necessary consequence of such failure to
comply with the one-month prior written notice rule, which constitutes a violation of an employee’s
right to statutory due process, is the payment of indemnity in the form of nominal damages.54 In
Culili v. Eastern Telecommunications Philippines, Inc., this Court further held:
_______________
53 Id.
54 Shimizu Phils. Contractors, Inc. v. Callanta, G.R. No. 165923, 29 September 2010, 631 SCRA 529,
542-543.
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63
In Serrano v. National Labor Relations Commission [citation omitted], we noted that “a job is more
than the salary that it carries.” There is a psychological effect or a stigma in immediately finding one’s
self laid off from work. This is exactly why our labor laws have provided for mandating procedural due
process clauses. Our laws, while recognizing the right of employers to terminate employees it cannot
sustain, also recognize the employee’s right to be properly informed of the impending severance of
his ties with the company he is working for. x x x.
x x x Over the years, this Court has had the opportunity to reexamine the sanctions imposed upon
employers who fail to comply with the procedural due process requirements in terminating its
employees. In Agabon v. National Labor Relations Commission [citation omitted], this Court reverted
back to the doctrine in Wenphil Corporation v. National Labor Relations Commission [citation
omitted] and held that where the dismissal is due to a just or authorized cause, but without
observance of the due pro-cess requirements, the dismissal may be upheld but the employer must
pay an indemnity to the employee. The sanctions to be imposed however, must be stiffer than those
imposed in Wenphil to achieve a result fair to both the employers and the employees.
In Jaka Food Processing Corporation v. Pacot [citation omitted], this Court, taking a cue from Agabon,
held that since there is a clear-cut distinction between a dismissal due to a just cause and a dismissal
due to an authorized cause, the legal implications for employers who fail to comply with the notice
requirements must also be treated differently:
Accordingly, it is wise to hold that: (1) if the dismissal is based on a just cause under Article 282 but
the employer failed to comply with the notice requirement, the sanction to be imposed upon him
should be tempered because the dismissal process was, in effect, initiated by an act imputable to the
employee; and (2) if the dismissal is based on an authorized cause under Article 283 but the employer
failed to comply with the notice requirement, the sanction should be stiffer because the dismissal
process was initiated by the employer’s exercise of his management prerogative.”55 [Emphasis
supplied.]
Thus, in addition to separation pay, respondent is also entitled to an award of nominal damages. In
conformity with this Court’s ruling in Culili v. Eastern Telecommunications Philippines, Inc. and Shi-
_______________
55 Culili v. Eastern Telecommunications Philippines, Inc., supra note 53.
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64

mizu Phils. Contractors, Inc. v. Callanta, both citing Jaka Food Processing Corporation v. Pacot,56 this
Court fixed the amount of nominal damages to P50,000.00.
With respect to petitioners’ contention that the Management Contract executed between respondent
and petitioner Lucila has no binding effect on petitioner corporation for having been executed way
before its incorporation, this Court finds the same meritorious.
Section 19 of the Corporation Code expressly provides:
“Sec. 19. Commencement of corporate existence.—A private corporation formed or organized

under this Code commences to have corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon the incorporators, stockholders/members and
their successors shall constitute a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law.” [Emphasis supplied.]
Logically, there is no corporation to speak of prior to an entity’s incorporation. And no contract

entered into before incorporation can bind the corporation.
As can be gleaned from the records, the Management Contract dated 16 January 1994 was executed
between respondent and petitioner Lucila months before petitioner corporation’s incorporation on 15
August 1994. Similarly, it was done when petitioner Lucila was still the President of Marc Marketing,
Inc. Undeniably, it cannot have any binding and legal effect on petitioner corporation. Also, there was
no evidence presented to prove that petitioner corporation adopted, ratified or confirmed the
Management Contract. It is for the same reason that petitioner corporation cannot be considered
estopped from questioning its binding effect now that respondent was invoking the same against it. In
no way, then, can it be enforced against petitioner corporation, much less, its provisions fixing
respondent’s compensa-
_______________
56 494 Phil. 114, 122-123; 454 SCRA 119, 127-128 (2005).
65
65
tion as General Manager to 30% of petitioner corporation’s net profit. Consequently, such percentage
cannot be the basis for the computation of respondent’s separation pay. This finding, however, will
not affect the undisputed fact that respondent was, indeed, the General Manager of petitioner
corporation from its incorporation up to the time of his dismissal.
Accordingly, this Court finds it necessary to still remand the present case to the Labor Arbiter to
conduct further proceedings for the sole purpose of determining the compensation that respondent
was actually receiving during the period that he was the General Manager of petitioner corporation,
this, for the proper computation of his separation pay.
As regards petitioner Lucila’s solidary liability, this Court affirms the same.
As a rule, corporation has a personality separate and distinct from its officers, stockholders and
members such that corporate officers are not personally liable for their official acts unless it is shown
that they have exceeded their authority. However, this corporate veil can be pierced when the notion
of the legal entity is used as a means to perpetrate fraud, an illegal act, as a vehicle for the evasion of
an existing obligation, and to confuse legitimate issues. Under the Labor Code, for instance, when a
corporation violates a provision declared to be penal in nature, the penalty shall be imposed upon the
guilty officer or officers of the corporation.57
Based on the prevailing circumstances in this case, petitioner Lucila, being the President of petitioner
corporation, acted in bad faith and with malice in effecting respondent’s dismissal from employment.
Although petitioner corporation has a valid cause for dismissing respondent due to cessation of
business operations, however, the latter’s dismissal therefrom was done abruptly by its President,
petitioner Lucila. Respondent was not given the required one-month prior written notice that
petitioner corporation will already cease its business operations. As can be gleaned from the records,
respondent
_______________
57 Reahs Corporation v. National Labor Relations Commission, supra note 51 at p. 255.
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66
was dismissed outright by petitioner Lucila on the same day that petitioner corporation decided to
stop and cease its business operations. Worse, respondent was not given separation pay considering
that petitioner corporation’s cessation of business was not due to business losses or financial
reverses.
WHEREFORE, premises considered, the Decision and Resolution dated 20 June 2005 and 7 March
2006, respectively, of the Court of Appeals in CA-G.R. SP No. 76624 are hereby AFFIRMED with the
MODIFICATION finding respondent’s dismissal from employment legal but without proper observance
of due process. Accordingly, petitioner corporation, jointly and solidarily liable with petitioner Lucila,
is hereby ordered to pay respondent the following; (1) separation pay equivalent to one month pay or
at least one-half month pay for every year of service, whichever is higher, to be computed from the
commencement of employment until termination; and (2) nominal damages in the amount of
P50,000.00.
This Court, however, finds it proper to still remand the records to the Labor Arbiter to conduct further
proceedings for the sole purpose of determining the compensation that respondent was actually
receiving during the period that he was the General Manager of petitioner corporation for the proper
computation of his separation pay.
Costs against petitioners.
SO ORDERED.
Carpio (Chairperson), Brion, Sereno and Reyes, JJ., concur.
Judgment and resolution affirmed with modification.
Note.—Corporate directors and officers are solidarily liable with the corporation for the termination
of employees done with malice or bad faith. (Mandaue Dinghow Dimsum House Co., Inc. vs. National
Labor Relations Commission–Fourth Division, 547 SCRA 402 [2008])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Marc II Marketing, Inc. vs. Joson, 662
SCRA 35, G.R. No. 171993 December 12, 2011
Case No. 11
G.R. No. 168008. August 17, 2011.*

PETRONILO J. BARAYUGA, petitioner, vs. ADVENTIST UNIVERSITY OF THE PHILIPPINES, THROUGH ITS
BOARD OF TRUSTEES, REPRESENTED BY ITS CHAIRMAN, NESTOR D. DAYSON, respondents.
Judgments; Moot and Academic Issues; It is a settled rule that a court will not determine a moot
question or an abstract proposition, nor express an opinion in a case in which no practical relief can be
granted, for the courts should not engage in academic declarations and determine a moot question.—
The mootness of the petition warranted its denial. When the resolution of the issue submitted in a
case has become moot and academic, and the prayer of the complaint or petition, even if granted, has
become impossible of enforcement—for there is nothing more to enjoin—the case should be
dismissed. No useful purpose would then be served by passing on the merits of the petition, because
any ruling could hardly be of any practical or useful purpose in the premises. It is a settled rule that a
court will not determine a moot question or an abstract proposition, nor express an opinion in a case
in which no practical relief can be granted. Indeed, moot and academic cases cease to present any
justiciable controversies by virtue of supervening events, and the courts of law will not determine
moot questions, for the courts should not engage in academic declarations and determine a moot
question.
Injunction; In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave
abuse of discretion and will result to nullification thereof—the possibility of irreparable damage sans
proof of an actual existing right is not a ground for a preliminary injunction.—A valid writ of
preliminary injunction rests on the weight of evidence submitted by the plaintiff establishing: (a) a
present and unmistakable right to be protected; (b) the acts against which the injunction is directed
violate such right; and (c) a special and paramount necessity for the writ to prevent serious damages.
In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of
discretion and will result to nullification thereof. Where the complainant’s right is doubtful or
disputed, in-
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* FIRST DIVISION.
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641
Barayuga vs. Adventist University of the Philippines
junction is not proper. The possibility of irreparable damage sans proof of an actual existing right is
not a ground for a preliminary injunction. It is clear to us, based on the foregoing principles guiding
the issuance of the TRO and the writ of injunction, that the issuance of the assailed order constituted
patently grave abuse of discretion on the part of the RTC, and that the CA rightly set aside the order of
the RTC.
Corporation Law; Evidence; Private Documents; Authentication is a condition for the admissibility of a
private document; For the trial court to base its issuance of a writ of preliminary injunction on the
mere photocopies of a document, especially that such document was designed to play a crucial part in
the resolution of the decisive issue on the length of term of the petitioner, was gross error.—Yet, the
document had no evidentiary value. It had not been officially adopted for submission to and approval
of the Securities and Exchange Commission. It was nothing but. an unfilled model form. As such, it
was, at best, only a private document that could not be admitted as evidence in judicial proceedings
until it was first properly authenticated in court. Section 20, Rule 132 of the Rules of Court requires
authentication as a condition for the admissibility of a private document, to wit: “Section 20. Proof of
private document.—Before any private document offered as authentic is received in evidence, its due
execution and authenticity must be proved either: (a) By anyone who saw the document executed or
written; or (b) By evidence of the genuineness of the signature or handwriting of the maker. Any
other private document need only be identified as that which it is claimed to be. (21a) For the RTC to
base its issuance of the writ of preliminary injunction on the mere photocopies of the document,
especially that such document was designed to play a crucial part in the resolution of the decisive
issue on the length of the term of office of the petitioner, was gross error.
Same; Same; An unfilled model form creates or establishes no rights in favor of anyone.—Secondly,
even assuming that the petitioner had properly authenticated the photocopies of the Bluebook, the
provisions contained therein did not vest the right to an office in him. An unfilled model form creates
or establishes no rights in favor of anyone.
642
642
Same; Same; Board of Trustees; The second paragraph of Section 108 of the Corporation Code,
although setting the term of the members of the Board of Trustees at five years, contains a proviso
expressly subjecting the duration to what is otherwise provided in the articles of incorporation or by-
laws of the educational corporation – that contrary provision controls on the term of office.—Section
108 of the Corporation Code determines the membership and number of trustees in an educational
corporation, viz.: Section 108. Board of trustees.—Trustees of educational institutions organized as
educational corporations shall not be less than five (5) nor more than fifteen (15): Provided, however,
That the number of trustees shall be in multiples of five (5). Unless otherwise provided in the articles
of incorporation or the by-laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify themselves that the term of office of
one-fifth (1/5) of their number shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office only for the unexpired period.
Trustees elected thereafter to fill vacancies caused by expiration of term shall hold office for five (5)
years. A majority of the trustees shall constitute a quorum for the transaction of business. The powers
and authority of trustees shall be defined in the by-laws. For institutions organized as stock
corporations, the number and term of directors shall be governed by the provisions on stock
corporations. The second paragraph of the provision, although setting the term of the members of the
Board of Trustees at five years, contains a proviso expressly subjecting the duration to what is
otherwise provided in the articles of incorporation or by-laws of the educational corporation. That
contrary provision controls on the term of office.
Same; Same; Same; One occupying an office in a hold-over capacity could be removed at any time,
without cause, upon the election or appointment of his successor.—Ineluctably, the petitioner, having
assumed as President of AUP on January 23, 2001, could serve for only two years, or until January 22,
2003. By the time of his removal for cause as President on January 27, 2003, he was already occupying
the office in a hold-over capacity, and could be removed at any time, without cause, upon the election
or appointment of his successor. His insistence on holding on to the office was untenable, there-
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VOL. 655, AUGUST 17, 2011
643
fore, and with more reason when one considers that his removal was due to the loss of confidence on
the part of the Board of Trustees.
Due Process; The requirements of due process in an administrative context are satisfied when the
parties are afforded fair and reasonable opportunity to explain their respective sides of the
controversy, for the essence of due process is an opportunity to be heard.—The requirements of due
process in an administrative context are satisfied when the parties are afforded fair and reasonable
opportunity to explain their respective sides of the controversy, for the essence of due process is an
opportunity to be heard. Here, the petitioner was accorded the full opportunity to be heard, as borne
by the fact that he was granted the opportunity to refute the adverse findings contained in the GCAS
audit report and that the Board of Trustees first heard his side during the board meetings before his
removal. After having voluntarily offered his refutations in the proceedings before the Board of
Trustees, he should not now be permitted to denounce the proceedings and to plead the denial of due
pro-cess after the decision of the Board of Trustees was adverse to him.
Siguion Reyna, Montecillo and Ongsiako for petitioner.
Paguio & Associates for respondents.

BERSAMIN, J:
The injunctive relief protects only a right in esse. Where the plaintiff does not demonstrate that he
has an existing right to be protected by injunction, his suit for injunction must be dismissed for lack of
a cause of action.
The dispute centers on whether the removal of the petitioner as President of respondent Adventist
University of the Philippines (AUP) was valid, and whether his term in that office was five years, as he
insists, or only two years, as AUP insists.
644
644
We hereby review the decision promulgated on August 5, 2004,1 by which the Court of Appeals (CA)
nullified and set aside the writ of preliminary injunction issued by the Regional Trial Court (RTC),
Branch 21, in Imus, Cavite to prevent AUP from removing the petitioner.
Antecedents
AUP, a non-stock and non-profit domestic educational institution incorporated under Philippine laws
on March 3, 1932, was directly under the North Philippine Union Mission (NPUM) of the Southern Asia
Pacific Division of the Seventh Day Adventists. During the 3rd Quinquennial Session of the General
Conference of Seventh Day Adventists held from November 27, 2000 to December 1, 2000, the NPUM
Executive Committee elected the members of the Board of Trustees of AUP, including the Chairman
and the Secretary. Respondent Nestor D. Dayson was elected Chairman while the petitioner was
chosen Secretary.
On January 23, 2001, almost two months following the conclusion of the 3rd Quinquennial Session,
the Board of Trustees appointed the petitioner President of AUP.2 During his tenure, or from
November 11 to November 13, 2002, a group from the NPUM conducted an external performance
audit. The audit revealed the petitioner’s autocratic management style, like making major decisions
without the approval or recommendation of the proper committees, including the Finance
Committee; and that he had himself done the canvassing and purchasing of materials and made
withdrawals and reimbursements for expenses without valid supporting receipts and without the
approval of the Finance Committee. The
_______________
1 Rollo, pp. 71-85; penned by Associate Justice Josefina Guevara-Salonga, with Associate Justice
Conrado M. Vasquez, Jr. (later Presiding Justice of the CA, but already retired) and Associate Justice
Fernanda Lampas-Peralta, concurring.
2 CA Rollo, Vol. I, pp. 19-20.
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VOL. 655, AUGUST 17, 2011
645
audit concluded that he had committed serious violations of fundamental rules and procedure in the
disbursement and use of funds.
The NPUM Executive Committee and the Board of Trustees decided to immediately request the
services of the General Conference Auditing Service (GCAS) to determine the veracity of the audit
findings. Accordingly, GCAS auditors worked in the campus from December 4 to December 20, 2002 to
review the petitioner’s transactions during the period from April 2002 to October 2002. On December
20, 2002, CGAS auditors reported the results of their review, and submitted their observations and
recommendations to the Board of Trustees.
Upon receipt of the CGAS report that confirmed the initial findings of the auditors on January 8, 2003,
the NPUM informed the petitioner of the findings and required him to explain.
On January 15, 2003, Chairman Dayson and the NPUM Treasurer likewise informed the petitioner
inside the NPUM office on the findings of the auditors in the presence of the AUP Vice-President for
Financial Affairs, and reminded him of the possible consequences should he fail to satisfactorily
explain the irregularities cited in the report. He replied that he had already prepared his written
explanation.
The Board of Trustees set a special meeting at 2 p.m. on January 22, 2003. Being the Secretary, the
petitioner himself prepared the agenda and included an item on his case. In that meeting, he provided
copies of the auditors’ report and his answers to the members of the Board of Trustees. After hearing
his explanations and oral answers to the questions raised on issues arising from the report, the
members of the Board of Trustees requested him to leave to allow them to analyze and evaluate the
report and his answers. Despite a long and careful deliberation, however, the members of the Board
of Trustees decided to adjourn that night and to set another meeting in the following week
considering that the meeting had not
646
646

been specifically called for the purpose of deciding his case. The adjournment would also allow the
Board of Trustees more time to ponder on the commensurate disciplinary measure to be meted on
him.
On January 23, 2003, Chairman Dayson notified the petitioner in writing that the Board of Trustees
would hold in abeyance its deliberation on his answer to the auditors’ report and would meet again at
10:00 a.m. on January 27, 2003. Chairman Dayson indicated that some sectors in the campus had not
been properly represented in the January 22, 2003 special meeting, and requested the petitioner as
Secretary to ensure that all sectors are duly represented in the next meeting of the Board of
Trustees.3
In the January 27, 2003 special meeting, the petitioner sent a letter to the Board of Trustees. The
members, by secret ballot, voted to remove him as President because of his serious violations of
fundamental rules and procedures in the disbursement and use of funds as revealed by the special
audit; to appoint an interim committee consisting of three members to assume the powers and
functions of the President; and to recommend him to the NPUM for consideration as Associate
Director for Secondary Education.4
On January 28, 2003, the petitioner was handed inside the NPUM office a letter, together with a copy
of the minutes of the special meeting held the previous day. In turn, he handed to Chairman Dayson a
letter requesting two weeks within which to seek a reconsideration, stating that he needed time to
obtain supporting documents because he was then attending to his dying mother.5
In the evening of January 28, 2003, the Board of Trustees, most of whose members had not yet left
Cavite, reconvened to consider and decide the petitioner’s request for reconsidera-
_______________
3 Id., p. 182.
4 Id., pp. 184-186.

5 Id., p. 187.
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tion. During the meeting, he made an emotional appeal to allow him to continue as President,
promising to immediately vacate his office should he again commit any of the irregularities cited in
the auditors’ report. He added that should the Board of Trustees not favor his appeal, he would settle
for a retirement package for him and his wife and would leave the church.
The Board of Trustees denied the petitioner’s request for reconsideration because his reasons were
not meritorious. Board Member Elizabeth Role served the notice of the denial on him the next day,
but he refused to receive the notice, simply saying Alam ko na yan.6
The petitioner later obtained a copy of the inter-school memorandum dated January 31, 2003
informing AUP students, staff, and faculty members about his relief as President and the appointment
of an interim committee to assume the powers and duties of the President.
On February 4, 2003, the petitioner brought his suit for injunction and damages in the RTC, with
prayer for the issuance of a temporary restraining order (TRO), impleading AUP and its Board of
Trustees, represented by Chairman Dayson, and the interim committee. His complaint alleged that the
Board of Trustees had relieved him as President without valid grounds despite his five-year term; that
the Board of Trustees had thereby acted in bad faith; and that his being denied ample and reasonable
time to present his evidence deprived him of his right to due process.7
The suit being intra-corporate and summary in nature, the application for TRO was heard by means of
affidavits. In the hearing of February 7, 2003, the parties agreed not to harass each other. The RTC
used the mutual agreement as its basis to issue a status quo order on February 11, 2003.8
_______________
6 Id., p. 189.
7 Id., pp. 115-126.
8 Id., p. 110.
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648
In their answer with counterclaim, the respondents denied the allegations of the petitioner, and
averred that he had been validly removed for cause; and that he had been granted ample opportunity
to be heard in his defense.9
Order of the RTC

On March 21, 2003, after summary hearing, the RTC issued the TRO enjoining the respondents and
persons acting for and in their behalf from implementing the resolution removing him as President
issued by the Board of Trustees during the January 27, 2003 special meeting, and enjoining the interim
committee from performing the functions of President of AUP. The RTC did not require a bond.10
After further hearing, the RTC issued on April 25, 2003 its controversial order,11 granting the
petitioner’s application for a writ of preliminary injunction. It thereby resolved three issues, namely:
(a) whether the special board meetings were valid; (b) whether the conflict-of-interest provision in
the By-Laws and Working Policy was violated; and (c) whether the petitioner was denied due process.
It found for the petitioner upon all the issues. On the first issue, it held that there was neither a
written request made by any two members of the Board of Trustees nor proper notices sent to the
members as required by AUP’s By-Laws, which omissions, being patent defects, tainted the special
board meetings with nullity. Anent the second issue, it ruled that the purchase of coco lumber from
his balae (i.e., mother-in-law of his son) was not covered by the conflict-of-interest provision, for
AUP’s Model Statement of Acceptance form mentioned only the members of the immediate family
and did not extend to the relationship between him and his balae. On the third issue, it concluded
that he was deprived of due process when the Board of Trus-
_______________
9 Id., pp. 146-158.
10 Id., pp. 108-109.
11 Rollo, pp. 128-131.
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VOL. 655, AUGUST 17, 2011
649
tees refused to grant his motion for reconsideration and his request for additional time to produce his
evidence, and instead immediately implemented its decision by relieving him from his position
without according him the treatment befitting a university President.
Proceedings in the CA
With the Interim Rules for Intra-Corporate Controversies prohibiting a motion for reconsideration, the
respondents forthwith filed a petition for certiorari in the CA,12 contending that the petitioner’s
complaint did not meet the requirement that an injunctive writ should be anchored on a legal right;
and that he had been merely appointed, not elected, as President for a term of office of only two
years, not five years, based on AUP’s amended By-Laws.
In the meanwhile, on September 17, 2003, the petitioner filed a supplemental petition in the CA,13
alleging that after the commencement of his action, he filed in the RTC an urgent motion for the
issuance of a second TRO to enjoin the holding of an AUP membership meeting and the election of a
new Board of Trustees, capitalizing on the admission in the respondents’ answer that he had been
elected in 2001 to a five-year term of office. He argued that the admission estopped the respondents
from insisting to the contrary.
The respondents filed in the CA a verified urgent motion for a TRO and to set a hearing on the
application for preliminary injunction to enjoin the RTC from implementing the assailed order granting
a writ of preliminary injunction and from further proceeding in the case. The petitioner opposed the
motion for TRO, but did not object to the scheduling of preliminary injunctive hearings.
_______________
12 Id., pp. 132-231.

13 CA Rollo, Vol. I, pp. 556-575.
650
650
On February 24, 2004, the CA issued a TRO to enjoin the RTC from proceeding for a period of 60 days,
and declared that the prayer for injunctive relief would be resolved along with the merits of the main
case.
The petitioner sought a clarification of the TRO issued by the CA, considering that his cause of action
in his petitions to cite the respondents in indirect contempt dated March 5, 2004 and March 16, 2004
filed in the RTC involved the election of a certain Robin Saban as the new President of AUP in blatant
and malicious violation of the writ of preliminary injunction issued by the RTC. In clarifying the TRO,
the CA explained that it did not go beyond the reliefs prayed for in the respondents’ motion for TRO
and preliminary injunctive hearings.
On August 5, 2004, the CA rendered its decision nullifying the RTC’s writ of preliminary injunction. It
rejected the petitioner’s argument that Article IV, Section 3 of AUP’s Constitution and By-Laws and
Working Policy of the Conference provided a five-year term for him, because the provision was
inexistent. It ruled that the petitioner’s term of office had expired on January 22, 2003, or two years
from his appointment, based on AUP’s amended By-Laws; that, consequently, he had been a mere de
facto officer appointed by the members of the Board of Trustees; and that he held no legal right
warranting the issuance of the writ of preliminary injunction.
The CA declared that the rule on judicial admissions admitted of exceptions, as held in National Power
Corporation v. Court of Appeals,14 where the Court held that admissions were not evidence that
prevailed over documentary proof; that the petitioner’s being able to answer the results of the
special audit point-by-point belied his allegation of denial of due process; that AUP was the party that
stood to be injured by the issuance of the injunctive writ in the form of a “demoralized
administration, studentry, faculty and staff, sullied reputation, and dishonest leadership;” and that
the assailed RTC
_______________
14 G.R. No. 113103, June 13, 1997, 273 SCRA 419.
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order sowed confusion and chaos because the RTC thereby chose to subordinate the interest of the
entire AUP community to that of the petitioner who had been deemed not to have satisfied the
highest ideals required of his office.
Issues
Undeterred, the petitioner has appealed, contending that:
I.
THE COURT OF APPPEALS HAS DECIDED CONTRARY TO LAW AND JURISPRUDENCE WHEN IT RULED
THAT THE EXTRA-ORDINARY WRIT OF CERTIORARI APPLIED IN THE CASE AT BAR.
II.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH THE
ESTABLISHED LAW AND JURISPRUDENCE THAT “ADMISSIONS, VERBAL OR WRITTEN, MADE BY A
PARTY IN THE COURSE OF THE PROCEEDINGS IN THE SAME CASE, DOES NOT REQUIRE PROOF,” BY
REQUIRING PETITIONER BARAYUGA TO PRESENT EVIDENCE THAT HIS TERM AS PRESIDENT OF AUP IS
FOR FIVE (5) YEARS.
III.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW
AND ESTABLISHED FACTS WHEN IT RULED THAT PETITIONER BARAYUGA HAS ONLY A TERM OF TWO
(2) YEARS INSTEAD OF FIVE (5) YEARS AS CLEARLY ADMITTED BY PRIVATE RESPONDENT AUP IN ITS
ANSWER.
IV.
AND JURISPRUDENCE BY SOLELY RELYING ON THE CASE OF NATIONAL POWER CORPORATION v.
COURT OF APPEALS, WHICH INVOLVE FACTS DIFFERENT FROM THE PRESENT CASE.
652
652

V.
AND ESTABLISHED FACTS WHEN IT UNJUSTIFIABLY ALLOWED THE WAIVER OF NOTICE FOR THE
SPECIAL MEETING OF THE BOARD OF TRUSTEES.
VI.
AND ESTABLISHED FACTS WHEN IT ERRONEOUSLY CONCLUDED THAT PETITIONER BARAYUGA WAS
MERELY OCCUPYING THE POSITION OF AUP PRESIDENT IN A HOLD-OVER CAPACITY.
The petitioner argues that the assailed RTC order, being supported by substantial evidence, accorded
with law and jurisprudence; that his tenure as President under the Constitution, By-Laws and the
Working Policy of the Conference was for five years, contrary to the CA’s findings that he held the
position in a hold-over capacity; that instead, the CA should have applied the rule on judicial
admission, because the holding in National Power Corporation v. Court of Appeals, cited by the CA,
did not apply, due to AUP not having presented competent evidence to prove that he had not been
elected by the Board of Trustees as President of AUP; and that his removal during the special board
meeting that was invalidly held for lack of notice denied him due process.
AUP counters that:
PETITIONER IS NOT AN ELECTED TRUSTEE OF THE AUP BOARD, NOR WAS (HE) ELECTED AS PRESIDENT,
AND AS SUCH, HE CAN CLAIM NO RIGHT TO THE AUP PRESIDENCY, BEING TWICE DISQUALIFIED BY
LAW, WHICH RENDERS MOOT AND ACAMEDIC ALL OF THE ARGUMENTS IN THIS PETITION.
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653
II
EVEN IF WE FALSELY ASSUME EX GRATIA THAT PETITIONER IS AN ELECTED TRUSTEE AND ELECTED
PRESIDENT, THE TWO (2) YEAR TERM PROVIDED IN AUP’S BY-LAWS—REQUIRED BY THE
CORPORATION CODE AND APPROVED BY THE SEC—IS WHAT GOVERNS THE INTRA-CORPORATE
CONTROVERSY, THE AUP’S ADMISSION IN ITS ANSWER THAT HE HAS A FIVE (5) YEAR TERM BASED ON
HIS INVOKED SAMPLE CONSTITUTION, BY-LAWS AND POLICY OF THE SEVENTH DAY ADVENTIST
NOTWITHSTANDING.
III
PURSUANT TO THE RULES AND SETTLED JURISPRUDENCE, THE ADMISSION IN THE ANSWER IS NOT
EVEN PREJUDICIAL AT ALL.
IV
EVEN IF WE FALSELY ASSUME, JUST FOR THE SAKE OF ARGUMENT, THAT THE PETITIONER HAD A FIVE
(5) YEAR TERM AS UNIVERSITY PRESIDENT, HE WAS NONETHELESS VALIDLY TERMINATED FOR LOSS OF
CONFIDENCE, GIVEN THE NUMEROUS ADMITTED ANOMALIES HE COMMITTED.
V
PETITIONER CANNOT COMPLAIN THAT NOTICES OF THE BOARD MEETING WERE NOT SENT TO ALL
“THE TWENTY FIVE (25) TRUSTEES OF THE AUP BOARD”, SINCE: [1] AS THE AUP SECRETARY, IT WAS HE
WHO HAD THE DUTY TO SEND THE NOTICES; [2] WORSE, HE ATTENDED AND EXHAUSTIVELY
DEFENDED HIS WRITTEN ANSWER IN THE AUP BOARD OF TRUSTEES MEETING, THUS, WAIVING ANY
“NOTICE OBJECTION”; [3] WORST OF ALL, HIS AFTERTHOUGHT OBJECTION IS DECEPTIVELY FALSE IN
FACT.
The decisive question is whether the CA correctly ruled that the petitioner had no legal right to the
position of President of AUP that could be protected by the injunctive writ issued by the RTC.
654
654
Ruling
We deny the petition for review for lack of merit.
1.
Petition is already moot
The injunctive writ issued by the RTC was meant to protect the petitioner’s right to stay in office as
President. Given that the lifetime of the writ of preliminary injunction was co-extensive with the
duration of the act sought to be prohibited,15 this injunctive relief already became moot in the face of
the admission by the petitioner himself, through his affidavit,16 that his term of office premised on
his alleged five-year tenure as President had lasted only until December 2005. In short, the injunctive
writ granted by the RTC had expired upon the end of the term of office (as posited by him).
The mootness of the petition warranted its denial. When the resolution of the issue submitted in a
case has become moot and academic, and the prayer of the complaint or petition, even if granted, has
become impossible of enforcement—for there is nothing more to enjoin—the case should be
dismissed.17 No useful purpose would then be served by passing on the merits of the petition,
because any ruling could hardly be of any practical or useful purpose in the premises. It is a settled
rule that a court will not determine a moot question or an abstract proposition, nor express an
opinion in a case in which no practical relief can be granted.18 Indeed, moot and
_______________
15 Ticzon v. Video Post Manila, Inc., G.R. No. 136342, June 15, 2000, 333 SCRA 472.
16 Rollo, pp. 101-109.
17 Lomo v. Mabelin, G.R. No. L-68649, December 29, 1986, 146 SCRA 473; Bongat v. Bureau of Labor
Relations, G.R. No. L-41039, April 30, 1985, 136 SCRA 225, 229.
18 Vda. de Dabao v. Court of Appeals, G.R. No. 116526, March 23, 2004, 426 SCRA 91; Banco Filipino
Savings and Mortgage Bank v. Tuazon, Jr., G.R. No. 132796, March 10, 2004, 425 SCRA 129;
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academic cases cease to present any justiciable controversies by virtue of supervening events,19 and
the courts of law will not determine moot questions,20 for the courts should not engage in academic
declarations and determine a moot question.21
2.
RTC acted in patently grave abuse of discretion
in issuing the TRO and writ of injunction
Nonetheless, the aspect of the case concerning the petitioner’s claim for damages has still to be
decided. It is for this reason that we have to resolve whether or not the petitioner had a right to the
TRO and the injunctive writ issued by the RTC.
A valid writ of preliminary injunction rests on the weight of evidence submitted by the plaintiff
establishing: (a) a present and unmistakable right to be protected; (b) the acts against which the
injunction is directed violate such right; and (c) a special and paramount necessity for the writ to
prevent serious damages.22 In the absence of a clear legal right, the issu-
_______________
Paloma v. Court of Appeals, G.R. No. 145431, November 11, 2003, 415 SCRA 590; Philippine Airlines v.
Pascua, G.R. No. 143258, August 15, 2003, 409 SCRA 195; City Sheriff v. Fortunado, G.R. No. 80390,
March 27, 1998, 288 SCRA 190; See also Bongat v. Bureau of Labor Relations, supra, citing Central
Azucarera Don Pedro v. Don Pedro Security Guards Union, G.R. No. 21610, March 15, 1968, 22 SCRA
1053.
19 Huibonhoa v. Concepcion, G.R. No. 153785, August 3, 2006, 497 SCRA 563; Province of Batangas v.
Romulo, May 27, 2004, 429 SCRA 736.
20 Cole v. Court of Appeals, G.R. No. 137551, December 26, 2000, 348 SCRA 692.
21 Pepsi-Cola Bottling Company v. Secretary of Labor, G.R. No. 96663, August 10, 1999, 312 SCRA 104.
22 Nisce v. Equitable PCI-Bank, Inc., G.R. No. 167434, February 19, 2007, 516 SCRA 231, 252.
656
656
ance of the injunctive writ constitutes grave abuse of discretion23 and will result to nullification
thereof. Where the complainant’s right is doubtful or disputed, injunction is not proper. The
possibility of irreparable damage sans proof of an actual existing right is not a ground for a
preliminary injunction.24
It is clear to us, based on the foregoing principles guiding the issuance of the TRO and the writ of
injunction, that the issuance of the assailed order constituted patently grave abuse of discretion on
the part of the RTC, and that the CA rightly set aside the order of the RTC.
To begin with, the petitioner rested his claim for injunction mainly upon his representation that he
was entitled to serve for five years as President of AUP under the Constitution, By-Laws and Working
Policy of the General Conference of the Seventh Day Adventists (otherwise called the Bluebook). All
that he presented in that regard, however, were mere photocopies of pages 225-226 of the Bluebook,
which read:
Article IV—Board of Directors
“Sec. 1. This school operated by the _______________ Union Conference/Mission of Seventh-Day

Adventists shall be under the direct control of a board of directors, elected by the constituency in its
quinquennial sessions. The board of directors shall consist of 15 to 21 members, depending on the size
of the institution. Ex officio members shall be the union president as chairperson, the head of the
school as secretary, the union secretary, the union treasurer, the union director of education, the
presidents of the conferences/missions within the union. xxx.
Sec. 2. The term of office of members of the board of directors shall be five years to coincide with
the ______________ Union Conference/Mission quinquennial period.
_______________
23 Tayag v. Lacson, G.R. No. 134971, March 25, 2004, 426 SCRA 282, 299.
24 Nisce v. Equitable PCI-Bank, supra at note 22, p. 253.
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657

Sec. 3. The duties of the board of directors shall be to elect quinquenially the president, xxx.”
Yet, the document had no evidentiary value. It had not been officially adopted for submission to and
approval of the Securities and Exchange Commission. It was nothing but an unfilled model form. As
such, it was, at best, only a private document that could not be admitted as evidence in judicial
proceedings until it was first properly authenticated in court.
Section 20, Rule 132 of the Rules of Court requires authentication as a condition for the admissibility
of a private document, to wit:
“Section 20. Proof of private document.—Before any private document offered as authentic is
received in evidence, its due execution and authenticity must be proved either:
(a) By anyone who saw the document executed or written; or
(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.” (21a)
For the RTC to base its issuance of the writ of preliminary injunction on the mere photocopies of the
document, especially that such document was designed to play a crucial part in the resolution of the
decisive issue on the length of the term of office of the petitioner, was gross error.
Secondly, even assuming that the petitioner had properly authenticated the photocopies of the
Bluebook, the provisions contained therein did not vest the right to an office in him. An unfilled model
form creates or establishes no rights in favor of anyone.
Thirdly, the petitioner’s assertion of a five-year duration for his term of office lacked legal basis.
658
658
Section 108 of the Corporation Code determines the membership and number of trustees in an
educational corporation, viz.:
“Section 108. Board of trustees.—Trustees of educational institutions organized as educational

corporations shall not be less than five (5) nor more than fifteen (15): Provided, however, That the
number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a particular term, shall hold
office only for the unexpired period. Trustees elected thereafter to fill vacancies caused by expiration
of term shall hold office for five (5) years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of directors shall be governed
by the provisions on stock corporations.”
The second paragraph of the provision, although setting the term of the members of the Board of
Trustees at five years, contains a proviso expressly subjecting the duration to what is otherwise
provided in the articles of incorporation or by-laws of the educational corporation. That contrary
provision controls on the term of office.25
In AUP’s case, its amended By-Laws provided the term of the members of the Board of Trustees, and
the period within which to elect the officers, thusly:
_______________
25 See Campos, The Corporation Code, Volume 2 (1990), p. 610.
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659
Article I
Board of Trustees
Section 1. At the first meeting of the members of the corporation, and thereafter every two years, a
Board of Trustees shall be elected. It shall be composed of fifteen members in good and regular
standing in the Seventh-day Adventist denomination, each of whom shall hold his office for a term of
two years, or until his successor has been elected and qualified. If a trustee ceases at any time to be a
member in good and regular standing in the Seventh-day Adventist denomination, he shall thereby
cease to be a trustee.
xxxx
Article IV
Officers
Section 1. Election of officers.—At their organization meeting, the members of the Board of
Trustees shall elect from among themselves a Chairman, a Vice-Chairman, a President, a Secretary, a
Business Manager, and a Treasurer. The same persons may hold and perform the duties of more than
one office, provided they are not incompatible with each other.”26
In light of foregoing, the members of the Board of Trustees were to serve a term of office of only two
years; and the officers, who included the President, were to be elected from among the members of
the Board of Trustees during their organizational meeting, which was held during the election of the
Board of Trustees every two years. Naturally, the officers, including the President, were to exercise
the powers vested by Section 2 of the amended By-Laws for a term of only two years, not five years.
Ineluctably, the petitioner, having assumed as President of AUP on January 23, 2001, could serve for
only two years, or until January 22, 2003. By the time of his removal for cause
_______________
26 Records Volume II, pp. 786, 788.
660
660

as President on January 27, 2003, he was already occupying the office in a hold-over capacity, and
could be removed at any time, without cause, upon the election or appointment of his successor. His
insistence on holding on to the office was untenable, therefore, and with more reason when one
considers that his removal was due to the loss of confidence on the part of the Board of Trustees.
4.
Petitioner was not denied due process
The petitioner complains that he was denied due process because he was deprived of the right to be
heard and to seek reconsideration; and that the proceedings of the Board of Trustees were illegal due
to its members not being properly notified of the meeting.
Still, the petitioner fails to convince us.
The requirements of due process in an administrative context are satisfied when the parties are
afforded fair and reasonable opportunity to explain their respective sides of the controversy,27 for
the essence of due process is an opportunity to be heard.28 Here, the petitioner was accorded the full
opportunity to be heard, as borne by the fact that he was granted the opportunity to refute the
adverse findings contained in the GCAS audit report and that the Board of Trustees first heard his side
during the board meetings before his removal. After having voluntarily offered his refutations in the
proceedings before the Board of Trustees, he should not now be permitted to denounce the
proceedings and to plead the denial of due process after the decision of the Board of Trustees was
adverse to him.
_______________
27 Samalio v. Court of Appeals, G.R. No. 140079, March 31, 2005, 454 SCRA 462, 473.
28 Association of International Shipping Lines, Inc. v. Philippine Ports Authority, G.R. No. 158000,
March 31, 2005, 454 SCRA 701, 717.
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661
Nor can his urging that the proceedings were illegal for lack of prior notification be plausible in light of
the fact that he willingly participated therein without raising the objection of lack of notification.
Thereby, he effectively waived his right to object to the validity of the proceedings based on lack of
due notice.29
5.
Conclusion
The removal of the petitioner as President of AUP, being made in accordance with the AUP Amended
By-Laws, was valid. With that, our going into the other issues becomes unnecessary. We conclude that
the order of the RTC granting his application for the writ of preliminary injunction was tainted with
manifestly grave abuse of discretion; that the CA correctly nullified and set aside the order; and that
his claim for damages, being bereft of factual and legal warrant, should be dismissed.
WHEREFORE, we DENY the petition for review on certiorari for lack of merit, and hereby DISMISS SEC
Case No. 028-03 entitled Dr. Petronilo Barayuga v. Nelson D. Dayson, et al.
The petitioner shall pay the cost of suit.
SO ORDERED.
Corona (C.J., Chairperson), Leonardo-De Castro, Del Castillo and Villarama, Jr., JJ., concur.
_______________
29 See third paragraph of Section 50 of the Corporation Code (B.P. Blg. 68).
Section 50. Regular and special meetings of stockholders or members.—xxx.
xxx
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member.
xxx
662
662

Petition denied.
Notes.—Courts of justice constituted to pass upon substantial rights will not consider questions where
no actual interests are involved—courts generally decline jurisdiction over moot cases because there
is no substantial relief to which petitioner will be entitled and which WILL anyway be negated by the
dismissal of the petition. (Go vs. Sandiganbayan, 532 SCRA 574 [2007])
As a general rule, officers and directors of a corporation hold over after the expiration of their terms
until such time as their successors are elected or appointed. (Señeres vs. Commission on Elections,
585 SCRA 557 [2009])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Barayuga vs. Adventist University of
the Philippines, 655 SCRA 640, G.R. No. 168008 August 17, 2011
Case No. 12
G.R. No. 176579. June 28, 2011.*
WILSON P. GAMBOA, petitioner, vs. FINANCE SECRETARY MARGARITO B. TEVES, FINANCE

UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT (PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO.,
LTD. IN HIS CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS
MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO OF
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE, respondents.
PABLITO V. SANIDAD and ARNO V. SANIDAD, petitioners-in-intervention.
Special Civil Actions; Declaratory Relief; Mandamus; Court treats the petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications.—In short, it is well-settled that
this Court may treat a petition for declaratory relief as one for mandamus if the issue involved has far-
reaching implications. As this Court held in Salvacion: The Court has no original and exclusive
jurisdiction over a petition for declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications and raises questions that should be
resolved, it may be treated as one for mandamus. (Emphasis supplied)
_______________
* EN BANC.
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Gamboa vs. Teves
Actions; Locus Standi; Petitioner being a stockholder of Philippine Long Distance Telephone (PLDT) has
the right to question the subject sale which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution; Court upheld the right of a citizen to bring a
suit on matters of transcendental importance to the public.—There is no dispute that petitioner is a
stockholder of PLDT. As such, he has the right to question the subject sale, which he claims to violate
the nationality requirement prescribed in Section 11, Article XII of the Constitution. If the sale indeed
violates the Constitution, then there is a possibility that PLDT’s franchise could be revoked, a dire
consequence directly affecting petitioner’s interest as a stockholder. More importantly, there is no
question that the instant petition raises matters of transcendental importance to the public. The
fundamental and threshold legal issue in this case, involving the national economy and the economic
welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action. In Chavez v. PCGG, 299 SCRA 744 (1998), the Court upheld the right of a
citizen to bring a suit on matters of transcendental importance to the public.
Corporation Law; Words and Phrases; “Capital”; The term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital stock comprising both
common and non-voting preferred shares.—We agree with petitioner and petitioners-in-intervention.
The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common shares, and not to
the total outstanding capital stock comprising both common and non-voting preferred shares.
Same; Capital; Common shares cannot be deprived of the right to vote in any corporate meeting, and
any provision in the articles of incorporation restricting the right of common shareholders to vote is
invalid.—Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of directors because
it is the board of directors that controls or manages the corporation. In the absence of provisions in
the articles of incorporation denying
692
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Gamboa vs. Teves
voting rights to preferred shares, preferred shares have the same voting rights as common shares.
However, preferred shareholders are often excluded from any control, that is, deprived of the right to
vote in the election of directors and on other matters, on the theory that the preferred shareholders
are merely investors in the corporation for income in the same manner as bondholders. In fact, under
the Corporation Code only preferred or redeemable shares can be deprived of the right to vote.
Common shares cannot be deprived of the right to vote in any corporate meeting, and any provision
in the articles of incorporation restricting the right of common shareholders to vote is invalid.
Same; Same; The term “capital” in Section 11, Article XII of the Constitution refers only to shares of
stock that can vote in the election of directors.—Considering that common shares have voting rights
which translate to control, as opposed to preferred shares which usually have no voting rights, the
term “capital” in Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the term “capital”
shall include such preferred shares because the right to participate in the control or management of
the corporation is exercised through the right to vote in the election of directors. In short, the term
“capital” in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the
election of directors.
Same; Same; The term “capital” in Section 11, Article XII of the Constitution to include both voting and
non-voting shares will result in the abject surrender of our telecommunications industry to foreigners,
amounting to a clear abdication of the State’s constitutional duty to limit control of public utilities to
Filipino citizens; The Court should never open to foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest.—
Indisputably, construing the term “capital” in Section 11, Article XII of the Constitution to include both
voting and non-voting shares will result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the State’s constitutional duty to limit control of public
utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional
provision reserving certain areas of investment to Filipino citizens, such as the exploitation of natural
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Gamboa vs. Teves

resources as well as the ownership of land, educational institutions and advertising businesses. The
Court should never open to foreign control what the Constitution has expressly reserved to Filipinos
for that would be a betrayal of the Constitution and of the national interest. The Court must perform
its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words
of the Constitution, “a self-reliant and independent national economy effectively controlled by
Filipinos.”
Same; Securities and Exchange Commission; The Securities and Exchange Commission (SEC) is vested
with the power and function to suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon any of the grounds
provided by law.—Under Section 5(m) of the Securities Regulation Code, the SEC is vested with the
“power and function” to “suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon any of the grounds
provided by law.” The SEC is mandated under Section 5(d) of the same Code with the “power and
function” to “investigate x x x the activities of persons to ensure compliance” with the laws and
regulations that SEC administers or enforces. The GIS that all corporations are required to submit to
SEC annually should put the SEC on guard against violations of the nationality requirement prescribed
in the Constitution and existing laws. This Court can compel the SEC, in a petition for declaratory relief
that is treated as a petition for mandamus as in the present case, to hear and decide a possible
violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDT’s
voting shares, as admitted by respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to
SEC.
VELASCO, JR., J., Separate Dissenting Opinion:
Actions; Locus Standi; Petitioner has not shown any real interest substantial enough to give him the
requisite locus standi to question the sale of the government’s PTIC shares to First Pacific.—The Rules
of Court specifically requires that “[e]very action must be prosecuted or defended in the name of the
real party in interest.” A real party in interest is defined as the “party who stands to be benefited or
injured by the judgment in the suit, or the party entitled to
694
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Gamboa vs. Teves
the avails of the suit.” Petitioner has failed to allege any interest in the 111,415 PTIC shares nor in any
of the previous purchase contracts he now seeks to annul. He is neither a shareholder of PTIC nor of
First Pacific. Also, he has not alleged that he was an interested bidder in the government’s auction
sale of the PTIC shares. Finally, he has not shown how, as a nominal shareholder of PLDT, he stands to
benefit from the annulment of the sale of the 111,415 PTIC shares or of any of the sales of the PLDT
common shares held by foreigners. In fine, petitioner has not shown any real interest substantial
enough to give him the requisite locus standi to question the sale of the government’s PTIC shares to
First Pacific.
Same; Same; A taxpayer is deemed to have the standing to raise a constitutional issue when it is
established that public funds have been disbursed in alleged contravention of the law or the
Constitution.—Likewise, petitioner’s assertion that he has standing to bring the suit as a “taxpayer”
must fail. In Gonzales v. Narvasa, We discussed that “a taxpayer is deemed to have the standing to
raise a constitutional issue when it is established that public funds have been disbursed in alleged
contravention of the law or the Constitution.” In this case, no public funds have been disbursed. In
fact, the opposite has happened—there is an inflow of funds into the government coffers.
Same; Jurisdiction; Declaratory Relief; Petitions for declaratory relief, annulment of sale and
injunction do not fall within the exclusive jurisdiction of this Court; The proper jurisdiction for
declaratory relief is the Regional Trial Court (RTC); Requisites for an Action for Declaratory Relief.—
Based on the foregoing provisos, it is patently clear that petitions for declaratory relief, annulment of
sale and injunction do not fall within the exclusive original jurisdiction of this Court. First, the court
with the proper jurisdiction for declaratory relief is the Regional Trial Court (RTC). Sec. 1, Rule 63 of
the Rules of Court stresses that an action for declaratory relief is within the exclusive original
jurisdiction of the RTC, viz.: Any person interested under a deed, will, contract or other written
instrument, whose rights are affected by a statute, executive order or regulation, ordinance, or any
other governmental regulation may, before breach or violation thereof, bring an action in the
appropriate Regional Trial Court to determine any question of construction or validity arising, and for
a declaration of his rights or duties, thereunder.
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Gamboa vs. Teves
(Emphasis supplied.) An action for declaratory relief also requires the following: (1) a justiciable
controversy between persons whose interests are adverse; (2) the party seeking the relief has a legal
interest in the controversy; and (3) the issue is ripe for judicial determination. As previously discussed,
petitioner lacks any real interest in this action; thus, no justiciable controversy between adverse
interests exists.
Same; Same; Same; The exercise of such discretion, whether to treat a petition for declaratory relief
as one for mandamus, presupposes that the petition is otherwise viable or meritorious.—Despite this,
the ponencia decided to treat the petition for declaratory relief as one for mandamus, citing the rule
that “where the petition has far-reaching implications and raises questions that should be resolved, it
may be treated as one for mandamus.” However, such rule is not absolute. In Macasiano v. National
Housing Authority, 224 SCRA 236 (1993), the Court explicitly stated that the exercise of such
discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that
the petition is otherwise viable or meritorious. As I shall discuss subsequently in the substantive
portion of this opinion, the petition in this case is clearly not viable or meritorious.
Same; Mandamus; A petition for mandamus is premature if there are administrative remedies
available to petitioner.—A petition for mandamus is premature if there are administrative remedies
available to petitioner. Under the doctrine of primary administrative jurisdiction, “courts cannot or
will not determine a controversy where the issues for resolution demand the exercise of sound
administrative discretion requiring the special knowledge, experience, and services of the
administrative tribunal to determine technical and intricate matters of fact. In other words, if a case is
such that its determination requires the expertise, specialized training and knowledge of an
administrative body, relief must first be obtained in an administrative proceeding before resort to the
courts is had even if the matter may well be within their proper jurisdiction.” Along with this, the
doctrine of exhaustion of administrative remedies also requires that where an administrative remedy
is provided by statute relief must be sought by exhausting this remedy before the courts will act.
696
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Gamboa vs. Teves
Same; Hierarchy of Courts; The doctrine dictates that when jurisdiction is shared concurrently with
different courts, the proper suit should first be filed with the lower-ranking court.—Although this
Court, the CA, and the RTC have “concurrent jurisdiction to issue writs of certiorari, prohibition,
mandamus, quo warranto, habeas corpus and injunction, such concurrence does not give the
petitioner unrestricted freedom of choice of court forum.” The doctrine of hierarchy of courts dictates
that when jurisdiction is shared concurrently with different courts, the proper suit should first be filed
with the lower-ranking court. Failure to do so is sufficient cause for the dismissal of a petition.
Corporation Law; Capital; The intent of the framers of the Constitution was not to limit the application
of the word “capital” to voting or common shares alone.—Contrary to pronouncement of the
ponencia, the intent of the framers of the Constitution was not to limit the application of the word
“capital” to voting or common shares alone. In fact, the Records of the Constitutional Commission
reveal that even though the UP Law Center proposed the phrase “voting stock or controlling interest,”
the framers of the Constitution did not adopt this but instead used the word “capital.”
Same; Same; Stockholders, whether holding voting or non-voting stocks, have all the rights, powers
and privileges of ownership over their stocks; Control is another inherent right of ownership.—
Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and privileges
of ownership over their stocks. This necessarily includes the right to vote because such is inherent in
and incidental to the ownership of corporate stocks, and as such is a property right. Additionally,
control is another inherent right of ownership. The circumstances enumerated in Sec. 6 of the
Corporation Code clearly evince this. It gives voting rights to the stocks deemed as non-voting as to
fundamental and major corporate changes. Thus, the issue should not only dwell on the daily
management affairs of the corporation but also on the equally important fundamental changes that
may need to be voted on. On this, the “non-voting” shares also exercise control, together with the
voting shares.
Same; Same; Securities and Exchange Commission; Securities and Exchange Commission (SEC) defined
“capital” as to include both
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voting and non-voting in the determination of the nationality of a corporation.—More importantly,

the SEC defined “capital” as to include both voting and non-voting in the determination of the
nationality of a corporation, to wit: In view of the foregoing, it is opined that the term “capital”
denotes the sum total of the shares subscribed and paid by the shareholders, or secured to be paid,
irrespective of their nomenclature to be issued by the corporation in the conduct of its operation.
Hence, non-voting preferred shares are considered in the computation of the 60-40% Filipino-alien
equity requirement of certain economic activities under the Constitution. (Emphasis supplied.)
Same; Same; Outstanding Capital Stock; The Corporation Code defines “outstanding capital stock” as
the “total shares of stock issued”; It includes all types of shares.—Similarly, the Corporation Code
defines “outstanding capital stock” as the “total shares of stock issued.” It does not distinguish
between common and preferred shares. It includes all types of shares.
ABAD, J., Dissenting Opinion:

Remedial Law; Actions; Jurisdiction; Gamboa actions for injunction, declaratory relief, and declaration
of nullity of sale are not among the cases that can be initiated before the Supreme Court; Only
exceptional and compelling circumstances such as cases of national interest and of serious
implications justify direct resort to the Supreme Court for the extraordinary remedy of writ of
certiorari, prohibition, or mandamus.—Strictly speaking, Gamboa actions for injunction, declaratory
relief, and declaration of nullity of sale are not among the cases that can be initiated before the
Supreme Court. Those actions belong to some other tribunal. And, although the Court has original
jurisdiction in prohibition cases, the Court shares this authority with the Court of Appeals and the
Regional Trial Courts. But this concurrence of jurisdiction does not give the parties absolute and
unrestrained freedom of choice on which court the remedy will be sought. They must observe the
hierarchy of courts. As a rule, the Supreme Court will not entertain direct resort to it unless the
remedy desired cannot be obtained in other tribunals. Only exceptional and compelling circumstances
such as cases of national interest and of serious implications justify direct resort to the Su-
698
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preme Court for the extraordinary remedy of writ of certiorari, prohibition, or mandamus.
Corporation Law; Capital; The Constitution fails to provide for the meaning of the term “capital”
considering that the shares of stock of a corporation vary in kinds.—The Constitution fails to provide
for the meaning of the term “capital,” considering that the shares of stock of a corporation vary in
kinds. The usual classification depends on how profits are to be distributed and which stockholders
have the right to vote the members of the corporation’s board of directors.
Same; Same; The Court should not leave the matter of compliance with the constitutional limit on
foreign ownership in public utilities, a matter of transcendental importance, to judicial legislation
especially since any ruling the Court makes on the matter could have deep economic repercussions; It
is apt for Congress to build up on this framework by defining the meaning of “capital.”—Under this
confusing legislative signals, the Court should not leave the matter of compliance with the
constitutional limit on foreign ownership in public utilities, a matter of transcendental importance, to
judicial legislation especially since any ruling the Court makes on the matter could have deep
economic repercussions. This is not a concern over which the Court has competence. The 1987
Constitution laid down the general framework for restricting foreign ownership of public utilities. It is
apt for Congress to build up on this framework by defining the meaning of “capital,” establishing rules
for the implementation of the State policy, providing sanctions for its violation, and vesting in the
appropriate agency the responsibility for carrying out the purposes of such policy.
ORIGINAL ACTION in the Supreme Court. Prohibition, Injunction, Declaratory Relief and Declaration of
Nullity of Sale of Shares of Stock.
Edgar D. Dumlao for China Banking Corporation.
Office of the General Counsel for respondent Francis Ed Lim.
Sycip, Salazar, Hernandez and Gatmaitan for respondent Manuel V. Pangilinan.
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Angara, Abello, Concepcion, Regala and Cruz for Napoleon L. Nazareno.

CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of
the sale of shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific).
The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance
Telephone Company (PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a
franchise and the right to engage in telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major PLDT stockholder, sold 26 percent of
the outstanding common shares of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated
by several persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became the
owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment executed by PTIC
stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares of stock of PTIC held
by PHI were sequestered by the Presidential Commission on Good Government (PCGG). The 111,415
PTIC shares, which represent about 46.125 percent of the outstanding capital stock of PTIC,
_______________
1 Rollo (Vol. I), pp. 15-103, (Vol. II), pp. 762-768.
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were later declared by this Court to be owned by the Republic of the Philippines.2
In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the
remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-
Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public
bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8
December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio
Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder
and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to
do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was
then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific,
through its subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415
PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with the Philippine
Government for the price of P25,217,556,000 or US$510,580,189. The sale was completed on 28
February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC
shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common
shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby in-
_______________
2 See Cojuangco v. Sandiganbayan, G.R. No. 183278, 24 April 2009, 586 SCRA 790.
701
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Gamboa vs. Teves
creasing the common shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section
11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a
public utility to not more than 40 percent.3
On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P.
Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts:
On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment
holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding
common shares. PHI, on the other hand, was incorporated in 1977, and became the owner of 111,415
PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held
by PHI were sequestered by the
_______________
3 Section 11, Article XII of the 1987 Constitution provides:

ARTICLE XII
NATIONAL ECONOMY AND PATRIMONY
xxxx
Section 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by
such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.
702
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Gamboa vs. Teves
PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former President
Ferdinand Marcos. The sequestered PTIC shares were reconveyed to the Republic of the Philippines in
accordance with this Court’s decision4 which became final and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of
the outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization
Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An
invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20
November 2006, a pre-bid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine different
newspapers.
During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder
with a bid of P25,217,556,000. The government notified First Pacific, the majority owner of PTIC
shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of first
refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its intention to
match Parallax’s bid.
On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a
public hearing on the particulars of the then impending sale of the 111,415 PTIC shares. Respondents
Teves and Sevilla were among those who attended the public hearing. The HR Committee Report No.
2270 concluded that: (a) the auction of the government’s 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacific’s intended acquisition
of the government’s 111,415 PTIC shares resulting in First Pacific’s 100%
_______________
4 Yuchengco v. Sandiganbayan, G.R. No. 149802, 20 January 2006, 479 SCRA 1.
703
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Gamboa vs. Teves

ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public
utility since PTIC holds only 13.847 percent of the total outstanding common shares of PLDT.5 On 28
February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding
for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the
remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax
offered the highest bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal in favor
of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a First Pacific affiliate,
exercised its right of first refusal by matching the highest bid offered for PTIC shares on 13 February
2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000
and the government delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan
denies the other allegations of facts of petitioner.
On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief,
and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the
sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common shareholdings in
PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s common
shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 percent
which is over the 40 percent constitutional limit.6 Petitioner asserts:
“If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0
percent of its common—or vot-
_______________
5 Rollo, (Vol. II), p. 806.
6 Rollo (Vol. I), p. 23.
704
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Gamboa vs. Teves
ing-stockholdings, x x x. Hence, the consummation of the sale will put the two largest foreign
investors in PLDT—First Pacific and Japan’s NTT DoCoMo, which is the world’s largest wireless
telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the completion of
the sale, data culled from the official website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five percent of common equity, will collectively
own 81.47 percent of PLDT’s common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT
submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and
several other foreign entities breached the constitutional limit of 40 percent ownership as early as
2003. x x x”7
Petitioner raises the following issues: (1) whether the consummation of the then impending sale of
111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public
utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of the
111,415 PTIC shares to First Pacific; and (3) whether the sale of common shares to foreigners in excess
of 40 percent of the entire subscribed common capital stock violates the constitutional limit on
foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and
Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the
motion and noted the Petition-in-Intervention.
Petitioners-in-intervention “join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin

and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee.”
Petitioners-in-intervention claim that, as
_______________
7 Id., at pp. 23-24, 26.
8 Id., at p. 41.
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Gamboa vs. Teves
PLDT subscribers, they have a “stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT], unquestionably a public
utility, in violation of the nationality restrictions of the Philippine Constitution.”
The Issue
This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which
indisputably demand a thorough examination of the evidence of the parties, are generally beyond this
Court’s jurisdiction. Adhering to this well-settled principle, the Court shall confine the resolution of
the instant controversy solely on the threshold and purely legal issue of whether the term “capital” in
Section 11, Article XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred shares) of PLDT, a
public utility.
The petition is partly meritorious.
Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only
the petition for prohibition is within the original jurisdiction of this court, which however is not
exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for
declaratory relief,10 injunction, and annulment of sale are
_______________
9 Id.
10 Governed by Rule 63 of the Rules of Court. Section 1, Rule 63 of the Rules of Court states:
706
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Gamboa vs. Teves
not embraced within the original jurisdiction of the Supreme Court. On this ground alone, the petition
could have been dismissed outright.
While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall
nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28
February 2007, the questioned sale was consummated when MPAH paid IPC P25,217,556,000 and the
government delivered the certificates for the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition of the term “capital” in Section
11, Article XII of the Constitution has far-reaching implications to the national
_______________
RULE 63
Declaratory Relief and Similar Remedies
Section 1. Who may file petition.—Any person interested under a deed, will, contract or other
written instrument, or whose rights are affected by a statute, executive order or regulation,
ordinance, or any other governmental regulation may, before breach or violation thereof bring an
action in the appropriate Regional Trial Court to determine any question of construction or validity
arising, and for a declaration of his rights or duties, thereunder. (Bar Matter No. 803, 17 February
1998)
11 Section 2, Rule 65 of the Rules of Court provides:
SEC. 2. Petition for prohibition.—When the proceedings of any tribunal, corporation, board, officer,
or person, whether exercising judicial, quasi-judicial or ministerial functions, are without or in excess
of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction,
and there is no appeal or any other plain, speedy and adequate remedy in the ordinary course of law,
a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with
certainty and praying that judgment be rendered commanding the respondent to desist from further
proceedings in the action or matter specified therein, or otherwise granting such incidental relief as
law and justice may require.
xxxx
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economy, the Court treats the petition for declaratory relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief
as one for mandamus considering the grave injustice that would result in the interpretation of a
banking law. In that case, which involved the crime of rape committed by a foreign tourist against a
Filipino minor and the execution of the final judgment in the civil case for damages on the tourist’s
dollar deposit with a local bank, the Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment, garnishment or any other order or process of
any court, inapplicable due to the peculiar circumstances of the case. The Court held that “injustice
would result especially to a citizen aggrieved by a foreign guest like accused x x x” that would “negate
Article 10 of the Civil Code which provides that ‘in case of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body intended right and justice to prevail.’ ” The Court
therefore required respondents Central Bank of the Philippines, the local bank, and the accused to
comply with the writ of execution issued in the civil
_______________
12 Section 3, Rule 65 of the Rules of Court states:

SEC. 3. Petition for mandamus.—When any tribunal, corporation, board, officer or person
unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting
from an office, trust, or station, or unlawfully excludes another from the use and enjoyment of a right
or office to which such other is entitled, and there is no other plain, speedy and adequate remedy in
the ordinary course of law, the person aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that judgment be rendered commanding the
respondent, immediately or at some other time to be specified by the court, to do the act required to
be done to protect the rights of the petitioner and to pay the damages sustained by the petitioner by
reason of the wrongful acts of the respondent.
xxxx
13 343 Phil. 539; 278 SCRA 27 (1997).
708
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Gamboa vs. Teves
case for damages and to release the dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the
procedural infirmity of the petition for declaratory relief and treated the same as one for mandamus.
In Alliance, the issue was whether the government unlawfully excluded petitioners, who were
government employees, from the enjoyment of rights to which they were entitled under the law.
Specifically, the question was: “Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included among the four
‘employers’ under Presidential Decree No. 851 which are required to pay their employees x x x a
thirteenth (13th) month pay x x x ?” The Constitutional principle involved therein affected all
government employees, clearly justifying a relaxation of the technical rules of procedure, and
certainly requiring the interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for declaratory relief as one for
mandamus if the issue involved has far-reaching implications. As this Court held in Salvacion:
“The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching implications
and raises questions that should be resolved, it may be treated as one for mandamus.”15 (Emphasis
supplied)
In the present case, petitioner seeks primarily the interpretation of the term “capital” in Section 11,
Article XII of the
_______________
14 209 Phil. 1; 124 SCRA 1 (1983), citing Nacionalista Party v. Angelo Bautista, 85 Phil. 101 (1949), and
Aquino v. Commission on Elections, 62 SCRA 275 (1975).
15 Supra note 13.
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Constitution. He prays that this Court declare that the term “capital” refers to common shares only,
and that such shares constitute “the sole basis in determining foreign equity in a public utility.”
Petitioner further asks this Court to declare any ruling inconsistent with such interpretation
unconstitutional.
The interpretation of the term “capital” in Section 11, Article XII of the Constitution has far-reaching
implications to the national economy. In fact, a resolution of this issue will determine whether
Filipinos are masters, or second class citizens, in their own country. What is at stake here is whether
Filipinos or foreigners will have effective control of the national economy. Indeed, if ever there is a
legal issue that has far-reaching implications to the entire nation, and to future generations of
Filipinos, it is the threshhold legal issue presented in this case.
The Court first encountered the issue on the definition of the term “capital” in Section 11, Article XII
of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case
involved the same public utility (PLDT) and substantially the same private respondents. Despite the
importance and novelty of the constitutional issue raised therein and despite the fact that the petition
involved a purely legal question, the Court declined to resolve the case on the merits, and instead
denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez assailed on a
pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a petition for review
under Rule 45.
_______________
16 Adverted to in respondent Nazareno’s Memorandum dated 27 September 2007. Rollo, p. 929.

Nazareno stated: “In fact, in Fernandez v. Cojuangco, which raised markedly similar issues, the
Honorable Court refused to entertain the Petition directly filed with it and dismissed the same for
violating the principle of hierarchy of courts.”
17 In a Resolution dated 9 June 2003.
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The Court’s Resolution, denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally settle this purely
legal issue which is of transcendental importance to the national economy and a fundamental
requirement to a faithful adherence to our Constitution. The Court must forthwith seize such
opportunity, not only for the benefit of the litigants, but more significantly for the benefit of the
entire Filipino people, to ensure, in the words of the Constitution, “a self-reliant and independent
national economy effectively controlled by Filipinos.”18 Besides, in the light of vague and confusing
positions taken by government agencies on this purely legal issue, present and future foreign
investors in this country deserve, as a matter of basic fairness, a categorical ruling from this Court on
the extent of their participation in the capital of public utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this purely legal issue has remained
unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade
this ever recurring fundamental issue and delay again defining the term “capital,” which appears not
only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and
joint venture agreements for the development of our natural resources,19 in
_______________
18 Section 19, Article II, Constitution.
19 Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State may directly undertake such
activities, or it may enter into co-production, joint venture, or production-sharing agreements with
Filipino citizens, or corporations or associations
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Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the own-
_______________
at least sixty per centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five years, and under
such terms and conditions as may be provided by law. In cases of water rights for irrigation, water
supply fisheries, or industrial uses other than the development of water power, beneficial use may be
the measure and limit of the grant.
The State shall protect the nation’s marine wealth in its archipelagic waters, territorial sea, and
exclusive economic zone, and reserve its use and enjoyment exclusively to Filipino citizens.
The Congress may, by law, allow small-scale utilization of natural resources by Filipino citizens, as well
as cooperative fish farming, with priority to subsistence fishermen and fish- workers in rivers, lakes,
bays, and lagoons.
The President may enter into agreements with foreign-owned corporations involving either technical
or financial assistance for large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and conditions provided by law,
based on real contributions to the economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of local scientific and technical
resources.
The President shall notify the Congress of every contract entered into in accordance with this
provision, within thirty days from its execution.
20 Section 7. Save in cases of hereditary succession, no private lands shall be transferred or

conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the
public domain.
21 Section 10. The Congress shall, upon recommendation of the economic and planning agency,
when the national interest dictates, reserve to citizens of the Philippines or to corporations or
associations at least sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of invest-
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Gamboa vs. Teves
ership of educational institutions,22 and in Section 11(2), Article XVI on the ownership of advertising
companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the
subject sale, which he claims to violate the nationality requirement pre-
_______________
ments. The Congress shall enact measures that will encourage the formation and operation of
enterprises whose capital is wholly owned by Filipinos.
In the grant of rights, privileges, and concessions covering the national economy and patrimony, the
State shall give preference to qualified Filipinos.
The State shall regulate and exercise authority over foreign investments within its national jurisdiction
and in accordance with its national goals and priorities.
22 Section 4(2), Article XIV of the 1987 Constitution provides: “Educational institutions, other than
those established by religious groups and mission boards, shall be owned solely by citizens of the
Philippines or corporations or associations at least sixty per centum of the capital of which is owned
by such citizens. The Congress may, however, require increased Filipino equity participation in all
educational institutions.
The control and administration of educational institutions shall be vested in citizens of the Philippines.
x x x x”
23 Section 11(2), Article XVI of the 1987 Constitution provides: “The advertising industry is impressed
with public interest, and shall be regulated by law for the protection of consumers and the promotion
of the general welfare.
Only Filipino citizens or corporations or associations at least seventy per centum of the capital of
which is owned by such citizens shall be allowed to engage in the advertising industry.
The participation of foreign investors in the governing body of entities in such industry shall be limited
to their proportionate share in the capital thereof, and all the executive and managing officers of such
entities must be citizens of the Philippines.
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scribed in Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution, then
there is a possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting
petitioner’s interest as a stockholder.
More importantly, there is no question that the instant petition raises matters of transcendental
importance to the public. The fundamental and threshold legal issue in this case, involving the
national economy and the economic welfare of the Filipino people, far outweighs any perceived
impediment in the legal personality of the petitioner to bring this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of
transcendental importance to the public, thus:
“In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties
in interest; and because it is sufficient that petitioner is a citizen and as such is interested in the
execution of the laws, he need not show that he has any legal or special interest in the result of the
action. In the aforesaid case, the petitioners sought to enforce their right to be informed on matters
of public concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and enforceable must be published in the
Official Gazette or otherwise effectively promulgated. In ruling for the petitioners’ legal standing, the
Court declared that the right they sought to be enforced ‘is a public right recognized by no less than
the fundamental law of the land.’
_______________
24 G.R. No. 130716, 9 December 1998, 299 SCRA 744 cited in Chavez v. Public Estates Authority, 433
Phil. 506; 403 SCRA 1 (2002). See also David v. Macapagal-Arroyo, G.R. No. 171396, 3 May 2006, 489
SCRA 160; Santiago v. Commission on Elections, G.R. No. 127325, 19 March 1997, 270 SCRA 106;
Kilosbayan, Inc. v. Guingona, Jr., G.R. No. 113375, 5 May 1994, 232 SCRA 110 (1994).
714
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Gamboa vs. Teves
Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a
mandamus proceeding involves the assertion of a public right, the requirement of personal interest is
satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general ‘public’ which
possesses the right.’
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been
involved under the questioned contract for the development, management and operation of the
Manila International Container Terminal, ‘public interest [was] definitely involved considering the
important role [of the subject contract] . . . in the economic development of the country and the
magnitude of the financial consideration involved.’ We concluded that, as a consequence, the
disclosure provision in the Constitution would constitute sufficient authority for upholding the
petitioner’s standing.” (Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public
importance, the petitioner has the requisite locus standi.
Definition of the Term “Capital” in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the
Filipinization of public utilities, to wit:
“Section 11. No franchise, certificate, or any other form of authorization for the operation of a
general public. The participation of foreign investors in the govern-
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Gamboa vs. Teves
ing body of any public utility enterprise shall be limited to their proportionate share in its capital, and
all the executive and managing officers of such corporation or association must be citizens of the
Philippines.” (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:
“Section 5. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of the capital of which is owned
by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a
condition that it shall be subject to amendment, alteration, or repeal by the National Assembly when
the public interest so requires. The State shall encourage equity participation in public utilities by the
enterprise shall be limited to their proportionate share in the capital thereof.” (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935
Constitution, viz.:
“Section 8. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or other entities
organized under the laws of the Philippines sixty per centum of the capital of which is owned by
citizens of the Philippines, nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. No franchise or right shall be granted to any
individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires.” (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us
that the
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Gamboa vs. Teves
Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism
which gripped the 1935 Constitutional Convention.25 The 1987 Constitution “provides for the
Filipinization of public utilities by requiring that any form of authorization for the operation of public
utilities should be granted only to ‘citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned by
such citizens.’ The provision is [an express] recognition of the sensitive and vital position of public
utilities both in the national economy and for national security.”26 The evident purpose of the
citizenship requirement is to prevent aliens from assuming control of public utilities, which may be
inimical to the national interest.27 This specific provision explicitly reserves to Filipino citizens control
of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to “conserve and
develop our patrimony”28 and ensure “a self-reliant and independent national economy effectively
controlled by Filipinos.”29
Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum
nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a
corporation to be granted authority to operate a public utility, at least 60 percent of its “capital” must
be owned by Filipino citizens.
_______________
25 Bernas, The Constitution of the Republic of the Philippines, p. 452, citing Smith, Bell and Co. v.
Natividad, 40 Phil. 136, 148 (1919); Luzon Stevedoring Corporation v. Anti-Dummy Board, 46 SCRA
474, 490 (1972).
26 Id.
27 De Leon, Hector, Philippine Constitutional Law (Principles and Cases), Volume 2, 1999 Ed., p. 848.
28 Preamble, 1987 Constitution; De Leon, Hector, Philippine Constitutional Law (Principles and Cases),
Volume 2, 1999 Ed., p. 788.
29 Section 19, Article II, Constitution.
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The crux of the controversy is the definition of the term “capital.” Does the term “capital” in Section
11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock
(combined total of common and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only
to common shares because such shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term “capital” in Section 11, Article XII of the
Constitution refers to “the ownership of common capital stock subscribed and outstanding, which
class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of
directors.” It is undisputed that PLDT’s non-voting preferred shares are held mostly by Filipino
citizens.30 This arose from Presidential Decree No. 217,31 issued on 16 June 1973 by then President
Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-voting
preferred shares to pay for the investment cost of installing the telephone line.32
_______________
30 http://www.pldt.com.ph/investor/shareholder/Documents/GIS2010_%28as%20of
%207.2.10%29_final.pdf
31 ESTABLISHING BASIC POLICIES FOR THE TELEPHONE INDUSTRY, AMENDING FOR THE PURPOSE THE
PERTINENT PROVISIONS OF COMMONWEALTH ACT NO. 146, AS AMENDED, OTHERWISE KNOWN AS
THE PUBLIC SERVICE ACT, AS AMENDED, AND ALL INCONSISTENT LEGISLATIVE AND MUNICIPAL
FRANCHISE OF THE PHILIPPINE LONG DISTANCE TELEPHONE COMPANY UNDER ACT NO. 3436, AS
AMENDED, AND ALL INCONSISTENT LEGISLATIVE AND MUNICIPAL FRANCHISES INCLUDING OTHER
EXISTING LAWS.
32 Upon approval by the National Telecommunications Commission, this mandatory requirement to

subscribe to non-voting preferred shares was made optional starting 22 April 2003. See PLDT 20- F
2005 filing with the United States Securities and Exchange Commission at
http://www.wikinvest.com/stock/Philippine
Long_Distance_Telephone Company_(PHI)/ Filing/20-F/2—5/F2923101.
718
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Gamboa vs. Teves

Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition
of the term “capital.”33Petitioners-in-intervention allege that “the approximate foreign ownership of
common capital stock of PLDT x x x already amounts to at least 63.54% of the total outstanding
common stock,” which means that foreigners exercise significant control over PLDT, patently violating
the 40 percent foreign equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term “capital” in Section 11, Article
XII of the Constitution. More importantly, private respondents Nazareno and Pangilinan of PLDT do
not dispute that more than 40 percent of the common shares of PLDT are held by foreigners.
In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the

procedural infirmities of the petition and the supposed violation of the due process rights of the
“affected foreign common shareholders.” Respondent Nazareno does not deny petitioner’s allegation
of foreigners’ dominating the common shareholdings of PLDT. Nazareno stressed mainly that the
petition “seeks to divest foreign common shareholders purportedly exceeding 40% of the total
common shareholdings in PLDT of their ownership over their shares.” Thus, “the foreign natural and
juridical PLDT shareholders must be impleaded in this suit so that they can be heard.”34 Essentially,
Nazareno invokes denial of due process on behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term “capital,” he states that “among the
factual asser-
_______________
See also Philippine Consumers Foundation, Inc. v. NTC and PLDT, G.R. No. L-63318, 18 April 1984, 131
SCRA 200, on the origin and rationale of the SIP.
33 Rollo (Vol. I), pp. 414-451.
34 Rollo (Vol. II), p. 991.

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tions that need to be established to counter petitioner’s allegations is the uniform interpretation by
government agencies (such as the SEC), institutions and corporations (such as the Philippine National
Oil Company-Energy Development Corporation or PNOC-EDC) of including both preferred shares and
common shares in “controlling interest” in view of testing compliance with the 40% constitutional
limitation on foreign ownership in public utilities.”35
Similarly, respondent Manuel V. Pangilinan does not define the term “capital” in Section 11, Article XII
of the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40
percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural flaws of
the petition and the alleged violation of the due process rights of foreigners. Respondent Pangilinan
emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over the petition; (2)
petitioner’s lack of standing; (3) mootness of the petition; (4) non-availability of declaratory relief;
and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges that the issue
should be whether “owners of shares in PLDT as well as owners of shares in companies holding shares
in PLDT may be required to relinquish their shares in PLDT and in those companies without any law
requiring them to surrender their shares and also without notice and trial.”
Respondent Pangilinan further asserts that “Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their
shares in the utility company.” According to him, “Section 11 does not authorize taking one person’s
property (the shareholder’s stock in the utility company) on the basis of another party’s alleged
failure to satisfy a requirement that is a condition
_______________
35 Id., at p. 951.
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Gamboa vs. Teves
only for that other party’s retention of another piece of property (the utility company being at least
60% Filipino-owned to keep its franchise).”36
The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term
“capital.” In its Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the
supposed procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of
interested parties, and lack of basis for injunction. The OSG does not present any definition or
interpretation of the term “capital” in Section 11, Article XII of the Constitution. The OSG contends
that “the petition actually partakes of a collateral attack on PLDT’s franchise as a public utility,” which
in effect requires a “full-blown trial where all the parties in interest are given their day in court.”38
Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine
Stock Exchange (PSE), does not also define the term “capital” and seeks the dismissal of the petition
on the following grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly
implemented its rules and required all listed companies, including PLDT, to make proper and timely
disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of
record of PLDT, contended that the term “capital” in the 1987 Constitution refers to shares entitled to
vote or the common shares. Fernandez explained thus:
_______________
36 Id., at p. 838.
37 Id., at pp. 898-923.
38 Rollo (Vol. II), p. 913.
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“The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution
refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is
through voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on
fully nationalized and partially nationalized activities is for Filipino nationals to be always in control of
the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding
respondents’ arguments were to be given credence, it would be possible for the ownership structure
of a public utility corporation to be divided into one percent (1%) common stocks and ninety-nine
percent (99%) preferred stocks. Following the Trial Court’s ruling adopting respondents’ arguments,
the common shares can be owned entirely by foreigners thus creating an absurd situation wherein
foreigners, who are supposed to be minority shareholders, control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares.
Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and
beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner
PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to
petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is equivalent
to 82.99%, and the nominee arrangements between the foreign principals and the Filipino owners is
likewise admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word “capital” as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder
and it allegedly is immaterial how the stock is classified, whether as common or preferred,
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Gamboa vs. Teves
cannot stand in the face of a clear legislative policy as stated in the FIA which took effect in 1991 or
way after said opinions were rendered, and as clarified by the above-quoted Amendments. In this
regard, suffice it to state that as between the law and an opinion rendered by an administrative
agency, the law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail
over the clear intent of the framers of the Constitution.
In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely
advisory for it is the courts that finally determine what a law means.”39
On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A.
Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C.
Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando B. Vea, argued that the term
“capital” in Section 11, Article XII of the Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the corporation’s “capital,” without
distinction as to classes of shares.
xxx
In this connection, the Corporation Code—which was already in force at the time the present (1987)
Constitution was drafted—defined outstanding capital stock as follows:
Section 137. Outstanding capital stock defined.—The term “outstanding capital stock”, as used in
this Code, means the total shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid, except treasury shares.
Section 137 of the Corporation Code also does not distinguish between common and preferred shares,
nor exclude either class of shares, in determining the outstanding capital stock (the “capital”) of a
corporation. Consequently, petitioner’s suggestion to reckon
_______________
39 Rollo (G.R. No. 157360), pp. 55-62.
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PLDT’s foreign equity only on the basis of PLDT’s outstanding common shares is without legal basis.
The language of the Constitution should be understood in the sense it has in common use.
xxxx
17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary,
there is nothing in the Record of the Constitutional Commission (Vol. III)—which petitioner
misleadingly cited in the Petition x x x—which supports petitioner’s view that only common shares
should form the basis for computing a public utility’s foreign equity.
xxxx
18. In addition, the SEC—the government agency primarily responsible for implementing the
Corporation Code, and which also has the responsibility of ensuring compliance with the
Constitution’s foreign equity restrictions as regards nationalized activities x x x—has categorically
ruled that both common and preferred shares are properly considered in determining outstanding
capital stock and the nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. The term “capital” in Section 11, Article XII
of the Constitution refers only to shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares,41 and not to the total outstanding capital stock
comprising both common and non-voting preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:
Sec. 6. Classification of shares.—The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any
_______________
40 Rollo (G.R. No. 157360), pp. 1577-1583.
41 In PLDT’s case, the preferred stock is non-voting, except as specifically provided by law.
(http://www.pldt.com.ph/investor/Documents/a2d211230ec3436eab66b41d3d107cfc4Q2004FSwith
opinion.pdf)
42 Batas Pambansa Blg. 68.
724
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Gamboa vs. Teves
of which classes or series of shares may have such rights, privileges or restrictions as may be stated in
the articles of incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which have complete voting
rights. Any or all of the shares or series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided, however, That banks, trust companies,
insurance companies, public utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions
of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The
Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions
of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
Provided, That shares without par value may not be issued for a consideration less than the value of
five (P5.00) pesos per share: Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every other share.
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Gamboa vs. Teves
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code,
the holders of such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting
rights.”
Indisputably, one of the rights of a stockholder is the right to participate in the control or
management of the corporation.43 This is exercised through his vote in the election of directors
because it is the board of directors that controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting rights to preferred shares, preferred shares
have the same voting rights as common shares. However, preferred shareholders are often excluded
from any control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the corporation for
income in the same manner as bondholders.45
_______________
43 As stated in the Corporation Code.
44 See http://www.congress.gov.ph/download/researches/rrb_0303_5.pdf
45 See http://www.congress.gov.ph/download/researches/rrb_0303_5.pdf
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Gamboa vs. Teves
In fact, under the Corporation Code only preferred or redeemable shares can be deprived of the right
to vote.46 Common shares cannot be deprived of the right to vote in any corporate meeting, and any
provision in the articles of incorporation restricting the right of common shareholders to vote is
invalid.47
Considering that common shares have voting rights which translate to control, as opposed to
preferred shares which usually have no voting rights, the term “capital” in Section 11, Article XII of the
Constitution refers only to common shares. However, if the preferred shares also have the right to
vote in the election of directors, then the term “capital” shall include such preferred shares because
the right to participate in the control or management of the corporation is exercised through the right
to vote in the election of directors. In short, the term “capital” in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the
hands of Filipino citizens the control and management of public utilities. As revealed in the
deliberations of the Constitutional Commission, “capital” refers to the voting stock or controlling
interest of a corporation, to wit:
MR. NOLLEDO.In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign
equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.
MR. VILLEGAS.That is right.
MR. NOLLEDO.In teaching law, we are always faced with this question: “Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock,
_______________
46 Section 6, BP Blg. 68 or The Corporation Code.
47 Agpalo, Ruben E., Comments on the Corporation Code of the Philippines, 2001 Second Edition, p.
36.
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Gamboa vs. Teves
or on the paid-up capital stock of a corporation”? Will the Committee please enlighten me on this?
MR. VILLEGAS.We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is “60 percent of voting stock.”
MR. NOLLEDO.That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. NOLLEDO.Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-
40 percent equity invests in another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS.Yes, that is the understanding of the Committee.
MR. NOLLEDO.Therefore, we need additional Filipino capital?
MR. VILLEGAS.Yes.48
xxxx
MR. AZCUNA.May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS.The portion accepted by the Committee is the deletion of the phrase “voting stock or
controlling interest.”
MR. AZCUNA.Hence, without the Davide amendment, the committee report would read:
“corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens.”
MR. VILLEGAS.Yes.
_______________
48 Record of the Constitutional Commission, Vol. III, pp. 255-256.

728
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Gamboa vs. Teves
MR. AZCUNA.So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.
MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say
40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the
nonvoting shares. So we can have a situation where the corporation is controlled by foreigners
despite being the minority because they have the voting capital. That is the anomaly that would result
here.
MR. BENGZON. No, the reason we eliminated the word “stock” as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say “CAPITAL.”
MR. AZCUNA. We should not eliminate the phrase “controlling interest.”
MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied)
Thus, 60 percent of the “capital” assumes, or should result in, “controlling interest” in the
corporation. Reinforcing this interpretation of the term “capital,” as referring to controlling interest or
shares entitled to vote, is the definition of a “Philippine national” in the Foreign Investments Act of
1991,50 to wit:
SEC. 3. Definitions.—As used in this Act:
a. The term “Philippine national” shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by
_______________
49 Id., at p. 360.
50 Republic Act No. 7042 entitled “AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE
PROCEDURES FOR REGISTERING ENTERPRISES DOING BUSINESS IN THE PHILIPPINES AND FOR OTHER
PURPOSES.”
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Gamboa vs. Teves
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized abroad and registered as doing business in the
Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock
outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That
where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding
and entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be considered a
“Philippine national.” (Emphasis supplied)
In explaining the definition of a “Philippine national,” the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 provide:
“b. “Philippine national” shall mean a citizen of the Philippines or a domestic partnership or
association wholly owned by the citizens of the Philippines; or a corporation organized under the laws
of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that
where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission
[SEC] registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty
percent [60%] of the members of the Board of Directors of each of both corporation must be citizens
of the Philippines, in order that the corporation
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Gamboa vs. Teves
shall be considered a Philippine national. The control test shall be applied for this purpose.
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled
to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title
is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled
with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned
or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-
Philippine nationals.” (Emphasis supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned “capital” required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is “considered as non-Philippine national[s].”
Under Section 10, Article XII of the Constitution, Congress may “reserve to citizens of the Philippines
or to corporations or associations at least sixty per centum of whose capital is owned by such citizens,
or such higher percentage as Congress may prescribe, certain areas of investments.” Thus, in
numerous laws Congress has reserved certain areas of investments to Filipino citizens or to
corporations at least sixty percent of the “capital” of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine
Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
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Gamboa vs. Teves
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or
R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine
Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521.
Hence, the term “capital” in Section 11, Article XII of the Constitution is also used in the same context
in numerous laws reserving certain areas of investments to Filipino citizens.
To construe broadly the term “capital” as the total outstanding capital stock, including both common
and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the
“State shall develop a self-reliant and independent national economy effectively controlled by
Filipinos.” A broad definition unjustifiably disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to the term “capital.” Let us assume
that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per share.
Under the broad definition of the term “capital,” such corporation would be considered compliant
with the 40 percent constitutional limit on foreign equity of public utilities since the overwhelming
majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is
obviously absurd.
In the example given, only the foreigners holding the common shares have voting rights in the
election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less
than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos, holding
more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no
control over the public utility. This starkly circumvents the intent of the framers of
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Gamboa vs. Teves
the Constitution, as well as the clear language of the Constitution, to place the control of public
utilities in the hands of Filipinos. It also renders illusory the State policy of an independent national
economy effectively controlled by Filipinos.
The example given is not theoretical but can be found in the real world, and in fact exists in the
present case.
Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors.
PLDT’s Articles of Incorporation expressly state that “the holders of Serial Preferred Stock shall not be
entitled to vote at any meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its stockholders, or to
receive notice of any meeting of stockholders.”51
_______________
51 Rollo (G.R. No. 157360), Vol. I, p. 348.
It must be noted that under PLDT’s Articles of Incorporation, the PLDT Board of Directors is expressly
authorized to determine, among others, with respect to each series of Serial Preferred Stock:
xxxx
(b) the dividend rate, if any, on the shares of such series (which, if and to the extent the Board of
Directors, in its sole discretion, shall deem appropriate under the circumstances, shall be fixed
considering the rate of return on similar securities at the time of issuance of such shares), the terms
and conditions upon which and the periods with respect to which dividends shall be payable, whether
and upon what conditions such dividends shall be cumulative and, if cumulative, the date or dates
from which dividends shall accumulate;
(c) whether or not the shares of such series shall be redeemable, the limitations with respect to
such redemption, the time or times when and the manner in which such shares shall be redeemable
(including the manner of selecting shares of such series for redemption if less than all shares are to be
redeemed) and the price or prices at which such shares shall be redeemable, which may not be less
than (i) the par value thereof plus (ii) accrued and unpaid
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Gamboa vs. Teves
On the other hand, holders of common shares are granted the exclusive right to vote in the election of
directors. PLDT’s
_______________
dividends thereon, nor more than (i) 110% of the par value thereof plus (ii) accrued and unpaid
dividends thereon;
(d) whether or not the shares of such series shall be subject to the operation of a purchase,
retirement or sinking fund, and, if so, whether and upon what conditions such purchase, retirement or
sinking fund shall be cumulative or non-cumulative, the extent to which and the manner in which such
fund shall be applied to the purchase or redemption of the shares of such series for retirement or to
other corporate purposes and the terms and provisions relative to the operation thereof;
(e) the rights to which the holders of shares of such series shall be entitled upon the voluntary or
involuntary liquidation, dissolution, distribution of assets or winding up of the corporation, which
rights may vary depending on whether such liquidation, dissolution, distribution or winding up is
voluntary or involuntary, and if voluntary, may vary at different dates, provided, however, that the
amount which the holders of shares of such series shall be entitled to receive in the event of any
voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the
corporation
Further, “the holders of Serial Preferred Stock shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available therefore, preferential cash dividends at the rate,
under the terms and conditions, for the periods and on the dates fixed by the resolution or resolutions
of the Board of Directors, x x x and no more, before any dividends on the Common Capital Stock
(other than dividends payable in Common Capital Stock) shall be paid or set apart for payment with
respect to the same dividend period. All shares of Preferred Stock of all series shall be of equal rank,
preference and priority as to dividends irrespective of whether or not the rates of dividends to which
the same shall be entitled shall be the same and, when the stated dividends are not paid in full, the
shares of all series of Serial Preferred Stock shall share ratably in the payment of dividends including
accumulations, if any, in accordance with the sums which would be payable on such shares if all
dividends were declared and paid in full, provided, however, that any two or more series of Serial
Preferred Stock may differ from each other as to the existence and extent of the right to cumulative
dividends as aforesaid.”
734
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Gamboa vs. Teves
Articles of Incorporation52 state that “each holder of Common Capital Stock shall have one vote in
respect of each share of such stock held by him on all matters voted upon by the stockholders, and
the holders of Common Capital Stock shall have the exclusive right to vote for the election of directors
and for all other purposes.”53
In short, only holders of common shares can vote in the election of directors, meaning only common
shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting
rights in the election of directors, do not have any control over PLDT. In fact, under PLDT’s
_______________
52 Rollo (G.R. No. 157360), Vol. I, pp. 339-355. Adopted on 21 November 1995 and approved on 18
February 1997.
53 The other rights, limitations and preferences of common capital stock are as follows:
1. After the requirements with respect to preferential dividends on the Serial Preferred Stock shall
have been met and after the corporation shall have complied with all the requirements, if any, with
respect to the setting aside of sums as purchase, retirement or sinking funds, then and not otherwise
the holders of the Common Capital Stock shall be entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally available therefor.
2. After distribution in full of the preferential amounts to be distributed to the holders of Serial
Preferred Stock in the event of the voluntary or involuntary liquidation, dissolution, distribution of
assets or winding up of the corporation, the holders of the Common Capital Stock shall be entitled to
receive all the remaining assets of the corporation of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of the Common Capital Stock held by
them, respectively.
xxxx
4. The ownership of shares of Common Capital Stock shall not entitle the owner thereof to any right
(other than such right, if any, as the Board of Directors in its discretion may from time to time grant)
to subscribe for or to purchase or to have offered to him for subscription or purchase any shares of
any class of preferred stock of the corporation.
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Gamboa vs. Teves
Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders
of preferred shares have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common
shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS),54 which is a document
required to be submitted annually to the Securities and Exchange Commission,55 foreigners hold
120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares.56 In
other words, foreigners hold 64.27% of the total number of PLDT’s common shares, while Filipinos
hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that
foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40
percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of
the Constitution.
Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per
share the SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT
declared dividends for the common shares at P70.00 per share, while the declared dividends for the
preferred shares amounted to a measly P1.00 per share.59
_______________
54 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf
55 http://www.sec.gov.ph/index.htm?GIS_Download
56 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of
%207.2.10%29_final.pdf
57 http://www.pldt.com.ph/investor/Documents/2009%20Dividend%20Declarations_Update
%2012082009.pdf. See also http://www.pldt.com.ph/investor/Documents/disclosures_03-01-
2011.pdf
58 Subscription Investment Plan. See PD No. 217.
59 This is the result of the preferred shares being denominated 10% preferred, which means each
preferred share will earn an annual dividend equal to 10% of its par value of P10, which amounts to
P1. Once this dividend is paid to holders of preferred shares, the rest
736
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Gamboa vs. Teves
So the preferred shares not only cannot vote in the election of directors, they also have very little and
obviously negligible dividend earning capacity compared to common shares.
As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is
P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but cannot elect directors and have only
1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse, preferred
shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only
22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred
shares but with the common shares, blatantly violating the constitutional requirement of
_______________
of the retained earnings can be paid as dividends to the holders of common shares. See
http://www.pldt.com.ph/investor/Documents/2009%20Dividend%20Declarations_Update
%2012082009.pdf
In 2011, PLDT declared dividends for the common shares at P78.00 per share.
(http://www.pldt.com.ph/investor/Documents/dis-closures_03-01-2011.pdf)
60 http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_(as%20of
%207.2.10)_final.pdf
61 Id. Based on PLDT’s 2010 GIS, the paid-up capital of PLDT (as of Record Date – 12 April 2010)
consists of the following:
Filipino (preferred): 403,410,355
Foreigners (preferred): 2,287,207
Total: 405,697,562
62 Based on par value, as stated in PLDT’s 2010 GIS submitted to the SEC. See
http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_%28as%20of%207.2.10%29_fi
nal.pdf (accessed 23 May 2011).
Authorized capital stock of PLDT is broken down as follows:
Common shares: 234,000,000
Preferred shares: 822,500,000
Total: 1,056,000,000
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60 percent Filipino control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
constitutionally required for the State’s grant of authority to operate a public utility. The undisputed
fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of
the dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the
Constitution that “[n]o franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to x x x corporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.”
To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own
only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do not
exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn;63 (5) preferred shares
have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the
authorized capital stock of PLDT and common shares only
_______________
63 For the year 2009.
738
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Gamboa vs. Teves
22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market
value of P2,328.00 per share,64 while PLDT preferred shares with a par value of P10.00 per share have
a current stock market value ranging from only P10.92 to P11.06 per share,65 is a glaring confirmation
by the market that control and beneficial ownership of PLDT rest with the common shares, not with
the preferred shares.
Indisputably, construing the term “capital” in Section 11, Article XII of the Constitution to include both
voting and non-voting shares will result in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the State’s constitutional duty to limit control of public
utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional
provision reserving certain areas of investment to Filipino citizens, such as the exploitation of natural
resources as well as the ownership of land, educational institutions and advertising businesses. The
Court should never open to foreign control what the Constitution has expressly reserved to Filipinos
for that would be a betrayal of the Constitution and of the national interest. The Court must perform
its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words
of the Constitution, “a self-reliant and independent national economy effectively controlled by
Filipinos.”
Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving
to Filipinos specific areas of investment, such as the development of natural resources and ownership
of land, educational institutions and advertising business, is self-executing. There is no need for
_______________
64 http://www.pse.com.ph/ (accessed 31 May 2011)
65 http://www.pse.com.ph/html/Quotations/2011/stockQuotes 05272011.pdf (accessed 27 May

2011)
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Gamboa vs. Teves
legislation to implement these self-executing provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:
“x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a

constitutional mandate, the presumption now is that all provisions of the constitution are self-
executing. If the constitutional provisions are treated as requiring legislation instead of self-executing,
the legislature would have the power to ignore and practically nullify the mandate of the fundamental
law. This can be cataclysmic. That is why the prevailing view is, as it has always been, that —
. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-
executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the legislature discretion to determine when,
or whether, they shall be effective. These provisions would be subordinated to the will of the
lawmaking body, which could make them entirely meaningless by simply refusing to pass the needed
implementing statute.” (Emphasis supplied)
In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later
Chief Justice, agreed that constitutional provisions are presumed to be self-executing. Justice Puno
stated:
“Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is not difficult to discern. For if they are not
treated as self-executing, the mandate of the fundamental law ratified by the sovereign people can be
easily ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding rule that
legislative actions may give breath
_______________
66 335 Phil. 82; 267 SCRA 408 (1997).

740
740
Gamboa vs. Teves
to constitutional rights but congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the
privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts to
effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the
protection of property. The same treatment is accorded to constitutional provisions forbidding the
taking or damaging of property for public use without just compensation.” (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied
directly the provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos.
In Soriano v. Ong Hoo,68 this Court ruled:
“x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to
an alien, and as both the citizen and the alien have violated the law, none of them should have a
recourse against the other, and it should only be the State that should be allowed to intervene and
determine what is to be done with the property subject of the violation. We have said that what the
State should do or could do in such matters is a matter of public policy, entirely beyond the scope of
judicial authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G.R. No. L-5996, June 27, 1956.) While
the legislature has not definitely decided what policy should be followed in cases of violations against
the constitutional prohibition, courts of justice cannot go beyond by declaring the disposition to be
null and void as violative of the Constitution. x x x” (Emphasis supplied)
_______________
67 Krivenko v. Register of Deeds, 79 Phil. 461 (1947); Rellosa v. Gaw Chee Hun, 93 Phil. 827 (1953);
Vasquez v. Li Seng Giap, 96 Phil. 447 (1955); Soriano v. Ong Hoo, 103 Phil. 829 (1958); Philippine
Banking Corporation v. Lui She, 128 Phil. 53; 21 SCRA 52 (1967); Frenzel v. Catito, 453 Phil. 885; 406
SCRA 55 (2003).
68 Id.
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To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the
1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly
reserving specific areas of investments to corporations, at least 60 percent of the “capital” of which is
owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by
corporations of public utilities, the exploitation by corporations of mineral resources, the ownership
by corporations of real estate, and the ownership of educational institutions. All the legislatures that
convened since 1935 also miserably failed to enact legislations to implement these vital constitutional
provisions that determine who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.
This Court has held that the SEC “has both regulatory and adjudicative functions.”69 Under its
regulatory functions, the
_______________
69 Securities and Exchange Commission v. Court of Appeals, et al., 316 Phil. 903; 246 SCRA 738 (1995).
The Court ruled in this case:
The Securities and Exchange Commission (“SEC”) has both regulatory and adjudicative functions.
Under its regulatory responsibilities, the SEC may pass upon applications for, or may suspend or
revoke (after due notice and hearing), certificates of registration of corporations, partnerships and
associations (excluding cooperatives, homeowners’ associations, and labor unions); compel legal and
regulatory compliances; conduct inspections; and impose fines or other penalties for violations of the
Revised Securities Act, as well as implementing rules and directives of the SEC, such as may be
warranted.
Relative to its adjudicative authority, the SEC has original and exclusive jurisdiction to hear and decide
controversies and cases involving—
742
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Gamboa vs. Teves
SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects to
perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be compelled
by mandamus to hear and decide a possible violation of any law it administers or enforces when it is
mandated by law to investigate such violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or
disapprove the Articles of Incorporation of any corporation where “the required percentage of
ownership of the capital stock to be owned by citizens of the Philippines has not been complied with
as required by existing laws or the Constitution.”
_______________
a. Intra-corporate and partnership relations between or among the corporation, officers and
stockholders and partners, including their elections or appointments;
b. State and corporate affairs in relation to the legal existence of corporations, partnerships and
associations or to their franchise; and
c. Investors and corporate affairs particularly in respect of devices and schemes, such as fraudulent
practices, employed by directors, officers, business associates, and/or other stockholders, partners, or
members of registered firms; x x x
x x x x (Emphasis supplied)
70 SEC. 17. Grounds when articles of incorporation or amendment may be rejected or

disapproved.—The Securities and Exchange Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in compliance with the requirements of this
Code: Provided, That the Commission shall give the incorporators a reasonable time within which to
correct or modify the objectionable portions of the articles or amendment. The following are grounds
for such rejection or disapproval:
xxx
(4) That the required percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the Constitution. (Emphasis
supplied)
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Thus, the SEC is the government agency tasked with the statutory duty to enforce the nationality
requirement prescribed in Section 11, Article XII of the Constitution on the ownership of public
utilities. This Court, in a petition for declaratory relief that is treated as a petition for mandamus as in
the present case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC
has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to
the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the “power and
function” to “suspend or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partner-
_______________
71 Republic Act No. 8799. Section 5 of R.A. No. 8799 provides:
Section 5. Powers and Functions of the Commission.—5.1. The Commission shall act with
transparency and shall have the powers and functions provided by this Code, Presidential Decree No.
902-A, the Corporation Code, the Investment Houses Law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others, the following powers and
functions:
grantees of primary franchises and/or a license or a permit issued by the Government; x x x
registration and licensing applications; x x x
(f) Impose sanctions for the violation of laws and the rules, regulations and orders, issued pursuant
thereto; x x x
(i) Issue cease and desist orders to prevent fraud or injury to the investing public; x x x
corporations, partnership or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
744
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Gamboa vs. Teves

ships or associations, upon any of the grounds provided by law.” The SEC is mandated under Section
5(d) of the same Code with the “power and function” to “investigate x x x the activities of persons to
ensure compliance” with the laws and regulations that SEC administers or enforces. The GIS that all
corporations are required to submit to SEC annually should put the SEC on guard against violations of
the nationality requirement prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the present
case, to hear and decide a possible violation of Section 11, Article XII of the Constitution in view of the
ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in PLDT’s 2010
GIS that PLDT submitted to SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term “capital” in Section 11, Article XII
of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and
thus in the present case only to common shares, and not to the total outstanding capital stock
(common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term “capital” in determining the extent of
allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there
is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under
the law.
SO ORDERED.
Leonardo-De Castro, Brion, Peralta, Bersamin, Del
Castillo, Villarama, Jr., Perez, Mendoza and Sereno, JJ., concur.
Corona, J., I join the dissent of Mr. Justice Velasco.
Velasco, Jr., J., I Dissent. (Please see Dissenting Opinion).
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Abad, J., See my Dissenting Opinion.
SEPARATE DISSENTING OPINION
VELASCO, JR., J.:
With due respect, I dissent.
A summary of the pertinent facts is as follows:
Philippine Long Distance Telephone Company (PLDT), a Philippine-registered telecommunications

firm, was granted an initial 50-year charter and the right to establish a telephone network by Act No.
3436 on November 28, 1928.1
In 1969, American-owned General Telephone and Electronics Corporation (GTE), a major shareholder
of PLDT, sold 26% of PLDT’s equity to Philippine Telecommunications Investment Corporation (PTIC).2
PTIC was incorporated on November 9, 1967 and is engaged in the business of investment holdings. It
held 26,034,263 of PLDT shares, or 13.847% of the total outstanding common stocks of PLDT.3
In 1977, Prime Holdings Inc. (PHI) was incorporated and 100% owned by the Conjuangco group.
Subsequently, PHI became the owner of 111,415 shares or 46.125% of PTIC by virtue of three (3)
Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla.4
On May 9, 1986, the 111,415 PTIC shares held by PHI were sequestered by the Presidential
Commission on Good Government (PCGG) pursuant to Executive Order No. 1.5
_______________
1 Rollo, p. 16.
2 Id.
3 Id., at p. 899.
4 Id., at p. 900.
5 Id.
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Gamboa vs. Teves
Later, this Court declared the said shares to be owned by the Republic of the Philippines.6
In 1999, First Pacific Company Limited (First Pacific), a Bermuda-registered, Hong Kong-based
investment firm, acquired the remaining 54% equity of PTIC.7
Thereafter, the government decided to sell its 46.1% stake in PTIC (equivalent to 6.4% indirect stake in
PLDT), designating the Privatization Council of the Philippine Government as the disposition entity. On
December 8, 2006, a public bidding was held where Singapore-based Parallax Capital Management LP
(Parallax) emerged as the highest bidder with an offer of PhP 25,217,556,000.8
January 31, 2007, the House of Representatives Committee on Good Government conducted a public
hearing on the particulars of the impending sale. Finance Secretary Margarito Teves, Finance
Undersecretary John Sevilla, PCGG Chairperson Camilo Sabio, Commissioners Narciso Nario and Nick
Conti, Securities and Exchange Commission (SEC) General Counsel Vernette Umali-Paco, Philippine
Stock Exchange (PSE) Chairperson Jose Vitug and President Francisco Ed Lim, Development Bank of the
Philippines (DBP) President Reynaldo David and Director Miguel Romero all attended the hearing.9
In Report No. 2270, the House Committee on Good Government concluded that: (1) the auction of the
government’s PTIC shares bore due diligence, transparency and conformity with existing legal
procedures; and (2) First Pacific’s intended acquisition of the government’s PTIC shares resulting in its
100% ownership in PTIC will not violate the 40% constitutional limit on foreign ownership of a public
utility since PTIC
_______________
6 See Cojuangco v. Sandiganbayan, G.R. No. 183278, April 24, 2009, 586 SCRA 790.
7 Rollo, p. 18.
8 Id., at pp. 900-901.
9 Id., at p. 902.
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held only 13.847% of the total outstanding common stocks of PLDT.10
Subsequently, the government informed First Pacific of the results of the bidding and gave it until
February 1, 2007 to exercise its right of first refusal as provided under PTIC’s Articles of Incorporation.
Consequently, First Pacific announced that it would match Parallax’s bid.11 However, First Pacific
failed to raise the money for the purchase by the February 1, 2007 deadline and, instead, yielded the
right to PTIC itself. The deadline was then reset to March 2, 2007.12
On February 14, 2007, First Pacific, through its subsidiary, Metro Pacific Assets Holdings Inc. (MPAH),
entered into a Conditional Sale and Purchase Agreement with the government for the latter’s 46.1%
stake in PTIC at the price of PhP 25,217,556,000.13 The acquisition was completed on February 28,
2007.
On the same date, Wilson Gamboa (Gamboa) filed the instant petition for prohibition, injunction,
declaratory relief and declaration of nullity of sale of the 111,415 shares of PTIC. He argues that: (1)
the consummation of the impending sale of 111,415 shares to First Pacific violates the constitutional
limitation on foreign ownership of a public utility; (2) respondents committed grave abuse of
discretion by allowing the sale of PTIC shares to First Pacific; (3) respondents have made a complete
misrepresentation of the impending sale by saying that it does not breach the constitutional limitation
on foreign ownership of a public utility; and (4) the sale of common shares to foreigners in excess of
40% of the entire subscribed common capital stock violates the 1987 Philippine Constitution.14
_______________
10 Id., at pp. 902-903.
11 Id., at p. 902.
12 Id., at p. 17.
13 Id., at p. 903.
14 Id., at p. 41.
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Gamboa vs. Teves
After a careful examination of the facts and law applicable to the case, I submit that the petition
should be dismissed.
At the outset, it is strikingly clear that the petition suffers from several jurisdictional and procedural
defects.
Petitioner Has No Locus Standi

Petitioner Gamboa claims that he filed the petition in his capacity as a “nominal shareholder of PLDT
and as [a] taxpayer.”15 However, these claims do not clothe him with the requisite legal standing to
bring this suit.
The Rules of Court specifically requires that “[e]very action must be prosecuted or defended in the
name of the real party in interest.”16 A real party in interest is defined as the “party who stands to be
benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit.”
Petitioner has failed to allege any interest in the 111,415 PTIC shares nor in any of the previous
purchase contracts he now seeks to annul. He is neither a shareholder of PTIC nor of First Pacific. Also,
he has not alleged that he was an interested bidder in the government’s auction sale of the PTIC
shares. Finally, he has not shown how, as a nominal shareholder of PLDT, he stands to benefit from
the annulment of the sale of the 111,415 PTIC shares or of any of the sales of the PLDT common
shares held by foreigners. In fine, petitioner has not shown any real interest substantial enough to
give him the requisite locus standi to question the sale of the government’s PTIC shares to First
Pacific.
Likewise, petitioner’s assertion that he has standing to bring the suit as a “taxpayer” must fail. In
Gonzales v. Narvasa, We discussed that “a taxpayer is deemed to have the standing to raise a
constitutional issue when it is established that public funds have been disbursed in alleged con-
_______________
15 Id., at p. 15.
16 Rule 3, Sec. 2.
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travention of the law or the Constitution.”17 In this case, no public funds have been disbursed. In fact,
the opposite has happened—there is an inflow of funds into the government coffers.
Evidently, petitioner Gamboa has no legal standing to bring the present petition before this Court.
This Court Has No Jurisdiction
Petitioner Gamboa filed four (4) different petitions before this Court—declaratory relief, annulment,
prohibition and injunction. However, all of these actions are not within the exclusive and/or original
jurisdiction of the Supreme Court.
Article VII of the 1987 Constitution, particularly Section 5(1), in relation to Sec. 5(5), enumerates the
instances where this Court exercises original jurisdiction:
Article VIII
Section 5. The Supreme Court shall have the following powers:
(1) Exercise original jurisdiction over cases affecting ambassadors, other public ministers and
consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.
xxxx
(5) Promulgate rules concerning the protection and enforcement of constitutional rights, pleading,
practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and
legal assistance to the under-privileged. Such rules shall provide a simplified and inexpensive
procedure for the speedy disposition of cases, shall be uniform for all courts of the same grade, and
shall not diminish, increase, or modify substantive rights. Rules of procedure of special courts and
quasi-judicial bodies shall remain effective unless disapproved by the Supreme Court.
_______________
17 G.R. No. 140835, August 14, 2000, 337 SCRA 733, 741. (Emphasis supplied.)
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Accordingly, this Court promulgated the Rules of Court, Sec. 1, Rule 56 of which states:
RULE 56
Original Cases
Section 1. Original cases cognizable.—Only petitions for certiorari, prohibition, mandamus, quo
warranto, habeas corpus, disciplinary proceedings against members of the judiciary and attorneys,
and cases affecting ambassadors, other public ministers and consuls may be filed originally in the
Supreme Court.
Based on the foregoing provisos, it is patently clear that petitions for declaratory relief, annulment of
sale and injunction do not fall within the exclusive original jurisdiction of this Court.
First, the court with the proper jurisdiction for declaratory relief is the Regional Trial Court (RTC). Sec.
1, Rule 63 of the Rules of Court stresses that an action for declaratory relief is within the exclusive
original jurisdiction of the RTC, viz.:
“Any person interested under a deed, will, contract or other written instrument, whose rights are
affected by a statute, executive order or regulation, ordinance, or any other governmental regulation
may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to
determine any question of construction or validity arising, and for a declaration of his rights or duties,
thereunder.” (Emphasis supplied.)
An action for declaratory relief also requires the following: (1) a justiciable controversy between
persons whose interests are adverse; (2) the party seeking the relief has a legal interest in the
controversy; and (3) the issue is ripe for judicial determination.18 As previously discussed, petitioner
lacks any real interest in this action; thus, no justiciable controversy between adverse interests exists.
_______________
18 Province of Camarines Sur v. Court of Appeals, G.R. No. 175064, September 18, 2009, 600 SCRA
569, 585.
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Further, the Rules of Court also requires that “[a]ll persons who have or claim any interest which
would be affected by the declaration shall be made parties.”19 The failure to implead all persons with
a claim or interest in the subject matter of the petition for declaratory relief is a jurisdictional defect.
20
What is more, an action for declaratory relief requires that it be filed before “the breach or violation
of the statute, deed, contract, etc. to which it refers. Where the law or contract has already been
contravened prior to the filing of an action for declaratory relief, the court can no longer assume
jurisdiction over the action.”21 Here, petitioner himself points out the fact that, using the common
stockholding basis, the 40% maximum foreign ownership limit on PLDT was already violated long
before the sale of the PTIC shares by the government.22 In addition, the sale itself has already been
consummated. This only means that an action for declaratory relief is no longer proper.
Despite this, the ponencia decided to treat the petition for declaratory relief as one for mandamus,
citing the rule that “where the petition has far-reaching implications and raises questions that should
be resolved, it may be treated as one for mandamus.”23 However, such rule is not absolute. In
Macasiano v. National Housing Authority,24 the Court explicitly stated that the exercise of such
discretion, whether to treat a petition for declaratory relief as one for mandamus, presupposes that
the petition is otherwise viable or meritorious. As I shall discuss subsequently in the substantive por-
_______________
19 Rule 63, Sec. 2.
20 Degala v. Reyes, No. L-2402, November 29, 1950.
21 Tambunting, Jr. v. Sumabat, G.R. No. 144101, September 16, 2005, 470 SCRA 92, 96.
22 Rollo, pp. 11-12.

23 Ponencia, p. 10.
24 G.R. No. 107921, July 1, 1993, 224 SCRA 236, 243.
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Gamboa vs. Teves
tion of this opinion, the petition in this case is clearly not viable or meritorious.
Moreover, one of the reasons pointed out by the Court in Macasiano when it refused to treat the
petition for declaratory relief as one for mandamus was that the petitioner lacked the proper standing
to file the petition. Thus, the petition was subsequently dismissed. This is exactly similar to the instant
case. As previously explained, petitioner has no legal standing to bring the present petition before this
Court. He failed to show any real interest in the case substantial enough to give him the required legal
standing to question the sale of the PTIC shares of the government to First Pacific.
Further, a petition for mandamus is premature if there are administrative remedies available to
petitioner.25 Under the doctrine of primary administrative jurisdiction, “courts cannot or will not
determine a controversy where the issues for resolution demand the exercise of sound administrative
discretion requiring the special knowledge, experience, and services of the administrative tribunal to
determine technical and intricate matters of fact. In other words, if a case is such that its
determination requires the expertise, specialized training and knowledge of an administrative body,
relief must first be obtained in an administrative proceeding before resort to the courts is had even if
the matter may well be within their proper jurisdiction.”26 Along with this, the doctrine of exhaustion
of administrative remedies also requires that where an administrative remedy is provided by statute
relief must be sought by exhausting this remedy before the courts will act.27
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25 Perez v. City Mayor of Cabanatuan, No. L-16786, October 31, 1961, 3 SCRA 431.
26 Ferrer, Jr. v. Roco, Jr., G.R. No. 174129, July 5, 2010, 623 SCRA 313.
27 Montes v. Civil Service Board of Appeals, No. L-10759, May 20, 1957.
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In the instant case, the power and authority to determine compliance with the Constitution lies with
the SEC. Under Section 17(4) of the Corporation Code, the SEC has the power to approve or reject the
Articles of Incorporation of any corporation where “the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has not been complied with as required by
existing laws or the Constitution.” Similarly, under Section 5 of the Securities Regulation Code, the SEC
is conferred with the power to suspend or revoke the franchise or certificate of registration of
corporations upon any of the grounds provided by law.28 It
_______________
28 Republic Act No. 8799, Sec. 5 provides:
Section 5. Powers and Functions of the Commission.—5.1. The commission shall act with
transparency and shall have the powers and functions provided by this code, Presidential Decree No.
902-A, the Corporation Code, the Investment Houses law, the Financing Company Act and other
existing laws. Pursuant thereto the Commission shall have, among others, the following powers and
functions:
(a) Have jurisdiction and supervision over all corporations, partnership or associations who are the
grantees of primary franchises and/or a license or a permit issued by the Government;
xxxx
registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure compliance;
xxxx
(f) Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant
thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide
guidance on and supervise compliance with such rules, regulation and orders;
xxxx
xxxx
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Gamboa vs. Teves
bears stressing that the SEC also has the power to investigate violations of the Securities Regulation
Code and its Amended Rules. With this, it is clear that petitioner failed to invoke the primary
jurisdiction of the SEC with respect to this matter.
Additionally, the petition contains numerous questions of fact which is not allowed in a petition for
mandamus.29 Hence, based on the foregoing, a petition for mandamus is evidently improper.
Second, since an action for annulment of sale is an ordinary civil action incapable of pecuniary
estimation,30 it also falls within the exclusive original jurisdiction of the RTC.31
Lastly, although this Court, the CA, and the RTC have “concurrent jurisdiction to issue writs of
certiorari, prohibition, mandamus, quo warranto, habeas corpus and injunction, such concurrence
does not give the petitioner unrestricted freedom of choice of court forum.”32The doctrine of
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corporations, partnership or associations, upon any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those which may be implied
from, or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws.
29 National Power Corporation v. Province of Quezon and Municipality of Pagbilao, G.R. No. 171586,
January 25, 2010, 611 SCRA 71.
30 See Heirs of Juanita Padilla v. Magdua, G.R. No. 176858, September 15, 2010, 630 SCRA 573, 586.
31 Batas Pambansa Blg. 129, Sec. 19. Jurisdiction in civil cases.—Regional Trial Courts shall exercise
exclusive original jurisdiction:
(1) In all civil actions in which the subject of the litigation is incapable of pecuniary estimation;
xxxx
32 Chong v. Dela Cruz, G.R. No. 184948, July 21, 2009, 593 SCRA 311, 314; citing Talento v. Escalada,
G.R. No. 180884, June 27, 2008, 556 SCRA 491.
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hierarchy of courts dictates that when jurisdiction is shared concurrently with different courts, the
proper suit should first be filed with the lower-ranking court. Failure to do so is sufficient cause for the
dismissal of a petition.33
In Santiago v. Vasquez,34 the Court took the opportunity to explain why the blatant disregard of the
hierarchy of courts is frowned upon, to wit:
“x x x We discern in the proceedings in this case a propensity on the part of petitioner, and, for that
matter, the same may be said of a number of litigants who initiate recourses before us, to disregard
the hierarchy of courts in our judicial system by seeking relief directly from this Court despite the fact
that the same is available in the lower courts in the exercise of their original or concurrent
jurisdiction, or is even mandated by law to be sought therein. This practice must be stopped, not only
because of the imposition upon the precious time of this Court but also because of the inevitable and
resultant delay, intended or otherwise, in the adjudication of the case which often has to be
remanded or referred to the lower court as the proper forum under the rules of procedure, or as
better equipped to resolve the issues since this Court is not a trier of facts. We, therefore, reiterate
the judicial policy that this Court will not entertain direct resort to it unless the redress desired cannot
be obtained in the appropriate courts or where exceptional and compelling circumstances justify
availment of a remedy within and calling for the exercise of our primary jurisdiction.”
In the instant case, petitioner should have filed the petition for injunction and prohibition with the
trial courts. Petitioner failed to show any exceptional or compelling circumstance to justify the
exception to the rule of hierarchy of courts. Thus, absent such justification, the rule must be upheld.
_______________
33 See Chamber of Real Estate and Builders Associations, Inc. (CREBA) v. Secretary of Agrarian Reform,
G.R. No. 183409, June 18, 2010, 621 SCRA 295.
34 G.R. Nos. 99289-90, January 27, 1993, 217 SCRA 633, 651-652.
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Gamboa vs. Teves
In fact, in Fernandez v. Cojuangco,35 which also involved a similar issue, questioning the issuance of
PLDT’s common shares to Smart and NTT’s stockholders on the ground, among others, that such
issuance of shares violated the 40% foreign ownership constitutional restriction for public utilities,
this Court issued a Resolution dismissing the petition filed with it for disregarding the hierarchy of
courts.
More importantly, the function of a writ of prohibition is to prevent the performance of an act which
is yet to be done. It is not intended to provide a remedy for acts already performed.36 The rationale
behind this was discussed in Cabanero v. Torres,37 citing U.S. v. Hoffman,38 viz.:
“The writ of prohibition, as its name imports, is one which commands the person to whom it is
directed not to do something which, by the suggested to the relator, the court is informed he is about
to do. If the thing be already done, it is manifest the writ of prohibition cannot undo it, for that would
require an affirmative act; and the only effect to a writ of prohibition is to suspend all action, and to
prevent any further proceeding in the prohibited direction.”
As previously pointed out, the sale by the government of the PTIC shares had already been
completed. Thus, the Petition for Prohibition has become moot. As a result, this Court has no
obligation to entertain the petition.
Finally, it should be noted that the non-joinder of ordinary civil actions with special civil actions is
elementary in remedial law. Sec. 5, Rule 2 of the Rules specifically prohibits the joining of special civil
actions or actions governed by special rules with ordinary civil actions.39 In this case, petitioner
_______________
35 G.R. No. 157360, June 9, 2003.
36 Pimentel v. Ermita, G.R. No. 164978, October 13, 2005, 472 SCRA 587, 593; Tolentino v.
Commission on Elections, G.R. No. 148334, January 21, 2004, 420 SCRA 438, 451.
37 61 Phil. 523 (1935).
38 4 Wall., 158, 161; 18 Law. ed., 354.
39 Rule 2, Sec. 5. Joinder of causes of action.
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violated this basic rule when he joined several special civil actions, prohibition and declaratory relief,
and the ordinary civil actions for annulment and injunction.
Violation of Due Process
It is a fundamental guarantee in the Constitution that “[n]o person shall be deprived of life, liberty or
property without due process of law.”40 Due process has two aspects: substantive and procedural.
Substantive due process is a prohibition of arbitrary laws, while procedural due process is a guarantee
of procedural fairness.41 Here, what petitioner asks of this Court is a finding of a violation of both
substantive and procedural due process.
Sec. 11, Art. XII of the Constitution contemplates of two situations: first, where the applicant of a
franchise is a natural person, he must be a Filipino citizen; and second, where the applicant is a
juridical person, 60% of its capital must be owned by Filipino citizens. In the first scenario, only one
person and one property is involved, i.e., the Filipino citizen and his or her franchise. In the second,
two different property holders and two different properties are involved, i.e., the public utility
company holding its franchise and the shareholders owning the capital of the utility company.
However, in both situations, Sec. 11 imposes a qualification for the retention of property on just one
property holder, the franchise holder, as a condition for keeping his or its franchise. It imposes no
nationality qualification on the shareholders of the
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A party may in one pleading assert, in the alternative or otherwise, as many causes of action as he
may have against an opposing party, subject to the following conditions:
xxxx
(b) The joinder shall not include special civil actions or actions governed by special rules; (Emphasis
supplied.)
40 Art. III, Sec. 1.

41 J.G. Bernas, S.J., The 1987 Philippine Constitution: A Comprehensive Reviewer 27-28 (2006).
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Gamboa vs. Teves
utility company as a condition for keeping their shares in the utility company. Thus, if a utility
company or the franchise holder fails to maintain the nationality qualification, only its franchise
should be revoked.
In J.G. Summit Holdings, Inc. v. CA,42 this Court had the chance to rule on a similar set of facts. In that
case, We refused to annul the sale of the government’s shares despite the petitioner’s claim that it
would breach the maximum 40% foreign ownership limit found in the Constitution. According to the
Court:
“x x x In fact, it can even be said that if the foreign shareholdings of a landholding corporation exceeds
40%, it is not the foreign stockholders’ ownership of the shares which is adversely affected but the
capacity of the corporation to own land—that is, the corporation becomes disqualified to own land.
This finds support under the basic corporate law principle that the corporation and its stockholders
are separate juridical entities. In this vein, the right of first refusal over shares pertains to the
shareholders whereas the capacity to own land pertains to the corporation. Hence, the fact that
PHILSECO owns land cannot deprive stockholders of their right of first refusal. No law disqualifies a
person from purchasing shares in a landholding corporation even if the latter will exceed the allowed
foreign equity, what the law disqualifies is the corporation from owning land.” (Emphasis supplied.)
Certainly, the Court has differentiated the two property owners and their properties. Confusing the
two would result in “an unreasonable curtailment of property rights without due process of law.”43
Furthermore, procedural due process requires that before any of the common shares in excess of the
40% maximum foreign ownership limit can be taken, all the shareholders
_______________
42 G.R. No. 124293, January 31, 2005, 450 SCRA 169, 192.
43 La Bugal-B’laan Tribal Association Inc. v. DENR, G.R. No. 127882, December 1, 2004, 445 SCRA 1.
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have to be given notice and a trial should be held before their shares are taken. This means that
petitioner should have impleaded all the foreign natural and juridical shareholders of PLDT so that
they can be heard. The foreign shareholders are considered as an “indispensable party” or one who:
“has such an interest in the controversy or subject matter that a final adjudication cannot be made, in
his absence, without injuring or affecting that interest[;] a party who has not only an interest in the
subject matter of the controversy, but also has an interest of such nature that a final decree cannot be
made without affecting his interest or leaving the controversy in such a condition that its final
determination may be wholly inconsistent with equity and good conscience. It has also been
considered that an indispensable party is a person in whose absence there cannot be a determination
between the parties already before the court which is effective, complete, or equitable. Further, an
indispensable party is one who must be included in an action before it may properly go forward.”44
At the same time, the Rules of Court explicitly requires the joinder of indispensable parties or
“[p]arties in interest without whom no final determination can be had.”45 This is mandatory. As held
in Pepsico, Inc. v. Emerald Pizza, Inc.,46 their absence renders all actions of the court null and void,
viz.:
“x x x x Their presence is necessary to vest the court with jurisdiction, which is “the authority to hear
and determine a cause, the right to act in a case.” Thus, without their presence to a suit or
proceeding, judgment of a court cannot attain real finality. The absence of an indispensable party
renders all subsequent actions of the court null and void for want of authority to act, not only as to
the absent parties but even as to those present.” (Emphasis supplied.)
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44 Metropolitan Bank & Trust Company v. Alejo, G.R. No. 141970, September 10, 2001, 364 SCRA 812,
820; citations omitted.
45 Rule 3, Sec. 7.
46 G.R. No. 153059, August 14, 2007, 530 SCRA 58.
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Gamboa vs. Teves
In this case, petitioner failed to implead all the indispensable parties. Accordingly, in the absence of
such indispensable parties, this Court is wanting in authority to act or rule on the present petition.
Ultimately, the present petition partakes of a collateral attack on PLDT’s franchise as a public utility
with petitioner pleading as ground PLDT’s alleged breach of the 40% limit on foreign equity. Such is
not allowed. As discussed in PLDT v. National Telecommunications Commission,47 a franchise is a
property right that can only be questioned in a direct proceeding:
“x x x A franchise is a property right and cannot be revoked or forfeited without due process of law.
The determination of the right to the exercise of a franchise, or whether the right to enjoy such
privilege has been forfeited by non-user, is more properly the subject of the prerogative writ of quo
warranto, the right to assert which, as a rule, belongs to the State “upon complaint or otherwise” x x x
the reason being that the abuse of a franchise is a public wrong and not a private injury. A forfeiture
of a franchise will have to be declared in a direct proceeding for the purpose brought by the State
because a franchise is granted by law and its unlawful exercise is primarily a concern of Government.”
Hence, due process requires that for the revocation of franchise a petition for quo warranto be filed
directly attacking the franchise itself.
Evidently, the petition is patently flawed and the petitioner availed himself of the wrong remedies.
These jurisdictional and procedural grounds, by themselves, are ample enough to warrant the
dismissal of the petition. Granting arguendo that the petition is sufficient in substance and form, it
will still suffer the same fate.
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47 G.R. No. 84404, October 18, 1990, 190 SCRA 717, 729.
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The Proper Definition of “Capital”
Petitioner’s main substantive issue revolves around the proper definition of the word “capital” found
in Section 11, Article 12 of the Constitution. The said section reads:
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.” (Emphasis
supplied.)
He argues that the framers of the Constitution intended the word “capital” to be limited to voting
shares alone and not the total outstanding capital stock (combined total of voting and non-voting
shares). Specifically, he contends that the term “capital” refers only to shares of stock that can vote in
the election of the members of the Board of Directors. The question is, is this the proper definition?
The ponencia resolved this in the affirmative and held that the term “capital” only refers to voting
shares since these are the shares that “have voting rights which translate to control,”48 i.e., the right
to elect directors who ultimately control or manage the corporation. Generally, these are referred to
as
_______________
48 Ponencia, p. 17.
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“common” shares. However, he clarified that if preferred shares also have the right to vote in the
election of the members of the Board of Directors, then the term “capital” shall also include such
preferred shares. Further, the ponencia maintains that “mere legal title is insufficient to meet the
required Filipino equity,” but that “full beneficial ownership of the stocks coupled with appropriate
voting rights” is required.49
I beg to disagree with the ponencia’s resolution of this issue for the following reasons:
First, contrary to pronouncement of the ponencia, the intent of the framers of the Constitution was
not to limit the application of the word “capital” to voting or common shares alone. In fact, the
Records of the Constitutional Commission reveal that even though the UP Law Center proposed the
phrase “voting stock or controlling interest,” the framers of the Constitution did not adopt this but
instead used the word “capital,” viz.:
MR. BENGZON. We would also like to indicate that perhaps the better term in order to avoid any
conflict or misinterpretations would be the use of the phrase “capital stock.”
MR. NATIVIDAD. Capital stock?
MR. SUAREZ. We will discuss that on the committee level because precisely, there were three
criteria that were submitted. One of them is with reference to the authorized capital stock; the
second would be with respect to the voting rights; and the third would be with respect to the
management. And so, again, we would like to inform the members that the Committee is still trying to
polish this particular provision.50
xxxx
_______________
49 Id., at p. 20.
50 Records of the Constitutional Commission, Volume III, p. 269.
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MR. FOZ. Mr. Vice-President, in Sections 3 and 9,51 the provision on equity is both 60 percent, but I
notice that this is now different from the provision in the 1973 Constitution in that the basis for the
equity provision is voting stock or controlling interest instead of the usual capital percentage as
provided for in the 1973 Constitution. We would like to know what the difference would be between
the previous and the proposed provisions regarding equity interest.
MR. VILLEGAS. Commissioner Suarez will answer that.
MR. SUAREZ. Thank you.
As a matter of fact, this particular portion is still being reviewed by this Committee. In Section 1,
Article XIII of the 1935 Constitution, the wording is that the percentage should be based on the capital
which is owned by such citizens. In the proposed draft, this phrase was proposed: “voting stock or
controlling interest.” This was a plan submitted by the UP Law Center.
Three days ago, we had an early morning breakfast conference with the members of the UP Law
Center and precisely, we were seeking clarification regarding the difference. We would have three
criteria to go by: One would be based on capital, which is capital stock of the corporation, authorized,
subscribed or paid up, as employed under the 1935 and the 1973 Constitution. The idea behind the
introduction of the phrase “voting stock or controlling interest” was precisely to avoid the
perpetration of dummies, Filipino dummies of multinationals. It is theoretically possible that a
situation may develop where these multinational interests would not really be only 40 percent but
will extend beyond that in the matter of voting because they could enter into what is known as a
voting trust or voting agreement with the rest of the stockholders and, therefore, notwithstanding the
fact that on record their capital extent is only up to 40-percent interest in the corporation, actually,
they would be managing and controlling the entire company. That is why the UP Law Center members
suggested that
_______________
51 Referring to Sections 2 and 10, Article XII of the 1987 Constitution.
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we utilize the words “voting interest” which would preclude multinational control in the matter of
voting, independent of the capital structure of the corporation. And then they also added the phrase
“controlling interest” which up to now they have not been able to successfully define the exact
meaning of. x x x And as far as I am concerned, I am not speaking in behalf of the Committee, I would
feel more comfortable if we go back to the wording of the 1935 and the 1973 Constitution, that is to
say, the 60-40 percentage could be based on the capital stock of the corporation.
MR. FOZ. I understand that that was the same view of Dean Carale who does not agree with the
other on this panel at the UP Law Center regarding the percentage of the ratio.
MR. Suarez. That is right. Dean Carale shares my sentiment about this matter.
MR. BENGZON. I also share the sentiment of Commissioner Suarez in that respect. So there are
already two in the Committee who want to go back to the wording of the 1935 and the 1973
Constitution.52
xxxx
MR. TREÑAS. Madam President, may I propose an amendment on line 14 of Section 3 by deleting
therefrom “whose voting stock and controlling interest.” And in lieu thereof, insert the CAPITAL so the
line should read: “associations at least sixty percent of the CAPITAL is owned by such citizens.
MR. VILLEGAS. We accept the amendment.
MR. TREÑAS. Thank you.
THE PRESIDENT. The amendment of Commissioner Treñas on line 14 has been accepted by the
Committee.
_______________
52 Records of the Constitutional Commission, Volume III, pp. 326-327.
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Is there any objection? (Silence) The Chair hears none; the amendment is approved.53
xxxx
MR. VILLEGAS. Yes, Commissioner Davide has accepted the word “CAPITAL” in place of “voting stock
or controlling interest.” This is an amendment already accepted by the Committee.54 x x x x
xxxx
MR. NOLLEDO. Thank you, Madam President.
I would like to propound some questions to the chairman and members of the committee. I have here
a copy of the approved provisions on Article on the National Economy and Patrimony. On page 2, the
first two lines are with respect to the Filipino and foreign equity and I said: “At least sixty percent of
whose capital or controlling interest is owned by such citizen.”
I notice that this provision was amended by Commissioner Davide by changing “voting stocks” to
“CAPITAL,” but I still notice that there appears the term “controlling interest” which seems to refer to
associations other than corporations and it is merely 50 percent plus one percent which is less than 60
percent. Besides, the wordings may indicate that the 60 percent may be based not only on capital but
also on controlling interest; it could mean 60 percent or 51 percent.
Before I propound the final question, I would like to make a comment in relation to Section 15 since
they are related to each other. I notice that in Section 15, there still appears the phrase “voting stock
or controlling interest.” The term “voting stocks” as the basis of the Filipino equity means that if 60
percent of the voting stocks belong to Filipinos, foreigners may not own more than 40 percent of the
capital as long as the 40 percent or the excess thereof will cover nonvoting stock. This is aside from
the fact that under the Corporation Code, even nonvoting shares can vote on certain instances.
_______________
53 Id., at p. 357.
54 Id., at p. 360.
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Control over investments may cover aspects of management and participation in the fruits of
production or exploitation.
So, I hope the committee will consider favorably my recommendation that instead of using
“controlling interests,” we just use “CAPITAL” uniformly in cases where foreign equity is permitted by
law, because the purpose is really to help the Filipinos in the exploitation of natural resources and in
the operation of public utilities. I know the committee, at its own instance, can make the amendment.
What does the committee say?
MR. VILLEGAS. We completely agree with the Commissioner’s views. Actually, it was really an
oversight. We did decide on the word “CAPITAL.” I think it was the opinion of the majority that the
phrase “controlling interest” is ambiguous.
So, we do accept the Commissioner’s proposal to eliminate the phrase “or controlling interest” in all
the provisions that talk about foreign participation. (Emphasis supplied.)
MR. NOLLEDO. Not only in Section 3, but also with respect to Section 15.
Thank you very much.55
Undoubtedly, the framers of the Constitution decided to use the word “capital” in all provisions that
talk about foreign participation and intentionally left out the phrase “voting stocks” or “controlling
interest.” Cassus Omissus Pro Omisso Habendus Est—a person, object or thing omitted must have
been omitted intentionally. In this case, the intention of the framers of the Constitution is very clear—
to omit the phrases “voting stock” and “controlling interest.”
Evidently, the framers of the Constitution were more comfortable with going back to the wording of
the 1935 and 1973 Constitutions, which is to use the 60-40 percentage for the
_______________
55 Id., at p. 582.
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basis of the capital stock of the corporation. Additionally, the phrases “voting stock or controlling
interest” were also initially used in Secs. 256 and 10,57 Article XII of the 1987 Constitution. These
provisions involve the development of natural resources and certain investments. However, after
much debate, they were also replaced with the word “capital” alone. All of these were very evident in
the aforementioned deliberations.
Much more significant is the fact that a comprehensive examination of the constitutional
deliberations in their entirety will reveal that the framers of the Constitution themselves understood
that the word capital includes both voting and non-voting shares and still decided to use “capital”
alone, to wit:
_______________
56 Section 2, Article XII, 1987 Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils,
all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural lands, all other natural resources
shall not be alienated. The exploration, development, and utilization of natural resources shall be
under the full control and supervision of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is owned by such
citizens. x x x x (Emphasis supplied.)
57 Section 10, Article XII, 1987 Constitution:
Section 10. The Congress shall, upon recommendation of the economic and planning agency, when
the national interest dictates, reserve to citizens of the Philippines or to corporations or associations
at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as
Congress may prescribe, certain areas of investments. The Congress shall enact measures that will
encourage the formation and operation of enterprises whose capital is wholly owned by Filipinos.
(Emphasis supplied.)
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MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase “voting stock or
MR. AZCUNA. Hence, without the Davide amendment, the committee report would read:
“corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens.”
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens?
MR. VILLEGAS. That is right.
xxxx
MR. AZCUNA. Yes, but what I mean is that the control should be with the Filipinos.
MR. BENGZON. Yes, that is understood.
MR. AZCUNA. Yes, because if we just say “sixty percent of whose capital is owned by the Filipinos,”
the capital may be voting or non-voting.
MR. BENGZON. That is correct.58

xxxx
MR. GARCIA. Thank you very much, Madam President.
I would like to propose the following amendment on Section 3, line 14 on page 2. I propose to change
the word “sixty” to SEVENTY-FIVE. So, this will read: “or it may enter into co-production, joint
venture, production sharing agreements with Filipino citizens or corporations or associations at least
SEVENTY-FIVE percent of whose CAPITAL stock or controlling interest is owned by such citizens.”
_______________
58 Records of the Constitutional Commission, Volume III, p. 360.
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MR. VILLEGAS. This is just a correction. I think Commissioner Azcuna is not insisting on the retention
of the phrase “controlling interest,” so we will retain “CAPITAL” to go back really to the 1935 and 1973
formulations.59 (Emphasis supplied.)
To emphasize, by using the word “capital,” the framers of the Constitution adopted the definition or
interpretation that includes all types of shares, whether voting or non-voting.
The fundamental principle in the construction of constitutional provisions is “to give the intent to the
framers of the organic law and the people adopting it. The intention to which force is to be given is
that which is embodied and expressed in the constitutional provisions themselves.”60 Generally, “in
construing constitutional provisions which are ambiguous or of doubtful meaning, the courts may
consider the debates in the constitutional convention as throwing light on the intent of the framers of
the Constitution. It is true that the intent of the convention is not controlling by itself, but as its
proceeding was preliminary to the adoption by the people of the Constitution the understanding of
the convention as to what was meant by the terms of the constitutional provision which was the
subject of the deliberation, goes a long way toward explaining the understanding of the people when
they ratified it.”61
Second, the ponencia also points to the provisions of the Foreign Investments Act of 1991 (FIA),62 as a
reinforcement of
_______________
59 Id., at p. 364.
60 Sarmiento v. Mison, G.R. No. 79974, December 17, 1987, 156 SCRA 549, 552 citing Gold Creek
Mining Corp. v. Rodriguez, 66 Phil. 259, 264.
61 Aquino, Jr. v. Enrile, No. L-35546, September 17, 1974, 59 SCRA 183.
62 Republic Act No. 7042 entitled “AN ACT TO PROMOTE FOREIGN INVESTMENTS, PRESCRIBE THE
PROCEDURES FOR REGISTERING ENTERPRISES DOING BUSINESS IN THE PHILIPPINES AND FOR OTHER
PURPOSES.”
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the interpretation of the word “capital” as only referring to those shares entitled to vote. However, a
careful examination of its provisions would reveal otherwise.
Section 3(a) of the FIA, as amended, defines the term “Philippine national” as:
“SEC. 3. Definitions.—As used in this Act:
a. The term “Philippine national” shall mean a citizen of the Philippines; of a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks
in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of
the capital stock outstanding and entitled to vote of each of both corporations must be owned and
held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of the Philippines, in order that the
corporation, shall be considered a “Philippine national.” (Emphasis supplied.)
The ponencia failed to see the fact that the FIA specifically has the phrase “entitled to vote” after the
phrase “total outstanding capital stock.” Logically, this means that interpreting the phrase “total
outstanding capital stock” alone connotes the inclusion of all types of shares under the term “capital”
and not just those that are entitled to vote. By adding the phrase “entitled to vote,” the FIA sought to
distinguish between the shares that can vote and those that cannot. Thus, it is very clear that even the
FIA itself supports the definition of the term “capital” as including all types of shares.
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As a matter of fact, in the Senate deliberations of the FIA, Senator Angara pointed out that the word
“capital,” as used in the 1987 Constitution, includes all types of shares:
Senator Angara. x x x x
Before I leave that point, Mr. President, as we know, the constitutional test is capital. That means,
equity investment, not control. Would this control test then now become an additional requirement
to the constitutional requirement?
Senator Paterno. Well, this is an amplification of the constitutional stipulation, Mr. President. It is a
definition, by law, of what is contained in the Constitution.
Senator Angara. No, Mr. President, because the Constitution requires 60 percent of capital. That
means, whether voting or nonvoting, 60 percent of that must belong to Filipinos. Whereas, under this
proposed definition, it is only the voting shares that we require to be 60 percent owned.
Senator Paterno. Yes.
Senator Angara. So, my question is: Would this requirement of control be in addition to what the
Constitution imposes?
Senator Paterno. No, this would be the definition of what the Constitution requires. We are saying
that it is the capital stock outstanding and entitled to vote. It is the definition of capital as maintained
by the Constitution.
Senator Angara. On the contrary, I am saying that the constitutional test is capital, which is
distinguished from capital stock entitled to vote. Capital means equity which can be voting or
nonvoting, common or preferred. That is the constitutional test.63 x x x (Emphasis supplied.)
_______________
63 Transcript of the January 15, 1991, 4th Regular Session, 8th CRP, Bill on Second Reading, Senate,
pp. 11-12.
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Moreover, it is a well-settled rule of statutory struction that a statute should be construed whenever
possible in a manner that will avoid conflict with the Constitution.64 Where a statute is reasonably
susceptible of two constructions, one constitutional and the other unconstitutional, the construction
in favor of its constitutionality should be adopted.
In this case, the FIA should be read in harmony with the Constitution. Since the Constitution only
provides for a single requirement for the operation of a public utility under Sec. 11, i.e., 60% capital
must be Filipino-owned, a mere statute cannot add another requirement. Otherwise, such statute
may be considered unconstitutional.
Accordingly, the phrase “entitled to vote” should not be interpreted to be limited to common shares
alone or those shares entitled to vote in the election of members of the Board of Directors. It should
also include those deemed non-voting because they also have voting rights. Sec. 6 of the Corporation
Code65 grants voting rights to holders of shares of a corporation on certain key fundamental
corporate matters despite being classified as non-voting in the articles of incorporation. These are:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code;
and
_______________
64 Teehankee v. Rovias, 75 Phil. 634 (1945).
65 Batas Pambansa Blg. 68 entitled “THE CORPORATION CODE OF THE PHILIPPINES.”

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8. Dissolution of the corporation.
Clearly, the shares classified as non-voting are also entitled to vote under these circumstances.
In fact, the FIA did not say “entitled to vote in the management affairs of the corporation” or “entitled
to vote in the election of the members of the Board of Directors.” Verily, where the law does not
distinguish, neither should We. Hence, the proper interpretation of the phrase “entitled to vote”
under the FIA should be that it applies to all shares, whether classified as voting or non-voting shares.
Such construction is in fact in harmony with the fundamental law of the land.
Stockholders, whether holding voting or non-voting stocks, have all the rights, powers and privileges
of ownership over their stocks. This necessarily includes the right to vote because such is inherent in
and incidental to the ownership of corporate stocks, and as such is a property right.66Additionally,
control is another inherent right of ownership.67 The circumstances enumerated in Sec. 6 of the
Corporation Code clearly evince this. It gives voting rights to the stocks deemed as non-voting as to
fundamental and major corporate changes. Thus, the issue should not only dwell on the daily
management affairs of the corporation but also on the equally important fundamental changes that
may need to be voted on. On this, the “non-voting” shares also exercise control, together with the
voting shares.
Consequently, the fact that only holders of common shares can elect a corporation’s board of
directors does not mean that only such holders exercise control over the corporation. Particularly, the
control exercised by the board of directors over
_______________
66 Castillo v. Balinghasay, G.R. No. 150976, October 18, 2004, 440 SCRA 442.
67 National Waterworks and Sewerage Authority vs. Dator, No. L-21911, September 29, 1967, 21 SCRA
355.
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the corporation, by virtue of the corporate entity doctrine, is totally distinct from the corporation’s
stockholders and any power stockholders have over the corporation as owners.
It is settled that when the activity or business of a corporation falls within any of the partly
nationalized provisions of the Constitution or a special law, the “control test” must also be applied to
determine the nationality of a corporation on the basis of the nationality of the stockholders who
control its equity.
The control test was laid down by the Department of Justice (DOJ) in its Opinion No. 18 dated January
19, 1989. It determines the nationality of a corporation with alien equity based on the percentage of
capital owned by Filipino citizens. It reads:
“Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60% only the number of shares corresponding
to such percentage shall be counted as of Philippine nationality.”68
In a catena of opinions, the SEC, “the government agency tasked with the statutory duty to enforce
the nationality requirement prescribed in Section 11, Article XII of the Constitution on the ownership
of public utilities,”69 has consistently applied the control test.70
_______________
68 Opinion No. 018, s. 1989, January 19, 1989, Department of Justice.
69 Ponencia, pp. 30-31.
70 SEC Opinion dated November 6, 1989 addressed to Attys. Barbara Anne C. Migollos and Peter
Dunnely A. Barot; SEC Opinion dated December 14, 1989 addressed to Atty. Maurice C. Nubla; SEC
Opinion dated January 2, 1990 addressed to Atty. Eduardo F. Hernandez; SEC Opinion dated May 30,
1990 addressed to Gold Fields Philippines Corporation; SEC Opinion dated September 21, 1990
addressed to Carag, Caballes, Jamora, Rodriguez & Somera Law
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The FIA likewise adheres to the control test. This intent is evident in the May 21, 1991 deliberations of
the Bicameral Conference Committee (Committees on Economic Affairs of the Senate and House of
Representatives), to wit:
CHAIRMAN TEVES. x x x On definition of terms, Ronnie, would you like anything to say here on the
definition of terms of Philippine national?
HON. RONALDO B. ZAMORA. I think we’ve—we have already agreed that we are adopting here the
control test. Wasn’t that the result of the—
CHAIRMAN PATERNO. No. I thought that at the last meeting, I have made it clear that the Senate
was not able to make a decision for or against the grandfather rule and the control test, because we
had gone into caucus and we had voted but later on the agreement was rebutted and so we had to go
back to adopting the wording in the present law which is not clearly, by its language, a control test
formulation.
_______________
Offices; SEC Opinion dated March 23, 1993 addressed to Mr. Francis F. How; SEC Opinion dated April
14, 1993 addressed to Director Angeles T. Wong of the Philippine Overseas Employment
Administration; SEC Opinion dated November 23, 1993 addressed to Mssrs. Dominador Almeda and
Renato S. Calma; SEC Opinion dated December 7, 1993 addressed to Roco Bunag Kapunan Migallos &
Jardaleza; SEC Opinion No. 49-04 dated December 22, 2004 addressed to Atty. Priscilla B. Valer; SEC
Opinion No. 17-07 dated September 27, 2007 addressed to Mr. Reynaldo G. David; SEC Opinion No.
18-07 dated November 28, 2007 addressed to Mr. Rafael C. Bueno, Jr.; SEC-OGC Opinion No. 20-07
dated November 28, 2007 addressed to Atty. Amado M. Santiago, Jr., SEC-OGC Opinion No. 21-07
dated November 28, 2007 addressed to Atty. Navato Jr.; SEC-OGC Opinion No. 03-08 dated January
15, 2008 addressed to Attys. Ruby Rose J. Yusi and Rudyard S. Arbolado; SEC-OGC Opinion No. 09-09
dated April 28, 2009 addressed to Villaraza Cruz Marcelo Angangco; SEC-OGC Opinion No. 08-10 dated
February 8, 2010 addressed to Mr. Teodoro B. Quijano; SEC-OGC Opinion No. 23-10 dated August 18,
2010 addressed to Attys. Teodulo G. San Juan, Jr. and Erdelyn C. Go.
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HON. ANGARA. Well, I don’t know. Maybe I was absent, Ting, when that happened but my
recollection is that we went into caucus, we debated [the] pros and cons of the control versus the
grandfather rule and by actual vote the control test bloc won. I don’t know when subsequent
rejection took place, but anyway even if the—we are adopting the present language of the law I think
by interpretation, administrative interpretation, while there may be some differences at the
beginning, the current interpretation of this is the control test. It amounts to the control test.
CHAIRMAN TEVES. That’s what I understood, that we could manifest our decision on the control test
formula even if we adopt the wordings here by the Senate version.
xxxx
CHAIRMAN PATERNO. The most we can do is to say that we have explained—is to say that although
the House Panel wanted to adopt language which would make clear that the control test is the
guiding philosophy in the definition of [a] Philippine national, we explained to them the situation in
the Senate and said that we would be—was asked them to adopt the present wording of the law
cognizant of the fact that the present administrative interpretation is the control test interpretation.
But, you know, we cannot go beyond that.71
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase “voting stock or
This intent is even more apparent in the Implementing Rules and Regulations (IRR) of the FIA. In
defining a “Philippine national,” Section 1(b) of the IRR of the FIA categorically states that for the
purposes of determining
_______________
71 Deliberations of the Bicameral Conference Committee, May 21, 1991, pp. 3-5.
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the nationality of a corporation the control test should be applied.72
The cardinal rule in the interpretation of laws is to ascertain and give effect to the intention of the
legislator.73 Therefore, the legislative intent to apply the control test in the determination of
nationality must be given effect.
Significantly, in applying the control test, the SEC has consistently ruled that the determination of the
nationality of the corporation must be based on the entire outstanding capital stock, which includes
both voting and non-voting shares. One such ruling can be found in an Opinion dated November 21,
1989 addressed to Atty. Reynaldo G. Geronimo, to wit:
“As to the basis of computation of the 60-40 percentage nationality requirement under existing laws
(whether it should be based on
_______________
72 Section 1(b), Implementing Rules and Regulations of the Foreign Investments Act of 1991:
b. “Philippine national” shall mean a citizen of the Philippines or a domestic partnership or

association wholly owned by the citizens of the Philippines; or a corporation organized under the laws
of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least
sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that
where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission
[SEC] registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled
to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty
percent [60%] of the members of the Board of Directors of each of both corporation must be citizens
of the Philippines, in order that the corporation shall be considered a Philippine national. The control
test shall be applied for this purpose. (Emphasis supplied.)
73 Roldan v. Villaroman, No. L-46825, October 18, 1939.
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the number of shares or the aggregate amount in pesos of the par value of the shares), the following
definitions of corporate terms are worth mentioning.
“The term capital stock signifies the aggregate of the shares actually subscribed”. (11 Fletcher, Cyc.
Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing Paper Co., 73 NJ Eq. 692, 69 A
1014 aff'g 72 NJ Eq. 645, 66 A, 607).
“Capital stock means the capital subscribed (the share capital)”. (Ibid., emphasis supplied).
“In its primary sense a share of stock is simply one of the proportionate integers or units, the sum of
which constitutes the capital stock of corporation. (Fletcher, sec. 5083).
The equitable interest of the shareholder in the property of the corporation is represented by the
term stock, and the extent of his interest is described by the term shares. The expression shares of
stock when qualified by words indicating number and ownership expresses the extent of the owner’s
interest in the corporate property (Ibid, Sec. 5083, emphasis supplied).
Likewise, in all provisions of the Corporation Code the stockholders’ right to vote and receive
dividends is always determined and based on the “outstanding capital stock”, defined as follows:
“SECTION 137. Outstanding capital stock defined.—The term “outstanding capital stock” as used in
this Code, means the total shares of stock issued to subscribers or stockholders, whether or not fully
or partially paid (as long as there is a binding subscription agreement, except treasury shares.”
The computation, therefore, should be based on the total outstanding capital stock, irrespective of
the amount of the par value of the shares.”
Again in SEC Opinion dated December 22, 2004 addressed to Atty. Priscilla B. Valer, the SEC reiterated
the application of the control test to the total outstanding capital stock irrespective of the amount of
the par value of shares, viz.:
“Under the ‘control concept’, the nationality of the corporation depends on the nationality of the
controlling stockholders. In deter-
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mining the nationality of a corporation under the ‘control test’, the following ruling was adopted by
the Commission:
xxxx
Hence, we confirm your view that the test for compliance with the nationality requirement is based
on the total outstanding capital stock irrespective of the amount of the par value of shares.”74
(Emphasis supplied.)
More importantly, the SEC defined “capital” as to include both voting and non-voting in the
determination of the nationality of a corporation, to wit:
“In view of the foregoing, it is opined that the term “capital” denotes the sum total of the shares
subscribed and paid by the shareholders, or secured to be paid, irrespective of their nomenclature to
be issued by the corporation in the conduct of its operation. Hence, non-voting preferred shares are
considered in the computation of the 60-40% Filipino-alien equity requirement of certain economic
activities under the Constitution.”75 (Emphasis supplied.)
In fact, the issue in the present case was already answered by the SEC in its Opinion dated February
15, 1988. The opinion was issued as an answer to the query––“Would it be legal for foreigners to own
more than 40% of the common shares but not more than 40% of the total outstanding capital stock
which would include both common and non-voting preferred shares?” This is exactly the question in
this case. The SEC ruled in the affirmative and stated:
_______________
74 See also SEC Opinion No. 18-07 dated November 28, 2007 addressed to Mr. Rafael C. Bueno, Jr.;
SEC-OGC Opinion No. 03-08 dated January 15, 2008 addressed to Attys. Ruby Rose J. Yusi and Rudyard
S. Arbolado; and SEC-OGC Opinion No. 23-10 dated August 18, 2010 addressed to Attys. Teodulo G.
San Juan, Jr. and Erdelyn C. Go.
75 SEC Opinion dated April 14, 1987.
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The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads in part thus:
“No franchise, certificate, or any form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines, or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such citizens. . .” x x x
The issue raised on your letter zeroes in on the meaning of the word “capital” as used in the above
constitutional provision.
Anent thereto, please be informed that the term “capital” as applied to corporations, refers to the
money, property or means contributed by stockholders as the form or basis for the business or
enterprise for which the corporation was formed and generally implies that such money or property
or means have been contributed in payment for stock issued to the contributors. (United Grocers, Ltd.
v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As
further ruled by the court, “capital of a corporation is the fund or other property, actually or
potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his
exchange by it for property other than money. This fund includes not only money or other property
received by the corporation for shares of stock but all balances of purchase money, or installments,
due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares.” (Williams v.
Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21).
The term “capital” is also used synonymously with the words “capital stock”, as meaning the amount
subscribed and paid-in and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc.
Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court in Haggard v. Lexington Utilities Co.,
(260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at 17), “The capital
stock of a corporation is the amount paid-in by its stockholders in money, property or services with
which it is to conduct its business, and it is immaterial how the stock is classified, whether as common
or preferred.”
The Commission, in a previous opinion, ruled that the term ‘capital’ denotes the sum total of the
shares subscribed and paid by the shareholders or served to be paid, irrespective of
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their nomenclature. (Letter to Supreme Technotronics Corporation, dated April 14, 1987).
Hence, your query is answered in the affirmative.76 (Emphasis supplied.)
This opinion was reiterated in another Opinion dated July 16, 1996 addressed to Mr. Mitsuhiro Otsuki:
“Relative to the second issue, “In the absence of special provisions the holders of preferred stock in a
corporation are in precisely the same position, both with respect to the corporation itself and with
respect to the creditors of the corporation, as the holders of common stock, except only that they are
entitled to receive dividends on their shares, to the extent guaranteed or agreed upon, before any
dividends can be paid to the holders of common stock. x x x. Accordingly, as a general rule, they are
considered in the computation of the 60-40% Filipino-alien equity percentage requirement, unless the
law covering the type of business to be undertaken provides otherwise.” (Emphasis supplied.)
In Opinion No. 32-03 dated June 2, 2003 addressed to Commissioner Armi Jane R. Borje, the SEC
likewise held that the word “capital” as used in Sec. 11, Art. XII of the 1987 Constitution refers to the
entire outstanding capital stock, regardless of its share classification, viz.:
Please note that Article XII, Section 11 of the Philippine Constitution provides:
“No franchise, certificate, or any other form of authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of whose capital is owned by such citizens…”
The legal capacity of the corporation to acquire franchise, certificate, or authority for the operation of
a public utility is regulated by the aforequoted Constitutional provision, which requires that at least
sixty per centum (60%) of the capital of such corporation be owned by
_______________
76 SEC Opinion dated February 15, 1988.
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citizens of the Philippines. However, such provision does not qualify whether the required ownership
of “capital” shall be that of the voting or non-voting, common or preferred. Hence, it should be
interpreted to refer to the sum total of the outstanding capital stock, irrespective of the nomenclature
or classification as common, preferred, voting or non-voting.” (Emphasis supplied.)
In the same way, the SEC has also adopted the same interpretation of the word “capital” to various
laws or statutes imposing a minimum on Filipino ownership. In an Opinion dated November 11, 1988
addressed to Mr. Nito Doria, which involved Executive Order No. 226, otherwise known as the
Omnibus Investments Code of 1987, the SEC stated:
“For permitted and permissible investments, the maximum percentage of control allowable to foreign
investors is found in Sections 46 and 47 of the Omnibus Investments Code of 1987, copy enclosed. In
relation thereto, “Outstanding capital stock” refers to the total shares issued to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares. (Section 137, Corporation
Code of the Philippines), and it is immaterial how the stock is classified, whether as common or
preferred, (SEC Opinions, dated June 13, 1988, April 14, 1987, and February 15, 1988).”
Again, in an Opinion dated October 16, 1981 addressed to Atty. Jose A. Bañez which involved Republic
Act No. 1180, otherwise known as the Retail Trade Nationalization Law, the SEC opined that the
issuance of preferred shares to a foreigner will disqualify the corporation from engaging in retail
trade, because the law provides that “no association, partnership, or corporation the capital of which
is not wholly owned by citizens of the Philippines, shall engage directly or indirectly in the retail
business.”77 The SEC held:
Your client will lose its character of being one hundred percent (100%) Filipino-owned if said Japanese
entity is allowed to subscribe
_______________
77 Republic Act No. 1180, Sec. 1.
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to its preferred shares. The issuance of shares to an alien will reduce the ownership of Filipino citizens
to less than the required percentage based on the outstanding capital stock of the corporation,
regardless of the fact that said shares are non-voting and non-convertible.
Please be advised that under the Retail Trade Nationalization Law (R.A. 1180), “No association,
partnership, or corporation the capital of which is not wholly owned by citizens of the Philippines,
shall engage directly or indirectly in the retail business.”
Notably, the foregoing Opinion was rendered before the promulgation of the 1987 Constitution. Thus,
it must be assumed that the framers of the Constitution were aware of the administrative
interpretation of the word “capital” and that they also adhered to the same interpretation when they
re-adopted it in the 1987 Constitution from the 1935 and 1973 Constitutions. As held in Laxamana v.
Baltazar, “[w]here a statute has received a contemporaneous and practical interpretation and the
statute as interpreted is re-enacted, the practical interpretation is accorded greater weight than it
ordinarily receives, and is regarded as presumptively the correct interpretation of the law. The rule
here is based upon the theory that the legislature is acquainted with the contemporaneous
interpretation of a statute, especially when made by an administrative body or executive officers
charged with the duty of administering or enforcing the law, and therefore impliedly adopts the
interpretation upon re-enactment.”78
Without a doubt, the SEC’s definition of the word “capital” has been consistently applied to include
the entire outstanding capital stock of a corporation, irregardless of whether it is common or
preferred or voting or non-voting.
This contemporaneous construction of the SEC is entitled to great respect and weight especially since
it is consistent with the Constitutional Commission’s intention to use the term “capital” as applying to
all shares, whether common or
_______________
78 No. L-5955, September 19, 1952.
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preferred. It is well to reiterate the principle of contemporaneous construction and the reason why it
is entitled to great respect, viz.:
“x x x As far back as In re Allen, (2 Phil. 630) a 1903 decision, Justice McDonough, as ponente, cited
this excerpt from the leading American case of Pennoyer v. McConnaughy, decided in 1891: “The
principle that the contemporaneous construction of a statute by the executive officers of the
government, whose duty it is to execute it, is entitled to great respect, and should ordinarily control
the construction of the statute by the courts, is so firmly embedded in our jurisprudence that no
authorities need be cited to support it.’ (Ibid, 640. Pennoyer v. McConnaughly is cited in 140 US 1. The
excerpt is on p. 23 thereof. Cf. Government v. Municipality of Binalonan, 32 Phil, 634 [1915]) There
was a paraphrase by Justice Malcolm of such a pronouncement in Molina v. Rafferty, (37 Phil. 545) a
1918 decision:” Courts will and should respect the contemporaneous construction placed upon a
statute by the executive officers whose duty it is to enforce it, and unless such interpretation is clearly
erroneous will ordinarily be controlled thereby. (Ibid, 555) Since then, such a doctrine has been
reiterated in numerous decisions.”79(Emphasis supplied.)
Similarly, the Corporation Code defines “outstanding capital stock” as the “total shares of stock
issued.”80 It does not distinguish between common and preferred shares. It includes all types of
shares.
Since foreigners hold 64.27% of to the total number of PLDT’s common shares which are entitled to
select the Board of Directors, the ponencia claims foreigners will elect the majority of the Board of
Director in PLDT and, hence, have control over the company.
This is incorrect.
_______________
79 Philippine Global Communications, Inc. v. Relova, No. L-60548, November 10, 1986, 145 SCRA 385;
citing Philippine Association of Free Labor Unions [PAFLU] v. Bureau of Labor Relations, August 21,
1976, 72 SCRA 396, 402.
80 Sec. 137.
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First of all, it has been established that the word “capital” in the phrase “corporation or associations
organized under the laws of the Philippines, at least sixty per centum of whose ‘capital’ is owned by
such citizens” under Sec. 11, Art. XII of the 1987 Constitution means both common or preferred shares
or voting or non-voting shares. This phrase is qualified by the last sentence of Sec. 11, which reads:
“x x x x The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines.” (Emphasis supplied.)
The aforequoted constitutional provision is unequivocal––it limits the participation of the foreign
investors in the governing body to their proportionate share in the capital of the corporation.
Participation is “the act of taking part in something.”81 Accordingly, it includes the right to elect or
vote for in the election of the members of the Board of Directors. However, this right to participate in
the election is restricted by the first sentence of Sec. 11 such that their right cannot exceed their
proportionate share in the capital, i.e., 40%. In other words, the right of foreign investors to elect the
members of the Board of Directors cannot exceed the voting rights of the 40% of the common shares,
even though their ownership of common shares may exceed 40%. Thus, since they can only vote up to
40% of the common shares of the corporation, they will never be in a position to elect majority of the
members of the Board of Directors. Consequently, control over the membership of the Board of
Directors will always be in the hands of Filipino stockholders although they actually own less than 50%
of the common shares.
Let Us apply the foregoing principles to the situation of PLDT. Granting without admitting that
foreigners own
_______________
81 Black’s Law Dictionary (9th ed. 2009).
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64.27% of PLDT’s common shares and say they own 40% of the total number of common and
preferred shares, still they can only vote up to 40% of the common shares of PLDT since their
participation in the election of the Board of Directors (the governing body of the corporation) is
limited by the 40% ownership of the capital under the first sentence of Sec. 11, Art. XII of the
Constitution. The foreigners can only elect members of the Board of Directors based on their 40%
ownership of the common shares and their directors will only constitute the minority. In no instance
can the foreigners obtain the majority seats in the Board of Directors.
Further, the 2010 General Information Sheet (GIS) of PLDT reveals that among the thirteen (13)
members of the Board of Directors, only two (2) are foreigners. It also reveals that the foreign
investors only own 13.71% of the capital of PLDT.82
Obviously, the nomination and election committee of PLDT uses the 40% cap on the foreign
ownership of the capital which explains why the foreigners only have two (2) members in the Board of
Directors. It is apparent that the 64.27% ownership by foreigners of the common shares cannot be
used to elect the majority of the Board of Directors. The fact that the proportionate share of the
foreigners in the capital (voting and non-voting shares or common and preferred shares) is even less
than 40%, then they are only entitled to voting rights equivalent to the said proportionate share in the
capital and in the process elect only a smaller number of directors. This is the reality in the instant
case. Hence, the majority control of Filipinos over the management of PLDT is, at all times, assured.
This intent to limit the participation of the foreign investors in the governing body of the corporation
was solidified in Commonwealth Act No. 108, otherwise known as the Anti-
_______________
82<http://www.pldt.com.ph/investor/shareholder/Documents/GIS_2010_(as%20of%207.2.10)_final.
pdf> (last visited June 23, 2011).
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Dummy Law. Sec. 2-A of the aforementioned law, as amended, provides in part:
“x x x Provided, finally, that the election of aliens as members of the Board of Directors of governing
body of corporations or associations engaging in partially nationalized activity shall be allowed in
proportion to their allowable participation or share in the capital of such entities.”
The view that the definition of the word “capital” is limited to common or voting shares alone would
certainly have the effect of removing the 60-40% nationality requirement on the non-voting shares.
This would then give rise to a situation wherein foreign interest would not really be limited to only
40% but may even extend beyond that because foreigners could also own the entire 100% of the
preferred or non-voting shares. As a result, Filipinos will no longer have effective ownership of the
corporate assets which may include lands. This is because the actual Filipino equity constitutes only a
minority of the entire outstanding capital stock. Therefore, the company would then be technically
owned by foreigners since the actual ownership of at least 60% of the entire outstanding capital stock
would be left to the hands of the foreigners. Allowing this to happen would violate and circumvent
the purpose for which the provision in the Constitution was created.83
This situation was the subject matter of the Opinion dated December 27, 1995 addressed to Mr.
George Lavidia where the SEC opined that for the computation of the required minimum 60% Filipino
ownership in a land owning corporation, both voting and preferred non-voting shares must be
included, to wit:
“The [law] does not qualify whether the required ownership of “capital stock” are voting or non-
voting. Hence, it
_______________
83 See SEC Opinion dated December 27, 1995 addressed to Mr. George Lavidia.
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should be interpreted to mean the sum total of the capital stock subscribed, irrespective of their
nomenclature and whether or not they are voting or non-voting. The use of the phrase “capital stock
belongs” connotes that in order to comply with the Filipino nationality requirement for land
ownership, it is necessary that the criterion of “beneficial ownership” should be met, not merely the
control of the corporation.
To construe the 60-40% equity requirement is merely based on the voting shares, disregarding the
preferred non-voting shares, not on the total outstanding subscribed capital stock, would give rise to a
situation where the actual foreign interest would not really be only 40% but may extend beyond that
because they could also own even the entire preferred non-voting shares. In this situation, Filipinos
may have the control in the operation of the corporation by way of voting rights, but have no
effective ownership of the corporate assets which include lands, because the actual Filipino equity
constitutes only a minority of the entire outstanding capital stock. Therefore, in essence, the
company, although controlled by Filipinos, is beneficially owned by foreigners since the actual
ownership of at least 60% of the entire outstanding capital stocks would be in the hands of foreigners.
Allowing this situation would open the floodgates to circumvention of the intent of the law to make
the Filipinos the principal beneficiaries in the ownership of Philippine alienable lands.
xxxx
Thus, for purpose of “land ownership”, non-voting preferred shares should be included in the
computation of the statutory 60-40% Filipino-alien equity requirement. To rule otherwise would
result in the emergence of foreign beneficial ownership of land, thereby defeating the purpose of the
law. On the other hand, to view the equity ratio as determined on the basis of the entire outstanding
capital stock would be to uphold the unequivocal purpose of the above-cited law of ensuring Filipino
rightful domination of land ownership.” (Emphasis supplied.)
Clearly, applying the ponencia’s definition of the word “capital” will give rise to a greater anomaly
because it will
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result in the foreigner’s obtaining beneficial ownership over the corporation, which is contrary to the
provisions of the Constitution; whereas interpreting “capital” to include both voting and non-voting
shares will result in giving both legal and beneficial ownership of the corporation to the Filipinos.
In the event that the word “capital” is construed as limited to common or voting shares only, it should
not have any retroactive effect. Reliance in good faith on the opinions issued by the SEC, the
regulating body in charged with the duty to enforce the nationality required by the Constitution,
should not prejudice any one, especially not the foreign investors. Giving such interpretation
retroactive effect is tantamount to violation of due process and would impact negatively on the
various foreign investments already present in the country. Accordingly, such construction should
only be applied prospectively.
In sum, the Constitution requires that 60% of the capital be owned by Filipinos. It further requires that
the foreign ownership of capital be limited to 40%, as well as its participation in the governing body of
the public utility corporation be limited to its proportionate share in the capital which cannot exceed
40% thereof. As a result, control over the Board of Directors and full beneficial ownership of 60% of
the capital stock of the corporation are secured in the hands of the Filipinos.
I, therefore, vote to DISMISS the petition.

DISSENTING OPINION
ABAD, J.:
In 1928, the legislature enacted Act 3436, granting Philippine Long Distance Telephone Company
(PLDT) a franchise to provide telecommunications services across the country. Forty years later in
1969, General Telephone and Electronics Corporation, an American company and major PLDT stock-
790
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Gamboa vs. Teves
holder, sold 26% of PLDT’s equity to the Philippine Telecommunications Investment Corporation
(PTIC).
Subsequently, PTIC assigned 46% of its equity or 111,415 shares of stock to Prime Holdings, Inc. In
1986, the Presidential Commission on Good Government sequestered these shares. Eventually, the
Court declared these as properties of the Republic of the Philippines.
In 1999, First Pacific, a Bermuda-registered and Hongkong-based investment firm, acquired the
remaining 54% of PTIC’s equity in PLDT.
In 2006, the government’s Inter-agency Privatization Council offered to auction the 46% PTIC equity in
PLDT that the Court adjudged to the Republic. Parallax Venture Fund XXVII won with a bid of P25.2
billion or US$510 million. First Pacific announced that it would exercise its right of first refusal and buy
those shares by matching Parallax’s bid. In 2007, First Pacific, through its subsidiary, Metro Pacific
Assets Holdings, Inc., entered into a Conditional Sale and Purchase Agreement with the national
government involving the 46% PTIC equity for P25.2 billion or US$510 million.
In this petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale,
petitioner Wilson P. Gamboa, a PLDT stockholder, seeks to annul the sale of the 46% PTIC equity or
111,415 shares of stock to Metro Pacific on the ground that it violates Section 11, Article XII of the
1987 Constitution which limits foreign ownership of a public utility company to 40% of its capital.
Gamboa claims that since PTIC is a PLDT stockholder, the sale of the 46% of its equity is actually an
indirect sale of 6.3% PLDT equity or 12 million shares of stock. This would increase First Pacific’s equity
in PLDT from 30.7% to 37%, and concomitantly increase the common shareholdings of foreigners in
PLDT to about 64.27%.
The action presents two primordial issues:
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1. Whether or not the Court can hear and decide Gamboa’s petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale; and
2. Whether or not Metro Pacific’s acquisition of 46% of PTIC’s equity violates the constitutional limit
on foreign ownership of the capital of PLDT, a public utility company, provided under Section 11,
Article XII of the 1987 Constitution.
One. The objection to the idea of the Court hearing and deciding Gamboa’s action seems to have
some basis in the rules. Under Section 1, Rule 56 of the Rules of Court, only the following cases may
be filed originally in the Supreme Court:
“Sec. 1. Original cases cognizable.—Only petitions for certiorari, prohibition, mandamus, quo
warranto, habeas corpus, disciplinary proceedings against members of the judiciary and attorneys,
and cases affecting ambassadors, other public ministers and consuls may be filed originally in the
Supreme Court.”
Strictly speaking, Gamboa actions for injunction, declaratory relief, and declaration of nullity of sale
are not among the cases that can be initiated before the Supreme Court. Those actions belong to
some other tribunal.
And, although the Court has original jurisdiction in prohibition cases, the Court shares this authority
with the Court of Appeals and the Regional Trial Courts. But this concurrence of jurisdiction does not
give the parties absolute and unrestrained freedom of choice on which court the remedy will be
sought. They must observe the hierarchy of courts.1 As a rule, the Supreme Court will not entertain
direct resort to it unless the remedy desired cannot be obtained in other tribunals. Only exceptional
and compelling circumstances such as cases of national interest and of serious implications justify
direct
_______________
1 Fortich v. Corona, G.R. No. 131457, April 24, 1998, 289 SCRA 624, 645.
792
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Gamboa vs. Teves
resort to the Supreme Court for the extraordinary remedy of writ of certiorari, prohibition, or
mandamus.2
The majority of the Court of course suggests that although Gamboa entitles his actions as ones for
injunction, declaratory relief, and declaration of nullity of sale, what controls the nature of such
actions are the allegations of his petition. And a valid special civil action for mandamus can be made
out of those allegations since respondent Secretary of Finance, his undersecretary, and respondent
Chairman of the Securities and Exchange Commission are the officials who appear to have the duty in
law to implement the foreign ownership restriction that the Constitution commands.3
To a certain extent, I agree with the position that the majority of my colleagues takes on this
procedural issue. I believe that a case can be made for giving due course to Gamboa’s action. Indeed,
there are in his actions compelling reasons to relax the doctrine of hierarchy of courts. The need to
address the important question of defining the constitutional limit on foreign ownership of public
utilities under Section 11, Article XII of the 1987 Constitution, a bedrock policy adopted by the Filipino
people, is certainly a matter of serious national interest. Such policy is intended to develop a self-
reliant and independent national economy effectively controlled by Filipino entrepreneurs.
Indeed, as the Court said in Espina v. Zamora,4 the provisions of Article XII of the 1987 Constitution
lay down the ideals of economic nationalism. One of these is the Filipinization of public utilities under
Section 11 which recognizes the very strategic position of public utilities both in the national
_______________
2 Springfield Development Corporation, Inc. v. Presiding Judge, RTC, Misamis Oriental, Br. 40, Cagayan
de Oro City, G.R. No. 142628, February 6, 2007, 514 SCRA 326, 342-343; Fortich v. Corona, id.
3 Decision, p. 10.
4 G.R. No. 143855, September 21, 2010, 631 SCRA 17.
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economy and for national security.5 The participation of foreign capital is encouraged since the
establishment and operation of public utilities may require the investment of substantial capital that
Filipino citizens could possibly not afford. But at the same time, the Constitution wants to limit foreign
involvement to prevent them from assuming control of public utilities which may be inimical to
national interest.6
Two. Still, the question is whether it is for the Court to decide in this case the shape and substance
of what the Constitution meant when it restricted the size of foreign ownership of the capital of public
utility corporations provided for in Section 11, Article XII of the 1987 Constitution which reads:
such citizens; x x x.”
Gamboa contends that the constitutional limit on foreign ownership in public utilities should be based
on the ownership of common or voting shares since it is through voting that stockholders are able to
have control over a corporation. Preferred or non-voting shares should be excluded from the
reckoning.
But this interpretation, adopted by the majority, places on the Court the authority to define and
interpret the meaning of “capital” in section 11. I believe, however, that such authority should be for
Congress to exercise since it partakes of policy making founded on a general principle laid down by
the fun-
_______________
5 Bernas, Joaquin G., Foreign Relations in Constitutional Law, 1995 Ed., p. 87 citing Smith, Bell and Co.
v. Natividad, 40 Phil 136, 148 (1919); Luzon Stevedoring Corporation v. Anti-Dummy Board, 46 SCRA
474, 490 (1972); De Leon, Hector S., Philippine Constitutional Law (Principles and Cases), 2004 Ed., Vol.
2, p. 940.
6 De Leon, Hector S., Philippine Constitutional Law (Principles and Cases), 2004 Ed., Vol. 2, p. 946.
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Gamboa vs. Teves
damental law. The capital restriction written in the constitution lacks sufficient details for orderly and
meaningful implementation. Indeed, in the twenty-four years that the provision has been in the
Constitution, no concrete step has been taken by any government agency to see to its actual
implementation given the absence of clear legislative guidance on how to go about it.
It has been said that a constitution is a system of fundamental laws for the governance and
administration of a nation. It prescribes the permanent framework of a system of government, assigns
to the different departments their respective powers and duties, and establishes certain fixed
principles on which the government is founded.7 But while some constitutional provisions are self-
executing, others are not.
A constitutional provision is self-executing if it fixes the nature and extent of the right conferred and
the liability imposed such that they can be determined by an examination and construction of its
terms, and there is no language indicating that the subject is referred to the legislature for action. On
the other hand, if the provision needs a supplementary or enabling legislation, it is merely a
declaration of policy and principle which is not self-executing.8
Here, the Constitution simply states that no franchise for the operation of a public utility shall be
granted to a corporation organized under Philippine laws unless at least sixty per centum of its capital
is owned by Filipino citizens.
Evidently, the Constitution fails to provide for the meaning of the term “capital,” considering that the
shares of stock of a corporation vary in kinds. The usual classification depends on how profits are to
be distributed and which stockholders have
_______________
7 Manila Prince Hotel v. Government Service Insurance System, G.R. No. 122156, February 3, 1997,
267 SCRA 408, 430.
8 Id., at p. 431.
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the right to vote the members of the corporation’s board of directors.
The Corporation Code does not offer much help, albeit it only confuses, since it uses the terms
“capital,” “capital stock,” or “outstanding capital stock” interchangeably. “Capital” refers to the
money, property, or means contributed by stockholders in the corporation and generally implies that
the same have been contributed in payment for stock issued to the stockholders.9 “Capital stock”
signifies the amount subscribed and paid-in in money, property or services.10 “Outstanding capital
stock” means the total shares of stock issued to stockholders, whether or not fully or partially paid,
except treasury shares.11
Meanwhile, the Foreign Investments Act of 1991 defines a “Philippine national” as, among others, a
corporation organized under the laws of the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines.12 This gives the im-
_______________
9 Agpalo, Ruben E., Comments on the Corporation Code of the Philippines, 2001 Ed., p. 50.
10 Id., at p. 51.
11 Section 137. The Corporation Code.
12 Sec. 3. Definitions.—As used in this Act:
a. The term “Philippine national” shall mean a citizen of the Philippines; of a domestic partnership
or association wholly owned by citizens of the Philippines; or a corporation organized under the laws
of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a
trustee of funds for pension or other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks
in a Securities and Exchange Com-
796
796
Gamboa vs. Teves
pression, as Justice Carpio noted, that the term “capital” refers only to controlling interest or shares
entitled to vote.13
On the other hand, government agencies such as the Securities and Exchange Commission,
institutions, and corporations (such as the Philippine National Oil Company-Energy Development
Corporation) interpret the term “capital” to include both preferred and common shares.14
Under this confusing legislative signals, the Court should not leave the matter of compliance with the
constitutional limit on foreign ownership in public utilities, a matter of transcendental importance, to
judicial legislation especially since any ruling the Court makes on the matter could have deep
economic repercussions. This is not a concern over which the Court has competence. The 1987
Constitution laid down the general framework for restricting foreign ownership of public utilities. It is
apt for Congress to build up on this framework by defining the meaning of “capital,” establishing rules
for the implementation of the State policy, providing sanctions for its violation, and vesting in the
appropriate agency the responsibility for carrying out the purposes of such policy.
Parenthetically, there have been several occasions in the past where Congress provided
supplementary or enabling legislation for constitutional provisions that are not self-executing. To
name just some: the Comprehensive Agrarian Reform Law of 1988,15 the Indigenous Peoples Rights
Act of
_______________
mission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines
and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations
must be citizens of the Philippines, in order that the corporation, shall be considered a “Philippine
national.” (As amended by Republic Act 8179)
13 Decision, pp. 25-26.
14 Id., at p. 17.
15 Section 21, Article II.
797
VOL. 652, JUNE 28, 2011
797
Gamboa vs. Teves

1997,16 the Local Government Code of 1991,17 the Anti-Graft and Corrupt Practices Act,18 the
Speedy Trial Act of 1998,19 the Overseas Absentee Voting Act of 2003,20 the Party-List System Act,21
the Paternity Leave Act of 1996,22 and the Solo Parents’ Welfare Act of 2000.23
Based on the foregoing, I vote to DENY the petition on the ground that the constitutional limit on
foreign ownership in public utilities under Section 11, Article XII of the 1987 Constitution is not a self-
executing provision and requires an implementing legislation for its enforcement.
Petition partly granted.
Note.—Only citizens of the Philippines can own and hold, directly or indirectly, the capital stock of a
rural bank, subject only to the exception also clearly stated in the same provision. (Nunga, Jr. vs.
Nunga III, 574 SCRA 760 [2008])
——o0o——
_______________
19 Section 16, Article III.
20 Section 2, Article V.
21 Section 5, Article VI.
22 Section 3, Article XIII.
23 Id.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Gamboa vs. Teves, 652 SCRA 690, G.R.
No. 176579 June 28, 2011
Case No. 13
G.R. No. 175109. August 6, 2008.*
PARAMOUNT INSURANCE CORP., petitioner, vs. A.C. ORDOÑEZ CORPORATION and FRANKLIN
SUSPINE, respondents.
Service of Summons; Pleadings and Practice; Service of summons to someone other than the
corporation’s president, managing partner, general manager, corporate secretary, treasurer, and in-
house counsel, is not valid.—Section 11, Rule 14 sets out an exclusive enumeration of the officers who
can receive summons on behalf of a corporation. Service of summons to someone other than the
corporation’s president, managing partner, general manager, corporate secretary, treasurer, and in-
house counsel, is not valid. The designation of persons or officers who are authorized to receive
summons for a domestic corporation or partnership is limited and more clearly specified in the new
rule. The phrase ‘agent, or any of its directors’ has been conspicuously deleted. Moreover, the
argument of substantial compliance is no longer compelling. We have ruled that the new rule, as
opposed to Section 13, Rule 14 of the 1964 Rules of Court, is restricted, limited and exclusive,
following the rule in statutory construction that expressio unios est exclusio alterius. Had the Rules of
Court Revision Committee intended to liberalize the rule on ser-
_______________
* THIRD DIVISION.
328
328
Paramount Insurance Corp. vs. A.C. Ordoñez Corporation
vice of summons, it could have done so in clear and concise language. Absent a manifest intent to
liberalize the rule, strict compliance with Section 11, Rule 14 of the 1997 Rules of Civil Procedure is
required.
Judgments; The hornbook rule is that default judgments are generally disfavored.—There was no
grave abuse of discretion when the Metropolitan Trial Court admitted respondent corporation’s
Answer. Although it was filed beyond the extension period requested by respondent corporation,
however, Sec. 11, Rule 11 grants discretion to the trial court to allow an answer or other pleading to
be filed after the reglementary period, upon motion and on such terms as may be just. An answer
should be admitted where it had been filed before the defendant was declared in default and no
prejudice is caused to plaintiff. The hornbook rule is that default judgments are generally disfavored.
Corporation Law; Dissolution or even the expiration of the three-year liquidation period should not be
a bar to a corporation’s enforcement of its rights as a corporation.—There is likewise no merit in
petitioner’s claim that respondent corporation lacks legal personality to file an appeal. Although the
cancellation of a corporation’s certificate of registration puts an end to its juridical personality, Sec.
122 of the Corporation Code, however provides that a corporation whose corporate existence is
terminated in any manner continues to be a body corporate for three years after its dissolution for
purposes of prosecuting and defending suits by and against it and to enable it to settle and close its
affairs. Moreover, the rights of a corporation, which is dissolved pending litigation, are accorded
protection by law pursuant to Sec. 145 of the Corporation Code, to wit: Section 145. Amendment or
repeal. No right or remedy in favor of or against any corporation, its stockholders, members,
directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part
thereof. (Emphasis ours) Dissolution or even the expiration of the three-year liquidation period should
not be a bar to a corporation’s enforcement of its rights as a corporation.
329
VOL. 561, AUGUST 6, 2008
329
Mediation; Alternative Dispute Resolution; Any party who is interested to have the appealed case
mediated may also submit a “written request in any form to the Court of Appeals.”—For cases
pending at the time the said guidelines were issued, the Division Clerks of Court, with the assistance
of the Philippine Mediation Center, shall identify the cases to be referred to mediation. Thereafter,
the petitioner or appellant shall specify, by writing or by stamping on the right side of the caption of
the initial pleading (under the case number), that the case is mediatable. Further, any party who is
interested to have the appealed case mediated may also submit a “written request in any form to the
Court of Appeals.” In the instant case, petitioner failed to write or stamp the notation “mediatable”
on its Memorandum of Appeal. Moreover, it failed to submit any written request for mediation.
Cornelio P. Pelaez for petitioner.
Oscar L. Karaan for respondent A.C. Ordoñez Construction Corporation.

This petition for review on certiorari seeks to annul and set aside the July 17, 2006 Decision1 of the
Court of Appeals in CA-G.R. SP No. 93073, which reversed and set aside the September 21, 2005
Decision of the Regional Trial Court of Makati City, Branch 582 and reinstated the August 25, 2000 and
September 26, 2000 Orders of the Metropolitan Trial Court of Makati City, Branch 66,3 which
admitted respondent’s Answer and set the case for pre-trial, as well as its
_______________
1 Rollo, pp. 15-25; penned by Associate Justice Conrado M. Vasquez, Jr. and concurred in by Associate
Justices Mariano C. Del Castillo and Vicente S.E. Veloso.
2 Id. at 36-39; penned by Judge Eugene C. Paras.
3 Penned by Judge Rommel O. Baybay.
330
330
October 12, 2006 Resolution4 denying the Motion for Reconsideration.

Petitioner Paramount Insurance Corp. is the subrogee of Maximo Mata, the registered owner of a
Honda City sedan involved in a vehicular accident with a truck mixer owned by respondent
corporation and driven by respondent Franklin A. Suspine on September 10, 1997, at Brgy.
Panungyanan, Gen. Trias, Cavite.
On February 22, 2000, petitioner filed before the Metropolitan Trial Court of Makati City, a complaint
for damages against respondents. Based on the Sheriff’s Return of Service, summons remained
unserved on respondent Suspine,5 while it was served on respondent corporation and received by
Samuel D. Marcoleta of its Receiving Section on April 3, 2000.6
On May 19, 2000, petitioner filed a Motion to Declare Defendants in Default; however, on June 28,
2000, respondent corporation filed an Omnibus Motion (And Opposition to Plaintiff’s Motion to
Declare Defendant in Default) alleging that summons was improperly served upon it because it was
made to a secretarial staff who was unfamiliar with court processes; and that the summons was
received by Mr. Armando C. Ordoñez, President and General Manager of respondent corporation only
on June 24, 2000. Respondent corporation asked for an extension of 15 days within which to file an
Answer.
Pending resolution of its first motion to declare respondents in default, petitioner filed on June 30,
2000 a Second Motion to Declare Defendants in Default.
On July 26, 2000, respondent corporation filed a Motion to Admit Answer alleging honest mistake and
business reverses that prevented them from hiring a lawyer until July 10, 2000, as well as justice and
equity. The Answer with Counterclaim
_______________
4 Rollo, pp. 34-35.
5 Records, Process Server’s Return dated April 4, 2000.

6 Id., Sheriff’s Return dated April 4, 2000.
331
VOL. 561, AUGUST 6, 2008
331
specifically denied liability, averred competency on the part of respondent Suspine, and due selection
and supervision of employees on the part of respondent corporation, and argued that it was Maximo
Mata who was at fault.
On August 25, 2000, the Metropolitan Trial Court of Makati City, Branch 66, issued an Order admitting
the answer and setting the case for pre-trial, thus:
“When this case was called for the hearing of Motion, the Court’s attention was brought to the
Answer filed by the defendant.
WHEREFORE, in order to afford the defendants a day in Court, defendant’s answer is admitted and the
pre-trial is set for October 17, 2000 at 8:30 in the morning.
SO ORDERED.”
Petitioner moved for reconsideration but it was denied. Thus, it filed a petition for certiorari and
mandamus with prayer for preliminary injunction and temporary restraining order before the
Regional Trial Court of Makati City. Petitioner claimed that the Metropolitan Trial Court gravely
abused its discretion in admitting the answer which did not contain a notice of hearing, contrary to
Sections 4 and 5, Rule 15 of the Rules of Court. It also assailed respondent corporation’s Omnibus
Motion for being violative of Section 9, Rule 15 because while it sought leave to file an answer, it did
not attach said answer but only asked for a 15-day extension to file the same. Petitioner also averred
that assuming the Omnibus Motion was granted, the Motion to Admit Answer and the Answer with
Counterclaim were filed 26 days beyond the extension period it requested.
On October 16, 2000, the Regional Trial Court of Makati City, Branch 58 issued a temporary restraining
order, and on May 22, 2001, issued a writ of preliminary injunction. On September 21, 2005, the
Regional Trial Court rendered a Decision7 granting the petition, thus:
_______________
7 Rollo, pp. 36-39.
332
332
“WHEREFORE, premises considered, the petition for certiorari and mandamus is hereby GRANTED.
The Orders of public respondent dated August 25, 2000 and September 26, 2000 are hereby SET
ASIDE. The writ of preliminary injunction issued by this Court on May 22, 2001 is hereby made
permanent.
The case is hereby remanded to the court a quo to act on petitioner’s (plaintiff’s) “Second motion to
declare defendants in Default” dated June 29, 2000.
SO ORDERED.”
Respondent corporation moved for reconsideration but it was denied; hence, it appealed to the Court
of Appeals which rendered the assailed Decision dated July 17, 2006, thus:
“By and large, We find no abuse of discretion committed by the first level court in the contested
orders.
IN VIEW OF ALL THE FOREGOING, the instant appeal is hereby GRANTED, the challenged RTC Decision
dated September 21, 2005 is hereby REVERSED and SET ASIDE, and a new one entered REINSTATING
the Orders dated August 25, 2000 and September 26, 2000 of the Metropolitan Trial Court of Makati
City. No pronouncement as to cost.
SO ORDERED.”
Petitioner’s motion for reconsideration was denied. Hence, the instant petition raising the following
issues:
I. WHETHER THERE WAS VALID SERVICE OF SUMMONS ON DEFENDANT AC ORDONEZ

CONSTRUCTION CORPORATION.
II. WHETHER A PARTY WITHOUT CORPORATE EXISTENCE MAY FILE AN APPEAL.
III. WHETHER THIS COURT ERRED IN NOT CALLING THE PARTIES INTO MEDIATION.
IV. WHETHER THERE WAS FRAUD COMMITTED BY THE PETITIONER IN ITS PLEADINGS.
The petition lacks merit.
333
VOL. 561, AUGUST 6, 2008
333
Section 11, Rule 14 of the Rules of Court provides:
“SEC. 11. Service upon domestic private juridical entity.—When the defendant is a corporation,
partnership or association organized under the laws of the Philippines with a juridical personality,
service may be made on the president, managing partner, general manager, corporate secretary,
treasurer, or in-house counsel.”
Section 11, Rule 14 sets out an exclusive enumeration of the officers who can receive summons on
behalf of a corporation. Service of summons to someone other than the corporation’s president,
managing partner, general manager, corporate secretary, treasurer, and in-house counsel, is not valid.
The designation of persons or officers who are authorized to receive summons for a domestic
corporation or partnership is limited and more clearly specified in the new rule. The phrase ‘agent, or
any of its directors’ has been conspicuously deleted.8 Moreover, the argument of substantial
compliance is no longer compelling. We have ruled that the new rule, as opposed to Section 13, Rule
14 of the 1964 Rules of Court, is restricted, limited and exclusive, following the rule in statutory
construction that expressio unios est exclusio alterius. Had the Rules of Court Revision Committee
intended to liberalize the rule on service of summons, it could have done so in clear and concise
language. Absent a manifest intent to liberalize the rule, strict compliance with Section 11, Rule 14 of
the 1997 Rules of Civil Procedure is required.9
Thus, the service of summons to respondent corporation’s Receiving Section through Samuel D.
Marcoleta is defective and not binding to said corporation.
_______________
8 E.B. Villarosa & Partner Co., Ltd. v. Benito, 370 Phil. 921, 929; 312 SCRA 65, 73 (1999).
9 Mason v. Court of Appeals, 459 Phil. 689, 698; 413 SCRA 303, 311 (2003).
334
334
Moreover, petitioner was served with a copy of the Sheriff’s Return which states:
“3. MANNER OF SERVICE: DULY SERVED thru SAMUEL D. MARCOLETA (receiving section-A.C.
Ordonez Construction Corp.,) and who was authorized by A. C. Ordonez Construction Corp.,
management to receive such court processes.”
On its face, the return shows that the summons was received by an employee who is not among the
responsible officers enumerated by law. Such being invalid, petitioner should have sought the
issuance and proper service of new summons instead of moving for a declaration of default.
Consequently, the motions for declaration of default filed on May 19, 2000 and June 30, 2000 were
both premature.
Thus, there was no grave abuse of discretion when the Metropolitan Trial Court admitted respondent
corporation’s Answer. Although it was filed beyond the extension period requested by respondent
corporation, however, Sec. 11, Rule 11 grants discretion to the trial court to allow an answer or other
pleading to be filed after the reglementary period, upon motion and on such terms as may be just. An
answer should be admitted where it had been filed before the defendant was declared in default and
no prejudice is caused to plaintiff. The hornbook rule is that default judgments are generally
disfavored.10
There is likewise no merit in petitioner’s claim that respondent corporation lacks legal personality to
file an appeal. Although the cancellation of a corporation’s certificate of registration puts an end to its
juridical personality, Sec. 122 of the Corporation Code, however provides that a corporation whose
corporate existence is terminated in any manner continues to be a body corporate for three years
after its dissolution for purposes of prosecuting and defending suits by and
_______________
10 Delos Santos v. Carpio, G.R. No. 153696, September 11, 2006, 501 SCRA 390, 403.
335
VOL. 561, AUGUST 6, 2008
335

against it and to enable it to settle and close its affairs.11 Moreover, the rights of a corporation, which
is dissolved pending litigation, are accorded protection by law pursuant to Sec. 145 of the Corporation
Code, to wit:
“Section 145. Amendment or repeal.—No right or remedy in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor any liability incurred by any such
corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by any subsequent amendment or repeal
of this Code or of any part thereof.” (Emphasis ours)
Dissolution or even the expiration of the three-year liquidation period should not be a bar to a
corporation’s enforcement of its rights as a corporation.12
Finally, the decision to refer a case to mediation involves judicial discretion. Although Sec. 9 B, Rule
141 of the Rules of Court, as amended by A.M. No. 04-2-04-SC, requires the payment of P1,000.00 as
mediation fee upon the filing of a mediatable case, petition, special civil action, comment/
answer to the petition or action, and the appellee’s brief, the final decision to refer a case to
mediation still belongs to the ponente, subject to the concurrence of the other members of the
division.
As clarified by A.M. No. 04-3-15 (Revised Guidelines for the Implementation of Mediation in the Court
of Appeals) dated March 23, 2004:
II. SELECTION OF CASES
Division Clerks of Court, with the assistance of the Philippine Mediation Center (PMC), shall identify
the pending cases to be
_______________
11 Pepsi-Cola Products Philippines, Inc. v. Court of Appeals, G.R. No. 145855, November 24, 2004, 443
SCRA 580, 594.
12 Knecht v. United Cigarette Corporation, 433 Phil. 380, 395; 384 SCRA 45, 57-58 (2002).
336
336
referred to mediation for the approval either of the Ponente for completion of records, or, the
Ponente for decision. Henceforth, the petitioner or appellant shall specify—by writing or by stamping
on the right side of the caption of the initial pleading (under the case number) that the case is
mediatable.
Any party who is interested to have the appealed case mediated may also submit a written request in
any form to the Court of Appeals. If the case is eligible for mediation, the Ponente, with the
concurrence of the other members of the Division, shall refer the case to the PMC.” (Emphasis ours)
Thus, for cases pending at the time the said guidelines were issued, the Division Clerks of Court, with
the assistance of the Philippine Mediation Center, shall identify the cases to be referred to mediation.
Thereafter, the petitioner or appellant shall specify, by writing or by stamping on the right side of the
caption of the initial pleading (under the case number), that the case is mediatable. Further, any party
who is interested to have the appealed case mediated may also submit a “written request in any form
to the Court of Appeals.” In the instant case, petitioner failed to write or stamp the notation
“mediatable” on its Memorandum of Appeal. Moreover, it failed to submit any written request for
mediation.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of Appeals dated July 17, 2006
reinstating the August 25, 2000 and September 26, 2000 Orders of the Metropolitan Trial Court of
Makati City, Branch 66 which admitted respondent corporation’s Answer and set the case for pre-trial,
as well as the Resolution dated October 12, 2006 denying the motion for reconsideration, are
AFFIRMED.
SO ORDERED.
Austria-Martinez, Chico-Nazario, Nachura and Reyes, JJ., concur.
Petition denied, assailed decision and resolution affirmed.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Paramount Insurance Corp. vs. A.C.
Ordoñez Corporation, 561 SCRA 327, G.R. No. 175109 August 6, 2008
Case No. 14
256
Suldao vs. Cimech System Construction, Inc.
G.R. No. 171392. October 30, 2006.*

RUPERTO SULDAO, petitioner, vs. CIMECH SYSTEM CONSTRUCTION, INC. and ENGR. RODOLFO S.
LABUCAY, respondents.
Labor Law; Dismissals; Constructive Dismissals; Words and Phrases; Constructive dismissal or a
constructive discharge has been defined as quitting because continued employment is rendered
impossible, unreasonable or unlikely, as an offer involving a demotion in rank and a diminution in
pay.—After a painstaking review of the records, we uphold the findings of the Labor Arbiter and of
the NLRC that petitioner was constructively dismissed. Constructive dismissal or a constructive
discharge has been defined as quitting because continued employment is rendered impossible,
unreasonable or unlikely, as an offer involving a demotion in rank and a diminution in pay. In the
instant case, there is constructive dismissal because the continued employment of petitioner is
rendered impossible so as to foreclose any choice on his part except to resign from such employment.
Same; Same; Same; In cases of constructive dismissal, the burden of proof is on the employer to show
that the employee was dismissed for a valid and a just cause.—In cases of constructive dismissal, the
burden of proof is on the employer to show that the employee was dismissed for a valid and a just
cause. In the instant case, respondent failed to discharge this burden.
Same; Same; Management Prerogatives; Managerial prerogative to transfer personnel must not be
exercised with grave abuse of discretion, bearing in mind the basic elements of justice and fair play.—
While the decision to transfer employees to other areas of its operations forms part of the well
recognized prerogatives of management, it must be stressed, however, that the managerial
prerogative to transfer personnel must not be exercised with grave abuse of discretion, bearing in
mind the basic elements of justice and fair play. Having the right should not be confused with the
manner in
_______________
* FIRST DIVISION.
257
VOL. 506, OCTOBER 30, 2006
257
which that right is exercised. Thus it cannot be used as a subterfuge by the employer to rid himself of
an undesirable worker. Corporation Law; A corporation is invested by law with a personality separate
from that of its stockholders or members.—A corporation is invested by law with a personality
separate from that of its stockholders or members. It has a personality separate and distinct from
those of the persons composing it as well as from that of any other 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 in itself sufficient ground for disregarding the separate corporate
personality. A corporation’s authority to act and its liability for its actions are separate and apart from
the individuals who own it.
Same; As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient
reason to the contrary appears.—The veil of corporate fiction treats as separate and distinct the
affairs of a corporation and its officers and stockholders. As a general rule, a corporation will be
looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons. Also, the corporate entity may
be disregarded in the interest of justice in such cases as fraud that may work inequities among
members of the corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot
be presumed.
Public Attorney’s Office for petitioner.

Francisco Rosario, Jr. for respondents.
258
258
This petition for review on certiorari assails the Decision1 dated June 23, 2005 of the Court of Appeals
in CA-G.R. SP No. 83963, which reversed and set aside the February 27, 2004 Resolution2 of the
National Labor Relations Commission (NLRC) in NLRC CA No. 036963-03 and the August 5, 2003
Decision of the Labor Arbiter finding petitioner to have been constructively dismissed. Also assailed is
the January 10, 2006 Resolution3 denying petitioner’s motion for reconsideration.
The facts are as follows:
Respondent Cimech Systems Construction, Inc. employed the services of petitioner Ruperto Suldao on
August 31, 2001 as a machinist with a daily wage of P300.00 on a contractual status for a period of five
months. After January 31, 2002, respondent continued to engage the services of petitioner as a
machinist until he became a permanent employee.
Petitioner alleged that owing to a dearth in projects being handled by the respondent, he was ordered
by Ms. Elsa Labocay to take a leave of absence from November 1 to 6, 2002. He reported for work on
November 7, 2002 but was again ordered to take a leave of absence from November 7 to 14, 2002. On
November 15, 2002, he was purportedly ordered to make a letter-request for field work transfer
which he complied. The following day, he failed to report back for work because he was sick. On
November 17, 2002, he reported for work but was allegedly barred from entering by the security
guard on duty. On November 21, 2002, he was again barred from enter-
_______________
1 Rollo, pp. 122-129. Penned by Associate Justice Vicente Q. Roxas and concurred in by Associate
Justices Portia Aliño-Hormachuelos and Juan Q. Enriquez, Jr.
2 Id., at pp. 107-113. Penned by Commissioner Victoriano R. Calaycay and concurred in by

Commissioners Raul T. Aquino and Angelita A. Gacutan.
3 Id., at pp. 141-142.
259
VOL. 506, OCTOBER 30, 2006
259
ing the premises, hence he filed the instant complaint4 for constructive dismissal.5
Respondent alleged that due to lack of available work in the machine shop, petitioner was
temporarily transferred to its fabrication department sometime in November 2002. Petitioner refused
to accept the transfer and insisted to work as a machinist. Because of petitioner’s arrogant and unruly
behavior, he was led away by a guard. When petitioner returned for work, he purportedly demanded
a salary increase and wages for the days that he did not work. Respondent considered the actuations
of petitioner tantamount to insubordination, hence, it suspended6 the petitioner for six days.
After his suspension on November 28, 2002, petitioner accepted his transfer to the fabrication
department but worked for only one day. During the company’s Christmas party on December 21,
2002, petitioner came and asked for his 13th month pay. On January 13, 2003, petitioner demanded
to get his one day salary deposit but was told to secure a clearance which he failed to comply.
Thereafter, petitioner filed the instant complaint for illegal dismissal.
On August 5, 2003, Labor Arbiter Melquiades Sol D. Del Rosario rendered a decision, the dispositive
portion of which reads:
“CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered finding complainant to have
been illegally dismissed constructively. Consequently, he should be reinstated to his former position
and paid his backwages which has accumulated as of July 17, 2003 in the sum of P62,400.00 plus his
one month separation pay of P7,800.00.
SO ORDERED.”7
_______________
4 Id., at pp. 55-56.
5 Id., at p. 58.
6 Id., at p. 53.
7 Id., at p. 91.
260
260
The NLRC concurred with the findings of the Labor Arbiter that petitioner was constructively
dismissed.
Hence, respondent filed a petition for certiorari8 which was granted by the Court of Appeals. In its
assailed June 23, 2005 decision, the Court of Appeals reversed the NLRC by declaring:
“WHEREFORE, premises considered, the Petition is hereby given DUE COURSE, and the February 27,
2004 Decision of the NLRC is hereby REVERSED and SET ASIDE. The December 20, 2002 Complaint is
hereby DISMISSED.
SO ORDERED.”9
Hence, this petition raising the sole issue of:
WHETHER THE COURT OF APPEALS COMMITED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN REVERSING THE DECISION OF THE LABOR ARBITER AND THE NLRC
THAT THE PETITIONER WAS CONSTRUCTIVELY DISMISSED.
As a general rule, a petition for review on certiorari under Rule 45 of the Rules of Court is limited to
questions of law. However, this rule admits of exceptions,10 such as in this case where the findings of
the Labor Arbiter and the NLRC vary from the findings of the Court of Appeals.
The petition is impressed with merit.
After a painstaking review of the records, we uphold the findings of the Labor Arbiter and of the NLRC
that petitioner was constructively dismissed. Constructive dismissal or a constructive discharge has
been defined as quitting because continued employment is rendered impossible, unreasonable or
unlikely, as an offer involving a demotion in rank and a
_______________
8 Id., at pp. 31-51.
9 Id., at p. 129.
10 Eastern Communications Philippines, Inc. v. Diamse, G.R. No. 169299, June 16, 2006, 491 SCRA 239.
261
VOL. 506, OCTOBER 30, 2006
261
diminution in pay.11 In the instant case, there is constructive dismissal because the continued
employment of petitioner is rendered impossible so as to foreclose any choice on his part except to
resign from such employment.12
In cases of constructive dismissal, the burden of proof is on the employer to show that the employee
was dismissed for a valid and a just cause.13 In the instant case, respondent failed to discharge this
burden. As aptly observed by the NLRC:
“In essence, respondents would have it that they have not dismissed complainant, rather it was he
who did not return to his job after 13 January 2003.
To begin with, the issues raised undoubtedly was factual, the determination of which lies within the
competence of the Labor Arbiter’s jurisdiction, over which this Commission will interfere only when
grave abuse or serious errors were committed by him in the interpretation of the evidence on records.
In this case however, respondents failed to show by substantial proof the veracity of their assertion.
For one, while claiming that complainant was placed on a six (6) days suspension for an alleged
infraction, they failed nonetheless to adduce evidence showing that indeed complainant committed
the offense and was placed as such as disciplinary measure.
Relevant on this score is the observation and findings of the Labor Arbiter, to wit:
Respondents’ averment that complainant was arrogant, and did not want to be transferred to another
position or department is belied by complainant’s letter dated November 28, 2002.
Excerpts from complainant’s letter reads:
_______________
11 Unicorn Safety Glass, Inc. v. Basarte, G.R. No. 154689, November 25, 2004, 444 SCRA 287, 294.
12 Mendiola v. Court of Appeals, G.R. No. 159333, July 31, 2006, 497 SCRA 346.
13 Philippine Industrial Security Agency Corporation v. Aguinaldo, G.R. No. 149974, June 15, 2005, 460
SCRA 229, 236.
262
262
“Na tinatanggap ko na utos ng kumpanyang ito na umako ng ibang gawain para sa kabutihan ng lahat.
Na ang pagtanggap ko ng ibang trabaho ay pansamantala lang habang walang gawain sa dati ko
puwesto or gawain trabaho sa kompanya.
Nang ang sulat salaysay kong ito ay aking isinagawa bilang pagtalima sa kautusan ng atin kumpanya.
xxxx
Complainant’s claim that he was required to go on a leave of absence due to a dearth of work is
consistent with respondent’s claim that there was scarcity of work because of the economic crisis.
By all appearances, complainant does not have a high educational attainment and his skill is limited to
being a machinist. As such, all he can do is to obey the biddings of his superior. So when required to
go on leave, he meekly obeys.
Even his claim that he failed to report for work due to indisposition is supported by a medical
certificate. As between the conflicting claims of the parties, this Arbitration Branch has to accord
more weight to complainant’s claim that he was no longer allowed to work because he was barred by
the security guard of the company to enter the premises for reasons only known to respondents.
Had there been truth to respondents’ claim that complainant abandoned his work because he did not
want the job in the fabrication department, complainant would not have made a letter of conformity
to do the bidding of the company. Moreover, complainant would not have taken steps to protect his
rights like the institution of the present labor suit if he had abandoned his work because rather than
spend time, effort and a little money in attending to the hearings of this case, he would have
concentrated in his new job or in finding one in order to feed his family.”14
While the decision to transfer employees to other areas of its operations forms part of the well
recognized prerogatives of management, it must be stressed, however, that the mana-
_______________
14 Rollo, pp. 110-112.
263
VOL. 506, OCTOBER 30, 2006
263
gerial prerogative to transfer personnel must not be exercised with grave abuse of discretion, bearing
in mind the basic elements of justice and fair play. Having the right should not be confused with the
manner in which that right is exercised. Thus it cannot be used as a subterfuge by the employer to rid
himself of an undesirable worker.15
In the instant case, while petitioner’s transfer was valid, the manner by which respondent
unjustifiably prevented him from returning to work on several occasions runs counter to the claim of
good faith on the part of respondent corporation. By reporting for work, petitioner manifested his
willingness to comply with the regulations of the corporation and his desire to continue working for
the latter. However, he was barred from entering the premises without any explanation. This is a clear
manifestation of disdain and insensibility on the part of an employer towards a particular employee
and a veritable hallmark of constructive dismissal.
We cannot sustain the theory of respondent that since petitioner was allowed to join its 2002
Christmas Party, there can be no constructive dismissal. Petitioner’s joining the Christmas party does
not negate his illegal dismissal. Neither does it detract us from the fact that petitioner was prevented
from entering the premises of the respondent corporation on previous occasions.
While the liability of the respondent corporation for the constructive dismissal of the petitioner has
been clearly established, the same does not hold true with the other respondent, Engr. Rodolfo S.
Labucay, President and General Manager of the respondent corporation.16 In finding Labucay also
liable, the Labor Arbiter declared that:
“The foregoing circumstances support the view that complainant was constructively dismissed in an
illegal manner. Conse-
_______________
15 Blue Dairy Corporation v. National Labor Relations Commission, 373 Phil. 179, 186; 314 SCRA 401,
408 (1999).
16 See Board Resolution dated May 6, 2004, Rollo, p. 51.

264
264
quently, respondents, in solidum, are ordered to reinstate the complainant to his former position and
pay complainant his backwages x x x.”
A corporation is invested by law with a personality separate from that of its stockholders or members.
It has a personality separate and distinct from those of the persons composing it as well as from that
of any other 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 in itself sufficient ground for
disregarding the separate corporate personality. A corporation’s authority to act and its liability for its
actions are separate and apart from the individuals who own it.
The veil of corporate fiction treats as separate and distinct the affairs of a corporation and its officers
and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and
until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons. Also, the corporate entity may be disregarded in the interest of justice in such
cases as fraud that may work inequities among members of the corporation internally, involving no
rights of the public or third persons. In both instances, there must have been fraud and proof of it. For
the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly
and convincingly established. It cannot be presumed.17
In the instant case, no reason exists that will justify the piercing of the veil of corporate fiction such as
to hold Labucay, as the president and general manager of the respondent corporation, solidarily liable
with it. Thus, the liability for the constructive dismissal of the petitioner solely devolves upon
_______________
17 Secosa v. Heirs of Erwin Suarez Francisco, G.R. No. 160039, June 29, 2004, 433 SCRA 273, 281.
265
VOL. 506, OCTOBER 30, 2006
265
the respondent corporation. Consequently, the decision of the Labor Arbiter and of the NLRC should
be modified in that only the respondent corporation should be held liable.
WHEREFORE, the petition is GRANTED. The June 23, 2005 Decision of the Court of Appeals in CA-G.R.
SP No. 83963 and its January 10, 2006 Resolution are REVERSED and SET ASIDE. The February 27, 2004
Resolution of the National Labor Relations Commission in NLRC CA No. 036963-03 affirming the
decision of the Labor Arbiter finding that petitioner was constructively dismissed, is REINSTATED with
MODIFICATION that only the respondent corporation, Cimech System Construction, Inc. is held liable.
No pronouncement as to costs.
SO ORDERED.
Panganiban (C.J., Chairperson), Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
Petition granted, judgment and resolution reversed and set aside.
Notes.—Constructive dismissal exists where there is a cessation of work because continued

employment is rendered impossible, unreasonable or unlikely. (Go vs. Court of Appeals, 430 SCRA 358
[2004])
Case law defines constructive dismissal as a cessation of work because continued employment is
rendered impossible, unreasonable or unlikely; when there is a demotion in rank or a diminution in
pay or both; or when a clear discrimination, insensibility, or disdain by an employer becomes
unbearable to the employee. (Chiang Kai Shek College vs. Court of Appeals, 437 SCRA 171 [2004])
——o0o——
266
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Suldao vs. Cimech System
Construction, Inc., 506 SCRA 256, G.R. No. 171392 October 30, 2006
G.R. No. 158262. July 21, 2008.*
SPS. PEDRO AND FLORENCIA VIOLAGO, petitioners, vs. BA FINANCE CORPORATION and AVELINO
VIOLAGO, respondents.
Negotiable Instruments Law; Promissory Notes; The promissory note is clearly negotiable.—The
promissory note is clearly negotiable. The appellate court was correct in finding all the requisites of a
negotiable instrument present. The NIL provides: Section 1. Form of Negotiable Instruments.—An
instrument to be negotiable must conform to the following requirements: (a) It must be in writing
and
_______________
* SECOND DIVISION.
70
70
Violago vs. BA Finance Corporation
signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum
certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must
be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable certainty.
Same; Same; The law presumes that a holder of a negotiable instrument is a holder thereof in due
course.—The law presumes that a holder of a negotiable instrument is a holder thereof in due course.
In this case, the CA is correct in finding that BA Finance meets all the foregoing requisites: In the
present recourse, on its face, (a) the “Promissory Note,” Exhibit “A,” is complete and regular; (b) the
“Promissory Note” was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when it
accepted the Note, acted in good faith and for value; (d) the Appellee was never informed, before and
at the time the “Promissory Note” was endorsed to the Appellee, that the vehicle sold to the
Defendants-Appellants was not delivered to the latter and that VMSC had already previously sold the
vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who
assigned his rights to the BA Finance Corporation (Cebu Branch), the same occurred only on May 8,
1987, much later than August 4, 1983, when VMSC assigned its rights over the “Chattel Mortgage” by
the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course.
Same; Same; The Negotiable Instruments Law considers every negotiable instrument prima facie to
have been issued for a valuable consideration.—In the hands of one other than a holder in due course,
a negotiable instrument is subject to the same defenses as if it were non-negotiable. A holder in due
course, however, holds the instrument free from any defect of title of prior parties and from defenses
available to prior parties among themselves, and may enforce payment of the instrument for the full
amount thereof. Since BA Finance is a holder in due course, petitioners cannot raise the defense of
non-delivery of the object and nullity of the sale against the corporation. The NIL considers every
negotiable instrument prima facie to have been issued for a valuable consideration. In Salas, 181 SCRA
296 (1990), we held that a party holding an instrument may enforce payment of the instrument for
the full amount thereof. As such, the maker cannot set up the defense of nullity of
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VOL. 559, JULY 21, 2008
71
the contract of sale. Thus, petitioners are liable to respondent corporation for the payment of the
amount stated in the instrument.
Corporation Law; Piercing-of-the-Corporate-Veil; We suggested as much in Arcilla v. Court of Appeals

(215 SCRA 120 [1992]), an appellate proceeding involving petitioner Arcilla’s bid to avoid the adverse
CA decision on argument that he is not personally liable for the amount adjudged since the same
constitutes a corporate liability which nevertheless cannot be enforced against the corporation which
has not been impleaded as a party below.—The fact that VMSC was not included as defendant in
petitioners’ third party complaint does not preclude recovery by petitioners from Avelino; neither
would such non-inclusion constitute a bar to the application of the piercing-of-the-corporate-veil
doctrine. We suggested as much in Arcilla v. Court of Appeals, 215 SCRA 120 (1992), an appellate
proceeding involving petitioner Arcilla’s bid to avoid the adverse CA decision on the argument that he
is not personally liable for the amount adjudged since the same constitutes a corporate liability which
nevertheless cannot even be enforced against the corporation which has not been impleaded as a
party below. In that case, the Court found as well-taken the CA’s act of disregarding the separate
juridical personality of the corporation and holding its president, Arcilla, liable for the obligations
incurred in the name of the corporation although it was not a party to the collection suit before the
trial court.
Cabrera, Makalintal & Baliad Law Offices for petitioners.
Reyes, Cruz & Associates for respondent Avelino Violago.
Brillantes, Navarro, Jumamil, Arcilla, Escolin, Martinez & Vivero Law Offices for respondent BA
Finance Corporation.
72
72
VELASCO, JR., J.:
This is a Petition for Review on Certiorari of the August 20, 2002 Decision1 and May 15, 2003
Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 48489 entitled BA Finance Corporation,
Plaintiff-Appellee v. Sps. Pedro and Florencia Violago, Defendants and Third Party Plaintiffs-
Appellants v. Avelino Violago, Third Party Defendant-Appellant. Petitioners-spouses Pedro and
Florencia Violago pray for the reversal of the appellate court’s ruling which held them liable to
respondent BA Finance Corporation (BA Finance) under a promissory note and a chattel mortgage.
Petitioners likewise pray that respondent Avelino Violago be adjudged directly liable to BA Finance.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation (VMSC), offered to
sell a car to his cousin, Pedro F. Violago, and the latter’s wife, Florencia. Avelino explained that he
needed to sell a vehicle to increase the sales quota of VMSC, and that the spouses would just have to
pay a down payment of PhP 60,500 while the balance would be financed by respondent BA Finance.
The spouses would pay the monthly installments to BA Finance while Avelino would take care of the
documentation and approval of financing of the car. Under these terms, the spouses then agreed to
purchase a Toyota Cressida Model 1983 from VMSC.3
_______________
1 Rollo, pp. 14-28. Penned by Associate Justice Romeo J. Callejo, Sr. (former member of this Court)
and concurred in by Associate Justices Remedios Salazar-Fernando and Danilo B. Pine (now retired).
2 Id., at pp. 30-31.
3 Id., at p. 15.
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VOL. 559, JULY 21, 2008
73
On August 4, 1983, the spouses and Avelino signed a promissory note under which they bound
themselves to pay jointly and severally to the order of VMSC the amount of PhP 209,601 in 36
monthly installments of PhP 5,822.25 a month, the first installment to be due and payable on
September 16, 1983. Avelino prepared a Disclosure Statement of Loan/Credit Transportation which
showed the net purchase price of the vehicle, down payment, balance, and finance charges. VMSC
then issued a sales invoice in favor of the spouses with a detailed description of the Toyota Cressida
car. In turn, the spouses executed a chattel mortgage over the car in favor of VMSC as security for the
amount of PhP 209,601. VMSC, through Avelino, endorsed the promissory note to BA Finance without
recourse. After receiving the amount of PhP 209,601, VMSC executed a Deed of Assignment of its
rights and interests under the promissory note and chattel mortgage in favor of BA Finance.
Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through Avelino.4
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch, which issued
Certificate of Registration No. 0137032 in the name of Pedro on August 8, 1983. The spouses were
unaware that the same car had already been sold in 1982 to Esmeraldo Violago, another cousin of
Avelino, and registered in Esmeraldo’s name by the LTO-San Rafael Branch. Despite the spouses’
demand for the car and Avelino’s repeated assurances, there was no delivery of the vehicle. Since
VMSC failed to deliver the car, Pedro did not pay any monthly amortization to BA Finance. 5
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in Pasay City a
complaint for Replevin with Damages against the spouses. The complaint, docketed as Civil Case No.
1628-P, prayed for the delivery of the vehicle in favor of BA Finance or, if delivery cannot be
_______________
4 Id., at pp. 15-16.
5 Id.
74
74
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month from February
15, 1984 until fully paid. BA Finance also asked for the payment of attorney’s fees, liquidated
damages, replevin bond premium, expenses in the seizure of the vehicle, and costs of suit. The RTC
issued an Order of Replevin on March 28, 1984. The Violago spouses, as defendants a quo, were
declared in default for failing to file an answer. Eventually, the RTC rendered on December 3, 1984 a
decision in favor of BA Finance. A writ of execution was thereafter issued on January 11, 1985,
followed by an alias writ of execution.6
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued Certificate of
Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985. On May 8, 1987, Jose
executed a Chattel Mortgage over the vehicle in favor of Generoso Lopez as security for a loan
covered by a promissory note in the amount of PhP 260,664. This promissory note was later endorsed
to BA Finance, Cebu City branch.7
On August 21, 1989, the spouses Violago filed a Motion for Reconsideration and Motion to Quash Writ
of Execution on the basis of lack of a valid service of summons on them, among other reasons. The
RTC denied the motions; hence, the spouses filed a petition for certiorari under Rule 65 before the CA,
docketed as CA G.R. No. 2002-SP. On May 31, 1991, the CA nullified the RTC’s order. This CA decision
became final and executory.
On January 28, 1992, the spouses filed their Answer before the RTC, alleging the following: they never
received the vehicle from VMSC; the vehicle was previously sold to Esmeraldo; BA Finance was not a
holder in due course under Section 59 of the Negotiable Instruments Law (NIL); and the recourse of BA
Finance should be against VMSC. On February 25, 1995,
_______________
6 Id., at pp. 16-17.

7 Id., at p. 18.
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VOL. 559, JULY 21, 2008
75
the Violago spouses, with prior leave of court, filed a Third Party Complaint against Avelino praying
that he be held liable to them in the event that they be held liable to BA Finance, as well as for
damages. VMSC was not impleaded as third party defendant. In his Motion to Dismiss and Answer,
Avelino contended that he was not a party to the transaction personally, but VMSC. Avelino’s motion
was denied and the third party complaint against him was entertained by the trial court.
Subsequently, the spouses belabored to prove that they affixed their signatures on the promissory
note and chattel mortgage in favor of VMSC in blank.8
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the Violago
spouses. The RTC, however, declared that they are entitled to be indemnified by Avelino. The
dispositive portion of the RTC’s decision reads:
“WHEREFORE, defendant-[third]-party plaintiffs spouses Pedro F. Violago and Florencia R. Violago are
ordered to deliver to plaintiff BA Finance Corporation, at its principal office the BAFC Building,
Gamboa St., Legaspi Village, Makati, Metro Manila the Toyota Cressida car, model 1983, bearing
Engine No. 21R-02854117, and with Serial No. RX60-804614, covered by the deed of chattel mortgage
dated August 4, 1983; or if such delivery cannot be made, to pay, jointly and severally, to the plaintiff
the sum of P198,003.06 together with the penalty [thereon] at three percent (3%) a month, from
March 1, 1984, until the amount is fully paid.
In either case, the defendant-third-party plaintiffs are required to pay, jointly and severally, to the
plaintiff a sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and another
amount also equivalent to twenty five percent (25%) of the said unpaid balance, as liquidated
damages. The defendant-third party-plaintiffs are also required to shoulder the litigation expenses
and costs.
As indemnification, third-party defendant Avelino Violago is ordered to deliver to defendants-third-

party plaintiffs spouses Pedro F. Violago and Florencia R. Violago the aforedescribed motor vehicle;
_______________
8 Id., at pp. 18-19.
76
76
or if such delivery is not possible, to pay to the said spouses the sum of P198,003.06, together with
the penalty thereon at three (3%) a month from March 1, 1984, until the amount is entirely paid.
In either case, the third-party defendant should pay to the defendant-third-party plaintiffs spouses a
sum equivalent to twenty-five percent (25%) of P198,003.06 as attorney’s fees, and another sum
equivalent also to twenty-five percent (25%) of the said unpaid balance, as liquidated damages.
Third-party defendant Avelino Violago is further ordered to return to the third-party plaintiffs the sum
of P60,500.00 they paid to him as down payment for the car; and to pay them P15,000.00 as moral
damages; P10,000.00 as exemplary damages; and reimburse them for all the expenses and costs of
the suit.
The counterclaims of the defendants and third-party defendant, for lack of merit, are dismissed.”9
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the promissory note is a
negotiable instrument; hence, the trial court should have applied the NIL and not the Civil Code. The
spouses also asserted that since VMSC was not the owner of the vehicle at the time of sale, the sale
was null and void for the failure in the “cause or consideration” of the promissory note, which in this
case was the sale and delivery of the vehicle. The spouses also alleged that BA Finance was not a
holder in due course of the note since it knew, through its Cebu City branch, that the car was never
delivered to the spouses.10 On the other hand, Avelino prayed for the dismissal of the complaint
against him because he was not a party to the transaction, and for an order to the spouses to pay him
moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument and that BA Finance
was a holder in
_______________
9 Id.
10 Id., at pp. 20-26.
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77
due course, applying Secs. 8, 24, and 52 of the NIL. The CA faulted petitioners for failing to implead
VMSC, the seller of the vehicle and creditor in the promissory note, as a party in their Third Party
Complaint. Citing Salas v. Court of Appeals,11 the appellate court reasoned that since VMSC is an
indispensable party, any judgment will not bind it or be enforced against it. The absence of VMSC
rendered the proceedings in the RTC and the judgment in the Third Party Complaint “null and void,
not only as to the absent party but also to the present parties, namely the Defendants-Appellants
(petitioners herein) and the Third-Party-Defendant-Appellant (Avelino Violago).” The CA set aside the
trial court’s order holding Avelino liable for damages to the spouses without prejudice to the action of
the spouses against VMSC and Avelino in a separate action.12
The dispositive portion of the August 20, 2002 CA Decision reads:
“IN THE LIGHT OF ALL THE FOREGOING, the appeal of the Plaintiffs-Appellants is DISMISSED. The
appeal of the Third-Party-Defendant-Appellant is GRANTED. The Decision of the Court a quo is
AFFIRMED, with the modification that the Third-Party Complaint against the Third-Party-Defendant-
appellant is DISMISSED, without prejudice. The counterclaims of the Third-Party Defendant Appellant
against the Defendants-Appellants are DISMISSED, also without prejudice.”13
The spouses Violago sought but were denied reconsideration by the CA per its Resolution of May 15,
2003.
The Issues
Petitioners raise the following issues:

_______________
11 G.R. No. 76788, January 22, 1990, 181 SCRA 296.
12 Rollo, p. 19.
13 Supra note 1, at p. 27.
78
78
WHETHER OR NOT THE HOLDER OF AN INVALID NEGOTIABLE PROMISSORY NOTE MAY BE

CONSIDERED A HOLDER IN DUE COURSE
WHETHER OR NOT A CHATTEL MORTGAGE SHOULD BE CONSIDERED VALID DESPITE VITIATION OF

CONSENT OF, AND THE FRAUD COMMITTED ON, THE MORTGAGORS BY AVELINO, AND THE CLEAR
ABSENCE OF OBJECT CERTAIN
WHETHER OR NOT THE VEIL OF CORPORATE ENTITY MAY BE INVOKED AND SUSTAINED DESPITE THE
FRAUD AND DECEPTION OF AVELINO

The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the third party
complaint of petitioners against Avelino thereby effectively absolving Avelino from any liability under
the third party complaint.
In addressing the threshold issue of whether BA Finance is a holder in due course of the promissory
note, we must determine whether the note is a negotiable instrument and, hence, covered by the NIL.
In their appeal to the CA, petitioners argued that the promissory note is a negotiable instrument and
that the provisions of the NIL, not the Civil Code, should be applied. In the present petition, however,
petitioners claim that Article 1318 of the Civil Code14 should be applied since their consent was
vitiated by fraud, and, thus, the promissory note does not carry any legal effect despite its
negotiation. Either way, the petitioners’ arguments deserve no merit.
The promissory note is clearly negotiable. The appellate court was correct in finding all the requisites
of a negotiable instrument present. The NIL provides:
_______________
14 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.
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79
“Section 1. Form of Negotiable Instruments.—An instrument to be negotiable must conform to the

following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.”
The promissory note signed by petitioners reads:
209,601.00
Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO MOTOR SALES
CORPORATION, its office, the principal sum of TWO HUNDRED NINE THOUSAND SIX HUNDRED ONE
ONLY Pesos (P209,601.00), Philippines Currency, with interest at the rate stipulated herein below, in
installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be paid on 9-16-
83, and the succeeding monthly installments on the 16th day of each and every succeeding month
thereafter until the account is fully paid, provided that the penalty charge of three (3%) per cent per
month or a fraction thereof shall be added on each unpaid installment from maturity thereof until
fully paid.
xxxx
Notice of demand, presentment, dishonor and protest are hereby waived.
(Sgd.)
PEDRO F. VIOLAGO
763 Constancia St., Sampaloc, Manila
(Address)
(Sgd.)
FLORENCIA R. VIOLAGO
same
(Address)
80
80
(Sgd.)
Marivic Avaria
(WITNESS)
(Sgd.)
Jesus Tuazon
(WITNESS)
PAY TO THE ORDER OF BA FINANCE CORPORATION
WITHOUT RECOURSE
VIOLAGO MOTOR SALES CORPORATION
By: (Sgd.)
AVELINO A. VIOLAGO, Pres.15
The promissory note clearly satisfies the requirements of a negotiable instrument under the NIL. It is
in writing; signed by the Violago spouses; has an unconditional promise to pay a certain amount, i.e.,
PhP 209,601, on specific dates in the future which could be determined from the terms of the note;
made payable to the order of VMSC; and names the drawees with certainty. The indorsement by
VMSC to BA Finance appears likewise to be valid and regular.
The more important issue now is whether or not BA Finance is a holder in due course. The resolution
of this issue will determine whether petitioners’ defense of fraud and nullity of the sale could validly
be raised against respondent corporation. Sec. 52 of the NIL provides:
“Section 52. What constitutes a holder in due course.––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.
_______________
15 Rollo, p. 21.
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VOL. 559, JULY 21, 2008
81
The law presumes that a holder of a negotiable instrument is a holder thereof in due course.16 In this
case, the CA is correct in finding that BA Finance meets all the foregoing requisites:
“In the present recourse, on its face, (a) the “Promissory Note,” Exhibit “A,” is complete and regular;
(b) the “Promissory Note” was endorsed by the VMSC in favor of the Appellee; (c) the Appellee, when
it accepted the Note, acted in good faith and for value; (d) the Appellee was never informed, before
and at the time the “Promissory Note” was endorsed to the Appellee, that the vehicle sold to the
Defendants-Appellants was not delivered to the latter and that VMSC had already previously sold the
vehicle to Esmeraldo Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who
assigned his rights to the BA Finance Corporation (Cebu Branch), the same occurred only on May 8,
1987, much later than August 4, 1983, when VMSC assigned its rights over the “Chattel Mortgage” by
the Defendants-Appellants to the Appellee. Hence, Appellee was a holder in due course.”17
In the hands of one other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable.18 A holder in due course, however, holds the instrument free
from any defect of title of prior parties and from defenses available to prior parties among
themselves, and may enforce payment
_______________
16 NIL, Sec. 59.
17 Rollo, p. 25.
18 NIL, Sec. 58.
19 Id., Sec. 57.
20 Id., Sec. 24.
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of the instrument for the full amount thereof.19 Since BA Finance is a holder in due course,
petitioners cannot raise the defense of non-delivery of the object and nullity of the sale against the
corporation. The NIL considers every negotiable instrument prima facie to have been issued for a
valuable consideration.20 In Salas, we held that a party holding an instrument may enforce payment
of the instrument for the full amount thereof. As such, the maker cannot set up the defense of nullity
of the contract of sale.21 Thus, petitioners are liable to respondent corporation for the payment of
the amount stated in the instrument.
From the third party complaint to the present petition, however, petitioners pray that the veil of
corporate fiction be set aside and Avelino be adjudged directly liable to BA Finance. Petitioners
likewise pray for damages for the fraud committed upon them.
In Concept Builders, Inc. v. NLRC, we held:
“It is a fundamental principle of corporation law that a corporation is an entity separate and distinct
from its stockholders and from other corporations to which it may be connected. But, this separate
and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice. So, when the notion of separate juridical personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor
laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction
pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter
ego of another corporation.
xxxx
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust acts in contravention of
plaintiffs legal rights; and
_______________
21 Supra note 11, at pp. 302-303.
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3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.”22
This case meets the foregoing test. VMSC is a family-owned corporation of which Avelino was
president. Avelino committed fraud in selling the vehicle to petitioners, a vehicle that was previously
sold to Avelino’s other cousin, Esmeraldo. Nowhere in the pleadings did Avelino refute the fact that
the vehicle in this case was already previously sold to Esmeraldo; he merely insisted that he cannot be
held liable because he was not a party to the transaction. The fact that Avelino and Pedro are cousins,
and that Avelino claimed to have a need to increase the sales quota, was likely among the factors
which motivated the spouses to buy the car. Avelino, knowing fully well that the vehicle was already
sold, and with abuse of his relationship with the spouses, still proceeded with the sale and collected
the down payment from petitioners. The trial court found that the vehicle was not delivered to the
spouses. Avelino clearly defrauded petitioners. His actions were the proximate cause of petitioners’
loss. He cannot now hide behind the separate corporate personality of VMSC to escape from liability
for the amount adjudged by the trial court in favor of petitioners.
The fact that VMSC was not included as defendant in petitioners’ third party complaint does not
preclude recovery by petitioners from Avelino; neither would such non-inclusion constitute a bar to
the application of the piercing-of-the-corporate-veil doctrine. We suggested as much in Arcilla v. Court
of Appeals, an appellate proceeding involving petitioner Arcilla’s bid to avoid the adverse CA decision
on the argument that he is not personally liable for the amount adjudged since the same constitutes a
corporate liability which nevertheless cannot even be enforced against the corporation which has not
been impleaded as a party below. In that case, the Court found as well-taken the CA’s act of
disregarding the separate
_______________
22 G.R. No. 108734, May 29, 1996, 257 SCRA 149, 157-159.
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juridical personality of the corporation and holding its president, Arcilla, liable for the obligations
incurred in the name of the corporation although it was not a party to the collection suit before the
trial court. An excerpt from Arcilla:
“x x x In short, even if We are to assume arguendo that the obligation was incurred in the name of the
corporation, the petitioner [Arcilla] would still be personally liable therefor because for all legal
intents and purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is
nothing more than his business conduit and alter ego. The fiction of separate juridical personality
conferred upon such corporation by law should be disregarded. Significantly, petitioner does not
seriously challenge the [CA’s] application of the doctrine which permits the piercing of the corporate
veil and the disregarding of the fiction of a separate juridical personality; this is because he knows
only too well that from the beginning, he merely used the corporation for his personal purposes.”23
WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution in CA-G.R. CV No. 48489
are SET ASIDE insofar as they dismissed without prejudice the third party complaint of petitioners-
spouses Pedro and Florencia Violago against respondent Avelino Violago. The March 5, 1994 Decision
of the RTC is REINSTATED and AFFIRMED. Costs against Avelino Violago.
SO ORDERED.
Quisumbing (Chairperson), Ynares-Santiago,** Carpio-Morales and Tinga, JJ., concur.
Judgment and resolution set aside. That of Regional Trial Court dated March 5, 1994 reinstated and
affirmed.
_______________
23 G.R. No. 89804, October 23, 1992, 215 SCRA 120, 129.
** Additional member as per Special Order No. 509 dated July 1, 2008.
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Violago vs. BA Finance Corporation,
559 SCRA 69, G.R. No. 158262 July 21, 2008
222
McLeod vs. National Labor Relations Commission
G.R. No. 146667. January 23, 2007.*

JOHN F. McLEOD, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS
SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES,
INC., (PEGGY MILLS, INC.), PATRICIO L. LIM, and ERIC HU, respondents.
Corporation Law; As a rule, a corporation that purchases the assets of another will not be liable for
the debts of the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets; Exceptions.—As a rule, a corporation that purchases the assets of
another will not be liable for the debts of the selling corporation, provided the former acted in good
faith and paid adequate consideration for such assets, except when any of the following
circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts,
(2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling
corporation fraudulently enters into the transaction to escape liability for those debts.
Same; Words and Phrases; “Consolidation,” and “Merger,” Defined; The parties to a merger or
consolidation are called constituent corporations; The surviving or consolidated corporation assumes
_______________
* SECOND DIVISION.
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223

automatically the liabilities of the dissolved corporations, regardless of whether the creditors have
consented or not to such merger or consolidation.—Consolidation is the union of two or more existing
corporations to form a new corporation called the consolidated corporation. It is a combination by
agreement between two or more corporations by which their rights, franchises, and property are
united and become those of a single, new corporation, composed generally, although not necessarily,
of the stockholders of the original corporations. Merger, on the other hand, is a union whereby one
corporation absorbs one or more existing corporations, and the absorbing corporation survives and
continues the combined business. The parties to a merger or consolidation are called constituent
corporations. In consolidation, all the constituents are dissolved and absorbed by the new
consolidated enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In
both cases, however, there is no liquidation of the assets of the dissolved corporations, and the
surviving or consolidated corporation acquires all their properties, rights and franchises and their
stockholders usually become its stockholders. The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved corporations, regardless of whether the creditors have
consented or not to such merger or consolidation.
Labor Law; Employer-Employee Relationship; Procedural Rules and Technicalities; Appointment

letters or employment contracts, payrolls, organization charts, SSS registration, personnel list, as well
as testimony of co-employees, may serve as evidence of employee status; While technical rules are
not strictly followed in the NLRC, this does not mean that the rules on proving allegations are entirely
ignored.—McLeod could have presented evidence to support his allegation of employer-employee
relationship between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or
employment contracts, payrolls, organization charts, SSS registration, personnel list, as well as
testimony of co-employees, may serve as evidence of employee status. It is a basic rule in evidence
that parties must prove their affirmative allegations. While technical rules are not strictly followed in
the NLRC, this does not mean that the rules on proving allegations are entirely ignored. Bare
allegations are not enough. They must be supported by substantial evidence at the very least.
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224

Same; Same; Doctrine of Piercing the Veil of Corporate Existence; While a corporation may exist for
any lawful purpose, the law will regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality.—A
corporation is an artificial being invested by law with a personality separate and distinct from that of
its stockholders and from that of other corporations to which it may be connected. While a
corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in
case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for
fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies
only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is
the mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. To disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly. It cannot be presumed.
Same; Same; Same; The existence of interlocking incorporators, directors, and officers is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy
considerations.—The existence of interlocking incorporators, directors, and officers is not enough
considerations. In Del Rosario v. NLRC, 187 SCRA 777 (1990), the Court ruled that substantial identity
of the incorporators of corporations does not necessarily imply fraud.
Same; Same; Same; In the absence of malice, bad faith, or specific provision of law, a stockholder or
an officer of a corporation cannot be made personally liable for corporate liabilities.—On Patricio’s
personal liability, it is settled that in the absence of malice, bad faith, or specific provision of law, a
stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. To
reiterate, a corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations
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225
incurred by the corporation, acting through its directors, officers, and employees, are its sole
liabilities. 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.
Same; Same; Same; Bad faith does not connote bad judgment or negligence—it imports a dishonest
purpose or some moral obliquity and conscious wrongdoing.—The records are bereft of any evidence
that Patricio acted with malice or bad faith. Bad faith is a question of fact and is evidentiary. Bad faith
does not connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity
and conscious wrongdoing. It means breach of a known duty through some ill motive or interest. It
partakes of the nature of fraud. In the present case, there is nothing substantial on record to show
that Patricio acted in bad faith in terminating McLeod’s services to warrant Patricio’s personal
liability. PMI had no other choice but to stop plant operations. The work stoppage therefore was by
necessity. The company could no longer continue with its plant operations because of the serious
business losses that it had suffered. The mere fact that Patricio was president and director of PMI is
not a ground to conclude that he should be held solidarily liable with PMI for McLeod’s money claims.
Same; Same; Same; 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.—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
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226
212(c) nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally
liable for the debts of the corporation.
Labor Law; Vacation and Sick Leaves; The payment of vacation leave and sick leave depends on the
policy of the employer or the agreement between the employer and employee.—As Vice President/
Plant Manager, McLeod is a managerial employee who is excluded from the coverage of Title I, Book
Three of the Labor Code. McLeod is entitled to payment of vacation leave and sick leave only if he and
PMI had agreed on it. The payment of vacation leave and sick leave depends on the policy of the
employer or the agreement between the employer and employee. In the present case, there is no
showing that McLeod and PMI had an agreement concerning payment of these benefits.
Same; Words and Phrases; To be considered a “regular practice,” the giving of the benefits should
have been done over a long period, and must be shown to have been consistent and deliberate.—
Also unavailing is McLeod’s claim that he was entitled to the “unpaid monetary equivalent of unused
plane tickets for the period covering 1989 to 1992 in the amount of P279,300.00.” PMI has no
company policy granting its officers and employees expenses for trips abroad. That at one time PMI
reimbursed McLeod for his and his wife’s plane tickets in a vacation to London could not be deemed
as an established practice considering that it happened only once. To be considered a “regular
practice,” the giving of the benefits should have been done over a long period, and must be shown to
have been consistent and deliberate.
Same; Damages; Moral damages are recoverable only if the defendant has acted fraudulently or in
bad faith, or is guilty of gross negligence amounting to bad faith, or in wanton disregard of his
contractual obligations.—Moral damages are recoverable only if the defendant has acted fraudulently
or in bad faith, or is guilty of gross negligence amounting to bad faith, or in wanton disregard of his
contractual obligations. The breach must be wanton, reckless, malicious, or in bad faith, oppressive or
abusive. From the records of the case, the Court finds no ultimate facts to support a conclusion of bad
faith on the part of PMI.
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Same; Parties; Words and Phrases; The “other party” mentioned in Section 3(a), Rule VI of the NLRC
New Rules of Procedure upon whom a memorandum of appeal is to be served obviously refers to the
adverse party, not to a co-party.—That respondent corporations, in their appeal to the NLRC, did not
serve a copy of their memorandum of appeal upon PMI is of no moment. Section 3(a), Rule VI of the
NLRC New Rules of Procedure provides: Requisites for Perfection of Appeal.—(a) The appeal shall be
filed within the reglementary period as provided in Section 1 of this Rule; shall be under oath with
proof of payment of the required appeal fee and the posting of a cash or surety bond as provided in
Section 5 of this Rule; shall be accompanied by a memorandum of appeal x x x and proof of service on
the other party of such appeal. (Emphasis supplied) The “other party” mentioned in the Rule
obviously refers to the adverse party, in this case, McLeod. Besides, Section 3, Rule VI of the Rules
which requires, among others, proof of service of the memorandum of appeal on the other party, is
merely a rundown of the contents of the required memorandum of appeal to be submitted by the
appellant. These are not jurisdictional requirements.

Victor C. Avecilla for petitioner.
Luis S. Escano for respondents.
CARPIO, J.:
The Case
This is a petition for review1 to set aside the Decision2 dated 15 June 2000 and the Resolution3 dated
27 December
_______________
2 Penned by Associate Justice Teodoro P. Regino, with Associate Justices Conchita Carpio-Morales
(now Associate Justice of this Court) and Mercedes Gozo-Dadole, concurring. Rollo, pp. 278-303.
3 Id., at pp. 329-330.
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228

2000 of the Court of Appeals in CA-G.R. SP No. 55130. The Court of Appeals affirmed with
modification the 29 December 1998 Decision4 of the National Labor Relations Commission (NLRC) in
NLRC NCR 02-00949-95.
The Facts
The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of Appeals, are
as follows:
“On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and sick
leave benefits, non-payment of unused airline tickets, holiday pay, underpayment of salary and 13th
month pay, moral and exemplary damages, attorney’s fees plus interest against Filipinas Synthetic
Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu.
In his Position Paper, complainant alleged that he is an expert in textile manufacturing process; that
as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc. (UTEX); that
he was promoted to Senior Manager and worked for UTEX till 1980 under its President, respondent
Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent Filsyn having
controlling interest; that complainant was absorbed by Peggy Mills as its Vice President and Plant
Manager of the plant at Sta. Rosa, Laguna; that at the time of his retirement complainant was
receiving P60,000.00 monthly with vacation and sick leave benefits; 13th month pay, holiday pay and
two round trip business class tickets on a Manila-London-Manila itinerary every three years which is
convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation and leave
credits and requested complainant to wait as it was short of funds but the same remain unpaid at
present; that complainant is entitled to such benefit as per CBA provision (Annex “A”); that
respondents likewise failed to pay complainant’s holiday pay up to the present; that complainant is
entitled to such benefits as per CBA provision (Annex “B”); that in 1989 the plant union staged a strike
and in 1993 was found guilty of staging
_______________
4 Penned by Presiding Commissioner Rogelio I. Rayala. Id., at pp. 182-203.

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an illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business class plane
tickets on a Manila-London-Manila itinerary but this benefit not (sic) its monetary equivalent was not
given; that on August 1990 the respondents reduced complainant’s monthly salary of P60,000.00 by
P9,900.00 till November 1993 or a period of 39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far
Eastern Textile Mills, Inc. as per agreement (Annex “D”) and this was renamed as Sta. Rosa Textile
with Patricio Lim as Chairman and President; that complainant worked for Sta. Rosa until November
30 that from time to time the owners of Far Eastern consulted with complainant on technical aspects
of reoperation of the plant as per correspondence (Annexes “D-1” and “D-2”); that when complainant
reached and applied retirement age at the end of 1993, he was only given a reduced 13th month pay
of P44,183.63, leaving a balance of P15,816.87; that thereafter the owners of Far Eastern Textiles
decided for cessation of operations of Sta. Rosa Textiles; that on two occasions, complainant wrote
letters (Annexes “E-1” to “E-2”) to Patricio Lim requesting for his retirement and other benefits; that
in the last quarter of 1994 respondents offered complainant compromise settlement of only
P300,000.00 which complainant rejected; that again complainant wrote a letter (Annex “F”)
reiterating his demand for full payment of all benefits and to no avail, hence this complaint; and that
he is entitled to all his money claims pursuant to law.
On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-
President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills
closed operations due to irreversible losses at the end of July 1992 but the corporation still exists at
present; that its assets were acquired by Sta. Rosa Textile Corporation which was established in April
1992 but still remains non-operational at present; that complainant was hired as consultant by Sta.
Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern
Textiles are separate legal entities and have no employer relationship with complainant; that
respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that
respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no
cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that
Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only
impleaded as Board
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Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice President
and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting in closure of
operations due to irreversible losses as per Notice (Annex “1”); that complainant was relied upon to
settle the labor problem but due to his lack of attention and absence the strike continued resulting in
closure of the company; and losses to Sta. Rosa which acquired its assets as per their financial
statements (Annexes “2” and “3”); that the attendance records of complainant from April 1992 to
November 1993 (Annexes “4” and “5”) show that he was either absent or worked at most two hours a
day; that Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the total amount of
P36,757.00 against complainant; that complainant’s monthly salary at Peggy Mills was P50,495.00 and
not P60,000.00; that Peggy Mills, does not have a retirement program; that whatever amount
complainant is entitled should be offset with the counterclaims; that complainant worked only for 12
years from 1980 to 1992; that complainant was only hired as a consultant and not an employee by
Sta. Rosa Textile; that complainant’s attendance record of absence and two hours daily work during
the period of the strike wipes out any vacation/sick leave he may have accumulated; that there is no
basis for complainant’s claim of two (2) business class airline tickets; that complainant’s pay already
included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has
waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month pay
as consultant; and that he is not entitled to moral and exemplary damages and attorney’s fees.
In his Reply, complainant alleged that all respondents being one and the same entities are solidarily
liable for all salaries and benefits and complainant is entitled to; that all respondents have the same
address at 12/F B.A. Lepanto Building, Makati City; that their counsel holds office in the same address;
that all respondents have the same offices and key personnel such as Patricio Lim and Eric Hu; that
respondents’ Position Paper is verified by Marialen C. Corpuz who knows all the corporate officers of
all respondents; that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate
fraud and confuse legitimate issues; that complainant never accepted the change in his position from
Vice-President and Plant Manger to consultant and it is incumbent upon respondents to prove that he
was only a consultant; that the Deed of Dation in Payment with Lease (Annex “C”) proves that Sta.
Rosa took over the
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231
assets of Peggy Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that
complainant never resigned from his job but applied for retirement as per letters (Annexes “E-1,” “E-
2” and “F”); that documents “G,” “H” and “I” show that Eric Hu is a top official of Peggy Mills that the
closure of Peggy Mills cannot be the fault of complainant; that the strike was staged on the issue of
CBA negotiations which is not part of the usual duties and responsibilities as Plant Manager; that
complainant is a British national and is prohibited by law in engaging in union activities; that as per
Resolution (Annex “3”) of the NLRC in the proper case, complainant testified in favor of management;
that the alleged attendance record of complainant was lifted from the logbook of a security agency
and is hearsay evidence; that in the other attendance record it shows that complainant was reporting
daily and even on Saturdays; that his limited hours was due to the strike and cessation of operations;
that as plant manager complainant was on call 24 hours a day; that respondents must pay
complainant the unpaid portion of his salaries and his retirement benefits that cash voucher No.
17015 (Annex “K”) shows that complainant drew the monthly salary of P60,000.00 which was reduced
to P50,495.00 in August 1990 and therefore without the consent of complainant; that complainant
was assured that he will be paid the deduction as soon as the company improved its financial standing
but this assurance was never fulfilled; that Patricio Lim promised complainant his retirement pay as
per the latter’s letters (Annexes “E-1,” “E-2” and “F”); that the law itself provides for retirement
benefits; that Patricio Lim by way of Memorandum (Annex “M”) approved vacation and sick leave
benefits of 22 days per year effective 1986; that Peggy Mills required monthly paid employees to sign
an acknowledgement that their monthly compensation includes holiday pay; that complainant was
not made to sign this undertaking precisely because he is entitled to holiday pay over and above his
monthly pay; that the company paid for complainant’s two (2) round trip tickets to London in 1983
and 1986 as reflected in the complainant’s passport (Annex “N”); that respondents claim that
complainant is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that
complainant is entitled to moral and exemplary damages and attorney’s fees; that all doubts must be
resolved in favor of complainant; and that complainant reserved the right to file perjury cases against
those concerned.
In their Reply, respondents alleged that except for Peggy Mills, the other respondents are not proper
persons in interest due to the
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lack of employer-employee relationship between them and complainant; that undersigned counsel
does not represent Peggy Mills, Inc.
In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on February
10, 1991 as per Board Minutes (Annex “A”); that on August 19, 1987, the workers staged an illegal
strike causing cessation of operations on July 21, 1992; that respondent filed a Notice of Closure with
the DOLE (Annex “B”); that all employees were given separation pay except for complainant whose
task was extended to December 31, 1992 to wind up the affairs of the company as per vouchers
(Annexes “C” and “C-1”); that respondent offered complainant his retirement benefits under RA 7641
but complainant refused; that the regular salaries of complainant from closure up to December 31,
1992 have offset whatever vacation and sick leaves he accumulated; that his claim for unused plane
tickets from 1989 to 1992 has no policy basis, the company’s formula of employees monthly rate x 314
days over 12 months already included holiday pay; that complainant’s unpaid portion of the 13th
month pay in 1993 has no basis because he was only an employee up to December 31, 1992; that the
13th month pay was based on his last salary; and that complainant is not entitled to damages.”5
On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive portion:
“WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable for
complainant’s money claims as adjudicated above and computed below as follows:
Retirement Benefits (one month salary
for every year of service)
6/80 - 11/30/93 = 14 years
P60,000 x 14.0 mos. ....................................
P840,000.00
Vacation and Sick Leave (3 yrs.)

P2,000.00 x 22 days x 3 yrs. .......................
132,000.00
Underpayment of Salaries (3 yrs.)
P60,000 - P50,495 = P9,505
P 9,505 x 36.0 mos. .....................................
342,180.00
_______________
5 Id., at pp. 158-165.
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Holiday Pay (3 yrs.)
P2,000 x 30 days .........................................
60,000.00
Underpayment of 13th month pay (1993) ...........
15,816.87
Moral Damages .....................................................
3,000,000.00
Exemplary Damages ............................................
1,000,000.00
10% Attorney’s Fees .............................................
138,999.68
TOTAL .................................
P5,528,996.55
Unused Airline Tickets (3 yrs.)
(To be converted in Peso upon payment)
$2,450.00 x 3.0 [yrs.]...................................
$7,350.00
SO ORDERED.”6
Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta. Rosa Textiles,
Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The NLRC rendered its decision
on 29 December 1998, thus:
“WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a new one is
entered ORDERING respondent Peggy Mills, Inc. to pay complainant his retirement pay equivalent to
22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a
salary rate of P50,495.00 a month.
All other claims are DISMISSED for lack of merit.
SO ORDERED.”7
John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its Resolution
of 30 June 1999.8 McLeod thus filed a petition for certiorari before the Court of Appeals assailing the
decision and resolution of the NLRC.9
_______________
6 Id., at pp. 167-168.
7 Id., at p. 202.
8 Id., at pp. 224-225.
9 Id., at pp. 226-250.
234
234
On 15 June 2000, the Court of Appeals rendered judgment as follows:
“WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with the
MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy Mills, Inc., to
pay the following amounts to petitioner John F. McLeod:
1. retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service
from 1980 to 1992 based on a salary rate of P50,495, a month;
2. moral damages in the amount of one hundred thousand (P100,000.00) Pesos;
3. exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; and
4. attorney’s fees equivalent to 10% of the total award. No costs is awarded.
SO ORDERED.”10
The Court of Appeals rejected McLeod’s theory that all respondent corporations are the same
corporate entity which should be held solidarily liable for the payment of his monetary claims.
The Court of Appeals ruled that the fact that (1) all respondent corporations have the same address;
(2) all were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano holds office at
respondent corporations’ address; and (4) all respondent corporations have common officers and key
personnel, would not justify the application of the doctrine of piercing the veil of corporate fiction.
The Court of Appeals held that there should be clear and convincing evidence that SRTI, FETMI, and
Filsyn were being used as alter ego, adjunct or business conduit for the sole
_______________
10 Id., at pp. 302-303.
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235
benefit of Peggy Mills, Inc. (PMI), otherwise, said corporations should be treated as distinct and
separate from each other.
The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six
incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A. Picasso, and
Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn show that it has 10
incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon A. Yulo,
Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael Maningas, and Benigno Zialcita, Jr.
The Court of Appeals pointed out that PMI and Filsyn have only two interlocking incorporators and
directors, namely, Patricio and Carlos Palanca, Jr.
Reiterating the ruling of this Court in Laguio v. NLRC,11 the Court of Appeals held that mere
substantial identity of the incorporators of two corporations does not necessarily imply fraud, nor
warrant the piercing of the veil of corporate fiction.
The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment with
Lease, it was clear that SRTI did not assume the liabilities PMI incurred before the execution of the
contract.
The Court of Appeals held that McLeod failed to substantiate his claim that all respondent
corporations should be treated as one corporate entity. The Court of Appeals thus upheld the NLRC’s
finding that no employer-employee relationship existed between McLeod and respondent
corporations except PMI.
The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from any liability,
there being no proof of malice or bad faith on his part. The Court of Appeals,
_______________
11 G.R. No. 108936, 4 October 1996, 262 SCRA 715.
236
236
however, ruled that McLeod was entitled to recover from PMI and Patricio, the company’s Chairman
and President.
The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMI’s financial
obligation to McLeod. The Court of Appeals stated that, on several occasions, despite his approval,
Patricio refused and ignored to pay McLeod’s retirement benefits. The Court of Appeals stated that
the delay lasted for one year prompting McLeod to initiate legal action. The Court of Appeals stated
that although PMI offered to pay McLeod his retirement benefits, this offer for P300,000 was still
below the “floor limits” provided by law. The Court of Appeals held that an employee could demand
payment of retirement benefits as a matter of right.
The Court of Appeals stated that considering that PMI was no longer in operation, its “officer should
be held liable for acting on behalf of the corporation.”
The Court of Appeals also ruled that since PMI did not have a retirement program providing for
retirement benefits of its employees, Article 287 of the Labor Code must be followed. The Court of
Appeals thus upheld the NLRC’s finding that McLeod was entitled to retirement pay equivalent to 22.5
days for every year of service from 1980 to 1992 based on a salary rate of P50,495 a month.
The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave and
holiday pay because as Vice President and Plant Manager, McLeod is a managerial employee who,
under Article 82 of the Labor Code, is not entitled to these benefits.
The Court of Appeals stated that for McLeod to be entitled to payment of service incentive leave and
holidays, there must be an agreement to that effect between him and his employer.
Moreover, the Court of Appeals rejected McLeod’s argument that since PMI paid for his two round-
trip tickets Manila-London in 1983 and 1986, he was also “entitled to unused airline tickets.” The
Court of Appeals stated that the fact that PMI granted McLeod “free transport to and from Manila and
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237
London for the year 1983 and 1986 does not ipso facto characterize it as regular that would establish a
prevailing company policy.”
The Court of Appeals also denied McLeod’s claims for underpayment of salaries and his 13th month
pay for the year 1994. The Court of Appeals upheld the NLRC’s ruling that it could be deduced from
McLeod’s own narration of facts that he agreed to the reduction of his compensation from P60,000 to
P50,495 in August 1990 to November 1993.
The Court of Appeals found the award of moral damages for P50,000 in order because of the
“stubborn refusal” of PMI and Patricio to respect McLeod’s valid claims.
The Court of Appeals also ruled that attorney’s fees equivalent to 10% of the total award should be
given to McLeod under Article 2208, paragraph 2 of the Civil Code.12
The Issues
McLeod submits the following issues for our consideration:
“1. Whether the challenged Decision and Resolution of the 14th Division of the Court of Appeals
promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R. SP No. 55130 are in
accord with law and jurisprudence;
2. Whether an employer-employee relationship exists between the private respondents and the
petitioner for purposes of determining employer liability to the petitioner;
3. Whether the private respondents may avoid their financial obligations to the petitioner by invoking
the veil of corporate fiction;
4. Whether petitioner is entitled to the relief he seeks against the private respondents;
5. Whether the ruling of [this] Court in Special Police and Watchman Association (PLUM) Federation v.
National Labor Rela
_______________
12 Rollo, p. 302.
238
238
tions Commission cited by the Office of the Solicitor General is applicable to the case of petitioner;
and
6. Whether the appeal taken by the private respondents from the Decision of the labor arbiter meets
the mandatory requirements recited in the Labor Code of the Philippines, as amended.”13
The petition must fail.
McLeod asserts that the Court of Appeals should not have upheld the NLRC’s findings that he was a
managerial employee of PMI from 20 June 1980 to 31 December 1992, and then a consultant of SRTI
up to 30 November 1993. McLeod asserts that if only for this “brazen assumption,” the Court of
Appeals should not have sustained the NLRC’s ruling that his cause of action was only against PMI.
These assertions do not deserve serious consideration.

Records disclose that McLeod was an employee only of PMI.14 PMI hired McLeod as its acting Vice
President and General Manager on 20 June 1980.15 PMI confirmed McLeod’s appointment as Vice
President/Plant Manager in the Special Meeting of its Board of Directors on 10 February 1981.16
McLeod himself testified during the hearing before the Labor Arbiter that his “regular employment”
was with PMI.17
When PMI’s rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI incurred
serious business losses.18 This prompted PMI to stop permanently plant operations and to send a
notice of closure to the Department of Labor and Employment on 21 July 1992.19
_______________
13 Id., at p. 28. Internal citation omitted.
14 TSN, 8 March 1996, p. 63; TSN, 10 December 1996, p. 55.
15 Rollo, p. 144.
16 Id., at p. 153.
17 TSN, 2 April 1996, p. 49.
18 Rollo, p. 145; TSN, 15 April 1996, pp. 13-14, 16-17.
19 Rollo, p. 93.
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VOL. 512, JANUARY 23, 2007
239
PMI informed its employees, including McLeod, of the closure.20 PMI paid its employees, including
managerial employees, except McLeod, their unpaid wages, sick leave, vacation leave, prorated 13th
month pay, and separation pay. Under the compromise agreement between PMI and its employees,
the employer-employee relationship between them ended on 25 November 1992.21
Records also disclose that PMI extended McLeod’s service up to 31 December 1992 “to wind up some
affairs” of the company.22 McLeod testified on cross-examination that he received his last salary from
PMI in December 1992.23
It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31 December
1992.
However, McLeod claims that after FETMI purchased PMI in January 1993, he “continued to work at
the same plant with the same responsibilities” until 30 November 1993. McLeod claims that FETMI
merely renamed PMI as SRTI. McLeod asserts that it was for this reason that when he reached the
retirement age in 1993, he asked all the respondents for the payment of his benefits.24
These assertions deserve scant consideration.
What took place between PMI and SRTI was dation in payment with lease. Pertinent portions of the
contract that PMI and SRTI executed on 15 June 1992 read:
“WHEREAS, PMI is indebted to the Development Bank of the Philippines (“DBP”) and as security for
such debts (the “Obligations”) has mortgaged its real properties covered by TCT Nos. T-38647, T-
37136, and T-37135, together with all machineries and
_______________
20 TSN, 10 December 1996, pp. 11-13.
21 Rollo, p. 242; TSN, 18 March 1997, pp. 19-22, 26-27; TSN, 26 August 1996, p. 24.
22 Rollo, p. 145; TSN, 26 August 1996, pp. 25-26.
23 TSN, 15 April 1996, p. 31. See Rollo, pp. 156 and 157.
24 Rollo, pp. 45-46.
240
240
improvements found thereat, a complete listing of which is hereto attached as Annex “A” (the
“Assets”);
WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the Obligations,
including the Assets, to the Asset Privatization Trust (“APT”) and the latter has received payment for
the Obligations from PMI, under APT’s Direct Debt Buy-Out (“DDBO”) program thereby causing APT to
completely discharge and cancel the mortgage in the Assets and to release the titles of the Assets
back to PMI;
WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED TEN
MILLION PESOS (P210,000,000.00) (the “Advances”) to enable PMI to consummate the DDBO with
APT, with SRTC subrogating APT as PMI’s creditor thereby;
WHEREAS, in payment to SRTC for PMI’s liability, PMI has agreed to transfer all its rights, title and
interests in the Assets by way of a dation in payment to SRTC, provided that simultaneous with the
dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions
stated hereunder;
xxxx
NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and conditions
hereinafter set forth, the parties hereby agree as follows:
1. CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00),
PMI hereby cedes, conveys and transfers to SRTC all of its rights, title and interest in and to the Assets
by way of a dation in payment.”25 (Emphasis supplied)
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present: (1) where the purchaser expressly
or impliedly agrees to assume the debts, (2) where the
_______________
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VOL. 512, JANUARY 23, 2007
241
transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing
corporation is merely a continuation of the selling corporation, and (4) where the selling corporation
fraudulently enters into the transaction to escape liability for those debts.26
None of the foregoing exceptions is present in this case.
Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P210,000,000. We
are not convinced that PMI fraudulently transferred these assets to escape its liability for any of its
debts. PMI had already paid its employees, except McLeod, their money claims.
There was also no merger or consolidation of PMI and SRTI.
Consolidation is the union of two or more existing corporations to form a new corporation called the
consolidated corporation. It is a combination by agreement between two or more corporations by
which their rights, franchises, and property are united and become those of a single, new corporation,
composed generally, although not necessarily, of the stockholders of the original corporations.
Merger, on the other hand, is a union whereby one corporation absorbs one or more existing
corporations, and the absorbing corporation survives and continues the combined business.
The parties to a merger or consolidation are called constituent corporations. In consolidation, all the
constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all
constituents, except the surviving corporation, are dissolved. In both cases, however, there is no
liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation
acquires all their prop-
_______________
26 Philippine National Bank v. Andrada Electric & Engineering Company, 430 Phil. 882; 381 SCRA 244
(2002).
242
242
erties, rights and franchises and their stockholders usually become its stockholders.
The surviving or consolidated corporation assumes automatically the liabilities of the dissolved
corporations, regardless of whether the creditors have consented or not to such merger or
consolidation.27
In the present case, there is no showing that the subject dation in payment involved any corporate
merger or consolidation. Neither is there any showing of those indicative factors that SRTI is a mere
instrumentality of PMI.
Moreover, SRTI did not expressly or impliedly agree to assume any of PMI’s debts. Pertinent portions
of the subject Deed of Dation in Payment with Lease provide, thus:
“2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the following:
xxxx
(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any liability for
claims of PMI’s creditors, laborers, and workers and for physical injury or injury to property arising
from PMI’s custody, possession, care, repairs, maintenance, use or operation of the Assets except
ordinary wear and tear;”28 (Emphasis supplied)
Also, McLeod did not present any evidence to show the alleged renaming of “Peggy Mills, Inc.” to
“Sta. Rosa Textiles, Inc.”
Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity.
Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped
operations.29 On the other hand,
_______________
27 II J. Campos and M.C. Lopez-Campos, The Corporation Code: Comments, Notes and Selected Cases
440-441 (1990 ed.).
28 Records, p. 50.
29 Rollo, pp. 359 and 386.
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VOL. 512, JANUARY 23, 2007
243
McLeod asserts that he was respondent corporations’ employee from 1980 to 30 November 1993.30
However, McLeod failed to present any proof of employer-employee relationship between him and
Filsyn, SRTI, or FETMI. McLeod testified, thus:
ATTY. ESCANO:
Do you have any employment contract with Far Eastern Textile?
WITNESS:
It is my belief up the present time.

ATTY. AVECILLA:
May I request that the witness be allowed to go through his Annexes, Your Honor.
ATTY. ESCANO:
Yes, but I want a precise answer to that question. If he has an employment contract with Far Eastern
Textile?
WITNESS:
Can I answer it this way, sir? There is not a valid contract but I was under the impression taking into
consideration that the closeness that I had at Far Eastern Textile is enough during that period of time
of the development of Peggy Mills to reorganize a staff. I was under the basic impression that they
might still retain my status as Vice President and Plant Manager of the company.
ATTY. ESCANO:
But the answer is still, there is no employment contract in your possession appointing you in any
capacity by Far Eastern?
WITNESS:
There was no written contract, sir.
xxxx
ATTY. ESCANO:
So, there is proof that you were in fact really employed by Peggy Mills?
_______________
30 Id., at pp. 43-46.
244
244

WITNESS:
Yes, sir.
ATTY. ESCANO:
Of course, my interest now is to whether or not there is a similar document to present that you were
employed by the other respondents like Filsyn Corporation?
WITNESS:
I have no document, sir.
ATTY. ESCANO:
What about Far Eastern Textile Mills?
WITNESS:
I have no document, sir.
ATTY. ESCANO:
And Sta. Rosa Textile Mills?
WITNESS:
There is no document, sir.31
xxxx
ATTY. ESCANO:
Q
Yes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from Far Eastern
Textiles, Inc.?
No, sir.
What about Sta. Rosa Textile Mills, do you have an employment contract from this company?
No, sir.
xxxx
And what about respondent Eric Hu. Have you had any contract of employment from Mr. Eric Hu?
Not a direct contract but I was taken in and I told to take over this from Mr. Eric Hu. Automatically, it
confirms that Mr. Eric Hu, in other words, was under the control of Mr. Patricio Lim at that period of
time.
Q
No documents to show, Mr. McLeod?
No. No documents, sir.32
_______________
31 TSN, 8 March 1996, pp. 49-51, 63-64.
32 TSN, 2 April 1996, pp. 56-58.
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VOL. 512, JANUARY 23, 2007
245
McLeod could have presented evidence to support his allegation of employer-employee relationship
between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or employment
contracts, payrolls, organization charts, SSS registration, personnel list, as well as testimony of co-
employees, may serve as evidence of employee status.33
It is a basic rule in evidence that parties must prove their affirmative allegations. While technical rules
are not strictly followed in the NLRC, this does not mean that the rules on proving allegations are
entirely ignored. Bare allegations are not enough. They must be supported by substantial evidence at
the very least.34
However, McLeod claims that “for purposes of determining employer liability, all private respondents
are one and the same employer” because: (1) they have the same address; (2) they are all engaged in
the same business; and (3) they have interlocking directors and officers.35
This assertion is untenable.
A corporation is an artificial being invested by law with a personality separate and distinct from that
of its stockholders and from that of other corporations to which it may be connected.36
While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is used
as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doc-
_______________
33 C.A. Azucena, Everyone’s Labor Code 57 (2001 ed.).
34 Gerlach v. Reuters Limited, Phils., G.R. No. 148542, 17 January 2005, 448 SCRA 535; Stolt-Nielsen
Marine Services, Inc. v. National Labor Relations Commission, 360 Phil. 881; 300 SCRA 713 (1998).
35 Rollo, pp. 29-30.
36 Martinez v. Court of Appeals, G.R. No. 131673, 10 September 2004, 438 SCRA 130.
246
246
trine applies only when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime,37 or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.38
To disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.39
Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate
veil.
Respondent corporations may be engaged in the same business as that of PMI, but this fact alone is
not enough reason to pierce the veil of corporate fiction.40
In Indophil Textile Mill Workers Union v. Calica,41 the Court ruled, thus:
“In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the
creation of the corporation is a devise to evade the application of the CBA between petitioner Union
and private respondent Company. While we do not discount the possibility of the similarities of the
businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by
petitioner in granting the relief sought. The fact that the
_______________
37 Jardine Davies, Inc. v. JRB Realty, Inc., G.R. No. 151438, 15 July 2005, 463 SCRA 555; Development
Bank of the Philippines v. Court of Appeals, 415 Phil. 538; 363 SCRA 307 (2001).
38 Indophil Textile Mill Workers Union v. Calica, G.R. No. 96490, 3 February 1992, 205 SCRA 697.
39 Lim v. Court of Appeals, 380 Phil. 60; 323 SCRA 102 (2000); Del Rosario v. National Labor Relations
Commission, G.R. No. 85416, 24 July 1990, 187 SCRA 777.
40 Complex Electronics Employees Association v. National Labor Relations Commission, 369 Phil. 666;
310 SCRA 403 (1999).
41 Supra.
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VOL. 512, JANUARY 23, 2007
247

businesses of private respondent and Acrylic are related, that some of the employees of the private
respondent are the same persons manning and providing for auxiliary services to the units of Acrylic,
and that the physical plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of
Acrylic.”42 (Emphasis supplied)
Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas,
Makati City,43 can be explained by the two companies’ stipulation in their Deed of Dation in Payment
with Lease that “simultaneous with the dation in payment, SRTC shall grant unto PMI the right to
lease the Assets under terms and conditions stated hereunder.”44
As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg., Paseo de
Roxas, Makati City,45 while FETMI held office at 18F, Tun Nan Commercial Building, 333 Tun Hwa
South Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did not have the same address as that of
PMI.
That respondent corporations have interlocking incorporators, directors, and officers is of no moment.
The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr.47 While
Patricio was Director and Board Chairman of Filsyn, SRTI, and PMI,48 he was never an officer of
FETMI.
_______________
42 Supra at p. 704.
43 Rollo, p. 59.
44 Id.
45 Rollo, p. 359; TSN, 10 December 1996, p. 58.
46 Rollo, p. 64.
47 Records, pp. 178, 281-282.
48 Rollo, p. 360; Records, pp. 106-109 and 172.
248
248
Eric Hu, on the other hand, was Director of Filsyn and SRTI.49 He was never an officer of PMI.
Marialen C. Corpuz, Filsyn’s Finance Officer,50 testified on cross-examination that (1) among all of
Filsyn’s officers, only she was the one involved in the management of PMI; (2) only she and Patricio
were the common officers between Filsyn and PMI; and (3) Filsyn and PMI are “two separate
companies.”51
Apolinario L. Posio, PMI’s Chief Accountant, testified that “SRTI is a different corporation from
PMI.”52
At any rate, the existence of interlocking incorporators, directors, and officers is not enough
considerations.53
In Del Rosario v. NLRC,54 the Court ruled that substantial identity of the incorporators of corporations
does not necessarily imply fraud.
In light of the foregoing, and there being no proof of employer-employee relationship between
McLeod and respondent corporations and Eric Hu, McLeod’s cause of action is only against his former
employer, PMI.
On Patricio’s personal liability, it is settled that in the absence of malice, bad faith, or specific
provision of law, a stock-
_______________
49 Rollo, pp. 360 and 362; Records, pp. 106-109.
50 TSN, 21 June 1996, p. 6.
51 Id., at pp. 54-57.
52 TSN, 10 December 1996, pp. 46 and 55.
53 Jardine Davies, Inc. v. JRB Realty, Inc., supra note 37; Velarde v. Lopez, Inc., G.R. No. 153886, 14
January 2004, 419 SCRA 422.
54 Supra note 39.

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249
holder or an officer of a corporation cannot be made personally liable for corporate liabilities.55
To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations
incurred by the corporation, acting through its directors, officers, and employees, are its sole
liabilities.56
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.57
Considering that McLeod failed to prove any of the foregoing exceptions in the present case, McLeod
cannot hold Patricio solidarily liable with PMI.
The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad faith is a
question of fact and is evidentiary. Bad faith does not connote bad judgment or neg-
_______________
55 Land Bank of the Philippines v. Court of Appeals, 416 Phil. 774; 364 SCRA 375 (2001); Complex
Electronics Employees Association v. National Labor Relations Commission, supra note 40.
56 Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, G.R. No. 113907, 20 April
2001, 357 SCRA 77.
57 H.L. Carlos Construction, Inc. v. Marina Properties Corporation, G.R. No. 147614, 29 January 2004,
421 SCRA 428; Powton Conglomerate, Inc. v. Agcolicol, 448 Phil. 643; 400 SCRA 523 (2003); Malayang
Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, supra.
250
250
ligence. It imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means
breach of a known duty through some ill motive or interest. It partakes of the nature of fraud.58
In the present case, there is nothing substantial on record to show that Patricio acted in bad faith in
terminating McLeod’s services to warrant Patricio’s personal liability. PMI had no other choice but to
stop plant operations. The work stoppage therefore was by necessity. The company could no longer
continue with its plant operations because of the serious business losses that it had suffered. The
mere fact that Patricio was president and director of PMI is not a ground to conclude that he should
be held solidarily liable with PMI for McLeod’s money claims.
The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,59 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 in
_______________
58 Malayang Samahan ng mga Manggagawa sa M. Greenfield v. Ramos, supra.
59 226 Phil. 199; 142 SCRA 269 (1986).
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251
clude 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.”60 (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,61 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 pay-
_______________
60 Id., at pp. 204-205; pp. 273-274.
61 325 Phil. 145; 254 SCRA 673 (1996).
252
252
ment 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.
253
VOL. 512, JANUARY 23, 2007
253

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.’ ”62 (Emphasis supplied)
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(c) 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:63
“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
_______________
62 Id., at pp. 158-160; pp. 683-684.
63 Supra note 57.

254
254
affairs; or (c) they incur conflict of interest, resulting in damages to the corporation, its stockholders
or other persons.
The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable
negligence, or that he acted outside the scope of his authority as company president. The unilateral
termination of the Contract during the existence of the TRO was indeed contemptible—for which MPC
should have merely been cited for contempt of court at the most—and a preliminary injunction would
have then stopped work by the second contractor. Besides, there is no showing that the unilateral
termination of the Contract was null and void.”64
McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay. Article
82, Title I, Book Three of the Labor Code, on Working Conditions and Rest Periods, provides:
“Coverage.—The provisions of this title shall apply to employees in all establishments and
undertakings whether for profit or not, but not to government employees, managerial employees,
field personnel, members of the family of the employer who are dependent on him for support,
domestic helpers, persons in the personal service of another, and workers who are paid by results as
determined by the Secretary of Labor in appropriate regulations.
As used herein, “managerial employees” refer to those whose primary duty consists of the
management of the establishment in which they are employed or of a department or subdivision
thereof, and to other officers or members of the managerial staff.” (Emphasis supplied)
As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the
coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation leave and
sick leave only if he and PMI had agreed on it. The payment of vacation leave and sick leave depends
on the policy of the employer or the agreement between the
_______________
64 Id., at pp. 442-443.
255
VOL. 512, JANUARY 23, 2007
255
employer and employee.65 In the present case, there is no showing that McLeod and PMI had an
agreement concerning payment of these benefits.
McLeod’s assertion of underpayment of his 13th month pay in December 1993 is unavailing.66 As
already stated, PMI stopped plant operations in 1992. McLeod himself testified that he received his
last salary from PMI in December 1992. After the termination of the employer-employee relationship
between McLeod and PMI, SRTI hired McLeod as consultant and not as employee. Since McLeod was
no longer an employee, he was not entitled to the 13th month pay.67 Besides, there is no evidence on
record that McLeod indeed received his alleged “reduced 13th month pay of P44,183.63” in December
1993.68
Also unavailing is McLeod’s claim that he was entitled to the “unpaid monetary equivalent of unused
plane tickets for the period covering 1989 to 1992 in the amount of P279,300.00.”69 PMI has no
company policy granting its offi-
_______________
65 St. Michael Academy v. National Labor Relations Commission, 354 Phil. 491; 292 SCRA 478 (1998).
66 Rollo, p. 13.
67 The pertinent portion of the Revised Guidelines on the Implementation of the 13th Month Pay
reads:
“Section 1 of Presidential Decree No. 851 is hereby modified to the extent that all employers are
hereby required to pay all their rank-and-file employees a 13th month pay not later than December
24 of every year.”
Before its modification by the aforecited Memorandum Order, P.D. No. 851 excludes from
entitlement to the 13th month pay those employees who were receiving a basic salary of more than
P1,000.00 a month. With the removal of the salary ceiling of P1,000.00, all rank-and-file employees
are now entitled to a 13th month pay regardless of the amount of basic salary that they receive in a
month if their employers are not otherwise exempted from the application of P.D. No. 851. (Emphasis
supplied)
68 TSN, 8 March 1996, p. 121.
69 Rollo, p. 15.
256
256
cers and employees expenses for trips abroad.70 That at one time PMI reimbursed McLeod for his and
his wife’s plane tickets in a vacation to London71 could not be deemed as an established practice
considering that it happened only once. To be considered a “regular practice,” the giving of the
benefits should have been done over a long period, and must be shown to have been consistent and
deliberate.72
In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co., Inc.,73 the
Court held that for a bonus to be enforceable, the employer must have promised it, and the parties
must have expressly agreed upon it, or it must have had a fixed amount and had been a long and
regular practice on the part of the employer.
In the present case, there is no showing that PMI ever promised McLeod that it would continue to
grant him the benefit in question. Neither is there any proof that PMI and McLeod had expressly
agreed upon the giving of that benefit.
McLeod’s reliance on Annex “M”74 can hardly carry the day for him. Annex “M”, which is McLeod’s
letter addressed to “Philip Lim, VP Administration,” merely contains McLeod’s proposals for the grant
of some benefits to supervisory and confidential employees. Contrary to McLeod’s allegation, Patricio
did not sign the letter. Hence, the letter does not embody any agreement between McLeod and the
management that would entitle McLeod to his money claims.
Neither can McLeod’s assertions find support in Annex “U”.75 Annex “U” is the Agreement which
McLeod and Univer-
_______________
70 TSN, 10 December 1996, pp. 21-22 and 68; TSN, 26 August 1996, pp. 66-67.
71 TSN, 10 December 1996, pp. 68-70; TSN, 26 August 1996, p. 17.
72 See Philippine Appliance Corporation (PHILACOR) v. Court of Appeals, G.R. No. 149434, 3 June
2004, 430 SCRA 525.
73 G.R. No. 155059, 29 April 2005, 457 SCRA 684.
74 Records, pp. 124-125.
75 Rollo, pp. 338-343.
257
VOL. 512, JANUARY 23, 2007
257
sal Textile Mills, Inc. executed in 1959. The Agreement merely contains the renewal of the service
agreement which the parties signed in 1956.
McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced without his
consent.
McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be reduced.
McLeod said that Philip told him that “they were short in finances; that it would be repaid.”76 Were
McLeod not amenable to that reduction in salary, he could have immediately resigned from his work
in PMI.
McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod testified that
PMI was not able to operate from August 1989 to 1992 because of the strike. Even before 1989, as
Vice President of PMI, McLeod was aware that the company had incurred “huge loans from DBP.”77
As it happened, McLeod continued to work with PMI. We find it pertinent to quote some portions of
Apolinario Posio’s testimony, to wit:
You also stated that before the period of the strike as shown by annex “K” of the reply filed by the
complainant which was I think a voucher, the salary of Mr. McLeod was roughly P60,000.00 a month?
Yes, sir.
And as shown by their annex “L” to their reply, that this was reduced to roughly P50,000.00 a month?
A
Yes, sir.
You stated that this was indeed upon the instruction by the Vice-President of Peggy Mills at that time
and that was Mr. Philip Lim, would you not?
Yes, sir.
_______________
76 TSN, 15 April 1996, pp. 22-23.
77 Id., at pp. 13-17.
258
258
Q
Of your own personal knowledge, can you say if this was, in fact, by agreement between Mr. Philip
Lim or any other officers of Peggy Mills and Mr. McLeod?
If I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr. Philip Lim
and Mr. McLeod, because the voucher that we prepared was actually acknowledged by Mr. McLeod,
the reduced amount was acknowledged by Mr. McLeod thru the voucher that we prepared.
In other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received the reduced
amount of P50,000.00 by signing the voucher and receiving the amount in question?
Yes, sir.
As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of this reduced
amount of his salary at that time?
I don’t have any personal knowledge of any complaint, sir.

Q
At least, that is in so far as you were concerned, he said nothing when he signed the voucher in
question?
Yes, sir.
Now, you also stated that the reason for what appears to be an agreement between Peggy Mills and
Mr. McLeod in so far as the reduction of his salary from P60,000.00 to P50,000.00 a month was
because he would have a reduced number of working days in view of the strike at Peggy Mills, is that
right?
Yes, sir.
And that this was so because on account of the strike, there was no work to be done in the company?
A
Yes, sir.78
xxxx
Now, you also stated if you remember during the first time that you testified that in the beginning,
the monthly
_______________
78 TSN, 26 August 1996, pp. 17-21.
259
VOL. 512, JANUARY 23, 2007
259
salary of the complainant was P60,000.00, is that correct?
A
Yes, sir.
And because of the long period of the strike, when there was no work to be done, by agreement with
the complainant, his monthly salary was adjusted to only P50,495 because he would not have to
report for work on Saturday. Do you remember having made that explanation?
Yes, sir.
You also stated that the complainant continuously received his monthly salary in the adjusted amount
of P50,495.00 monthly signing the necessary vouchers or pay slips for that without complaining, is
that not right, Mr. Posio?
Yes, sir.79
Since the last salary that McLeod received from PMI was P50,495, that amount should be the basis in
computing his retirement benefits. McLeod must be credited only with his service to PMI as it had a
juridical personality separate and distinct from that of the other respondent corporations.
Since PMI has no retirement plan,80 we apply Section 5, Rule II of the Rules Implementing the New
Retirement Law which provides:
5.1 In the absence of an applicable agreement or retirement plan, an employee who retires pursuant
to the Act shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for
every year of service, a fraction of at least six (6) months being considered as one whole year.
5.2 Components of One-half (1/2) Month Salary.—For the purpose of determining the minimum
retirement pay due an employee under this Rule, the term “one-half month salary” shall include all of
the following:
_______________
79 TSN, 10 December 1996, pp. 77-79.
80 TSN, 18 March 1997, p. 23.
260
260
(a)Fifteen (15) days salary of the employee based on his latest salary rate. x x x
With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a retirement
pay equivalent to 1/2 month salary for every year of service based on his latest salary rate of P50,495
a month.
There is no basis for the award of moral damages.
Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is
guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligations. The breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive.81
From the records of the case, the Court finds no ultimate facts to support a conclusion of bad faith on
the part of PMI.
Records disclose that PMI had long offered to pay McLeod his money claims. In their Comment,
respondents assert that they offered to pay McLeod the sum of P840,000, as “separation benefits, and
not P300,000, if only to buy peace and to forestall any complaint” that McLeod may initiate before the
NLRC. McLeod admitted at the hearing before the Labor Arbiter that PMI has made this offer—
ATTY. ESCANO:
x x x According to your own statement in your Position Paper and I am referring to page 8, your
unpaid retirement benefit for fourteen (14) years of service atP60,000.00 per year is P840,000.00, is
that correct?
WITNESS:
That is correct, sir.
ATTY. ESCANO:
And this amount is correct P840,000.00, according to your Position Paper?
_______________
81 Philippine National Bank v. Pike, G.R. No. 157845, 20 September 2005, 470 SCRA 328.
261
VOL. 512, JANUARY 23, 2007
261
WITNESS:
That is correct, sir.
ATTY. ESCANO:
The question I want to ask is, are you aware that this amount was offered to you sometime last year
through your own lawyer, my good friend, Atty. Avecilla, who is right here with us?
WITNESS:
I was aware, sir.
ATTY. ESCANO:
So this was offered to you, is that correct?
WITNESS:
I was told that a fixed sum of P840,000.00 was offered.
ATTY. ESCANO:
And, of course, the reason, if I may assume, that you declined this offer was that, according to you,
there are other claims which you would like to raise against the Respondents which, by your
impression, they were not willing to pay in addition to this particular amount?
WITNESS:
Yes, sir.
ATTY. ESCANO:
The question now is, if the same amount is offered to you by way of retirement which is exactly what
you stated in your own Position Paper, would you accept it or not?
WITNESS:
Not on the concept without all the basic benefits due me, I will refuse.82
xxxx
ATTY. ROXAS:
Q
You mentioned in the cross-examination of Atty. Escano that you were offered the separation pay in
1994, is that correct, Mr. Witness?
_______________
82 TSN, 8 March 1996, pp. 42-45.
262
262
WITNESS:
I was offered a settlement of P300,000.00 for complete settlement and that was I think in January or
February 1994, sir.
ATTY. ESCANO:
No. What was mentioned was the amount of P840,000.00.
WITNESS:
What did you say, Atty. Escano?
ATTY. ESCANO:
The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .
WITNESS:
May I ask that the question be clarified, your Honor?
ATTY. ROXAS:
Q
You mentioned that you were offered for the settlement of your claims in 1994 for P840,000.00, is
that right, Mr.
Witness?
During that period in time, while the petition in this case was ongoing, we already filed a case at that
period of time, sir. There was a discussion. To the best of my knowledge, they are willing to settle for
P840,000.00 and based on what the Attorney told me, I refused to accept because I believe that my
position was not in anyway due to a compromise situation to the benefits I am entitled to.83
Hence, the awards for exemplary damages and attorney’s fees are not proper in the present case.84
That respondent corporations, in their appeal to the NLRC, did not serve a copy of their memorandum
of appeal upon PMI is of no moment. Section 3(a), Rule VI of the NLRC New Rules of Procedure
provides:
_______________
83 TSN, 15 April 1996, pp. 65-67.
84 Special Police and Watchmen Asso. (PLUM) Federation v. National Labor Relations Commission,
344 Phil. 384; 278 SCRA 828 (1997).
263
VOL. 512, JANUARY 23, 2007
263
“Requisites for Perfection of Appeal.—(a) The appeal shall be filed within the reglementary period as
provided in Section 1 of this Rule; shall be under oath with proof of payment of the required appeal
fee and the posting of a cash or surety bond as provided in Section 5 of this Rule; shall be
accompanied by a memorandum of appeal x x x and proof of service on the other party of such
appeal.” (Emphasis supplied)
The “other party” mentioned in the Rule obviously refers to the adverse party, in this case, McLeod.
Besides, Section 3, Rule VI of the Rules which requires, among others, proof of service of the
memorandum of appeal on the other party, is merely a rundown of the contents of the required
memorandum of appeal to be submitted by the appellant. These are not jurisdictional
requirements.85
WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No.
55130, with the following MODIFICATIONS: (a) the retirement pay of John F. McLeod should be
computed at 1/2 month salary for every year of service for 12 years based on his salary rate of
P50,495 a month; (b) Patricio L. Lim is absolved from personal liability; and (c) the awards for moral
and exemplary damages and attorney’s fees are deleted. No pronouncement as to costs.
SO ORDERED.
Carpio-Morales, J., No Part. Concurred in assailed decision.

_______________
85 Del Mar Domestic Enterprises v. National Labor Relations Commission, 347 Phil. 277; 282 SCRA 602
(1997).
264
264
Toriano vs. Trieste, Sr.
Notes.—The merger does not become effective upon the mere agreement of the constituent
corporations—the merger shall be effective only upon the issuance by the SEC of a certificate of
merger. (Associated Bank vs. Court of Appeals, 291 SCRA 511 [1998])
Ordinarily in the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business. Merger shall only be effective upon the issuance of a
certificate of merger by the Securities and Exchange Commission (SEC). Upon the effectivity of the
merger, the absorbed corporation ceases to exist but its rights, and the properties as well as the
liabilities shall be taken and deemed transferred to and vested in the surviving corporation. (Poliand
Industrial Limited vs. National Development Company, 467 SCRA 500 [2005])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. McLeod vs. National Labor Relations
Commission, 512 SCRA 222, G.R. No. 146667 January 23, 2007
G.R. No. 167560. September 17, 2008.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. DOMINADOR MENGUITO, respondent.
Corporation Law; Piercing the Veil of Corporate Fiction; The Court has shredded the veil of corporate
identity and rule that where a corporation is merely an adjunct, business conduit or alter ego of
another corporation or when they practice fraud on our internal revenue laws, the fiction of their
separate and distinct corporate identities shall be disregarded, and both entities treated as one
taxable person, subject to assessment for the same taxable transaction.—In a number of cases, the
Court has shredded the veil of corporate identity and ruled that where a corporation is merely an
adjunct, business conduit or alter ego of another corporation or when they practice fraud on our
internal revenue laws, the fiction of their separate and distinct corporate identities shall be
disregarded, and both entities treated as one taxable person, subject to assessment for the same
taxable transaction.
Same; Taxation; When the owner of one directs and controls the operations of the other, and the
payments effected or received by one are for the accounts due from or payable to the other, or when
the properties or products of one are all sold to the other, which in turn immediately sells them to the
public, as substantial evidence in support of the finding that the two are actually one juridical taxable
personality.—The Court considers the presence of the following circumstances, to wit: when the
owner of one directs and controls the operations of the other, and the payments effected or received
by one are for the accounts due from or payable to the other; or when the properties or products of
one are all sold to the other, which in turn immediately sells them to the public, as substantial
evidence in support of the finding that the two are actually one juridical taxable personality.
Taxation; Under Section 11 of Revenue Regulation No. 12-85, respondent’s failure to give written
notice of change of address bound him to whatever communications were sent to the address
appearing
_______________
* THIRD DIVISION.
462
462
Commissioner of Internal Revenue vs. Menguito
in the tax returns for the period involved in the investigation.—As to the address indicated on the
assessment notices, respondent cannot question the same for it is the said address which appears in
its percentage tax returns. While respondent claims that he had earlier notified petitioner of a change
in his business address, no evidence of such written notice was presented. Under Section 11 of
Revenue Regulation No. 12-85, respondent’s failure to give written notice of change of address bound
him to whatever communications were sent to the address appearing in the tax returns for the period
involved in the investigation.
Same; It should be emphasized that the stringent requirement that an assessment notice be
satisfactorily proven to have been issued and released or, if receipt thereof is denied, that said
assessment notice have been served on the taxpayer, applies only to formal assessments prescribed
under Section 228 of the National Internal Revenue Code, but not to post-reporting notices or pre-
assessment notices.—While the lack of a post-reporting notice and pre-assessment notice is a
deviation from the requirements under Section 1 and Section 2 of Revenue Regulation No. 12-85, the
same cannot detract from the fact that formal assessments were issued to and actually received by
respondents in accordance with Section 228 of the National Internal Revenue Code which was in
effect at the time of assessment. It should be emphasized that the stringent requirement that an
assessment notice be satisfactorily proven to have been issued and released or, if receipt thereof is
denied, that said assessment notice have been served on the taxpayer, applies only to formal
assessments prescribed under Section 228 of the National Internal Revenue Code, but not to post-
reporting notices or pre-assessment notices. The issuance of a valid formal assessment is a
substantive prerequisite to tax collection, for it contains not only a computation of tax liabilities but
also a demand for payment within a prescribed period, thereby signaling the time when penalties and
interests begin to accrue against the taxpayer and enabling the latter to determine his remedies
therefor. Due process requires that it must be served on and received by the taxpayer.
Same; Notices; A post-reporting notice and pre-assessment notice do not bear the gravity of a formal
assessment notice.—A post-reporting notice and pre-assessment notice do not bear the gravity of a
formal assessment notice. The post-reporting notice and pre-
463
463
assessment notice merely hint at the initial findings of the BIR against a taxpayer and invites the latter
to an “informal” conference or clarificatory meeting. Neither notice contains a declaration of the tax
liability of the taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no
prejudice on the taxpayer for as long as the latter is properly served a formal assessment notice. In
the case of respondent, a formal assessment notice was received by him as acknowledged in his
Petition for Review and Joint Stipulation; and, on the basis thereof, he filed a protest with the BIR,
Baguio City and eventually a petition with the CTA.
The Solicitor General for petitioner.
Cayetano, Sebastian, Ata, Dado & Cruz for respondent.

AUSTRIA-MARTINEZ, J.:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing
the March 31, 2005 Decision1 of the Court of Appeals (CA) which reversed and set aside the Court of
Tax Appeals (CTA) April 2, 2002 Decision2 and October 10, 2002 Resolution3 ordering Dominador
Menguito (respondent) to pay the Commissioner of Internal Revenue (petitioner) deficiency income
and percentage taxes and delinquency interest.
Based on the Joint Stipulation of Facts and Admissions4 of the parties, the CTA summarized the
factual and procedural antecedents of the case, the relevant portions of which read:
_______________
1 Penned by Associate Justice Vicente S.E. Veloso and concurred in by Associate Justices Roberto A.
Barrios and Amelita G. Tolentino; Rollo, p. 10.
2 Id., at p. 82.
3 Id., at p. 101.
4 CA Rollo, pp. 143-145.
464
464

“Petitioner Dominador Menguito [herein respondent] is a Filipino citizen, of legal age, married to
Jeanne Menguito and is engaged in the restaurant and/or cafeteria business. For the years 1991, 1992
and 1993, its principal place of business was at Gloriamaris, CCP Complex, Pasay City and later
transferred to Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy
Aquino International Airport, Pasay City. During the same years, he also operated a branch at Club
John Hay, Baguio City carrying the business name of Copper Kettle Cafeteria Specialist (Joint
Stipulation of Facts and Admissions, p. 133, CTA records).
xxxx
Subsequently, BIR Baguio received information that Petitioner [herein respondent] has undeclared
income from Texas Instruments and Club John Hay, prompting the BIR to conduct another
investigation. Through a letter dated July 28, 1997, Spouses Dominador Menguito and Jeanne
Menguito (Spouses Menguito) were informed by the Assessment Division of the said office that they
have underdeclared sales totaling P48,721,555.96 (Exhibit “11”, p. 83, BIR records). This was followed
by a Preliminary Ten (10) Day Letter dated August 11, 1997, informing Petitioner [herein respondent]
that in the investigation of his 1991, 1992 and 1993 income, business and withholding tax case, it was
found out that there is still due from him the total sum of P34,193,041.55 as deficiency income and
percentage tax.
On September 2, 1997, the assessment notices subject of the instant petition were issued. These were
protested by Ms. Jeanne Menguito, through a letter dated September 28, 1997 (Exhibit “14,” p. 112,
BIR Records), on the ground that the 40% deduction allowed on their computed gross revenue, is
unrealistic. Ms. Jeanne Menguito requested for a period of thirty (30) days within which to coordinate
with the BIR regarding the contested assessment.
On October 10, 1997, BIR Baguio replied, informing the Spouses Menguito that the source of
assessment was not through the disallowance of claimed expenses but on data received from Club
John Hay and Texas Instruments Phils., Inc. Said letter gave the spouses ten (10) days to present
evidence (Exhibit “15,” p. 110, BIR Records).
465
465
In an effort to clear an alleged confusion regarding Copper Kettle Cafeteria Specialist (CKCS) being a
sole proprietorship owned by the Spouses, and Copper Kettle Catering Services, Inc. (CKCS, Inc.) being
a corporation with whom Texas Instruments and Club John Hay entered into a contract, Petitioner
[respondent] submitted to BIR Baguio a photocopy of the SEC Registration of Copper Kettle Catering
Services, Inc. on March 23, 1999 (pp. 134-141, BIR Records).
On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito, informing the latter that a
reinvestigation or reconsideration cannot be given due course by the mere submission of an
uncertified photocopy of the Certificate of Incorporation. Thus, it avers that the amendment issued is
still valid and enforceable.
On May 26, 1999, Petitioner [respondent] filed the present case, praying for the cancellation and
withdrawal of the deficiency income tax and percentage tax assessments on account of prescription,
whimsical factual findings, violation of procedural due process on the issuance of assessment notices,
erroneous address of notices and multiple credit/ investigation by the Respondent [petitioner] of
Petitioner’s [respondent’s] books of accounts and other related records for the same tax year.
Instead of filing an Answer, Respondent [herein petitioner] moved to dismiss the instant petition on
July 1, 1999, on the ground of lack of jurisdiction. According to Respondent [petitioner], the
assessment had long become final and executory when Petitioner [respondent] failed to comply with
the letter dated October 10, 1997.
Petitioner opposed said motion on July 21, 1999, claiming that the final decision on Petitioner’s
[respondent’s] protest is the April 12, 1999 letter of the Baguio Regional Office; therefore, the filing of
the action within thirty (30) days from receipt of the said letter was seasonably filed. Moreover,
Petitioner [respondent] asserted that granting that the April 12, 1999 letter in question could not be
construed to mean as a denial or final decision of the protest, still Petitioner’s [respondent’s] appeal
was timely filed since Respondent [petitioner] issued a Warrant of Distraint and/or Levy against the
Petitioner [respondent] on May 3, 1999, which warrant constituted a final decision of the Respondent
[petitioner] on the protest of the taxpayer.
On September 3, 1999, this Court denied Respondent’s [petitioner’s] ‘Motion to Dismiss’ for lack of
merit.
466
466
Respondent [petitioner] filed his Answer on September 24, 1999, raising the following Special and
Affirmative Defenses:
xxxx
5. Investigation disclosed that for taxable years 1991, 1992 and 1993, petitioner [respondent] filed
false or fraudulent income and percentage tax returns with intent to evade tax by under declaring his
sales.
6. The alleged duplication of investigation of petitioner [respondent] by the BIR Regional Office in
Baguio City and by the Revenue District Office in Pasay City is justified by the finding of fraud on the
part of the petitioner [respondent], which is an exception to the provision in the Tax Code that the
examination and inspection of books and records shall be made only once in a taxable year (Section
235, Tax Code). At any rate, petitioner [respondent], in a letter dated July 18, 1994, waived his right to
the consolidation of said investigation.
7. The aforementioned falsity or fraud was discovered on August 5, 1997. The assessments were
issued on September 2, 1997, or within ten (10) years from the discovery of such falsity or fraud
(Section 223, Tax Code). Hence, the assessments have not prescribed.
8. Petitioner’s [respondent’s] allegation that the assessments were not properly addressed is
rendered moot and academic by his acknowledgment in his protest letter dated September 28, 1997
that he received the assessments.
9. Respondent [petitioner] complied with the provisions of Revenue Regulations No. 12-85 by
informing petitioner [respondent] of the findings of the investigation in letters dated July 28, 1997
and August 11, 1997 prior to the issuance of the assessments.
10. Petitioner [respondent] did not allege in his administrative protest that there was a duplication
of investigation, that the assessments have prescribed, that they were not properly addressed, or that
the provisions of Revenue Regulations No. 12-85 were not observed. Not having raised them in the
administrative level, petitioner [respondent] cannot raise the same for the first
467
467
time on appeal (Aguinaldo Industries Corp. vs. Commissioner of Internal Revenue, 112 SCRA 136).
11. The assessments were issued in accordance with law and regulations.
12. All presumptions are in favor of the correctness of tax assessments (CIR vs. Construction
Resources of Asia, Inc., 145 SCRA 67), and the burden to prove otherwise is upon petitioner
[respondent].”5 (Emphasis supplied)
On April 2, 2002, the CTA rendered a Decision, the dispositive portion of which reads:
“Accordingly, Petitioner [herein respondent] is ORDERED to PAY the Respondent [herein petitioner]
the amount of P11,333,233.94 and P2,573,655.82 as deficiency income and percentage tax liabilities,
respectively for taxable years 1991, 1992 and 1993 plus 20% delinquency interest from October 2,
1997 until full payment thereof.
SO ORDERED.”6
Respondent filed a motion for reconsideration but the CTA denied the same in its Resolution of
October 10, 2002.7
Through a Petition for Review8 filed with the CA, respondent questioned the CTA Decision and
Resolution mainly on the ground that Copper Kettle Catering Services, Inc. (CKCS, Inc.) was a separate
and distinct entity from Copper Kettle Cafeteria Specialist (CKCS); the sales and revenues of CKCS, Inc.
could not be ascribed to CKCS; neither may the taxes due from one, charged to the other; nor the
notices to be served on the former, coursed through the latter.9 Respondent cited the Joint
Stipulation in which petitioner acknowledged that its
_______________
5 CTA Decision, Rollo, pp. 82, 84-87.
6 Id., at p. 100.
7 CA Rollo, p. 106.
8 Id., at p. 107.
9 Petition for Review with the CA, Rollo, pp. 115-123.
468
468
(respondent’s) business was called Copper Kettle Cafeteria Specialist, not Copper Kettle Catering
Services, Inc.10
Based on the unrefuted11 CTA summary, the CA rendered the Decision assailed herein, the dispositive
portion of which reads:
“WHEREFORE, the instant petition is GRANTED. Reversing the assailed Decision dated April 2, 2002
and Resolution dated October 10, 2002, the deficiency income tax and percentage income tax
assessments against petitioner in the amounts of P11,333,233.94 and P2,573,655.82 for taxable years
1991, 1992 and 1993 plus the 20% delinquency interest thereon are annulled.
SO ORDERED.”12
Petitioner filed a motion for reconsideration but the CA denied the same in its October 10, 2002
Resolution.13
Hence, herein recourse to the Court for the reversal of the CA decision and resolution on the following
grounds:
The Court of Appeals erred in reversing the decision of the Court of Tax Appeals and in holding that
Copper Kettle Cafeteria Specialist owned by respondent and Copper Kettle Catering Services, Inc.
owned and managed by respondent’s wife are not one and the same.
II
The Court of Appeals erred in holding that respondent was denied due process for failure of petitioner
to validly serve respondent with the post-reporting and pre-assessment notices as required by law.
On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are one and the same corporation
because “[t]he con-
_______________
10 Petition, CA Rollo, pp. 48-50.
11 See Petition, Rollo, pp. 4-12; respondent did not appeal from the CA Decision.
12 Id., at pp. 80-81.
13 Supra note 3.
469
469
tract between Texas Instruments and Copper Kettle was signed by petitioner’s [respondent’s] wife,
Jeanne Menguito as proprietress.”14
However, the CA reversed the CTA on these grounds:
“Respondent’s [herein petitioner’s] allegation that Copper Kettle Catering Services, Inc. and Copper
Kettle Cafeteria Specialists are not distinct entities and that the under-declared sales/revenues of
Copper Kettle Catering Services, Inc. pertain to Copper Kettle Cafeteria Specialist are belied by the
evidence on record. In the Joint Stipulation of Facts submitted before the tax court, respondent
[petitioner] admitted “that petitioner’s [herein respondent’s] business name is Copper Kettle
Cafeteria Specialist.”
Also, the Certification of Club John Hay and Letter dated July 9, 1997 of Texas Instruments both
addressed to respondent indicate that these companies transacted with Copper Kettle Catering
Services, Inc., owned and managed by JEANNE G. MENGUITO, NOT petitioner Dominador Menguito.
The alleged under-declared sales income subject of the present assessments were shown to have
been earned by Copper Kettle Catering Services, Inc. in its commercial transaction with Texas
Instruments and Camp John Hay; NOT by petitioner’s dealing with these companies. In fact, there is
nothing on record which shows that Texas Instruments and Camp John Hay conducted business
relations with Copper Kettle Cafeteria Specialist, owned by herein petitioner Dominador Menguito. In
the absence, therefore, of clear and convincing evidence showing that Copper Kettle Cafeteria
Specialist and Copper Kettle Catering Services, Inc. are one and the same, respondent can NOT validly
impute alleged underdeclared sales income earned by Copper Kettle Catering Services, Inc. as sales
income of Copper Kettle Cafeteria Specialist.”15 (Emphasis supplied)
Respondent is adamant that the CA is correct. Many times in the past, the BIR had treated CKCS
separately from CKCS, Inc.: from May 1994 to June 1995, the BIR sent audit teams to examine the
books of account and other accounting
_______________
14 CTA Decision, Rollo, p. 93.
15 CA Decision, id., at pp. 24-26.
470
470
records of CKCS, and based on said audits, respondent was held liable for deficiency taxes, all of which
he had paid.16 Moreover, the certifications17 issued by Club John Hay and Texas Instruments identify
the concessionaire operating therein as CKCS, Inc., owned and managed by his spouse Jeanne
Menguito, and not CKCS.18
Petitioner impugns the findings of the CA, claiming that these are contradicted by evidence on record
consisting of a reply to the September 2, 1997 assessment notice of BIR Baguio which Jeanne
Menguito wrote on September 28, 1997, to wit:
“We are in receipt of the assessment notice you have sent us, dated September 2, 1997. Having taken
hold of the same only now following our travel overseas, we were not able to respond immediately
and manifest our protest. Also, with the impending termination of our businesses at 19th Tee, Club
John Hay and at Texas Instruments, Loakan, Baguio City, we have already started the transfer of our
records and books in Baguio City to Manila that we will need more time to review and sort the records
that may have to be presented relative to the assessment x x x.”19 (Emphasis supplied)
Petitioner insists that said reply confirms that the assessment notice is directed against the businesses
which she and her husband, respondent herein, own and operate at Club John Hay and Texas
Instruments, and establishes that she is protesting said notice not just for herself but also for
respondent.20
Moreover, petitioner argues that if it were true that CKCS, Inc. and CKCS are separate and distinct
entities, respondent could have easily produced the articles of incorporation of
_______________
16 Memorandum for respondent, id., at pp. 274-276.
17 Exhibits “10” and “11,” id., at pp. 170-171.
18 Rollo, pp. 270-272.
19 Exhibit “14,” BIR Records, p. 112,
20 Petition, Rollo, pp. 49-50.
471
471
CKCS, Inc.; instead, what respondent presented was merely a photocopy of the incorporation
articles.21 Worse, petitioner adds, said document was not offered in evidence before the CTA, but
was presented only before the CA.22
Petitioner further insists that CKCS, Inc. and CKCS are merely employing the fiction of their separate
corporate existence to evade payment of proper taxes; that the CTA saw through their ploy and
rightly disregarded their corporate individuality, treating them instead as one taxable entity with the
same tax base and liability;23 and that the CA should have sustained the CTA.24
In effect, petitioner would have the Court resolve a purely factual issue25 of whether or not there is
substantial evidence that CKCS, Inc. and CKCS are one and the same taxable entity.
As a general rule, the Court does not venture into a trial of facts in proceedings under Rule 45 of the
Rules of Courts, for its only function is to review errors of law.26 The Court declines to inquire into
errors in the factual assessment of the CA, for the latter’s findings are conclusive, especially when
these are synonymous to those of the CTA.27 But when the CA contradicts the factual findings of the
CTA, the Court deems it necessary to determine whether the CA was justified in doing so, for one
basic rule in taxation is that the factual findings of the CTA, when supported by substantial evidence,
_______________
21 Id., at pp. 50-51.

22 Id., at pp. 51-52; Memorandum for petitioner, id., at pp. 243-245.
23 Rollo, pp. 245-246.
24 Petition, id., at pp. 57-58.
25 ASJ Corporation v. Sps. Evangelista, G.R. No. 158086, February 14, 2008, 545 SCRA 300.
26 Twin Towers Condominium Corporation v. Court of Appeals, 446 Phil. 280; 398 SCRA 205 (2003).
27 Commissioner of Internal Revenue v. Sekisui Jushi Philippines, Inc., G.R. No. 149671, July 21, 2006,
496 SCRA 206.
472
472
will not be disturbed on appeal unless it is shown that the CTA committed gross error in its
appreciation of facts.28
The Court finds that the CA gravely erred when it ignored the substantial evidence on record and
reversed the CTA.
In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a
corporation is merely an adjunct, business conduit or alter ego of another corporation or when they
practice fraud on our internal revenue laws,29 the fiction of their separate and distinct corporate
identities shall be disregarded, and both entities treated as one taxable person, subject to assessment
for the same taxable transaction.
The Court considers the presence of the following circumstances, to wit: when the owner of one
directs and controls the operations of the other, and the payments effected or received by one are for
the accounts due from or payable to the other;30 or when the properties or products of one are all
sold to the other, which in turn immediately sells them to the public,31 as substantial evidence in
support of the finding that the two are actually one juridical taxable personality.
In the present case, overwhelming evidence supports the CTA in disregarding the separate identity of
CKCS, Inc. from CKCS and in treating them as one taxable entity.
_______________
28 Commissioner of Internal Revenue v. Manila Electric Co., G.R. No. 121666, October 10, 2007, 535
SCRA 399; Commissioner of Internal Revenue v. Bank of the Philippine Islands, G.R. No. 134062, April
17, 2007; 521 SCRA 373.
29 Commissioner of Internal Revenue v. Norton and Harrison Company, No. L-17618, August 31, 1964,
11 SCRA 714.
30 Commissioner of Internal Revenue v. Norton and Harrison Company, supra note 29.
31 Liddell & Co., Inc. v. Commissioner of Internal Revenue, 112 Phil. 524; 2 SCRA 632 (1961). See also
Commissioner of Internal Revenue v. Toda, G.R. No. 147188, September 14, 2004, 438 SCRA 290.
473
473
First, in respondent’s Petition for Review before the CTA, he expressly admitted that he “is engaged in
restaurant and/or cafeteria business” and that “[i]n 1991, 1992 and 1993, he also operated a branch
at Club John Hay, Baguio City with a business name of Copper Kettle Cafeteria Specialist.”32
Respondent repeated such admission in the Joint Stipulation.33 And then in Exhibit “1”34 for
petitioner, a July 18, 1994 letter sent by Jeanne Menguito to BIR, Baguio City, she stated thus:
“in connection with the investigation of Copper Kettle Cafeteria Specialist which is located at 19th Tee
Club John Hay, Baguio City under letter of authority nos. 0392897, 0392898, and 0392690 dated May
16, 1994, investigating my income, business, and withholding taxes for the years 1991, 1992, and
1993.”35 (Emphasis supplied)
Jeanne Menguito signed the letter as proprietor of Copper Kettle Cafeteria Specialist.36
Related to Exhibit “1” is petitioner’s Exhibit “14,” which is another letter dated September 28, 1997, in
which Jeanne Menguito protested the September 2, 1997 assessment notices directed at Copper
Kettle Cafeteria Specialist and referred to the latter as “our business at 19th Tee Club John Hay and at
Texas Instruments.”37 Taken along with the Joint Stipulation, Exhibits “A” through “C” and the August
3, 1993 Certification of Camp John Hay, Exhibits “1” and “14,” confirm that respondent, together with
his spouse Jeanne Menguito, own, operate and manage a branch of Copper Kettle Cafeteria Specialist,
also called Copper Kettle Catering Services at Camp John Hay.
_______________
32 CTA Records, p. 1.
34 BIR Records, p. 0180.
35 Petitioner’s Formal Officer of Evidence, CA Rollo, p. 217.
36 Rollo, p. 170.
37 Petition, Rollo, pp. 49-50.
474
474
Moreover, in Exhibits “A” to “A-1,”38 Exhibits “B” to “B-1”39 and Exhibits “C” to “C-1”40 which are
lists of concessionaires that operated in Club John Hay in 1992, 1993 and 1991, respectively,41 it
appears that there is no outlet with the name “Copper Kettle Cafeteria Specialist” as claimed by
respondent. The name that appears in the lists is “19th TEE CAFETERIA (Copper Kettle, Inc.).”
However, in the light of the express admission of respondent that in 1991, 1992 and 1993, he
operated a branch called Copper Kettle Cafeteria Specialist in Club John Hay, the entries in Exhibits
“A” through “C” could only mean that said branch refers to “19th Tee Cafeteria (Copper Kettle, Inc.).”
There is no evidence presented by respondent that contradicts this conclusion.
In addition, the August 9, 1993 Certification issued by Club John Hay that “COPPER KETTLE CATERING
SERVICES owned and managed by MS. JEANNE G. MENGUITO is a concessionaire in John Hay since
July 1991 up to the present and is operating the outlet 19TH TEE CAFETERIA AND THE TEE BAR”42
convincingly establishes that respondent’s branch which he refers to as Copper Kettle Cafeteria
Specialist at Club John Hay also appears in the latter’s records as “Copper Kettle Catering Services”
with an outlet called “19th Tee Cafeteria and The Tee Bar.”
Second, in Exhibit “8”43 and Exhibit “E,”44 Texas Instruments identified the concessionaire operating
its canteen as “Copper Kettle Catering Services, Inc.”45 and/or “COPPER KETTLE CAFETERIA
SPECIALIST SVCS.”46 It being settled
_______________
39 Id., at p. 211.
40 Id., at p. 210.
41 Respondent’s Formal Officer of Evidence, id., at p. 206.
42 Rollo, p. 170.
43 Rollo, p. 171.
45 Supra note 34.

46 Supra note 35.
475
475
that respondent’s “Copper Kettle Cafeteria Specialist” is also known as “Copper Kettle Catering
Services,” and that respondent and Jeanne Menguito both own, manage and act as proprietors of the
business, Exhibit “8” and Exhibit “E” further establish that, through said business, respondent also had
taxable transactions with Texas Instruments.
In view of the foregoing facts and circumstances, the Articles of Incorporation of CKCS, Inc.—a
certified true copy of which respondent attached only to his Reply filed with the CA47—cannot
insulate it from scrutiny of its real identity in relation to CKCS. It is noted that said Articles of
Incorporation of CKCS, Inc. was issued in 1989, but documentary evidence indicate that after said
date, CKCS, Inc. has also assumed the name CKCS, and vice-versa. The most concrete indication of this
practice is the 1991 Quarterly Percentage Tax Returns covering the business name/trade “19th Tee
Camp John Hay.” In said returns, the taxpayer is identified as “Copper Kettle Cafeteria Specialist”48 or
CKCS, not CKCS, Inc. Yet, in several documents already cited, the purported owner of 19th Tee Bar at
Club John Hay is CKCS, Inc.
All these pieces of evidence buttress the finding of the CTA that in 1991, 1992 and 1993, respondent,
together with his spouse Jeanne Menguito, owned and operated outlets in Club John Hay and Texas
Instruments under the names Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering
Services or Copper Kettle Catering Services, Inc.
Turning now to the second issue.

In respondent’s Petition for Review with the CTA, he questioned the validity of the Assessment
Notices,49 all dated September 2, 1997, issued by BIR, Baguio City against him on the following
grounds:
_______________
47 CA Rollo, pp. 358-367.
48 BIR Records, pp. 0004-0007.
49 Annexes “G,” “H,” “I,” “J,” “K” and “L,” CTA Records, pp. 13-18.
476
476
1. The assessment notices, based on income and percentage tax returns filed for 1991, 1992 and
1993, were issued beyond the three-year prescriptive period under Section 203 of the Tax Code;50
2. The assessment notices were addressed to Copper Kettle Specialist, Club John Hay, Baguio City,
despite notice to petitioner that respondent’s principal place of business was at the CCP Complex,
Pasay City.51
3. The assessment notices were issued in violation of the requirement of Revenue Regulations No.
12-85, dated November 27, 1985, that the taxpayer be issued a post-reporting notice and pre-
assessment notice before the preliminary findings of deficiency may ripen into a formal
assessment;52 and
4. The assessment notices did not give respondent a 15-day period to reply to the findings of
deficiency.53
The Court notes that nowhere in his Petition for Review did respondent deny that he received the
September 2, 1997 assessment notices. Instead, during the trial, respondent’s witness, Ma. Theresa
Nalda (Nalda), testified that she informed the BIR, Baguio City “that there was no Notice or letter, that
we did not receive, perhaps, because they were not addressed to Mr. Menguito’s head office.”54
The CTA correctly upheld the validity of the assessment notices. Citing Section 223 of the Tax Code
which provides that the prescriptive period for the issuance of assessment notices based on fraud is
10 years, the CTA ruled that the assessment notices issued against respondent on September 2, 1997
were timely because petitioner discovered the falsity in respondent’s tax returns for 1991, 1992 and
1993 only on
_______________
50 Petition for Review, id., at p. 4.
51 Id.
52 Id., at pp. 4-5.
53 Id., at p. 5.
54 TSN, January 5, 2000, pp. 9-10.
477
477
February 19, 1997.55 Moreover, in accordance with Section 2 of Revenue Regulation No. 12-85, which
requires that assessment notices be sent to the address indicated in the taxpayer’s return, unless the
latter gives a notice of change of address, the assessment notices in the present case were sent by
petitioner to Camp John Hay, for this was the address respondent indicated in his tax returns.56 As to
whether said assessment notices were actually received, the CTA correctly held that since respondent
did not testify that he did not receive said notices, it can be presumed that the same were actually
sent to and received by the latter. The Court agrees with the CTA in considering as hearsay the
testimony of Nalda that respondent did not receive the notices, because Nalda was not competent to
testify on the matter, as she was employed by respondent only in June 1998, whereas the assessment
notices were sent on September 2, 1997.57
Anent compliance with the requirements of Revenue Regulation No. 12-85, the CTA held:
BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to Spouses Menguito,
informing the latter of their supposed underdeclaration of sales totaling P48,721,555.96 and giving
them 5 days to communicate any objection to the results of the investigation (Exhibit “11,” p. 83, BIR
Records). Records likewise reveal the issuance of a Preliminary Ten (10) Day Letter on August 11,
1997, informing Petitioner [respondent herein] that the sum of P34,193,041.55 is due from him as
deficiency income and percentage tax (Exhibit “13,” p. 173, BIR Records). Said letter gave the
Petitioner [respondent herein] a period of ten (10) days to submit his objection to the proposed
assessment, either personally or in writing, together with any evidence he may want to present.
xxxx
As to Petitioner’s allegation that he was given only ten (10) days to reply to the findings of deficiency
instead of fifteen (15) days
_______________
55 CTA Decision, Rollo, pp. 94-95.
56 Id., at pp. 89-90.
57 Id., at p. 90.
478
478
granted to a taxpayer under Revenue Regulations No. 12-85, this Court believes that when
Respondent [petitioner herein] gave the Petitioner [respondent herein] on October 10, 1997 an
additional period of ten (10) days to present documentary evidence or a total of twenty (20) days,
there was compliance with Revenue Regulations No. 12-85 and the latter was amply given
opportunity to present his side x x x.”58
The CTA further held that respondent was estopped from raising procedural issues against the
assessment notices, because these were not cited in the September 28, 1997 letter-protest which his
spouse Jeanne Menguito filed with petitioner.59
On appeal by respondent,60 the CA resolved the issue, thus:
“Moreover, if the taxpayer denies ever having received an assessment from the BIR, it is incumbent
upon the latter to prove by competent evidence that such notice was indeed received by the
addressee. Here, respondent [petitioner herein] merely alleged that it “forwarded” the assessment
notices to petitioner [respondent herein]. The respondent did not show any proof of mailing, registry
receipt or acknowledgment receipt signed by the petitioner [respondent herein]. Since respondent
[petitioner herein] has not adduced sufficient evidence that petitioner [respondent herein] had in fact
received the pre-assessment notice and post-reporting notice required by law, it cannot be assumed
that petitioner [respondent herein] had been served said notices.”61
No other ground was cited by the CA for the reversal of the finding of the CTA on the issue.
The CA is gravely mistaken.
In their Petition for Review with the CTA, respondent expressly stated that “[s]ometime in September
1997, petitioner
_______________
58 CTA Decision, Rollo, pp. 88 and 91.
59 CTA Resolution, id., at pp. 104-105.
60 Petition for Review, CA Rollo, p. 47.

61 CA Decision, Rollo, p. 26.
479
479
[respondent herein] received various assessment notices, all dated 02 September 1997, issued by BIR-
Baguio for alleged deficiency income and percentage taxes for taxable years ending 31 December
1991, 1992 and 1993 x x x.”62 In their September 28, 1997 protest to the September 2, 1997
assessment notices, respondent, through his spouses Jeanne Menguito, acknowledged that “[they]
are in receipt of the assessment notice you have sent us, dated September 2, 1997 x x x.”63
Respondent is therefore estopped from denying actual receipt of the September 2, 1997 assessment
notices, notwithstanding the denial of his witness Nalda.
As to the address indicated on the assessment notices, respondent cannot question the same for it is
the said address which appears in its percentage tax returns.64 While respondent claims that he had
earlier notified petitioner of a change in his business address, no evidence of such written notice was
presented. Under Section 11 of Revenue Regulation No. 12-85, respondent’s failure to give written
notice of change of address bound him to whatever communications were sent to the address
appearing in the tax returns for the period involved in the investigation.65
Thus, what remain in question now are: whether petitioner issued and mailed a post-reporting notice
and a pre-assessment notice; and whether respondent actually received them.
There is no doubt that petitioner failed to prove that it served on respondent a post-reporting notice
and a pre-assessment notice. Exhibit “11”66 of petitioner is a mere photo-
_______________
62 CA Rollo, p. 44.
63 Supra note 21.
64 BIR Records, pp. 0004-0007.
65 See Commissioner of Internal Revenue v. Bank of the Philippine Islands, 458 Phil. 332; 411 SCRA
456 (2003).
66 BIR Records pp. 0082-0083.
480
480
copy of a July 28, 1997 letter it sent to respondent, informing him of the initial outcome of the
investigation into his sales, and the release of a preliminary assessment upon completion of the
investigation, with notice for the latter to file any objection within five days from receipt of the letter.
“Exhibit “13”67 of petitioner is also a mere photocopy of an August 11, 1997 Preliminary Ten (10) Day
Letter to respondent, informing him that he had been found to be liable for deficiency income and
percentage tax and inviting him to submit a written objection to the proposed assessment within 10
days from receipt of notice. But nowhere on the face of said documents can be found evidence that
these were sent to and received by respondent. Nor is there separate evidence, such as a registry
receipt of the notices or a certification from the Bureau of Posts, that petitioner actually mailed said
notices.
However, while the lack of a post-reporting notice and pre-assessment notice is a deviation from the
requirements under Section 168 and Section 269 of Revenue Regulation No. 12-85,
_______________
67 Id., at p. 0173.
68 Sec. 1. Post-reporting notice.—Upon receipt of the report of findings, the Division Chief, Revenue
District Officer or Chief, Office Audit Section, as the case maybe, shall send to the taxpayer a notice of
an informal conference before forwarding the report to higher authorities for approval. The notice
which is Annex “A” hereof shall be accompanied with a summary of findings as basis for the informal
conference.
In cases where the taxpayer has agreed in writing to the proposed assessment, or where such
proposed assessment has been paid, the required notice maybe dispensed with.
69 Sec. 2. Notice of proposed assessment.—When the commissioner or his duly authorized

representative finds that taxes should be assessed, he shall first notify the taxpayer of the findings in
the attached prescribed form as Annex “B” hereof. The notice shall be made in writing and sent to the
taxpayer at the address indicated in his return or at his last known address as stated in his notice of
change of address.
481
481
the same cannot detract from the fact that formal assessments were issued to and actually received
by respondents in accordance with Section 228 of the National Internal Revenue Code which was in
effect at the time of assessment.
It should be emphasized that the stringent requirement that an assessment notice be satisfactorily
proven to have been issued and released or, if receipt thereof is denied, that said assessment notice
have been served on the taxpayer,70 applies only to formal assessments prescribed under Section 228
of the National Internal Revenue Code, but not to post-reporting notices or pre-assessment notices.
The issuance of a valid formal assessment is a substantive prerequisite to tax collection,71 for it
contains not only a computation of tax liabilities but also a demand for payment within a prescribed
period, thereby signaling the time when penalties and interests begin to accrue against the taxpayer
and enabling the latter to determine his remedies therefor. Due process requires that it must be
served on and received by the taxpayer.72
A post-reporting notice and pre-assessment notice do not bear the gravity of a formal assessment
notice. The post-reporting notice and pre-assessment notice merely hint at the initial findings of the
BIR against a taxpayer and invites the latter to an “informal” conference or clarificatory meeting.
Neither notice contains a declaration of the tax liability of the
_______________
In cases where the taxpayer has agreed in writing to the proposed assessment, or where such
proposed assessment has been paid, the required notice maybe dispensed with.
70 Diez Vda. de Gabriel v. Commissioner of Internal Revenue, 465 Phil. 986; 421 SCRA 266 (2004).
71 Commissioner of Internal Revenue v. Reyes, G.R. No. 159694, January 27, 2006, 480 SCRA 382.
72 Roxas Securities, Inc. v. Commissioner of Internal Revenue, G.R. No. 157064, August 7, 2006, 498
SCRA 126. See also Commissioner of Internal Revenue v. Pascor Realty & Devt. Corp., 368 Phil. 714;
309 SCRA 402 (1999).
482
482
taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice on the
taxpayer for as long as the latter is properly served a formal assessment notice. In the case of
respondent, a formal assessment notice was received by him as acknowledged in his Petition for
Review and Joint Stipulation; and, on the basis thereof, he filed a protest with the BIR, Baguio City and
eventually a petition with the CTA.
WHEREFORE, the petition is GRANTED. The March 31, 2005 Decision of the Court of Appeals is
REVERSED and SET ASIDE and the April 2, 2002 Decision and October 10, 2002 Resolution of the Court
of Tax Appeals are REINSTATED.
SO ORDERED.
Ynares-Santiago (Chairperson), Chico-Nazario, Nachura and Reyes, JJ., concur.

Petition granted, judgment reversed and set aside.
Notes.—Taxpayers shall be informed in writing of the law and the facts on which the assessment is
made, otherwise, the assessment shall be void. (Commissioner of Internal Revenue vs. Reyes, 480
SCRA 382 [2006])
An assessment is made within the prescriptive period if notice to this effect is released, mailed or sent
by the Commissioner of Internal Revenue to the taxpayer within said period—receipt thereof by the
taxpayer with the prescriptive period is not necessary but this rule does not dispense with the
requirement that the taxpayer should actually receive, even beyond the prescriptive period, the
assessment notice. (Barcelon, Roxas Securities, Inc. vs. Commissioner of Internal Revenue, 498 SCRA
126 [2006])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Commissioner of Internal Revenue vs.
Menguito, 565 SCRA 461, G.R. No. 167560 September 17, 2008
Case No. 15
G.R. No. 150283. April 16, 2008.*
RYUICHI YAMAMOTO, petitioner, vs. NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO,
respondents.
Corporation Law; Board of Directors; Under the Corporation Law, unless otherwise provided,
corporate powers are exercised by the Board of Directors.—The resolution of the petition hinges, in
the main, on whether the advice in the letter of Atty. Doce that Yamamoto may retrieve the
machineries and equipment, which admittedly were part of his investment, bound the corporation.
The Court holds in the negative. Indeed, without a Board Resolution authorizing respondent Nishino
to act for and in behalf of the corporation, he cannot bind the latter. Under the Corporation Law,
unless otherwise provided, corporate powers are exercised by the Board of Directors.
Same; Doctrine of Piercing the Veil of Corporate Fiction; Elements.—While the veil of separate
corporate personality may be pierced when the corporation is merely an adjunct, a business conduit,
or alter ego of a person, the mere ownership by a single stockholder of even all or nearly all of the
capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate
personality. The elements determinative of the applicability of the doctrine of piercing the veil of
corporate fiction follow: “1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own; 2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of the plaintiff’s legal rights; and 3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of. The absence of any one of these elements
prevents “piercing the corporate veil.” In applying the ‘instrumentality’ or ‘alter ego’ doctrine, the
courts are concerned with reality and not form, with how the corporation operated and the individual
defendant’s rela-
_______________
* SECOND DIVISION.
448
448
Yamamoto vs. Nishino Leather Industries, Inc.

tionship to that operation.” (Italics in the original; emphasis and underscoring supplied)
Obligations and Contracts; Without acceptance, a mere offer produces no obligation.—It bears noting,
however, that the aforementioned paragraph 12 of the letter is followed by a request for Yamamoto
to give his “comments on all the above, soonest.” What was thus proffered to Yamamoto was not a
promise, but a mere offer, subject to his acceptance. Without acceptance, a mere offer produces no
obligation. Thus, under Article 1181 of the Civil Code, “[i]n conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already acquired, shall depend upon the
happening of the event which constitutes the condition.” In the case at bar, there is no showing of
compliance with the condition for allowing Yamamoto to take the machineries and equipment,
namely, his agreement to the deduction of their value from his capital contribution due him in the
buy-out of his interests in NLII. Yamamoto’s allegation that he agreed to the condition remained just
that, no proof thereof having been presented.
Corporation Law; Trust Fund Doctrine; Words and Phrases; Under the trust fund doctrine, the capital
stock, property, and other assets of a corporation are regarded as equity in trust for the payment of
corporate creditors which are preferred over the stockholders in the distribution of corporate
assets.—It is settled that the property of a corporation is not the property of its stockholders or
members. Under the trust fund doctrine, the capital stock, property, and other assets of a corporation
are regarded as equity in trust for the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets. The distribution of corporate assets and property
cannot be made to depend on the whims and caprices of the stockholders, officers, or directors of the
corporation unless the indispensable conditions and procedures for the protection of corporate
creditors are followed.
Serafin U. Salvador, Jr. for petitioner.
449
VOL. 551, APRIL 16, 2008
449
Clarito I. Aquino, Jr. for respondents.
CARPIO-MORALES, J.:
In 1983, petitioner, Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under Philippine
laws Wako Enterprises Manila, Incorporated (WAKO), a corporation engaged principally in leather
tanning, now known as Nishino Leather Industries, Inc. (NLII), one of herein respondents.
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), also a Japanese national, forged
a Memorandum of Agreement under which they agreed to enter into a joint venture wherein Nishino
would acquire such number of shares of stock equivalent to 70% of the authorized capital stock of
WAKO.
Eventually, Nishino and his brother1 Yoshinobu Nishino (Yoshinobu) acquired more than 70% of the
authorized capital stock of WAKO, reducing Yamamoto’s investment therein to, by his claim, 10%,2
less than 10% according to Nishino.3
The corporate name of WAKO was later changed to, as reflected earlier, its current name NLII.
Negotiations subsequently ensued in light of a planned takeover of NLII by Nishino who would buy-
out the shares of stock of Yamamoto. In the course of the negotiations, Yoshinobu and Nishino’s
counsel Atty. Emmanuel G. Doce (Atty. Doce) advised Yamamoto by letter dated October 30, 1991,
the pertinent portions of which follow:
“Hereunder is a simple memorandum of the subject matters discussed with me by Mr. Yoshinobu
Nishino yesterday, October
_______________
1 TSN, May 7, 1993, p. 23.
2 Id., at p. 18.
3 Records, p. 58.
450
450
29th, based on the letter of Mr. Ikuo Nishino from Japan, and which I am now transmitting to you.4
xxxx
12. Machinery and Equipment:

The following machinery/equipment have been contributed by you to the company:
Splitting machine - 1 unit
Samming machine - 1 unit
Forklift - 1 unit
Drums - 4 units
Toggling machine - 2 units
Regarding the above machines, you may take them out with you (for your own use and sale) if you
want, provided, the value of such machines is deducted from your and Wako’s capital contributions,
which will be paid to you.
Kindly let me know of your comments on all the above, soonest.
x x x x”5 (Emphasis and underscoring supplied)
On the basis of such letter, Yamamoto attempted to recover the machineries and equipment which
were, by Yamamoto’s admission, part of his investment in the corporation,6 but he was frustrated by
respondents, drawing Yamamoto to file on January 15, 1992 before the Regional Trial Court (RTC) of
Makati a complaint7 against them for replevin.
Branch 45 of the Makati RTC issued a writ of replevin after Yamamoto filed a bond.8
In their Answer with Counterclaim,9 respondents claimed that the machineries and equipment
subject of replevin form
_______________
4 Exhibit “C,” id., at p. 124.
5 Exhibit “C-3,” id., at p. 127.
6 Vide TSN, May 7, 1993, pp. 20-21, 29, 35-36.
7 Records, pp. 1-5.
8 Id., at pp. 39-50.
9 Id., at pp. 58-64.
451
VOL. 551, APRIL 16, 2008
451

part of Yamamoto’s capital contributions in consideration of his equity in NLII and should thus be
treated as corporate property; and that the above-said letter of Atty. Doce to Yamamoto was merely
a proposal, “conditioned on [Yamamoto’s] sell-out to . . . Nishino of his entire equity,”10 which
proposal was yet to be authorized by the stockholders and Board of Directors of NLII.
By way of Counterclaim, respondents, alleging that they suffered damage due to the seizure via the
implementation of the writ of replevin over the machineries and equipment, prayed for the award to
them of moral and exemplary damages, attorney’s fees and litigation expenses, and costs of suit.
The trial court, by Decision of June 9, 1995, decided the case in favor of Yamamoto,11 disposing thus:
“WHEREFORE, judgment is hereby rendered: (1) declaring plaintiff as the rightful owner and possessor
of the machineries in question, and making the writ of seizure permanent; (2) ordering defendants to
pay plaintiff attorney’s fees and expenses of litigation in the amount of Fifty Thousand Pesos
(P50,000.00), Philippine Currency; (3) dismissing defendants’ counterclaims for lack of merit; and (4)
ordering defendants to pay the costs of suit.
SO ORDERED.”12 (Italics supplied)
On appeal,13 the Court of Appeals held in favor of herein respondents and accordingly reversed the
RTC decision and dismissed the complaint.14 In so holding, the appellate court found that the
machineries and equipment claimed by Yamamoto are corporate property of NLII and may not thus
be
_______________
10 Id., at p. 61.
11 Id., at pp. 246-253. Vide id., at pp. 220-228, 247-248.

12 Id., at p. 253.
13 Id., at p. 254.
14 Decision of May 30, 2001, penned by Court of Appeals Associate Justice Josefina Guevara-Salonga,
with the concurrence of Associate Justices Delilah Vidallon-Magtolis and Teodoro P. Regino. CA Rollo,
pp 66-77.
452
452
retrieved without the authority of the NLII Board of Directors;15 and that petitioner’s argument that
Nishino and Yamamoto cannot hide behind the shield of corporate fiction does not lie,16 nor does
petitioner’s invocation of the doctrine of promissory estoppel.17 At the same time, the Court of
Appeals found no ground to support respondents’ Counterclaim.18
The Court of Appeals having denied19 his Motion for Reconsideration,20 Yamamoto filed the present
petition,21 faulting the Court of Appeals
A.
x x x IN HOLDING THAT THE VEIL OF CORPORATE FICTION SHOULD NOT BE PIERCED IN THE CASE AT
BAR.
B.
x x x IN HOLDING THAT THE DOCTRINE OF PROMISSORY ESTOPPEL DOES NOT APPLY TO THE CASE AT
BAR.
C.
x x x IN HOLDING THAT RESPONDENTS ARE NOT LIABLE FOR ATTORNEY’S FEES.22
The resolution of the petition hinges, in the main, on whether the advice in the letter of Atty. Doce
that Yamamoto may retrieve the machineries and equipment, which admittedly were part of his
investment, bound the corporation. The Court holds in the negative.
Indeed, without a Board Resolution authorizing respondent Nishino to act for and in behalf of the
corporation, he cannot
_______________
15 Vide id., at pp. 73-74.
16 Id., at p. 75.
17 Id., at pp. 74-75.

18 Id., at p. 76.
19 Id., at p. 94.
20 Id., at pp. 81-87.
21 Rollo, pp. 16-34.
22 Id., at p. 23.
453
VOL. 551, APRIL 16, 2008
453
bind the latter. Under the Corporation Law, unless otherwise provided, corporate powers are
exercised by the Board of Directors.23
Urging this Court to pierce the veil of corporate fiction, Yamamoto argues, viz.:
“During the negotiations, the issue as to the ownership of the Machiner[ies] never came up. Neither
did the issue on the proper procedure to be taken to execute the complete take-over of the Company
come up since Ikuo, Yoshinobu, and Yamamoto were the owners thereof, the presence of other
stockholders being only for the purpose of complying with the minimum requirements of the law.
What course of action the Company decides to do or not to do depends not on the “other members of
the Board of Directors.” It depends on what Ikuo and Yoshinobu decide. The Company is but a mere
instrumentality of Ikuo [and] Yoshinobu.24
xxxx
x x x The Company hardly holds board meetings. It has an inactive board, the directors are directors in
name only and are there to do the bidding of the Nish[i]nos, nothing more. Its minutes are paper
minutes. x x x 25
xxxx
The fact that the parties started at a 70-30 ratio and Yamamoto’s percentage declined to 10% does
not mean the 20% went to others. x x x The 20% went to no one else but Ikuo himself. x x x Yoshinobu
is the younger brother of Ikuo and has no say at all in the business. Only Ikuo makes the decisions.
There were, therefore, no other members of the Board who have not given their approval.”26
(Emphasis and underscoring supplied)
_______________
23 Vide Corporation Code, Section 23; San Juan Structural & Steel Fabricators, Inc. v. Court of Appeals,
357 Phil. 631, 644; 296 SCRA 631, 644 (1998).
24 Rollo, p. 25.
25 Id., at p. 27.
26 Id., at p. 28.
454
454
While the veil of separate corporate personality may be pierced when the corporation is merely an
adjunct, a business conduit, or alter ego of a person,27 the mere ownership by a single stockholder of
even all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground to
disregard the separate corporate personality.28
The elements determinative of the applicability of the doctrine of piercing the veil of corporate fiction
follow:
“1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of the
plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents “piercing the corporate veil.” In applying the
‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality and not form, with how
the corporation operated and the individual defendant’s relationship to that operation.”29 (Italics in
the original; emphasis and underscoring supplied)
In relation to the second element, to disregard the separate juridical personality of a corporation, the
wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be
_______________
27 Vide Philippine National Bank v. Ritratto Group, Inc., 414 Phil. 494, 505; 362 SCRA 216, 225-226
(2001) (citation omitted).
28 Vide Martinez v. Court of Appeals, G.R. No. 131673, September 10, 2004, 438 SCRA 130, 150.
29 Concept Builders, Inc. v. National Labor Relations Commission, 326 Phil. 955, 966; 257 SCRA 149,
159 (1996) (citation omitted).
455
VOL. 551, APRIL 16, 2008
455
clearly and convincingly established; it cannot be presumed.30 Without a demonstration that any of
the evils sought to be prevented by the doctrine is present, it does not apply.31
In the case at bar, there is no showing that Nishino used the separate personality of NLII to unjustly
act or do wrong to Yamamoto in contravention of his legal rights.
Yamamoto argues, in another vein, that promissory estoppel lies against respondents, thus:
“Under the doctrine of promissory estoppel, x x x estoppel may arise from the making of a promise,
even though without consideration, if it was intended that the promise should be relied upon and in
fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetration of
fraud or would result in other injustice.
x x x Ikuo and Yoshinobu wanted Yamamoto out of the Company. For this purpose negotiations were
had between the parties. Having expressly given Yamamoto, through the Letter and through a
subsequent meeting at the Manila Peninsula where Ikuo himself confirmed that Yamamoto may take
out the Machinery from the Company anytime, respondents should not be allowed to turn around
and do the exact opposite of what they have represented they will do.
In paragraph twelve (12) of the Letter, Yamamoto was expressly advised that he could take out the
Machinery if he wanted to so, provided that the value of said machines would be deducted from his
capital contribution x x x.
xxxx
Respondents cannot now argue that they did not intend for Yamamoto to rely upon the Letter. That
was the purpose of the Letter to begin with. Petitioner[s] in fact, relied upon said Letter and
_______________
30 Vide Solidbank Corporation v. Mindanao Ferroalloy Corporation, G.R. No. 153535, July 28, 2005,
464 SCRA 409, 424-425 (citation omitted).
31 Vide Philippine National Bank v. Ritratto Group, Inc., supra note 27 at p. 506; p. 226; San Juan
Structural and Steel Fabricators, Inc. v. Court of Appeals, supra note 23 at p. 649; p. 650.
456
456
such reliance was further strengthened during their meeting at the Manila Peninsula.
To sanction respondents’ attempt to evade their obligation would be to sanction the perpetration of
fraud and injustice against petitioner.”32 (Italics supplied)
It bears noting, however, that the aforementioned paragraph 12 of the letter is followed by a request
for Yamamoto to give his “comments on all the above, soonest.”33
What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his
acceptance. Without acceptance, a mere offer produces no obligation.34
Thus, under Article 1181 of the Civil Code, “[i]n conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired, shall depend upon the happening of the
event which constitutes the condition.” In the case at bar, there is no showing of compliance with the
condition for allowing Yamamoto to take the machineries and equipment, namely, his agreement to
the deduction of their value from his capital contribution due him in the buy-out of his interests in
NLII. Yamamoto’s allegation
_______________
32 Rollo, pp. 28-30 (citations omitted).
33 Exhibit “C-3,” Records, p. 127.
34 Vide Civil Code, Article 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.;
Article 1319:
Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause
which are to constitute the contract. The offer must be certain and the acceptance absolute. A
qualified acceptance constitutes a counter-offer.
xxxx
457
VOL. 551, APRIL 16, 2008
457
that he agreed to the condition35 remained just that, no proof thereof having been presented.
The machineries and equipment, which comprised Yamamoto’s investment in NLII,36 thus remained
part of the capital property of the corporation.37
It is settled that the property of a corporation is not the property of its stockholders or members.38
Under the trust fund doctrine, the capital stock, property, and other assets of a corporation are
regarded as equity in trust for the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets.39 The distribution of corporate assets and
property cannot be made to depend on the whims and caprices of the stockholders, officers, or
directors of the corporation unless the indispensable conditions and procedures for the protection of
corporate creditors are followed.40
WHEREFORE, the petition is DENIED.
Costs against petitioner.
_______________
35 Rollo, p. 188.
36 Records, p. 60; Exhibits “B”-“B-1,” Records, pp. 122-123; Exhibit “C-3,” Records, p. 127; TSN, May 7,
1993, pp. 20-21, 35-36; CA Rollo, p. 75.
37 Vide National Telecommunications Commission v. Court of Appeals, 370 Phil. 538, 544; 311 SCRA
508 (1999). “The term ‘capital’ and other terms used to describe the capital structure of a corporation
are of universal acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation.”
38 Vide San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, supra note 23 at p. 643; p.
644.
39 Vide Boman Environmental Development Corporation v. Court of Appeals, G.R. No. L-77860,
November 22, 1988, 167 SCRA 540, 548.
40 Vide Ong Yong v. Tiu, 448 Phil. 860, 887; 401 SCRA 1, 20 (2003).
458
458
SO ORDERED.
Tinga, Velasco, Jr. and Brion, JJ., concur.

Quisumbing, J. (Chairperson), On Official Leave.
Petition denied.
Notes.—In the absence of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits, such as stock dividends.
(Commissioner of Internal Revenue vs. Court of Appeals, 301 SCRA 152 [1999])
The “Trust Fund” doctrine considers the subscribed capital as a trust fund for the payment of the
debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or released to the stockholder (except
in the redemption of redeemable shares) without violating this principle. Thus, dividends must never
impair the subscribed capital; subscription commitments cannot be condoned or remitted; nor can
the corporation buy its own shares using the subscribed capital as the consideration therefor.
(National Telecommunications Commission vs. Court of Appeals, 311 SCRA 508 [1999])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Yamamoto vs. Nishino Leather
Industries, Inc., 551 SCRA 447, G.R. No. 150283 April 16, 2008
Case No. 16
G.R. No. 174353. September 10, 2014.*

NESTOR CHING and ANDREW WELLINGTON, petitioners, vs. SUBIC BAY GOLF AND COUNTRY CLUB,
INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH alias JACK HU, HU TSUNG HUI, HU TSUNG
TZU and REYNALD R. SUAREZ, respondents.
Remedial Law; Actions; Jurisdiction; The nature of an action, as well as which court or body has
jurisdiction over it, is determined based on the allegations contained in the complaint of the plaintiff,
irrespective of whether or not the plaintiff is entitled to recover upon all or some of the claims
asserted therein.—On the issue of whether
_______________
* FIRST DIVISION.
570
570
Ching vs. Subic Bay Golf and Country Club, Inc.
the Complaint is indeed a derivative suit, we are mindful of the doctrine that the nature of an action,
as well as which court or body has jurisdiction over it, is determined based on the allegations
contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to
recover upon all or some of the claims asserted therein. We have also held that the body rather than
the title of the complaint determines the nature of an action.
Corporation Law; Derivative Suits; It is settled that a stockholder’s right to institute a derivative suit is
not based on any express provision of the Corporation Code, or even the Securities Regulation Code,
but is impliedly recognized when the said laws make corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their fiduciary duties.—As minority
stockholders, petitioners do not have any statutory right to override the business judgments of
SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged lack of qualification to
manage a golf course. Contrary to the arguments of petitioners, Presidential Decree No. 902-A, which
is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH ADDITIONAL
POWERS AND PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE
OF THE PRESIDENT, does not grant minority stockholders a cause of action against waste and
diversion by the Board of Directors, but merely identifies the jurisdiction of the SEC over actions
already authorized by law or jurisprudence. It is settled that a stockholder’s right to institute a
derivative suit is not based on any express provision of the Corporation Code, or even the Securities
Regulation Code, but is impliedly recognized when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its stockholders for violation of their fiduciary
duties.
Same; Same; The legal standing of minority stockholders to bring derivative suits is not a statutory
right, there being no provision in the Corporation Code or related statutes authorizing the same, but is
instead a product of jurisprudence based on equity.—We should take note that while there were
allegations in the Complaint of fraud in their subscription agreements, such as the misrepresentation
of the Articles of Incorporation, petitioners do not pray for the rescission of their subscription or seek
to avail of their appraisal rights. Instead, they ask that defendants be enjoined from managing the
571
571
corporation and to pay damages for their mismanagement. Petitioners’ only possible cause of action
as minority stockholders against the actions of the Board of Directors is the common law right to file a
derivative suit. The legal standing of minority stockholders to bring derivative suits is not a statutory
right, there being no provision in the Corporation Code or related statutes authorizing the same, but is
instead a product of jurisprudence based on equity. However, a derivative suit cannot prosper
without first complying with the legal requisites for its institution.
Same; Same; Even if petitioners thought it was futile to exhaust intra-corporate remedies, they should
have stated the same in the Complaint and specified the reasons for such opinion.—We find that
petitioners failed to state with particularity in the Complaint that they had exerted all reasonable
efforts to exhaust all remedies available under the articles of incorporation, bylaws, and laws or rules
governing the corporation to obtain the relief they desire. The Complaint contained no allegation
whatsoever of any effort to avail of intra-corporate remedies. Indeed, even if petitioners thought it
was futile to exhaust intra-corporate remedies, they should have stated the same in the Complaint
and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss the Complaint,
even motu proprio, in accordance with the Interim Rules. The requirement of this allegation in the
Complaint is not a useless formality which may be disregarded at will.
Isagani M. Jungco for petitioners.
Suarez & Narvasa Law Firm for respondent R. Suarez.
Edano & Pangan Law Office for other respondents.
572
572

LEONARDO-DE CASTRO, ** J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the review of the
Decision1 dated October 27, 2005 of the Court of Appeals in C.A.-G.R. CV No. 81441, which affirmed
the Order2 dated July 8, 2003 of the Regional Trial Court (RTC), Branch 72 of Olongapo City in Civil
Case No. 03-001 dismissing the Complaint filed by herein petitioners.
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington filed a Complaint3 with the
RTC of Olongapo City on behalf of the members of Subic Bay Golf and Country Club, Inc. (SBGCCI)
against the said country club and its Board of Directors and officers under the provisions of
Presidential Decree No. 902-A in relation to Section 5.2 of the Securities Regulation Code. The Subic
Bay Golfers and Shareholders, Incorporated (SBGSI), a corporation composed of shareholders of the
defendant corporation, was also named as plaintiff. The officers impleaded as defendants were the
following: (1) its President, Hu Ho Hsiu Lien alias Susan Hu; (2) its treasurer, Hu Tsung Chieh alias Jack
Hu; (3) corporate secretary Reynald Suarez; and (4) directors Hu Tsung Hui and Hu Tsung Tzu. The case
was docketed as Civil Case No. 03-001.
The complaint alleged that the defendant corporation sold shares to plaintiffs at US$22,000.00 per
share, presenting to them the Articles of Incorporation which contained the following provision:
_______________
* * Designated Acting Chairperson per Special Order No. 1771 dated August 28, 2014.
1 Rollo, pp. 31-44; penned by Associate Justice Bienvenido L. Reyes (now a member of this Court),
with Associate Justices Godardo A. Jacinto and Arturo D. Brion (now a member of this Court),
concurring.
2 Id., at pp. 58-61.
3 Id., at pp. 62-70.
573
573
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. Shareholders shall be entitled only to a pro rata share of the assets of the Club
at the time of its dissolution or liquidation.4
However, on June 27, 1996, an amendment to the Articles of Incorporation was approved by the
Securities and Exchange Commission (SEC), wherein the above provision was changed as follows:
No profit shall inure to the exclusive benefit of any of its shareholders, hence, no dividends shall be
declared in their favor. In accordance with the Lease and Development Agreement by and between
Subic Bay Metropolitan Authority and The Universal International Group of Taiwan, where the golf
course and clubhouse component thereof was assigned to the Club, the shareholders shall not have
proprietary rights or interests over the properties of the Club.5 x x x. (Emphasis supplied)
Petitioners claimed in the Complaint that defendant corporation did not disclose to them the above
amendment which allegedly makes the shares nonproprietary, as it takes away the right of the
shareholders to participate in the pro rata distribution of the assets of the corporation after its
dissolution. According to petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation from suspending their
rights to use all the facilities of the club. Furthermore, petitioners alleged that the Board of Directors
and officers of the corporation did not call any stockholders’ meeting from the time of the
incorporation, in violation of Section 50 of the Corporation Code and the By-Laws of the corporation.
Neither did the defendant directors and officers furnish
_______________
5 Id., at p. 103.
4 Id., at p. 94.
574
574
the stockholders with the financial statements of the corporation nor the financial report of the
operation of the corporation in violation of Section 75 of the Corporation Code. Petitioners also claim
that on August 15, 1997, SBGCCI presented to the SEC an amendment to the By-Laws of the
corporation suspending the voting rights of the shareholders except for the five founders’ shares. Said
amendment was allegedly passed without any stockholders’ meeting or notices to the stockholders in
violation of Section 48 of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the management of the
corporation allegedly committed by the Board of Directors and officers of the corporation,
particularly:
a. The Board of Directors and the officers of the corporation did not indicate in its financial report for
the year 1999 the amount of P235,584,000.00 collected from the subscription of 409 shareholders
who paid US$22,000.00 for one (1) share of stock at the then prevailing rate of P26.18 to a dollar. The
stockholders were not informed how these funds were spent or its whereabouts.
b. The Corporation has been collecting green fees from the patrons of the golf course at an average
sum of P1,600.00 per eighteen (18) holes but the income is not reported in their yearly report. The
yearly report for the year 1999 contains the report of the Independent Public Accountant who stated
that the company was incorporated on April 1, 1996 but has not yet started its regular business
operation. The golf course has been in operation since 1997 and as such has collected green fees from
nonmembers and foreigners who played golf in the club. There is no financial report as to the income
derived from these sources.
c. There is reliable information that the Defendant Corporation has not paid its rentals to the Subic
575
575
Bay Metropolitan Authority which up to the present is estimated to be not less than one (1) million US
Dollars. Furthermore, the electric billings of the corporation [have] not been paid which amounts also
to several millions of pesos.
d. That the Supreme Court sustained the pretermination of its contract with the SBMA and presently
the club is operating without any valid contract with SBMA. The defendant was ordered by the
Supreme Court to yield the possession, the operation and the management of the golf course to
SBMA. Up to now the defendants [have] defied this Order.
e. That the value of the shares of stock of the corporation has drastically declined from its issued
value of US$22,000.00 to only Two Hundred Thousand Pesos, (P200,000.00) Philippine Currency. The
shareholders [have] lost in terms of investment the sum estimated to be more than two hundred
thousand pesos. This loss is due to the fact that the Club is mismanaged and the golf course is poorly
maintained. Other amenities of the Club has (sic) not yet been constructed and are not existing
despite the lapse of more than five (5) years from the time the stocks were offered for sale to the
public. The cause of the decrease in value of the shares of stocks is the fraudulent mismanagement of
the club.6
6 Id., at pp. 66-67.
Alleging that the stockholders suffered damages as a result of the fraudulent mismanagement of the
corporation, petitioners prayed in their Complaint for the following:
WHEREFORE, it is most respectfully prayed that upon the filing of this case a temporary restraining
order be issued enjoining the defendants from acting as Officers and Board of Directors of the
Corporation. After hearing[,] a writ of preliminary injunction be issued en-
576
576

joining defendants to act as Board of Directors and Officers of the Corporation. In the meantime a
Receiver be appointed by the Court to act as such until a duly constituted Board of Directors and
Officers of the Corporation be elected and qualified.
That defendants be ordered to pay the stockholders damages in the sum of Two Hundred Thousand
Pesos each representing the decrease in value of their shares of stocks plus the sum of P100,000.00 as
legal expense and attorney’s fees, as well as appearance fee of P4,000.00 per hearing.7
In their Answer, respondents specifically denied the allegations of the Complaint and essentially
averred that:
(a) The subscriptions of the 409 shareholders were paid to Universal International Group
Development Corporation (UIGDC), the majority shareholder of SBGCCI, from whom plaintiffs and
other shareholders bought their shares;8
(b) Contrary to the allegations in the Complaint, said subscriptions were reflected in SBGCCI’s
balance sheets for the fiscal years 1998 and 1999;9
(c) Plaintiffs were never presented the original Articles of Incorporation of SBGCCI since their shares
were purchased after the amendment of the Articles of Incorporation and such amendment was
publicly known to all members prior and subsequent to the said amendment;10
_______________
7 Id., at p. 68.
8 Id., at p. 137.
9 Id.
10 Id., at p. 138.
577
577
(d) Shareholders’ meetings had been held and the corporate acts complained of were approved at
shareholders’ meetings;11
(e) Financial statements of SBGCCI had always been presented to shareholders justifiably requesting
copies;12
(f) Green fees collected were reported in SBGCCI’s audited financial statements;13
(g) Any unpaid rentals are the obligation of UIGDC with SBMA and SBGCCI continued to operate
under a valid contract with the SBMA;14 and
(h) SBGCCI’s Board of Directors was not guilty of any mismanagement and in fact the value of
members’ shares have increased.15
Respondents further claimed by way of defense that petitioners failed (a) to show that it was
authorized by SBGSI to file the Complaint on the said corporation’s behalf; (b) to comply with the
requisites for filing a derivative suit and an action for receivership; and (c) to justify their prayer for
injunctive relief since the Complaint may be considered a nuisance or harassment suit under Section
1(b), Rule 1 of the Interim Rules of Procedure for Intra-Corporate Controversies.16 Thus, they prayed
for the dismissal of the Complaint.
On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC held that the action is a
derivative suit, explaining thus:
_______________
11 Id.
12 Id.
13 Id., at p. 139.
14 Id.
15 Id., at pp. 139-140.
16 Id., at pp. 140-148.
578
578

The Court finds that this case is intended not only for the benefit of the two petitioners. This is
apparent from the caption of the case which reads Nestor Ching, Andrew Wellington and the Subic
Bay Golfers and Shareholders, Inc., for and in behalf of all its members as petitioners.
This is also shown in the allegations of the petition[.] x x x.
On the bases of these allegations of the petition, the Court finds that the case is a derivative suit.
Being a derivative suit in accordance with Rule 8 of the Interim Rules, the stockholders and members
may bring an action in the name of the corporation or association provided that he (the minority
stockholder) exerted all reasonable efforts and allege[d] the same with particularity in the complaint
to exhaust of (sic) all remedies available under the articles of incorporation, bylaws or rules governing
the corporation or partnership to obtain the reliefs he desires. An examination of the petition does
not show any allegation that the petitioners applied for redress to the Board of Directors of
respondent corporation there being no demand, oral or written on the respondents to address their
complaints. Neither did the petitioners appl[y] for redress to the stockholders of the respondent
corporation and ma[k]e an effort to obtain action by the stockholders as a whole. Petitioners should
have asked the Board of Directors of the respondent corporation and/or its stockholders to hold a
meeting for the taking up of the petitioners’ rights in this petition.17
The RTC held that petitioners failed to exhaust their remedies within the respondent corporation
itself. The RTC further observed that petitioners Ching and Wellington were not authorized by their
co-petitioner Subic Bay Golfers and Shareholders, Inc. to file the Complaint, and therefore had no
personality to file the same on behalf of the said shareholders’ corporation. According to the RTC, the
shareholdings of peti-
_______________
17 Id., at pp. 58-59.
579
579
tioners comprised of two shares out of the 409 alleged outstanding shares or 0.24% is an indication
that the action is a nuisance or harassment suit which may be dismissed either motu proprio or upon
motion in accordance with Section 1(b) of the Interim Rules of Procedure for Intra-Corporate
Controversies.18
Petitioners Ching and Wellington elevated the case to the Court of Appeals, where it was docketed as
C.A.-G.R. CV No. 81441. On October 27, 2005, the Court of Appeals rendered the assailed Decision
affirming that of the RTC.
Hence, petitioners resort to the present Petition for Review, wherein they argue that the Complaint
they filed with the RTC was not a derivative suit. They claim that they filed the suit in their own right
as stockholders against the officers and Board of Directors of the corporation under Section 5(a) of
Presidential Decree No. 902-A, which provides:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
_______________
18 (b) Prohibition against nuisance and harassment suits.—Nuisance and harassment suits are
prohibited. In determining whether a suit is a nuisance or harassment suit, the court shall consider,
among others, the following:
(1) The extent of the shareholding or interest of the initiating stockholder or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in relation to the relief
sought.
In case of nuisance or harassment suits, the court may, motu proprio or upon motion, forthwith
dismiss the case.
580
580
(a) Devices or schemes employed by or any acts of the board of directors, business associates, its
interest of the public and/or of the stockholders, partners, members of associations or organizations
registered with the Commission.
According to petitioners, the above provision (which should be read in relation to Section 5.2 of the
Securities Regulation Code which transfers jurisdiction over such cases to the RTC) allows any
stockholder to file a complaint against the Board of Directors for employing devices or schemes
amounting to fraud and misrepresentation which is detrimental to the interest of the public and/or
the stockholders.
In the alternative, petitioners allege that if this Court rules that the Complaint is a derivative suit, it
should nevertheless reverse the RTC’s dismissal thereof on the ground of failure to exhaust remedies
within the corporation. Petitioners cite Republic Bank v. Cuaderno19 wherein the Court allowed the
derivative suit even without the exhaustion of said remedies as it was futile to do so since the Board
of Directors were all members of the same family. Petitioners also point out that in Cuaderno this
Court held that the fact that therein petitioners had only one share of stock does not justify the denial
of the relief prayed for.
To refute the lower courts’ ruling that there had been non-exhaustion of intra-corporate remedies on
petitioners’ part, they claim that they filed in Court a case for Injunction docketed as Civil Case No.
103-0-01, to restrain the corporation from suspending their rights to use all the facilities of the club,
on the ground that the club cannot collect membership fees until they have completed the amenities
as advertised when the shares of stock were sold to them. They allegedly asked the Club to produce
the minutes of the meeting of the Board of Directors allowing the amendments of the Articles of
_______________
19 125 Phil. 1076, 1082; 19 SCRA 671, 675 (1967).
581
581
Incorporation and By-Laws. Petitioners likewise assail the dismissal of the Complaint for being a
harassment or nuisance suit before the presentation of evidence. They claim that the evidence they
were supposed to present will show that the members of the Board of Directors are not qualified
managers of a golf course.
We find the petition unmeritorious.
At the outset, it should be noted that the Complaint in question appears to have been filed only by
the two petitioners, namely Nestor Ching and Andrew Wellington, who each own one stock in the
respondent corporation SBGCCI. While the caption of the Complaint also names the “Subic Bay
Golfers and Shareholders, Inc. for and in behalf of all its members,” petitioners did not attach any
authorization from said alleged corporation or its members to file the Complaint. Thus, the Complaint
is deemed filed only by petitioners and not by SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are mindful of the doctrine that
the nature of an action, as well as which court or body has jurisdiction over it, is determined based on
the allegations contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff
is entitled to recover upon all or some of the claims asserted therein.20 We have also held that the
body rather than the title of the complaint determines the nature of an action.21
In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among a derivative suit, an
individual suit, and a representative or class suit:
_______________
20 Go v. Distinction Properties Development and Construction, Inc., G.R. No. 194024, April 25, 2012,
671 SCRA 461, 471-472.
21 Reyes v. Hon. Regional Trial Court of Makati, Branch 142, 583 Phil. 591, 612; 561 SCRA 593, 615
(2008).
22 G.R. Nos. 181455-56, December 4, 2009, 607 SCRA 645,
690-693.
582
582
A derivative suit must be differentiated from individual and representative or class suits, thus:
“Suits by stockholders or members of a corporation based on wrongful or fraudulent acts of directors

or other persons may be classified into individual suits, class suits, and derivative suits. Where a
stockholder or member is denied the right of inspection, his suit would be individual because the
wrong is done to him personally and not to the other stockholders or the corporation. Where the
wrong is done to a group of stockholders, as where preferred stockholders’ rights are violated, a class
or representative suit will be proper for the protection of all stockholders belonging to the same
group. But where the acts complained of constitute a wrong to the corporation itself, the cause of
action belongs to the corporation and not to the individual stockholder or member. Although in most
every case of wrong to the corporation, each stockholder is necessarily affected because the value of
his interest therein would be impaired, this fact of itself is not sufficient to give him an individual
cause of action since the corporation is a person distinct and separate from him, and can and should
itself sue the wrongdoer. Otherwise, not only would the theory of separate entity be violated, but
there would be multiplicity of suits as well as a violation of the priority rights of creditors.
Furthermore, there is the difficulty of determining the amount of damages that should be paid to each
individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed by the directors or
trustees themselves, a stockholder or member may find that he has no redress because the former
are vested by law with the right to decide whether or not the corporation should sue, and they will
never be willing to sue
583
583
themselves. The corporation would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized the right of a stockholder to sue
on behalf of a corporation in what eventually became known as a “derivative suit.” It has been proven
to be an effective remedy of the minority against the abuses of management. Thus, an individual
stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds
stock in order to protect or vindicate corporate rights, whenever officials of the corporation refuse to
sue or are the ones to be sued or hold the control of the corporation. In such actions, the suing
stockholder is regarded as the nominal party, with the corporation as the party-in-interest.”
xxxx
Indeed, the Court notes American jurisprudence to the effect that a derivative suit, on one hand, and
individual and class suits, on the other, are mutually exclusive, viz.:
“As the Supreme Court has explained: A shareholder’s derivative suit seeks to recover for the benefit
of the corporation and its whole body of shareholders when injury is caused to the corporation that
may not otherwise be redressed because of failure of the corporation to act. Thus, ‘the action is
derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or
to the whole body of its stock and property without any severance or distribution among individual
holders, or it seeks to recover assets for the corporation or to prevent the dissipation of its assets.’
x x x. In contrast, a direct action [is one] filed by the shareholder individually (or on behalf of a class of
shareholders to which he or she belongs) for injury to his or her interest as a shareholder. x x x. [T]he
two
584
584
actions are mutually exclusive: i.e., the right of action and recovery belongs to either the shareholders
(direct action) *651 or the corporation (derivative action).” x x x.
Thus, in Nelson v. Anderson (1999), x x x, the **289 minority shareholder alleged that the other
shareholder of the corporation negligently managed the business, resulting in its total failure. x x x.
The appellate court concluded that the plaintiff could not maintain the suit as a direct action:
“Because the gravamen of the complaint is injury to the whole body of its stockholders, it was for the
corporation to institute and maintain a remedial action. x x x. A derivative action would have been
appropriate if its responsible officials had refused or failed to act.” x x x. The court went on to note
that the damages shown at trial were the loss of corporate profits. x x x. Since “[s]hareholders own
neither the property nor the earnings of the corporation,” any damages that the plaintiff alleged that
resulted from such loss of corporate profits “were incidental to the injury to the corporation.”
(Citations omitted)
The reliefs sought in the Complaint, namely that of enjoining defendants from acting as officers and
Board of Directors of the corporation, the appointment of a receiver, and the prayer for damages in
the amount of the decrease in the value of the shares of stock, clearly show that the Complaint was
filed to curb the alleged mismanagement of SBGCCI. The causes of action pleaded by petitioners do
not accrue to a single shareholder or a class of shareholders but to the corporation itself.
However, as minority stockholders, petitioners do not have any statutory right to override the
business judgments of SBGCCI’s officers and Board of Directors on the ground of the latter’s alleged
lack of qualification to manage a golf course. Contrary to the arguments of petitioners, Presidential
Decree
585
585
No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION
WITH ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE ADMINISTRATIVE
SUPERVISION OF THE OFFICE OF THE PRESIDENT, does not grant minority stockholders a cause of
action against waste and diversion by the Board of Directors, but merely identifies the jurisdiction of
the SEC over actions already authorized by law or jurisprudence. It is settled that a stockholder’s right
to institute a derivative suit is not based on any express provision of the Corporation Code, or even
the Securities Regulation Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its stockholders for violation
of their fiduciary duties.23
At this point, we should take note that while there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of Incorporation, petitioners
do not pray for the rescission of their subscription or seek to avail of their appraisal rights. Instead,
they ask that defendants be enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners’ only possible cause of action as minority stockholders against the
actions of the Board of Directors is the common law right to file a derivative suit. The legal standing of
minority stockholders to bring derivative suits is not a statutory right, there being no provision in the
Corporation Code or related statutes authorizing the same, but is instead a product of jurisprudence
based on equity. However, a derivative suit cannot prosper without first complying with the legal
requisites for its institution.24
_______________
23 Yu v. Yukayguan, 607 Phil. 581, 610; 589 SCRA 588, 618 (2009).
24 Id.
586
586
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate Controversies imposes
the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions subject of the action
occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity in the complaint, to
exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the same should not have been
dismissed on the ground that it is a nuisance or harassment suit. Although the shareholdings of
petitioners are indeed only two out of the 409 alleged outstanding shares or 0.24%, the Court has held
that it is enough that a member or a minority of stockholders file a derivative suit for and in behalf of
a corporation.25
25 Majority Stockholders of Ruby Industrial Corporation v. Lim, G.R. No. 165887, June 6, 2011, 650
SCRA 461, 497.
With regard, however, to the second requisite, we find that petitioners failed to state with
particularity in the Complaint that they had exerted all reasonable efforts to exhaust all remedies
available under the articles of incorporation, by-laws, and laws or rules governing the corporation to
obtain the relief they desire. The Complaint contained no allegation whatsoever of any effort to avail
of intra-corporate remedies. Indeed, even if petitioners thought it was futile to exhaust intra-
corporate remedies, they should have stated the same in
587
587

the Complaint and specified the reasons for such opinion. Failure to do so allows the RTC to dismiss
the Complaint, even motu proprio, in accordance with the Interim Rules. The requirement of this
allegation in the Complaint is not a useless formality which may be disregarded at will. We ruled in Yu
v. Yukayguan:26
The wordings of Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra-Corporate
Controversies are simple and do not leave room for statutory construction. The second paragraph
thereof requires that the stockholder filing a derivative suit should have exerted all reasonable efforts
to exhaust all remedies available under the articles of incorporation, bylaws, laws or rules governing
the corporation or partnership to obtain the relief he desires; and to allege such fact with particularity
in the complaint. The obvious intent behind the rule is to make the derivative suit the final recourse of
the stockholder, after all other remedies to obtain the relief sought had failed.
WHEREFORE, the Petition for Review is hereby DENIED. The Decision of the Court of Appeals in C.A.-
G.R. CV No. 81441 which affirmed the Order of the Regional Trial Court (RTC) of Olongapo City
dismissing the Complaint filed thereon by herein petitioners is AFFIRMED.
SO ORDERED.
Velasco, Jr.,*** Bersamin, Perez and Perlas-Bernabe, JJ., concur.
Notes.—Since the ones to be sued are the directors/officers of the corporation itself, a stockholder,
like petitioner Cruz,
_______________
26 Supra note 23 at p. 612; p. 619.

* ** Designated acting member per Special Order No. 1772 dated August 28, 2014.
588
588
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. (Filipinas Port Services, Inc. vs. Go, 518
SCRA 453 [2007])
Requisites for the existence of a derivative suit are: a. the party bringing suit should be a shareholder
during the time of the act or transaction complained of, the number of shares not being material; b.
the party 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. (Reyes vs. Regional
Trial Court of Makati, Br. 142, 561 SCRA 593 [2008])
——o0o——
© Copyright 2018 Central Book Supply, Inc. All rights reserved. Ching vs. Subic Bay Golf and Country
Club, Inc., 734 SCRA 569, G.R. No. 174353 September 10, 2014

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CASE No.

G.R. No. 175278. September 23, 2015.*

VOL. 771, SEPTEMBER 23, 2015

SUPREME COURT REPORTS ANNOTATED

VOL. 771, SEPTEMBER 23, 2015

Benedicto & Associates for respondent.

SUPREME COURT REPORTS ANNOTATED

6 Petition for Review on Certiorari, id., at p. 13.

8 Petition for Review, id., at p. 94.

VOL. 771, SEPTEMBER 23, 2015

Proceedings before the SEC

12 Id., at pp. 38-39.

In a decision19 dated May 19, 2003, the SEC CRMD said:

19 Id., at pp. 65-70.

VOL. 771, SEPTEMBER 23, 2015

3. Whether BPI Family Bank is guilty of forum shopping;

21 Id., at pp. 71-81.

23 Id., at pp. 41-42.

SUPREME COURT REPORTS ANNOTATED

Court of Appeals’ Ruling

The dispositive portion of the decision read:

24 Id., at pp. 42-43.

25 Id., at pp. 45-46.

27 Id., at pp. 43-44.

29 Resolution dated October 23, 2006, id., at p. 49.

VOL. 771, SEPTEMBER 23, 2015

Issues in the Petition

Petitioner raised the following issues in its petition:

We uphold the decision of the Court of Appeals.

Section 18 of the Corporation Code provides:

SUPREME COURT REPORTS ANNOTATED

(2) the proposed name is either

(c) patently deceptive, confusing or contrary to existing law.35

34 G.R. No. 96161, February 21, 1992, 206 SCRA 457.

36 G.R. No. 122174, October 3, 2002, 390 SCRA 252.

VOL. 771, SEPTEMBER 23, 2015

39 SEC Memorandum Circular No. 14-2000.

SUPREME COURT REPORTS ANNOTATED

40 G.R. No. 137592, December 12, 2001, 372 SCRA 171.

VOL. 771, SEPTEMBER 23, 2015

SUPREME COURT REPORTS ANNOTATED

46 Rollo, pp. 56-57.

VOL. 771, SEPTEMBER 23, 2015

53 74 Phil. 50 (1942). Citations omitted.

SUPREME COURT REPORTS ANNOTATED

VOL. 771, SEPTEMBER 23, 2015

56 The New Oxford American Dictionary, 2nd ed., p. 607 (2005).

58 Presidential Decree (PD) No. 902-A (1976).

SUPREME COURT REPORTS ANNOTATED

VOL. 771, SEPTEMBER 23, 2015

66 Republic Act No. 8293 (1997), Section 138.

67 Petition for Review, Rollo, p. 104.

SUPREME COURT REPORTS ANNOTATED

69 G.R. No. 183804, September 11, 2013, 705 SCRA 584.

VOL. 771, SEPTEMBER 23, 2015

70 Id., at p. 594, citations omitted. Emphasis in the original.

71 Appellee’s Reply Memorandum, Rollo, p. 85.

As provided in this case —

SUPREME COURT REPORTS ANNOTATED

Petition denied, judgment affirmed.

It is the element of “likelihood of confusion” that is the gravamen of trademark infringement; In

G.R. No. 167041. June 17, 2008.*

PROVIDENT INTERNATIONAL RESOURCES CORPORATION, represented by Edward T. Marcelo,

Tinga, Reyes, Leonardo-De Castro* and Brion, JJ., concur.