34.

THIRD DIVISION
[G.R. No. 142936. April 17, 2002.]
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR
DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA
ELECTRIC & ENGINEERING COMPANY, respondent.
Salvador Luy for petitioners.
Renecio Espiritu for private respondent.
SYNOPSIS
Respondent filed an action against petitioners for the unpaid balance on
electrical services it previously rendered to Pampanga Sugar Mill (PASUMIL).
Respondent alleged that petitioners became liable to them when the former
acquired the assets of, took over, and operated PASUMIL.
The Court disagreed with respondent. The following precludes the
piercing of the corporate veil in the case at bar: Other than the fact that
petitioners acquired the assets of PASUMIL, there was no showing that their
control over it warrants the disregard of corporate personalities, there was no
evidence that their juridical personality was used to commit fraud or to do a
wrong, or that the separate corporate entity was farcically used as a mere
alter ego, business conduit or instrumentality of another entity or person;
respondent was not defrauded or injured when petitioners acquired the assets
of PASUMIL. Neither is there merger nor consolidation with respect to
PASUMIL and PNB.
SYLLABUS
1.REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PETITION FOR REVIEW;
QUESTIONS OF FACT MAY NOT RE RAISED THEREIN; EXCEPTION IS WHEN
THERE IS MISAPPRECIATION OF EVIDENCE. As a general rule, questions of
fact may not be raised in a petition for review under Rule 45 of the Rules of
Court. To this rule, however, there are some exceptions enumerated in Fuentes
v. Court of Appeals. After a careful scrutiny of the records and the pleadings
submitted by the parties, we find that the lower courts misappreciated the
evidence presented. Overlooked by the CA were certain relevant facts that would
justify a conclusion different from that reached in the assailed Decision.
2.COMMERCIAL LAW; PRIVATE CORPORATIONS; WHERE CORPORATION
PURCHASED THE ASSETS OF ANOTHER CORPORATION, THE FORMER WILL
NOT BE LIABLE TO THE DEBTS OF THE LATTER; 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 transaction is
fraudulently entered into in order to escape liability for those debts. SCHATc
3.ID.; ID.; CORPORATION; ELUCIDATED. A corporation is an artificial being
created by operation of law. It possesses the right of succession and such
powers, attributes, and properties expressly authorized by law or incident to its
existence. It has a personality separate and distinct from the persons composing
it, as well as from any other legal entity to which it may be related. This is basic.
4.ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION; WHEN
PROPER. Equally well-settled is the principle that the corporate mask may be
removed or the corporate veil pierced when the corporation is just an alter ego
of a person or of another corporation. For reasons of public policy and in the
interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons.
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard
of its rights. The wrongdoing must be clearly and convincingly established; it
cannot be presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application. This Court has pierced the corporate veil to
ward off a judgment credit, to avoid inclusion of corporate assets as part of the
estate of the decedent, to escape liability arising from a debt, or to perpetuate
fraud and/or confuse legitimate issues either to promote or to shield unfair
objectives or to cover up an otherwise blatant violation of the prohibition against
forum-shopping. Only in these and similar instances may the veil be pierced and
disregarded.
5.ID.; ID.; ID.; ELEMENTS; NOT PRESENT IN CASE AT BAR. The question of
whether a corporation is a mere alter ego is one of fact. Piercing the veil of
corporate fiction may be allowed only if the following elements concur: (1)
control not mere stock control, but complete domination not only of
finances, but of policy and business practice in respect to the transaction
attacked, must have been such 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 a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or a dishonest
and an unjust act in contravention of plaintiff's legal right; and (3) the said
control and breach of duty must have proximately caused the injury or unjust
loss complained of. We believe that the absence of the foregoing elements in the
present case precludes the piercing of the corporate veil. First, other than the
fact that petitioners acquired the assets of PASUMIL, there is no showing that
their control over it warrants the disregard of corporate personalities. Second,
there is no evidence that their juridical personality was used to commit a fraud or
to do a wrong; or that the separate corporate entity was farcically used as a
mere alter ego, business conduit or instrumentality of another entity or
person. Third, respondent was not defrauded or injured when petitioners
acquired the assets of PASUMIL. Being the party that asked for the piercing of
the corporate veil, respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate personality rule.
However, it utterly failed to discharge this burden; it failed to establish by
competent evidence that petitioner's separate corporate veil had been used to
conceal fraud, illegality or inequity. The CA erred in affirming the trial court's
lifting of the corporate mask. The CA did not point to any fact evidencing bad
faith on the part of PNB and its transferee. The corporate fiction was not used to
defeat public convenience, justify a wrong, protect fraud or defend crime. None
of the foregoing exceptions was shown to exist in the present case. On the
contrary, the lifting of the corporate veil would result in manifest injustice. This
we cannot allow.
6.ID.; ID.; CONSOLIDATION OR MERGER OF CORPORATIONS; REQUISITES;
NOT PRESENT IN CASE AT BAR. A consolidation is the union of two or more
existing entities to form a new entity called the consolidated corporation. A
merger, on the other hand, is a union whereby one or more existing corporations
are absorbed by another corporation that survives and continues the combined
business. The merger, however, does not become effective upon the mere
agreement of the constituent corporations. Since a merger or consolidation
involves fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law authorizing
them. For a valid merger or consolidation, the approval by the Securities and
Exchange Commission (SEC) of the articles of merger or consolidation is
required. These articles must likewise be duly approved by a majority of the
respective stockholders of the constituent corporations. In the case at bar, we
hold that there is no merger or consolidation with respect to PASUMIL and PNB.
The procedure prescribed under Title IX of the Corporation Code was not
followed. AEIcSa
D E C I S I O N
PANGANIBAN, J p:
Basic is the rule that a corporation has a legal personality distinct and separate
from the persons and entities owning it. The corporate veil may be lifted only if it
has been used to shield fraud, defend crime, justify a wrong, defeat public
convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that
the Philippine National Bank (PNB) acquired ownership or management of some
assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed
and purchased at the resulting public auction by the Development Bank of the
Philippines (DBP), will not make PNB liable for the PASUMIL's contractual debts
to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the
Court of Appeals (CA) in CA-G.R. CV No. 57610. The decretal portion of the
challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as
follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a
partnership duly organized, existing, and operating under the laws of the
Philippines, with office and principal place of business at Nos. 794-812
Del Monte [A]venue, Quezon City, while the defendant [herein
petitioner] Philippine National Bank (herein referred to as PNB), is a
semi-government corporation duly organized, existing and operating
under the laws of the Philippines, with office and principal place of
business at Escolta Street, Sta. Cruz, Manila; whereas, the other
defendant, the National Sugar Development Corporation (NASUDECO in
brief), is also a semi-government corporation and the sugar arm of the
PNB, with office and principal place of business at the 2nd Floor,
Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga
Sugar Mills (PASUMIL in short), is a corporation organized, existing and
operating under the 1975 laws of the Philippines, and had its business
office before 1975 at Del Carmen, Floridablanca, Pampanga; that the
plaintiff is engaged in the business of general construction for the
repairs and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired the
assets of the defendant PASUMIL that were earlier foreclosed by the
Development Bank of the Philippines (DBP) under LOI No. 311; that the
defendant PNB organized the defendant NASUDECO in September,
1975, to take ownership and possession of the assets and ultimately to
nationalize and consolidate its interest in other PNB controlled sugar
mills; that prior to October 29, 1971, the defendant PASUMIL engaged
the services of plaintiff for electrical rewinding and repair, most of which
were partially paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff
and the defendant PASUMIL entered into a contract for the plaintiff to
perform the following, to wit

'(a)Construction of one (1) power house building;
'(b)Construction of three (3) reinforced concrete foundation for three (3)
units 350 KW diesel engine generating set[s];
'(c)Construction of three (3) reinforced concrete foundation for the
5,000 KW and 1,250 KW turbo generator sets;
'(d)Complete overhauling and reconditioning tests sum for three (3) 350
KW diesel engine generating set[s];
'(e)Installation of turbine and diesel generating sets including
transformer, switchboard, electrical wirings and pipe provided
those stated units are completely supplied with their accessories;
'(f)Relocating of 2,400 V transmission line, demolition of all existing
concrete foundation and drainage canals, excavation, and earth
fillings all for the total amount of P543,500.00 as evidenced by
a contract, [a] xerox copy of which is hereto attached as Annex
'A' and made an integral part of this complaint;'
that aside from the work contract mentioned-above, the defendant
PASUMIL required the plaintiff to perform extra work, and provide
electrical equipment and spare parts, such as:
'(a)Supply of electrical devices;
'(b)Extra mechanical works;
'(c)Extra fabrication works;
'(d)Supply of materials and consumable items;
'(e)Electrical shop repair;
'(f)Supply of parts and related works for turbine generator;
'(g)Supply of electrical equipment for machinery;
'(h)Supply of diesel engine parts and other related works including
fabrication of parts.'
that out of the total obligation of P777,263.80, the defendant PASUMIL
had paid only P250,000.00, leaving an unpaid balance, as of June 27,
1973, amounting to P527,263.80, as shown in the Certification of the
chief accountant of the PNB, a machine copy of which is appended as
Annex 'C' of the complaint; that out of said unpaid balance of
P527,263.80, the defendant PASUMIL made a partial payment to the
plaintiff of P14,000.00, in broken amounts, covering the period from
January 5, 1974 up to May 23, 1974, leaving an unpaid balance of
P513,263.80; that the defendant PASUMIL and the defendant PNB, and
now the defendant NASUDECO, failed and refused to pay the plaintiff
their just, valid and demandable obligation; that the President of the
NASUDECO is also the Vice-President of the PNB, and this official holds
office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff
besought this official to pay the outstanding obligation of the defendant
PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned
and possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as well as
the engineering and repairs, performed by the plaintiff; that because of
the failure and refusal of the defendants to pay their just, valid, and
demandable obligations, plaintiff suffered actual damages in the total
amount of P513,263.80; and that in order to recover these sums, the
plaintiff was compelled to engage the professional services of counsel,
to whom the plaintiff agreed to pay a sum equivalent to 25% of the
amount of the obligation due by way of attorney's fees. Accordingly, the
plaintiff prayed that judgment be rendered against the defendants PNB,
NASUDECO, and PASUMIL, jointly and severally to wit:
'(1)Sentencing the defendants to pay the plaintiffs the
sum of P513,263.80, with annual interest of 14% from the
time the obligation falls due and demandable;
'(2)Condemning the defendants to pay attorney's fees
amounting to 25% of the amount claim;
'(3)Ordering the defendants to pay the costs of the
suit.'
"The defendants PNB and NASUDECO filed a joint motion to dismiss the
complaint chiefly on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against both
defendants, inasmuch as there is lack or want of privity of contract
between the plaintiff and the two defendants, the PNB and NASUDECO,
said defendants citing Article 1311 of the New Civil Code, and the case
law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila
Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order of
November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.
"In their answer, the defendant NASUDECO reiterated the grounds of its
motion to dismiss, to wit:
'That the complaint does not state a sufficient cause of action
against the defendant NASUDECO because: (a) NASUDECO is not
. . . privy to the various electrical construction jobs being sued
upon by the plaintiff under the present complaint; (b) the taking
over by NASUDECO of the assets of defendant PASUMIL was
solely for the purpose of reconditioning the sugar central of
defendant PASUMIL pursuant to martial law powers of the
President under the Constitution; (c) nothing in the LOI No. 189-
A (as well as in LOI No. 311) authorized or commanded the PNB
or its subsidiary corporation, the NASUDECO, to assume the
corporate obligations of PASUMIL as that being involved in the
present case; and, (d) all that was mentioned by the said letter of
instruction insofar as the PASUMIL liabilities [were] concerned
[was] for the PNB, or its subsidiary corporation the NASUDECO,
to make a study of, and submit [a] recommendation on the
problems concerning the same.'
"By way of counterclaim, the NASUDECO averred that by reason of the
filing by the plaintiff of the present suit, which it [labeled] as unfounded
or baseless, the defendant NASUDECO was constrained to litigate and
incur litigation expenses in the amount of P50,000.00, which plaintiff
should be sentenced to pay. Accordingly, NASUDECO prayed that the
complaint be dismissed and on its counterclaim, that the plaintiff be
condemned to pay P50,000.00 in concept of attorney's fees as well as
exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its
motion to dismiss, namely: (1) the complaint states no cause of action
against the defendant PNB; (2) that PNB is not a party to the contract
alleged in par. 6 of the complaint and that the alleged services rendered
by the plaintiff to the defendant PASUMIL upon which plaintiff's suit is
erected, was rendered long before PNB took possession of the assets of
the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-
over of the assets of the defendant PASUMIL under LOI 189-A was
solely for the purpose of reconditioning the sugar central so that
PASUMIL may resume its operations in time for the 1974-75 milling
season, and that nothing in the said LOI No. 189-A, as well as in LOI No.
311, authorized or directed PNB to assume the corporate obligation/s of
PASUMIL, let alone that for which the present action is brought; (4) that
PNB's management and operation under LOI No. 311 did not refer to
any asset of PASUMIL which the PNB had to acquire and thereafter
[manage], but only to those which were foreclosed by the DBP and were
in turn redeemed by the PNB from the DBP; (5) that conformably to LOI
No. 311, on August 15, 1975, the PNB and the Development Bank of the
Philippines (DBP) entered into a 'Redemption Agreement' whereby DBP
sold, transferred and conveyed in favor of the PNB, by way of
redemption, all its (DBP) rights and interest in and over the foreclosed
real and/or personal properties of PASUMIL, as shown in Annex 'C' which
is made an integral part of the answer; (6) that again, conformably with
LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21,
1975, conveyed, transferred, and assigned for valuable consideration, in
favor of NASUDECO, a distinct and independent corporation, all its (PNB)
rights and interest in and under the above 'Redemption Agreement.' This
is shown in Annex 'D' which is also made an integral part of the answer;
[7] that as a consequence of the said Deed of Assignment, PNB on
October 21, 1975 ceased to manage and operate the above-mentioned
assets of PASUMIL, which function was now actually transferred to
NASUDECO. In other words, so asserted PNB, the complaint as to PNB,
had become moot and academic because of the execution of the said
Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize
or direct PNB to assume the corporate obligations of PASUMIL, including
the alleged obligation upon which this present suit was brought; and [9]
that, at most, what was granted to PNB in this respect was the authority
to 'make a study of and submit recommendation on the problems
concerning the claims of PASUMIL creditors,' under sub-par. 5 LOI No.
311.
"In its counterclaim, the PNB averred that it was unnecessarily
constrained to litigate and to incur expenses in this case, hence it is
entitled to claim attorney's fees in the amount of at least P50,000.00.
Accordingly, PNB prayed that the complaint be dismissed; and that on its
counterclaim, that the plaintiff be sentenced to pay defendant PNB the
sum of P50,000.00 as attorney's fees, aside from exemplary damages in
such amount that the court may seem just and equitable in the
premises.
"Summons by publication was made via the Philippines Daily Express, a
newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila,
against the defendant PASUMIL, which was thereafter declared in
default as shown in the August 7, 1981 Order issued by the Trial Court.
"After due proceedings, the Trial Court rendered judgment, the decretal
portion of which reads:
'WHEREFORE, judgment is hereby rendered in favor of plaintiff
and against the defendant Corporation, Philippine National Bank
(PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION
(NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering
the latter to pay jointly and severally the former the following:
'1.The sum of P513,623.80 plus interest thereon at the
rate of 14% per annum as claimed from
September 25, 1980 until fully paid;
'2.The sum of P102,724.76 as attorney's fees; and,
'3.Costs.
'SO ORDERED.
'Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO

'Judge '" 3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic tenets of
justice and equity for a corporation to take over and operate the business of
another corporation, while disavowing or repudiating any responsibility,
obligation or liability arising therefrom. 4
Hence, this Petition. 5
Issues
In their Memorandum, petitioners raise the following errors for the Court's
consideration:
"I
The Court of Appeals gravely erred in law in holding the herein
petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally extinguished
or terminated, simply because of petitioners['] take-over of the
management and operation of PASUMIL pursuant to the mandates of
LOI No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the case
at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15
SCRA 415." 6
Succinctly put, the aforesaid errors boil down to the principal issue of whether
PNB is liable for the unpaid debts of PASUMIL to respondent.
This Court's Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review
under Rule 45 of the Rules of Court. 7 To this rule, however, there are some
exceptions enumerated in Fuentes v. Court of Appeals. 8 After a careful scrutiny
of the records and the pleadings submitted by the parties, we find that the lower
courts misappreciated the evidence presented. 9 Overlooked by the CA were
certain relevant facts that would justify a conclusion different from that reached
in the assailed Decision. 10
Petitioners posit that they should not be held liable for the corporate debts of
PASUMIL, because their takeover of the latter's foreclosed assets did not make
them assignees. On the other hand, respondent asserts that petitioners and
PASUMIL should be treated as one entity and, as such, jointly and severally held
liable for PASUMIL's unpaid obligation.
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 transaction is
fraudulently entered into in order to escape liability for those debts. 11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the
right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. 12 It has a personality separate and
distinct from the persons composing it, as well as from any other legal entity to
which it may be related. 13 This is basic.
Equally well-settled is the principle that the corporate mask may be removed or
the corporate veil pierced when the corporation is just an alter ego of a person
or of another corporation. 14 For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled 15 only when it becomes a
shield for fraud, illegality or inequity committed against third persons. 16
Hence, any application of the doctrine of piercing the corporate veil should be
done with caution. 17 A court should be mindful of the milieu where it is to be
applied. 18 It must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in disregard
of its rights. 19 The wrongdoing must be clearly and convincingly established; it
cannot be presumed. 20 Otherwise, an injustice that was never unintended may
result from an erroneous application. 21
This Court has pierced the corporate veil to ward off a judgment credit, 22 to
avoid inclusion of corporate assets as part of the estate of the decedent, 23 to
escape liability arising from a debt, 24 or to perpetuate fraud and/or confuse
legitimate issues 25either to promote or to shield unfair objectives 26 or to cover
up an otherwise blatant violation of the prohibition against forum-
shopping. 27 Only in these and similar instances may the veil be pierced and
disregarded. 28
The question of whether a corporation is a mere alter ego is one of
fact. 29 Piercing the veil of corporate fiction may be allowed only if the following
elements concur: (1) control not mere stock control, but complete domination
not only of finances, but of policy and business practice in respect to the
transaction attacked, must have been such 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 a fraud or a
wrong to perpetuate the violation of a statutory or other positive legal duty, or a
dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the
said control and breach of duty must have proximately caused the injury or
unjust loss complained of. 30
We believe that the absence of the foregoing elements in the present case
precludes the piercing of the corporate veil. First, other than the fact that
petitioners acquired the assets of PASUMIL, there is no showing that their control
over it warrants the disregard of corporate personalities. 31 Second, there is no
evidence that their juridical personality was used to commit a fraud or to do a
wrong; or that the separate corporate entity was farcically used as a mere alter
ego, business conduit or instrumentality of another entity or
person. 32 Third, respondent was not defrauded or injured when petitioners
acquired the assets of PASUMIL. 33
Being the party that asked for the piercing of the corporate veil, respondent had
the burden of presenting clear and convincing evidence to justify the setting
aside of the separate corporate personality rule. 34 However, it utterly failed to
discharge this burden; 35 it failed to establish by competent evidence that
petitioner's separate corporate veil had been used to conceal fraud, illegality or
inequity. 36
While we agree with respondent's claim that the assets of the National Sugar
Development Corporation (NASUDECO) can be easily traced to PASUMIL, 37 we
are not convinced that the transfer of the latter's assets to petitioners was
fraudulently entered into in order to escape liability for its debt to respondent. 38
A careful review of the records reveals that DBP foreclosed the mortgage
executed by PASUMIL and acquired the assets as the highest bidder at the public
auction conducted. 39 The bank was justified in foreclosing the mortgage,
because the PASUMIL account had incurred arrearages of more than 20 percent
of the total outstanding obligation. 40 Thus, DBP had not only a right, but also a
duty under the law to foreclose the subject properties. 41
Pursuant to LOI No. 189-A 42 as amended by LOI No. 311, 43 PNB acquired
PASUMIL's assets that DBP had foreclosed and purchased in the normal course.
Petitioner bank was likewise tasked to manage temporarily the operation of such
assets either by itself or through a subsidiary corporation. 44
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL
assets pursuant to Section 6 of Act No. 3135. 45These assets were later conveyed
to PNB for a consideration, the terms of which were embodied in the Redemption
Agreement46 PNB, as successor-in-interest, stepped into the shoes of DBP as
PASUMIL's creditor. 47 By way of a Deed of Assignment,48 PNB then transferred
to NASUDECO all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals, 49 we had the
occasion to resolve a similar issue. We ruled that PNB, DBP and their transferees
were not liable for Marinduque Mining's unpaid obligations to Remington
Industrial Sales Corporation (Remington) after the two banks had foreclosed the
assets of Marinduque Mining. We likewise held that Remington failed to
discharge its burden of proving bad faith on the part of Marinduque Mining to
justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court's lifting of the
corporate mask. 50 The CA did not point to any fact evidencing bad faith on the
part of PNB and its transferee. 51 The corporate fiction was not used to defeat
public convenience, justify a wrong, protect fraud or defend crime. 52 None of
the foregoing exceptions was shown to exist in the present case. 53On the
contrary, the lifting of the corporate veil would result in manifest injustice. This
we cannot allow.
No Merger or
Consolidation
Respondent further claims that petitioners should be held liable for the unpaid
obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly
authorized PASUMIL and PNB to merge or consolidate. On the other hand,
petitioners contend that their takeover of the operations of PASUMIL did not
involve any corporate merger or consolidation, because the latter had never lost
its separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a new entity
called the consolidated corporation. A merger, on the other hand, is a union
whereby one or more existing corporations are absorbed by another corporation
that survives and continues the combined business. 54
The merger, however, does not become effective upon the mere agreement of
the constituent corporations. 55 Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of stockholders
and creditors, there must be an express provision of law authorizing them. 56 For
a valid merger or consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is required. 57 These
articles must likewise be duly approved by a majority of the respective
stockholders of the constituent corporations. 58

In the case at bar, we hold that there is no merger or consolidation with respect
to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation
Code 59 was not followed.
In fact, PASUMIL's corporate existence, as correctly found by the CA, had not
been legally extinguished or terminated. 60Further, prior to PNB's acquisition of
the foreclosed assets, PASUMIL had previously made partial payments to
respondent for the former's obligation in the amount of P777,263.80. As of June
27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974
to May 23, 1974, another P14,000.
Neither did petitioner expressly or impliedly agree to assume the debt of
PASUMIL to respondent. 61 LOI No. 11 explicitly provides that PNB shall study
and submit recommendations on the claims of PASUMIL's creditors. 62 Clearly,
the corporate separateness between PASUMIL and PNB remains, despite
respondent's insistence to the contrary. 63
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET
ASIDE. No pronouncement as to costs. DHTCaI
SO ORDERED.
Vitug, Sandoval-Gutierrez and Carpio, JJ., concur.
Melo, J., Abroad, is on official leave.
Footnotes

35.
EN BANC
[G.R. No. L-21601. December 28, 1968.]
NIELSON & COMPANY, INC., plaintiff-
appellant, vs. LEPANTO CONSOLIDATED MINING
COMPANY,defendant-appellee.
SYLLABUS
1.REMEDIAL LAW; APPEAL; QUESTION OF FACT OR LAW NOT RAISED IN THE
LOWER COURT MAY NOT BE RAISED ON APPEAL; INSTANT CASE. In the
pleadings filed by defendant Lepanto in the lower court and its memorandum
and brief on appeal it never asserted the theory that it has the right to terminate
the management contract because that contract is one of agency which it could
terminate at will. While it is true that in its ninth and tenth special affirmative
defenses, it has the right to terminate the management contract in question, that
plea of its right to terminate was not based upon the ground that the relation
between defendant and plaintiff was that of principal and agent but upon the
ground that plaintiff had allegedly not complied with certain terms of the
management contract. If defendant had thought of considering the management
contract as one of agency it could have amended its answer by stating exactly its
position. It could have asserted its theory of agency in its memorandum for the
lower and in its brief on appeal. This, defendant did not do. It is the rule, and
the settled doctrine that a party cannot change his theory on appeal, that is, that
a party cannot raise in the appellate court any question of law or of fact that was
not raised in the court below or which was not within the issue made by the
parties in their pleadings.
2.CIVIL LAW; SPECIAL CONTRACTS; AGENCY DISTINGUISHED FROM LEASE OF
SERVICES. In both agency and lease of services one of the parties binds
himself to render some service to the other party. Agency, however, is
distinguished from lease of work or services in that the basis of agency is
representation, while in the lease of work or services the basis is employment.
The lessor of services does not represent his employer while the agent
represents his principal. Agency is a preparatory contract as agency "does not
stop with the agency because the purpose is to enter into other contracts." The
most characteristic feature of an agency relationship is the agent's power to
bring about business relations between his principal and third persons. "The
agent is destined to execute juridical acts (creation, modification or extinction of
relations with third parties). Lease services contemplate only material (non-
juridical) acts."
3.ID.; ID.; CONTRACT IN INSTANT CASE IS FOR LEASE OF SERVICES. It
appears that the principal and paramount undertaking of plaintiff under the
management contract was the operation and development of the mine and the
operation of the mill. All the other undertakings mentioned in the contract are
necessary or incidental to the principal undertaking these other undertakings
being dependent upon the work on the development of the mine and the
operation of the mill. In the performance of this principal undertaking plaintiff
was not in any way executing juridical acts for defendant, destined to create,
modify or extinguish business relations between Lepanto and third persons. In
other words, in performing its principal undertaking plaintiff was not acting as an
agent of defendant Lepanto, in the sense that the term agent is interpreted
under the law of agency, but as one who was performing material acts for an
employer, for a compensation.
4.ID.; ID.; ID.; DEFENDANT MAY NOT TERMINATE CONTRACT AT WILL. In
the instant case, paragraph XI of the contract provides: ". . . Nielson agrees
that Lepanto may cancel this agreement at any time upon ninety days written
notice, in the event that Nielson for any reason whatsoever, except acts of God,
strike and other causes beyond its control, shall cease to prosecute the operation
and development of the properties herein described, in good faith and in
accordance with the approved mining practice" defendant could not terminate
the agreement at will. Under the provision, it could terminate or cancel the
agreement by giving notice of termination 90 days in advance only in the event
that plaintiff should prosecute in bad faith and not in accordance with approved
mining practice the operation and development of the mining properties of
defendant. Defendant could not terminate the agreement if plaintiff should cease
to prosecute the operation and development of the mining properties by reason
of acts of God, strike and other causes beyond the control of plaintiff. It is,
therefore, by express stipulation of the parties, the management contract in
question is not revocable at will of defendant. This management contract is not a
contract of agency as defined in Article 1700 of the Old Civil Code, but a contract
of lease of service as defined in Article 1544 of the same code. This contract can
not be unilaterally revoked by defendant.
5.ID.; ID.; ID.; EXTENSION OF CONTRACT EQUAL TO PERIOD OF SUSPENSION.
The nature of the contract for management and operation of mines justifies
the interpretation of the force majeure clause, that a period equal to the period
of suspension due to force majeure should be added to the original term of the
contract by way of an extension. We, therefore, reiterate the ruling in our
decision that since the management contract in the instant case was suspended
from February 1942 to June 26, 1948, from the latter the contract had yet five
years to go.
6.ID.; ID.; ID.; ID.; PLAINTIFF LIMITED TO MANAGEMENT FEES FOR PERIOD
OF EXTENSION. Since the management contract had been extended for 5
years, or 60 months, from June 27, 1948 to June 26, 1953, and the cause of
action of plaintiff to claim for its compensation during that period of extension
had not prescribed, it follows that plaintiff should be awarded the management
fees during the whole period of extension plus the 10% of the value of the
dividends declared during the said period of extension the 10% of the depletion
reserve that was set up, and the 10% of any amount expended out of surplus
earnings for capital account.
7.ID.; PRESCRIPTION; INAPPLICABILITY THEREOF IN INSTANT CASE. The
claim accrued on December 31, 1941, and the right to commence an action
thereon started on January 1, 1942. The action on this claim did not prescribe
although the complaint was filed on February 6, 1958 - or after a lapse of 16
years, 1 month and 5 days because of the operation of moratorium law. The
moratorium period of 8 years, 2 months and 8 days should be deducted from the
period that had elapsed since the accrual of the cause of action to the date of
the filing of the complaint, so that there is a period of less than 8 years to be
reckoned for the purpose of prescription.
8.ID.; EXECUTIVE ORDER NUMBER 32, MORATORIUM LAW. Executive Order
No. 32 covered all debts and monetary obligation on contract before the war (or
before December 1941) and those contracted subsequent to Dec. 8, 1941 and
during the Japanese occupation. RA No. 342, approved on July 26, 1948, lifted
the moratorium provided for in Executive Order No. 32 on pre-war (or pre-Dec.
8, 1941) debts of debtors who had not filed war damage claims with the United
States War Damage Commission. In other words, after the effectivity of RA No.
342, the debt moratorium was limited (1) to debts and other monetary
obligations which were contracted after Dec. 8, 1941 and during the Japanese
occupation, and (2) to those pre-war (or pre-Dec. 8, 1941) debts and other
monetary claims. That was the situation up to May 18, 1953 when this Court
declared RA No. 342 unconstitutional. It has been held by this Court, however,
that from March 10, 1945 when Executive Order No. 32 was issued, to May 18,
1953 when RA No. 342 was declared unconstitutional or a period of 8 years, 2
months and 8 days the debt moratorium was in force, and had the effect of
suspending the period of prescription.
9.MERCANTILE LAW; CORPORATIONS; SHARES OF STOCK; ISSUANCE
THEREOF. From Section 16 of the Corporation Law, the consideration for
which shares of stock may be issued are: (1) cash; (2) property and (3)
undistributed profits. Shares of stock are given the special name "stock
dividends" only if they are issued in lieu of undistributed profits. If the shares of
stocks are issued in exchange of cash or Property then those shares do not fall
under the category of "stock dividends". A corporation may legally issue shares
of stock in consideration of services rendered to it by a person not a stockholder,
or in payment of its indebtedness. A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property because
services is equivalent to property. Likewise a share of stock issued in payment of
indebtedness is equivalent to issuing a stock in exchange for cash. But a share of
stock thus issued should be part of the original capital stock of the corporation
upon its organization, or part of the stocks issued when the increase of the
capitalization of a corporation is properly authorized.
10.ID.; ID.; STOCK DIVIDEND, DEFINED. A "stock dividend" is any dividend
payable in shares of stock of the corporation declaring or authorizing such
dividend. It is, what the term itself implies, a distribution of the shares of stock
of the corporation among the stockholders as dividends. A stock dividend of a
corporation is a dividend paid in shares of stock instead of cash and is properly
payable only out of surplus profits. So, a stock dividend is actually two things:
(1) a dividend, and (2) the enforced use of the dividend money to purchase
additional shares of stock at par. When a corporation issues stock dividends, it
shows that the corporations' accumulated profits have been capitalized instead of
distributed to the stockholders or retained as surplus available for distribution, in
money or in kind, should opportunity offer. Far from being a realization of profits
for the stockholder, it tends rather to postpone said realization, in that the fund
represented by the new stock has been transferred from the surplus to assets
and no longer available for actual distribution.

11.ID.; ID.; DIVIDEND. The term "dividend" both in the technical sense and
its ordinary acceptation, is that part or portion of the profits of the enterprise
which the corporation, by its governing agents, sets apart for ratable division
among the holders of the capital stock. It means the fund actually set aside, and
declared by the directors of the corporation as a dividend, and duly ordered by
the directory, or by the stockholders at a corporate meeting to be divided or
distributed among the stockholders according to their respective interests.
12.ATTORNEYS; ATTORNEYS FEES; AWARD OF ATTORNEYS FEES IS WITHIN
THE SOUND DISCRETION OF THE COURT. The matter of the award of
attorneys fees is within the sound discretion of this court. In our decision We
have stated the reason why the award of P50,000.00 for attorney's fees is
considered by this Court as reasonable.
D E C I S I O N
ZALDIVAR, J p:
Lepanto seeks the reconsideration of the decision rendered on December 17,
1966. The motion for reconsideration is based on two sets of grounds the first
set consisting of four principal grounds, and the second set consisting of five
alternative grounds, as follows:
Principal Grounds:
1.The court erred in overlooking and failing to apply the proper law
applicable to the agency or management contract in question, namely,
Article 1733 of the Old Civil Code (Article 1920 of the new), by virtue of
which said agency was effectively revoked and terminated in 1945
when, as stated in paragraph 20 of the complaint, "defendant voluntarily
. . . prevented plaintiff from resuming management and operation of
said mining properties."
2.The court erred in holding that paragraph II of the management
contract (Exhibit C) suspended the period of said contract.
3.The court erred in reversing the ruling of the trial judge, based on
well-settled jurisprudence of this Supreme Court, that the management
agreement was only suspended but not extended on account of the war.
4The court erred in reversing the finding of the trial judge
that Nielson's action had prescribed, but considering only the first claim
and ignoring the prescriptibility of the other claims.
Alternative Grounds:
5.The court erred in holding that the period of suspension of the
contract on account of the war lasted from February 1942 to June 26,
1948.
6.Assuming arguendo that Nielson is entitled to any relief, the court
erred in awarding as damages (a) 10% of the cash dividends declared
and paid in December, 1941; (b) the management fee of P2,500.00 for
the month of January, 1942; and (c) the full contract price for the
extended period of sixty months, since these damages were neither
demanded nor proved and, in any case, not allowable under the general
law of damages.
7.Assuming arguendo that appellant is entitled to any relief, the court
erred in ordering appellee to issue and deliver to appellant shares of
stock together with fruits thereof.
8.The court erred in awarding to appellant an undetermined amount of
shares of stock and/or cash, which award cannot be ascertained and
executed without further litigation.
9.The court erred in rendering judgment for attorney's fees.
We are going to dwell on these grounds in the order they are presented.
1.In its first principal ground Lepanto claims that its own counsel and this Court
had overlooked the real nature of the management contract entered into by and
between Lepanto and Nielson, and the law that is applicable on said
contract. Lepantonow asserts for the first time - and this is done in a motion for
reconsideration that the management contract in question is a contract of
agency such that it has the right to revoke and terminate the said contract, as it
did terminate the same, under the law of agency, and particularly pursuant to
Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code)
We have taken note that Lepanto is advancing a new theory. We have carefully
examined the pleadings filed by Lepanto in the lower court, its memorandum and
its brief on appeal, and never did it assert the theory that it has the right to
terminate the management contract because that contract is one of agency
which it could terminate at will. While it is true that in its ninth and tenth special
affirmative defenses, in its answer in the court below, Lepanto pleaded that it
had the right to terminate the management contract in question, that plea of its
right to terminate was not based upon the ground that the relation
betweenLepanto and Nielson was that of principal and agent but upon the
ground that Nielson had allegedly not complied with certain terms of the
management contract. If Lepanto had thought of considering the management
contract as one of agency it could have amended its answer by stating exactly its
position. It could have asserted its theory of agency in its memorandum for the
lower court and in its brief on appeal. This, Lepanto did not do. It is the rule, and
the settled doctrine of this Court, that a party cannot change his theory on
appeal that is, that a party cannot raise in the appellate court any question of
law or of fact that was not raised in the court below or which was not within the
issue made by the parties in their pleadings (Section 19, Rule 49 of the old Rules
of Court, and also Section 18 of the new Rules of Court; Hautea vs. Magallon, L-
20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884,
February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo
vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil. 49)
At any rate, even if we allow Lepanto to assert its new theory at this very late
stage of the proceedings, this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is one of
agency because: (1) Nielson was to manage and operate the mining properties
and mill on behalf, and for the account, of Lepanto; and (2) Nielson was
authorized to represent Lepanto in entering, on Lepanto's behalf, into contracts
for the hiring of laborers, purchase of supplies, and the sale and marketing of
the ores mined. All these, Lepanto claims, show that Nielson was, by the terms
of the contract, destined to execute juridical acts not on its own behalf but on
behalf of Lepanto under the control of the Board of Directors of Lepanto "at all
times". Hence Lepanto claims that the contract is one of agency. Lepanto then
maintains that an agency is revocable at the will of the principal (Article 1733 of
the Old Civil Code) regardless of any term or period stipulated in the contract,
and it was in pursuance of that right that Lepanto terminated the contract in
1945 when it took over and assumed exclusive management of the work
previously entrusted to Nielson under the contract. Lepanto finally maintains
that Nielson as an agent is not entitled to damages since the law gives to the
principal the right to terminate the agency at will.
Because of Lepanto's new theory We consider it necessary to determine
the nature of the management contract whether it is a contract of agency or a
contract of lease of services. Incidentally, we have noted that the lower court, in
the decision appealed from, considered the management contract as a contract
of lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
"By the contract of agency, one person binds himself to render some
service or do something for the account or at the request of another."
Article 1544, defining contract of lease of service, provides:
"In a lease of work or services, one of the parties binds himself to make
or construct something or to render a service to the other for a price
certain."
In both agency and lease of services one of the parties binds himself to render
some service to the other party. Agency, however, is distinguished from lease of
work or services in that the basis of agency is representation, while in the lease
of work or services the basis is employment. The lessor of services does not
represent his employer, while the agent represents his principal. Manresa, in his
"Commentarios al Codigo Civil Espaol" (1931, Tomo IX, pp. 372-373), points
out that the element of representation distinguishes agency from lease of
services, as follows:
"Nuestro art. 1.709 como el art 1.984 del Codigo de Napoleon y cuantos
textos legales citamos en las concordancias,expresan claramente esta
idea de la representacin, 'hacer alguna cosa por cuenta o encargo de
otra' dice nuestro Codigo; 'poder de hacer alguna cosa para el mandante
o en su nombre' dice el Codigo de Napoleon, y en tales palabras aparece
vivo y luminoso el concepto y la teoria de la representacion, tan fecunda
en enseanzas, que a su sola luz es como se explican las diferencias que
separan el mandato del arrendamiento de servicios, de los contratos
inominados, del consejo y de la gestion de negocios.
"En efecto, en el arrendamiento de servicios al obligarse para su
ejecucion, se trabaja, en verdad, para el dueo que remunera la labor,
pero ni se le representa ni se obra en su nombre . . ."
On the basis of the interpretation of Article 1709 of the old Civil Code, Article
1868 of the new Civil Code has defined the contract of agency in more explicit
terms, as follows:
"By the contract of agency a person binds himself to render some
service or to do something in representation or on behalf of another,
with the consent or authority of the latter."
There is another obvious distinction between agency and lease of services.
Agency is a preparatory contract, as agency "does not stop with the agency
because the purpose is to enter into other contracts." The most characteristic
feature of an agency relationship is the agent's power to bring about business
relations between his principal and third persons. "The agent is destined to
execute juridical acts (creation, modification or extinction of relations with third
parties). Lease of services contemplate only material (non-juridical) acts." (Reyes
and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277)

In the light of the interpretations we have mentioned in the foregoing
paragraphs, let us now determine the nature of the management contract in
question. Under the contract, Nielson had agreed, for a period of five years, with
the right to renew for a like period, to explore, develop and operate the mining
claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found
therein and to market the metallic products recovered therefrom which may
prove to be marketable, as well as to render for Lepanto other services specified
in the contract. We gather from the contract that the work undertaken
by Nielsonwas to take complete charge, subject at all times to the general
control of the Board of Directors of Lepanto, of the exploration and development
of the mining claims, of the hiring of a sufficient and competent staff and of
sufficient and capable laborers, of the prospecting and development of the mine,
of the erection and operation of the mill, and of the beneficiation and marketing
of the minerals found on the mining properties; and in carrying out said
obligation Nielson should proceed diligently and in accordance with the best
mining practice. In connection with its work Nielson was to submit reports,
maps, plans and recommendations with respect to the operation and
development of the mining properties, make recommendations and plans on the
erection or enlargement of any existing mill, dispatch mining engineers and
technicians to the mining properties as from time to time may reasonably be
required to investigate and make recommendations without cost or expense
to Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment
and other necessary purchases by Lepanto, provided, however, that no purchase
shall be made without the prior approval of Lepanto; and provided further, that
no commission shall be claimed or retained byNielson on such purchase"; and "to
submit all requisition for supplies, all contracts and arrangement with engineers,
and staff and all matters requiring the expenditures of money, present or future,
for prior approval by Lepanto; and also to make contracts subject to the prior
approval of Lepanto for the sale and marketing of the minerals mined from said
properties, when said products are in a suitable condition for marketing." 1
It thus appears that the principal and paramount undertaking of Nielson under
the management contract was the operation and development of the mine and
the operation of the mill. All the other undertakings mentioned in the contract
are necessary or incidental to the principal undertaking these other
undertakings being dependent upon the work on the development of the mine
and the operation of the mill. In the performance of this principal
undertaking Nielson was not in any way executing juridical acts for Lepanto,
destined to create, modify or extinguish business relations between Lepanto and
third persons. In other words, in performing its principal undertaking Nielson was
not acting as an agent of Lepanto, in the sense that the term agent is
interpreted under the law of agency, but as one who was performing material
acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act as
purchasing agent of supplies and enter into contracts regarding the sale of
mineral, but the contract also provides that Nielson could not make any
purchase, or sell the minerals, without the prior approval of Lepanto. It is clear,
therefore, that even in these cases Nielson could not execute juridical acts which
would bind Lepanto without first securing the approval of Lepanto. Nielson, then,
was to act only as an intermediary, not as an agent.
Lepanto contends that the management contract in question being one of
agency it had the right to terminate the contract at will pursuant to the provision
of Article 1733 of the old Civil Code. We find, however, a provision in the
management contract which militates against this stand of Lepanto. Paragraph
XI of the contract provides:
"Both parties to this agreement fully recognize that the terms of this
Agreement are made possible only because of the faith or confidence
that the Officials of each company have in the other; therefore, in order
to assure that such confidence and faith shall abide and
continue, NIELSON agrees that LEPANTO may cancel this Agreement at
any time upon ninety (90) days written notice, in the event
that NIELSON for any reason whatsoever, except acts of God, strike and
other causes beyond its control, shall cease to prosecute the operation
and development of the properties herein described, in good faith and in
accordance with approved mining practice."
It is thus seen, from the above-quoted provision of paragraph XI of the
management contract, that Lepanto could not terminate the agreement at
will. Lepanto could terminate or cancel the agreement by giving notice of
termination ninety days in advance only in the event that Nielson should
prosecute in bad faith and not in accordance with approved mining practice the
operation and development of the mining properties of Lepanto. Lepanto could
not terminate the agreement if Nielson should cease to prosecute the operation
and development of the mining properties by reason of acts of God, strike and
other causes beyond the control of Nielson.
The phrase "Both parties to this agreement fully recognize that the terms of this
agreement are made possible only because of the faith and confidence of the
officials of each company have in the other" in paragraph XI of the management
contract does not qualify the relation between Lepanto and Nielson as that of
principal and agent based on trust and confidence, such that the contractual
relation may be terminated by the principal at any time that the principal loses
trust and confidence in the agent. Rather, that phrase simply implies the
circumstance that brought about the execution of the management contract.
Thus, in the annual report for 1936 2 , submitted by Mr. C. A. Dewit, President
of Lepanto, to its' stockholders, under date of March 15, 1937, we read the
following:
"To the Stockholders:
xxx xxx xxx
"The incorporation of our Company was effected as a result of
negotiations with Messrs. Nielson & Co., Inc., and an offer by these
gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August 11,
1936, reading as follows:
'Messrs. Cookes and Lednicky,'
'Present.
'Re: Mankayan Copper Mines.
'GENTLEMEN:
'After an examination of your property by our engineers, we have
decided to offer as we hereby offer to underwrite the entire issue
of stock of a corporation to be formed for the purpose of taking
over said properties, said corporation to have an authorized
capital of P1,750,000.00, of which P700,000.00 will be issued in
escrow to the claimowners in exchange for their claims, and the
balance of P1,050,000.00 we will sell to the public at par or take
ourselves.
'The arrangement will be under the following conditions:
'1.The subscriptions for cash shall be payable 50% at time of
subscription and the balance subject to the call of the Board of
Directors of the proposed corporation.
'2.We shall have an underwriting and brokerage commission of
10% of the P1,050,000.00 to be sold for cash to the public, said
commission to be payable from the first payment of 50% on each
subscription.
'3.We will bear the cost of preparing and mailing any prospectus
that may be required, but no such prospectus will be sent out
until the text thereof has been first approved by the Board of
Directors of the proposed corporation.
'4.That after the organization of the corporation, all operating
contract be entered into between ourselves and said corporation,
under the terms which the property will be developed and mined
and a mill erected, under our supervision, our compensation to be
P2,000.00 per month until the property is put on a profitable
basis and P2,500.00 per month plus 10% of the net profits for a
period of five years thereafter.`
'5.That we shall have the option to renew said operating contract
for an additional period of five years, on the same basis as the
original contract, upon the expiration thereof.
'It is understood that the development and mining operations on
said property, and the erection of the mill thereon, and the
expenditures therefore, shall be subject to the general control of
the Board of Directors of the proposed corporation, and, in case
you accept this proposition, that a detailed operating contract will
be entered into, covering the relationships between the parties.
Yours very truly,
(Sgd.) L. R. Nielson'"
"Pursuant to the provisions of paragraph 2 of this offer,
Messrs. Nielson & Co., took subscriptions for One Million Fifty Thousand
Pesos (P1,050,000.00) in shares of our Company and their underwriting
and brokerage commission has been paid. More than fifty per cent of
these subscriptions have been paid to the Company in cash. The
claimowners have transferred their claims to the Corporation, but the
P700,000.00 in stock which they are to receive therefor, is as yet held in
escrow.
"Immediately upon the formation of the Corporation Messrs. Nielson &
Co., assumed the Management of the property under the control of the
Board of Directors. A modification in the Management Contract was
made with the consent of all the then stockholders, in virtue of which
the compensation of Messrs. Nielson & Co., was increased to P2,500.00
per month when mill construction began. The formal Management
Contract was not entered into until January 30, 1937."
xxx xxx xxx
"Manila, March 15, 1937
(Sgd.) "C.A. DeWitt
"President"
We can gather from the foregoing statements in the annual report for 1936, and
from the provision of paragraph XI of the Management contract, that the
employment by Lepanto of Nielson to operate and manage its mines was
principally in consideration of the know-how and technical services
that Nielson offered Lepanto. The contract thus entered into pursuant to the
offer made by Nielson and accepted by Lepanto was a "detailed operating
contract". It was not a contract of agency. Nowhere in the record is it shown
that Lepanto considered Nielson as its agent and that Lepanto terminated the
management contract because it had lost its trust and confidence in Nielson.

The contention of Lepanto that it had terminated the management contract in
1945, following the liberation of the mines from Japanese control, because the
relation between it and Nielson was one of agency and as such it could terminate
the agency at will, is, therefore, untenable. On the other hand, it can be said
that, in asserting that it had terminated or cancelled the management contract in
1945, Lepanto had thereby violated the express terms of the management
contract. The management contract was renewed to last until January 31, 1947,
so that the contract had yet almost two years to go upon the liberation of the
mines in 1945. There is no showing that Nielson had ceased to prosecute the
operation and development of the mines in good faith and in accordance with
approved mining practice which would warrant the termination of the contract
upon ninety days written notice. In fact there was no such written notice of
termination. It is an admitted fact that Nielson ceased to operate and develop
the mines because of the war a cause beyond the control of Nielson.
Indeed, if the management contract in question was intended to create a
relationship of principal and agent between Lepanto andNielson, paragraph XI of
the contract should not have been inserted because, as provided in Article 1733
of the old Civil Code, agency is essentially revocable at the will of the principal -
that means, with or without cause. But precisely said paragraph XI was inserted
in the management contract to provide for the cause for its revocation. The
provision of paragraph XI must be given effect.
In the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to
all, 3 and if some stipulation of any contract should admit of several meanings, it
shall be understood as bearing that import which is most adequate to render it
effectual. 4
It is Our considered view that by express stipulation of the parties, the
management contract in question is not revocable at the will of Lepanto. We rule
that this management contract is not a contract of agency as defined in Article
1709 of the old Civil Code, but a contract of lease of services as defined in Article
1544 of the same Code. This contract can not be unilaterally revoked
by Lepanto.
The first ground of the motion for reconsideration should, therefore, be brushed
aside.
2.In the second, third and fifth grounds of its motion for
reconsideration, Lepanto maintains that this Court erred, in holding that
paragraph II of the management contract suspended the period of said contract,
in holding that the agreement was not only suspended but was extended on
account of the war, and in holding that the period of suspension on account of
the war lasted from February, 1942 to June 26, 1948. We are going to discuss
these three grounds together because they are inter-related.
In Our decision we have dwelt lengthily on the points that the management
contract was suspended because of the war, and that the period of the contract
was extended for the period equivalent to the time when Nielson was unable to
perform the work of mining and milling because of the adverse effects of the war
on the work of mining and milling. It is the contention of Lepantothat the
happening of those events, and the effects of those events, simply suspended
the performance of the obligations by either party in the contract, but did not
suspend the period of the contract, much less extended the period of the
contract.
We have conscientiously considered the arguments of Lepanto in support of
these three grounds, but We are not persuaded to reconsider the rulings that We
made in Our decision.
We want to say a little more on these points, however. Paragraph II of the
management contract provides as follows:
"In the event of inundation, flooding of the mine, typhoon, earthquake
or any other force majeure, war, insurrection, civil commotion,
organized strike, riot, fire, injury to the machinery or other event or
cause reasonably beyond the control of NIELSON and which adversely
affects the work of mining and milling; NIELSON shall report such fact
toLEPANTO and without liability or breach of the terms of this
Agreement, the same shall remain in suspense, wholly or partially during
the terms of such inability."(Italics supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that
upon the happening of any of the events enumerated therein, which adversely
affects the work of mining and milling, the agreement is deemed suspended for
as long asNielson is unable to perform its work of mining and milling because of
the adverse effects of the happening of the event on the work of mining and
milling. During the period when the adverse effects on the work of mining and
milling exist, neither party in the contract would be held liable for non-
compliance of its obligation under the contract. In other words, the operation of
the contract is suspended for as long as the adverse effects of the happening of
any of those events had impeded or obstructed the work of mining and milling.
An analysis of the phraseology of the above-quoted paragraph II of the
management contract readily supports the conclusion that it is the agreement, or
the contract, that is suspended. The phrase "the same" can refer to no other
than the term "Agreement" which immediately precedes it. The "Agreement"
may be wholly or partially suspended, and this situation will depend on whether
the event wholly or partially affected adversely the work of mining and milling. In
the instant case, the war had adversely affected and wholly at that the
work of mining and milling. We have clearly stated in Our decision the
circumstances brought about by the war which caused the whole or total
suspension of the agreement or of the management contract.
LEPANTO itself admits that the management contract was suspended. We quote
from the brief of LEPANTO:
"Probably, what Nielson meant was, it was prevented by Lepanto to
assume again the management of the mine in 1945, at the precise time
when defendant was at the feverish phase of rehabilitation and although
the contract had already been suspended." (Lepanto's Brief, p. 9)
". . . it was impossible, as a result of the destruction of the mine, for the
plaintiff to manage and operate the same and because, as provided in
the agreement, the contract was suspended by reason of the war."
(Lepanto's Brief, pp. 9-10)
"Clause II, by its terms, is clear that the contract is suspended in case
fortuitous event or force majeure, such as war, adversely affects the
work of mining and milling." (Lepanto's Brief, p. 49)
Lepanto is correct when it said that the obligations under the contract were
suspended upon the happening of any of the events enumerated in paragraph II
of the management contract. Indeed, those obligations were suspended because
the contract itself was suspended. When we talk of a contract that has been
suspended we certainly mean that the contract temporarily ceased to be
operative, and the contract becomes operative again upon the happening of a
condition or when a situation obtains which warrants the termination of the
suspension of the contract.
In Our decision We pointed out that the agreement in the management contract
would be suspended when two conditions concur, namely: (1) the happening of
the event constituting a force majeure that was reasonably beyond the control
of Nielson, and (2) that the event constituting the force majeure adversely
affected the work of mining and milling. The suspension, therefore, would last
not only while the event constituting the force majeure continued to occur but
also for as long as the adverse effects of the force majeure on the work of
mining and milling had not been eliminated. Under the management contract the
happening alone of the event constituting the force majeure which did not affect
adversely the work of mining and milling would not suspend the period of the
contract. It is only when the two conditions concur that the period of the
agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the original
mill, the original power plant, the supplies and equipment, and all installations at
the Mankayan mines of Lepanto, were destroyed upon order of the United States
Army, to prevent their utilization by the enemy. It is not denied that for the
duration of the war Nielson could not undertake the work of mining and milling.
When the mines were liberated from the enemy in August, 1945, the condition of
the mines, the mill, the power plant and other installations, was not the same as
in February 1942 when they were ordered destroyed by the US army. Certainly,
upon the liberation of the mines from the enemy, the work of mining and milling
could not be undertaken by Nielsonunder the same favorable circumstances that
obtained before February 1942. The work of mining and milling, as undertaken
byNielson in January, 1942, could not be resumed by Nielson soon after
liberation because of the adverse effects of the war, and this situation continued
until June of 1948. Hence, the suspension of the management contract did not
end upon the liberation of the mines in August, 1945. The mines and the mill
and the installations, laid waste by the ravages of war, had to be reconstructed
and rehabilitated, and it can be said that it was only on June 26, 1948 that the
adverse effects of the war on the work of mining and milling had ended, because
it was on that date that the operation of the mines and the mill was resumed.
The period of suspension should, therefore, be reckoned from February 1942
until June 26, 1948, because it was during this period that the war and the
adverse effects of the war on the work of mining and milling had lasted. The
mines and the installations had to be rehabilitated because of the adverse effects
of the war. The work of rehabilitation started soon after the liberation of the
mines in August, 1945 and lasted until June 26, 1948 when, as stated
in Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948
marked the official return to operation of this company at its properties at
Mankayan, Mountain province, Philippines" (Exh. F-1).

Lepanto would argue that if the management contract was suspended at all the
suspension should cease in August of 1945, contending that the effects of the
war should cease upon the liberation of the mines from the enemy. This
contention cannot be sustained, because the period of rehabilitation was still a
period when the physical effects of the war the destruction of the mines and
of all the mining installations adversely affected, and made impossible, the
work of mining and milling. Hence, the period of the reconstruction and
rehabilitation of the mines and the installations must be counted as part of the
period of suspension of the contract.
Lepanto claims that it would not be unfair to end the period of suspension upon
the liberation of the mines because soon after the liberation of the
mines Nielson insisted to resume the management work, and that Nielson was
under obligation to reconstruct the mill in the same way that it was under
obligation to construct the mill in 1937. This contention is untenable. It is true
that Nielson insisted to resume its management work after liberation, but this
was only for the purpose of restoring the mines, the mill, and other installations
to their operating and producing condition as of February 1942 when they were
ordered destroyed. It is not shown by any evidence in the record,
that Nielson had agreed, or would have agreed, that the period of suspension of
the contract would end upon the liberation of the mines. This is so because, as
found by this Court, the intention of the parties in the management contract, and
as understood by them, the management contract was suspended for as long as
the adverse effects of the force majeure on the work of mining and milling had
not been removed, and the contract would be extended for as long as it was
suspended. Under the management contract Nielson had the obligation to erect
and operate the mill, but not to re-erect or reconstruct the mill in case of its
destruction by force majeure.
It is the considered view of this Court that it would not be fair to Nielson to
consider the suspension of the contract as terminated upon the liberation of the
mines because then Nielson would be placed in a situation whereby it would
have to suffer the adverse effects of the war on the work of mining and milling.
The evidence shows that as of January 1942 the operation of the mines under
the management of Nielson was already under beneficial conditions, so much so
that dividends were already declared by Lepanto for the years 1939, 1940 and
1941. To make the management contract immediately operative after the
liberation of the mines from the Japanese, at the time when the mines and all its
installations were laid waste as a result of the war, would be to place Nielson in a
situation whereby it would lose all the benefits of what it had accomplished in
placing theLepanto mines in profitable operation before the outbreak of the war
in December, 1941. The record shows that Nielson started its management
operation way back in 1936, even before the management contract was entered
into. As early as August 1936Nielson negotiated with Messrs. C.I. Cookes and
V.L. Lednicky for the operation of the Mankayan mines and it was the result of
those negotiations that Lepanto was incorporated; that it was Nielson that
helped to capitalize Lepanto, and that after the formation of the corporation
(Lepanto) Nielson immediately assumed the management of the mining
properties of Lepanto. It was not until January 30, 1937 when the management
contract in question was entered into between Lepanto and Nielson(Exhibit A).
A contract for the management and operation of mines calls for a speculative
and risky venture on the part of the manager-operator. The manager-operator
invests its technical know-how, undertakes back-breaking efforts and
tremendous spade-work, so to say, in the first years of its management and
operation of the mines, in the expectation that the investment and the efforts
employed might be rewarded later with success. This expected success may
never come. This had happened in the very case of the Mankayan mines where,
as recounted by Mr. Lednicky of Lepanto, various persons and entities of
different nationalities, including Lednicky himself, invested all their money and
failed. The manager-operator may not strike sufficient ore in the first, second,
third, or fourth year of the management contract, or he may not strike ore even
until the end of the fifth year. Unless the manager-operator strikes sufficient
quantity of ore he cannot expect profits or reward for his investment and efforts.
In the case of Nielson, its corps of competent engineers, geologists, and
technicians begun working on the Mankayan mines ofLepanto since the latter
part of 1936, and continued their work without success and profit through 1937,
1938, and the earlier part of 1939. It was only in December of 1939 when the
efforts of Nielson started to be rewarded when Lepanto realized profits and the
first dividends were declared. From that time on Nielson could expect profit to
come to it as in fact Lepanto declared dividends for 1940 and 1941 if the
development and operation of the mines and the mill would continue
unhampered. The operation, and the expected profits, however, would still be
subject to hazards due to the occurrence of fortuitous events, fires, earthquakes,
strikes, war, etc., constituting force majeure, which would result in the
destruction of the mines and the mill. One of these diverse causes, or one after
the other, may consume the whole period of the contract, and if it should
happen that way the manager- operator would reap no profit to compensate for
the first years of spade-work and investment of efforts and know-how. Hence, in
fairness to the manager-operator, so that he may not be deprived of the benefits
of the work he had accomplished, the force majeure clause is incorporated as a
standard clause in contracts for the management and operation of mines.
The nature of the contract for the management and operation of mines justifies
the interpretation of the force majeure clause, that a period equal to the period
of suspension due to force majeure should be added to the original term of the
contract by way of an extension. We, therefore, reiterate the ruling in Our
decision that the management contract in the instant case was suspended from
February, 1942 to June 26, 1948, and that from the latter date the contract had
yet five years to go.
3.In the fourth ground of its motion for reconsideration, Lepanto maintains that
this Court erred in reversing the finding of the trial court that Nielson's action has
prescribed, by considering only the first claim and ignoring the prescriptibility of
the other claims.
This ground of the motion for reconsideration has no merit.
In Our decision We stated that the claims of Nielson are based on a written
document, and, as such, the cause of action prescribes in ten years. 5 Inasmuch
as there are different claims which accrued on different dates the prescriptive
periods for all the claims are not the same. The claims of Nielson that have been
awarded by this Court are itemized in the dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson's compensation in
the sum of P17,500.00, which is equivalent to 10% of the cash dividends
declared by Lepanto in December, 1941. As We have stated in Our decision, this
claim accrued on December 31, 1941, and the right to commence an action
thereon started on January 1, 1942. We declared that the action on this claim
did not prescribe although the complaint was filed on February 6, 1958 or
after a lapse of 16 years, 1 month and 5 days because of the operation of the
moratorium law. We declared that under the applicable decisions of this
Court 6 the moratorium period of 8 years, 2 months and 8 days should be
deducted from the period that had elapsed since the accrual of the cause of
action to the date of the filing of the complaint, so that there is a period of less
than 8 years to be reckoned for the purpose of prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March 10,
1945, which provides as follows:
"Enforcement of payments of all debts and other monetary
obligations payable in the Philippines, except debts and other monetary
obligations entered into in any area after declaration by Presidential
Proclamation that such area has been freed from enemy occupation and
control, is temporarily suspended pending action by the Commonwealth
Government." (41 O.G. 56-57; Emphasis supplied)
Executive Order No. 32 covered all debts and monetary obligation contracted
before the war (or before December 8, 1941) and those contracted subsequent
to December 8, 1941 and during the Japanese occupation. Republic Act No. 342,
approved on July 26, 1948, lifted the moratorium provided for in Executive Order
No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who had not filed
war damage claims with the United States War Damage Commission. In other
words, after the effectivity of Republic Act No. 342, the debt moratorium was
limited: (1) to debts and other monetary obligations which were contracted after
December 8, 1941 and during the Japanese occupation, and (2) to those pre-war
(or pre-December 8, 1941) debts and other monetary obligations where the
debtors filed war damage claims. That was the situation up to May 18, 1953
when this Court declared Republic Act No. 342 unconstitutional. 7 It has been
held by this Court, however, that from March 10, 1945 when Executive Order No.
32 was issued, to May 18, 1953 when Republic Act No. 342 was declared
unconstitutional or a period of 8 years, 2 months and 8 days the debt
moratorium was in force, and had the effect of suspending the period of
prescription. 8
Lepanto is wrong when in its motion for reconsideration it claims that the
moratorium provided for in Executive Order No. 32 was continued by Republic
Act No. 342 "only with respect to debtors of pre-war obligations or those
incurred prior to December 8, 1941," and that "the moratorium
was lifted and terminated with respect to obligations incurred after December 8,
1941." 9

This Court has held that Republic Act No. 342 does not apply to debts contracted
during the war and did not lift the moratorium in relation thereto. 10 In the case
of Abraham, et al. vs. Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan.
31, 1962, this Court said:
"Respondents, however, contend that Republic Act No. 342, which took
effect on July 26, 1948, lifted the moratorium on debts contracted
during the Japanese occupation. The court has already held that
Republic Act No. 342 did not lift the moratorium on debts contracted
during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949)
but modified Executive Order No. 32 as to pre-war debts, making the
protection available only to debtors who had war damage claims (Sison
vs. Mirasol, G.R. No. L-4711, Oct. 3, 1952)"
We therefore reiterate the ruling in Our decision that the claim involved in the
first item awarded to Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of
action of the claim involved in the first item in the award also holds true with
respect to the second item in the award, which refers to Nielson's claim for
management fee of P2,500.00 for January, 1942. Lepanto admits that this
second item, like the first, is a monetary obligation. The right of action
ofNielson regarding this claim accrued on January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium
law is not applicable. That is the reason why in Our decision We did not discuss
the question of prescription regarding these items. The claims of Nielson involved
in these items are based on the management contract, and Nielson's cause of
action regarding these claims prescribes in ten years. Corollary to Our ruling that
the management contract was suspended from February, 1942 until June 26,
1948, and that the contract was extended for five years from June 26, 1948, the
right of action of Nielson to claim for what is due to it during that period of
extension accrued during the period from June 26, 1948 till the end of the five-
year extension period or until June 26, 1953. And so, even if We reckon June
26, 1948 as the starting date of the ten-year period in connection with the
prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in
the decision, it is obvious that when the complaint was filed on February 6, 1958
the ten-year prescriptive period had not yet lapsed.
In Our decision We have also ruled that the right of action
of Nielson against Lepanto had not prescribed because of the arbitration clause
in the Management contract. We are satisfied that there is evidence
that Nielson had asked for arbitration, and an arbitration committee had been
constituted. The arbitration committee, however, failed to bring about any
settlement of the differences between Nielson and Lepanto. On June 25, 1957
counsel for Lepanto definitely advised Nielson that they were not entertaining
any claim of Nielson. The complaint in this case was filed on February 6, 1958.
4.In the sixth ground of its motion for reconsideration, Lepanto maintains that
this Court "erred in awarding as damages (a) 10% of the cash dividends
declared and paid in December, 1941; (b) the management fee of P2,500.00 for
the month of January 1942; and (c) the full contract price for the extended
period of 60 months, since the damages were never demanded nor proved and,
in any case, not allowable under the general law on damages."
We have stated in Our decision that the original agreement in the management
contract regarding the compensation of Nielsonwas modified, such that instead
of receiving a monthly compensation of P2,500.00 plus 10% of the net profits
from the operation of the properties for the preceding month, 11 Nielson would
receive a compensation of P2,500.00 a month, plus (1)10% of the dividends
declared and paid, when and as paid, during the period of the contract, and at
the end of each year, (2)10% of any depletion reserve that may be set up, and
(3) 10% of any amount expended during the year out of surplus earnings for
capital account.
It is shown that in December, 1941, cash dividends amounting to P175,000.00
was declared by Lepanto. 12 Nielson, therefore, should receive the equivalent of
10% of this amount, or the sum of P17,500.00. We have found that this amount
was not paid toNielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of page
127 of its cash disbursement book, allegedly for 1941, in an effort to show that
this amount of P17,500.00 had been paid to Nielson. It appears, however, in this
photographic copy of page 127 of the cash disbursement book that the sum of
P17,500.00 was entered on October 29 as "surplus a/c Nielson& Co. Inc." The
entry does not make any reference to dividends or participation of Nielson in the
profits. On the other hand, in the photographic copy of page 89 of the 1941 cash
disbursement book, also attached to the motion for reconsideration, there is an
entry for P17,500.00 on April 23, 1941 which states "Accts. Pay.
Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the
participation of Nielson in the profits based on dividends declared in April 1941
as shown in Exhibit L. But in the same Exhibit L it is not stated that any dividend
was declared in October 1941. On the contrary it is stated in Exhibit L that
dividends were declared in December 1941. We cannot entertain this piece of
evidence for several reasons: (1) because this evidence was not presented
during the trial in the court below; (2) there is no showing that this piece of
evidence is newly discovered and that Lepanto was not in possession of said
evidence when this case was being tried in the court below; and (3) according to
Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and
so the sum of P17,500.00 which appears to have been paid to Nielson in October
1941 could not be payment of the equivalent of 10% of the cash dividends that
were later declared in December, 1941.
As regards the management fee of Nielson corresponding to January, 1942, in
the sum of P2,500.00, We have also found thatNielson is entitled to be paid this
amount, and that this amount was not paid by Lepanto to Nielson.
Whereas, Lepanto was able to prove that it had paid the management fees
of Nielson for November and December, 1941, 13 it was not able to present any
evidence to show that the management fee of P2,500.00 for January, 1942 had
been paid.
It having been declared in Our decision, as well as in this resolution, that the
management contract had been extended for 5 years, or sixty months, from
June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to claim
for its compensation during that period of extension had not prescribed, it
follows that Nielson should be awarded the management fees during the whole
period of extension, plus the 10% of the value of the dividends declared during
the said period of extension, the 10% of the depletion reserve that was set up,
and the 10% of any amount expended out of surplus earnings for capital
account.
5.In the seventh ground of its motion for reconsideration, Lepanto maintains that
this Court erred in ordering Lepanto to issue and deliver to Nielson shares of
stock together with fruits thereof.
In Our decision, We declared that pursuant to the modified agreement regarding
the compensation of Nielson which provides, among others, that Nielson would
receive 10% of any dividends declared and paid, when and as
paid, Nielson should be paid 10% of the stock dividends declared
by Lepanto during the period of extension of the contract.
It is not denied that on November 28, 1949, Lepanto declared stock dividends
worth P1,000,000.00; and on August 22, 1950, it declared stock dividends worth
P2,000,000.00. In other words, during the period of extension Lepanto had
declared stock dividends worth 3,000,000.00. We held in Our decision
that Nielson is entitled to receive 10% of the stock dividends declared, or shares
of stocks, worth P300,000.00 at the par value of P0.10 per share. We
ordered Lepanto to issue and deliver to Nielsonthose shares of stocks as well as
all the fruits or dividends that accrued to said shares.
In its motion for reconsideration, Lepanto contends that the payment
to Nielson of stock dividends as compensation for its services under the
management contract is a violation of the Corporation Law, and that it was not,
and it could not be, the intention of Lepanto and Nielson as contracting
parties that the services of Nielson should be paid in shares of stock taken out
of stock dividends declared by Lepanto. We have assiduously considered the
arguments adduced by Lepanto in support of its contention, as well as the
answer of Nielson in this connection, and We have arrived at the conclusion that
there is merit in the contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:
"No corporation organized under this Act shall create or issue bills, notes
or other evidence of debt, for circulation as money, and no corporation
shall issue stock or bonds except in exchange for actual cash paid to the
corporation or for: (1) property actually received by it at a fair valuation
equal to the par or issued value of the stock or bonds so issued; and in
case of disagreement as to their value, the same shall be presumed to
be the assessed value or the value appearing in invoices or other
commercial documents, as the case may be; and the burden or proof
that the real present value of the property is greater than the assessed
value or value appearing in invoices or other commercial documents, as
the case may be, shall be upon the corporation, or for (2) profits earned
by it but not distributed among its stockholders or members; Provided,
however, That no stock or bond dividend shall be issued without the
approval of stockholders representing not less than two-thirds of all
stock then outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.

xxx xxx xxx
"No corporation shall make or declare any dividend except from the
surplus profits arising from its business, or divide or distribute its capital
stock or property other than actual profits among its members or
stockholders until after the payment of its debts and the termination of
its existence by limitation or lawful dissolution: Provided, That banking,
savings and loan, and trust corporations may receive deposits and issue
certificates of deposit, checks, drafts, and bills of exchange, and the like
in the transaction of the ordinary business of banking, savings and loan,
and trust corporations." (As amended by Act No. 2792, and Act No.
3518; Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the
consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special
name "stock dividends" only if they are issued in lieu of undistributed profits. If
shares of stocks are issued in exchange of cash or property then those shares do
not fall under the category of "stock dividends". A corporation may legally issue
shares of stock in consideration of services rendered to it by a person not a
stockholder, or in payment of its indebtedness. A share of stock issued to pay for
services rendered is equivalent to a stock issued in exchange of property,
because services is equivalent to property. 14Likewise a share of stock issued in
payment of indebtedness is equivalent to issuing a stock in exchange for cash.
But a share of stock thus issued should be part of the original capital stock of the
corporation upon its organization, or part of the stocks issued when the increase
of the capitalization of a corporation is properly authorized. In other words, it is
the shares of stock that are originally issued by the corporation and forming part
of the capital that can be exchanged for cash or services rendered, or property;
that is, if the corporation has original shares of stock unsold or unsubscribed,
either coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a stockholder, or to
a person already a stockholder in exchange for services rendered or for cash or
property. But a share of stock coming from stock dividends declared cannot be
issued to one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend. It is, what the term itself implies, a
distribution of the shares of stock of the corporation among the stockholders as
dividends. A stock dividend of a corporation is a dividend paid in shares of stock
instead of cash, and is properly payable only out of surplus profits.15 So, a stock
dividend is actually two things: (1) a dividend, and (2) the enforced use of the
dividend money to purchase additional shares of stock at par. 16 When a
corporation issues stock dividends, it shows that the corporation's accumulated
profits have been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind, should
opportunity offer. Far from being a realization of profits for the stockholder, it
tends rather to postpone said realization, in that the fund represented by the
new stock has been transferred from surplus to assets and no longer available
for actual distribution. 17 Thus, it is apparent that stock dividends are issued only
to stockholders. This is so because only stockholders are entitled to dividends.
They are the only ones who have a right to a proportional share in that part of
the surplus which is declared as dividends. A stock dividend really adds nothing
to the interest of the stockholder; the proportional interest of each stockholder
remains the same. 18 If a stockholder is deprived of his stock dividends and
this happens if the shares of stock forming part of the stock dividends are issued
to a non-stockholder then the proportion of the stockholder's interest changes
radically. Stock dividends are civil fruits of the original investment, and to the
owners of the shares belong the civil fruits. 19
The term "dividend" both in the technical sense and its ordinary acceptation, is
that part or portion of the profits of the enterprise which the corporation, by its
governing agents, sets apart for ratable division among the holders of the capital
stock. It means the fund actually set aside, and declared by the directors of the
corporation as a dividends, and duly ordered by the director, or by the
stockholders at a corporate meeting, to be divided or distributed among the
stockholders according to their respective interests. 20
It is Our considered view, therefore, that under Section 16 of the Corporation
Law stock dividends can not be issued to a person who is not a stockholder in
payment of services rendered. And so, in the case at bar Nielson can not be paid
in shares of stock which form part of the stock dividends of Lepanto for services
it rendered under the management contract. We sustain the contention
of Lepanto that the understanding between Lepanto and Nielson was simply to
make the cash value of the stock dividends declared as the basis for determining
the amount of compensation that should be paid to Nielson, in the proportion of
10% of the cash value of the stock dividends declared. And this conclusion of
Ours finds support in the record.
We had adverted to in Our decision that in 1940 there was some dispute
between Lepanto and Nielson regarding the application and interpretation of
certain provisions of the original contract particularly with regard to the 10%
participation of Nielson in the net profits, so that some adjustments had to be
made. In the minutes of the meeting of the Board of Directors of Lepanto on
August 21, 1940, We read the following:
"The Chairman stated that he believed that it would be better to tie the
computation of the 10% participation ofNielson & Company, Inc. to the
dividend, because Nielson will then be able to definitely compute its net
participation by the amount of the dividends declared. In addition to the
dividend, we have been setting up a depletion reserve and it does not
seem fair to burden the 10% participation of Nielson with the depletion
reserve, as the depletion reserve should not be considered as an
operating expense. After a prolonged discussion, upon motion duly
made and seconded, it was
"RESOLVED, That the President, be, and he hereby is, authorized to
enter into an agreement with Nielson & Company, Inc., modifying
Paragraph V of management contract of January 30, 1937, effective
January 1, 1940, in such a way that Nielson & Company, Inc. shall
receive 10% of any dividends declared and paid, when and as paid
during the period of the contract and at the end of each year, 10% of
any depletion reserve that may be set up and 10% of any amount
expended during the year out of surplus earnings for capital account."
(Emphasis supplied.)
From the sentence, "The Chairman stated that he believed that it would be
better to tie the computation of the 10% participation of Nielson & Company,
Inc. to the dividend, because Nielson will then be able to definitely compute its
net participation by the amount of the dividends declared" the idea is conveyed
that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to
make the value of the dividends declared whether the dividends were in cash
or in stock as the basis for determining the amount of compensation that
should be paid to Nielson, in the proportion of 10% of the cash value of the
dividends so declared. It does not mean, however, that the compensation
of Nielson would be taken from the amount actually declared as cash dividend to
be distributed to the stockholder, nor from the shares of stocks to be issued to
the stockholders as stock dividends, but from the other assets or funds of the
corporation which are not burdened by the dividends thus declared. In other
words, if, for example, cash dividends of P300,000.00 are
declared. Nielson would be entitled to a compensation of P30,000.00, but this
P30,000.00 should not be taken from the P300,000.00 to be distributed as cash
dividends to the stockholders but from some other funds or assets of the
corporation which are not included in the amount to answer for the cash
dividends thus declared. This is so because if the P30,000.00 would be taken out
from the P300,000.00 declared as cash dividends, then the stockholders would
not be getting P300,000.00 as dividends but only P270,000.00. There would be a
dilution of the dividend that corresponds to each share of stock held by the
stockholders. Similarly, if there were stock dividends worth one million pesos that
were declared, which means an issuance of ten million shares at the par value of
ten centavos per share, it does not mean that Nielson would be given 100,000
shares. It only means that Nielson should be given the equivalent of 10% of the
aggregate cash value of those shares issued as stock dividends. That this was
the understanding of Nielson itself is borne out by the fact that in its appeal
brief Nielson urged that it should be paid P300,000.00 being 10% of the
P3,000,000.00 stock dividends declared on November 28, 1949 and August 20,
1950 . . ." 21
We, therefore, reconsider that part of Our decision which declares that Nielson is
entitled to shares of stock worth P300,000.00 based on the stock dividends
declared on November 28, 1949 and on August 20, 1950, together with all the
fruits accruing thereto. Instead, We declare that Nielson is entitled to payment
by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money
value of the stock dividends worth P3,000,000.00 which were declared on
November 28, 1949 and on August 20, 1950, with interest thereon at the rate of
6% from February 6, 1958.

6.In the eighth ground of its motion for reconsideration Lepanto maintains that
this Court erred in awarding to Nielson an undetermined amount of shares of
stock and/or cash, which award can not be ascertained and executed without
further litigation.
In view of Our ruling in this resolution that Nielson is not entitled to receive
shares of stock as stock dividends in payment of its compensation under the
management contract, We do not consider it necessary to discuss this ground of
the motion for reconsideration. The awards in the present case are all reduced to
specific sums of money.
7.In the ninth ground of its motion for reconsideration Lepanto maintains that
this Court erred in rendering judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of this
Court. In Our decision We have stated the reason why the award of P50,000.00
for attorney's fees is considered by this Court as reasonable.
Accordingly, We resolve to modify the decision that We rendered on December
17, 1966, in the sense that instead of awardingNielson shares of stock worth
P300,000.00 at the par value of ten centavos (P0.10) per share based on the
stock dividends declared by Lepanto on November 28, 1949 and August 20,
1950, together with their fruits, Nielson should be awarded the sum of
P300,000.00 which is an amount equivalent to 10% of the cash value of the
stock dividends thus declared, as part of the compensation due Nielson under
the management contract. The dispositive portion of the decision should,
therefore, be amended, to read as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the
decision of the court a quo and enter in lieu thereof another, ordering the
appellee Lepanto to pay the appellant Nielson the different amounts as specified
hereinbelow:
(1)Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of
the cash dividends of December, 1941, with legal interest thereon from the date
of the filing of the complaint;
(2)Two thousand five hundred pesos (P2,500.00), as management fee for
January, 1942, with legal interest thereon from the date of the filing of the
complaint;
(3)One hundred fifty thousand pesos (P150,000.00), representing management
fees for the sixty-month period of extension of the management contract, with
legal interest thereon from the date of the filing of the complaint;
(4)One million four hundred thousand pesos (P1,400,000.00), equivalent to 10%
of the cash dividends declared during the period of extension of the
management contract, with legal interest thereon from the date of the filing of
the complaint;
(5)Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash
value of the stock dividends declared on November 28, 1949 and August 20,
1950, with legal interest thereon from the date of the filing of the complaint;
(6)Fifty three thousand nine hundred twenty eight pesos and eighty eight
centavos (P53,928.88), equivalent to 10% of the depletion reserve set up during
the period of extension, with legal interest thereon from the date of the filing of
the complaint;
(7)Six hundred ninety four thousand three hundred sixty four pesos and seventy
six centavos (P694,364.76), equivalent to 10% of the expenses for capital
account during the period of extension, with legal interest thereon from the date
of the filing of the complaint;
(8)Fifty thousand pesos (P50,000.00) as attorney's fees; and
(9)The costs.
It is so ordered..
Concepcion, C . J ., Reyes, J.B.L., Dizon, Makalintal, Sanchez and Ruiz Castro,
JJ ., concur.
Fernando, Capistrano, Teehankee and Barredo, JJ ., did not take part.
Footnotes

36.
FIRST DIVISION
[G.R. No. 160215. November 10, 2004.]
HYDRO RESOURCES CONTRACTORS
CORPORATION, petitioner, vs. NATIONAL IRRIGATION
ADMINISTRATION, respondent.
D E C I S I O N
YNARES-SANTIAGO, J p:
Challenged in this petition for review on certiorari under Rule 45 is the Decision
of the Court of Appeals 1 dated October 29, 2002 and its Resolution dated
September 24, 2003 2 in CA-G.R. SP No. 44527, 3 reversing the judgment of the
Construction Industry Arbitration Commission (CIAC) dated June 10, 1997 4 in
CIAC Case No. 14-98 in favor of petitioner Hydro Resources Contractors
Corporation.
The facts are undisputed and are matters of record.
In a competitive bidding conducted by the National Irrigation Administration
(NIA) sometime in August 1978, Hydro Resources Contractors Corporation
(Hydro) was awarded Contract MPI-C-2 5 involving the main civil work of the
Magat River Multi-Purpose Project. The contract price for the work was pegged
at P1,489,146,473.72 with the peso component thereof amounting to
P1,041,884,766.99 and the US$ component valued at $60,657,992.37 at the
exchange rate of P7.3735 to the dollar or P447,361,706.73.
On November 6, 1978, the parties signed Amendment No. 1 6 of the contract
whereby NIA agreed to increase the foreign currency allocation for equipment
financing from US$28,000,000.00 for the first and second years of the contract
to US$38,000,000.00, to be made available in full during the first year of the
contract to enable the contractor to purchase the needed equipment and spare
parts, as approved by NIA, for the construction of the project. On April 9, 1980,
the parties entered into a Memorandum of Agreement 7 (MOA) whereby they
agreed that Hydro may directly avail of the foreign currency component of the
contract for the sole purpose of purchasing necessary spare parts and equipment
for the project. This was made in order for the contractor to avoid further delays
in the procurement of the said spare parts and equipment.
A few months after the MOA was signed, NIA and Hydro entered into a
Supplemental Memorandum of Agreement (Supplemental MOA) to include
among the items to be financed out of the foreign currency portion of the
Contract "construction materials, supplies and services as well as equipment and
materials for incorporation in the permanent works of the Project." 8
Work on the project progressed steadily until Hydro substantially completed the
project in 1982 and the final acceptance was made by NIA on February 14,
1984. 9
During the period of the execution of the contract, the foreign exchange value of
the peso against the US dollar declined and steadily deteriorated. Whenever
Hydro's availment of the foreign currency component exceeded the amount of
the foreign currency payable to Hydro for a particular period, NIA charged
interest in dollars based on the prevailing exchange rate instead of the fixed
exchange rate of P7.3735 to the dollar. Yet when Hydro received payments from
NIA in Philippine Pesos, NIA made deductions from Hydro's foreign currency
component at the fixed exchange rate of P7.3735 to US$1.00 instead of the
prevailing exchange rate. AEHTIC
Upon completion of the project, a final reconciliation of the total entitlement of
Hydro to the foreign currency component of the contract was made. The result
of this final reconciliation showed that the total entitlement of Hydro to the
foreign currency component of the contract exceeded the amount of US dollars
required by Hydro to repay the advances made by NIA for its account in the
importation of new equipment, spare parts and tools. Hydro then requested a full
and final payment due to the underpayment of the foreign exchange portion
caused by price escalations and extra work orders. In 1983, NIA and Hydro
prepared a joint computation denominated as the "MPI-C-2 Dollar Rate
Differential on Foreign Component of Escalation." 10Based on said joint
computation, Hydro was still entitled to a foreign exchange differential of
US$1,353,771.79 equivalent to P10,898,391.17.
Hydro then presented its claim for said foreign exchange differential to NIA on
August 12, 1983 11 but the latter refused to honor the same. Hydro made
several 12 demands to recover its claim until the same was turned down with
finality by then NIA Administrator Federico N. Alday, Jr. on January 6, 1987. 13
On December 7, 1994, Hydro filed a request for arbitration with the Construction
Industry Arbitration Commission (CIAC). 14 In the said request, Hydro nominated
six (6) arbitrators. The case was docketed as CIAC Case No. 18-94.
NIA filed its Answer with Compulsory Counterclaim 15 raising laches, estoppel
and lack of jurisdiction by CIAC as its special defenses. NIA also submitted its six
(6) nominees to the panel of arbitrators. After appointment of the arbitrators,
both parties agreed on the Terms of Reference 16 as well as the issues submitted
for arbitration.
On March 13, 1995, NIA filed a Motion to Dismiss 17 questioning CIAC's
jurisdiction to take cognizance of the case. The latter, however, deferred
resolution of the motion and set the case for hearing for the reception of
evidence. 18 NIA moved 19 for reconsideration but the same was denied by CIAC
in an Order dated April 25, 1995. 20
Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of
Appeals where the same was docketed as CA-G.R. SP No. 37180, 21 which
dismissed the petition in a Resolution dated June 28, 1996. 22
NIA challenged the resolution of the Court of Appeals before this Court in a
special civil action for certiorari, docketed as G.R. No. 129169. 23
Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of
Hydro. 24 NIA filed a Petition for Review on Appeal before the Court of Appeals,
which was docketed as CA-G.R. SP No. 44527. 25
During the pendency of CA-G.R. SP No. 44527 before the Court of Appeals, this
Court dismissed special civil action for certioraridocketed as G.R. No. 129169 on
the ground that CIAC had jurisdiction over the dispute and directed the Court of
Appeals to proceed with reasonable dispatch in the disposition of CA-G.R. SP No.
44527. NIA did not move for reconsideration of the said decision, hence, the
same became final and executory on December 15, 1999. 26
Thereafter, the Court of Appeals rendered the challenged decision in CA-G.R. SP
No. 44527, reversing the judgment of the CIAC on the grounds that: (1) Hydro's
claim has prescribed; (2) assuming that Hydro was entitled to its claim, the rate
of exchange should be based on a fixed rate; (3) Hydro's claim is contrary to
R.A. No. 529; 27 (4) NIA's Certification of Non-Forum-Shopping was proper even
if the same was signed only by counsel and not by NIA's authorized
representative; and (5) NIA did not engage in forum-shopping.
Hydro's Motion for Reconsideration was denied in Resolution of September 24,
2003.
Hence, this petition.
Addressing first the issue of prescription, the Court of Appeals, in ruling that
Hydro's claim had prescribed, reasoned thus:
Nevertheless, We find good reason to apply the principle of prescription
against HRCC. It is well to note that Section 25 of the General
Conditions of the subject contract provides (CIAC Decision, p. 15, Rollo,
p. 57):
Any controversy or dispute arising out of or relating to this
Contract which cannot be resolved by mutual agreement shall be
decided by the Administrator within thirty (30) calendar days from
receipt of a written notice from Contractor and who shall furnish
Contractor a written copy of this decision. Such decision shall be
final and conclusive unless within thirty (30) calendar days from
the date of receipt thereof, Contractor shall deliver to NIA a
written notice addressed to the Administrator that he desires that
the dispute be submitted to arbitration. Pending decision from
arbitration, Contractor shall proceed diligently with the
performance of the Contract and in accordance with the decision
of the Administrator. (Emphasis and Italics Ours)
Both parties admit the existence of this provision in the Contract
(Petition, p. 4; Comment, p. 16; Rollo, pp. 12 and 131). Apropos, the
following matters are clear: (1) any controversy or dispute between the
parties arising from the subject contract shall be governed by the
provisions of the contract; (2) upon the failure to arrive at a mutual
agreement, the contractor shall submit the dispute to the Administrator
of NIA for determination; and (3) the decision of the Administrator shall
become final and conclusive, unless within thirty (30) calendar days
from the date of receipt thereof, the Contractor shall deliver to NIA a
written notice addressed to the Administrator that he desires that the
dispute be submitted for arbitration. cHCIDE
Prescinding from the foregoing matters, We find that the CIAC erred in
granting HRCC's claim considering that the latter's right to make such
demand had clearly prescribed. To begin with, on January 7, 1986,
Cesar L. Tech (NIA's Administrator at the time) informed HRCC in writing
that after a review of the additional points raised by the latter, NIA
confirms its original recommendation not to allow the said claim (Annex
"F"; Rollo, p. 81; CIAC Decision, p. 11; Rollo, p. 53). This should have
propelled private respondent to notify and signify to NIA of intention to
submit the dispute to arbitration pursuant to the provision of the
contract. Yet, it did not. Instead it persisted to send several letters to
NIA reiterating the reason for its rejected claim (CIAC Decision, p. 11;
Rollo, p. 53). 28
We disagree for the following reasons:
First, the appellate court clearly overlooked the fact that NIA, through then
Administrator Federico N. Alday, Jr., denied "with finality" Hydro's claim only on
January 6, 1987 in a letter bearing the same date 29 which reads:

This refers to your letter dated November 7, 1986 requesting
reconsideration on your claim for payment of the Dollar Rate Differential
of Price Escalation in Contract No. MPI-C-2.
We have reviewed the relevant facts and issues as presented and the
additional points raised in the abovementioned letter in the context of
the Contract Documents and we find no strong and valid reason to
reverse the earlier decision of NIA's previous management denying your
claim. Therefore, we regret that we have to reiterate the earlier official
stand of NIA under its letter dated January 7, 1986, that confirms the
original recommendation which had earlier been presented in our 4th
Indorsement dated February 5, 1985 to your office.
In view hereof, we regret to say with finality that the claim cannot be
given favorable consideration. (Emphasis and italics supplied)
Hydro received the above-mentioned letter on January 27, 1987. 30 Pursuant to
Section 25 of the Contract's General Conditions (GC-25), Hydro had thirty (30)
days from receipt of said denial, or until February 26, 1987, within which to
notify NIA of its desire to submit the dispute to arbitration.
On February 18, 1987, Hydro sent a letter 31 to NIA, addressed to then NIA
Administrator Federico N. Alday, Jr., manifesting its desire to submit the dispute
to arbitration. The letter was received by NIA on February 19, 1987, which
was within the thirty-day prescriptive period.
Moreover, a circumspect scrutiny of the wording of GC-25 with regard to the
thirty-day prescriptive period shows that said proviso is intended to apply to
disputes which arose during the actual construction of the project and not for
controversies which occurred after the project is completed. The rationale for
such a stipulation was aptly explained thus by the CIAC in its Decision in CIAC
Case No. 18-94:
In construction contracts, there is invariably a provision for interim
settlement of disputes. The right to settle disputes is given to the owner
or his representative, either an architect or engineer, designated as
"owner's representative," only for the purpose of avoiding delay in the
completion of the project. In this particular contract, that right was
reserved to the NIA Administrator. The types of disputes contemplated
were those which may have otherwise affected the progress of the
work. It is very clear that this is the purpose of the limiting periods in
this clause that the dispute shall be resolved by the Administrator within
30 days from receipt of a written notice from the Contractor and that
the Contractor may submit to arbitration this dispute if it does not agree
with the decision of the Administrator, and "Pending decision from
arbitration, Contractor shall proceed diligently with the performance of
the Contract and in accordance with the decision of the Administrator."
In this case, the dispute had arisen after completion of the Project. The
reason for the 30-day limitation no longer applies, and we find no legal
basis for applying it. Moreover, in Exhibit "B," NIA Administrator Cesar L.
Tech had, instead of rendering an adverse decision, by signing the
document with HRCC's Onofre B. Banson, implicitly approved the
payment of the foreign exchange differential, but this payment could not
be made because of the opinion of Auditor Saldua and later of the
Commission on Audit. 32
Second, as early as April 1983, Hydro and NIA, through its Administrator Cesar L.
Tech, prepared the Joint Computation which shows that Hydro is entitled to the
foreign currency differential. 33 As correctly found by the CIAC, this computation
constitutes a written acknowledgment of the debt by the debtor under Article
1155 of the Civil Code, which states:
ART. 1155.The prescription of actions is interrupted when they are filed
before the court, when there is a written extrajudicial demand by the
creditors, and when there is any written acknowledgment of the debt by
the debtor. (Emphasis and italics supplied) aDSIHc
Instead of upholding the CIAC's findings on this point, the Court of Appeals ruled
that Cesar L. Tech's act of signing the Joint Computation was an ultra vices act.
This again is patent error. It must be noted that the Administrator is the highest
officer of the NIA. Furthermore, Hydro has been dealing with NIA through its
Administrator in all of its transactions with respect to the contract and
subsequently the foreign currency differential claim. The NIA Administrator is
empowered by the Contract to grant or deny foreign currency differential claims.
It would be preposterous for the NIA Administrator to have the power of
granting claims without the authority to verify the computation of such claims.
Finally, the records of the case will show that NIA itselfnever disputed its
Administrator's capacity to sign the Joint Computation because it knew that the
Administrator, in fact, had such capacity.
Even assuming for the sake of argument that the Administrator had no authority
to bind NIA, the latter is already estopped after repeatedly representing to Hydro
that the Administrator had such authority. A corporation may be held in estoppel
from denying as against third persons the authority of its officers or agents who
have been clothed by it with ostensible or apparent authority.34 Indeed
. . . The rule is of course settled that "[a]lthough an officer or agent acts
without, or in excess of, his actual authority if he acts within the scope
of an apparent authority with which the corporation has clothed him by
holding him out or permitting him to appear as having such
authority, the corporation is bound thereby in favor of a person who
deals with him in good faith in reliance on such apparent authority, as
where an officer is allowed to exercise a particular authority with respect
to the business, or a particular branch of it, continuously and publicly,
for a considerable time.". . . 35
Third, NIA has clearly waived the prescriptive period when it continued to
entertain Hydro's claim regarding new matters raised by the latter in its letters to
NIA and then issuing rulings thereon. In this regard, Article 1112 of the Civil
Code provides that:
ART. 1112.Persons with capacity to alienate property may renounce
prescription already obtained, but not the right to prescribe in the
future.
Prescription is deemed to have been tacitly renounced when the
renunciation results from acts which imply the abandonment of the right
acquired. (Emphasis and italics supplied)
Certainly, when a party has renounced a right acquired by prescription through
its actions, it can no longer claim prescription as a defense. 36
Fourth, even assuming that NIA did not waive the thirty-day prescriptive period,
it clearly waived the effects of such period when it actively participated in
arbitration proceedings through the following acts:
a)On January 6, 1995, NIA voluntarily filed its written appearance,
readily submitted its Answer and asserted its own Counterclaims;
b)In the Compliance which accompanied the Answer, NIA also submitted
its six nominees to the Arbitral Tribunal to be constituted, among of
which one was eventually appointed to the tribunal;
c)NIA also actively participated in the deliberations for and the
formulation of the Terms of Reference during the preliminary conference
set by CIAC; and
d)For the purpose of obviating the introduction of testimonial evidence
on the authenticity and due execution of its documentary evidence, NIA
even had examined, upon prior request to Hydro, all of the documents
which the latter intended to present as evidentiary exhibits for the said
arbitration case.
We now come to the issue of whether or not the provisions of R.A. No. 529,
otherwise known as an Act To Assure Uniform Value to Philippine Coin And
Currency, is applicable to Hydro's claim.
The Contract between NIA and Hydro is an internationally tendered contract
considering that it was funded by the International Bank for Reconstruction and
Development (IBRD). As a contract funded by an international organization,
particularly one recognized by the Philippines, 37 the contract is exempt from the
provisions of R.A. No. 529. R.A. No. 4100 amended the provisions of R.A. 529
thus:
SECTION 1.Section one of Republic Act Numbered Five hundred and
twenty-nine, entitled "An Act to Assure Uniform Value of Philippine Coin
and Currency," is hereby amended to read as follows:
Sec. 1.Every provision contained in, or made with respect to, any
domestic obligation to wit, any obligation contracted in the
Philippines which provisions purports to give the obligee the right
to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money
of the Philippines measured thereby, be as it is hereby declared
against public policy, and null, void, and of no effect, and no such
provision shall be contained in, or made with respect to, any
obligation hereafter incurred. The above prohibition shall not
apply to (a) transactions where the funds involved are the
proceeds of loans or investments made directly or indirectly,
through bona fide intermediaries or agents, by foreign
governments, their agencies and instrumentalities, and
international financial and banking institutions so long as the
funds are identifiable, as having emanated from the sources
enumerated above; (b) transactions affecting high-priority
economic projects for agricultural, industrial and power
development as may be determined by the National Economic
Council which are financed by or through foreign funds; (c)
forward exchange transaction entered into between banks or
between banks and individuals or juridical persons; (d) import-
export and other international banking, financial investment and
industrial transactions. With the exception of the cases
enumerated in items (a), (b), (c) and (d) in the foregoing
provisions, in which bases the terms of the parties' agreement
shall apply, every other domestic obligation heretofore or
hereafter incurred, whether or not any such provision as to
payment is contained therein or made with respect thereto, shall
be discharged upon payment in any coin or currency which at the
time of payment is legal tender for public and private
debts: Provided, That if the obligation was incurred prior to the
enactment of this Act and required payment in a particular kind of
coin or currency other than Philippine currency, it shall be
discharged in Philippine currency measured at the prevailing rates
of exchange at the time the obligation was incurred, except in
case of a loan made in a foreign currency stipulated to be payable
in the same currency in which case the rate of exchange
prevailing at the time of the stipulated date of payment shall
prevail. All coin and currency, including Central Bank notes,
heretofore and hereafter issued and declared by the Government
of the Philippines shall be legal tender for all debts, public and
private. ACETSa

SECTION 2.This Act shall take effect upon its approval. (Emphasis and
italics supplied)
Even assuming ex gratia argumenti that R.A. No. 529 is applicable, it is still
erroneous for the Court of Appeals to deny Hydro's claim because Section 1 of
R.A. No. 529 states that only the stipulation requiring payment in foreign
currency is void, but not theobligation to make payment. This can be gleaned
from the provision that "every other domestic obligation heretofore or hereafter
incurred" shall be "discharged upon payment in any coin and currency which at
the time is legal tender for public and private debts." In Republic Resources and
Development Corporation v. Court of Appeals, 38 it was held:
. . . it is clear from Section 1 of R.A. No. 529 that what is declared null
and void is the "provision contained in, or made with respect to, any
domestic obligation to wit, any obligation contracted in the Philippines
which provision purports to give the obligee the right to require payment
in gold or in a particular kind of coin or currency other than Philippine
currency or in an amount of money of the Philippines measured thereby"
and not the contract or agreement which contains such proscribed
provision. (Emphasis supplied)
More succinctly, we held in San Buenaventura v. Court of Appeals 39 that
It is to be noted under the foregoing provision that while an agreement
to pay an obligation in a currency other than Philippine currency is null
and void as contrary to public policy, what the law specifically prohibits
is payment in currency other than legal tender but does not defeat a
creditor's claim for payment. A contrary rule would allow a person to
profit or enrich himself inequitably at another's expense. (Emphasis
supplied)
It is thus erroneous for the Court of Appeals to disallow petitioner's claim for
foreign currency differential because NIA's obligation should be converted to
Philippine Pesos which was legal tender at the time. 40
The next issue to be resolved is whether or not Hydro's claim should be
computed at the fixed rate of exchange.
When the MOA 41 and the Supplemental MOA 42 were in effect, there were
instances when the foreign currency availed of by Hydro exceeded the foreign
currency payable to it for that particular Progress Payment. In instances like
these, NIA actually charged Hydro interest in foreign currency computed at
the prevailing exchange rate and not at the fixed rate. NIA now insists that the
exchange rate should be computed according to the fixed rate and not the
escalating rate it actually charged Hydro.
Suffice it to state that this flip-flopping stance of NIA of adopting and discarding
positions to suit its convenience cannot be countenanced. A person who, by his
deed or conduct has induced another to act in a particular manner, is barred
from adopting an inconsistent position, attitude or course of conduct that
thereby causes loss or injury to another. 43 Indeed, the application of the
principle of estoppel is proper and timely in heading off NIA's efforts at
renouncing its previous acts to the prejudice of Hydro which had dealt with it
honestly and in good faith.
. . . A principle of equity and natural justice, this is expressly adopted
under Article 1431 of the Civil Code, and pronounced as one of the
conclusive presumptions under Rule 131, Section 3(a) of the Rules of
Court, as follows:
Whenever a party has, by his own declaration, act or omission,
intentionally and deliberately led another to believe a particular
thing to be true, and to act upon such a belief he cannot, in any
litigation arising out of such declaration, act or omission, be
permitted to falsify it. aTcIAS
Petitioner, having performed affirmative acts upon which the
respondents based their subsequent actions, cannot thereafter refute his
acts or renege on the effects of the same, to the prejudice of the latter.
To allow him to do so would be tantamount to conferring upon him the
liberty to limit his liability at his whim and caprice, which is against the
very principles of equity and natural justice. . . . 44
NIA is, therefore, estopped from invoking the contractual stipulation providing for
the fixed rate to justify a lower computation than that claimed by Hydro. It
cannot be allowed to hide behind the very provision which it itself continuously
violated. 45 An admission or representation is rendered conclusive upon the
person making it and cannot be denied nor disproved as against the person
relying thereon. 46 A party may not go back on his own acts and representations
to the prejudice of the other party who relied upon them. 47
NIA was guilty of forum-shopping. Forum-shopping refers to the act of availing
oneself of several judicial remedies in different courts, either simultaneously or
successively, substantially founded on the same transaction and identical
material facts and circumstances, raising basically the like issues either pending
in, or already resolved by, some other court. 48
It has been characterized as an act of malpractice that is prohibited and
condemned as trifling with the courts and abusing their processes. It constitutes
improper conduct which tends to degrade the administration of justice. It has
also been described as deplorable because it adds to the congestion of the
heavily burdened dockets of the courts. 49 The test in determining the presence
of this pernicious practice is whether in the two or more cases pending, there is
identity of: (a) parties; (b) rights or causes of action; and (c) reliefs sought. 50
Applying the foregoing yardstick to the instant case, it is clear that NIA violated
the prohibition against forum-shopping. Besides filing CA-G.R. SP No. 44527
wherein the Court of Appeals' decision is the subject of appeal in this proceeding,
NIA previously filed CA-G.R. SP No. 37180 and G.R. No. 129169 which is a
special civil action for certiorari. In all three cases, the parties are invariably
Hydro and NIA. In all three petitions, NIA raised practically the same
issues 51 and in all of them, NIA's prayer was the same: to nullify the
proceedings commenced at the CIAC.
It must be pointed out in this regard that the first two petitions namely, CA-G.R.
SP No. 37180 and G.R. No. 129169 are bothoriginal actions. Since NIA failed to
file a petition for review on certiorari under Rule 45 of the Rules of Court
challenging the decision of the appellate court in CA-G.R. SP No. 37180
dismissing its petition, it opted to file an original action for certiorariunder Rule
65 with this Court where the same was docketed as G.R. No. 129169. For its
failure to appeal the judgments in CA-G.R. SP No. 37180 and G.R. No. 129169,
NIA is necessarily bound by the effects of those decisions. The filing of CA-G.R.
SP No. 44527, which raises the issues already passed upon in both cases is a
clear case of forum-shopping which merits outright dismissal.
The issue of whether or not the Certification of Non-Forum Shopping is valid
despite that it was signed by NIA's counsel must be answered in the negative.
Applicable is the ruling in Mariveles Shipyard Corp. v. Court of Appeals, et al.: 52
It is settled that the requirement in the Rules that the certification of
non-forum shopping should be executed and signed by the plaintiff or
the principal means that counsel cannot sign said certification unless
clothed with special authority to do so. The reason for this is that the
plaintiff or principal knows better than anyone else whether a petition
has previously been filed involving the same case or substantially the
same issues. Hence, a certification signed by counsel alone is defective
and constitutes a valid cause for dismissal of the petition. In the case of
natural persons, the Rule requires the parties themselves to sign the
certificate of non-forum shopping. However, in the case of the
corporations, the physical act of signing may be performed, on behalf of
the corporate entity, only by specifically authorized individuals for the
simple reason that corporations, as artificial persons, cannot personally
do the task themselves. . . . It cannot be gainsaid that obedience to the
requirements of procedural rule[s] is needed if we are to expect fair
results therefrom. Utter disregard of the rules cannot justly be
rationalized by harking on the policy of liberal construction. (Emphasis
and italics supplied) HASDcC
In this connection, the lawyer must be "specifically authorized" in order to validly
sign the certification. 53
In closing, we restate the rule that the courts will not interfere in matters which
are addressed to the sound discretion of government agencies entrusted with the
regulation of activities coming under the special technical knowledge and training
of such agencies. 54
An action by an administrative agency may be set aside by the judicial
department only if there is an error of law, abuse of power, lack of jurisdiction or
grave abuse of discretion clearly conflicting with the letter and spirit of the
law. 55 In the case at bar, there is no cogent reason to depart from the general
rule because the action of the CIAC conforms rather than conflicts with the
governing statutes and controlling case law on the matter.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in
CA-G.R. SP No. 44527 dated October 29, 2002 and the Resolution dated
September 24, 2003 are REVERSED aid SET ASIDE. The Decision of the
Construction Industry Arbitration Commission dated June 10, 1997 in CIAC Case
No. 18-94 is REINSTATED.
SO ORDERED.
Davide, Jr., C .J ., Quisumbing, Carpio and Azcuna, JJ ., concur.
Footnotes

37.
SECOND DIVISION
[G.R. No. 126006. January 29, 2004.]
LAPULAPU FOUNDATION, INC. and ELIAS Q.
TAN, petitioners, vs. COURT OF APPEALS (Seventeenth
Division) and ALLIED BANKING CORP., respondents.
D E C I S I O N
CALLEJO, SR., J p:
Before the Court is the petition for review on certiorari filed by the Lapulapu
Foundation, Inc. and Elias Q. Tan seeking to reverse and set aside the
Decision 1 dated June 26, 1996 of the Court of Appeals (CA) in CA-G.R. CV No.
37162 ordering the petitioners, jointly and solidarily, to pay the respondent Allied
Banking Corporation the amount of P493,566.61 plus interests and other
charges. Likewise, sought to be reversed and set aside is the appellate court's
Resolution dated August 19, 1996 denying the petitioners' motion for
reconsideration.
The case stemmed from the following facts:
Sometime in 1977, petitioner Elias Q. Tan, then President of the co-petitioner
Lapulapu Foundation, Inc., obtained four loans from the respondent Allied
Banking Corporation covered by four promissory notes in the amounts of
P100,000 each. The details of the promissory notes are as follows:
P/N No.Date of P/NMaturity DateAmount as of 1/23/79
BD No. 504Nov. 7, 1977Feb. 5, 1978P123,377.76
BD No. 621Nov. 28, 1977Mar. 28, 1978P123,411.10
BD No. 716Dec. 12, 1977Apr. 11, 1978P122,322.21
BD No. 839Jan. 5, 1978May 5, 1978P120,455.54 2
As of January 23, 1979, the entire obligation amounted to P493,566.61 and
despite demands made on them by the respondent Bank, the petitioners failed to
pay the same. The respondent Bank was constrained to file with the Regional
Trial Court of Cebu City, Branch 15, a complaint seeking payment by the
petitioners, jointly and solidarily, of the sum of P493,566.61 representing their
loan obligation, exclusive of interests, penalty charges, attorney's fees and costs.
In its answer to the complaint, the petitioner Foundation denied incurring
indebtedness from the respondent Bank alleging that the loans were obtained by
petitioner Tan in his personal capacity, for his own use and benefit and on the
strength of the personal information he furnished the respondent Bank. The
petitioner Foundation maintained that it never authorized petitioner Tan to co-
sign in his capacity as its President any promissory note and that the respondent
Bank fully knew that the loans contracted were made in petitioner Tan's personal
capacity and for his own use and that the petitioner Foundation never benefited,
directly or indirectly therefrom. The petitioner Foundation then interposed a
cross-claim against petitioner Tan alleging that he, having exceeded his
authority, should be solely liable for said loans, and a counterclaim against the
respondent Bank for damages and attorney's fees.
For his part, petitioner Tan admitted that he contracted the loans from the
respondent Bank in his personal capacity. The parties, however, agreed that the
loans were to be paid from the proceeds of petitioner Tan's shares of common
stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were
covered by promissory notes which were automatically renewable ("rolled-over")
every year at an amount including unpaid interests, until such time as petitioner
Tan was able to pay the same from the proceeds of his aforesaid shares.
According to petitioner Tan, the respondent Bank's employee required him to
affix two signatures on every promissory note, assuring him that the loan
documents would be filled out in accordance with their agreement. However,
after he signed and delivered the loan documents to the respondent Bank, these
were filled out in a manner not in accord with their agreement, such that the
petitioner Foundation was included as party thereto. Further, prior to its filing of
the complaint, the respondent Bank made no demand on him.
After due trial, the court a quo rendered judgment the dispositive portion of
which reads:
WHEREFORE, in view of the foregoing evidences [sic], arguments and
considerations, this court hereby finds the preponderance of evidence in
favor of the plaintiff and hereby renders judgment as follows:
"1.Requiring the defendants Elias Q. Tan and Lapulapu
Foundation, Inc. [the petitioners herein] to pay jointly and
solidarily to the plaintiff Allied Banking Corporation [the
respondent herein] the amount of P493,566.61 as principal
obligation for the four promissory notes, including all other
charges included in the same, with interest at 14% per annum,
computed from January 24, 1979, until the same are fully paid,
plus 2% service charges and 1% monthly penalty charges.
"2.Requiring the defendants Elias Q. Tan and Lapulapu
Foundation, Inc., to pay jointly and solidarily, attorney's fees in
the equivalent amount of 25% of the total amount due from the
defendants on the promissory notes, including all charges;
"3.Requiring the defendants Elias Q. Tan and Lapulapu
Foundation, Inc., to pay jointly and solidarily litigation expenses
of P1,000.00 plus costs of the suit." 3
On appeal, the CA affirmed with modification the judgment of the court a quo by
deleting the award of attorney's fees in favor of the respondent Bank for being
without basis.
The appellate court disbelieved petitioner Tan's claim that the loans were his
personal loans as the promissory notes evidencing them showed upon their faces
that these were obligations of the petitioner Foundation, as contracted by
petitioner Tan himself in his "official and personal character." Applying the parol
evidence rule, the CA likewise rejected petitioner Tan's assertion that there was
an unwritten agreement between him and the respondent Bank that he would
pay the loans from the proceeds of his shares of stocks in the Lapulapu
Industries Corp.
Further, the CA found that demand had been made by the respondent Bank on
the petitioners prior to the filing of the complainta quo. It noted that the two
letters of demand dated January 3, 1979 4 and January 30, 1979 5 asking
settlement of the obligation were sent by the respondent Bank. These were
received by the petitioners as shown by the registry return cards 6presented
during trial in the court a quo.
Finally, like the court a quo, the CA applied the doctrine of piercing the veil of
corporate entity in holding the petitioners jointly and solidarily liable. The
evidence showed that petitioner Tan had represented himself as the President of
the petitioner Foundation, opened savings and current accounts in its behalf, and
signed the loan documents for and in behalf of the latter. The CA, likewise,
found that the petitioner Foundation had allowed petitioner Tan to act as though
he had the authority to contract the loans in its behalf. On the other hand,
petitioner Tan could not escape liability as he had used the petitioner Foundation
for his benefit.
Aggrieved, the petitioners now come to the Court alleging that:
I.THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT
THE LOANS SUBJECT MATTER OF THE INSTANT PETITION
ARE ALREADY DUE AND DEMANDABLE DESPITE ABSENCE
OF PRIOR DEMAND.
II.THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE
PAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING
THE VEIL OF CORPORATE ENTITY AS BASIS FOR
ADJUDGING JOINT AND SOLIDARY LIABILITY ON THE PART
OF PETITIONERS ELIAS Q. TAN AND LAPULAPU
FOUNDATION, INC. 7
The petitioners assail the appellate court's finding that the loans had become due
and demandable in view of the two demand letters sent to them by the
respondent Bank. The petitioners insist that there was no prior demand as they
vigorously deny receiving those letters. According to petitioner Tan, the
signatures on the registry return cards were not his.
The petitioners' denial of receipt of the demand letters was rightfully given scant
consideration by the CA as it held:
Exhibits "R" and "S" are two letters of demand, respectively dated
January 3, 1979 and January 30, 1979, asking settlement of the
obligations covered by the promissory notes. The first letter was written
by Ben Tio Peng Seng, Vice-President of the bank, and addressed to
Lapulapu Foundation, Inc., attention of Mr. Elias Q. Tan, President, while
the second was a final demand written by the appellee's counsel,
addressed to both defendants-appellants, and giving them five (5) days
from receipt within which to settle or judicial action would be instituted
against them. Both letters were duly received by the defendants, as
shown by the registry return cards, marked as Exhibits "R-2" and "S-1,"
respectively. The allegation of Tan that he does not know who signed
the said registry return receipts merits scant consideration, for there is
no showing that the addresses thereon were wrong. Hence, the
disputable presumption "that a letter duly directed and mailed was
received in the regular course of mail" (per par. V, Section 3, Rule 131
of the Revised Rules on Evidence) still holds. 8
There is no dispute that the promissory notes had already matured. However,
the petitioners insist that the loans had not become due and demandable as they
deny receipt of the respondent Bank's demand letters. When presented the
registry return cards during the trial, petitioner Tan claimed that he did not
recognize the signatures thereon. The petitioners' allegation and denial are self-
serving. They cannot prevail over the registry return cards which constitute
documentary evidence and which enjoy the presumption that, absent clear and
convincing evidence to the contrary, these were regularly issued by the postal
officials in the performance of their official duty and that they acted in good
faith. 9 Further, as the CA correctly opined, mails are presumed to have been
properly delivered and received by the addressee "in the regular course of the
mail." 10 As the CA noted, there is no showing that the addresses on the registry
return cards were wrong. It is the petitioners' burden to overcome the
presumptions by sufficient evidence, and other than their barefaced denial, the
petitioners failed to support their claim that they did not receive the demand
letters; therefore, no prior demand was made on them by the respondent Bank.

Having established that the loans had become due and demandable, the Court
shall now resolve the issue of whether the CA correctly held the petitioners
jointly and solidarily liable therefor.
In disclaiming any liability for the loans, the petitioner Foundation maintains that
these were contracted by petitioner Tan in his personal capacity and that it did
not benefit therefrom. On the other hand, while admitting that the loans were
his personal obligation, petitioner Tan avers that he had an unwritten agreement
with the respondent Bank that these loans would be renewed on a year-to-year
basis and paid from the proceeds of his shares of stock in the Lapulapu
Industries Corp.
These contentions are untenable.
The Court particularly finds as incredulous petitioner Tan's allegation that he was
made to sign blank loan documents and that the phrase "IN MY
OFFICIAL/PERSONAL CAPACITY" was superimposed by the respondent Bank's
employee despite petitioner Tan's protestation. The Court is hard pressed to
believe that a businessman of petitioner Tan's stature could have been so
careless as to sign blank loan documents.
In contrast, as found by the CA, the promissory notes 11 clearly showed upon
their faces that they are the obligation of the petitioner Foundation, as
contracted by petitioner Tan "in his official and personal capacity." 12 Moreover,
the application for credit accommodation, 13 the signature cards of the two
accounts in the name of petitioner Foundation, 14 as well as New Current
Account Record, 15 all accompanying the promissory notes, were signed by
petitioner Tan for and in the name of the petitioner Foundation. 16 These
documentary evidence unequivocally and categorically establish that the loans
were solidarily contracted by the petitioner Foundation and petitioner Tan.
As a corollary, the parol evidence rule likewise constrains this Court to reject
petitioner Tan's claim regarding the purported unwritten agreement between him
and the respondent Bank on the payment of the obligation. Section 9, Rule 130
of the of the Revised Rules of Court provides that "[w]hen the terms of an
agreement have been reduced to writing, it is to be considered as containing all
the terms agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such terms other than the contents of the
written agreement." 17
In this case, the promissory notes are the law between the petitioners and the
respondent Bank. These promissory notes contained maturity dates as follows:
February 5, 1978, March 28, 1978, April 11, 1978 and May 5, 1978, respectively.
That these notes were to be paid on these dates is clear and explicit. Nowhere
was it stated therein that they would be renewed on a year-to-year basis or
"rolled-over" annually until paid from the proceeds of petitioner Tan's shares in
the Lapulapu Industries Corp. Accordingly, this purported unwritten agreement
could not be made to vary or contradict the terms and conditions in the
promissory notes.
Evidence of a prior or contemporaneous verbal agreement is generally not
admissible to vary, contradict or defeat the operation of a valid contract. 18 While
parol evidence is admissible to explain the meaning of written contracts, it
cannot serve the purpose of incorporating into the contract additional
contemporaneous conditions which are not mentioned at all in writing, unless
there has been fraud or mistake. 19 No such allegation had been made by the
petitioners in this case.
Finally, the appellate court did not err in holding the petitioners jointly and
solidarily liable as it applied the doctrine of piercing the veil of corporate entity.
The petitioner Foundation asserts that it has a personality separate and distinct
from that of its President, petitioner Tan, and that it cannot be held solidarily
liable for the loans of the latter.
The Court agrees with the CA that the petitioners cannot hide behind the
corporate veil under the following circumstances:
The evidence shows that Tan has been representing himself as the
President of Lapulapu Foundation, Inc. He opened a savings account
and a current account in the names of the corporation, and signed the
application form as well as the necessary specimen signature cards
(Exhibits "A," "B" and "C") twice, for himself and for the foundation. He
submitted a notarized Secretary's Certificate (Exhibit "G") from the
corporation attesting that he has been authorized inter alia to sign for
and in behalf of the Lapulapu Foundation any and all checks, drafts or
other orders with respect to the bank; to transact business with the
Bank, negotiate loans, agreements, obligations, promissory notes and
other commercial documents: and to initially obtain a loan for
P100,000.00 from any bank (Exhibits "G-1" and "G-2"). Under these
circumstances, the defendant corporation is liable for the transactions
entered into by Tan on its behalf. 20
Per its Secretary's Certificate, the petitioner Foundation had given its President,
petitioner Tan, ostensible and apparent authority to inter alia deal with the
respondent Bank. Accordingly, the petitioner Foundation is estopped from
questioning petitioner Tan's authority to obtain the subject loans from the
respondent Bank. It is a familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those
acts; and thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agent's
authority. 21
In fine, there is no cogent reason to deviate from the CA's ruling that the
petitioners are jointly and solidarily liable for the loans contracted with the
respondent Bank. AEcIaH
WHEREFORE, premises considered, the petition is DENIED and the Decision
dated June 26, 1996 and Resolution dated August 19, 1996 of the Court of
Appeals in CA-G.R. CV No. 37162 are AFFIRMED in toto.
SO ORDERED.
Puno, Quisumbing, Austria-Martinez and Tinga, JJ., concur.
Footnotes

38.
SECOND DIVISION
[G.R. No. 117188. August 7, 1997.]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH)
ASSOCIATION, INC., petitioner, vs. HON. COURT OF
APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO
AYCARDO, respondents.
Rene A. Diokno for petitioner.
Reyno De Vera Tiu Domingo and Santos for private respondents.
SYLLABUS
1.STATUTORY CONSTRUCTION; STATUTE; INTERPRETATION; THE WORD
"MUST" IS NOT ALWAYS IMPERATIVE. Ordinarily, the word "must" connotes
an imperative act or operates to impose a duty which may be enforced. It is
synonymous with "ought" which connotes compulsion or mandatoriness.
However, the word "must" in a statute, like, "shall", is not always imperative. It
may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable
construction of the statute in which it is used demands or requires. This is
equally true as regards the word "must". Thus, if the language of a statute
considered as a whole and with due regard to its nature and object reveals that
the legislature intended to use the words "shall" and "must" to be directory, they
should be given that meaning. cdt
2.COMMERCIAL LAW; CORPORATION CODE; SEC. 46 (ADOPTION OF BY-LAWS);
BY-LAWS; REQUIREMENT FOR THE ADOPTION THEREOF WITHIN THE PERIOD
PROVIDED; NOT MANDATORY. Taken as a whole and under the principle that
the best interpreter of a statute is the statute itself (optima statuli interpretatix
est ipsum statutum). Section 46 of the Corporation Code reveals the legislative
intent to attach a directory, and not mandatory, meaning for the word "must" in
the first sentence thereof. Note should be taken of the second paragraph of the
law which allows the filing of the by-laws even prior to incorporation. This
provision in the same section of the Code rules out mandatory compliance with
the requirement of filing the by-laws "within one (1) month after receipt of
official notice of the issuance of its certificate of incorporation by the Securities
and Exchange Commission". It necessarily follows that failure to file the by-laws
within any period does not imply the "demise" of the corporation. By-laws may
be necessary for the "government" of the corporation but these are subordinate
to the articles of incorporation as well as to the Corporation Code and related
statutes. There are in fact cases where by-laws are unnecessary to corporate
existence or to the valid exercise of corporate powers, thus: "In the absence of
charter or statutory provisions to the contrary, by-laws are not necessary either
to the existence of a corporation or to the valid exercise of the powers conferred
upon it, certainly in all cases where the charter sufficiently provides for the
government of the body; and even where the governing statute in express terms
confers upon the corporation the power to adopt by-laws, the failure to exercise
the power will be ascribed to mere nonaction which will not render void any acts
of the corporation which would otherwise be valid." As the "rules and regulations
or private laws enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or members and directors
and officers with relation thereto and among themselves in their relation to it,"
by-laws are indispensable to corporations in this jurisdiction. These may not be
essential to corporate birth but certainly, these are required by law for an orderly
governance and management of corporations. Nonetheless, failure to file them
within the period required by law by no means tolls the automatic dissolution of
a corporation.
3.ID.; ID.; ID.; EFFECT OF FAILURE TO FILE. Although the Corporation Code
requires the filing of by-laws, it does not expressly provide for the consequences
of the non-filing of the same within the period provided for in Section 46.
However, such omission has been rectified by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the SEC of which state: "SEC. 6. In
order to effectively exercise such jurisdiction, the Commission shall possess the
following powers: . . . (1) 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: .
. . Failure to file by-laws within the required period; . . . In the exercise of the
foregoing authority and jurisdiction of the Commissions or by a Commissioner or
by such there 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." Even under the foregoing express grant of power and authority, there
can be no automatic corporate dissolution simply because the incorporators
failed to abide by the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" private of corporate existence.
Proper notice and hearing are cardinal components of due process in any
democratic institution, agency or society. In other words, the incorporators must
be given the chance to explain their neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but in
another law is of no moment. P.D. No. 902-A, which took effect immediately
after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions above-quoted supply the law governing the situation
in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are
statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other
statutes as to form a uniform system of jurisprudence. cdasia
D E C I S I O N
ROMERO, J p:
May the failure of a corporation to file its by-laws within one month from the
date of its incorporation, as mandated by Section 46 of the Corporation Code,
result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the Decision 1 of
the Court of Appeals affirming the decision of the Home Insurance and Guaranty
Corporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas
Homeowners Association (LGVHA) as the sole homeowners' association in Loyola
Grand Villas, a duly registered subdivision in Quezon City and Marikina City that
was owned and developed by Solid Homes, Inc. It revoked the certificates of
registration issued to Loyola Grand Villas Homeowners (North) Association
Incorporated (the North Association for brevity) and Loyola Grand Villas
Homeowners (South) Association Incorporated (the South Association). aisadc
LGVHAI was organized on February 8, 1983 as the association of homeowners
and residents of the Loyola Grand Villas. It was registered with the Home
Financing Corporation, the predecessor of herein respondent HIGC, as the sole
homeowners' organization in the said subdivision under Certificate of Registration
No. 04-197. It was organized by the developer of the subdivision and its first
president was Victorio V. Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file its corporate by-laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They
failed to do so. 2 'To the officers' consternation, they discovered that there were
two other organizations within the subdivision the North Association and the
South Association. According to private respondents, a non-resident and Soliven
himself, respectively headed these associations. They also discovered that these
associations had five (5) registered homeowners each who were also the
incorporators, directors and officers thereof. None of the members of the
LGVHAI was listed as member of the North Association while three (3) members
of LGVHAI were listed as members of the South Association. 3 The North
Association was registered with the HIGC on February 13, 1989 under Certificate
of Registration No. 04-1160 covering Phases West II, East III, West III and East
IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin
A. Bautista, the head of the legal department of the HIGC, informed him that
LGVHAI had been automatically dissolved for two reasons. First, it did not submit
its by-laws within the period required by the Corporation Code and, second,
there was non-user of corporate charter because HIGC had not received any
report on the association's activities. Apparently, this information resulted in the
registration of the South Association with the HIGC on July 27, 1989 covering
Phases West I, East I and East II. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint
with the HIGC. They questioned the revocation of LGVHAI's certificate of
registration without due notice and hearing and concomitantly prayed for the
cancellation of the certificates of registration of the North and South Associations
by reason of the earlier issuance of a certificate of registration in favor of
LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents obtained
a favorable ruling from HIGC Hearing Officer Danilo C. Javier who disposed of
HIGC Case No. RRM-5-89 as follows:

"WHEREFORE, judgment is hereby rendered recognizing the Loyola
Grand Villas Homeowners Association, Inc., under Certificate of
Registration No. 04-197 as the duly registered and existing homeowners
association for Loyola Grand Villas homeowners, and declaring the
Certificates of Registration of Loyola Grand Villas Homeowners (North)
Association, Inc. and Loyola Grand Villas Homeowners (South)
Association, Inc. as hereby revoked or cancelled; that the receivership
be terminated and the Receiver is hereby ordered to render an
accounting and turn-over to Loyola Grand Villas Homeowners
Association, Inc., all assets and records of the Association now under his
custody and possession."
The South Association appealed to the Appeals Board of the HIGC. In its
Resolution of September 8, 1993, the Board 4dismissed the appeal for lack of
merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals, raising
two issues. First, whether or not LGVHAI's failure to file its by-laws within the
period prescribed by Section 46 of the Corporation Code resulted in the
automatic dissolution of LGVHAI. Second, whether or not two homeowners'
associations may be authorized by the HIGC in one "sprawling subdivision."
However, in the Decision of August 23, 1994 being assailed here, the Court of
Appeals affirmed the Resolution of the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under the Corporation
Code, a private corporation commences to have corporate existence and juridical
personality from the date the Securities and Exchange Commission (SEC) issues
a certificate of incorporation under its official seal. The requirement for the filing
of by-laws under Section 46 of the Corporation Code within one month from
official notice of the issuance of the certificate of incorporation presupposes that
it is already incorporated, although it may file its by-laws with its articles of
incorporation. Elucidating on the effect of a delayed filing of by-laws, the Court
of Appeals said:
"We also find nothing in the provisions cited by the petitioner, i.e.,
Sections 46 and 22, Corporation Code, or in any other provision of the
Code and other laws which provide or at least imply that failure to file
the by-laws results in an automatic dissolution of the corporation. While
Section 46, in prescribing that by-laws must be adopted within the
period prescribed therein, may be interpreted as a mandatory provision,
particularly because of the use of the word 'must,' its meaning cannot
be stretched to support the argument that automatic dissolution results
from non-compliance.
We realize that Section 46 or other provisions of the Corporation Code
are silent on the result of the failure to adopt and file the by-laws within
the required period. Thus, Section 46 and other related provisions of the
Corporation Code are to be construed with Section 6 (1) of P.D. 902-A.
This section empowers the SEC to suspend or revoke certificates of
registration on the grounds listed therein. Among the grounds stated is
the failure to file by-laws (see also II Campos: The Corporation Code,
1990 ed., pp. 124-125). Such suspension or revocation, the same
section provides, should be made upon proper notice and hearing.
Although P.D. 902-A refers to the SEC, the same principles and
procedures apply to the public respondent HIGC as it exercises its power
to revoke or suspend the certificates of registration or homeowners
associations. (Section 2 [a], E.O. 535, series 1979, transferred the
powers and authorities of the SEC over homeowners associations to the
HIGC.)
We also do not agree with the petitioner's interpretation that Section 46,
Corporation Code prevails over Section 6, P.D. 902-A and that the latter
is invalid because it contravenes the former. There is no basis for such
interpretation considering that these two provisions are not inconsistent
with each other. They are, in fact, complementary to each other so that
one cannot be considered as invalidating the other."
The Court of Appeals added that, as there was no showing that the registration
of LGVHAI had been validly revoked, it continued to be the duly registered
homeowners' association in the Loyola Grand Villas. More importantly, the South
Association did not dispute the fact that LGVHAI had been organized and that,
thereafter, it transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling 5 that the
HIGC has the authority to order the holding of a referendum to determine which
of two contending associations should represent the entire community, village or
subdivision.
Undaunted, the South Association filed the instant petition for review on
certiorari. It elevates as sole issue for resolution the first issue it had raised
before the Court of Appeals, i.e., whether or not the LGVHAI's failure to file its
by-laws within the period prescribed by Section 46 of the Corporation Code had
the effect of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect to
the filing of by-laws, noncompliance therewith would result in "self-extinction"
either due to non-occurrence of a suspensive condition or the occurrence of a
resolutory condition ''under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is deemed already
formed." It asserts that the Corporation Code provides for a "gradation of
violations of requirements." Hence, Section 22 mandates that the corporation
must be formally organized and should commence transactions within two years
from date of incorporation. Otherwise, the corporation would be deemed
dissolved. On the other hand, if the corporation commences operations but
becomes continuously inoperative for five years, then it may be suspended or its
corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation
Code do not provide for sanctions for non-filing of the by-laws. However, it
insists that no sanction need be provided "because the mandatory nature of the
provision is so clear that there can be no doubt about its being an essential
attribute of corporate birth." To petitioner, its submission is buttressed by the
facts that the period for compliance is "spelled out distinctly," that the
certification of the SEC/HIGC must show that the by-laws are not inconsistent
with the Code, and that a copy of the by-laws "has to be attached to the articles
of incorporation." Moreover, no sanction is provided for because "in the first
place, no corporate identity has been completed." Petitioner asserts that "non-
provision for remedy or sanction is itself the tacit proclamation that non-
compliance is fatal and no corporate existence had yet evolved," and therefore,
there was "no need to proclaim its demise." 6 In a bid to convince the Court of
its arguments, petitioner stresses that:
". . . the word MUST is used in Sec. 46 in its universal literal meaning
and corollary human implication its compulsion is integrated in its
very essence MUST is always enforceable by the inevitable
consequence that is, 'OR ELSE'. The use of the word MUST in Sec. 46
is no exception it means file the by-laws within one month after
notice of issuance of certificate of registration OR ELSE. The OR ELSE,
though not specified, is inextricably a part of MUST. Do this or if you do
not you are 'Kaput'. The importance of the by-laws to corporate
existence compels such meaning for as decreed the by-laws is 'the
government' of the corporation. Indeed, how can the corporation do any
lawful act as such without by-laws. Surely, no law is intended to create
chaos." 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the
Corporation Code which itself does not provide sanctions for non-filing of by-
laws. For the petitioner, it is "not proper to assess the true meaning of Sec. 46 . .
. on an unauthorized provision on such matter contained in the said decree."
In their comment on the petition, private respondents counter that the
requirement of adoption of by-laws is not mandatory. They point to P.D. No.
902-A as having resolved the issue of whether said requirement is mandatory or
merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private
respondents contend that Section 6(I) of that decree provides that non-filing of
by-laws is only a ground for suspension or revocation of the certificate of
registration of corporations and, therefore, it may not result in automatic
dissolution of the corporation. Moreover, the adoption and filing of by-laws is a
condition subsequent which does not affect the corporate personality of a
corporation like the LGVHAI. This is so because Section 9 of the Corporation
Code provides that the corporate existence and juridical personality of a
corporation begins from the date the SEC issues a certificate of incorporation
under its official seal. Consequently, even if the by-laws have not yet been filed,
a corporation may be considered a de facto corporation. To emphasize the fact
the LGVHAI was registered as the sole homeowners' association in the Loyola
Grand Villas, private respondents point out that membership in the LGVHAI was
an "unconditional restriction in the deeds of sale signed by lot buyers." cdtai
In its reply to private respondents' comment on the petition, petitioner reiterates
its argument that the word "must" in Section 46 of the Corporation Code is
mandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate
Appellate Court could be applied to this case, this Court must first resolve the
issue of whether or not the provisions of P.D. No. 902-A prescribing the rules
and regulations to implement the Corporation Code can "rise above and change"
the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of
controversy in this case states:

"Sec. 46.Adoption of by-laws. Every corporation formed under this
Code, must within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
corporation, the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a majority
of the members, in the case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to inspection of the stockholders or members during
office hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may
be adopted and filed prior to incorporation; in such case, such by-laws
shall be approved and signed by all the incorporators and submitted to
the Securities and Exchange Commission, together with the articles of
incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company, public
utility, educational institution or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or amendments are
in accordance with law."
As correctly postulated by the petitioner, interpretation of this provision of law
begins with the determination of the meaning and import of the word "must" in
this section. Ordinarily, the word "must" connotes an imperative act or operates
to impose a duty which may be enforced. 9 It is synonymous with "ought" which
connotes compulsion or mandatoriness. 10 However, the word "must" in a
statute, like "shall," is not always imperative. It may be consistent with an
exercise of discretion. In this jurisdiction, the tendency has been to interpret
"shall" as the context or a reasonable construction of the statute in which it is
used demands or requires. 11 This is equally true as regards the word "must."
Thus, if the language of a statute considered as a whole and with due regard to
its nature and object reveals that the legislature intended to use the words
"shall" and "must" to be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
"MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the
effect of the failure of the corporation to file these by- laws within one
month?
MR. MENDOZA. There is a provision in the latter part of the Code which
identifies and describes the consequences of violations of any provision
of this Code. One such consequence is the dissolution of the corporation
for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution
of the corporation by merely failing to file the by-laws within one month.
Supposing the corporation was late, say, five days, what would be the
mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic
or ipso facto dissolution of the corporation. Perhaps, as in the case, as
you suggested, in the case of El Hogar Filipino where a quo
warranto action is brought, one takes to account the gravity of the
violation committed. If the by-laws were late the filing of the by-laws
were late by, perhaps, a day or two, I would suppose that might be a
tolerable delay, but if they are delayed over a period of months as is
happening now because of the absence of a clear requirement that
by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences." 13
This exchange of views demonstrates clearly that automatic corporate dissolution
for failure to file the by-laws on time was never the intention of the legislature.
Moreover, even without resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue propounded by
petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is
the statute itself (optima statuli interpretatix est ipsum statutum), 14 Section 46
aforequoted reveals the legislative intent to attach a directory, and not
mandatory, meaning for the word ''must" in the first sentence thereof. Note
should be taken of the second paragraph of the law which allows the filing of the
by-laws even prior to incorporation. This provision in the same section of the
Code rules out mandatory compliance with the requirement of filing the by-laws
"within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission." It
necessarily follows that failure to file the by-laws within that period does not
imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and related statutes. 15 There
are in fact cases where by-laws are unnecessary to corporate existence or to the
valid exercise of corporate powers, thus:
"In the absence of charter or statutory provisions to the contrary, by-
laws are not necessary either to the existence of a corporation or to the
valid exercise of the powers conferred upon it, certainly in all cases
where the charter sufficiently provides for the government of the body;
and even where the governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to exercise the
power will be ascribed to mere nonaction which will not render void any
acts of the corporation which would otherwise be valid." 16 (Emphasis
supplied.)
As Fletcher aptly puts it:
"It has been said that the by-laws of a corporation are the rule of its life,
and that until by-laws have been adopted the corporation may not be
able to act for the purposes of its creation, and that the first and most
important duty of the members is to adopt them. This would seem to
follow as a matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a matter of practical, if
not one of legal, necessity. Moreover, the peculiar circumstances
attending the formation of a corporation may impose the obligation to
adopt certain by-laws, as in the case of a close corporation organized for
specific purposes. And the statute or general laws from which the
corporation derives its corporate existence may expressly require it to
make and adopt by-laws and specify to some extent what they shall
contain and the manner of their adoption. The mere fact, however, of
the existence of power in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise of such power essential to
its corporate life, or to the validity of any of its acts." 17
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within the
period provided for in Section 46. However, such omission has been rectified by
Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the
SEC of which state:
"SEC. 6.In order to effectively exercise such jurisdiction, the Commission
shall possess the following powers:
xxx xxx xxx
(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:
xxx xxx xxx
5.Failure to file by-laws within the required period;
xxx xxx xxx
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. cdpr
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."
Even under the foregoing express grant of power and authority, there can be
no automatic corporate dissolution simply because the incorporators failed to
abide by the required filing of by-laws embodied in Section 46 of the Corporation
Code. There is no outright "demise" of corporate existence. Proper notice and
hearing are cardinal components of due process in any democratic institution,
agency or society. In other words, the incorporators must be given the chance to
explain their neglect or omission and remedy the same.

That the failure to file by-laws is not provided for by the Corporation Code but in
another law is of no moment. P.D. No. 902-A, which took effect immediately
after its promulgation on March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions abovequoted supply the law governing the situation
in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are
statutes in pari materia. Interpretare et concordare legibus est optimus
interpretandi. Every statute must be so construed and harmonized with other
statutes as to form a uniform system of jurisprudence. 18
As the "rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and
among themselves in their relation to it," 19 by-laws are indispensable to
corporations in this jurisdiction. These may not be essential to corporate birth
but certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a corporation.
In this regard, private respondents are correct in relying on the pronouncements
of this Court in Chung Ka Bio v. Intermediate Appellate Court, 20 as follows:
". . . Moreover, failure to file the by-laws does not automatically operate
to dissolve a corporation but is now considered only a ground for such
dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of
the Corporation Code, provided that the powers of the corporation
would cease if it did not formally organize and commence the
transaction of its business or the continuation of its works within two
years from date of its incorporation. Section 20, which has been
reproduced with some modifications in Section 46 of the Corporation
Code, expressly declared that 'every corporation formed under this Act,
must within one month after the filing of the articles of incorporation
with the Securities and Exchange Commission, adopt a code of by-laws.'
Whether this provision should be given mandatory or only directory
effect remained a controversial question until it became academic with
the adoption of PD 902-A. Under this decree, it is now clear that the
failure to file by-laws within the required period is only a ground for
suspension or revocation of the certificate of registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(l) of PD 902-A, the SEC is empowered to
'suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation' on the ground inter alia of
'failure to file by-laws within the required period.' It is clear from this
provision that there must first of all be a hearing to determine the
existence of the ground, and secondly, assuming such finding, the
penalty is not necessarily revocation but may be only suspension of the
charter. In fact, under the rules and regulations of the SEC, failure to file
the by-laws on time may be penalized merely with the imposition of an
administrative fine without affecting the corporate existence of the
erring firm.
It should be stressed in this connection that substantial compliance with
conditions subsequent will suffice to perfect corporate personality.
Organization and commencement of transaction of corporate business
are but conditions subsequent and not prerequisites for acquisition of
corporate personality. The adoption and filing of by-laws is also a
condition subsequent. Under Section 19 of the Corporation Code, a
corporation commences its corporate existence and juridical personality
and is deemed incorporated from the date the Securities and Exchange
Commission issues certificate of incorporation under its official seal. This
may be done even before the filing of the by-laws, which under Section
46 of the Corporation Code, must be adopted 'within one month after
receipt of official notice of the issuance of its certificate of
incorporation.'" 21
That the corporation involved herein is under the supervision of the HIGC does
not alter the result of this case. The HIGC has taken over the specialized
functions of the former Home Financing Corporation by virtue of Executive Order
No. 90 dated December 17, 1986. 22 With respect to homeowners associations,
the HIGC shall "exercise all the powers, authorities and responsibilities that are
vested on the Securities and Exchange Commission . . ., the provision of Act
1459, as amended by P.D. 902-A, to the contrary notwithstanding." 23
WHEREFORE, the instant petition for review on certiorari is hereby DENIED and
the questioned Decision of the Court of Appeals AFFIRMED. This Decision is
immediately executory. Costs against petitioner. cda
SO ORDERED.
Regalado, Puno and Mendoza, JJ ., concur.
Torres, Jr., J ., is on leave.
Footnotes

39.
FIRST DIVISION
[G.R. No. 117604. March 26, 1997.]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF
APPEALS, and VALLEY GOLF and COUNTRY CLUB,
INC., respondents.
Lim Vigilia Cinco & Orencia for petitioner.
Jose F . Manacop for private respondent.
SYLLABUS
1.COMMERCIAL LAW; P.D. 902-A; JURISDICTION OF THE SECURITIES AND
EXCHANGE COMMISSION; CASE AT BAR; INTRA-CORPORATE CONTROVERSY
BETWEEN A CORPORATION AND ITS STOCKHOLDER. There is no question
that the purchase of the subject share or membership certificate at public
auction by petitioner (and the issuance to it of the corresponding Certificate of
Sale) transferred ownership of the same to the latter and thus entitled petitioner
to have the said share registered in its name as a member of VGCCI. It is readily
observed that VGCCI did not assail the transfer directly and has in fact, in its
letter of 27 September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner and has even
noted said agreement in its corporate books. In addition, Calapatia, the original
owner of the subject share, has not contested the said transfer. By virtue of the
afore-mentioned sale, petitioner became abona fide stockholder of VGCCI and,
therefore, the conflict that arose between petitioner and VGCCI aptly exemplies
an intra-corporate controversy between a corporation and its stockholder under
Sec. 5(b) of P.D. 902-A.
2.ID.; ID.; ID.; THE SECURITIES AND EXCHANGE COMMISSION TOOK PROPER
COGNIZANCE OF THE INSTANT CASE. An important consideration, moreover,
is the nature of the controversy between petitioner and private respondent
corporation. VGCCI claims a prior right over the subject share anchored mainly
on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have
been posted as delinquent, the Board may order his/her/its share sold to satisfy
the claims of the Club . . ." It is pursuant to this provision that VGCCI also sold
the subject share at public auction, of which it was the highest bidder. VGCCI
caps its argument by asserting that its corporate by-laws should prevail. The
bone of contention, thus, is the proper interpretation and application of VGCCI's
aforequoted by-laws, a subject which irrefutably calls for the special competence
of the SEC. We reiterate herein the sound policy enunciated by the Court in
Abejo v. De la Cruz: 6. In the fifties, the Court taking cognizance of the move to
vest jurisdiction in administrative commissions and boards the power to resolve
specialized disputes in the field of labor (as in corporations, public transportation
and public utilities) ruled that Congress in requiring the Industrial Court's
intervention in the resolution of labor-management Controversies likely to cause
strikes or lockouts meant such jurisdiction to be exclusive, although it did not so
expressly state in the law. The Court held that under the "sense-making and
expeditious doctrine of primary jurisdiction. . . the courts cannot or will not
determine a controversy involving a question which is within the jurisdiction of
an administrative tribunal, where the question demands 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, and a uniformity of ruling is essential to comply with the
purposes of the regulatory statute administered." In this era of clogged court
dockets, the need for specialized administrative boards or commissions with the
special knowledge, experience and capability to hear and determine promptly
disputes on technical matters or essentially factual matters, subject to judicial
review in case of grave abuse of discretion, has become well nigh indispensable.
Thus, in 1984, the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has been to refer it to
the former. 'Increasingly, this Court has been committed to the view that unless
the law speaks clearly and unequivocably, the choice should fall on [an
administrative agency.]"' The Court in the earlier case of Ebon v. De Guzman,
noted that the lawmaking authority, in restoring to the labor arbiters and the
NLRC their jurisdiction to award all kinds of damages in labor cases, as against
the previous P.D. amendment splitting their jurisdiction with the regular courts,
"evidently, . . . had second thoughts about depriving the Labor Arbiters and the
NLRC of the jurisdiction to award damages in labor cases because that setup
would mean duplicity of suits, splitting the cause of action and possible
conflicting findings and conclusions by two tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-
emphasized involving as it does the meticulous analysis and correct
interpretation of a corporation's by-laws as well as the applicable provisions of
the Corporation Code in order to determine the validity of VGCCI's claims. The
SEC, therefore, took proper cognizance of the instant case.
3.ID.; ID.; ID.; THE FILING OF A COMPLAINT WITH ONE COURT WHICH HAS
NO JURISDICTION OVER IT DOES NOT PREVENT THE PLAINTIFF FROM FILING
THE SAME COMPLAINT LATER WITH THE COMPETENT COURT. VGCCI further
contends that petitioner is estopped from denying its earlier position, in the first
complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no
intra-corporate relations between itself and VGCCI. VGCCI's contention lacks
merit. In Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani A.
Cruz, declared that: "It follows that as a rule the filing of a complaint with one
court which has no jurisdiction over it does not prevent the plaintiff from filing
the same complaint later with the competent court. The plaintiff is not estopped
from doing so simply because it made a mistake before in the choice of the
proper forum . . ." We remind VGCCI that in the same proceedings before the
RTC of Makati, it categorically, stated (in its motion to dismiss) that the case
between itself and petitioner is intra-corporate and insisted that it is the SEC and
not the regular courts which has jurisdiction. This is precisely the reason why the
said court dismissed petitioner's complaint and led to petitioner's recourse to the
SEC.
4.ID.; CORPORATION CODE; BY-LAWS; THIRD PERSONS ARE NOT BOUND BY
THE BY-LAWS OF A CORPORATION SINCE THEY ARE NOT PRIVY THERETO.
In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third
party and the shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing petitioner as pledgee of one of its
shares registered in Calapatia's name. Petitioner's belated notice of said by-laws
at the time of foreclosure will not suffice.
5.ID.; ID.; SECTION 63 THEREOF; THE TERM "UNPAID CLAIM" REFERS TO ANY
UNPAID CLAIM ARISING FROM UNPAID SUBSCRIPTION, AND NOT TO ANY
INDEBTEDNESS WHICH A SUBSCRIBER OR STOCKHOLDER MAY OWE THE
CORPORATION FROM ANY OTHER TRANSACTION. Sec. 63 of the Corporation
Code which provides that "no shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of the corporation" cannot be
utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising
from unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other transaction." In the
case at bar, the subscription for the share in question has been fully paid as
evidenced by the issuance of Membership Certificate No. 1219. What Calapatia
owed the corporation were merely the monthly dues. Hence, the aforequoted
provision does not apply.
6.CIVIL LAW; SPECIAL CONTRACTS; PLEDGE; RULE THAT THE CREDITOR MUST
TAKE CARE OF THE THING PLEDGED WITH THE DILIGENCE OF A GOOD
FATHER OF A FAMILY; DOES NOT APPLY TO A PLEDGEE OF A SHARE OF
STOCK. VGCCI's contention that petitioner is duty-bound to know its by-laws
because of Art. 2099 of the Civil Code which stipulates that the creditor must
take care of the thing pledged with the diligence of a good father of a family,
fails to convince. The case ofCruz & Serrano v. Chua A. H. Lee, is clearly not
applicable: "In applying this provision to the situation before us it must be borne
in mind that the ordinary pawn ticket is a document by virtue of which the
property in the thing pledged passes from hand to hand by mere delivery of the
ticket; and the contract of the pledge is, therefore, absolvable to bearer. It
results that one who takes a pawn ticket in pledge acquires domination over the
pledge; and it is the holder who must renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite
different in character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's
by-laws.
D E C I S I O N
KAPUNAN, J p:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioner China Banking Corporation seeks the reversal of the decision of
the Court of Appeals dated 15 August 1994 nullifying the Securities and
Exchange Commission's order and resolution dated 4 June 1993 and 7 December
1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of
Appeals' resolution dated 4 September 1994 which denied petitioner's motion for
reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder
of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity),
pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation
(CBC, for brevity). 1
On 16 September 1974, petitioner wrote VGCCI requesting that the
aforementioned pledge agreement be recorded in its books.2

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge
executed by Calapatia in petitioner's favor was duly noted in its corporate
books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner,
payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed
a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of
Manila, requesting the latter to conduct a public auction sale of the pledged
stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure
proceedings and requested that the pledged stock be transferred to its
(petitioner's) name and the same be recorded in the corporate books. However,
on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to
petitioner's request in view of Calapatia's unsettled accounts with the club. 6
Despite the foregoing, Notary Public de Vera held a public auction on 17
September 1985 and petitioner emerged as the highest bidder at P20,000.00 for
the pledged stock. Consequently, petitioner was issued the corresponding
certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of
his overdue account in the amount of P18,783.24. 8 Said notice was followed by
a demand letter dated 12 December 1985 for the same amount 9 and another
notice dated 22 November 1986 for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the newspaper Daily
Express a notice of auction sale of a number of its stock certificates, to be held
on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own share
of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the
termination of his membership due to the sale of his share of stock in the 10
December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's
Stock Certificate No. 1219 by virtue of being the highest bidder in the 17
September 1985 auction and requested that a new certificate of stock be issued
in its name. 12
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's
stock was sold at the public auction held on 10 December 1986 for
P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of
stock and thereafter filed a case with the Regional Trial Court of Makati for the
nullification of the 10 December 1986 auction and for the issuance of a new
stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for
lack of jurisdiction over the subject matter on the theory that it involves an intra-
corporate dispute and on 27 August 1990 denied petitioner's motion for
reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and
Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock
by VGCCI; the cancellation of any new stock certificate issued pursuant thereto;
for the issuance of a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in
favor of VGCCI, stating in the main that "(c)onsidering that the said share is
delinquent, (VGCCI) had valid reason not to transfer the share in the name of
the petitioner in the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for
reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission
issued an order reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior
right over the pledged share and because of pledgor's failure to pay the
principal debt upon maturity, appellant-petitioner can proceed with the
foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and
April 14, 1992 are hereby SET ASIDE. The auction sale conducted by
appellee-respondent Club on December 10, 1986 is declared NULL and
VOID. Finally, appellee-respondent Club is ordered to issue another
membership certificate in the name of appellant-petitioner bank.
SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However, the SEC denied
the same in its resolution dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of
Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying
and setting aside the orders of the SEC and its hearing officer on ground of lack
of jurisdiction over the subject matter and, consequently, dismissed petitioner's
original complaint. The Court of Appeals declared that the controversy between
CBC and VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case,
the controversy must pertain to any of the following relationships: (a)
between the corporation, partnership or association and the public; (b)
between the corporation, partnership or association and its stockholders,
partners, members, or officers; (c) between the corporation, partnership
or association and the state in so far as its franchise, permit or license to
operate is concerned, and (d) among the stockholders, partners or
associates themselves (Union Glass and Container Corporation vs. SEC,
November 28, 1983, 126 SCRA 31). The establishment of any of the
relationship mentioned will not necessarily always confer jurisdiction
over the dispute on the Securities and Exchange Commission to the
exclusion of the regular courts. The statement made in Philex Mining
Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in determining which
body has jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of the question
that is the subject of their controversy (Viray vs. Court of Appeals,
November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank which
involves ownership of the stock that used to belong to Calapatia, Jr. is
not within the competence of respondent Commission to decide. It is not
any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated
December 7, 1993 of respondent Securities and Exchange Commission
(Annexes Y and BB, petition) and of its hearing officer dated January 3,
1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and
set aside for lack of jurisdiction over the subject matter of the case.
Accordingly, the complaint of respondent China Banking Corporation
(Annex Q, petition) is DISMISSED. No pronouncement as to costs in this
instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by the Court of
Appeals in its resolution dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth
Division) GRAVELY ERRED WHEN:
1.IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993
AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES
AND EXCHANGE COMMISSION EN BANC, AND WHEN IT
DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION
OVER THE SUBJECT MATTER OF THE CASE;
2.IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND
EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993
DESPITE PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the
controversy, the regular courts or the SEC.
P.D. No. 902-A conferred upon the SEC the following pertinent powers:
SEC. 3. The Commission shall have absolute jurisdiction, supervision and
control over all corporations, partnerships or associations, who are the
grantees of primary franchises 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 and to
deputize any and all enforcement agencies of the government, civil or
military as well as any private institution, corporation, firm, association
or person.
xxx xxx xxx
SEC. 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 officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners,
members of associations or organizations 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 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 appointment of directors,
trustees, officers, or managers of such corporations, partnerships
or associations.

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 property to
cover all of 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 Committee
created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases
of Mainland Construction Co., Inc. v. Movilla23 and Bernardo v. CA, 24 thus:
. . . The better policy in determining which body has jurisdiction over a
case would be to consider not only the status or relationship of the
parties but also the nature of the question that is the subject of their
controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal
has jurisdiction we have to determine therefore whether or not petitioner is a
stockholder of VGCCI and whether or not the nature of the controversy between
petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share
or membership certificate at public auction by petitioner (and the issuance to it
of the corresponding Certificate of Sale) transferred ownership of the same to
the latter and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did not assail the
transfer directly and has in fact, in its letter of 27 September 1974, expressly
recognized the pledge agreement executed by the original owner, Calapatia, in
favor of petitioner and has even noted said agreement in its corporate
books. 25 In addition, Calapatia, the original owner of the subject share, has not
contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder
of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI
aptly exemplifies an intra-corporate controversy between a corporation and its
stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between
petitioner and private respondent corporation. VGCCI claims a prior right over
the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which
provides that "after a member shall have been posted as delinquent, the Board
may order his/her/its share sold to satisfy the claims of the Club . . ."26 It is
pursuant to this provision that VGCCI also sold the subject share at public
auction, of which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws should prevail. The bone of contention, thus,
is the proper interpretation and application of VGCCI's aforequoted by-laws, a
subject which irrefutably calls for the special competence of the SEC. cdphil
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la
Cruz 27 :
6.In the fifties, the Court taking cognizance of the move to vest
jurisdiction in administrative commissions and boards the power to
resolve specialized disputes in the field of labor (as in corporations,
public transportation and public utilities) ruled that Congress in requiring
the Industrial Court's intervention in the resolution of labor-management
controversies likely to cause strikes or lockouts meant such jurisdiction
to be exclusive, although it did not so expressly state in the law. The
Court held that under the "sense-making and expeditious doctrine of
primary jurisdiction . . . the courts cannot or will not determine a
controversy involving a question which is within the jurisdiction of an
administrative tribunal, where the question demands 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, and a uniformity of ruling is
essential to comply with the purposes of the regulatory statute
administered."
In this era of clogged court dockets, the need for specialized
administrative boards or commissions with the special knowledge,
experience and capability to hear and determine promptly disputes on
technical matters or essentially factual matters, subject to judicial review
in case of grave abuse of discretion, has become well nigh
indispensable. Thus, in 1984, the Court noted that "between the power
lodged in an administrative body and a court, the unmistakable trend
has been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an administrative agency.]'"
The Court in the earlier case of Ebon v. De Guzman, noted that the
lawmaking authority, in restoring to the labor arbiters and the NLRC
their jurisdiction to award all kinds of damages in labor cases, as against
the previous P.D. amendment splitting their jurisdiction with the regular
courts, "evidently,. . . had second thoughts about depriving the Labor
Arbiters and the NLRC of the jurisdiction to award damages in labor
cases because that setup would mean duplicity of suits, splitting the
cause of action and possible conflicting findings and conclusions by two
tribunals on one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-
emphasized involving as it does the meticulous analysis and correct
interpretation of a corporation's by-laws as well as the applicable provisions of
the Corporation Code in order to determine the validity of VGCCI's claims. The
SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier
position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-
1112) that there is no intra-corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz,
declared that:
It follows that as a rule the filing of a complaint with one court which
has no jurisdiction over it does not prevent the plaintiff from filing the
same complaint later with the competent court. The plaintiff is not
estopped from doing so simply because it made a mistake before in the
choice of the proper forum . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it
categorically stated (in its motion to dismiss) that the case between itself and
petitioner is intra-corporate and insisted that it is the SEC and not the regular
courts which has jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to
the Court of Appeals, this Court likewise deems it procedurally sound to proceed
and rule on its merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for
review on certiorari on the issue of jurisdiction. In its assignment of errors,
petitioner specifically raised questions on the merits of the case. In turn, in its
responsive pleadings, private respondent duly answered and countered all the
issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs
of Crisanta Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero
v. Dulay 30 and The Roman Catholic Archbishop of Manila v. Court of Appeals: 31
In the interest of the public and for the expeditious administration of
justice the issue on infringement shall be resolved by the court
considering that this case has dragged on for years and has gone from
one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the
entire controversy in a single proceeding leaving no root or branch to
bear the seeds of future litigation. No useful purpose will be served if a
case or the determination of an issue in a case is remanded to the trial
court only to have its decision raised again to the Court of Appeals and
from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an issue
to the lower court for further reception of evidence is not necessary
where the Court is in position to resolve the dispute based on the
records before it and particularly where the ends of justice would not be
subserved by the remand thereof. Moreover, the Supreme Court is
clothed with ample authority to review matters, even those not raised on
appeal if it finds that their consideration is necessary in arriving at a just
disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et
al., 32 this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that that since
the filing of this suit before the trial court, none of the substantial issues
have been resolved. To avoid and gloss over the issues raised by the
parties, as what the trial court and respondent Court of Appeals did,
would unduly prolong this litigation involving a rather simple case of
foreclosure of mortgage. Undoubtedly, this will run counter to the
avowed purpose of the rules, i.e., to assist the parties in obtaining just,
speedy and inexpensive determination of every action or proceeding.
The Court, therefore, feels that the central issues of the case, albeit
unresolved by the courts below, should now be settled specially as they
involved pure questions of law. Furthermore, the pleadings of the
respective parties on file have amply ventilated their various positions
and arguments on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the
proceedings before the SEC) sufficient to enable us to render a sound judgment
and since only questions of law were raised (the proper jurisdiction for Supreme
Court review), we can, therefore, unerringly take cognizance of and rule on the
merits of the case.

The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in
petitioner's favor. It contends that the same was null and void for lack of
consideration because the pledge agreement was entered into on 21 August
1974 33 but the loan or promissory note which it secured was obtained by
Calapatia much later or only on 3 August 1983. 34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting
parties explicitly stipulated therein that the said pledge will also stand as security
for any future advancements (or renewals thereof) that Calapatia (the pledgor)
may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due of all
loans, overdrafts, promissory notes, drafts, bills or exchange, discounts,
and all other obligations of every kind which have heretofore been
contracted, or which may hereafter be contracted, by the PLEDGOR(S)
and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE,
including discounts of Chinese drafts, bills of exchange, promissory
notes, etc., without any further endorsement by the PLEDGOR(S) and/or
Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS,
together with the accrued interest thereon, as hereinafter provided, plus
the costs, losses, damages and expenses (including attorney's fees)
which PLEDGEE may incur in connection with the collection
thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot
thus be held suspect by VGCCI. As candidly explained by petitioner, the
promissory note of 3 August 1983 in the amount of P20,000.00 was but a
renewal of the first promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent
accounts, it had the right to sell the share in question in accordance with the
express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that
VGCCI began sending notices of delinquency to Calapatia after it was informed
by petitioner (through its letter dated 14 May 1985) of the foreclosure
proceedings initiated against Calapatia's pledged share, although Calapatia has
been delinquent in paying his monthly dues to the club since 1975. Stranger still,
petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's
share, was neither informed nor furnished copies of these letters of overdue
accounts until VGCCI itself sold the pledged share at another public auction. By
doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even
failed to give petitioner notice of said auction sale. Such actuations of VGCCI
thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its
by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the by-
laws of a corporation since they are not privy thereto (Fleischer v. Botica
Nolasco, 47 Phil. 584). The exception to this is when third persons have
actual or constructive knowledge of the same. In the case at bar,
petitioner had actual knowledge of the by-laws of private respondent
when petitioner foreclosed the pledge made by Calapatia and when
petitioner purchased the share foreclosed on September 17, 1985. This
is proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner
even quoted a portion of private respondent's by-laws which is material
to the issue herein in a letter it wrote to private respondent. Because of
this actual knowledge of such by-laws then the same bound the
petitioner as of the time when petitioner purchased the share. Since the
by-laws was already binding upon petitioner when the latter purchased
the share of Calapatia on September 17, 1985 then the petitioner
purchased the said share subject to the right of the private respondent
to sell the said share for reasons of delinquency and the right of private
respondent to have a first lien on said shares as these rights are
provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco
Co.: 37
"And moreover, the by-law now in question cannot have any effect on
the appellee. He had no knowledge of such by-law when the shares
were assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzales and the Botica Nolasco, Inc.
Said by-law cannot operate to defeat his rights as a purchaser.
"An unauthorized by-law forbidding a shareholder to sell his shares
without first offering them to the corporation for a period of thirty days
is not binding upon an assignee of the stock as a personal contract,
although his assignor knew of the by-law and took part in its adoption."
(10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
"When no restriction is placed by public law on the transfer of corporate
stock, a purchaser is not affected by any contractual restriction of which
he had no notice." (Brinkerhoff-Farris Trust & Savings Co. vs. Home
Lumber Co., 118 Mo., 447.)
"The assignment of shares of stock in a corporation by one who has
assented to an unauthorized by-law has only the effect of a contract by,
and enforceable against, the assignor; the assignee is not bound by
such by-law by virtue of the assignment alone." (Ireland vs. Globe
Milling Co., 21 R.I., 9.)
"A by-law of a corporation which provides that transfers of stock shall
not be valid unless approved by the board of directors, while it may be
enforced as a reasonable regulation for the protection of the corporation
against worthless stockholders, cannot be made available to defeat the
rights of third persons." (Farmers' and Merchants' Bank of Lineville vs.
Wasson, 48 Iowa, 336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third
party and the shareholder was entered into, in this case, at the time the pledge
agreement was executed. VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing petitioner as pledgee of one of its
shares registered in Calapatia's name. Petitioner's belated notice of said by-laws
at the time of foreclosure will not suffice. The ruling of the SEC en banc is
particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers
with relation thereto and among themselves in their relation to it. In
other words, by-laws are the relatively permanent and continuing rules
of action adopted by the corporation for its own government and that of
the individuals composing it and having the direction, management and
control of its affairs, in whole or in part, in the management and control
of its affairs and activities. (9 Fletcher 4166. 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties
of the members towards the corporation and among themselves. They
are self-imposed and, although adopted pursuant to statutory authority,
have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not
bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. In the case of Fleisher v. Botica
Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting
the transfer of shares cannot have any effect on the the transferee of
the shares in question as he "had no knowledge of such by-law when
the shares were assigned to him. He obtained them in good faith and for
a valuable consideration. He was not a privy to the contract created by
the by-law between the shareholder . . . and the Botica Nolasco, Inc.
Said by-law cannot operate to defeat his right as a purchaser."
(Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the
opinion that said case is applicable to the present controversy.
Appellant-petitioner bank as a third party can not be bound by appellee-
respondent's by-laws. It must be recalled that when appellee-
respondent communicated to appellant-petitioner bank that the pledge
agreement was duly noted in the club's books there was no mention of
the shareholder-pledgor's unpaid accounts. The transcript of
stenographic notes of the June 25, 1991 Hearing reveals that the
pledgor became delinquent only in 1975. Thus, appellant-petitioner was
in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the
general accepted rule that third persons are not bound by by-laws to be
applicable and binding upon the pledgee, knowledge of the provisions of
the VGCCI By-laws must be acquired at the time the pledge agreement
was contracted. Knowledge of said provisions, either actual or
constructive, at the time of foreclosure will not affect pledgee's right
over the pledged share. Art. 2087 of the Civil Code provides that it is
also of the essence of these contracts that when the principal obligation
becomes due, the things in which the pledge or mortgage consists
maybe alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the
Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the certificate, their
cancellation, and the issuance to him of new ones, and when
done, the pledgee will be fully protected against a subsequent
purchaser who would be charged with constructive notice that the
certificate is covered by the pledge. (12-A Fletcher 502)

The pledgee is entitled to retain possession of the stock until the
pledgor pays or tenders to him the amount due on the debt
secured. In other words, the pledgee has the right to resort to its
collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new
certificate to a third person who purchased the same certificate
covered by the pledge, will certainly defeat the right of the
pledgee to resort to its collateral for the payment of the debt. The
pledgor or his representative or registered stockholders has no
right to require a return of the pledged stock until the debt for
which it was given as security is paid and satisfied, regardless of
the length of time which have elapsed since debt was created.
(12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens
in favor either of the corporation or of third persons, if he has no notice
thereof, but not otherwise. He also takes it free of liens or claims that
may subsequently arise in favor of the corporation if it has notice of the
pledge, although no demand for a transfer of the stock to the pledgee
on the corporate books has been made. (12-A Fletcher 5634, 1982 ed.,
citing Snyder v. Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws
because of Art. 2099 of the Civil Code which stipulates that the creditor must
take care of the thing pledged with the diligence of a good father of a family,
fails to convince. The case of Cruz & Serrano v. Chua A. H . Lee, 39 is clearly not
applicable:
In applying this provision to the situation before us it must be borne in
mind that the ordinary pawn ticket is a document by virtue of which the
property in the thing pledged passes from hand to hand by mere
delivery of the ticket; and the contract of the pledge is, therefore,
absolvable to bearer. It results that one who takes a pawn ticket in
pledge acquires domination over the pledge; and it is the holder who
must renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite
different in character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's
by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim"
refers to "any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising
from any other transaction." 40 In the case at bar, the subscription for the share
in question has been fully paid as evidenced by the issuance of Membership
Certificate No. 1219. 41 What Calapatia owed the corporation were merely the
monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals
is REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby
AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ ., concur.
Footnotes

40.
EN BANC
[G.R. Nos. 147062-64. December 14, 2001.]
REPUBLIC OF THE PHILIPPINES, represented by the
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG), petitioner, vs. COCOFED et al. and BALLARES et
al., 1 EDUARDO M. COJUANGCO JR. and the
SANDIGANBAYAN (First Division) respondents.
The Solicitor General for petitioners.
Mario E. Ongkiko for petitioners-intervenors.
Abello Concepcion Regala & Cruz for COCOFED, et al. & Ballares, et al.
Estelito P. Mendoza for E.M. Cojuangco, Jr.
Catapang Guzman Tiongco & Torres for UCPB & 14 CIIF Holding Co.
Sycip Salazar Hernandez & Gatmaitan for UCPB.
SYNOPSIS
The first Division of the Sandiganbayan in Civil Case Nos. 0033-A, 0033-B and
0033-P allowed respondents COCOFED, et al., and Ballares, et al., as well as
Eduardo Cojuangco, et al., acknowledged registered stockholders of the United
Coconut Planters Bank (UCPB) and all other registered stockholders of the bank,
to exercise their right to vote their shares of stock and themselves to be voted
upon in the UCPB at the scheduled Stockholders' Meeting on March 6, 2001 or
on any subsequent continuation or resetting thereof, and to perform such acts as
will normally follow in the exercise of these rights as registered stockholders. In
its petition, the Republic of the Philippines, represented by the Presidential
Commission on Good Government (PCGG), contended that respondent
Sandiganbayan committed grave abuse of discretion in enjoining them from
voting the sequestered shares of stock in UCPB despite the fact that the
sequestration share were purchased with coconut levy funds (which were
declared public in character) and the continuing effectivity of Resolution dated
February 16, 1993 in G.R. No. 96073 which allows the PCGG to vote said
sequestered shares.
The Supreme Court uphold the contention of the PCGG ands set aside the
assailed order of the Sandiganbayan. The Court held that the government should
be allowed to continue voting those shares inasmuch as they were purchased
with coconut levy funds funds that are prima facie public in character or, at
the very least, are "clearly affected withy public interest," and because they
belong to it as the prima facie beneficial and true owner thereof. Voting is an act
of dominion that should be exercised by the share owner. One of the recognized
rights of an owner is the right to vote at meetings of the corporation. The right
to vote is classified as the right to control. Voting rights may be for the purpose
of, among others, electing or removing directors, amending a charter or making
or amending by laws. Because the subject UCPB shares were acquired with
government funds, the government becomes their prima facie beneficial and true
owner. Ownership includes the right to enjoy, dispose of, exclude and recover a
thing without limitations other than those established by law or by the owner.
Ownership has been aptly described as the most comprehensive of all real rights
and the right to vote shares is a mere incident of ownership. In the present case,
the government has been shown to be the prima facie owner of the funds used
to purchase the shares. Hence, it should be allowed the rights and privileges
flowing from such fact. HCSEcI
SYLLABUS
1. MERCANTILE LAW; CORPORATION CODE; SHARES OF STOCK; GENERAL
RULE; SEQUESTERED SHARES OF STOCK ARE VOTED BY THE REGISTERED
HOLDER. It is necessary to restate the general rule that the registered owner
of the shares of a corporation exercises the right and the privilege of voting. This
principle applies even to shares that are sequestered by the government, over
which the PCGG as a mere conservator cannot, as a general rule, exercise acts of
dominion. On the other hand, it is authorized to vote these sequestered shares
registered in the names of private persons and acquired with allegedly ill-gotten
wealth, if it is able to satisfy the two-tiered test devised by the Court
in Cojuangco v. Calpo and PCGG v. Cojuangco Jr., as follows: (1) Is there prima
facie evidence showing that the said shares are ill-gotten and thus belong to the
State? (2) Is there an imminent danger of dissipation, thus necessitating their
continued sequestration and voting by the PCGG, while the main issue is pending
with the Sandiganbayan?
2. ID.; ID.; ID.; EXCEPTION TO THE RULE; SEQUESTERED SHARES ACQUIRED
WITH PUBLIC FUNDS. The Court inBaseco v. PCGG (hereinafter "Baseco")
and Cojuangco Jr. v. Roxas ("Cojuangco-Roxas") has provided two clear "public
character" exceptions under which the government is granted the authority to
vote the shares: (1) Where government shares are taken over by private persons
or entities who/which registered them in their own names, and (2) Where the
capitalization or shares that were acquired with public funds somehow landed in
private hands. The exceptions are based on the common-sense principle that
legal fiction must yield to truth; that public property registered in the names of
non-owners is affected with trust relations; and that the prima facie beneficial
owner should be given the privilege of enjoying the rights flowing from the prima
facie fact of ownership.
3. ID:, ID.; ID.; COCONUT LEVY FUNDS ARE AFFECTED WITH PUBLIC
INTEREST. Having conclusively shown that the sequestered UCPB shares were
purchased with coconut levies, we hold that these funds and shares are, at the
very least, "affected with public interest." The Resolution issued by the Court on
February 16, 1993 in Republic v. Sandiganbayan stated that coconut levy funds
were "clearly affected with public interest"; thus, herein private respondents
even if they are the registered shareholders cannot be accorded the right to
vote them.
4. ID.; ID.; COCONUT LEVY FUNDS ARE PRIMA FACIE PUBLIC FUNDS; SAID
FUND SATISFY THE GENERAL DEFINITION OF PUBLIC FUNDS. To avoid
misunderstanding and confusion, this Court will even be more categorical and
positive than its earlier pronouncements: the coconut levy funds are not only
affected with public interest; they are, in fact, prima facie public funds. Public
funds are those moneys belonging to the State or to any political subdivision of
the State; more specifically, taxes, customs duties and moneys raised by
operation of law for the support of the government or for the discharge of its
obligations. Undeniably, coconut levy funds satisfy this general definition of
public funds. CcEHaI
5. ID.; ID.; ID.; COCONUT LEVY FUND RAISED THROUGH STATE'S POLICE AND
TAXING POWER. Indeed, coconut levy funds partake of the nature of taxes
which, in general, are enforced proportional contributions from persons and
properties, exacted by the State by virtue of its sovereignty for the support of
government and for all public needs. Based on this definition, a tax has three
elements, namely: a) it is an enforced proportional contribution from persons
and properties; b) it is imposed by the State by virtue of its sovereignty; and c) it
is levied for the support of the government. The coconut levy funds fall squarely
into these elements.
6. ID.; ID.; ID.; HAVING BEEN ACQUIRED WITH PUBLIC FUNDS, THE SUBJECT
SHARES BELONG, PRIMA FACIE, TO THE GOVERNMENT. Having shown that
the coconut levy funds are not only affected with public interest, but are in
fact prima facie public funds, this Court believes that the government should be
allowed to vote the questioned shares, because they belong to it as the prima
facie beneficial and true owner. As stated at the beginning, voting is an act of
dominion that should be exercised by the share owner. One of the recognized
rights of an owner is the right to vote at meetings of the corporation. The right
to vote is classified as the right to control. Voting rights may be for the purpose
of, among others, electing or removing directors, amending a charter, or making
or amending bylaws. Because the subject UCPB shares were acquired with
government funds, the government becomes their prima facie beneficial and true
owner. Ownership includes the right to enjoy, dispose of, exclude and recover a
thing without limitations other than those established by law or by the owner.
Ownership has been aptly described as the most comprehensive of all real rights.
And the right to vote shares is a mere incident of ownership. In the present case,
the government has been shown to be the prima facie owner of the funds used
to purchase the shares. Hence, it should be allowed the rights and privileges
flowing from such fact.
7. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI; GRAVE ABUSE OF
DISCRETION MAY ARISE WHEN A LOWER COURT OR TRIBUNAL VIOLATES OR
CONTRAVENES THE CONSTITUTION, THE LAW OR EXISTING JURISPRUDENCE.
We hold that the Sandiganbayan gravely abused its discretion when it
contravened the rulings of this Court in Baseco andCojuangco-Roxas thereby
unlawfully, capriciously and arbitrarily depriving the government of its right to
vote sequestered shares purchased with coconut levy funds which are prima
facie public funds. Indeed, grave abuse of discretion may arise when a lower
court or tribunal violates or contravenes the Constitution, the law or existing
jurisprudence. In one case, this Court ruled that the lower court's resolution was
"tantamount to overruling a judicial pronouncement of the highest Court . . . and
unmistakably a very grave abuse of discretion." TSIDEa
8. ID.; ID.; ID.; PUBLIC CHARACTER OF SHARES IS A VALID ISSUE. The main
issue of who may vote the shares cannot be determined without passing upon
the question of the public/private character of the shares and the funds used to
acquire them. The latter issue, although not specifically raised in the Court a
quo, should still be resolved in order to fully adjudicate the main issue. Indeed,
this Court has "the authority to waive the lack of proper assignment of errors if
the unassigned errors closely relate to errors properly pinpointed out or if the
unassigned errors refer to matters upon which the determination of the
questions raised by the errors properly assigned depend." Therefore, "where the
issues already raised also rest on other issues not specifically presented as long
as the latter issues bear relevance and close relation to the former and as long
as they arise from matters on record, the Court has the authority to include them
in its discussion of the controversy as well as to pass upon them."

9. ID.; ID.; ID.; NO POSITIVE RELIEF FOR INTERVENORS; THEIR RIGHT IS
DEPENDENT UPON THE SANDIGANBAYAN'S RESOLUTION ON THE ACTION FOR
THE RECOVERY OF THE SEQUESTERED SHARES. We cannot rule on
intervenors' alleged right to vote at this time and in this case. That right is
dependent upon the Sandiganbayan's resolution of their action for the recovery
of said sequestered shares. Given the patent fact that intervenors are not
registered stockholders of UCPB as of the moment, their asserted rights cannot
be ruled upon in the present proceedings. Hence, no positive relief can be given
them now, except insofar as they join petitioner in barring private respondents
from voting the subject shares.
VITUG, J., separate opinion:
1. MERCANTILE LAW, CORPORATION CODE; SHARES OF STOCK; PURCHASE BY
THE COCONUT INDUSTRY INVESTMENT FUND COMPANIES OF THE COCONUT
FARMER'S SHARE IN UNITED COCONUT PLANTERS BANK DID NOT CHANGE
THE PUBLIC CHARACTER OF THE SHARES. To account for their equity
holdings in the bank, COCOFED, et al., in their Memorandum, would advance
that, in 1975, COCOFED, a private national association of coconut producers,
was designated by the Philippine Coconut Authority ("PCA") as being the
implementing agency for the free distribution of the shares of stock of the UCPB
to the coconut farmers. By 02 May 1981, 232,805,852.16 of said shares were
distributed to the farmers. Still there remained 15,619,419.84 shares registered
in the name of COCOFED which, according to it, were ultimately given to the
farmers. Prior to June 1986, a substantial number of the coconut farmers sold
their shares in the bank at prices below par value. By way of a financial
assistance to the selling coconut farmers, the UCPB Board of Directors authorized
the CIIF companies to purchase their holdings in the bank at par value. These
transactions, nevertheless, did not change the character of the UCPB shares,
these having been bought with coconut levy funds which the Court distinctly
characterized to be "clearly affected with public interest" and "raised such as
they were by the State's police and taxing powers." The fundamental rule is that
tax proceeds may only be used for a public purpose, which may either be a
general public purpose to support the existence of the state or a special public
purpose to pursue certain legitimate objects of government in the exercise of
police power, and none other. As a measure to ensure the proper utilization of
money collected for a specified public purpose, the 1987 Constitution, restating
another general principle, treats the proceeds as a special fund to be paid out for
such purpose. If, however, that purpose has been fulfilled or is no longer
forthcoming, the balance, if any, shall then be transferred to the general funds of
the government, which may thereafter be appropriated by Congress and
expended for any legitimate purpose within the scope of the general fund. An
entity, whether public or private, which holds the tax money has no authority to
disburse it or to pay any of it to anyone, the power to dispose of such money
being vested in the legislature. Thus, the 1987 Constitution, like its counterparts
in the 1935 and the 1973 Constitution, mandates that no money shall be paid
out of the national treasury except in pursuance of an appropriation made by
law. SECHIA
2. ID.; ID.; ID.; PENDING A CONCLUSIVE DETERMINATION ON THE LEGALITY
OF THE 10% EQUITY RETENTION STANDING IN THE NAME OF RESPONDENT
EDUARDO COJUANGCO, JR., IT WOULD BE NEITHER RIGHT NOR JUST TO
DEPRIVE HIM FROM MEANWHILE EXERCISING HIS RIGHT TO AT LEAST VOTE
THE SAME. Respondent Eduardo Cojuangco, Jr., upon the other hand, in
claiming ownership over a portion of the sequestered UCPB shares, advanced
two documents an agreement in May 1975, where he appeared to have
exercised his option to acquire the UCPB shares of stock owned by the family of
the late Don Jose Cojuangco, Sr., amounting to 72.2% equity holding in the
bank, at two hundred pesos (Php200.00) per share, and the "Agreement for the
Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the
Philippines," dated 25 May 1975, whereby the PCA purchased with funds from
the CCSF the aforesaid UCPB shares from Eduardo Cojuangco, Jr., also at two
hundred pesos (Php200.00) per share. In the latter agreement, it was stipulated
that as compensation for exercising his personal and exclusive option to acquire
the UCPB shares and for transferring such shares to the PCA, Eduardo
Cojuangco, Jr., would receive one (1) share for every nine (9) shares acquired by
the PCA and additional equity in the bank. In sum, correlating the two
agreements, Eduardo Cojuangco, Jr., would contend, in effect, that he retained
title over roughly 10% equity holding in the bank and established his prima
facie right over the corresponding shares independently sourced from the
coconut levy funds. Even if it were to be conceded that the said 10% holding in
UCPB of Eduardo Cojuangco, Jr., could be assailed, pending a conclusive
determination on the legality of such a retention, however, it would neither be
right nor just to deprive him from meanwhile exercising his right to at least vote
the same. For the foregoing reasons, I vote to grant the petition in part and
to deny it insofar as the shares of stock pertaining to the 10% of the 72% equity
retention standing in the name of Eduardo Cojuangco, Jr., are concerned. In
passing, I should like to state my understanding of the ruling of the Court. I
must first clarify, however, that sequestration does not mean the vesting of title
in the hands of the sequestering authority; rather, the term implies the
preservation of assets. Neither ownership nor rights thereover are acquired or
lost by virtue alone of sequestration a mere ancillary remedy to secure a
disputed asset.
MELO, J., dissenting opinion:
1. MERCANTILE LAW; CORPORATION LAW; SHARES OF STOCK; THE VALIDITY
OF THE ACQUISITION OF THE UNITED COCONUT PLANTERS BANK SHARES IS
THE VERY LIS MOTA OF THE ACTION FOR RECONVEYANCE, ACCOUNTING,
REVERSION AND RESTITUTION FILED BY THE PCGG WITH THE
SANDIGANBAYAN; TO RULE ON THE MATTER WOULD BE TO PREEMPT SAID
COURT. The view expressed by the majority that the UCPB shares, having
been acquired with the use of coconut levy funds, and, therefore belong to the
government, may very well turn out to be correct. However, since these issues
are still pending litigation at the Sandiganbayan, it would be premature, I submit,
to rule on this point at this time. Verily, the validity of the acquisition by
Cojuangco Jr., et al. of their UCPB shares is the very lis mota of the action for
reconveyance, accounting, reversion, and restitution filed by the PCGG with
the Sandiganbayan. To rule on this matter would be to preempt said court. Too,
the argument that the coconut levy funds used to purchase the sequestered
UCPB shares of stock are public funds does not appear to have been raised
before the Sandiganbayan; consequently, the Sandiganbayan did not rule on the
nature of the fund. It would be absurd to hold that the Sandiganbayan gravely
abused its discretion in not holding that the sequestered shares belong prima
facie to the government, the issue of whether or not coconut levy funds are
public funds not having been raised before it. DAaIHT
2. ID.; ID.; ID.; THE DETERMINATION OF WHETHER THE COCONUT LEVY
FUNDS ARE PUBLIC FUNDS INVOLVES THE ASCERTAINMENT OF THE
CONSTITUTIONALITY OF SECTION 5 OF ARTICLE III OF PRESIDENTIAL DECREE
NO. 1468. Moreover, and as mentioned earlier, the nature of the funds used is
a matter which should be decided first-hand by theSandiganbayan when it
resolves the merits of Civil Case No. 0033-A. Note should also be taken of the
fact that the determination of whether the coconut levy funds are public funds
involves the ascertainment of the constitutionality of Section 5, Article III of
Presidential Decree No. 961 and Section 5, Article III of Presidential Decree No.
1468. Presidential Decrees No. 961 and 1468 have not been repealed, revoked,
or declared unconstitutional, hence they are presumed valid and binding.
Without a previous declaration of unconstitutionality, the coconut levy funds may
not thus be characterized as prima facie belonging to the government. That issue
must first be resolved by the Sandiganbayan. In fact, when the Solicitor General,
in G.R. No. 96073, filed a motion to declare the coconut levies collected pursuant
to the various issuances as public funds and to declare Section 5, Article III of
Presidential Decree No. 1468 as unconstitutional, the Court denied the same in a
Resolution dated March 26, 1996.
3. ID.; ID.; ID.; THE QUESTION OF WHETHER THE COCONUT LEVY FUNDS ARE
PUBLIC FUNDS IS NOT IN ISSUE IN THE PRESENT CASE. And if it is to be
recalled, the issue involved herein is whether or not
the Sandiganbayan committed grave abuse of discretion when it issued the
disputed order allowing respondents to vote the UCPB shares of stock registered
in their names. The question of whether the coconut levy funds are public funds
is not in issue here. In fact, the constitutionality of Presidential Decrees No. 961
and 1468 have not been raised by the PCGG during the proceedings before
the Sandiganbayan. Moreover, it should be pointed out that the avowed purpose
of sequestration is to preserve the assets sequestered to assure that if, and
when, judgment is rendered in favor of the petitioner, the judgment may be
implemented. "Preservation," not "deprivation" before judgment, is its essence.
In the instant case, however, the actuations of PCGG with regard to the
sequestered shares partake more of deprivation rather than preservation. As
pointed out by respondents, since 1986, only one (1) stockholders' meeting of
UCPB has been held. At this meeting, PCGG voted all of the shares, as a result of
which all members of the Board of UCPB, since 1986 to the present, have been
PCGG nominees. When vacancies in the Board occur because of resignation,
replacements are installed by the remaining members of the Board on
nomination of the PCGG. The stockholders' meeting scheduled on March 6, 2001
would have been the first stockholders' meeting since 1986 at which registered
stockholders would exercise their right to vote and by their vote elect the
members of the Board of Directors. Also, the shares of stock in UCPB were
sequestered in 1986. The civil action "Republic of the Philippines v. Eduardo M.
Cojuangco, Jr., Civil Case No. 033," was instituted before the Sandiganbayan on
July 30, 1987. This action included, among other things, the UCPB shares of
stock and was filed to maintain the effectivity of the writs of sequestration
pursuant to Section 26, Article XVIII of the Constitution. Notwithstanding the
lapse of more than 14 years, the proceedings have barely gone beyond the pre-
trial stage. PCGG's exercise of the right to vote the sequestered shares of stock
for a period of 14 years constitutes effectively a deprivation of a property right
belonging to the registered stockholders (18 Am. Jur. 2d, Corporations 2d
Section 1065, p. 859, citing cases), a state of affairs not within the
contemplation of "sequestration" as a means of preservation of assets. DHATcE

4. ID.; ID.; INCIDENTS CONCERNING THE VOTING OF THE SEQUESTERED
SHARES BEING MATTERS INCIDENTAL TO THE SEQUESTRATION SHOULD BE
ADDRESSED TO THE SANDIGANBAYAN. I regret to say that I find
unacceptable the contention that the "law of the case" herein should be the
Resolution dated February 16, 1993, in Republic of the Philippines vs.
Sandiganbayan, et al. For one, the UCPB shares of stock of respondents
COCOFED, et al. and Ballares, et al. are not the subject of the case relied upon.
Hence, the Resolution therein could not have referred to or covered said shares.
For another, and more importantly, what is invoked by petitioner is, in effect,
merely a restraining order which was not re-affirmed by the Court when we
rendered the main decision in the said consolidated sequestration cases. Rather,
what I believe is truly applicable herein is the Court's decision in COCOFED vs.
PCGG (178 SCRA 236 [1989]) wherein it was held that "the incidents concerning
the voting of the sequestered shares, the COCOFED elections, and the
replacement of directors, being matters incidental to the sequestration, should
be addressed to the Sandiganbayan." Thus, the Sandiganbayan has been given
by the Court full discretion to evaluate and to allow or disallow the duly
registered stockholders of the UCPB shares to exercise the right to vote the said
shares in the UCPB elections and/or appointment/replacement of its directors. If,
as in the case at hand, the Sandiganbayan, in the exercise of its sound discretion
and for justifiable reasons cited in its assailed Order of February 28, 2001,
allowed herein private respondents to vote the sequestered shares in question,
one would simply be at a loss to understand how such action could be said to be
tainted with grave abuse of discretion. SHIETa
D E C I S I O N
PANGANIBAN, J P:
The right to vote sequestered shares of stock registered in the names of private
individuals or entities and alleged to have been acquired with ill-gotten wealth
shall, as a rule, be exercised by the registered owner. The PCGG may, however,
be granted such voting right provided it can (1) show prima facie evidence that
the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate
imminent danger of dissipation of the assets, thus necessitating their continued
sequestration and voting by the government until a decision, ruling with finality
on their ownership, is promulgated by the proper court. cdasia
However, the foregoing two-tiered test does not apply when the sequestered
stocks are acquired with funds that are prima facie public in character or, at
least, are affected with public interest. Inasmuch as the subject UCPB shares in
the present case were undisputably acquired with coco levy funds which are
public in character, then the right to vote them shall be exercised by the PCGG.
In sum, the public character test, not the two-tiered one, applies in the
instant controversy.
The Case
Before us is a Petition for Certiorari with a 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 set aside the February 28, 2001 Order 2 of the First
Division of the Sandiganbayan 3 in Civil Case Nos. 0033-A, 0033-B and 0033-F.
The pertinent portions of the assailed Order read as follows:
In view hereof, the movants COCOFED, et al. and Ballares, et al. as
well as Eduardo Cojuangco, et al., who were acknowledged to be
registered stockholders of the UCPB are authorized, as are all other
registered stockholders of the United Coconut Planters Bank, until
further orders from this Court, to exercise their rights to vote their
shares of stock and themselves to be voted upon in the United Coconut
Planters Bank (UCPB) at the scheduled Stockholders Meeting on March
6, 2001 or on any subsequent continuation or resetting thereof, and to
perform such acts as will normally follow in the exercise of these rights
as registered stockholders.
Since by way of form, the pleadings herein had been labeled as praying
for an injunction, the right of the movants to exercise their right as
abovementioned will be subject to the posting of a nominal bond in the
amount of FIFTY THOUSAND PESOS (P50,000.00) jointly for the
defendants COCOFED, et al. and Ballares, et al., as well as all other
registered stockholders of sequestered shares in that bank, and FIFTY
THOUSAND PESOS (P50,000.00) for Eduardo Cojuangco, Jr., et al., to
answer for any undue damage or injury to the United Coconut Planters
Bank as may be attributed to their exercise of their rights as registered
stockholders. 4
The Antecedents
The very roots of this case are anchored on the historic events that transpired
during the change of government in 1986. Immediately after the 1986 EDSA
Revolution, then President Corazon C. Aquino issued Executive Order (E.O.) Nos.
1, 5 2 6 and 14. 7
On the explicit premise that vast resources of the government have
been amassed by former President Ferdinand E. Marcos, his immediate
family, relatives, and close associates both here and abroad, the
Presidential Commission on Good Government (PCGG) was created by
Executive Order No. 1 to assist the President in the recovery of the ill-
gotten wealth thus accumulated whether located in the Philippines or
abroad. 8
Executive Order No. 2 states that the ill-gotten assets and properties are in the
form of bank accounts, deposits, trust accounts, shares of stocks, buildings,
shopping centers, condominiums, mansions, residences, estates, and other kinds
of real and personal properties in the Philippines and in various countries of the
world. 9
Executive Order No. 14, on the other hand, empowered the PCGG, with the
assistance of the Office of the Solicitor General and other government
agencies, inter alia, to file and prosecute all cases investigated by it under E.O.
Nos. 1 and 2. IDASHa
Pursuant to these laws, the PCGG issued and implemented numerous
sequestrations, freeze orders and provisional takeovers of allegedly ill-gotten
companies, assets and properties, real or personal. 10
Among the properties sequestered by the Commission were shares of stock in
the United Coconut Planters Bank (UCPB) registered in the names of the alleged
one million coconut farmers, the so-called Coconut Industry Investment Fund
companies (CIIF companies) and Private Respondent Eduardo Cojuangco Jr.
(hereinafter Cojuangco).
In connection with the sequestration of the said UCPB shares, the PCGG, on July
31, 1987, instituted an action for reconveyance, reversion, accounting, restitution
and damages docketed as Case No. 0033 in the Sandiganbayan.
On November 15, 1990, upon Motion 11 of Private Respondent COCOFED, the
Sandiganbayan issued a Resolution 12 lifting the sequestration of the subject
UCPB shares on the ground that herein private respondents in particular,
COCOFED and the so-called CIIF companies had not been impleaded by the
PCGG as parties-defendants in its July 31, 1987 Complaint for reconveyance,
reversion, accounting, restitution and damages. The Sandiganbayan ruled that
the Writ of Sequestration issued by the Commission was automatically lifted for
PCGGs failure to commence the corresponding judicial action within the six-
month period ending on August 2, 1987 provided under Section 26, Article XVIII
of the 1987 Constitution. The anti-graft court noted that though these entities
were listed in an annex appended to the Complaint, they had not been named as
parties-respondents.
This Sandiganbayan Resolution was challenged by the PCGG in a Petition
for Certiorari docketed as G.R. No. 96073 in this Court. Meanwhile, upon motion
of Cojuangco, the anti-graft court ordered the holding of elections for the Board
of Directors of UCPB. However, the PCGG applied for and was granted by this
Court a Restraining Order enjoining the holding of the election. Subsequently,
the Court lifted the Restraining Order and ordered the UCPB to proceed with the
election of its board of directors. Furthermore, it allowed the sequestered shares
to be voted by their registered owners.
The victory of the registered shareholders was fleeting because the Court, acting
on the solicitor generals Motion for Clarification/Manifestation, issued a
Resolution on February 16, 1993, declaring that the right of petitioners [herein
private respondents] to vote stock in their names at the meetings of the UCPB
cannot be conceded at this time. That right still has to be established by them
before the Sandiganbayan. Until that is done, they cannot be deemed legitimate
owners of UCPB stock and cannot be accorded the right to vote them. 13 The
dispositive portion of the said Resolution reads as follows:
IN VIEW OF THE FOREGOING, the Court recalls and sets aside the
Resolution dated March 3, 1992 and, pending resolution on the merits of
the action at bar, and until further orders, suspends the effectivity of the
lifting of the sequestration decreed by the Sandiganbayan on November
15, 1990, and directs the restoration of the status quo ante, so as to
allow the PCGG to continue voting the shares of stock under
sequestration at the meetings of the United Coconut Planters Bank. 14
On January 23, 1995, the Court rendered its final Decision in G.R. No. 96073,
nullifying and setting aside the November 15, 1990 Resolution of the
Sandiganbayan which, as earlier stated, lifted the sequestration of the subject
UCPB shares. The express impleading of herein Respondents COCOFED et al.
was deemed unnecessary because the judgment may simply be directed against
the shares of stock shown to have been issued in consideration of ill-gotten
wealth. 15 Furthermore, the companies are simply the res in the actions for the
recovery of illegally acquired wealth, and there is, in principle, no cause of action
against them and no ground to implead them as defendants in said case. 16

A month thereafter, the PCGG pursuant to an Order of the Sandiganbayan
subdivided Case No. 0033 into eight Complaints and docketed them as Case Nos.
0033-A to 0033-H. CaDEAT
Six years later, on February 13, 2001, the Board of Directors of UCPB received
from the ACCRA Law Office a letter written on behalf of the COCOFED and the
alleged nameless one million coconut farmers, demanding the holding of a
stockholders meeting for the purpose of, among others, electing the board of
directors. In response, the board approved a Resolution calling for a
stockholders meeting on March 6, 2001 at three oclock in the afternoon.
On February 23, 2001, COCOFED, et al. and Ballares, et al. filed the Class
Action Omnibus Motion 17 referred to earlier in Sandiganbayan Civil Case Nos.
0033-A, 0033-B and 0033-F, asking the court a quo:
1. To enjoin the PCGG from voting the UCPB shares of stock registered
in the respective names of the more than one million coconut
farmers; and
2. To enjoin the PCGG from voting the SMC shares registered in the
names of the 14 CIIF holding companies including those
registered in the name of the PCGG. 18
On February 28, 2001, respondent court, after hearing the parties on oral
argument, issued the assailed Order.
Hence, this Petition by the Republic of the Philippines represented by the
PCGG. 19
The case had initially been raffled to this Courts Third Division which, by a vote
of 3-2, 20 issued a Resolution 21 requiring the parties to maintain the
status quo existing before the issuance of the questioned Sandiganbayan Order
dated February 28, 2001. On March 7, 2001, Respondent COCOFED et al. moved
that the instant Petition be heard by the Court en banc. 22 The Motion was
unanimously granted by the Third Division.
On March 13, 2001, the Court en banc resolved to accept the Third Divisions
referral. 23 It heard the case on Oral Argument in Baguio City on April 17, 2001.
During the hearing, it admitted the intervention of a group of coconut farmers
and farm worker organizations, the Pambansang Koalisyon ng mga Samahang
Magsasaka at Manggagawa ng Niyugan (PKSMMN). The coalition claims that its
members have been excluded from the benefits of the coconut levy fund. Inter
alia, it joined petitioner in praying for the exclusion of private respondents in
voting the sequestered shares.
Issues
Petitioner submits the following issues for our consideration: 24
A.
Despite the fact that the subject sequestered shares were purchased
with coconut levy funds (which were declared public in character) and
the continuing effectivity of Resolution dated February 16, 1993 in G.R.
No. 96073 which allows the PCGG to vote said sequestered shares,
Respondent Sandiganbayan, with grave abuse of discretion, issued its
Order dated February 28, 2001 enjoining PCGG from voting the
sequestered shares of stock in UCPB.
B.
The Respondent Sandiganbayan violated petitioners right to due
process by taking cognizance of the Class Action Omnibus Motion dated
23 February 2001 despite gross lack of sufficient notice and by issuing
the writ of preliminary injunction despite the obvious fact that there was
no actual pressing necessity or urgency to do so.
In its Resolution dated April 17, 2001, the Court defined the issue to be resolved
in the instant case simply as follows:
Did the Sandiganbayan commit grave abuse of discretion when it issued
the disputed Order allowing respondents to vote UCPB shares of stock
registered in the name of respondents?
This Courts Ruling
The Petition is impressed with merit.
Main Issue:
Who May Vote the Sequestered Shares of Stock?
Simply stated, the gut substantive issue to be resolved in the present Petition is:
Who may vote the sequestered UCPB shares while the main case for their
reversion to the State is pending in the Sandiganbayan?
This Court holds that the government should be allowed to continue voting those
shares inasmuch as they were purchased with coconut levy funds funds that
are prima facie public in character or, at the very least, are clearly affected with
public interest.
General Rule: Sequestered Shares
Are Voted by the Registered Holder
At the outset, it is necessary to restate the general rule that the registered owner
of the shares of a corporation exercises the right and the privilege of
voting. 25 This principle applies even to shares that are sequestered by the
government, over which the PCGG as a mere conservator cannot, as a general
rule, exercise acts of dominion. 26 On the other hand, it is authorized to vote
these sequestered shares registered in the names of private persons and
acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test
devised by the Court in Cojuangco v. Calpo 27 and PCGG v. Cojuangco Jr., 28 as
follows:
(1) Is there prima facie evidence showing that the said shares are ill-gotten and
thus belong to the State?
(2) Is there an imminent danger of dissipation, thus necessitating their continued
sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?
Sequestered Shares Acquired with
Public Funds Are an Exception
From the foregoing general principle, the Court in Baseco v. PCGG 29 (hereinafter
Baseco) and Cojuangco Jr. v. Roxas 30(Cojuangco-Roxas) has provided two
clear public character exceptions under which the government is granted the
authority to vote the shares:
(1) Where government shares are taken over by private persons or entities
who/which registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public funds
somehow landed in private hands.
The exceptions are based on the common-sense principle that legal fiction must
yield to truth; that public property registered in the names of non-owners is
affected with trust relations; and that the prima facie beneficial owner should be
given the privilege of enjoying the rights flowing from the prima facie fact of
ownership.
In Baseco, a private corporation known as the Bataan Shipyard and Engineering
Co. was placed under sequestration by the PCGG. Explained the Court:
The facts show that the corporation known as BASECO was owned and
controlled by President Marcos during his administration, through
nominees, by taking undue advantage of his public office and/or using
his powers, authority, or influence, and that it was by and through the
same means, that BASECO had taken over the business and/or assets of
the National Shipyard and Engineering Co., Inc., and other government-
owned or controlled entities. 31
Given this factual background, the Court discussed PCGGs right over BASECO in
the following manner:
Now, in the special instance of a business enterprise shown by evidence
to have been taken over by the government of the Marcos
Administration or by entities or persons close to former President
Marcos, the PCGG is given power and authority, as already adverted to,
to provisionally take (it) over in the public interest or to prevent . . .
(its) disposal or dissipation; and since the term is obviously employed in
reference to going concerns, or business enterprises in operation,
something more than mere physical custody is connoted; the PCGG may
in this case exercise some measure of control in the operation, running,
or management of the business itself. 32
Citing an earlier Resolution, it ruled further:
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders'
meeting for the election of directors as authorized by the Memorandum
of the President . . . (to the PCGG) dated June 26, 1986, particularly,
where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of
BASECO have failed to show any right or even any shareholding in said
corporation. 33 (Italics supplied)
The Court granted PCGG the right to vote the sequestered shares because they
appeared to be assets belonging to the government itself. The Concurring
Opinion of Justice Ameurfina A. Melencio-Herrera, in which she was joined by
Justice Florentino P. Feliciano, explained this principle as follows:
I have no objection to according the right to vote sequestered stock in
case of a take-over of business actually belonging to the government
or whose capitalization comes from public funds but which, somehow,
landed in the hands of private persons, as in the case of BASECO. To my
mind, however, caution and prudence should be exercised in the case of
sequestered shares of an on-going private business enterprise, specially
the sensitive ones, since the true and real ownership of said shares is
yet to be determined and proven more conclusively by the
Courts.34 (Italics supplied)
The exception was cited again by the Court in Cojuangco-Roxas 35 in this wise:
The rule in this jurisdiction is, therefore, clear. The PCGG cannot
perform acts of strict ownership of sequestered property. It is a mere
conservator. It may not vote the shares in a corporation and elect the
members of the board of directors. The only conceivable exception is in
a case of a takeover of a business belonging to the government or
whose capitalization comes from public funds, but which landed in
private hands as in BASECO. 36 (Italics supplied)
The public character test was reiterated in many subsequent cases; most
recently, in Antiporda v. Sandiganbayan. 37Expressly citing Cojuangco-
Roxas, 38 this Court said that in determining the issue of whether the PCGG
should be allowed to vote sequestered shares, it was crucial to find out first
whether these were purchased with public funds, as follows:

It is thus important to determine first if the sequestered corporate
shares came from public funds that landed in private hands. 39
In short, when sequestered shares registered in the names of private individuals
or entities are alleged to have been acquired with ill-gotten wealth, then the two-
tiered test is applied. However, when the sequestered shares in the name of
private individuals or entities are shown, prima facie, to have been (1) originally
government shares, or (2) purchased with public funds or those affected with
public interest, then the two-tiered test does not apply. Rather, the public
character exceptions in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that
is, the government shall vote the shares.
UCPB Shares Were Acquired
With Coconut Levy Funds
In the present case before the Court, it is not disputed that the money used to
purchase the sequestered UCPB shares came from the Coconut Consumer
Stabilization Fund (CCSF), otherwise known as the coconut levy funds.
This fact was plainly admitted by private respondents counsel, Atty. Teresita J.
Herbosa, during the Oral Arguments held on April 17, 2001 in Baguio City, as
follows:
Justice Panganiban:
In regard to the theory of the Solicitor General that the funds used
to purchase [both] the original 28 million and the subsequent 80 million
came from the CCSF, Coconut Consumers Stabilization Fund, do you
agree with that?
Atty. Herbosa:
Yes, Your Honor.
xxx xxx xxx
Justice Panganiban:
So it seems that the parties [have] agreed up to that point that
the funds used to purchase 72% of the former First United Bank came
from the Coconut Consumers Stabilization Fund?
Atty. Herbosa:
Yes, Your Honor. 40
Indeed in Cocofed v. PCGG, 41 this Court categorically declared that the UCPB
was acquired with the use of the Coconut Consumers Stabilization Fund in virtue
of Presidential Decree No. 755, promulgated on July 29, 1975.
Coconut Levy Funds Are
Affected With Public Interest
Having conclusively shown that the sequestered UCPB shares were purchased
with coconut levies, we hold that these funds and shares are, at the very least,
affected with public interest.
The Resolution issued by the Court on February 16, 1993 in Republic v.
Sandiganbayan 42 stated that coconut levy funds were clearly affected with
public interest; thus, herein private respondents even if they are the
registered shareholders cannot be accorded the right to vote them. We quote
the said Resolution in part, as follows:
The coconut levy funds being clearly affected with public interest, it
follows that the corporations formed and organized from those funds,
and all assets acquired therefrom should also be regarded as clearly
affected with public interest. 43
xxx xxx xxx
Assuming, however, for purposes of argument merely, the lifting of
sequestration to be correct, may it also be assumed that the lifting of
sequestration removed the character of the coconut levy companies of
being affected with public interest, so that they and their stock and
assets may now be considered to be of private ownership? May it be
assumed that the lifting of sequestration operated to relieve the holders
of stock in the coconut levy companies affected with public interest
of the obligation of proving how that stock had been legitimately
transferred to private ownership, or that those stockholders who had
had some part in the collection, administration, or disposition of the
coconut levy funds are now deemed qualified to acquire said stock, and
freed from any doubt or suspicion that they had taken advantage of
their special or fiduciary relation with the agencies in charge of the
coconut levies and the funds thereby accumulated? The obvious answer
to each of the questions is a negative one. It seems plain that the lifting
of sequestration has no relevance to the nature of the coconut levy
companies or their stock or property, or to the legality of the acquisition
by private persons of their interest therein, or to the latters capacity or
disqualification to acquire stock in the companies or any property
acquired from coconut levy funds.
This being so, the right of the [petitioners] to vote stock in their names
at the meetings of the UCPB cannot be conceded at this time. That right
still has to be established by them before the Sandiganbayan. Until that
is done, they cannot be deemed legitimate owners of UCPB stock and
cannot be accorded the right to vote them. 44 (Italics supplied)
It is however contended by respondents that this Resolution was in the nature of
a temporary restraining order. As such, it was supposedly interlocutory in
character and became functus oficio when this Court decided G.R. No. 96073 on
January 23, 1995.LexLib
This argument is aptly answered by petitioner in its Memorandum, which we
quote:
The ruling made in the Resolution dated 16 February 1993 confirming
the public nature of the coconut levy funds and denying claimants their
purported right to vote is an affirmation of doctrines laid down in the
cases of COCOFED v. PCGG supra, Baseco v. PCGG, supra,
and Cojuangco v. Roxas, supra. Therefore it is of no moment that the
Resolution dated 16 February 1993 has not been ratified. Its
jurisprudential bases remain. 45 (Italics supplied)
Granting arguendo that the Resolution is interlocutory, the truth remains: the
coconut levy funds are still clearly affected with public interest. That was the
truth in 1989 as quoted by this Court in its February 16, 1993 Resolution, and so
it is today. Said the Court in 1989:
The utilization and proper management of the coconut levy funds,
raised as they were by the States police and taxing powers, are
certainly the concern of the Government. It cannot be denied that it was
the welfare of the entire nation that provided the prime moving factor
for the imposition of the levy. It cannot be denied that the coconut
industry is one of the major industries supporting the national economy.
It is, therefore, the States concern to make it a strong and secure
source not only of the livelihood of a significant segment of the
population but also of export earnings the sustained growth of which is
one of the imperatives of economic stability. The coconut levy funds are
clearly affected with public interest. Until it is demonstrated satisfactorily
that they have legitimately become private funds, they must prima facie
and by reason of the circumstances in which they were raised and
accumulated be accounted subject to the measures prescribed in E.O.
Nos. 1, 2, and 14 to prevent their concealment, dissipation, etc., which
measures include the sequestration and other orders of the PCGG
complained of. 46 (Italics supplied)
To repeat, the foregoing juridical situation has not changed. It is still the truth
today: the coconut levy funds are clearly affected with public interest. Private
respondents have not demonstrated satisfactorily that they have legitimately
become private funds.
If private respondents really and sincerely believed that the final Decision of the
Court in Republic v. Sandiganbayan (G.R. No. 96073, promulgated on January
23, 1995) granted them the right to vote, why did they wait for the lapse of six
long years before definitively asserting it (1) through their letter dated February
13, 2001, addressed to the UCPB Board of Directors, demanding the holding of a
shareholders meeting on March 6, 2001; and (2) through their Omnibus Motion
dated February 23, 2001 filed in the court a quo, seeking to enjoin PCGG from
voting the subject sequestered shares during the said stockholders meeting?
Certainly, if they even half believed their submission now that they already
had such right in 1995 why are they suddenly and imperiously claiming
it only now?
It should be stressed at this point that the assailed Sandiganbayan Order dated
February 28, 2001 allowing private respondents to vote the sequestered
shares is not based on any finding that the coconut levies and the shares have
legitimately become private funds. Neither is it based on the alleged lifting of
the TRO issued by this Court on February 16, 1993. Rather, it is anchored on the
grossly mistaken application of the two-tiered test mentioned earlier in this
Decision.
To stress, the two-tiered test is applied only when the sequestered asset in the
hands of a private person is alleged to have been acquired with ill-gotten wealth.
Hence, in PCGG v. Cojuangco, 47 we allowed Eduardo Cojuangco Jr. to vote the
sequestered shares of the San Miguel Corporation (SMC) registered in his name
but alleged to have been acquired with ill-gotten wealth. We did so on his
representation that he had acquired them with borrowed funds and upon failure
of the PCGG to satisfy the two-tiered test. This test was, however, not applied
to sequestered SMC shares that were purchased with coco levy funds.DHcESI
In the present case, the sequestered UCPB shares are confirmed to have been
acquired with coco levies, not with alleged ill-gotten wealth. Hence, by parity of
reasoning, the right to vote them is not subject to the two-tiered test but to
the public character of their acquisition, which per Antiporda v.
Sandiganbayan cited earlier, must first be determined.
Coconut Levy Funds Are
Prima Facie Public Funds
To avoid misunderstanding and confusion, this Court will even be more
categorical and positive than its earlier pronouncements:the coconut levy funds
are not only affected with public interest; they are, in fact, prima facie public
funds.
Public funds are those moneys belonging to the State or to any political
subdivision of the State; more specifically, taxes, customs duties and moneys
raised by operation of law for the support of the government or for the discharge
of its obligations.48 Undeniably, coconut levy funds satisfy this general definition
of public funds, because of the following reasons:

1. Coconut levy funds are raised with the use of the police and
taxing powers of the State.
2. They are levies imposed by the State for the benefit of the
coconut industry and its farmers.
3. Respondents have judicially admitted that the sequestered
shares were purchased with public funds.
4. The Commission on Audit (COA) reviews the use of coconut levy
funds.
5. The Bureau of Internal Revenue (BIR), with the acquiescence of
private respondents, has treated them as public funds.
6. The very laws governing coconut levies recognize their public
character.
We shall now discuss each of the foregoing reasons, any one of which is enough
to show their public character.
1. Coconut Levy Funds Are Raised Through
the States Police and Taxing Powers.
Indeed, coconut levy funds partake of the nature of taxes which, in general, are
enforced proportional contributions from persons and properties, exacted by the
State by virtue of its sovereignty for the support of government and for all public
needs. 49
Based on this definition, a tax has three elements, namely: a) it is an enforced
proportional contribution from persons and properties; b) it is imposed by the
State by virtue of its sovereignty; and c) it is levied for the support of the
government. The coconut levy funds fall squarely into these elements for the
following reasons:
(a) They were generated by virtue of statutory enactments imposed on the
coconut farmers requiring the payment of prescribed amounts. Thus, P.D. No.
276, which created the Coconut Consumers Stabilization Fund (CCSF), mandated
the following:
a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its
equivalent in other coconut products, shall be imposed on every first
sale, in accordance with the mechanics established under R.A. 6260,
effective at the start of business hours on August 10, 1973.
The proceeds from the levy shall be deposited with the Philippine
National Bank or any other government bank to the account of the
Coconut Consumers Stabilization Fund, as a separate trust fund which
shall not form part of the general fund of the government. 50
The coco levies were further clarified in amendatory laws, specifically P.D. No.
961 51 and P.D. No. 1468 52 in this wise:
The Authority (Philippine Coconut Authority) is hereby empowered to
impose and collect a levy, to be known as the Coconut Consumers
Stabilization Fund Levy, on every one hundred kilos of copra resecada,
or its equivalent in other coconut products delivered to, and/or
purchased by, copra exporters, oil millers, desiccators and other end-
users of copra or its equivalent in other coconut products. The levy shall
be paid by such copra exporters, oil millers, desiccators and other end-
users of copra or its equivalent in other coconut products under such
rules and regulations as the Authority may prescribe. Until otherwise
prescribed by the Authority, the current levy being collected shall be
continued. 53
Like other tax measures, they were not voluntary payments or donations by the
people. They were enforced contributions exacted on pain of penal sanctions, as
provided under P.D. No. 276:
3. Any person or firm who violates any provision of this Decree or the
rules and regulations promulgated thereunder, shall, in addition to
penalties already prescribed under existing administrative and special
law, pay a fine of not less than P2,500 or more than P10,000, or suffer
cancellation of licenses to operate, or both, at the discretion of the
Court. 54
Such penalties were later amended thus:
Whenever any person or entity willfully and deliberately violates any of
the provisions of this Act, or any rule or regulation legally promulgated
hereunder by the Authority, the person or persons responsible for such
violation shall be punished by a fine of not more than P20,000.00 and by
imprisonment of not more than five years. If the offender be a
corporation, partnership or a juridical person, the penalty shall be
imposed on the officer or officers authorizing, permitting or tolerating
the violation. Aliens found guilty of any offenses shall, after having
served his sentence, be immediately deported and, in the case of a
naturalized citizen, his certificate of naturalization shall be cancelled. 55
(b) The coconut levies were imposed pursuant to the laws enacted by the proper
legislative authorities of the State. Indeed, the CCSF was collected under P.D.
No. 276, issued by former President Ferdinand E. Marcos who was then
exercising legislative powers. 56
(c) They were clearly imposed for a public purpose. There is absolutely no
question that they were collected to advance the governments avowed policy of
protecting the coconut industry. This Court takes judicial notice of the fact that
the coconut industry is one of the great economic pillars of our nation, and
coconuts and their by products occupy a leading position among the countrys
export products; that it gives employment to thousands of Filipinos; that it is a
great source of the States wealth; and that it is one of the important sources of
foreign exchange needed by our country and, thus, pivotal in the plans of a
government committed to a policy of currency stability.
Taxation is done not merely to raise revenues to support the government, but
also to provide means for the rehabilitation and the stabilization of a threatened
industry, which is so affected with public interest as to be within the police
power of the State, as held in Caltex Philippines v. COA 57 and Osmea v.
Orbos. 58
Even if the money is allocated for a special purpose and raised by special means,
it is still public in character. In the case before us, the funds were even used to
organize and finance State offices. In Cocofed v. PCGG, 59 the Court observed
that certain agencies or enterprises were organized and financed with revenues
derived from coconut levies imposed under a succession of laws of the late
dictatorship . . . with deposed Ferdinand Marcos and his cronies as the suspected
authors and chief beneficiaries of the resulting coconut industry
monopoly. 60 The Court continued: . . . . It cannot be denied that the coconut
industry is one of the major industries supporting the national economy. It is,
therefore, the States concern to make it a strong and secure source not only of
the livelihood of a significant segment of the population, but also of export
earnings the sustained growth of which is one of the imperatives of economic
stability. . . .. 61
2. Coconut Funds Are Levied for the Benefit
of the Coconut Industry and Its Farmers.
Just like the sugar levy funds, the coconut levy funds constitute state funds even
though they may be held for a special public purpose.
In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the
coconut levy funds to the sugar levy funds, both being special public funds
acquired through the taxing and police powers of the State. The sugar levy
funds, which are strikingly similar to the coconut levies in their imposition and
purpose, were declared public funds by this Court in Gaston v. Republic Planters
Bank, 62 from which we quote:
The stabilization fees collected are in the nature of a tax which is within
the power of the State to impose for the promotion of the sugar industry
(Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b],
P.D. No. 388). The collections made accrue to a Special Fund, a
Development and Stabilization Fund, almost identical to the Sugar
Adjustment and Stabilization Fund created under Section 6 of
Commonwealth Act 567. The tax collected is not in a pure exercise of
the taxing power. It is levied with a regulatory purpose, to provide
means for the stabilization of the sugar industry. The levy is primarily in
the exercise of the police power of the State. (Lutz vs. Araneta,
supra.)63
The Court further explained: 64
The stabilization fees in question are levied by the State upon sugar
millers, planters and producers for a special purpose that of financing
the growth and development of the sugar industry and all its
components, stabilization of the domestic market including the foreign
market. The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them as state funds, even
though they are held for a special purpose (Lawrence v. American
Surety Co., 263 Mich 586, 294 ALR 535, cited in 42 Am. Jur., Sec. 2., p.
718). Having been levied for a special purpose, the revenues collected
are to be treated as a special fund, to be, in the language of the statute,
administered in trust for the purpose intended. Once the purpose has
been fulfilled or abandoned, the balance, if any, is to be transferred to
the general funds of the Government. That is the essence of the trust
intended (see 1987 Constitution, Art. VI, Sec. 29[3], lifted from the 1935
Constitution, Article VI, Sec. 23[1]. (Italics supplied)
The character of the Stabilization Fund as a special fund is emphasized
by the fact that the funds are deposited in the Philippine National Bank
and not in the Philippine Treasury, moneys from which may be paid out
only in pursuance of an appropriation made by law (1987 Constitution,
Article VI, Sec. 29[1], 1973 Constitution, Article VIII, Sec. 18[1]).
That the fees were collected from sugar producers, planters and
millers, and that the funds were channeled to the purchase of shares of
stock in respondent Bank do not convert the funds into a trust fund for
their benefit nor make them the beneficial owners of the shares so
purchased. It is but rational that the fees be collected from them since it
is also they who are to be benefited from the expenditure of the funds
derived from it. The investment in shares of respondent Bank is not
alien to the purpose intended because of the Banks character as a
commodity bank for sugar conceived for the industrys growth and
development. Furthermore, of note is the fact that one-half (1/2) or
P0.50 per picul, of the amount levied under P.D. No. 388 is to be utilized
for the payment of salaries and wages of personnel, fringe benefits and
allowances of officers and employees of PHILSUCOM thereby
immediately negating the claim that the entire amount levied is in trust
for sugar, producers, planters and millers.

To rule in petitioners favor would contravene the general principle that
revenues derived from taxes cannot be used for purely private purposes
or for the exclusive benefit of private persons. The Stabilization Fund is
to be utilized for the benefit of the entire sugar industry, and all its
components, stabilization of the domestic market including the foreign
market, the industry being of vital importance to the countrys economy
and to national interest.
In the same manner, this Court has also ruled that the oil stabilization funds
were public in character and subject to audit by COA. It ruled in this wise:
Hence, it seems clear that while the funds collected may be referred to
as taxes, they are exacted in the exercise of the police power of the
State. Moreover, that the OPSF is a special fund is plain from the special
treatment given it byE.O. 137. It is segregated from the general fund;
and while it is placed in what the law refers to as a trust liability
account, the fund nonetheless remains subject to the scrutiny and
review of the COA. The Court is satisfied that these measures comply
with the constitutional description of a special fund. Indeed, the
practice is not without precedent. 65
In his Concurring Opinion in Kilosbayan v. Guingona, 66 Justice Florentino P.
Feliciano explained that the funds raised by the On-line Lottery System were also
public in nature. In his words:
. . .. In the case presently before the Court, the funds involved are
clearly public in nature. The funds to be generated by the proposed
lottery are to be raised from the population at large. Should the
proposed operation be as successful as its proponents project, those
funds will come from well-nigh every town and barrio of Luzon. The
funds here involved are public in another very real sense: they will
belong to the PCSO, a government owned or controlled corporation and
an instrumentality of the government and are destined for utilization in
social development projects which, at least in principle, are designed to
benefit the general public. . . .. The interest of a private citizen in seeing
to it that public funds, from whatever source they may have been
derived, go only to the uses directed and permitted by law is as real and
personal and substantial as the interest of a private taxpayer in seeing
to it that tax monies are not intercepted on their way to the public
treasury or otherwise diverted from uses prescribed or allowed by law. It
is also pertinent to note that the more successful the government is in
raising revenues by non-traditional methods such as PAGCOR operations
and privatization measures, the lesser will be the pressure upon the
traditional sources of public revenues, i.e., the pocket books of individual
taxpayers and importers. 67
Thus, the coconut levy funds like the sugar levy and the oil stabilization funds,
as well as the monies generated by the On-line Lottery System are funds
exacted by the State. Being enforced contributions, they are prima facie public
funds.
3. Respondents Judicially Admit That
the Levies Are Government Funds.
Equally important as the fact that the coconut levy funds were raised through
the taxing and police powers of the State is respondents effective judicial
admission that these levies are government funds. As shown by the attachments
to their pleadings, 68 respondents concede that the Coconut Consumers
Stabilization Fund (CCSF) and the Coconut Investment Development Fund
constitute government funds . . . for the benefit of coconut farmers.
Collections on both levies constitute government funds. However,
unlike other taxes that the Government levies and collects such as
income tax, tariff and customs duties, etc., the collections on the CCSF
and CIDF are, by express provision of the laws imposing them, for a
definite purpose, not just for any governmental purpose. As stated
above part of the collections on the CCSF levy should be spent for the
benefit of the coconut farmers. And in respect of the collections on the
CIDF levy, P.D. 582 mandatorily requires that the same should be
spent exclusively for the establishment, operation and maintenance of a
hybrid coconut seed garden and the distribution, for free, to the coconut
farmers of the hybrid coconut seednuts produced from that seed
garden. IDAESH
On the other hand, the laws which impose special levies on specific
industries, for example on the mining industry, sugar industry, timber
industry, etc., do not, by their terms, expressly require that the
collections on those levies be spent exclusively for the benefit of the
industry concerned. And if the enabling law thus so provide, the fact
remains that the governmental agency entrusted with the duty of
implementing the purpose for which the levy is imposed is vested with
the discretionary power to determine when and how the collections
should be appropriated. 69
4. The COA Audit Shows the
Public Nature of the Funds.
Under COA Office Order No. 86-9470 dated April 15, 1986, 70 the COA reviewed
the expenditure and use of the coconut levies allocated for the acquisition of the
UCPB. The audit was aimed at ascertaining whether these were utilized for the
purpose for which they had been intended. 71 Under the 1987 Constitution, the
powers of the COA are as follows:
The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities . . . . 72
Because these funds have been subjected to COA audit, there can be no other
conclusion than that they are prima facie public in character.
5. The BIR Has Pronounced That the
Coconut Levy Funds Are Taxes.
In response to a query posed by the administrator of the Philippine Coconut
Authority regarding the character of the coconut levy funds, the Bureau of
Internal Revenue has affirmed that these funds are public in character. It held as
follows: [T]he coconut levy is not a public trust fund for the benefit of the
coconut farmers, but is in the nature of a tax and, therefore, . . . public funds
that are subject to government administration and disposition. 73
Furthermore, the executive branch treats the coconut levies as public funds.
Thus, Executive Order No. 277, issued on September 24, 1995, directed the
mode of treatment, utilization, administration and management of the coconut
levy funds. It provided as follows:
(a) The coconut levy funds, which include all income, interests,
proceeds or profits derived therefrom, as well as all assets, properties
and shares of stocks procured or obtained with the use of such
funds, shall be treated, utilized, administered and managed as public
funds consistent with the uses and purposes under the laws which
constituted them and the development priorities of the government,
including the governments coconut productivity, rehabilitation, research
extension, farmers organizations, and market promotions programs,
which are designed to advance the development of the coconut industry
and the welfare of the coconut farmers. 74 (Italics supplied)
Doctrinally, acts of the executive branch are prima facie valid and binding, unless
declared unconstitutional or contrary to law.
6. Laws Governing Coconut Levies
Recognize Their Public Nature.
Finally and tellingly, the very laws governing the coconut levies recognize their
public character. Thus, the third Whereas clause of P.D. No. 276 treats them as
special funds for a specific public purpose. Furthermore, P.D. No. 711 transferred
to the general funds of the State all existing special and fiduciary funds including
the CCSF. On the other hand, P.D. No. 1234 specifically declared the CCSF as a
special fund for a special purpose, which should be treated as a special account
in the National Treasury. TcEaDS
Moreover, even President Marcos himself, as the sole legislative/executive
authority during the martial law years, struck off the phrase which is a private
fund of the coconut farmers from the original copy of Executive Order No. 504
dated May 31, 1978, and we quote:
WHEREAS, by means of the Coconut Consumers Stabilization Fund
(CCSF), which is the private fund of the coconut farmers (deleted),
essential coconut-based products are made available to household
consumers at socialized prices. (Italics supplied)
The phrase in bold face which is the private fund of the coconut farmers
was crossed out and duly initialed by its author, former President Marcos. This
deletion, clearly visible in Attachment C of petitioners Memorandum, 75 was a
categorical legislative intent to regard the CCSF as public, not private, funds.
Having Been Acquired With Public
Funds, UCPB Shares Belong, Prima
Facie, to the Government
Having shown that the coconut levy funds are not only affected with public
interest, but are in fact prima facie public funds, this Court believes that the
government should be allowed to vote the questioned shares, because they
belong to it as the prima facie beneficial and true owner.
As stated at the beginning, voting is an act of dominion that should be exercised
by the share owner. One of the recognized rights of an owner is the right to vote
at meetings of the corporation. The right to vote is classified as the right to
control. 76Voting rights may be for the purpose of, among others, electing or
removing directors, amending a charter, or making or amending
bylaws. 77 Because the subject UCPB shares were acquired with government
funds, the government becomes theirprima facie beneficial and true owner.
Ownership includes the right to enjoy, dispose of, exclude and recover a thing
without limitations other than those established by law or by the
owner. 78 Ownership has been aptly described as the most comprehensive of all
real rights. 79 And the right to vote shares is a mere incident of ownership. In
the present case, the government has been shown to be the prima facie owner
of the funds used to purchase the shares. Hence, it should be allowed the rights
and privileges flowing from such fact.

And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic should
continue to vote those shares until and unless private respondents are able to
demonstrate, in the main cases pending before the Sandiganbayan, that they
[the sequestered UCPB shares] have legitimately become private.
Procedural and Incidental Issues:
Grave Abuse of Discretion,
Improper Arguments
and Intervenors Relief
Procedurally, respondents argue that petitioner has failed to demonstrate that
the Sandiganbayan committed grave abuse of discretion, a demonstration
required in every petition under Rule 65. 80
We disagree. We hold that the Sandiganbayan gravely abused its discretion
when it contravened the rulings of this Court inBaseco and Cojuangco-Roxas
thereby unlawfully, capriciously and arbitrarily depriving the government of its
right to vote sequestered shares purchased with coconut levy funds which
are prima facie public funds.
Indeed, grave abuse of discretion may arise when a lower court or tribunal
violates or contravenes the Constitution, the law or existing jurisprudence. In
one case, 81 this Court ruled that the lower courts resolution was tantamount to
overruling a judicial pronouncement of the highest Court . . . and unmistakably a
very grave abuse of discretion. 82
The Public Character of
Shares Is a Valid Issue
Private respondents also contend that the public nature of the coconut levy funds
was not raised as an issue before the Sandiganbayan. Hence, it could not be
taken up before this Court.
Again we disagree. By ruling that the two-tiered test should be applied in
evaluating private respondents claim of exercising voting rights over the
sequestered shares, the Sandiganbayan effectively held that the subject assets
were private in character. Thus, to meet this issue, the Office of the Solicitor
General countered that the shares were not private in character, and that quite
the contrary, they were and are public in nature because they were acquired
with coco levy funds which are public in character. In short, the main issue of
who may vote the shares cannot be determined without passing upon the
question of the public/private character of the shares and the funds used to
acquire them. The latter issue, although not specifically raised in the Court a
quo, should still be resolved in order to fully adjudicate the main issue.
Indeed, this Court has the authority to waive the lack of proper assignment of
errors if the unassigned errors closely relate to errors properly pinpointed out or
if the unassigned errors refer to matters upon which the determination of the
questions raised by the errors properly assigned depend. 83
Therefore, where the issues already raised also rest on other issues not
specifically presented as long as the latter issues bear relevance and close
relation to the former and as long as they arise from matters on record, the
Court has the authority to include them in its discussion of the controversy as
well as to pass upon them. 84
No Positive Relief
For Intervenors
Intervenors anchor their interest in this case on an alleged right that they are
trying to enforce in another Sandiganbayan case docketed as SB Case No.
0187. 85 In that case, they seek the recovery of the subject UCPB shares from
herein private respondents and the corporations controlled by them. Therefore,
the rights sought to be protected and the reliefs prayed for by intervenors are
still being litigated in the said case. The purported rights they are invoking are
mere expectancies wholly dependent on the outcome of that case in the
Sandiganbayan.
Clearly, we cannot rule on intervenors alleged right to vote at this time and in
this case. That right is dependent upon the Sandiganbayans resolution of their
action for the recovery of said sequestered shares. Given the patent fact that
intervenors are not registered stockholders of UCPB as of the moment, their
asserted rights cannot be ruled upon in the present proceedings. Hence, no
positive relief can be given them now, except insofar as they join petitioner in
barring private respondents from voting the subject shares.
Epilogue
In sum, we hold that the Sandiganbayan committed grave abuse of discretion in
grossly contradicting and effectively reversing existing jurisprudence, and in
depriving the government of its right to vote the sequestered UCPB shares which
are prima faciepublic in character.
In making this ruling, we are in no way preempting the proceedings the
Sandiganbayan may conduct or the final judgment it may promulgate in Civil
Case Nos. 0033-A, 0033-B and 0033-F. Our determination here is merely prima
facie, and should not bar the anti-graft court from making a final ruling, after
proper trial and hearing, on the issues and prayers in the said civil cases,
particularly in reference to the ownership of the subject shares. cTSHaE
We also lay down the caveat that, in declaring the coco levy funds to be prima
facie public in character, we are not ruling in any final manner on their
classification whether they are general or trust or special funds since such
classification is not at issue here. Suffice it to say that the public nature of the
coco levy funds is decreed by the Court only for the purpose of determining the
right to vote the shares, pending the final outcome of the said civil cases.
Neither are we resolving in the present case the question of whether the shares
held by Respondent Cojuangco are, as he claims, the result of private enterprise.
This factual matter should also be taken up in the final decision in the cited cases
that are pending in the court a quo. Again suffice it to say that the only issue
settled here is the right of PCGG to vote the sequestered shares, pending the
final outcome of said cases.
This matter involving the coconut levy funds and the sequestered UCPB shares
has been straddling the courts for about 15 years. What we are discussing in the
present Petition, we stress, is just an incident of the main cases which are
pending in the anti-graft court the cases for the reconveyance, reversion and
restitution to the State of these UCPB shares.
The resolution of the main cases has indeed been long overdue. Every effort,
both by the parties and the Sandiganbayan, should be exerted to finally settle
this controversy.
WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET
ASIDE. The PCGG shall continue voting the sequestered shares until
Sandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F are finally and
completely resolved. Furthermore, the Sandiganbayan is ORDERED to decide
with finality the aforesaid civil cases within a period of six (6) months from
notice. It shall report to this Court on the progress of the said cases every three
(3) months, on pain of contempt. The Petition in Intervention is DISMISSED
inasmuch as the reliefs prayed for are not covered by the main issues in this
case. No costs. IAEcCT
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Mendoza, Quisumbing, Buena, De Leon,
Jr., and Carpio, JJ., concur.
Melo, J., see dissenting opinion.
Puno, J., joins the separate opinion of J. Vitug.
Vitug, J., see separate opinion.
Kapunan, Ynares-Santiago, Sandoval-Gutierrez, JJ., concur with the
dissenting opinion of J. Melo.
Pardo, J., Join in the result of the dissents
Separate Opinions
VITUG, J., separate opinion:
The Presidential Commission on Good Government ("PCGG"), representing the
Republic of the Philippines, assails in the instant special action
for certiorari under Rule 65 of the Rules of Court, the order, dated 28 February
2001, of public respondent Sandiganbayan (First Division) in Civil Cases No.
0033-A, 0033-B, and 0033-F, entitled "Republic of the Philippines vs. Eduardo
Cojuangco, Jr., et al.," on the ground of grave abuse of discretion amounting to
lack of jurisdiction. In the order, the Sandiganbayan enjoined the PCGG from
voting the sequestered shares of stock of the United Coconut Planters' Bank
("UCPB") and authorized private respondents Philippines Coconut Producers
Federation, Inc. ("COCOFED"), et al., Ballares, et al., and Eduardo Cojuangco,
Jr., et al., to vote the UCPB shares registered in their names and themselves be
voted upon at the stockholders' meeting of the bank.
The institution of sequestration proceedings by the PCGG against the shares of
stock of the UCPB claimed to be owned by one million coconut farmers and the
"Coconut Industry Investment Fund" ("CIIF") companies, was among the
measures undertaken by the Aquino Government shortly after the February 1986
Revolution for the recovery of "ill-gotten wealth" said to have been amassed by
former President and Mrs. Ferdinand E. Marcos, their relatives, friends and
business associates. Among the initial cases filed with the Sandiganbayan was
Case No. 003 against private respondent Eduardo Cojuangco, Jr., and sixty
others, for reconveyance, reversion, accounting, restitution and damages.
Sequestration orders were later issued by the Sandiganbayan. CaTcSA
Subsequently, however, Sandiganbayan issued a resolution lifting the
sequestration of the UCPB shares of stock registered in the name of the coconut
farmers and the CIIF companies on the thesis that these entities were not so
impleaded by the PCGG as party-defendants, having merely been listed in an
annex appended to the complaint in Case No. 003. The PCGG questioned, viaa
petition for certiorari, docketed G.R. No. 96073, that resolution before this Court.
In the interim, the Sandiganbayan authorized the holding of a stockholders'
meeting for the election of the members of the Board of Directors of the UCPB.
Ruling in favor of a petition filed by Eduardo Cojuangco, Jr., this Court lifted the
temporary restraining order it issued against the holding of said meeting and
allowed private respondents to vote the sequestered shares of stock. On 16
February 1993, the Court recalled this order by issuing another resolution,
directing the restoration of the status quo ante in G.R. No. 96073. The resolution
allowed the PCGG to continue voting the sequestered shares of stock of the
UCPB at the bank's meetings, pending determination of the validity of the
Sandiganbayan resolution lifting the sequestration of said shares. Justifying the
new order, the Court adverted to its earlier decision in COCOFED vs.
PCGG 1 which dismissed the petition of private respondent COCOFED to nullify
the sequestration order against, inter alia, the UCPB shares of stock. The
acquisition of the UCPB shares was explained thusly:

"The United Coconut Planters Bank (or the UCPB) is a commercial bank
acquired 'for the benefit of the coconut farmers' (Section 1, P.D. 755)
with the use of the Coconut Consumers Stabilization Fund (CCSF) in
virtue of P.D. 755, promulgated on 29 July 1975. The Decree authorized
the Bank to provide the intended beneficiaries with 'readily available
credit facilities at preferential rates' (Ibid.). It also authorized the
distribution of the Bank's shares of stock, free, to the coconut farmers;
and some 1,405,366 purported recipients have been listed as UCPB
stockholders as of 10 April 1986 (Item A.1.1. Of the UCPB List of
Stockholders.)"
The Coconut Consumers Stabilization Fund (CCSF) was established by P.D. 276
on 29 August 1973. Its funds, used in acquiring UCPB, were derived from the
collection of a "Stabilization Fund Levy" of fifteen pesos (P15.00) on the first sale
of every 100 kilograms of copra resecada or equivalent product. The CCSF, later
firmed up by amendatory decrees, was intended to subsidize the sale of coconut-
based products at prices set by the Price Control Council in order to stabilize the
price of edible oil and other coconut oil-based products for the benefit of
consumers. 2
Relying on these pronouncements, the Court, in its 16th February 1993
resolution, raised the following relevant questions: "How is it that shares of stock
in such entities which were organized and financed by revenues derived from
coconut levy funds which were imbued with public interest ended up in private
hands who are not farmers or beneficiaries; and whether or not the holders of
said stock, who in one way or another had had some part in the collection,
administration, disbursement or other disposition of the coconut levy funds, were
qualified to acquire stock, in the corporations formed and operated from those
funds." These issues, the Court noted, were still unresolved and, in fact,
unaffected by the issue of the automatic lifting of the sequestration. Thus, the
resolution declared: "The right of the petitioners to vote stock in their names at
the meetings of the UCPB cannot be conceded at this time. That right still has to
be established by them before the Sandiganbayan. Until that is done, they
cannot be deemed legitimate owners of UCPB stock and cannot be accorded me
right to vote them." ATcEDS
On 23 January 1995, the Court, in a consolidated decision which, among other
cases, included G.R. No. 96073, nullified and set aside the disputed
Sandiganbayan resolution and upheld the sequestration of the UCPB shares of
stock on the ground that the impleading of the subject firms would be
unnecessary since, if warranted by the evidence, judgments could be handed
down against the defendants divesting them of their ownership of said shares
and imposing upon them the obligation of surrendering the shares of stock to the
Government. The decision, while not expressly ratifying the 16th February 1993
resolution, was a mandate, nevertheless, for the maintenance of the status quo
ante that embraced the exercise by the PCGG of its voting rights on the
sequestered shares of stock of the UCPB.
Since 1986, the PCGG had been able to effectively install its nominees to the
Board of Directors of the UCPB. Such was the state of affairs when the
Sandiganbayan so issued the challenged resolution on 28 February 2001,
authorizing COCOFED, et al., Ballares, et al., and Eduardo Cojuangco, Jr., et
al., along with all other registered stockholders of UCPB, to vote the shares of
stock and themselves be voted upon at stockholders' meetings of the UCPB. In
support of this order, preempting the final disposition of the main case in Case
No. 003, Sandiganbayan applied the two-tiered test enunciated in Eduardo
Cojuangco, Jr.,vs. Calpo 3 and PCGG vs. Eduardo Cojuangco, Jr. 4 As so aptly
argued by petitioner, however, the test would find no application to a case of the
"takeover of a business belonging to the government or whose capitalization
comes from public funds, but which landed in private hands." 5 The Court
acknowledged to be a fact that the money used to purchase and capitalize the
UCPB had come from the CCSF, 6 a fund raised from the exercise by the State of
its inherent police and taxing powers.
To account for their equity holdings in the bank, COCOFED, et al., in their
Memorandum, 7 would advance that, in 1975, COCOFED, a private national
association of coconut producers, was designated 'by the Philippine Coconut
Authority ("PCA") as being the implementing agency for the free distribution of
the shares of stock of the UCPB to the coconut farmers. By 02 May 1981,
232,805,852.16 of said shares were distributed to the farmers. Still there
remained 15,619,419.84 shares registered in the name of COCOFED which,
according to it, were ultimately given to the farmers. Prior to June 1986, a
substantial number of the coconut farmers sold their shares in the bank at prices
below par value. By way of a financial assistance to the selling coconut farmers,
the UCPB Board of Directors authorized the CIIF companies to purchase their
holdings in the bank at par value. These transactions, nevertheless, did not
change the character of the UCPB shares, these having been bought with
coconut levy funds which the Court distinctly characterized to be "clearly affected
with public interest" and "raised such as they were by the State's police and
taxing powers." 8
The fundamental rule is that tax proceeds may only be used for a public
purpose, which may either be a general public purpose to support the existence
of the state or a special public purpose to pursue certain legitimate objects of
government in the exercise of police power, and none other. As a measure to
ensure the proper utilization of money collected for a specified public purpose,
the 1987 Constitution, restating another general principle, treats the proceeds as
a special fund to be paid out for such purpose. If, however, that purpose has
been fulfilled or is no longer forthcoming, the balance, if any, shall then be
transferred to the general funds of the government, 9 which may thereafter be
appropriated by Congress and expended for any legitimate purpose within the
scope of the general fund. An entity, whether public or private, which holds the
tax money has no authority to disburse it or to pay any of it to anyone, the
power to dispose of such money being vested in the legislature. 10 Thus, the
1987 Constitution, like its counterparts in the 1935 and the 1973 Constitution,
mandates that no money shall be paid out of the national treasury except in
pursuance of an appropriation made by law. 11
Respondent Eduardo Cojuangco, Jr., upon the other hand, in claiming ownership
over a portion of the sequestered UCPB shares, advanced two documents an
agreement in May 1975, where he appeared to have exercised his option to
acquire the UCPB shares of stock owned by the family of the late Don Jose
Cojuangco, Sr., amounting to 72.2% equity holding in the bank, at two hundred
pesos (Php 200.00) per share, and the "Agreement for the Acquisition of a
Commercial Bank for the Benefit of the Coconut Farmers of the Philippines",
dated 25 May 1975, whereby the PCA purchased with funds from the CCSF the
aforesaid UCPB shares from Eduardo Cojuangco, Jr., also at two hundred pesos
(Php 200.00) per share. 12 In the latter agreement, it was stipulated that as
compensation for exercising his personal and exclusive option to acquire the
UCPB shares and for transferring such shares to the PCA, Eduardo Cojuangco,
Jr., would receive one (1) share for every nine (9) shares acquired by the PCA
and additional equity in the bank. In sum, correlating the two agreements,
Eduardo Cojuangco, Jr., would contend, in effect, that he retained title over
roughly 10% equity holding in the bank and established his prima facie right
over the corresponding shares independently sourced from the coconut levy
funds. Even if it were to be conceded that the said 10% holding in UCPB of
Eduardo Cojuangco, Jr., could be assailed, pending a conclusive determination
on the legality of such a retention, however, it would neither be right nor just to
deprive him from meanwhile exercising his right to at least vote the same.
For the foregoing reasons, I vote to grant the petition in part and to deny it
insofar as the shares of stock pertaining to the 10% of the 72% equity retention
standing in the name of Eduardo Cojuangco, Jr., are concerned. aTcESI
In passing, I should like to state my understanding of the ruling of the Court. I
must first clarify, however, that sequestration does not mean the vesting of title
in the hands of the sequestering authority; rather, the term implies the
preservation of assets. Neither ownership nor rights thereover are acquired or
lost by virtue alone of sequestration a mere ancillary remedy to secure a
disputed asset.
(a) By a vote of ten justices, namely, Chief Justice Davide and Justices Bellosillo,
Puno, Vitug, Mendoza, Panganiban, Quisumbing, Buena, de Leon and Carpio, the
coconut levy funds have been declared prima facie to be "public funds."
Justices Melo, Kapunan, Pardo, Ynares-Santiago and Sandoval-Gutierrez have
dissented from the view of the majority.
(b) The Sandiganbayan must now determine conclusively and with deliberate
dispatch the status of sequestered shares of stock, as well as whether or not the
shares have been acquired utilizing the coconut levy funds, and, ultimately, the
ownership thereof.
(c) Meanwhile, the right to vote the disputed shares belongs to whoever or
whichever can show prima facie ownership or a better right thereover. Chief
Justice Davide and Justices Bellosillo, Mendoza, Panganiban, Quisumbing, Buena,
de Leon and Carpio hold that such prima facie showing exists in favor of the
government on all the disputed shares. Justices Puno and Vitug concur except
for the 10% of the 72% disputed shares in the name of respondent Cojuangco
over which the PCGG will yet have to establish a prima facie right of
ownership. SEIcAD

Justices Melo, Kapunan, Pardo, Ynares-Santiago and Sandoval-Gutierrez maintain
the view that, the coconut levy funds not being public funds and the government
not having been able to satisfactorily establish to date its title over the
sequestered shares, the PCGG has no right to vote any of the disputed shares.
MELO, J ., dissenting opinion:
I respectfully dissent from the majority opinion, penned by Mr. Justice
Panganiban, upholding the right of the PCGG to vote the sequestered UCPB
shares of stock.
The petition sprung from the following factual antecedents:
In 1986 and 1987, numerous business enterprises, entities, and pieces of
property, real and personal, were sequestered or taken over by the PCGG on the
ground that these were ill-gotten property of former President Marcos, his family,
and close associates. Among these sequestered property were shares of stock in
the United Coconut Planters Bank (UCPB) registered in the name of 1,405,366
coconut farmers and of the so-called Coconut Industry Investment Fund (CIIF)
companies. IaHDcT
In connection with the sequestration and take-over of said UCPB shares of stock,
the PCGG, on July 31, 1987, instituted an action for reconveyance, reversion,
accounting, restitution, and damages against Eduardo Cojuangco, Jr. and sixty
others with the Sandiganbayan, docketed therein as Case No. 0033.
On November 19, 1990, and during the pendency of the case,
the Sandiganbayan issued a resolution lifting the sequestration of the UCPB
shares of stock registered in the name of "1 million coconut farmers" and the
CIIF companies, on the ground that these entities were not impleaded by the
PCGG as party-defendants within the 6-month period ending on August 2,
1987 fixed by the Constitution, having merely been listed in an annex
appended to the complaint in Case No. 0033.
This Resolution was challenged by the PCGG in a petition for certiorari filed with
the Court, docketed herein as G.R. No. 96073. Pending resolution of the case,
the Sandiganbayan, on March 4, 1991, ordered the holding of elections for
members of the Board of Directors of UCPB. Opposing the holding of elections,
PCGG applied for, and was granted by the Court a restraining order enjoining the
holding of a stockholders' meeting for the election of the Board of Directors of
UCPB.
However, on March 3, 1992, acting on a petition filed by Eduardo Cojuangco, Jr.,
the Court lifted the restraining order it had issued and ordered instead that UCPB
elect its Board of Directors. Furthermore, the Court allowed the sequestered
shares of UCPB to be voted by the registered owners thereof. The shareholders'
victory would, however, be fleeting. On February 17, 1993, acting on the
Solicitor General's Clarification/Manifestation with Motion, the Court issued a
subsequent Resolution declaring that "the right of the petitioners to vote stock in
their names at the meetings of the UCPB cannot be conceded at this time. That
right still has to be established by them before the Sandiganbayan. Until that is
done, they cannot be deemed legitimate owners of UCPB stock and cannot be
accorded the right to vote them." Accordingly, the dispositive portion of said
Resolution provided:
IN VIEW OF THE FOREGOING, the Court recalls and sets aside the
Resolution dated March 3, 1992 and; pending resolution on the merits of
the action at bar, and until further orders, suspends the effectivity of the
lifting of the sequestration decreed by the Sandiganbayan on November
15, 1990, and directs the restoration of the status quo ante, so as to
allow the PCGG to continue voting the shares of stock under
sequestration at the meetings of the United Coconut Planters Bank.
IT IS SO ORDERED.
(Rollo, p. 73.)
Two years thereafter, on January 23, 1995, the Court rendered a decision in G.R.
No. 96073 (240 SCRA 376) nullifying and setting aside the November 19, 1990
Resolution of the Sandiganbayan lifting the sequestration of the shares of stock
of UCPB registered in the name of "1 million coconut farmers" and of the CIIF
companies on the ground that "as regards actions in which the complaints seek
recovery of defendants' shares of stock in existing corporations (e.g. San Miguel
Corporation, Benguet Corporation, Meralco, etc.) because allegedly purchased
with misappropriated public funds, in breach of fiduciary duty, or otherwise
under illicit or anomalous conditions, the impleading of said firms would clearly
appear to be unnecessary" since, if warranted by the evidence, judgments could
be handed down against the defendants divesting them of their ownership of
said stock and imposing upon them the obligation of surrendering said stock to
the Government. It may be noted that in said decision, the Court did not reaffirm
and maintain its Resolution dated February 17, 1993.
A month thereafter, the PCGG, pursuant to the order of the Sandiganbayan,
subdivided Case No. 0033 into eight complaints, docketed as Cases No. 0033-A
to 0033-H.
Six years thereafter, on February 13, 2001, the Board of Directors of UCPB,
received a letter from the ACCRA Law Office. Written on behalf of the Philippine
Coconut Producers' Federation (COCOFED), et al. and the more than one million
coconut farmers who are registered stockholders of UCPB, the letter demanded
of UCPB, which had not held any stockholders' meeting since 1986, to call such a
meeting on March 6, 2001, at 3 o'clock in the afternoon, for the purpose of,
among other things, electing the Board of Directors. In the same letter,
COCOFED also requested information as to whether UCPB had investigated and
reported to the Bangko Sentral ng Pilipinas the large scale estafa allegedly
committed by the previous members of the board and other responsible officials
of UCPB.
On February 26, 2001, the UCPB Board of Directors, by way of response to the
aforementioned letter, passed and approved a resolution calling for a
stockholders' meeting of the bank on March 6, 2001 at 3 o'clock in the afternoon,
the date fixed in the bank's By-Laws.
In anticipation of the announced stockholders' meeting, COCOFED, et al. and
Ballares, et al., filed, in the following Sandiganbayancases:
Civil Case No. 0033-A;
Civil Case No. 0033-B; and
Civil Case No. 0033-F,
a class action omnibus motion dated February 23, 2001, seeking to enjoin the
PCGG from voting in the announced stockholders' meeting of March 6, 2001
(a) the UCPB shares of stock registered in the names of the more than one
million coconut farmers; (b) the San Miguel Corporation (SMC) shares
registered in the names of the 14 CIIF Holding Companies and beneficially
owned by COCOFED; and (c) the shares of stock registered in the name of
PCGG itself.
Because of the motion's extreme urgency, and as prayed for by the movants
themselves, the Sandiganbayan (1st Division) heard the motion on February 28,
2001. Lorenzo V. Tan, President of UCPB, was present during this hearing and in
a manifestation, he asked to be heard therein.
The Sandiganbayan noted the manifestation of Mr. Lorenzo V. Tan, as follows:
At a certain state of the argument on this matter, the UCPB sought to be
heard in "executive session" upon the alleged significant matters of fact
to be conveyed by the UCPB to this Court. Duly warned by the engaged
counsel for the UCPB, Atty. Roberto San Juan, the Court excluded all
private individuals and all counsel not related to these cases so that
whatever matters of a restricted or confidential character of significance
to banks in the business community, and of the UCPB in particular, could
be heard in confidence.
The bank's President in the person of Mr. Lorenzo V. Tan was heard.
While the matters he put forth might be relevant to the bank, the entire
thrust of the clarification made by the president was the need to dispose
of this case expeditiously so that question of ownership of the shares
and therefore of the bank, would be resolved with finality; this
apparently is a desirable element in the business world and in the
market in which banks operate, as much for drawing investments as for
acceptability of other transactions and "products" of banks in the
market. It must be stated that the matter, while important in itself, is of
minor relevance to the issue at bar.
(p. 3, Order dated February 28, 2001.)
Following the conclusion of the hearing, the Sandiganbayan issued in open court
on the same date February 28, 2001 the Order authorizing COCOFED, et
al., Ballares, et al. and Eduardo Cojuangco, Jr., et al. and all other registered
stockholders of UCPB to vote their shares of stock and themselves to be voted
upon at the UCPB announced stockholders' meeting of March 6, 2001 or in any
subsequent continuation or resetting thereof, and to perform such acts as will
normally follow in the exercise of their rights as registered stockholders. More
specifically, the pertinent portion of the Order declared:
In view hereof, the movants COCOFED, et al. and Ballares, et al. as well
as Eduardo Cojuangco, et al. who were acknowledged to be registered
stockholders of the UCPB are authorized, as are all other registered
stockholders of the United Coconut Planters Bank, until further orders
from this Court, to exercise their rights to vote their shares of stock and
themselves to be voted upon in the United Coconut Planters Bank
(UCPB) at the scheduled Stockholders' Meeting on May 6, 2001 or on
any subsequent continuation or resetting thereof, and to perform such
acts as will normally follow in the exercise of these rights as registered
stockholders.
On March 1, 2001, the Sandiganbayan issued a writ of preliminary injunction
enjoining PCGG or any person acting in its behalf from voting the sequestered
shares of UCPB at its scheduled stockholders' meeting of March 6, 2001, or at
anytime at which the meeting may be continued or reset until otherwise ordered
by the same court. In the same writ, the Sandiganbayan also directed the
chairman and the secretary of the stockholders' meeting of UCPB on the above
scheduled date and other dates to which the meeting may be reset, to
acknowledge the right of Eduardo M. Cojuangco, Jr., et al. to vote the shares of
stock registered in their names on all matters that may be properly considered
before said stockholders' meeting. DaAIHC

Such was the state of things when, on March 5, 2001, herein petitioner Republic
of the Philippines, represented by the PCGG, filed the instant petition premised
on the fact that at all times prior to the questioned order, PCGG had been voting
the sequestered UCPB shares registered in the names of private respondents
under the authority of the Court's pronouncement in G.R. No. 96073 and
104850. PCGG claimed that the right granted to it to vote the sequestered shares
was the status quo and for this status quo to be disturbed, there must be a clear
showing that this Court has reversed or, at the very least, modified its prior
pronouncements on the matter. Since there was none, petitioner contended that
respondent Sandiganbayan gravely abused its discretion, tantamount to lack or
excess of jurisdiction, when it granted the right to vote said sequestered shares
to private respondents COCOFED, Ballares, and Cojuangco, Jr. et al. PCGG
likewise insisted that the subject sequestered shares were purchased with
coconut levy funds, funds declared public in character, and that the Resolution
issued by this Court dated February 13,1993 in G.R. No. 96073 remains effective.
In its Resolution of April 17, 2001, the Court defined the issue to be resolved in
the instant case in this fashion:
Did the Sandiganbayan commit grave abuse of discretion when it issued
the disputed order allowing respondents to vote UCPB shares of stock
registered in the name of respondents?
While the majority declares that, indeed, the Sandiganbayan acted with grave
abuse of discretion in allowing respondents to vote their UCPB shares of stock
registered in their names, I respectfully submit that it did not.
In determining whether there has been "grave abuse of discretion", under Rule
65, the "unyielding yardstick" is whether the abuse of discretion is "so patent
and gross as to amount to an evasion of positive duty or a virtual refusal to
perform a duty enjoined by law, or to act at all in contemplation of law, as where
the power is exercised in an arbitrary and despotic manner by reason of passion
or hostility (Sinon vs. Civil Service Commission, 215 SCRA 410 [1992]; Planters
Products, Inc. vs. Court of Appeals, 193 SCRA 563 [1991]; Litton Mills, Inc. vs.
Galleon Trader, Inc., 163 SCRA 489 [1988]; Esguerra vs. Court of Appeals, 267
SCRA 380 [1997]; Republic vs. Villarama, 278 SCRA 736 [1997]).
To discharge its burden of showing that the Sandiganbayan acted with grave
abuse of discretion, the PCGG relies principally on the Court's February 16, 1993
Resolution in Republic vs. Sandiganbayan, et al., G.R. No. 96073 where we
ordered the restoration of the status quo ante so as to allow PCGG to continue
voting the shares of stock under sequestration at the meetings of the UCPB.
As correctly pointed out by respondents, the February 16, 1993 Resolution, is in
the nature of a temporary restraining order, having been issued to recall the
March 3, 1992 Resolution lifting of the temporary restraining order previously
issued by the Court on March 5, 1991. In other words, the subject resolution
merely reinstated the temporary restraining order which the Court had earlier
issued enjoining private respondents from voting the sequestered shares
registered in their names. Being in the nature of a restraining order, the same is
interlocutory in character and it became functus oficio when this Court decided
the PCGG Sequestration Cases, including G.R. No. 96073, on January 23, 1995. A
restraining order is but a provisional remedy to which parties may resort "for the
preservation or protection of their rights or interests, and for no other
purpose, during the pendency of the principal action (Commissioner of Customs
vs. Cloribel, 19 SCRA 234 [1967]).
Moreover, the Resolution of February 16, 1993 explicitly provided that it shall be
effective only "pending resolution on the merits of the action at bar." G.R. No.
96073, the "action at bar" referred to, was decided on the merits on January 23,
1995. The dispositive portion of the decision in the aforementioned PCGG
Sequestration Cases, including G.R. No. 96073, provided:
WHEREFORE, judgment is hereby rendered:
A. NULLIFYING AND SETTING ASIDE:
xxx xxx xxx
B. CONFIRMING AND MAINTAINING the temporary restraining
orders issued in G.R. Nos. 104883, 105170, 105206,
105808, 105809, 107233, and 107908, which shall
continue in force and effect during the continuation of the
proceedings in the corresponding civil actions in
the Sandiganbayan, subject to the latter's power to modify
or terminate the same in the exercise of its sound
discretion in light of such evidence as may be subsequently
adduced; and
C. DISMISSING the petitions in G.R. Nos. 107908 and 109592, for
lack of merit
(Republic v. Sandiganbayan [First Division, 240 SCRA 376
[1995], at pp. 474-476.)
Even a casual study of the above dispositive portion would show that the Court's
Resolution dated February 16, 1993 is not among the temporary restraining
orders "confirmed and maintained" in the January 23, 1995 decision.
In fact, in Calpo vs. Sandiganbayan (Third Division) (265 SCRA 380 [1996]), the
Court clarified that the "PCGG Sequestration Cases," including G.R. No. 96073,
did not involve the issue of PCGG's right to vote sequestered corporate shares.
The Court held thus:
The crucial question in "The PCGG Sequestration Cases," capsulized by
the Court in its resolution of 23 January 1995, is this:
"DOES INCLUSION IN THE COMPLAINTS FILED BY THE PCGG
BEFORE THE SANDIGANBAYAN OF SPECIFIC ALLEGATIONS OF
CORPORATIONS BEING "DUMMIES" OR UNDER THE CONTROL
OF ONE OR ANOTHER OF THE DEFENDANTS NAMED THEREIN
AND USED AS INSTRUMENTS FOR ACQUISITION, OR AS BEING
DEPOSITARIES OR PRODUCTS, OF ILL-GOTTEN WEALTH; OR
THE ANNEXING TO SAID COMPLAINTS OF A LIST OF SAID
FIRMS, BUT WITHOUT ACTUALLY IMPLEADING THEM AS
DEFENDANTS, SATISFY THE CONSTITUTIONAL REQUIREMENT
THAT IN ORDER TO MAINTAIN A SEIZURE EFFECTED IN
ACCORDANCE WITH EXECUTIVE ORDER NO. 1, s. 1986, THE
CORRESPONDING "JUDICIAL ACTION OR PROCEEDING" SHOULD
BE FILED WITHIN THE SIX-MONTH PERIOD PRESCRIBED IN
SECTION 26, ARTICLE XVIII, OF THE (1987) CONSTITUTION?
xxx xxx xxx
Neither the qualifications of the PCGG nominees to sit in the SMC Board
of Directors nor the right of the PCGG to vote the sequestered corporate
shares have been mentioned, even in passing, by the Court. In fact, the
promulgation of the Court's resolution in the PCGG sequestration cases
should now pave the way for the cognizance by theSandiganbayan of
the quo warranto proceedings.
(p. 386-387; italics supplied.)
The issue being limited to the propriety of impleading the firms and corporations
subject of sequestration, the Court's failure to "confirm and maintain" the
February 16, 1993 Resolution only means that it became functus oficio upon
resolution of the main action on January 23, 1995. The PCGG cannot, therefore,
claim the continuing effectivity of said Resolution so as to authorize it to continue
voting the sequestered UCPB shares. AHSEaD
The majority opinion, however, claims that PCGG's right to vote said shares
remains on the ground that the jurisprudential basesfor the Court's Resolution
dated February 16, 1993 still remain. In Buayan Cattle Co. vs. Quintillan (128
SCRA 276 [1984]), the Court categorically declared that a complaint for
injunctive relief must be construed strictly against the pleader. Even if the
jurisprudential bases for the Resolution are still extant, the fact that said
Resolution was not "confirmed and maintained" by the Court after it decided the
main action militates against its continuing effectivity, otherwise a temporary
restraining order would no longer be "temporary."
With the February 16, 1993 Resolution having lost effectivity, the question as to
who could then vote the sequestered shares should then revert to
the Sandiganbayan, in accordance with our ruling in Philippine Coconut
Producers Federation, Inc.(COCOFED) vs. Presidential Commission on Good
Government (178 SCRA 236[1989]), where we directed:
3. The incidents concerning the voting of the sequestered shares, the
COCOFED elections, and the replacement of directors, being matters
incidental to the sequestration, should be addressed to
the Sandiganbayan in accordance with the doctrine laid down in PCGG
vs. Pena, 159 SCRA 556, reiterated in G.R. No. 74910, Andres Soriano
III vs. Hon. Manuel Yuzon; G.R. No. 75075, Eduardo Cojuangco, Jr. vs.
Securities and Exchange Commission; G.R. No. 75094,Clifton Ganay vs.
Presidential Commission on Good Government; G.R. No. 76397, Board of
Directors of San Miguel Corporation vs. Securities and Exchange
Commission; G.R. No. 79459, Eduardo Cojuangco, Jr. vs. Hon. Pedro N.
Laggui; G.R. No. 79520, Neptunia Corporation, Ltd. vs. Presidential
Commission on Good Government, August 10, 1988.
(p. 253.)
Significantly, even the Resolution in dispute recognizes that it is
the Sandiganbayan which should determine who has the right to vote said
shares, the same stating that "the right of the petitioners to vote stock in their
names at the meetings of the UCPB cannot be conceded at this time. That right
still has to be established by them before the Sandiganbayan."
It must also be pointed out that even the temporary restraining orders
"confirmed and maintained" by the Court in the Sequestration Cases were made
subject to the Sandiganbayan's "powers to modify or terminate the same in the
exercise of its sound discretion," thereby reinforcing the conclusion that the
February 16, 1993 Resolution relied upon by PCGG (which was not "confirmed
and maintained" by the Court) was, in any event, subject to modification or
termination by the Sandiganbayan.
And in the exercise of its power to determine who should vote the sequestered
shares, the Sandiganbayan must be guided by the principles first enunciated
in BASECO vs. PCGG (150 SCRA 181 [1987]), and further elucidated by the Court
in Cojuangco, Jr. vs. Roxas (195 SCRA 797 [1991]), where we stated that:

Nothing is more settled than the ruling of this Court in BASECO
vs. PCGG, that the PCGG cannot exercise acts of dominion over property
sequestered. It may not vote sequestered shares of stock or elect the
members of the board of directors of the corporation concerned
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG
cannot exercise acts of dominion over property sequestered, frozen or
provisionally taken over. As already stressed with no little insistence, the
act of sequestration,freezing or provisional takeover of property does
not import or bring about a divestment of title over said property;does
not make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not perform acts of strict
ownership; and this is specially true in the situations contemplated by
the sequestration rules where, unlike cases of receivership, for example,
no court exercises effective supervision or can upon due application and
hearing, grant authority for the performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in
question shall entail the least possible interference with business
operations or activities so that, in the event that the accusation of the
business enterprise being 'ill-gotten' be not proven, it may be returned
to its rightful owner as far as possible in the same condition as it was at
the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered provisionally taken over, much like a
court-appointed receiver, such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and
generally do such other acts and things as may be necessary to fulfill its
mission as conservator and administrator. In this context, it may in
addition enjoin or restrain any actual or threatened commission of acts
by any person or entity that may render moot and academic, or frustrate
or otherwise make ineffectual its efforts to carry out its task; punish for
direct or indirect contempt in accordance with the Rules of Court; and
seek and secure the assistance of any office, agency or instrumentality
of the government. In the case of sequestered businesses generally,
(i.e., going concerns, businesses in current operation), as in the case of
sequestered objects, its essential role, as already discussed, is that of
conservator, 'watchdog' or overseer, it is not that of manager, or
innovator, much less an owner.
xxx xxx xxx
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and
circumstances that the PCGG may properly exercise the prerogative to
vote sequestered stock of corporations, granted to it by the President of
the Philippines through a memorandum dated June 26, 1986. That
memorandum authorizes the PCGG, 'pending the outcome of
proceedings to determine the ownership of . . . (sequestered) shares of
stock,' 'to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of
Incorporation, etc.' The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive
Orders earlier promulgated on the same matter. There should be no
exercise of the right to vote simply because the right exists, or because
the stocks sequestered constitute the controlling or a substantial part of
the corporate voting power. The stock is not to be voted to replace
directors, or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program or practice of the corporation
except for demonstrably weighty and defensible grounds, and always in
the context of the stated purposes of sequestration or provisional
takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets.Directors are not to be voted out simply because the
power to do so exists. Substitution of directors is not to be done without
reason or rhyme, should indeed be shunned if at all possible, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as to assure
that the replacements are truly possessed of competence, experience
and probity.
In the case at bar, there was adequate justification to vote the
incumbent directors out of office and elect others in their stead because
the evidence showed prima facie that the former were just tools of
President Marcos and were no longer owners of any stock in the firm, if
they ever were at all. This is why, in its Resolution of October 28, 1986;
this Court declared that
'Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders'
meeting for the election of directors as authorized by the Memorandum
of the President . . . (to the PCGG) dated June 26, 1986, particularly,
where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear
to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of
BASECO have failed to show any right or even any shareholding in said
corporation.'
It must however be emphasized that the conduct of the PCGG nominees
in the BASECO Board in the management of the company's affairs
should be henceforth be guided and governed by the norms herein laid
down. They should never for a moment allow themselves to forget that
they are conservators, not owners of the business; they are fiduciaries,
trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required.
xxx xxx xxx
The rule in this jurisdiction is, therefore, clear. The PCGG cannot
perform acts of strict ownership of sequestered property. It is a mere
conservator. It may not vote the shares in a corporation and elect the
members of the board of directors. The only conceivable exception is in
a case of a takeover of a business belonging to the government or
whose capitalization comes from public funds, but which landed in
private hands as in BASECO.
The constitutional right against deprivation of life, liberty and property
without due process of law is so well-known and too precious so that the
hand of the PCGG must be stayed in its indiscriminate takeover of and
voting of shares allegedly ill-gotten in these cases. It is only after
appropriate judicial proceedings when a clear determination is made that
said shares are truly ill-gotten when such a takeover and exercise of acts
of strict ownership by the PCGG are justified.
(pp. 808-813.)
These principles were subsequently refined in the cases of Eduardo Cojuangco,
Jr. vs. Calpo (G.R. No. 115352, June 10, 1997) and PCGG vs. Eduardo
Cojuangco, Jr. (G.R. No. 133197, January 27, 1999) where we held that:
The issue of whether PCGG may vote the sequestered shares in SMC
necessitates a determination of at least two factual matters: EDcICT
1. whether there is prima facie evidence showing that the said shares
are ill-gotten and thus belong to the State; and
2. whether there is an imminent danger of dissipation thus necessitating
their continued sequestration and voting by the PCGG while the main
issue pends with the Sandiganbayan.
The foregoing two points require presentation of evidence which can
only be done before the Sandiganbayan, it being settled that the
Supreme Court is not a trier of facts.
(p. 2, Resolution, June 10, 1997.)
However, the majority opinion holds that the two-tiered test above-enunciated
finds no application to the case of a take-over of a business belonging to
government or whose capitalization comes from public funds, but which landed
in private hands, citingCojuangco vs. Roxas and BASECO as authority therefor.
The majority opinion asserts that the government is granted authority to vote
sequestered shares:
1. Where government shares are taken over by private persons or
entities who/which registered them in their own names; and
2. Where the capitalization or shares that were acquired with public
funds somehow landed in private hands.
In fine, the majority points out that since the instant case involves shares that
were acquired with public funds which somehow landed in private hands, there is
no more need to apply the two-tiered test, the right to vote said shares
automatically vesting in the government, acting through the PCGG.
As stated earlier, the Court, in Cojuangco vs. Roxas, unequivocally declared that
"[t]he rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts
of strict ownership of sequestered property. It is a mere conservator. It may not
vote the shares in a corporation and elect the members of the board of
directors. The only conceivable exception is in a case of a takeover of a business
belonging to the government or whose capitalization comes from public funds,
but which landed in private hands as in BASECO."
Thus, it is well-settled that the only instance when PCGG can vote the shares in a
sequestered corporation is in case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but which landed
in private hands. The foregoing principle, as stated in the majority opinion, has
been reiterated in many subsequent cases, most recently in Antiporda
vs. Sandiganbayan (G.R. No. 116941, May 31, 2001).
On the other hand, the two-tiered test, first enunciated in Cojuangco
vs. Calpo and subsequently in PCGG vs. Cojuangco Jr., provides the guidelines or
requisites to be fulfilled in determining whether or not PCGG can vote shares in a
sequestered corporation. Since PCGG can vote the shares in a sequestered
corporation only in case of a takeover of a business belonging to the government
or whose capitalization comes from public funds, but which landed in private
hands, plainly the two-tiered test is applicable only in this instance. In other
words, the two-tiered test is designed precisely to verify whether or not the
sequestered corporation is a business belonging to the government or whose
capitalization comes from public funds, but which landed in private hands! Thus,
I submit that the Sandiganbayan did not err when it applied the two-tiered test
in disallowing the PCGG to vote the sequestered shares.

In authorizing COCOFED, Ballares, and Eduardo Cojuangco, Jr. to exercise their
right to vote their shares of stock, theSandiganbayan stated:
Jurisprudence, from as far back as the leading case of Baseco (150
SCRA 181), has clearly defined the functions and authority of the PCGG
in relation to sequestered property. Be it noted by way of footnote that
government agencies as well as government officials, do not have rights
in the exercise of the functions of the office. They have only duties to
perform and authority by means of which they may comply with those
duties under the law.
In this instance, the issue is whether or not the authority of the PCGG
exists to remain in control of the voting rights of sequestered shares of
stock in general, and whether or not the sequestered shares of stock in
the UCPB in particular may be voted by it as part of its functions as
sequestor of these shares of stock; corollarily, may the moving
stockholders exercise of their proprietary rights over the shares of stock,
save for the limitations of free disposal, until judgment shall have been
rendered against them thereon.
It may be stated that jurisprudence has evolved from certain categorical
positions originally enunciated to more refinements as time and events
demonstrated to be appropriate. Let it also be noted that jurisprudence
has not reversed itself; rather, jurisprudence has re-stated the rules as
the circumstances and the facts presented before the courts had
required in order to put in proper perspective the earlier assertions of
jurisprudence.
In this light, the Court is faced now with the question: Who may vote
sequestered shares of stock in general, and who may vote them in the
particular instance of the UCPB shares of stock at its scheduled
Stockholders' Meeting on March 5, 2001? CacTIE
xxx xxx xxx
In the light of all of the above, the Court submits itself to jurisprudence
and with the statements of the Supreme Court in G.R. No. 115352
entitled Enrique Cojuangco, Jr., et al. vs. Jaime Calpo, et al. dated June
10, 1997, as well as the resolution of the Supreme Court promulgated
on January 27, 1999 in the case of PCGG vs. Eduardo Cojuangco, Jr., et
al., G.R. No. 13319 which included the Sandiganbayan as one of the
respondents. In these two cases, the Supreme Court ruled that the
voting of sequestered shares of stock is governed by two considerations,
namely,
1. whether there is prima facie evidence showing that the said
shares are ill-gotten and thus belong to the State; and
2. whether there is an imminent danger of dissipation thus
necessitating their continued sequestration and voting by
the PCGG while the main issue pends with
the Sandiganbayan.
(p. 5, Presidential Commission on Good Government vs.
Eduardo M. Cojuangco, Jr., et al., supra)
This ruling does not state where, what or who the cause of the
dissipation might be to justify the vote by the PCGG of the shares under
sequestration. If the registered stockholders, however, have not
participated in the management of the corporation, and the dissipation
has not been demonstrated to have been caused either by the
stockholders' action in the past, nor by action independent of the
management during sequestration, then whatever "imminent danger of
dissipation necessitating their continued sequestration and voting by the
PCGG. . ." could not be raised against the voting rights of the asserting
stockholders.
The Court has sought to obtain by all means any form of reinforcement
from the PCGG on this matter, not only this morning but over the
months that go as far back as July of the year 2000. Much to the
impatience of this Court, the matter has not been responded to in any
satisfactory manner.
(pp. 2-5, Order dated February 28, 2001.)
A perusal of the above order would show that the Sandiganbayan, in allowing
private respondents to vote their shares, merely followed judicial precedents laid
down by the Court. These decisions have not been challenged by the PCGG.
Their review, much less reversal, has not been sought. They continue to express
good law. I find no "patent or gross" arbitrariness or despotism by reason of
passion or personal hostility in the Sandiganbayan's adherence to these
precedents. I thus submit that one can hardly characterize
the Sandiganbayan's order authorizing private respondents to vote their
sequestered shares of stock as having been issued with grave abuse of
discretion. CSAcTa
Additionally, Cojuangco, Jr. vs. Roxas is cited by the other side as authority for
the proposition that PCGG should be the one to vote the sequestered shares, the
Court having declared in Roxas that: "[t]he only conceivable exception (to the
rule that PCGG may not vote the shares in a corporation and elect the members
of the board of directors) is in a case of a takeover of a business belonging to
the government or whose capitalization comes from public funds, but which
landed in private hands as in BASECO." PCGG thus, likens the facts of the instant
petition to the BASECO case.
The BASECO case does not support petitioner's position. It was proven in the
BASECO case that 95.82% of the outstanding stock of BASECO, endorsed in
blank by the owners thereof, were inexplicably in the possession of then
President Marcos. More, deeds of assignment of practically all the stock of the
corporations owning the aforementioned 95.82% were also inexplicably in the
possession of President Marcos. Thus, in the case of BASECO, the directors
thereof were merely Marcos nominees or dummies, it having been proven that
President Marcos not only exercised control over BASECO but also that he
actually owned almost 100% of BASECO's outstanding stock. Then too, it was
proven that BASECO had been able to take-over and acquire the business and
assets of the National Shipyard and Steel Corporation and other government-
owned or controlled entities through the undue exercise by then President
Marcos of his powers, authority, and influence. Upon these premises, the Court
held that the government could properly exercise control and management over
what appeared to be properties and assets owned and belonging to the
government itself. Hereunder are the pertinent observations of the Court in said
case:
The facts show that the corporation known as BASECO was owned or
controlled by President Marcos "during his administration, through
nominees, by taking undue advantage of his public office and/or using
his powers, authority, or influence," and that it was by and through the
same means, that BASECO had taken over the business and/or assets of
the National Shipyard and Engineering Co., Inc., and other government-
owned or controlled entities.
xxx xxx xxx
In the case at bar, there was adequate justification to vote the
incumbent directors out of office and elect others in their stead because
the evidence showed prima facie that the former were just tools of
President Marcos and were no longer owners of any stock in the firm, if
they ever were at all. This is why, in its Resolution of October 28, 1986;
this Court declared that
Petitioner has failed to make out a case of grave abuse or excess
of jurisdiction in respondents' calling and holding of a
stockholders' meeting for the election of directors as authorized
by the memorandum of the President (to the PCGG) dated June
26, 1986, particularly, where as in this case, the government can,
though its designated directors, properly exercise control and
management over what appear to be properties and assets
owned and belonging to the government itself and over which the
persons who appear in this case on behalf of BASECO have failed
to show any right or even any shareholding in said corporation."
In contrast, respondents in the instant case are the registered stockholders. No
evidence was presented before theSandiganbayan showing that respondents are
mere "tools of President Marcos and were no longer owners of any stock in the
firm if they ever were at all."
Nor has it been shown that the sequestered UCPB shares of stock were
inexplicably acquired by respondents. Respondent Cojuangco Jr. obtained his
shares by virtue of an agreement with the Philippine Coconut Authority (PCA)
whereby, as compensation for exercising his personal and exclusive option to
acquire UCPB shares, Cojuangco Jr. would receive 1 share for every 9 acquired
by PCA. The UCPB shares of stock in the name of the 1,405,366 coconut-
farmers, on the other hand, were distributed to them by virtue of Presidential
Decree No. 755, which authorized the distribution of UCPB's shares of stock,
free, to coconut farmers. Other UCPB shares were acquired by the CIIF
companies. It is precisely the validity of these acquisitions which is under
litigation in the main case pending with the Sandiganbayan.
The view expressed by the majority that the UCPB shares, having been acquired
with the use of coconut levy funds, and, therefore belong to the government,
may very well turn out to be correct. However, since these issues are still
pending litigation at the Sandiganbayan, it would be premature, I submit, to rule
on this point at this time. Verily, the validity of the acquisition by Cojuangco
Jr., et al. of their UCPB shares is the very lis mota of the action for
reconveyance, accounting, reversion, and restitution filed by the PCGG with
the Sandiganbayan. To rule on this matter would be to preempt said court.
Too, the argument that the coconut levy funds used to purchase the sequestered
UCPB shares of stock are public funds does not appear to have been raised
before the Sandiganbayan; consequently, the Sandiganbayan did not rule on the
nature of the fund. It would be absurd to hold that the Sandiganbayan gravely
abused its discretion in not holding that the sequestered shares belong prima
facie to the government, the issue of whether or not coconut levy funds are
public funds not having been raised before it.
Moreover, and as mentioned earlier, the nature of the funds used is a matter
which should be decided first-hand by theSandiganbayan when-it resolves the
merits of Civil Case No. 0033-A. Note should also be taken of the fact that the
determination of whether the coconut levy funds are public funds involves the
ascertainment of the constitutionality of Section 5, Article III of Presidential
Decree No. 961 and Section 5, Article III of Presidential Decree No. 1468, both
of which contain the following identical provisions:

Section 5. Exemptions. The Coconut Consumers Stabilization Fund
and the Coconut Industry Development Fund as well as all
disbursements of said Funds for the benefit of the coconut farmers as
herein authorized shall not be construed or interpreted, under any law
or regulation, as special or fiduciary funds, or as part of the general
funds of the national government within the contemplation of P.D. 771;
nor as a subsidy, donation, levy, government funded investment or
government share within the contemplation of P.D. 898, the intention
being that said Fund and the disbursements thereof as herein authorized
for the benefit of the coconut farmers shall be owned by them in their
own private capacities.
Presidential Decrees No. 961 and 1468 have not been repealed, revoked, or
declared unconstitutional, hence they are presumed valid and binding. Without a
previous declaration of unconstitutionality, the coconut levy funds may not thus
be characterized asprima facie belonging to the government. That issue must
first be resolved by the Sandiganbayan. In fact, when the Solicitor General, in
G.R. No. 96073, filed a motion to declare the coconut levies collected pursuant to
the various issuances as public funds and to declare Section 5, Article III of
Presidential Decree No. 1468 as unconstitutional, the Court denied the same in a
Resolution dated March 26, 1996.
Parenthetically, in Philippine Coconut Producers Federation, Inc. vs. PCGG
(supra), the Court ruled that the fund is "affected with public interest," implying
that the fund is private in character. If the coconut levy funds were public funds,
then the Court would have so held and there would be no reason to describe the
same as funds "affected with public interest." It may not, thus, be immediately
said that the coconut levy funds are public funds, the resolution of the issue
being left, at the first instance, with theSandiganbayan. HDTSIE
And if it is to be recalled, the issue involved herein is whether or not
the Sandiganbayan committed grave abuse of discretion when it issued the
disputed order allowing respondents to vote the UCPB shares of stock registered
in their names. The question of whether the coconut levy funds are public funds
is not in issue here. In fact, the constitutionality of Presidential Decrees No. 961
and 1468 have not been raised by the PCGG during the proceedings before
the Sandiganbayan.
Moreover, it should be pointed out that the avowed purpose of sequestration is
to preserve the assets sequestered to assure that if, and when, judgment is
rendered in favor of the petitioner, the judgment may be implemented.
"Preservation", not "deprivation" before judgment, is its essence. That is why in
BASECO, we emphasized:
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional,
contingent character of the remedies just described. Indeed the law
plainly qualifies the remedy of takeover by the adjective, "provisional."
These remedies may be resorted to only for a particular exigency: to
prevent in the public interest the disappearance or dissipation of
property or business, and conserve it pending adjudgment in
appropriate proceedings of the primary issue of whether or not the
acquisition of title or other right thereto by the apparent owner was
attended by some vitiating anomaly. None of the remedies is meant to
deprive the owner or possessor of his title or any right to the property
sequestered, frozen or taken over and vest it in the sequestering
agency, the Government or other person. This can be done only for the
causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or
provisionally take over is to be understood and exercised, the language
of the executive orders in question leaves no doubt. Executive Order No.
1 declares that the sequestration of property the acquisition of which is
suspect shall last "until the transactions leading to such acquisition . . .
can be disposed of by the appropriate authorities." Executive Order No.
2 declares that the assets or properties therein mentioned shall remain
frozen "pending the outcome of appropriate proceedings in the
Philippines to determine whether any such assets or properties were
acquired" by illegal means. Executive Order No. 14 makes clear that
judicial proceedings are essential for the resolution of the basic issue of
whether or not particular assets are "ill-gotten," and resultant recovery
thereof by the Government is warranted.
(pp. 211-212.)
In the instant case, however, the actuations of PCGG with regard to the
sequestered shares partake more of deprivation rather than preservation. As
pointed out by respondents, since 1986, only one (1) stockholders' meeting of
UCPB has been held. At this meeting, PCGG voted all of the shares, as a result of
which all members of the Board of UCPB, since 1986 to the present, have been
PCGG nominees. When vacancies in the Board occur because of resignation,
replacements are installed by the remaining members of the Board-on
nomination of the PCGG. The stockholders' meeting scheduled on March 6, 2001
would have been the first stockholders' meeting since 1986 at which registered
stockholders would exercise their right to vote and by their vote elect the
members of the Board of Directors.
Also, the shares of stock in UCPB were sequestered in 1986. The civil action
"Republic of the Philippines v. Eduardo M. Cojuangco, Jr., Civil Case No. 033,"
was instituted before the Sandiganbayan on July 30, 1987. This action included,
among other things, the UCPB shares of stock and was filed to maintain the
effectivity of the writs of sequestration pursuant to Section 26, Article XVIII of
the Constitution. Notwithstanding the lapse of more than 14 years, the
proceedings have barely gone beyond the pre-trial stage. PCGG's exercise of the
right to vote the sequestered shares of stock for a period of 14 years constitutes
effectively a deprivation of a property right belonging to the registered
stockholders (18 Am. Jur. 2d, Corporations 2d Section 1065, p. 859, citing
cases), a state of affairs not within the contemplation of "sequestration" as a
means of preservation of assets.
To recapitulate, evaluated in accordance with applicable jurisprudence, I hold
that the issuance by respondent Sandiganbayan of its impugned Order dated
February 28, 2001, is clearly not an act committed in grave abuse of discretion.
Simply put, petitioner PCGG failed to persuade the Sandiganbayan on the
basis of the "two-tiered test" enunciated by this Court in the San
Miguelcase, supra that it is entitled to vote the UCPB sequestered shares.
Verily, the Sandiganbayan was duty-bound to comply with the jurisprudence laid
down by the Court on the matter. This is certainly not a case of abuse, much
more grave abuse of discretion, on the part of respondent Sandiganbayan.
I regret to say that I find unacceptable the contention that the "law of the case"
herein should be the Resolution dated February 16, 1993 in Republic of
the Philippines vs. Sandiganbayan, et al. For one, the UCPB shares of stock of
respondents COCOFED,et al. and Ballares, et al. are not the subject of the case
relied upon. Hence, the Resolution therein could not have referred to or covered
said shares. For another, and more importantly, what is invoked by petitioner is,
in effect, merely a restraining order which was not re-affirmed by the Court
when we rendered the main decision in the said consolidated sequestration
cases.
Rather, what I believe is truly applicable herein is the Court's decision
in COCOFED vs. PCGG (178 SCRA 236 [1989]) wherein it was held that "the
incidents concerning the voting of the sequestered shares, the COCOFED
elections, and the replacement of directors, being matters incidental to the
sequestration, should be addressed to the Sandiganbayan." Thus,
the Sandiganbayanhas been given by the Court full discretion to evaluate and to
allow or disallow the duly registered stockholders of the UCPB shares to exercise
the right to vote the said shares in the UCPB elections and/or
appointment/replacement of its directors. If, as in the case at hand,
the Sandiganbayan, in the exercise of its sound discretion and for justifiable
reasons cited in its assailed Order of February 28, 2001, allowed herein private
respondents to vote the sequestered shares in question, one would simply be at
a loss to understand how such action could be said to be tainted with grave
abuse of discretion. AcHEaS
FOR THE FOREGOING REASONS, I vote to DISMISS the instant petition for lack
of merit.
Footnotes

41.
FIRST DIVISION
[G.R. No. L-1721. May 19, 1950.]
JUAN D. EVANGELISTA ET AL., plaintiffs-appellants, vs.
RAFAEL SANTOS, defendant-appellee.
Antonio Gonzales for appellants.
Benjamin H. Tirol for appellee.
SYLLABUS
1.PLEADING AND PRACTICE; VENUE; MERE SOJOURNING IN A PLACE
DOES NOT MAKE THE LATTER A RESIDENT FOR PURPOSES OF VENUE.
The facts in this case show that the objection to the venue is well-founded.
The fact that defendant was sojourning in Pasay at the time he was served
with summons does not make him a resident of that place for purposes of
venue.
2.PARTIES; CORPORATION; MISMANAGEMENT BY ITS OFFICER;
RIGHT OF STOCKHOLDERS TO BEING SUIT. The plaintiff stockholders
have brought the action not for the benefit of the corporation but for their
own benefit, since they ask that the defendant make good the losses
occasioned by his mismanagement and pay to them the value of their
respective participation in the corporate assets on the basis of their respective
holdings.
D E C I S I O N
REYES, J p:
This is an action by the minority stockholders of a corporation against
its principal officer for damages resulting from his mismanagement of its
affairs and misuse of its assets.
The complaint alleges that plaintiff's are minority stockholders of the
Vitali Lumber Company, Inc., a Philippine corporation organized for the
exploitation of a lumber concession in Zamboanga, Philippines; that
defendant holds more than 50 per cent of the stocks of said corporation and
also is and always has been the president, manager, and treasurer thereof;
and that defendant, in such triple capacity, through fault, neglect, and
abandonment allowed its lumber concession to lapse and its properties and
assets, among them machineries, buildings, warehouses, trucks, etc., to
disappear, thus causing the complete ruin of the corporation and total
depreciation of its stocks. The complaint therefore prays for judgment
requiring defendant: (1) to render an account of his administration of the
corporate affairs and assets: (2) to pay plaintiffs the value of their respective
participation in said assets on the basis of the value of the stocks held by
each of them; and (3) to pay the costs of suit. Plaintiffs also ask for such
other remedy as may be just and equitable.
The complaint does not give plaintiffs' residence, but, for purposes of
venue, alleges that defendant resides at 2112 Dewey Boulevard, corner
Libertad Street, Pasay, province of Rizal. Having been served with summons
at that place, defendant filed a motion for the dismissal of the complaint on
the ground of improper venue and also on the ground that the complaint did
not state a cause of action in favor of plaintiffs.
In support of the objection to the venue, the motion, which is under
oath, states that defendant is a resident of Iloilo City and not of Pasay, and at
the hearing of the motion defendant also presented further affidavit to the
effect that while he has a house in Pasay, where members of his family who
are studying in Manila live and where he himself is sojourning for the purpose
of attending to his interests in Manila, yet he has his permanent residence in
the City of Iloilo where he is registered as a voter for election purposes and
has been paying his residence certificate. Plaintiffs opposed the motion for
dismissal but presented no counter proof and merely called attention to the
Sheriff's return showing service of summons on defendant personally at his
alleged residence at No. 2112 Dewey Boulevard, Pasay.
After hearing, the lower court rendered its order, granting the motion
for dismissal upon the two grounds alleged by defendant, and reconsideration
of this order having been denied, plaintiffs have appealed to this Court.
The appeal presents two questions. The first refers to venue and the
second, to the right of the plaintiffs to bring this action for their benefit.
As to the first question, it is important to remember that the laying of
the venue of an action is not left to plaintiff's caprice. The matter is regulated
by the Rules of Court. And in actions like the present, which is one in
personam, the regulation applicable is that contained in section 1 of Rule 5,
which provides:.
"Civil action in Courts of First Instance may be commenced and tried
where the defendant or any of the defendant resides or may be found, or
where the plaintiff or any of the plaintiffs resides, at the election of the
plaintiff.".
Objection to improper venue may be interposed at any time prior to the
trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.).
Believing that defendant resided in the province of Rizal, herein
plaintiffs brought their action in the Court of First Instance of that province.
But that belief proved erroneous, for the lower court found after hearing that
defendant had his residence in Iloilo. The finding is based on defendant's
sworn statement not rebutted by any proof to the contrary.
There is nothing to the contention that defendant's motion to dismiss
necessarily presupposes a hypothetical admission of the allegations of the
complaint, among them the averment that defendant is a resident of Rizal
province, for the motion precisely denies that averment and alleges that his
real residence is in Iloilo City. This, defendant had the right to do in objecting
to the court's jurisdiction on the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of
the venue in the province where the defendant "may be found." But this
phrase has already been held to have a limited application. It is the same
phrase used in section 377 of Act 190 from which section 1 of Rule 5 was
taken, and as construed by this Court it applies only to cases where
defendant has no residence in the Philippine Islands. This was the
construction adopted in the case of Cohen vs. Benguet Commercial Co., Ltd.,
34 Phil. 526, which was an action brought in Manila by a nonresident against
a corporation which had its residence for legal purposes in Baguio but whose
President was found in Manila and there served with summons. This Court
there said: "Section 377 provides that actions of this character 'may be
brought in any province where the defendant or any necessary party
defendant may reside or be found, or in any province where the plaintiff or
one of the plaintiffs resides, at the election of the plaintiff.' The plaintiff in this
action has no residence in the Philippine Islands. Only one of the parties to
the action resides here. There can be, therefore, no election by plaintiff as to
the place of trial. It must be in the province where the defendant resides. The
defendant resides, in the eye of the law, in Baguio. Was it 'found' in the city
of Manila under section 377, its president being in that city where the service
of summons was made? We think not. The word 'found' as used in section
377 has a different meaning that belongs to it as used in section 394, which
refers exclusively to the place where the summons may be served. As we
have said a summons may be legally served on a defendant wherever he may
be 'found,' i. e., wherever he may be, provided he be in the Philippine
Islands; but the venue cannot be laid wherever the defendant may be 'found.'
There is an element entering in section 377 which is not present in section
394, that is a residence. Residence of the plaintiff or defendant does not
affect the place where a summons may be served; but residence is the vital
thing when we deal with venue. The venue must be laid in the province
where one of the parties resides. If the plaintiff is a nonresident the venue
must be laid in the province of the defendant's residence. The venue can be
laid in the province where defendant is 'found' only when defendant has no
residence in the Philippine Islands. A defendant can not have a residence in
one province and be 'found' in another. As long as he has a residence in the
Philippine Islands he can be 'found,' for the purposes of section 377, only in
the province of his residence. In such case the words 'residence' and 'found'
are synonymous. If he is a nonresident then the venue may be laid in the
province where he is 'found' at the time the action is commenced or in the
province of plaintiff's residence. This applies also to a domestic corporation.
"While the service of the summons was good in either Baguio or Manila
we are of the opinion that the objection of the defendant to the place of trial
was proper in both cases and that the trial court should have held that the
venue was improperly laid.".
And elaborating on the point when the case came up for
reconsideration, the Court further said:.
"The moving party contends that the venue was properly laid under
section 377 in that it was laid in the province where the defendant was found
at the time summons was served on its president, he having been found and
served with process in the city of Manila. For the purposes of the discussion
we assumed in the main case, as the plaintiff claimed, that the defendant was
in fact and in law found in the city of Manila; and proceeded to decide the
cause upon the theory that, even if the defendant were found in the city of
Manila, that did not justify, under the facts of the case, the laying of the
venue in the city of Manila.
"We do not believe that the moving party's objection that our
construction deprives the word 'found' of all significance and results, in effect,
in eliminating it from the statute, is sound. We do not deprive it of all
significance and effect and do not eliminate it from the statute. We give it the
only effect which can be given it and still accord with the other provisions of
the section which give defendant the right to have the venue laid in the
province of his residence, the effect which it was intended by the legislature
they should have. We held that the word 'found' was applicable in certain
cases, and in such cases gave it full significance and effect. We declared that
it was applicable and effective in cases where the defendant is a nonresident.
In such cases the venue may be laid wherever he may be found in the
Philippine Islands at the time of the service of the process, but we also held
that where he is a resident of the Philippine Islands the word 'found' has no
application and the venue must be laid in the province where he resides.

"The construction which the moving party asks us to place on that
provision of section 377 above quoted would result in the destruction of the
privilege conferred by the section upon a resident defendant which requires
the venue to be laid in the province where he resides. This is clear; for, if the
venue may be laid in any province where the defendant, although a resident
of some other province, may be found at the time process is served on him,
then the provision that it shall be laid in the province where he resides is of
no value to him. If a defendant residing in the province of Rizal is helpless
when the venue is laid in the province of Mindoro in an action in which the
plaintiff is a nonresident or resides in Manila, what is the value of a residence
in Rizal? If a defendant residing in Jolo is without remedy when a nonresident
plaintiff or a plaintiff residing in Jolo lays the venue in Bontoc because the
defendant happens to be found there, of what significance is a residence in
Jolo? The phrases 'where the defendant *** may reside' and 'or be found'
must be construed together and in such manner that both may be given
effect. The construction asked for by the moving party would deprive the
phrase 'where the defendant *** may reside' of all significance, as the
plaintiff could always elect to lay the venue in the province where the
defendant was 'found' and not where he resided; whereas the construction
which we place upon these phrases permits both to have effect. We declare
that, when the defendant is a resident of the Philippine Islands, the venue
must be laid either in the province where the plaintiff resides or in the
province where the defendant resides, and in no other province. Where,
however, the defendant is a nonresident the venue may be laid wherever
defendant may be found in the Philippine Islands. This construction gives
both phrases their proper and legitimate effect without doing violence to the
spirit which informs all laws relating to venue and which insists always that
the action shall be tried in the place where the greatest convenience of the
parties will be served. Ordinarily a defendant's witnesses are found where the
defendant resides; and plaintiffs witnesses are generally found where he
resides or where the defendant resides. It is, therefore, generally desirable to
have the action tried where one of the parties resides. Where the plaintiff is a
nonresident and the contract upon which suit is brought was made in the
Philippine Islands it may safely be asserted that the convenience of the
defendant would be best served by a trial in the province where he resides.
The fact that defendant was sojourning in Pasay at the time he was served
with summons does not make him a resident of that place for purposes of
venue. Residence is "the permanent home, the place to which, whenever
absent for business or pleasure, one intends to return, ***" (67 C. J., pp.
123-124.) A man can have but one domicile at a time (Alcantara vs. Secretary
of Interior, 61 Phil., 459), and residence is synonymous with domicile under
section 1 of Rule 5 (Moran's Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue was
correctly sustained by the lower court.
As to the second question, the complaint shows that the action is for
damages resulting from mismanagement of the affairs and assets of the
corporation by its principal officer, it being alleged that defendant's
maladministration has brought about the ruin of the corporation and the
consequent loss of value of its stocks. The injury complained of is thus
primarily to the corporation, so that the suit for the damages claimed should
be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia
of Corporation pp. 977-980). The stockholders may not directly claim those
damages for themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the dissolution
of the corporation and the liquidation of its debts and liabilities, something
which cannot be legally done in view of section 16 of the Corporation Law,
which provides:.
"No corporation shall make or declare any stock or bond dividend or
any dividend whatsoever except from the surplus profits arising from its
business, or divide or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment of its debts
and the termination of its existence by limitation or lawful dissolution.".
But while it is to the corporation that the action should pertain in cases
of this nature, however, if the officers of the corporation, who are the ones
called upon to protect their rights, refuse to sue, or where a demand upon
them to file the necessary suit would be futile because they are the very ones
to be sued or because they hold the controlling interest in the corporation,
then in that case any one of the stockholders is allowed to bring suit (3
Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real party in
interest, so that such damages as may be recovered shall pertain to the
corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is
a derivative suit brought by a stockholder as the nominal party plaintiff for the
benefit of the corporation, which is the real party in interest (13 Fletcher,
Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the action
not for the benefit of the corporation but for their own benefit, since they ask
that the defendant make good the losses occasioned by his mismanagement
and pay to them the value of their respective participation in the corporate
assets on the basis of their respective holdings. Clearly, this cannot be done
until all corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful dissolution
in view of the provisions of section 16 of the Corporation Law.It results that
plaintiffs' complaint shows no cause of action in their favor so that the lower
court did not err in dismissing the complaint on that ground.
While plaintiffs ask for a remedy to which they are not entitled unless
the requirement of section 16 of the Corporation Law be first complied with,
we note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a mere
change in the prayer. Such amendment, however, is not possible now, since
the complaint has been filed in the wrong court, so that the same has to be
dismissed.
The order appealed from is therefore affirmed, but without prejudice to
the filing of the proper action in which the venue shall be laid in the proper
province. Appellants shall pay costs. So ordered.
Moran, C. J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.
Order affirmed.

42.
FIRST DIVISION
[G.R. No. 150793. November 19, 2004.]
FRANCIS CHUA, petitioner, vs. HON. COURT OF APPEALS
and LYDIA C. HAO, respondents.
D E C I S I O N
QUISUMBING, J p:
Petitioner assails the Decision, 1 dated June 14, 2001, of the Court of Appeals in
CA-G.R. SP No. 57070, affirming the Order, dated October 5, 1999, of the
Regional Trial Court (RTC) of Manila, Branch 19. The RTC reversed the Order,
dated April 26, 1999, of the Metropolitan Trial Court (MeTC) of Manila, Branch
22. Also challenged by herein petitioner is the CA Resolution, 2dated November
20, 2001, denying his Motion for Reconsideration.
The facts, as culled from the records, are as follows:
On February 28, 1996, private respondent Lydia Hao, treasurer of Siena Realty
Corporation, filed a complaint-affidavit with the City Prosecutor of Manila
charging Francis Chua and his wife, Elsa Chua, of four counts of falsification of
public documents pursuant to Article 172 3 in relation to Article 171 4 of the
Revised Penal Code. The charge reads:
That on or about May 13, 1994, in the City of Manila, Philippines, the
said accused, being then a private individual, did then and there willfully,
unlawfully and feloniously commit acts of falsification upon a public
document, to wit: the said accused prepared, certified, and falsified the
Minutes of the Annual Stockholders meeting of the Board of Directors of
the Siena Realty Corporation, duly notarized before a Notary Public,
Atty. Juanito G. Garcia and entered in his Notarial Registry as Doc No.
109, Page 22, Book No. IV and Series of 1994, and therefore, a public
document, by making or causing it to appear in said Minutes of the
Annual Stockholders Meeting that one LYDIA HAO CHUA was present
and has participated in said proceedings, when in truth and in fact, as
the said accused fully well knew that said Lydia C. Hao was never
present during the Annual Stockholders Meeting held on April 30, 1994
and neither has participated in the proceedings thereof to the prejudice
of public interest and in violation of public faith and destruction of truth
as therein proclaimed.
CONTRARY TO LAW. 5
Thereafter, the City Prosecutor filed the Information docketed as Criminal Case
No. 285721 6 for falsification of public document, before the Metropolitan Trial
Court (MeTC) of Manila, Branch 22, against Francis Chua but dismissed the
accusation against Elsa Chua.
Herein petitioner, Francis Chua, was arraigned and trial ensued thereafter.
During the trial in the MeTC, private prosecutors Atty. Evelyn Sua-Kho and Atty.
Ariel Bruno Rivera appeared as private prosecutors and presented Hao as their
first witness.
After Hao's testimony, Chua moved to exclude complainant's counsels as private
prosecutors in the case on the ground that Hao failed to allege and prove any
civil liability in the case.
In an Order, dated April 26, 1999, the MeTC granted Chua's motion and ordered
the complainant's counsels to be excluded from actively prosecuting Criminal
Case No. 285721. Hao moved for reconsideration but it was denied.
Hence, Hao filed a petition for certiorari docketed as SCA No. 99-
94846, 7 entitled Lydia C. Hao, in her own behalf and for the benefit of Siena
Realty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega,
Presiding Judge, Branch 22, Metropolitan Trial Court of Manila, before the
Regional Trial Court (RTC) of Manila, Branch 19. TcDaSI
The RTC gave due course to the petition and on October 5, 1999, the RTC in an
order reversed the MeTC Order. The dispositive portion reads:
WHEREFORE, the petition is GRANTED. The respondent Court is ordered
to allow the intervention of the private prosecutors in behalf of petitioner
Lydia C. Hao in the prosecution of the civil aspect of Crim. Case No.
285721, before Br. 22 [MeTC], Manila, allowing Attys. Evelyn Sua-Kho
and Ariel Bruno Rivera to actively participate in the proceedings.
SO ORDERED. 8
Chua moved for reconsideration which was denied.
Dissatisfied, Chua filed before the Court of Appeals a petition for certiorari. The
petition alleged that the lower court acted with grave abuse of discretion in: (1)
refusing to consider material facts; (2) allowing Siena Realty Corporation to be
impleaded as co-petitioner in SCA No. 99-94846 although it was not a party to
the criminal complaint in Criminal Case No. 285721; and (3) effectively amending
the information against the accused in violation of his constitutional rights.
On June 14, 2001, the appellate court promulgated its assailed Decision denying
the petition, thus:
WHEREFORE, premises considered, the petition is hereby DENIED DUE
COURSE and DISMISSED. The Order, dated October 5, 1999 as well as
the Order, dated December 3, 1999, are hereby AFFIRMED in toto.
SO ORDERED. 9
Petitioner had argued before the Court of Appeals that respondent had no
authority whatsoever to bring a suit in behalf of the Corporation since there was
no Board Resolution authorizing her to file the suit.
For her part, respondent Hao claimed that the suit was brought under the
concept of a derivative suit. Respondent maintained that when the directors or
trustees refused to file a suit even when there was a demand from stockholders,
a derivative suit was allowed.
The Court of Appeals held that the action was indeed a derivative suit, for it
alleged that petitioner falsified documents pertaining to projects of the
corporation and made it appear that the petitioner was a stockholder and a
director of the corporation. According to the appellate court, the corporation was
a necessary party to the petition filed with the RTC and even if private
respondent filed the criminal case, her act should not divest the Corporation of
its right to be a party and present its own claim for damages.
Petitioner moved for reconsideration but it was denied in a Resolution dated
November 20, 2001.
Hence, this petition alleging that the Court of Appeals committed reversible
errors:
I.. . . IN RULING THAT LYDIA HAO'S FILING OF CRIMINAL CASE NO.
285721 WAS IN THE NATURE OF A DERIVATIVE SUIT
II.. . . IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENA
REALTY WAS A PROPER PETITIONER IN SCA NO. [99-94846]
III.. . . IN UPHOLDING JUDGE DAGUNA'S DECISION ALLOWING LYDIA
HAO'S COUNSEL TO CONTINUE AS PRIVATE PROSECUTORS IN
CRIMINAL CASE NO. 285721
IV.. . . IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUE
THAT JUDGE DAGUNA ACTED IN GRAVE ABUSE OF DISCRETION
IN NOT DISMISSING THE PETITION IN SCA NO. [99-94846] FOR
BEING A SHAM PLEADING. 10
The pertinent issues in this petition are the following: (1) Is the criminal
complaint in the nature of a derivative suit? (2) Is Siena Realty Corporation a
proper petitioner in SCA No. 99-94846? and (3) Should private prosecutors be
allowed to actively participate in the trial of Criminal Case No. 285721.
On the first issue, petitioner claims that the Court of Appeals erred when (1) it
sustained the lower court in giving due course to respondent's petition in SCA
No. 99-94846 despite the fact that the Corporation was not the private
complainant in Criminal Case No. 285721, and (2) when it ruled that Criminal
Case No. 285721 was in the nature of a derivative suit.
Petitioner avers that a derivative suit is by nature peculiar only to intra-corporate
proceedings and cannot be made part of a criminal action. He cites the case
of Western Institute of Technology, Inc. v. Salas, 11 where the court said that an
appeal on the civil aspect of a criminal case cannot be treated as a derivative
suit. Petitioner asserts that in this case, the civil aspect of a criminal case cannot
be treated as a derivative suit, considering that Siena Realty Corporation was not
the private complainant.
Petitioner misapprehends our ruling in Western Institute. In that case, we said:
Here, however, the case is not a derivative suit but is merely an appeal
on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the
RTC of Iloilo for estafa and falsification of public document. Among the
basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must
allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join. . . . This was not
complied with by the petitioners either in their complaint before the
court a quo nor in the instant petition which, in part, merely states that
"this is a petition for review on certiorari on pure questions of law to set
aside a portion of the RTC decision in Criminal Cases Nos. 37097 and
37098" since the trial court's judgment of acquittal failed to impose civil
liability against the private respondents. By no amount of equity
considerations, if at all deserved, can a mere appeal on the civil aspect
of a criminal case be treated as a derivative suit. 12
Moreover, in Western Institute, we said that a mere appeal in the civil aspect
cannot be treated as a derivative suit because the appeal lacked the basic
requirement that it must be alleged in the complaint that the shareholder is suing
on a derivative cause of action for and in behalf of the corporation and other
shareholders who wish to join. CDESIA
Under Section 36 13 of the Corporation Code, read in relation to Section
23, 14 where a corporation is an injured party, its power to sue is lodged with its
board of directors or trustees. 15 An individual stockholder is permitted to
institute a derivative suit on behalf of the corporation wherein he holds stocks in
order to protect or vindicate corporate rights, whenever the 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 a nominal
party, with the corporation as the real party in interest. 16

A derivative action is a suit by a shareholder to enforce a corporate cause of
action. The corporation is a necessary party to the suit. And the relief which is
granted is a judgment against a third person in favor of the corporation.
Similarly, if a corporation has a defense to an action against it and is not
asserting it, a stockholder may intervene and defend on behalf of the
corporation. 17
Under the Revised Penal Code, every person criminally liable for a felony is also
civilly liable. 18 When a criminal action is instituted, the civil action for the
recovery of civil liability arising from the offense charged shall be deemed
instituted with the criminal action, unless the offended party waives the civil
action, reserves the right to institute it separately or institutes the civil action
prior to the criminal action. 19
In Criminal Case No. 285721, the complaint was instituted by respondent against
petitioner for falsifying corporate documents whose subject concerns corporate
projects of Siena Realty Corporation. Clearly, Siena Realty Corporation is an
offended party. Hence, Siena Realty Corporation has a cause of action. And the
civil case for the corporate cause of action is deemed instituted in the criminal
action.
However, the board of directors of the corporation in this case did not institute
the action against petitioner. Private respondent was the one who instituted the
action. Private respondent asserts that she filed a derivative suit in behalf of the
corporation. This assertion is inaccurate. Not every suit filed in behalf of the
corporation is a derivative suit. For a derivative suit to prosper, it is required that
the minority stockholder suing for and on behalf of the corporation must allege in
his complaint that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish to join
him in the suit. 20 It is a condition sine qua non that the corporation be
impleaded as a party because not only is the corporation an indispensable party,
but it is also the present rule that it must be served with process. The judgment
must be made binding upon the corporation in order that the corporation may
get the benefit of the suit and may not bring subsequent suit against the same
defendants for the same cause of action. In other words, the corporation must
be joined as party because it is its cause of action that is being litigated and
because judgment must be a res adjudicata against it. 21
In the criminal complaint filed by herein respondent, nowhere is it stated that
she is filing the same in behalf and for the benefit of the corporation. Thus, the
criminal complaint including the civil aspect thereof could not be deemed in the
nature of a derivative suit.
We turn now to the second issue, is the corporation a proper party in the petition
for certiorari under Rule 65 before the RTC? Note that the case was titled "Lydia
C. Hao, in her own behalf and for the benefit of Siena Realty Corporation v.
Francis Chua, and the Honorable Hipolito dela Vega, Presiding Judge, Branch 22,
Metropolitan Trial Court of Manila." Petitioner before us now claims that the
corporation is not a private complainant in Criminal Case No. 285721, and thus
cannot be included as appellant in SCA No. 99-94846.
Petitioner invokes the case of Ciudad Real & Devt. Corporation v. Court of
Appeals. 22 In Ciudad Real, it was ruled that the Court of Appeals committed
grave abuse of discretion when it upheld the standing of Magdiwang Realty
Corporation as a party to the petition for certiorari, even though it was not a
party-in-interest in the civil case before the lower court.
In the present case, respondent claims that the complaint was filed by her not
only in her personal capacity, but likewise for the benefit of the corporation.
Additionally, she avers that she has exhausted all remedies available to her
before she instituted the case, not only to claim damages for herself but also to
recover the damages caused to the company.
Under Rule 65 of the Rules of Civil Procedure, 23 when a trial court commits a
grave abuse of discretion amounting to lack or excess of jurisdiction, the person
aggrieved can file a special civil action for certiorari. The aggrieved parties in
such a case are the State and the private offended party or complainant. 24
In a string of cases, we consistently ruled that only a party-in-interest or those
aggrieved may file certiorari cases. It is settled that the offended parties in
criminal cases have sufficient interest and personality as "person(s) aggrieved" to
file special civil action of prohibition and certiorari. 25
In Ciudad Real, cited by petitioner, we held that the appellate court committed
grave abuse of discretion when it sanctioned the standing of a corporation to join
said petition for certiorari, despite the finality of the trial court's denial of its
Motion for Intervention and the subsequent Motion to Substitute and/or Join as
Party/Plaintiff.
Note, however, that in Pastor, Jr. v. Court of Appeals 26 we held that if
aggrieved, even a non-party may institute a petition forcertiorari. In that case,
petitioner was the holder in her own right of three mining claims and could file a
petition for certiorari, the fastest and most feasible remedy since she could not
intervene in the probate of her father-in-laws estate. 27
In the instant case, we find that the recourse of the complainant to the
respondent Court of Appeals was proper. The petition was brought in her own
name and in behalf of the Corporation. Although, the corporation was not a
complainant in the criminal action, the subject of the falsification was the
corporation's project and the falsified documents were corporate documents.
Therefore, the corporation is a proper party in the petition for certiorari because
the proceedings in the criminal case directly and adversely affected the
corporation.
We turn now to the third issue. Did the Court of Appeals and the lower court err
in allowing private prosecutors to actively participate in the trial of Criminal Case
No. 285721?
Petitioner cites the case of Tan, Jr. v. Gallardo, 28 holding that where from the
nature of the offense or where the law defining and punishing the offense
charged does not provide for an indemnity, the offended party may not intervene
in the prosecution of the offense.
Petitioner's contention lacks merit. Generally, the basis of civil liability arising
from crime is the fundamental postulate that every man criminally liable is also
civilly liable. When a person commits a crime he offends two entities namely (1)
the society in which he lives in or the political entity called the State whose law
he has violated; and (2) the individual member of the society whose person,
right, honor, chastity or property has been actually or directly injured or
damaged by the same punishable act or omission. An act or omission is felonious
because it is punishable by law, it gives rise to civil liability not so much because
it is a crime but because it caused damage to another. Additionally, what gives
rise to the civil liability is really the obligation and the moral duty of everyone to
repair or make whole the damage caused to another by reason of his own act or
omission, whether done intentionally or negligently. The indemnity which a
person is sentenced to pay forms an integral part of the penalty imposed by law
for the commission of the crime. 29 The civil action involves the civil liability
arising from the offense charged which includes restitution, reparation of the
damage caused, and indemnification for consequential damages. 30
Under the Rules, where the civil action for recovery of civil liability is instituted in
the criminal action pursuant to Rule 111, the offended party may intervene by
counsel in the prosecution of the offense. 31 Rule 111(a) of the Rules of Criminal
Procedure provides that, "[w]hen a criminal action is instituted, the civil action
arising from the offense charged shall be deemed instituted with the criminal
action unless the offended party waives the civil action, reserves the right to
institute it separately, or institutes the civil action prior to the criminal action."
Private respondent did not waive the civil action, nor did she reserve the right to
institute it separately, nor institute the civil action for damages arising from the
offense charged. Thus, we find that the private prosecutors can intervene in the
trial of the criminal action.
Petitioner avers, however, that respondent's testimony in the inferior court did
not establish nor prove any damages personally sustained by her as a result of
petitioner's alleged acts of falsification. Petitioner adds that since no personal
damages were proven therein, then the participation of her counsel as private
prosecutors, who were supposed to pursue the civil aspect of a criminal case, is
not necessary and is without basis. IHcTDA
When the civil action is instituted with the criminal action, evidence should be
taken of the damages claimed and the court should determine who are the
persons entitled to such indemnity. The civil liability arising from the crime may
be determined in the criminal proceedings if the offended party does not waive
to have it adjudged or does not reserve the right to institute a separate civil
action against the defendant. Accordingly, if there is no waiver or reservation of
civil liability, evidence should be allowed to establish the extent of injuries
suffered. 32
In the case before us, there was neither a waiver nor a reservation made; nor
did the offended party institute a separate civil action. It follows that evidence
should be allowed in the criminal proceedings to establish the civil liability arising
from the offense committed, and the private offended party has the right to
intervene through the private prosecutors.

WHEREFORE, the instant petition is DENIED. The Decision, dated June 14, 2001,
and the Resolution, dated November 20, 2001, of the Court of Appeals in CA-
G.R. SP No. 57070, affirming the Order, dated October 5, 1999, of the Regional
Trial Court (RTC) of Manila, Branch 19, are AFFIRMED. Accordingly, the private
prosecutors are hereby allowed to intervene in behalf of private respondent Lydia
Hao in the prosecution of the civil aspect of Criminal Case No. 285721 before
Branch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs against petitioner.
SO ORDERED.
Davide, Jr., C .J ., Ynares-Santiago, Carpio and Azcuna, JJ ., concur.
Footnotes

43.
SECOND DIVISION
[G.R. No. 152392. May 26, 2005.]
EXPERTRAVEL & TOURS, INC., petitioner, vs. COURT OF
APPEALS and KOREAN AIRLINES,respondents.
D E C I S I O N
CALLEJO, SR., J p:
Before us is a petition for review on certiorari of the Decision 1 of the Court of
Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition
for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the Republic
of South Korea and licensed to do business in the Philippines. Its general
manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty.
Mario Aguinaldo and his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint 2 against
ETI with the Regional Trial Court (RTC) of Manila, for the collection of the
principal amount of P260,150.00, plus attorney's fees and exemplary damages.
The verification and certification against forum shopping was signed by Atty.
Aguinaldo, who indicated therein that he was the resident agent and legal
counsel of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo
was not authorized to execute the verification and certificate of non-forum
shopping as required by Section 5, Rule 7 of the Rules of Court. KAL opposed the
motion, contending that Atty. Aguinaldo was its resident agent and was
registered as such with the Securities and Exchange Commission (SEC) as
required by the Corporation Code of the Philippines. It was further alleged that
Atty. Aguinaldo was also the corporate secretary of KAL. Appended to the said
opposition was the identification card of Atty. Aguinaldo, showing that he was
the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had
been authorized to file the complaint through a resolution of the KAL Board of
Directors approved during a special meeting held on June 25, 1999. Upon his
motion, KAL was given a period of 10 days within which to submit a copy of the
said resolution. The trial court granted the motion. Atty. Aguinaldo subsequently
filed other similar motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit 3 of even date, executed by
its general manager Suk Kyoo Kim, alleging that the board of directors conducted
a special teleconference on June 25, 1999, which he and Atty. Aguinaldo
attended. It was also averred that in that same teleconference, the board of
directors approved a resolution authorizing Atty. Aguinaldo to execute the
certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim also
alleged, however, that the corporation had no written copy of the aforesaid
resolution.
On April 12, 2000, the trial court issued an Order 4 denying the motion to
dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that
the KAL Board of Directors indeed conducted a teleconference on June 25, 1999,
during which it approved a resolution as quoted in the submitted affidavit. CAacTH
ETI filed a motion for the reconsideration of the Order, contending that it was
inappropriate for the court to take judicial notice of the said teleconference
without any prior hearing. The trial court denied the motion in its Order 5 dated
August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the orders of the
RTC. In its comment on the petition, KAL appended a certificate signed by Atty.
Aguinaldo dated January 10, 2000, worded as follows:
SECRETARY'S/RESIDENT AGENT'S CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and
appointed Corporate Secretary and Resident Agent of KOREAN
AIRLINES, a foreign corporation duly organized and existing under and
by virtue of the laws of the Republic of Korea and also duly registered
and authorized to do business in the Philippines, with office address at
Ground Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village, Makati
City, HEREBY CERTIFY that during a special meeting of the Board of
Directors of the Corporation held on June 25, 1999 at which a quorum
was present, the said Board unanimously passed, voted upon and
approved the following resolution which is now in full force and effect, to
wit:
RESOLVED, that Mario A. Aguinaldo and his law firm
M.A. Aguinaldo & Associates or any of its lawyers are
hereby appointed and authorized to take with whatever
legal action necessary to effect the collection of the unpaid
account of Expert Travel & Tours. They are hereby
specifically authorized to prosecute, litigate, defend, sign
and execute any document or paper necessary to the filing
and prosecution of said claim in Court, attend the Pre-Trial
Proceedings and enter into a compromise agreement
relative to the above-mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this 10th
day of January, 1999, in the City of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
SUBSCRIBED AND SWORN to before me this 10th day of January, 1999,
Atty. Mario A. Aguinaldo exhibiting to me his Community Tax Certificate
No. 14914545, issued on January 7, 2000 at Manila, Philippines.
(Sgd.)
Doc. No. 119;ATTY. HENRY D. ADASA
Page No. 25;Notary Public
Book No. XXIVUntil December 31, 2000
Series of 2000.PTR #889583/MLA 1/3/2000 6
On December 18, 2001, the CA rendered judgment dismissing the petition, ruling
that the verification and certificate of non-forum shopping executed by Atty.
Aguinaldo was sufficient compliance with the Rules of Court. According to the
appellate court, Atty. Aguinaldo had been duly authorized by the board
resolution approved on June 25, 1999, and was the resident agent of KAL. As
such, the RTC could not be faulted for taking judicial notice of the said
teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA denied.
Thus, ETI, now the petitioner, comes to the Court by way of petition for review
on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE
ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT
RENDERED ITS QUESTIONED DECISION AND WHEN IT ISSUED ITS
QUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANT
PETITION? 7
The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of
Court can be determined only from the contents of the complaint and not by
documents or pleadings outside thereof. Hence, the trial court committed grave
abuse of discretion amounting to excess of jurisdiction, and the CA erred in
considering the affidavit of the respondent's general manager, as well as the
Secretary's/Resident Agent's Certification and the resolution of the board of
directors contained therein, as proof of compliance with the requirements of
Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that the
RTC cannot take judicial notice of the said teleconference without prior hearing,
nor any motion therefor. The petitioner reiterates its submission that the
teleconference and the resolution adverted to by the respondent was a mere
fabrication.
The respondent, for its part, avers that the issue of whether modern technology
is used in the field of business is a factual issue; hence, cannot be raised in a
petition for review on certiorari under Rule 45 of the Rules of Court. On the
merits of the petition, it insists that Atty. Aguinaldo, as the resident agent and
corporate secretary, is authorized to sign and execute the certificate of non-
forum shopping required by Section 5, Rule 7 of the Rules of Court, on top of the
board resolution approved during the teleconference of June 25, 1999. The
respondent insists that "technological advances in this time and age are as
commonplace as daybreak." Hence, the courts may take judicial notice that the
Philippine Long Distance Telephone Company, Inc. had provided a record of
corporate conferences and meetings through FiberNet using fiber-optic
transmission technology, and that such technology facilitates voice and image
transmission with ease; this makes constant communication between a foreign-
based office and its Philippine-based branches faster and easier, allowing for
cost-cutting in terms of travel concerns. It points out that even the E-Commerce
Law has recognized this modern technology. The respondent posits that the
courts are aware of this development in technology; hence, may take judicial
notice thereof without need of hearings. Even if such hearing is required, the
requirement is nevertheless satisfied if a party is allowed to file pleadings by way
of comment or opposition thereto. DHSaCA
In its reply, the petitioner pointed out that there are no rulings on the matter of
teleconferencing as a means of conducting meetings of board of directors for
purposes of passing a resolution; until and after teleconferencing is recognized
as a legitimate means of gathering a quorum of board of directors, such cannot
be taken judicial notice of by the court. It asserts that safeguards must first be
set up to prevent any mischief on the public or to protect the general public from
any possible fraud. It further proposes possible amendments to the Corporation
Code to give recognition to such manner of board meetings to transact business
for the corporation, or other related corporate matters; until then, the petitioner
asserts, teleconferencing cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special meeting on
June 25, 1999 through teleconferencing where Atty. Aguinaldo was supposedly
given such an authority is a farce, considering that there was no mention of
where it was held, whether in this country or elsewhere. It insists that the
Corporation Code requires board resolutions of corporations to be submitted to
the SEC. Even assuming that there was such a teleconference, it would be
against the provisions of the Corporation Code not to have any record thereof.

The petitioner insists that the teleconference and resolution adverted to by the
respondent in its pleadings were mere fabrications foisted by the respondent and
its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 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.
Failure to comply with the foregoing requirements shall not be curable
by mere amendment of the complaint or other initiatory pleading but
shall be cause for the dismissal of the case without prejudice, unless
otherwise provided, upon motion and after hearing. The submission of a
false certification or non-compliance with any of the undertakings
therein shall constitute indirect contempt of court, without prejudice to
the corresponding administrative and criminal actions. If the acts of the
party or his counsel clearly constitute willful and deliberate forum
shopping, the same shall be ground for summary dismissal with
prejudice and shall constitute direct contempt, as well as a cause for
administrative sanctions.
It is settled that the requirement to file a certificate of non-forum shopping is
mandatory 8 and that the failure to comply with this requirement cannot be
excused. The certification is a peculiar and personal responsibility of the party,
an assurance given to the court or other tribunal that there are no other pending
cases involving basically the same parties, issues and causes of action. Hence,
the certification must be accomplished by the party himself because he has
actual knowledge of whether or not he has initiated similar actions or
proceedings in different courts or tribunals. Even his counsel may be unaware of
such facts. 9Hence, the requisite certification executed by the plaintiff's counsel
will not suffice. 10
In a case where the plaintiff is a private corporation, the certification may be
signed, for and on behalf of the said corporation, by a specifically authorized
person, including its retained counsel, who has personal knowledge of the facts
required to be established by the documents. The reason was explained by the
Court in National Steel Corporation v. Court of Appeals, 11 as follows:
Unlike natural persons, corporations may perform physical actions only
through properly delegated individuals; namely, its officers and/or
agents.
xxx xxx xxx
The corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly-
authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly-authorized
for the purpose by corporate by-laws or by specific act of the board of
directors. "All acts within the powers of a corporation may be performed
by agents of its selection; and except so far as limitations or restrictions
which may be imposed by special charter, by-law, or statutory
provisions, the same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power to act
for the corporation; and agents once appointed, or members acting in
their stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons." ECTSDa
xxx xxx xxx
. . . For who else knows of the circumstances required in the Certificate
but its own retained counsel. Its regular officers, like its board chairman
and president, may not even know the details required therein.
Indeed, the certificate of non-forum shopping may be incorporated in the
complaint or appended thereto as an integral part of the complaint. The rule is
that compliance with the rule after the filing of the complaint, or the dismissal of
a complaint based on its non-compliance with the rule, is impermissible.
However, in exceptional circumstances, the court may allow subsequent
compliance with the rule. 12 If the authority of a party's counsel to execute a
certificate of non-forum shopping is disputed by the adverse party, the former is
required to show proof of such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the authority of
Atty. Aguinaldo to execute the requisite verification and certificate of non-forum
shopping as the resident agent and counsel of the respondent. It was, thus,
incumbent upon the respondent, as the plaintiff, to allege and establish that
Atty. Aguinaldo had such authority to execute the requisite verification and
certification for and in its behalf. The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was incorporated in
the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite
210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, after
having sworn to in accordance with law hereby deposes and say: THAT

1.I am the Resident Agent and Legal Counsel of the
plaintiff in the above entitled case and have caused the
preparation of the above complaint;
2.I have read the complaint and that all the
allegations contained therein are true and correct based on
the records on files;
3.I hereby further certify that I have not
commenced any other action or proceeding involving the
same issues in the Supreme Court, the Court of Appeals,
or different divisions thereof, or any other tribunal or
agency. If I subsequently learned that a similar action or
proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions
thereof, or any tribunal or agency, I will notify the court,
tribunal or agency within five (5) days from such
notice/knowledge.
(Sgd.)
MARIO A. AGUINALDO
Affiant
CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999,
affiant exhibiting to me his Community Tax Certificate No. 00671047
issued on January 7, 1999 at Manila, Philippines.
(Sgd.)
Doc. No. 1005;ATTY. HENRY D. ADASA
Page No. 198;Notary Public
Book No. XXIUntil December 31, 2000
Series of 1999.PTR No. 320501 Mla 1/4/99 13
As gleaned from the aforequoted certification, there was no allegation that Atty.
Aguinaldo had been authorized to execute the certificate of non-forum shopping
by the respondent's Board of Directors; moreover, no such board resolution was
appended thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the Philippines,
this does not mean that he is authorized to execute the requisite certification
against forum shopping. Under Section 127, in relation to Section 128 of the
Corporation Code, the authority of the resident agent of a foreign corporation
with license to do business in the Philippines is to receive, for and in behalf of
the foreign corporation, services and other legal processes in all actions and
other legal proceedings against such corporation, thus:
SEC. 127.Who may be a resident agent. A resident agent may either
be an individual residing in the Philippines or a domestic corporation
lawfully transacting business in the Philippines: Provided, That in the
case of an individual, he must be of good moral character and of sound
financial standing.
SEC. 128.Resident agent; service of process. The Securities and
Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and
Exchange Commission a written power of attorney designating some
persons who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or other
legal proceedings against such corporation, and consenting that service
upon such resident agent shall be admitted and held as valid as if served
upon the duly-authorized officers of the foreign corporation as its home
office. 14
Under the law, Atty. Aguinaldo was not specifically authorized to execute a
certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of
Court. This is because while a resident agent may be aware of actions filed
against his principal (a foreign corporation doing business in the Philippines),
such resident may not be aware of actions initiated by its principal, whether in
the Philippines against a domestic corporation or private individual, or in the
country where such corporation was organized and registered, against a
Philippine registered corporation or a Filipino citizen. cDSAEI
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was
not specifically authorized to execute the said certification. It attempted to show
its compliance with the rule subsequent to the filing of its complaint by
submitting, on March 6, 2000, a resolution purporting to have been approved by
its Board of Directors during a teleconference held on June 25, 1999, allegedly
with Atty. Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt of
the respondent casts veritable doubt not only on its claim that such a
teleconference was held, but also on the approval by the Board of Directors of
the resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum
shopping.

In its April 12, 2000 Order, the RTC took judicial notice that because of the onset
of modern technology, persons in one location may confer with other persons in
other places, and, based on the said premise, concluded that Suk Kyoo Kim and
Atty. Aguinaldo had a teleconference with the respondent's Board of Directors in
South Korea on June 25, 1999. The CA, likewise, gave credence to the
respondent's claim that such a teleconference took place, as contained in the
affidavit of Suk Kyoo Kim, as well as Atty. Aguinaldo's certification.
Generally speaking, matters of judicial notice have three material requisites: (1)
the matter must be one of common and general knowledge; (2) it must be well
and authoritatively settled and not doubtful or uncertain; and (3) it must be
known to be within the limits of the jurisdiction of the court. The principal guide
in determining what facts may be assumed to be judicially known is that of
notoriety. Hence, it can be said that judicial notice is limited to facts evidenced
by public records and facts of general notoriety. 15 Moreover, a judicially noticed
fact must be one not subject to a reasonable dispute in that it is either: (1)
generally known within the territorial jurisdiction of the trial court; or (2) capable
of accurate and ready determination by resorting to sources whose accuracy
cannot reasonably be questionable. 16
Things of "common knowledge," of which courts take judicial matters coming to
the knowledge of men generally in the course of the ordinary experiences of life,
or they may be matters which are generally accepted by mankind as true and
are capable of ready and unquestioned demonstration. Thus, facts which are
universally known, and which may be found in encyclopedias, dictionaries or
other publications, are judicially noticed, provided, they are of such universal
notoriety and so generally understood that they may be regarded as forming part
of the common knowledge of every person. As the common knowledge of man
ranges far and wide, a wide variety of particular facts have been judicially
noticed as being matters of common knowledge. But a court cannot take judicial
notice of any fact which, in part, is dependent on the existence or non-existence
of a fact of which the court has no constructive knowledge. 17
In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing.
Teleconferencing is interactive group communication (three or more people in
two or more locations) through an electronic medium. In general terms,
teleconferencing can bring people together under one roof even though they are
separated by hundreds of miles. 18 This type of group communication may be
used in a number of ways, and have three basic types: (1) video conferencing
television-like communication augmented with sound; (2) computer conferencing
printed communication through keyboard terminals, and (3) audio-
conferencing-verbal communication via the telephone with optional capacity for
telewriting or telecopying. 19
A teleconference represents a unique alternative to face-to-face (FTF) meetings.
It was first introduced in the 1960's with American Telephone and Telegraph's
Picturephone. At that time, however, no demand existed for the new technology.
Travel costs were reasonable and consumers were unwilling to pay the monthly
service charge for using the picturephone, which was regarded as more of a
novelty than as an actual means for everyday communication. 20 In time, people
found it advantageous to hold teleconferencing in the course of business and
corporate governance, because of the money saved, among other advantages
include:
1.People (including outside guest speakers) who wouldn't normally
attend a distant FTF meeting can participate.
2.Follow-up to earlier meetings can be done with relative ease and little
expense.
3.Socializing is minimal compared to an FTF meeting; therefore,
meetings are shorter and more oriented to the primary purpose of the
meeting.
4.Some routine meetings are more effective since one can audio-
conference from any location equipped with a telephone.
5.Communication between the home office and field staffs is maximized.
6.Severe climate and/or unreliable transportation may necessitate
teleconferencing.
7.Participants are generally better prepared than for FTF meetings.
8.It is particularly satisfactory for simple problem-solving, information
exchange, and procedural tasks.
9.Group members participate more equally in well-moderated
teleconferences than an FTF meeting. 21
On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:
1.Technical failures with equipment, including connections that aren't
made.
2.Unsatisfactory for complex interpersonal communication, such as
negotiation or bargaining.
3.Impersonal, less easy to create an atmosphere of group rapport.
4.Lack of participant familiarity with the equipment, the medium itself,
and meeting skills.
5.Acoustical problems within the teleconferencing rooms.
6.Difficulty in determining participant speaking order; frequently one
person monopolizes the meeting.
7.Greater participant preparation time needed. HCDAac
8.Informal, one-to-one, social interaction not possible. 22
Indeed, teleconferencing can only facilitate the linking of people; it does not alter
the complexity of group communication. Although it may be easier to
communicate via teleconferencing, it may also be easier to miscommunicate.
Teleconferencing cannot satisfy the individual needs of every type of meeting. 23
In the Philippines, teleconferencing and videoconferencing of members of board
of directors of private corporations is a reality, in light of Republic Act No.
8792. The Securities and Exchange Commission issued SEC Memorandum
Circular No. 15, on November 30, 2001, providing the guidelines to be complied
with related to such conferences. 24 Thus, the Court agrees with the RTC that
persons in the Philippines may have a teleconference with a group of persons in
South Korea relating to business transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in
a teleconference along with the respondent's Board of Directors, the Court is not
convinced that one was conducted; even if there had been one, the Court is not
inclined to believe that a board resolution was duly passed specifically
authorizing Atty. Aguinaldo to file the complaint and execute the required
certification against forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint on
the ground that the respondent failed to comply with Section 5, Rule 7 of the
Rules of Court. The respondent opposed the motion on December 1, 1999, on its
contention that Atty. Aguinaldo, its resident agent, was duly authorized to sue in
its behalf. The respondent, however, failed to establish its claim that Atty.
Aguinaldo was its resident agent in the Philippines. Even the identification
card 25 of Atty. Aguinaldo which the respondent appended to its pleading merely
showed that he is the company lawyer of the respondent's Manila Regional
Office.
The respondent, through Atty. Aguinaldo, announced the holding of the
teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo then
prayed for ten days, or until February 8, 2000, within which to submit the board
resolution purportedly authorizing him to file the complaint and execute the
required certification against forum shopping. The court granted the
motion.26 The respondent, however, failed to comply, and instead prayed for 15
more days to submit the said resolution, contending that it was with its main
office in Korea. The court granted the motion per its Order 27 dated February 11,
2000. The respondent again prayed for an extension within which to submit the
said resolution, until March 6, 2000. 28 It was on the said date that the
respondent submitted an affidavit of its general manager Suk Kyoo Kim,
stating, inter alia, that he and Atty. Aguinaldo attended the said teleconference
on June 25, 1999, where the Board of Directors supposedly approved the
following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo &
Associates or any of its lawyers are hereby appointed and authorized to
take with whatever legal action necessary to effect the collection of the
unpaid account of Expert Travel & Tours. They are hereby specifically
authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim
in Court, attend the Pre-trial Proceedings and enter into a compromise
agreement relative to the above-mentioned claim. 29
But then, in the same affidavit, Suk Kyoo Kim declared that the respondent
"do[es] not keep a written copy of the aforesaid Resolution" because no records
of board resolutions approved during teleconferences were kept. This belied the
respondent's earlier allegation in its February 10, 2000 motion for extension of
time to submit the questioned resolution that it was in the custody of its main
office in Korea. The respondent gave the trial court the impression that it needed
time to secure a copy of the resolution kept in Korea, only to allege later (via the
affidavit of Suk Kyoo Kim) that it had no such written copy. Moreover, Suk Kyoo
Kim stated in his affidavit that the resolution was embodied in the
Secretary's/Resident Agent's Certificate signed by Atty. Aguinaldo. However, no
such resolution was appended to the said certificate.
The respondent's allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution (with Atty.
Aguinaldo in attendance) is incredible, given the additional fact that no such
allegation was made in the complaint. If the resolution had indeed been
approved on June 25, 1999, long before the complaint was filed, the respondent
should have incorporated it in its complaint, or at least appended a copy thereof.
The respondent failed to do so. It was only on January 28, 2000 that the
respondent claimed, for the first time, that there was such a meeting of the
Board of Directors held on June 25, 1999; it even represented to the Court that a
copy of its resolution was with its main office in Korea, only to allege later that
no written copy existed. It was only on March 6, 2000 that the respondent
alleged, for the first time, that the meeting of the Board of Directors where the
resolution was approved was held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had
signed a Secretary's/Resident Agent's Certificate alleging that the board of
directors held a teleconference on June 25, 1999. No such certificate was
appended to the complaint, which was filed on September 6, 1999. More
importantly, the respondent did not explain why the said certificate was signed
by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year
later (on January 10, 2000); it also did not explain its failure to append the said
certificate to the complaint, as well as to its Compliance dated March 6, 2000. It
was only on January 26, 2001 when the respondent filed its comment in the CA
that it submitted the Secretary's/Resident Agent's Certificate30 dated January 10,
2000.
The Court is, thus, more inclined to believe that the alleged teleconference on
June 25, 1999 never took place, and that the resolution allegedly approved by
the respondent's Board of Directors during the said teleconference was a mere
concoction purposefully foisted on the RTC, the CA and this Court, to avert the
dismissal of its complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of
the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The
Regional Trial Court of Manila is hereby ORDERED to dismiss, without prejudice,
the complaint of the respondent. DCAEcS
SO ORDERED.
Puno, Austria-Martinez and Chico-Nazario, JJ., concur.
Tinga, J., is out of the country.
Footnotes

44.
THIRD DIVISION
[G.R. No. 93695. February 4, 1992.]
RAMON C. LEE and ANTONIO DM.
LACDAO, petitioners, vs. THE HON. COURT OF APPEALS,
SACOBA MANUFACTURING CORP., PABLO GONZALES, JR.
and TOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
SYLLABUS
1.COMMERCIAL LAW; CORPORATIONS; VOTING TRUST; DEFINED. Under
Section 59 of the new Corporation Code which expressly recognizes voting trust
agreements, a more definite meaning may be gathered. The said provision partly
reads: "Section 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other rights pertaining to the shares for
a period not exceeding five (5) years at any one time: Provided, that in the case
of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding (5) years but shall automatically
expire upon full payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with the corporation and with the
Securities and Exchange Commission; otherwise, said agreement is ineffective
and unenforceable. The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be issued in the name of
the trustee or trustees stating that they are issued pursuant to said agreement.
In the books of the corporation, it shall be noted that the transfer in the name of
the trustee or trustees is made pursuant to said voting trust agreement."
2.ID.; ID.; VOTING TRUST AGREEMENT; DEFINED. By its very nature, a
voting trust agreement results in the separation of the voting rights of a
stockholder from his other rights such as the right to receive dividends, the right
to inspect the books of the corporation, the right to sell certain interests in the
assets of the corporation and other rights to which a stockholder may be entitled
until the liquidation of the corporation. However, in order to distinguish a voting
trust agreement from proxies and other voting pools and agreements, it must
pass three criteria or tests, namely: (1) that the voting rights of the stock are
separated from the other attributes of ownership; (2) that the voting rights
granted are intended to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to acquire voting control of
the corporation. (5 Fletcher, Cylopedia of the Law on Private Corporations,
section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538)
3.ID.; ID.; ID.; EFFECT AS TO VOTING RIGHTS; CRITERIA TO DISTINGUISH IT
FROM OTHER AGREEMENTS. The law simply provides that a voting trust
agreement is an agreement in writing whereby one or more stockholders of a
corporation consent to transfer his or their shares to a trustee in order to vest in
the latter voting or other rights pertaining to said shares for a period not
exceeding five years upon the fulfillment of statutory conditions and such other
terms and conditions specified in the agreement. The five year-period may be
extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of the
loan.
4.ID.; ID.; ID.; LIMITATIONS THEREON. Under section 59 of the Corporation
Code, supra, a voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his shares as long
as the voting trust agreement is not entered "for the purpose of circumventing
the law against monopolies and illegal combinations in restraint of trade or used
for purposes of fraud." (section 59, 5th paragraph of the Corporation Code).
Thus, the traditional concept of a voting trust agreement primarily intended to
single out a stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal device whereby
a transfer of the stockholders shares is effected subject to the specific provision
of the voting trust agreement. The execution of a voting trust agreement,
therefore, may create a dichotomy between the equitable or beneficial ownership
of the corporate shares of a stockholder, on the one hand, and the legal title
thereto on the other hand.
5.ID.; ID.; ID.; EFFECT THEREOF ON THE STATUS OF TRANSFERRING
STOCKHOLDERS. Both under the old and the new Corporation Codes there is
no dispute as to the most immediate effect of a voting trust agreement on the
status of a stockholder who is a party to its execution from legal title holder or
owner of the shares subject of the voting trust agreement, he becomes the
equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations,
1958 ed., p. 268; Pineda and Carlos, the Law on Private Corporations and
Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The
Corporation Code; Comments, Notes & Selected Cases, 1981 ed., p. 386;
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. 3, 1988 ed., p. 536.
6.ID.; ID.; ID.; RIGHTS GRANTED THEREIN AUTOMATICALLY EXPIRE AT THE
END OF AGREED PERIOD. The 6th paragraph of section 59 of the new
Corporation Code which reads: "Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at the end of the agreed
period, and the voting trust certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors."
7.ID.; ID.; ID.; ELIGIBILITY OF A DIRECTOR UNDER THE OLD CORPORATION
CODE AND UNDER THE NEW CORPORATION CODE. Under the old
Corporation Code, the eligibility of a director, strictly speaking, cannot be
adversely affected by the simple act of such director being a party to a voting
trust agreement inasmuch as he remains owner (although beneficial or equitable
only) of the shares subject of the voting trust agreement pursuant to which a
transfer of the stockholder's shares in favor of the trustee is required (section 36
of the old Corporation Code). No disqualification arises by virtue of the phrase "in
his own right" provided under the old Corporation Code. With the omission of the
phrase "in his own right" the election of trustees and other persons who in fact
are not the beneficial owners of the shares registered in their names on the
books of the corporation becomes formally legalized (see Campos and Lopez-
Campos, supra, p. 296). Hence, this is a clear indication that in order to be
eligible as a director, what is material is the legal title to, not beneficial
ownership of, the stock as appearing on the books of the corporation (2 Fletcher,
Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969] citing
People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
8.ID.; ID.; REPRESENTATIVES THEREOF AUTHORIZED TO RECEIVE COURT
PROCESSES ON ITS BEHALF; RATIONALE. Under section 13, Rule 14 of the
Revised Rules of Court, it is provided that: "Section. 13. Service upon private
domestic corporation or partnership. If the defendant is a corporation
organized under the laws of the Philippines or a partnership duly registered,
service may be made on the president, manager, secretary, cashier, agent or
any of its directors. It is a basic principle in Corporation Law that a corporation
has a personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias
Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58,
December 21, 1990). Thus, the above role on service of processes on a
corporation enumerates the representatives of a corporation who can validly
receive court processes on its behalf. Not every stockholder or officer can bind
the corporation considering the existence of a corporate entity separate from
those who compose it. The rationale of the aforecited rule is that service must be
made on a representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know what he should
do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA
197 1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303
[1978]).
9.ID.; ID.; BOUND ONLY BY ACTS WITHIN THE SCOPE OF ITS OFFICER'S OR
AGENT'S AUTHORITY. The general principle that a corporation can only be
bound by such acts which are within the scope of its officers' or agents'
authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973])
D E C I S I O N
GUTIERREZ, JR., J p:
What is the nature of the voting trust agreement executed between two parties
in this case? Who owns the stocks of the corporation under the terms of the
voting trust agreement? How long can a voting trust agreement remain valid and
effective? Did a director of the corporation cease to be such upon the creation of
the voting trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition for certiorari whether
or not there was proper service of summons on Alfa Integrated Textile Mills
(ALFA, for short), through the petitioners as president and vice-president,
allegedly, of the subject corporation after the execution of a voting trust
agreement between ALFA and the Development Bank of the Philippines (DBP, for
short).
From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the
International Corporate Bank, Inc. against the private respondents who, in turn,
filed a third party complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party
complaint which the Regional Trial Court of Makati, Branch 58 denied in an Order
dated June 27, 1988.

On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the
petitioners' letter informing the court that the summons for ALFA was
erroneously served upon them considering that the management of ALFA had
been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not
authorized to receive summons on behalf of ALFA since the DBP had not taken
over the company which has a separate and distinct corporate personality and
existence.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for
the Declaration of Proper Service of Summons which the trial court granted on
August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration
submitting that the Rule 14, section 13 of the Revised Rules of Court is not
applicable since they were no longer officers of ALFA and the private
respondents should have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e., through publication to effect proper service
upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988,
the private respondents argued that the voting trust agreement dated March 11,
1981 did not divest the petitioners of their positions as president and executive
vice-president of ALFA so that service of summons upon ALFA through the
petitioners as corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons
on ALFA through the petitioners, thus, denying the latter's motion for
reconsideration and requiring ALFA to file its answer through the petitioners as
its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the
petitioners reiterating their stand that by virtue of the voting trust agreement
they ceased to be officers and directors of ALFA, hence, they could no longer
receive summons or any court processes for or on behalf of ALFA. In support of
their second motion for reconsideration, the petitioners attached thereto a copy
of the voting trust agreement between all the stockholders of ALFA (the
petitioners included), on the one hand, and the DBP, on the other hand, whereby
the management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous
Order dated January 2, 1989 and declared that service upon the petitioners who
were no longer corporate officers of ALFA cannot be considered as proper service
of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the
above Order which was affirmed by the court in its Order dated August 14, 1989
denying the private respondents' motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the
private respondent before the public respondent which, nonetheless, resolved to
give due course thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending
petition for certiorari with the public respondent issued an Order declaring as
final the Order dated April 25, 1989. The private respondents in the said Order
were required to take positive steps in prosecuting the third party complaint in
order that the court would not be constrained to dismiss the same for failure to
prosecute. Subsequently, on October 25, 1989 the private respondents filed a
motion for reconsideration on which the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private
respondents' petition for certiorari, the public respondent rendered its decision,
the dispositive portion of which reads:
"WHEREFORE, in view of the foregoing, the orders of respondent judge
dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and
respondent corporation is ordered to file its answer within the
reglementary period." (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of
the public respondent which resolved to deny the same on May 10, 1990. Hence,
the petitioners filed this certiorari petition imputing grave abuse of discretion
amounting to lack of jurisdiction on the part of the public respondent in reversing
the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a
quo, thus, holding that there was proper service of summons on ALFA through
the petitioners.
In the meantime, the public respondent inadvertently made an entry of
judgment on July 16, 1990 erroneously applying the rule that the period during
which a motion for reconsideration has been pending must be deducted from the
15-day period to appeal. However, in its Resolution dated January 3, 1991, the
public respondent set aside the aforestated entry of judgment after further
considering that the rule it relied on applies to appeals from decisions of the
Regional Trial Courts to the Court of Appeals, not to appeals from its decision to
us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp.
249-250)
In their memorandum, the petitioners present the following arguments, to wit:
"(1)that the execution of the voting trust agreement by a stockholder
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholder of his position as director of the
corporation; to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code (Rollo, pp. 270-
273); and
(2)that the petitioners were no longer acting or holding any of the
positions provided under Rule 14, Section 13 of the Rules of Court
authorized to receive service of summons for and in behalf of the private
domestic corporation so that the service of summons on ALFA effected
through the petitioners is not valid and ineffective; to maintain the
respondent Court of Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary to the general
principle that a corporation can only be bound by such acts which are
within the scope of its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant
case, we dwell first on the nature of a voting trust agreement and the
consequent effects upon its creation in the light of the provisions of the
Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
"(a)trust created by an agreement between a group of the stockholders
of a corporation and the trustee or by a group of identical agreements
between individual stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period contingent upon a
certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all
purposes, is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them, of the power
to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19
Am J 2d Corp. sec. 685)."
Under Section 59 of the new Corporation Code which expressly recognizes voting
trust agreements, a more definite meaning may be gathered. The said provision
partly reads:
"Section 59.Voting Trusts. One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time:
Provided, that in the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be for a period
exceeding (5) years but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be issued
in the name of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement."
By its very nature, a voting trust agreement results in the separation of the
voting rights of a stockholder from his other rights such as the right to receive
dividends, the right to inspect the books of the corporation, the right to sell
certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However, in
order to distinguish a voting trust agreement from proxies and other voting pools
and agreements, it must pass three criteria or tests, namely: (1) that the voting
rights of the stock are separated from the other attributes of ownership; (2) that
the voting rights granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to acquire
voting control of the corporation. (5 Fletcher, Cylopedia of the Law on Private
Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F.
Supp. 538)
Under Section 59 of the Corporation Code, supra, a voting trust agreement may
confer upon a trustee not only the stockholder's voting rights but also other
rights pertaining to his shares as long as the voting trust agreement is not
entered "for the purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud." (section 59, 5th
paragraph of the Corporation Code). Thus, the traditional concept of a voting
trust agreement primarily intended to single out a stockholder's right to vote
from his other rights as such and made irrevocable for a limited duration may in
practice become a legal device whereby a transfer of the stockholder's shares is
effected subject to the specific provision of the voting trust agreement.

The execution of a voting trust agreement, therefore, may create a dichotomy
between the equitable or beneficial ownership of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing
whereby one or more stockholders of a corporation consent to transfer his or
their shares to a trustee in order to vest in the latter voting or other rights
pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions specified
in the agreement. The five year-period may be extended in cases where the
voting trust is executed pursuant to a loan agreement whereby the period is
made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the
creation of the voting trust agreement. The petitioners maintain that with the
execution of the voting trust agreement between them and the other
stockholders of ALFA, as one party, and the DBP, as the other party, the former
assigned and transferred all their shares in ALFA to DBP, as trustee. They argue
that by virtue of the voting trust agreement the petitioners can no longer be
considered directors of ALFA. In support of their contention, the petitioners
invoke section 23 of the Corporation Code which provides, in part, that:
"Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director. x
x x." (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement
between ALFA and the DBP had all the more safeguarded the petitioners'
continuance as officers and directors of ALFA inasmuch as the general object of
voting trust is to insure permanency of the tenure of the directors of a
corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right
and status of the transferring stockholder, to wit:
"The 'transferring stockholder', also called the 'depositing stockholder', is
equitable owner of the stocks represented by the voting trust certificates
and the stock reversible on termination of the trust by surrender. It is
said that the voting trust agreement does not destroy the status of the
transferring stockholders as such, and thus render them ineligible as
directors. But a more accurate statement seems to be that for some
purposes the depositing stockholder holding voting trust certificates in
lieu of his stock and being the beneficial owner thereof, remains and is
treated as a stockholder. It seems to be deducible from the case that he
may sue as a stockholder if the suit is in equity or is of an equitable
nature, such as, a technical stockholders' suit in right of the corporation.
[Commercial Laws of the Philippines by Agbayani, Vol. 3, pp. 492-493,
citing 5 Fletcher 326, 327]" (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the
most immediate effect of a voting trust agreement on the status of a stockholder
who is a party to its execution from legal title-holder or owner of the shares
subject of the voting trust agreement, he becomes the equitable or beneficial
owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268;
Pineda and Carlos, the Law on Private Corporations and Corporate Practice, 1969
ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments,
Notes & Selected Cases, 1981 ed., p. 386; Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p.
536). The penultimate question, therefore, is whether the change in his status
deprives the stockholder of the right to qualify as a director under section 23 of
the present Corporation Code which deletes the phrase "in his own
right." Section 30 of the old Code states that:
"Every director must own in his own right at least one share of the
capital stock of the stock corporation of which he is a director, which
stock shall stand in his name on the books of the corporation. A director
who ceases to be the owner of at least one share of the capital stock of
a stock corporation of which is a director shall thereby cease to be a
director . . .." (Underlining supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a party to a
voting trust agreement inasmuch as he remains owner (although beneficial or
equitable only) of the shares subject of the voting trust agreement pursuant to
which a transfer of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises by virtue of
the phrase "in his own right" provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and
other persons who in fact are not the beneficial owners of the shares registered
in their names on the books of the corporation becomes formally legalized (see
Campos and Lopez-Campos, supra, p. 296). Hence, this is a clear indication that
in order to be eligible as a director, what is material is the legal title to, not
beneficial ownership of, the stock as appearing on the books of the corporation
(2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92
[1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust
agreement executed in 1981 disposed of all their shares through assignment and
delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to
own at least one share standing in their names on the books of ALFA as required
under Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners ceased to
be directors. Hence, the transfer of the petitioners' shares to the DBP created
vacancies in their respective positions as directors of ALFA. The transfer of
shares from the stockholders of ALFA to the DBP is the essence of the subject
voting trust agreement as evident from the following stipulations:
"1.The TRUSTORS hereby assign and deliver to the TRUSTEE the
certificate of the shares of stocks owned by them respectively and shall
do all things necessary for the transfer of their respective shares to the
TRUSTEE on the books of ALFA.
2.The TRUSTEE shall issue to each of the TRUSTORS a trust certificate
for the number of shares transferred, which shall be transferable in the
same manner and with the same effect as certificates of stock subject to
the provisions of this agreement;
3.The TRUSTEE shall vote upon the shares of stock at all meetings of
ALFA, annual or special, upon any resolution, matter or business that
may be submitted to any such meeting, and shall possess in that respect
the same powers as owners of the equitable as well as the legal title to
the stock;
4.The TRUSTEE may cause to be transferred to any person one share of
stock for the purpose of qualifying such person as director of ALFA, and
cause a certificate of stock evidencing the share so transferred to be
issued in the name of such person;
xxx xxx xxx
9.Any stockholder not entering into this agreement may transfer his
shares to the same trustee, without the need of revising this agreement,
and this agreement shall have the same force and effect upon that said
stockholder." (CARollo, pp. 137-138; Underlining supplied)
Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stocks covered by the agreement to the DBP
as trustee, the latter became the stockholder of record with respect to the said
shares of stocks. In the absence of a showing that the DBP had caused to be
transferred in their names one share of stock for the purpose of qualifying as
directors of ALFA, the petitioners can no longer be deemed to have retained their
status as officers of ALFA which was the case before the execution of the subject
voting trust agreement. There appears to be no dispute from the records that
DBP has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through
one Elsa A. Guevarra, Vice-President of its Special Accounts Department II,
Remedial Management Group, the petitioners were no longer included in the list
of officers of ALFA "as of April 1982". (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their
claim that the subject voting trust agreement did not deprive the petitioners of
their position as directors of ALFA, the public respondent committed a reversible
error when it ruled that:
". . . while the individual respondents (petitioners Lee and Lacdao) may
have ceased to be president and vice-president, respectively, of the
corporation at the time of service of summons on them on August 21,
1987, they were at least up to that time, still directors . . .".
The aforequoted statement is quite inaccurate in the light of the express terms
of Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA
and the DBP, were aware at the time of the execution of the agreement that by
virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were
stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the voting
trust agreement in question had lapsed in 1986 so that the legal title to the
stocks covered by the said voting trust agreement ipso facto reverted to the
petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of
the new Corporation Code which reads:

"Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period, and the
voting trust certificates as well as the certificates of stock in the name of
the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors."
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the agreement is
contingent upon the fulfillment of certain obligations of ALFA with the DBP. This
is shown by the following portions of the agreement.
"WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit
is secured by a first mortgage on the manufacturing plant of said
company;
WHEREAS, ALFA is also indebted to other creditors for various financial
accommodations and because of the burden of these obligations is
encountering very serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA has offered and the TRUSTEE has accepted participation
in the management and control of the company and to assure the
aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to
execute a voting trust covering their shareholding in ALFA in favor of the
TRUSTEE;
AND WHEREAS, DBP, is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6.This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any
portion thereof, remains outstanding;' (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP
would not have transferred all its rights, titles and interests in ALFA "effective
June 30, 1986" to the national government through the Asset Privatization Trust
(APT) as attested to in a Certification dated January 24, 1989 of the Vice
President of the DBP's Special Accounts Department II. In the same certification,
it is stated that the DBP, from 1987 until 1989, had handled APT's account which
included ALFA's assets pursuant to a management agreement by and between
the DBP and APT. (CA Rollo, p. 142) Hence, there is evidence on record that at
the time of the service of summons on ALFA through the petitioners on August
21, 1987, the voting trust agreement in question was not yet terminated so that
the legal title to the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper
service of summons on ALFA through the petitioners is readily answered in the
negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
"Sec. 13.Service upon private domestic corporation or partnership. If
the defendant is a corporation organized under the laws of the
Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent or any of its directors."
It is a basic principle in Corporation Law that a corporation has a personality
separate and distinct from the officers or members who compose it. (See Sulo ng
Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department
of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990).
Thus, the above rule on service of processes on a corporation enumerates the
representatives of a corporation who can validly receive court processes on its
behalf. Not every stockholder or officer can bind the corporation considering the
existence of a corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know what he should
do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA
197 1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303
[1978]).
The petitioners in this case do not fall under any of the enumerated officers. The
service of summons upon ALFA, through the petitioners, therefore, is not valid.
To rule otherwise, as correctly argued by the petitioners, will contravene the
general principle that a corporation can only be bound by such acts which are
within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52
SCRA 210 [1973].)
WHEREFORE, premises considered, the petition is hereby GRANTED. The
appealed decision dated March 19, 1990 and the Court of Appeals' resolution of
May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October
17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are
REINSTATED.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

45.
SPECIAL SECOND DIVISION
[G.R. No. 144476. April 8, 2003.]
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L.
ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG
ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY
YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT
CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS
OF PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003.]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU,
D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and
INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG,
WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE
T. ONG, and JULIA ONG ALONZO, respondents.
Feria Feria Lugtu La O'Noche for petitioners.
Estelito P. Mendoza for petitioners.
Gonzales Batiller Bilog & Asso. for W. Ong.
Tan Acut & Lopez for respondents.
Aquilino L. Pimentel III for Landlink, etc.
Arturo Santos for Masagana.
SYNOPSIS
In these consolidated petitions, the Ongs moved for reconsideration of the
February 1, 2002 Decision of the Supreme Court affirming with modification the
October 5, 1999 Decision of the Court of Appeals, which in turn upheld, likewise
with modification, the decision of the SEC en banc dated September 11, 1998,
which confirmed the unilateral rescission by the Tius of the Pre-Subscription
Agreement between them and the Ongs. The Tius, on the other hand, moved for
the issuance of a writ of execution of the February 1, 2002 decision of the Court.
Movants Ong argued that specific performance and not rescission was the proper
remedy under the premises. According to them, their alleged breach of the Pre-
Subscription Agreement was, at most casual, which did not justify the rescission
of the contract. They claimed that it was the Tius who were guilty of
fundamental violation in failing to remit funds to FLADC and diverting the same
to their MATTERCO account. They alleged that in view of the findings that both
parties were guilty of violating their Agreement, neither of them could resort to
rescission under the principle of pari delicto. The Ongs further argued that
assuming rescission to be proper, they should be given the proportionate share
of the mall.
In reversing itself, the Court ruled that the Tius could not legally rescind the Pre-
Subscription Agreement. According to the Court, although the Tius were
adversely affected by the Ong's unwillingness to let them assume the positions
of Vice-President and Treasurer of the Corporation, rescission due to breach of
contract was definitely a wrong remedy for their personal grievances. The
Corporation Code, SEC rules and even the Rules of Court provide for appropriate
adequate intra-corporate remedies, other than rescission, in situations like this.
Rescission is certainly not one of them, especially if the party asking for it has no
legal personality to do so and the requirements of the law therefor have not
been met. A contrary doctrine will tread on extremely dangerous ground because
it will allow just any stockholder, for just about any real or imagined offense, to
demand rescission of his subscription and call for the distribution of some part of
the corporate assets to him without complying with the requirements of the
Corporation Code. Hence, the Court held that the Tius, in their personal
capacities, cannot seek the ultimate and extraordinary remedy of rescission of
the subject agreement based on a less than substantial breach of the
subscription contract. Moreover, the Court found that Masagana Citimall would
not be what it has become today were it not for the timely infusion of P190
million by the Ongs in 1994. Without the Ongs, the Tius would have lost
everything they originally invested in said mall. Thus, it would be totally against
all rules of justice, fairness and equity to deprive the Ongs of their interest on
petty and tenuous grounds. Accordingly, the Court declared null and void the
unilateral rescission by the Tius of the subject Pre-Subscription Agreement. It
denied Tius' motion for issuance of a writ of execution for being moot. EHTIcD
SYLLABUS
1.REMEDIAL LAW; MOTIONS; MOTION FOR RECONSIDERATION; NOT PRO-
FORMA FOR THE REASON ALONE THAT IT REITERATES THE ARGUMENTS
EARLIER PASSED UPON AND REJECTED BY THE APPELLATE COURT. The
procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same
adequately raises a valid ground (i.e., the decision or final order is contrary to
law), this Court has to evaluate the merits of the arguments to prevent an unjust
decision from attaining finality. In Security Bank and Trust Company vs. Cuenca,
we ruled that a motion for reconsideration is not pro forma for the reason alone
that it reiterates the arguments earlier passed upon and rejected by the
appellate court. We explained there that a movant may raise the same
arguments, if only to convince this Court that its ruling was erroneous. Moreover,
the rule (that a motion is pro-forma if it only repeats the arguments in the
previous pleadings) will not apply if said arguments were not squarely passed
upon and answered in the decision sought to be reconsidered. In the case at
bar, no ruling was made on some of the petitioner Ongs' arguments. For
instance, no clear ruling was made on why an order distributing corporate assets
and property to the stockholders would not violate the statutory preconditions
for corporate dissolution or decrease of authorized capital stock. Thus, it would
serve the ends of justice to entertain the subject motion for reconsideration since
some important issues therein, although mere repetitions, were not considered
or clearly resolved by this Court.
2.COMMERCIAL LAW; CORPORATION LAW; CORPORATIONS; SUBSCRIPTION
CONTRACT; A PARTY WHO HAS NOT TAKEN PART IN THE TRANSACTION
CANNOT SUE OR BE SUED FOR PERFORMANCE OR FOR CANCELLATION
THEREOF, UNLESS HE SHOWS THAT HE HAS A REAL INTEREST AFFECTED
THEREBY. A subscription contract necessarily involves the corporation as one
of the contracting parties since the subject matter of the transaction is property
owned by the corporation its shares of stock. Thus, the subscription contract
(denominated by the parties as Pre-Subscription Agreement) whereby the Ongs
invested P100 million for 1,000,000 shares of stock was, from the viewpoint of
the law, one between the Ongs and FLADC, not between the Ongs and the Tius.
Otherwise stated, the Tius did not contract in their personal capacities with the
Ongs since they were not selling any of their own shares to them. It was FLADC
that did. Considering therefore that the real contracting parties to the
subscription agreement were FLADC and the Ongs alone, a civil case for
rescission on the ground of breach of contract filed by the Tius m their personal
capacities will not prosper. Assuming it had valid reasons to do so, only FLADC
(and certainly not the Tius) had the legal personality to file suit rescinding the
subscription agreement with the Ongs inasmuch as it was the real party in
interest therein. Article 1311 of the Civil Code provides that "contracts take effect
only between the parties, their assigns and heirs. . ." Therefore, a party who has
not taken part in the transaction cannot sue or be sued for performance or for
cancellation thereof, unless he shows that he has a real interest affected
thereby.
3.ID.; ID.; ID.; ID.; RESCISSION BASED ON BREACH OF CONTRACT NOT
PROPER REMEDY WHERE PARTY ASKING FOR IT HAS NO LEGAL PERSONALITY
TO DO SO AND THE REQUIREMENTS OF THE LAW THEREFOR HAVE NOT BEEN
MET. However, although the Tius were adversely affected by the Ongs'
unwillingness to let them assume their positions, rescission due to breach of
contract is definitely the wrong remedy for their personal grievances. The
Corporation Code, SEC rules and even the Rules of Court provide for appropriate
and adequate intra-corporate remedies, other than rescission, in situations like
this. Rescission is certainly not one of them, specially if the party asking for it has
no legal personality to do so and the requirements of the law therefor have not
been met. A contrary doctrine will tread on extremely dangerous ground because
it will allow just any stockholder, for just about any real or imagined offense, to
demand rescission of his subscription and call for the distribution of some part of
the corporate assets to him without complying with the requirements of the
Corporation Code. Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject agreement based
on a less than substantial breach of subscription contract. Not only are they not
parties to the subscription contract between the Ongs and FLADC; they also have
other available and effective remedies under the law.
4.ID.; ID.; ID.; ID.; RESCISSION THEREOF WILL RESULT IN THE PREMATURE
LIQUIDATION OF THE CORPORATION IN CASE AT BAR. Contrary to the Tius'
allegation, rescission will, in the final analysis, result in the premature liquidation
of the corporation without the benefit of prior dissolution in accordance with
Sections 117, 118, 119 and 120 of the Corporation Code. The Tius maintain that
rescinding the subscription contract is not synonymous to corporate liquidation
because all rescission will entail would be the simple restoration of the status quo
ante and a return to the two groups of their cash and property contributions. We
wish it were that simple. Very noticeable is the fact that the Tius do not explain
why rescission in the instant case will not effectively result in liquidation. The
Tius merely refer in cavalier fashion to the end-result of rescission (which
incidentally is 100% favorable to them) but turn a blind eye to its unfair,
inequitable and disastrous effect on the corporation, its creditors and the
Ongs. DAcaIE
5.ID.; ID.; ID.; ID.; RESCISSION THEREOF UNWARRANTED IN CASE AT BAR.
After all is said and done, no one can close his eyes to the fact that the
Masagana Citimall would not be what it has become today were it not for the
timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts
about it. Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution can truly
pave the way for both groups to enjoy the fruits of their investments
assuming good faith and honest intentions we cannot allow the rescission of
the subject subscription agreement. The Ongs' shortcomings were far from
serious and certainly less than substantial; they were in fact remediable and
correctable under the law. It would be totally against all rules of justice, fairness
and equity to deprive the Ongs of their interests on petty and tenuous grounds.

6.ID.; ID.; ID.; PIERCING THE VEIL OF CORPORATE FICTION; NOT
WARRANTED ABSENT PROOF THAT THE CORPORATION IS BEING USED AS A
CLOAK OR COVER FOR FRAUD OR ILLEGALITY, OR TO WORK INJUSTICE. In
their February 28, 2003 Memorandum, the Tius claim that there are two
contracts embodied in the Pre-Subscription Agreement: a shareholder's
agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and FLADC
regarding the subscription of the parties to the corporation. They point out that
these two component parts form one whole agreement and that their terms and
conditions are intrinsically related and dependent on each other. Thus, the
breach of the shareholders' agreement, which was allegedly the consideration for
the subscription contract, was also a breach of the latter. Aside from the fact
that this is an entirely new angle never raised in any of their previous pleadings
until after the oral arguments on January 29, 2003, we find this argument too
strained for comfort. It is obviously intended to remedy and cover up the Tius'
lack of legal personality to rescind an agreement in which they were personally
not parties-in-interest. Assuming arguendo that there were two "sub-
agreements" embodied in the Pre-Subscription Agreement, this Court fails to see
how the shareholders agreement between the Ongs and Tius can, within the
bounds of reason, be interpreted as the consideration of the subscription
contract between FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged interdependence.
Be that as it may, however, the Tius are nevertheless not the proper parties to
raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC
and the Ongs to enter into the subscription contract. It is the Ongs alone who
can say that. Though FLADC was represented by the Tius in the subscription
contract, FLADC had a separate juridical personality from the Tius. The case
before us does not warrant piercing the veil of corporate fiction since there is no
proof that the corporation is being used "as a cloak or cover for fraud or
illegality, or to work injustice."
7.ID.; ID.; ID.; HAS A SEPARATE JURIDICAL PERSONALITY FROM ITS
STOCKHOLDERS. The Tius also argue that, since the Ongs represent FLADC
as its management, breach by the Ongs is breach by FLADC. This must also fail
because such an argument disregards the separate juridical personality of
FLADC. aDECHI
8.ID.; ID.; ID.; PRESIDENT OF THE CORPORATION IS PROHIBITED FROM
ACTING CONCURRENTLY AS TREASURER THEREOF. The Tius allege that they
were prevented from participating in the management of the corporation. There
is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu,
from exercising her function as such. The records show that the President,
Wilson Ong, supervised the collection and receipt of rentals in the Masagana
Citimall; that he ordered the same to be deposited in the bank; and that he held
on to the cash and properties of the corporation. Section 25 of the Corporation
Code prohibits the President from acting concurrently as Treasurer of the
corporation. The rationale behind the provision is to ensure the effective
monitoring of each officer's separate functions.
9.ID.; ID.; ID.; TRUST FUND DOCTRINE; ELABORATED. All this
notwithstanding, granting but not conceding that the Tius possess the legal
standing to sue for to rescission based on breach of contract, said action will
nevertheless still not prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and property under the
Corporation Code. The Trust Fund Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. vs. Rivera, provides that subscriptions to the
capital stock of a corporation constitute a fund to which the creditors have a
right to look for the satisfaction of their claims. This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce the
authorized capital stock, (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings, and (3) dissolution
and eventual liquidation of the corporation. Furthermore, the doctrine is
articulated in Section 41 on the power of a corporation to acquire its own shares
and in Section 122 on the prohibition against the distribution of corporate assets
and property unless the stringent requirements therefor are complied with.
10.ID.; ID.; ID.; DISTRIBUTION OF CORPORATE ASSETS AND PROPERTY
CANNOT BE MADE TO DEPEND ON THE WHIMS AND CAPRICES OF THE
STOCKHOLDERS, OFFICERS OR DIRECTORS OR EARNEST DESIRE OF THE
COURT A QUO TO PREVENT FURTHER SQUABBLES AND FUTURE LITIGATIONS.
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, or even, for that matter, on the earnest desire of the court a quo "to
prevent further squabbles and future litigations" unless the indispensable
conditions and procedures for the protection of corporate creditors are followed.
Otherwise, the "corporate peace" laudably hoped for by the court will remain
nothing but a dream because this time, it will be the creditors' turn to engage in
"squabbles and litigations" should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine. In the instant case, the rescission
of the Pre-Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution of capital
assets and property of the corporation is allowed.
11.ID.; ID.; ID.; DECREASE OF CAPITAL STOCK; FORMAL REQUIREMENTS; NOT
COMPLIED WITH IN CASE AT BAR. The Tius' case for rescission cannot validly
be deemed a petition to decrease capital stock because such action never
complied with the formal requirements for decrease of capital stock under
Section 33 of the Corporation Code. No majority vote of the board of directors
was ever taken. Neither was there any stockholders meeting at which the
approval of stockholders owning at least two-thirds of the outstanding capital
stock was secured. There was no revised treasurer's affidavit and no proof that
said decrease will not prejudice the creditors' rights. On the contrary, all their
pleadings contained were alleged acts of violations by the Ongs to justify an
order of rescission. Furthermore, it is an improper judicial intrusion into the
internal affairs of the corporation to compel FLADC to file at the SEC a petition
for the issuance of a certificate of decrease of stock. Decreasing a corporation's
authorized capital stock is an amendment of the Articles of Incorporation. It is a
decision that only the stockholders and the directors can make, considering that
they are the contracting parties thereto. In this case, the Tius are actually not
just asking for a review of the legality and fairness of a corporate decision. They
want this Court to make a corporate decision for FLADC. We decline to intervene
and order corporate structural changes not voluntarily agreed upon by its
stockholders and directors. DCSTAH
12.ID.; ID.; ID.; BUSINESS JUDGMENT RULE; EXPLAINED; RATIONALE BEHIND
THE RULE; CASE AT BAR. Truth to tell, a judicial order to decrease capital
stock without the assent of FLADC's directors and stockholders is a violation of
the "business judgment rule" which states that: . . . (C)ontracts intra
vires entered into by the board of directors are binding upon the corporation and
courts will not interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of the minority, as
when plaintiffs aver that the defendants (members of the board), have
concluded a transaction among themselves as will result in serious injury to the
plaintiffs stockholders. The reason behind the rule is aptly explained by Dean
Cesar L. Villanueva, an esteemed author in corporate law, thus: Courts and other
tribunals are wont to override the business judgment of the board mainly
because, courts are not in the business of business, and the laissez fairerule or
the free enterprise system prevailing in our social and economic set-up dictates
that it is better for the State and its organs to leave business to the
businessmen; especially so, when courts are ill-equipped to make business
decisions. More importantly, the social contract in the corporate family to decide
the course of the corporate business has been vested in the board and not with
courts. Apparently, the Tius do not realize the illegal consequences of seeking
rescission and control of the corporation to the exclusion of the Ongs. Such an
act infringes on the law on reduction of capital stock. Ordering the return and
distribution of the Ongs' capital contribution without dissolving the corporation or
decreasing its authorized capital stock is not only against the law but is also
prejudicial to corporate creditors who enjoy absolute priority of payment over
and above any individual stockholder thereof.
R E S O L U T I O N
CORONA, J p:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of
petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William
Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partial
reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a
reversal of this Court's Decision, 1 dated February 1, 2002, in G.R.
Nos. 144476 and 144629 affirming with modification the decision 2 of the Court
of Appeals, dated October 5, 1999, which in turn upheld, likewise with
modification, the decision of the SEC en banc, dated September 11, 1998; and
(3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y.
Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu
(the Tius) of our February 1, 2002 Decision. DaAETS

A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened
with stoppage and incompletion when its owner, the First Landlink Asia
Development Corporation (FLADC), which was owned by the Tius, encountered
dire financial difficulties. It was heavily indebted to the Philippine National Bank
(PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots
where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong,
Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to
invest in FLADC. Under the Pre-Subscription Agreement they entered into, the
Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs
were to subscribe to 1,000,000 shares at a par value of P100.00 each while the
Tius were to subscribe to an additional 549,800 shares at P100.00 each in
addition to their already existing subscription of 450,200 shares. Furthermore,
they agreed that the Tius were entitled to nominate the Vice-President and the
Treasurer plus five directors while the Ongs were entitled to nominate the
President, the Secretary and six directors (including the chairman) to the board
of directors of FLADC. Moreover, the Ongs were given the right to manage and
operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to
1,000,000 shares of stock while the Tius committed to contribute to FLADC a
four-storey building and two parcels of land respectively valued at P20 million
(for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for
49,800 shares) to cover their additional 549,800 stock subscription therein. The
Ongs paid in another P70 million 3 to FLADC and P20 million to the Tius over and
above their P100 million investment, the total sum of which (P190 million) was
used to settle the P190 million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-
Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit to
them the FLADC shares covering their real property contributions; (2) preventing
David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their
duties as Vice-President and Treasurer, respectively, and (3) refusing to give
them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to
assume the positions and perform the duties of Vice-President and Treasurer,
respectively, but the Ongs prevented them from doing so. Furthermore, the
Ongs refused to provide them the space for their executive offices as Vice-
President and Treasurer. Finally, and most serious of all, the Ongs refused to
give them the shares corresponding to their property contributions of a four-
story building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence,
they felt they were justified in setting aside their Pre-Subscription Agreement
with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact
assumed the positions of Vice-President and Treasurer of FLADC but that it was
they who refused to comply with the corporate duties assigned to them. It was
the contention of the Ongs that they wanted the Tius to sign the checks of the
corporation and undertake their management duties but that the Tius shied away
from helping them manage the corporation. On the issue of office space, the
Ongs pointed out that the Tius did in fact already have existing executive offices
in the mall since they owned it 100% before the Ongs came in. What the Tius
really wanted were new offices which were anyway subsequently provided to
them. On the most important issue of their alleged failure to credit the Tius with
the FLADC shares commensurate to the Tius' property contributions, the Ongs
asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P570,690 for
capital gains tax and documentary stamp tax. Without the payment thereof, the
SEC would not approve the valuation of the Tius' property contribution (as
opposed to cash contribution). This, in turn, would make it impossible to secure
a new Transfer Certificate of Title (TCT) over the property in FLADC's name. In
any event, it was easy for the Tius to simply pay the said transfer taxes and,
after the new TCT was issued in FLADC's name, they could then be given the
corresponding shares of stocks. On the 151 square-meter property, the Tius
never executed a deed of assignment in favor of FLADC. The Tius initially
claimed that they could not as yet surrender the TCT because it was "still being
reconstituted" by the Lichaucos from whom the Tius bought it. The Ongs later on
discovered that FLADC had in reality owned the property all along, even before
their Pre-Subscription Agreement was executed in 1994. This meant that the 151
square-meter property was at that time already the corporate property of FLADC
for which the Tius were not entitled to the issuance of new shares of stock. TEAICc
The controversy finally came to a head when this case was commenced 4 by the
Tius on February 27, 1996 at the Securities and Exchange Commission (SEC),
seeking confirmation of their rescission of the Pre-Subscription Agreement. After
hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a
decision on May 19, 1997 confirming the rescission sought by the Tius, as
follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of
the Pre-Subscription Agreement, and consequently ordering:
(a)The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b)FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for
1,000,000 shares of FLADC;
(c)The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to
conform with this decision;
(d)The defendants to surrender to the plaintiffs TCT Nos. 132493,
132494, 134066 (formerly 15587), 135325 and 134204
and any other title or deed in the name of FLADC, failing in
which said titles are declared void;
(e)The Register of Deeds to issue new certificates of titles in favor
of the plaintiffs and to cancel the annotation of the Pre-
Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587);
(f)The individual defendants, individually and collectively, their
agents and representatives, to desist from exercising or
performing any and all acts pertaining to stockholder,
director or officer of FLADC or in any manner intervene in
the management and affairs of FLADC;
(g)The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00
and all interest payments as well as any payments on
principal received from the P70,000,000.00 inexistent loan,
plus the legal rate of interest thereon from the date of
their receipt of such payment until fully paid;
(h)The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants
plus legal interest from the date of receipt of such amount.
SO ORDERED. 5
On motion of both parties, the above decision was partially reconsidered but only
insofar as the Ongs' P70 million was declared not as a premium on capital stock
but an advance (loan) by the Ongs to FLADC and that the imposition of interest
on it was correct. 6
Both parties appealed 7 to the SEC en banc which rendered a decision on
September 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer.
The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but
reverted to classifying the P70 million paid by the Ongs as premium on capital
and not as a loan or advance to FLADC, hence, not entitled to earn interest. 8
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999,
thus:
WHEREFORE, the Order dated September 11, 1998 issued by the
Securities and Exchange Commission En Banc in SEC AC CASE NOS. 598
and 601 confirming the rescission of the Pre-Subscription Agreement
dated August 15, 1994 is hereby AFFIRMED, subject to the following
MODIFICATIONS:
1.The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash
and property contributions of the parties therein.
(a)Ong Group P100,000,000.00 cash contribution for one (1)
million shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
(b)Tiu Group:
1)P45,020,000.00 original cash contribution for 450,200
shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
2)A four-storey building described in Transfer Certificate of
Title No. 15587 in the name of Intraland Resources
and Development Corporation valued at
P20,000,000.00 for 200,000 shares in First Landlink
Asia Development Corporation at a par value of
P100.00 per share;
3)A 1,902.30 square-meter parcel of land covered by
Transfer Certificate of Title No. 15587 in the name
of Masagana Telamart, Inc. valued at
P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of
P100.00 per share.
2)Whatever remains of the assets of the First Landlink Asia Development
Corporation and the management thereof is (sic) hereby ordered
transferred to the Tiu Group.
3)First Landlink Asia Development Corporation is hereby ordered to pay
the amount of P70,000,000.00 that was advanced to it by the
Ong Group upon the finality of this decision. Should the former
incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.
4)The Tius are hereby ordered to pay the amount of P20,000,000.00
loaned them by the Ongs upon the finality of this decision. Should
the former incur in delay in the payment thereof, it shall pay the
legal interest thereon pursuant to Article 2209 of the New Civil
Code.

SO ORDERED. 9
An interesting sidelight of the CA decision was its description of the rescission
made by the Tius as the "height of ingratitude" and as "pulling a fast one" on the
Ongs. The CA moreover found the Tius guilty of withholding FLADC funds from
the Ongs and diverting corporate income to their own MATTERCO
account. 10 These were findings later on affirmed in our own February 1, 2002
Decision which is the subject of the instant motion for reconsideration. 11
But there was also a strange aspect of the CA decision. The CA concluded that
both the Ongs and the Tius were in pari delicto(which would not have legally
entitled them to rescission) but, "for practical considerations," that is, their
inability to work together, it was best to separate the two groups by rescinding
the Pre-Subscription Agreement, returning the original investment of the Ongs
and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate
petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs
argued that the Tius may not properly avail of rescission under Article 1191 of
the Civil Code considering that the Pre-Subscription Agreement did not provide
for reciprocity of obligations; that the rights over the subject matter of the
rescission (capital assets and properties) had been acquired by a third party
(FLADC); that they did not commit a substantial and fundamental breach of their
agreement since they did not prevent the Tius from assuming the positions of
Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000
shares corresponding to the 1,902.30 square-meter property covered by TCT No.
134066 (formerly 15587) was due to the refusal of the Tius to pay the required
transfer taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADC's name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate court even for
so called "practical considerations" or even to prevent "further squabbles and
numerous litigations," since the same are not valid grounds under the
Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant
interest on their P70 million and P20 million advances to FLADC and David S. Tiu,
respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius,
on the other hand, contended that the rescission should have been limited to the
restitution of the parties' respective investments and not the liquidation of FLADC
based on the erroneous perception by the court that: the Masagana Citimall was
threatened with incompletion since FLADC was in financial distress; that the Tius
invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that
they violated the Pre-Subscription Agreement when it was the Lichaucos and not
the Tius who executed the deed of assignment over the 151 square-meter
property commensurate to 49,800 shares in FLADC thereby failing to pay the
price for the said shares; that they did not turn over to the Ongs the entire
amount of FLADC funds; that they were diverting rentals from lease contracts
due to FLADC to their own MATTERCO account; that the P70 million paid by the
Ongs was an advance and not a premium on capital; and that, by rescinding the
Pre-Subscription Agreement, they wanted to wrestle away the management of
the mall and prevent the Ongs from enjoying the profits of their P190 million
investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the
instant motions), affirming the assailed decision of the Court of Appeals but with
the following modifications:
1.the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed from
the time of judicial demand which is from April 23, 1996;
2.the P70 million advanced by the Ongs to the FLADC shall earn interest
at ten percent (10%) per annum to be computed from the date
of the FLADC Board Resolution which is June 19, 1996; and
3.the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their
respective obligations under the Pre-Subscription Agreement. The Ongs
prevented the Tius from assuming the positions of Vice-President and Treasurer
of the corporation. On the other hand, the Decision established that the Tius
failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals
due to FLADC to their MATTERCO account. Consequently, it held that rescission
was not possible since both parties were in pari delicto. However, this Court
agreed with the Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would only lead
to further "squabbles and numerous litigations" between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a
Writ of Execution on the grounds that: (a) the SEC order had become executory
as early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the
Rules of Court; (b) any further delay would be injurious to the rights of the Tius
since the case had been pending for more than six years; and (c) the SEC no
longer had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code).
The Ongs filed their opposition, contending that the Decision dated February 1,
2002 was not yet final and executory; that no good reason existed to issue a
warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC
retained jurisdiction over pending cases involving intra-corporate disputes
already submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution,
the Ongs filed their own "Motion for Reconsideration; Alternatively, Motion for
Modification (of the February 1, 2002 Decision)" on March 15, 2002, raising two
main points: (a) that specific performance and not rescission was the proper
remedy under the premises; and (b) that, assuming rescission to be proper, the
subject decision of this Court should be modified to entitle movants to their
proportionate share in the mall.
On their first point (specific performance and not rescission was the proper
remedy), movants Ong argue that their alleged breach of the Pre-Subscription
Agreement was, at most, casual which did not justify the rescission of the
contract. They stress that providing appropriate offices for David S. Tiu and Cely
Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their
obligations under the Pre-Subscription Agreement since the said obligation (to
provide executive offices) pertained to FLADC itself. Such obligation arose from
the relations between the said officers and the corporation and not any of the
individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to
credit shares of stock in favor of the Tius for their property contributions also
pertained to the corporation and not to the Ongs. Just the same, it could not be
done in view of the Tius' refusal to pay the necessary transfer taxes which in
turn resulted in the inability to secure SEC approval for the property
contributions and the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering
into the Pre-Subscription Agreement in 1994 was to raise the P190 million
desperately needed for the payment of FLADC's loan to PNB. Hence, in this light,
the alleged failure to provide office space for the two corporate officers was no
more than an inconsequential infringement. For rescission to be justified, the law
requires that the breach of contract should be so "substantial or fundamental" as
to defeat the primary objective of the parties in making the agreement. At any
rate, the Ongs claim that it was the Tius who were guilty of fundamental
violations in failing to remit funds due to FLADC and diverting the same to their
MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties
were guilty of violating the Pre-Subscription Agreement, neither of them could
resort to rescission under the principle of pari delicto. In addition, since the cash
and other contributions now sought to be returned already belong to FLADC, an
innocent third party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be
given their proportionate share of the mall), movants Ong vehemently take
exception to the second item in the dispositive portion of the questioned Decision
insofar as it decreed that whatever remains of the assets of FLADC and the
management thereof (after liquidation) shall be transferred to the Tius. They
point out that the mall itself, which would have been foreclosed by PNB if not for
their timely investment of P190 million in 1994 and which is now worth about P1
billion mainly because of their efforts, should be included in any partition and
distribution. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted to
the unjust enrichment of the Tius and ran contrary to our own pronouncement
that the act of the Tius in unilaterally rescinding the agreement was "the height
of ingratitude" and an attempt "to pull a fast one" as it would prevent the Ongs
from enjoying the fruits of their P190 million investment in FLADC. It also
contravenes this Court's assurance in the questioned Decision that the Ongs and
Tius "will have a bountiful return of their respective investments derived from the
profits of the corporation."

Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8,
2002, pointing out that there was no violation of the Pre-Subscription Agreement
on the part of the Ongs; that, after more than seven years since the mall began
its operations, rescission had become not only impractical but would also
adversely affect the rights of innocent parties; and that it would behighly
inequitable and unfair to simply return the P100 million investment of the Ongs
and give the remaining assets now amounting to about P1 billion to the Tius. AISHcD
The Tius, in their opposition to the Ongs' motion for reconsideration, counter
that the arguments therein are a mere re-hash of the contentions in the Ongs'
petition for review and previous motion for reconsideration of the Court of
Appeals' decision. The Tius compare the arguments in said pleadings to prove
that the Ongs do not raise new issues, and, based on well-settled
jurisprudence, 12 the Ongs' present motion is therefore pro forma and did not
prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral
arguments on the respective positions of the parties. On February 27, 2003, Dr.
Willie Ong and the rest of the movants Ong filed their respective memoranda. On
February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission, 13 this Court, through then Chief Justice Felix
V. Makasiar, said that its members may and do change their minds, after a re-
study of the facts and the law, illuminated by a mutual exchange of
views.14 After a thorough re-examination of the case, we find that our Decision
of February 1, 2002 overlooked certain aspects which, if not corrected, will cause
extreme and irreparable damage and prejudice to the Ongs, FLADC and its
creditors.
The procedural rule on pro forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same
adequately raises a valid ground 15 (i.e., the decision or final order is contrary to
law), this Court has to evaluate the merits of the arguments to prevent an unjust
decision from attaining finality. In Security Bank and Trust Company vs.
Cuenca, 16 we ruled that a motion for reconsideration is not pro forma for the
reason alone that it reiterates the arguments earlier passed upon and rejected by
the appellate court. We explained there that a movant may raise the same
arguments, if only to convince this Court that its ruling was erroneous. Moreover,
the rule (that a motion is pro formaif it only repeats the arguments in the
previous pleadings) will not apply if said arguments were not squarely passed
upon and answered in the decision sought to be reconsidered. In the case at
bar, no ruling was made on some of the petitioner Ongs' arguments. For
instance, no clear ruling was made on why an order distributing corporate assets
and property to the stockholders would not violate the statutory preconditions
for corporate dissolution or decrease of authorized capital stock. Thus, it would
serve the ends of justice to entertain the subject motion for reconsideration since
some important issues therein, although mere repetitions, were not considered
or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the
Pre-Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000
shares with the Tius owning 450,200 shares representing the paid-up capital.
When the Tius invited the Ongs to invest in FLADC as stockholders, an increase
of the authorized capital stock became necessary to give each group equal (50-
50) shareholdings as agreed upon in the Pre-Subscription Agreement. The
authorized capital stock was thus increased from 500,000 shares to 2,000,000
shares with a par value of P100 each, with the Ongs subscribing to 1,000,000
shares and the Tius to 549,800 more shares in addition to their 450,200 shares
to complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these
were unissued shares, the parties' Pre-Subscription Agreement was in fact a
subscription contract as defined under Section 60, Title VII of the Corporation
Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract (Italics
supplied).
A subscription contract necessarily involves the corporation as one of the
contracting parties since the subject matter of the transaction is property owned
by the corporation its shares of stock. Thus, the subscription contract
(denominated by the parties as a Pre-Subscription Agreement) whereby the
Ongs invested P100 million for 1,000,000 shares of stock was, from the
viewpoint of the law, one between the Ongs and FLADC, not between the Ongs
and the Tius. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own shares to
them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on the
ground of breach of contract filed by the Tius in their personal capacities will not
prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not
the Tius) had the legal personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real party in interest
therein. Article 1311 of the Civil Code provides that "contracts take effect only
between the parties, their assigns and heirs. . ." Therefore, a party who has not
taken part in the transaction cannot sue or be sued for performance or for
cancellation thereof, unless he shows that he has a real interest affected
thereby. 17
In their February 28, 2003 Memorandum, the Tius claim that there are two
contracts embodied in the Pre-Subscription Agreement: a shareholder's
agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and FLADC
regarding the subscription of the parties to the corporation. They point out that
these two component parts form one whole agreement and that their terms and
conditions are intrinsically related and dependent on each other. Thus, the
breach of the shareholders' agreement, which was allegedly the consideration for
the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find
this argument too strained for comfort. It is obviously intended to remedy and
cover up the Tius' lack of legal personality to rescind an agreement in which they
were personally not parties-in-interest. Assuming arguendo that there were two
"sub-agreements" embodied in the Pre-Subscription Agreement, this Court fails
to see how the shareholders agreement between the Ongs and Tius can, within
the bounds of reason, be interpreted as the consideration of the subscription
contract between FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged interdependence.
Be that as it may, however, the Tius are nevertheless not the proper parties to
raise this point because they were not parties to the subscription contract
between FLADC and the Ongs. Thus, they are not in a position to claim that the
shareholders agreement between them and the Ongs was what induced FLADC
and the Ongs to enter into the subscription contract. It is the Ongs alone who
can say that. Though FLADC was represented by the Tius in the subscription
contract, FLADC had a separate juridical personality from the Tius. The case
before us does not warrant piercing the veil of corporate fiction since there is no
proof that the corporation is being used "as a cloak or cover for fraud or
illegality, or to work injustice."18
The Tius also argue that, since the Ongs represent FLADC as its management,
breach by the Ongs is breach by FLADC. This must also fail because such an
argument disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management
of the corporation. There is evidence that the Ongs did prevent the rightfully
elected Treasurer, Cely Tiu, from exercising her function as such. The records
show that the President, Wilson Ong, supervised the collection and receipt of
rentals in the Masagana Citimall; 19 that he ordered the same to be deposited in
the bank; 20 and that he held on to the cash and properties of the
corporation. 21 Section 25 of the Corporation Code prohibits the President from
acting concurrently as Treasurer of the corporation. The rationale behind the
provision is to ensure the effective monitoring of each officer's separate
functions.
However, although the Tius were adversely affected by the Ongs' unwillingness
to let them assume their positions, rescission due to breach of contract is
definitely the wrong remedy for their personal grievances. The Corporation Code,
SEC rules and even the Rules of Court provide for appropriate and adequate
intra-corporate remedies, other than rescission, in situations like this. Rescission
is certainly not one of them, specially if the party asking for it has no legal
personality to do so and the requirements of the law therefor have not been
met. A contrary doctrine will tread on extremely dangerous ground because it
will allow just any stockholder, for just about any real or imagined offense, to
demand rescission of his subscription and call for the distribution of some part of
the corporate assets to him without complying with the requirements of the
Corporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less
than substantial breach of subscription contract. Not only are they not parties to
the subscription contract between the Ongs and FLADC; they also have other
available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the
legal standing to sue for rescission based on breach of contract, said action will
nevertheless still not prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and property under the
Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case
of Philippine Trust Co. vs. Rivera, 22 provides that subscriptions to the capital
stock of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. 23 This doctrine is the underlying
principle in the procedure for the distribution of capital assets, embodied in the
Corporation Code, which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce the
authorized capital stock, 24 (2) purchase of redeemable shares by the
corporation, regardless of the existence of unrestricted retained earnings, 25 and
(3) dissolution and eventual liquidation of the corporation. Furthermore, the
doctrine is articulated in Section 41 on the power of a corporation to acquire its
own shares 26 and in Section 122 on the prohibition against the distribution of
corporate assets and property unless the stringent requirements therefor are
complied with.27
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, or even, for that matter, on the earnest desire of the court a quo "to
prevent further squabbles and future litigations" unless the indispensable
conditions and procedures for the protection of corporate creditors are followed.
Otherwise, the "corporate peace" laudably hoped for by the court will remain
nothing but a dream because this time, it will be the creditors' turn to engage in
"squabbles and litigations" should the court order an unlawful distribution in
blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is
allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code. 28 The
Tius maintain that rescinding the subscription contract is not synonymous to
corporate liquidation because all rescission will entail would be the simple
restoration of the status quo ante and a return to the two groups of their cash
and property contributions. We wish it were that simple. Very noticeable is the
fact that the Tius do not explain why rescission in the instant case will not
effectively result in liquidation. The Tius merely refer in cavalier fashion to the
end-result of rescission (which incidentally is 100% favorable to them) but turn a
blind eye to its unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of
the agreement will not result in an unauthorized liquidation of the corporation
because their case is actually a petition to decrease capital stock pursuant to
Section 38 of the Corporation Code. Section 122 of the law provides that
"(e)xcept by decrease of capital stock . . ., no corporation shall distribute any of
its assets or property except upon lawful dissolution and after payment of all its
debts and liabilities." The Tius claim that their case for rescission, being a
petition to decrease capital stock, does not violate the liquidation procedures
under our laws. All that needs to be done, according to them, is for this Court to
order (1) FLADC to file with the SEC a petition to issue a certificate of decrease
of capital stock and (2) the SEC to approve said decrease. This new argument
has no merit.
The Tius' case for rescission cannot validly be deemed a petition to decrease
capital stock because such action never complied with the formal requirements
for decrease of capital stock under Section 33 of the Corporation Code. No
majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-
thirds of the outstanding capital stock was secured. There was no revised
treasurer's affidavit and no proof that said decrease will not prejudice the
creditors' rights. On the contrary, all their pleadings contained were alleged acts
of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a
certificate of decrease of stock. Decreasing a corporation's authorized capital
stock is an amendment of the Articles of Incorporation. It is a decision that only
the stockholders and the directors can make, considering that they are the
contracting parties thereto. In this case, the Tius are actually not just asking for
a review of the legality and fairness of a corporate decision. They want this Court
to make a corporate decision for FLADC. We decline to intervene and order
corporate structural changes not voluntarily agreed upon by its stockholders and
directors.
Truth to tell, a judicial order to decrease capital stock without the assent of
FLADC's directors and stockholders is a violation of the "business judgment rule"
which states that:
. . . (C)ontracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such
contracts are so unconscionable and oppressive as to amount to wanton
destruction to the rights of the minority, as when plaintiffs aver that the
defendants (members of the board), have concluded a transaction
among themselves as will result in serious injury to the plaintiffs
stockholders. 29
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment
of the board mainly because, courts are not in the business of business,
and the laissez faire rule or the free enterprise system prevailing in our
social and economic set-up dictates that it is better for the State and its
organs to leave business to the businessmen; especially so, when courts
are ill-equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the corporate
business has been vested in the board and not with courts. 30
Apparently, the Tius do not realize the illegal consequences of seeking rescission
and control of the corporation to the exclusion of the Ongs. Such an act infringes
on the law on reduction of capital stock. Ordering the return and distribution of
the Ongs' capital contribution without dissolving the corporation or decreasing its
authorized capital stock is not only against the law but is also prejudicial to
corporate creditors who enjoy absolute priority of payment over and above any
individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult
to understand. If rescission is denied, will injustice be inflicted on any of the
parties? The answer is no because the financial interests of both the Tius and the
Ongs will remain intact and safe within FLADC. On the other hand, if rescission is
granted, will any of the parties suffer an injustice? Definitely yes because the
Ongs will find themselves out in the streets with nothing but the money they had
in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere
from P450 million to P900 million 31 but will also take over an extremely
profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our
Decision dated February 1, 2002, stated that both groups were in pari delicto,
meaning, that both the Tius and the Ongs committed breaches of the Pre-
Subscription Agreement. This may be true to a certain extent but, judging from
the comparative gravity of the acts separately committed by each group, we find
that the Ongs' acts were relatively tame vis--vis those committed by the Tius in
not surrendering FLADC funds to the corporation and diverting corporate income
to their own MATTERCO account. The Ongs were right in not issuing to the Tius
the shares corresponding to the four-story building and the 1,902.30 square-
meter lot because no title for it could be issued in FLADC's name, owing to the
Tius' refusal to pay the transfer taxes. And as far as the 151 square-meter lot
was concerned, why should FLADC issue additional shares to the Tius for
property already owned by the corporation and which, in the final analysis, was
already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of
Appeals, to "pull a fast one" on the Ongs because that was where the problem
precisely started. It is clear that, when the finances of FLADC improved
considerably after the equity infusion of the Ongs, the Tius started planning to
take over the corporation again and exclude the Ongs from it. It appears that the
Tius' refusal to pay transfer taxes might not have really been at all unintentional
because, by failing to pay that relatively small amount which they could easily
afford, the Tius should have expected that they were not going to be given the
corresponding shares. It was, from every angle, the perfect excuse for
blackballing the Ongs. In other words, the Tius created a problem then used that
same problem as their pretext for showing their partners the door. In the
process, they stood to be rewarded with a bonanza of anywhere between P450
million to P900 million in assets (from an investment of only P45 million which
was nearly foreclosed by PNB), to the extreme and irreparable damage of the
Ongs, FLADC and its creditors.

After all is said and done, no one can close his eyes to the fact that the
Masagana Citimall would not be what it has become today were it not for the
timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts
about it. Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution can truly
pave the way for both groups to enjoy the fruits of their investments
assuming good faith and honest intentions we cannot allow the rescission of
the subject subscription agreement. The Ongs' shortcomings were far from
serious and certainly less than substantial; they were in fact remediable and
correctable under the law. It would be totally against all rules of justice, fairness
and equity to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of
petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,
Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated
March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for
Confirmation of the Rescission of the Pre-Subscription Agreement docketed as
SEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateral
rescission by the Tius of the subject Pre-Subscription Agreement, dated August
15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y.
Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and
the SEC en banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
Bellosillo, Quisumbing and Callejo, Sr., JJ., concur.
Footnotes

46.
FIRST DIVISION
[G.R. No. 126891. August 5, 1998.]
LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND
CO. INC., SY GUIOK, and ESTATE OF ALFONSO
LIM, respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles for petitioner.
Manuel M. Gonzales for private respondent.
SYNOPSIS
Private respondent Sy Guiok and Alfonso Sy Lim secured a loan from petitioner
Lim Tay, securing their loans with contracts of pledge covering their respective
shares of stock in Go Fay & Company, Inc. Under said contracts of pledge, Guiok
and Sy Lim agreed that in the event of their failure to pay the amount within the
period agreed upon, the pledgee, Lim Tay, was authorized to foreclose the
pledge upon the said shares of stock.
Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank
and delivered the same to Lim Tay. Guiok and Lim, however, failed to pay their
respective loans to Lim Tay.
Lim Tay filed a petition for mandamus with the Securities and Exchange
Commission (SEC) against Go Fay & Company, praying that an order be issued
directing the corporate secretary of the company to register the stock transfers
and issue new certificates in his favor. Lim Tay alleged in his petition that the
controversy between him as stockholder and the company was intra-corporate in
view of the obstinate refusal of the corporate secretary of the company to record
the transfer of the shares of stock of Guiok and Sy Lim in favor of petitioner.
The registration of shares in a stockholder's name, the issuance of stock
certificates, and the right to receive dividends which pertain to the said shares
are all rights that flow from ownership. The determination of whether or not a
shareholder is entitled to exercise the preceding rights falls within the jurisdiction
of the SEC. However, if ownership of the shares is not clearly established and is
still unresolved at the time the action for mandamus is filed, then jurisdiction lies
with the regular courts.
Manifestly, petitioner's complaint by itself did not contain any prima
facie showing that petitioner was the owner of the shares of stocks. Quite the
contrary, it demonstrated that he was merely a pledgee, not an owner. The
contractual stipulation which was part of the complaint, shows that petitioner
was merely authorized to foreclose the pledge upon maturity of the loans, not to
own them. Accordingly, it failed to lay down a sufficient basis for the SEC to
exercise jurisdiction over the controversy.
SYLLABUS
1.MERCANTILE LAW; CORPORATION LAW; OWNERSHIP OF SHARES OF
STOCKS; JURISDICTION LIES WITH REGULAR COURTS AND NOT WITH THE
SEC; REASON. The registration of shares in a stockholder's name, the
issuance of stock certificates, and the right to receive dividends which pertain to
the said shares are all rights that flow from ownership. The determination of
whether or not a shareholder is entitled to exercise the above-mentioned rights
falls within the jurisdiction of the SEC. However, if ownership of the shares is not
clearly established and is still unresolved at the time the action for mandamus is
filed, then jurisdiction lies with the regular courts. As a general rule, the
jurisdiction of a court or tribunal over the subject matter is determined by the
allegations in the complaint. In the present case, however, petitioner's claim that
he was the owner of the shares of stock in question has no prima facie basis. In
his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. However,
the contracts of pledge, which were made integral parts of the Complaint,
contain this common proviso: In the event of the failure of the PLEDGOR to pay
the amount within a period of six (6) months from the date hereof, the PLEDGEE
is hereby authorized to foreclose the pledge upon the said shares of stock . . .."
2.REMEDIAL LAW; CIVIL PROCEDURE; MANDAMUS; MANDAMUS WILL NOT
ISSUE TO ESTABLISH A RIGHT. Petitioner has failed to establish a clear legal
right. Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have any
ownership rights at all. At the time petitioner instituted his suit at the SEC, his
ownership claim had no prima facie leg to stand on. At best, his contention was
disputable and uncertain. Mandamus will not issue to establish a legal right, but
only to enforce one that is already clearly established.
3.CIVIL LAW; CREDIT TRANSACTIONS; PLEDGE; PETITIONER DID NOT
ACQUIRE OWNERSHIP OF THE SHARES BY VIRTUE OF THE PLEDGE. There is
no showing that petitioner made any attempt to foreclose or sell the shares
through public or private auction, as stipulated in the contracts of pledge and as
required by Article 2112 of the Civil Code. Therefore, ownership of the shares
could not have passed to him. The pledgor remains the owner during the
pendency of the pledge and prior to foreclosure and sale, as explicitly provided
by Article 2103 of the same Code: "Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof. Nevertheless, the creditor may bring
the actions which pertain to the owner of the thing pledged in order to recover it
from, or defend it against a third person."
4.ID.; PRESCRIPTION; PETITIONER'S POSSESSION OF THE SHARES OF STOCK
AS A PLEDGEE CANNOT RIPEN INTO OWNERSHIP BY PRESCRIPTION.
Petitioner's contention that he can be deemed to have acquired ownership over
the certificates of stock through extraordinary prescription, as provided for in
Article 1132 of the Civil Code, is untenable. What is required by Article 1132 is
possession in the concept of an owner. In the present case, petitioner's
possession of the stock certificates came about because they were delivered to
him pursuant to the contracts of pledge. His possession as a pledgee cannot
ripen into ownership by prescription.
5.ID.; NOVATION; NOVATION OF A CONTRACT MUST NOT BE PRESUMED.
Neither did petitioner acquire the shares by virtue of a novation of the contract
of pledge. Novation is defined as "the extinguishment of an obligation by a
subsequent one which terminates it, either by changing its object or principal
conditions, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor." Novation of a contract
must not be presumed. "In the absence of an express agreement, novation takes
place only when the old and the new obligations are incompatible on every
point."
D E C I S I O N
PANGANIBAN, J p:
The duty of a corporate secretary to record transfers of stocks is ministerial.
However, he cannot be compelled to do so when the transferee's title to said
shares has no prima facie validity or is uncertain. More specifically, a pledgor,
prior to foreclosure and sale, does not acquire ownership rights over the pledged
shares and thus cannot compel the corporate secretary to record his alleged
ownership of such shares on the basis merely of the contract of pledge. Similarly,
the SEC does not acquire jurisdiction over a dispute when a party's claim to
being a shareholder is, on the face of the complaint, invalid or inadequate or is
otherwise negated by the very allegations of such complaint. Mandamus will not
issue to establish a right, but only to enforce one that is already established. LibLex
Statement of the Case
These are the principles used by this Court in resolving this Petition for Review
on Certiorari before us, assailing the October 24, 1996 Decision 1 of the Court of
Appeals 2 in CA-GR SP No. 40832, the dispositive portion of which reads:
"IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is
DENIED DUE COURSE and is hereby DISMISSED. With costs against the
[p]etitioner." 3
By the foregoing disposition, the Court of Appeals effectively affirmed the March
7, 1996 Decision 4 of the Securities and Exchange Commission (SEC) en banc:
"WHEREFORE, in view of all the foregoing, judgment is hereby rendered
dismissing the appeal on the ground that mandamus will only issue upon
a clear showing of ownership over the assailed shares of stock, [t]he
determination of which, on the basis of the foregoing facts, is within the
jurisdiction of the regular courts and not with the SEC." 5
The SEC en banc upheld the August 16, 1993 Decision 6 of SEC Hearing Officer
Rolando C. Malabonga, which dismissed the action for mandamus filed by
petitioner.
The Facts
As found by the Court of Appeals, the facts of the case are as follows:
" . . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan
from the [p]etitioner in the amount of P40,000 payable within six (6)
months. To secure the payment of the aforesaid loan and interest
thereon, Respondent Guiok executed a Contract of Pledge in favor of the
[p]etitioner whereby he pledged his three hundred (300) shares of stock
in the Go Fay & Company Inc., Respondent Corporation, for brevity's
sake. Respondent Guiok obliged himself to pay interest on said loan at
the rate of 10% per annum from the date of said contract of pledge. On
the same date, Alfonso Sy Lim secured a loan, from the [p]etitioner in
the amount of P40,000 payable in six (6) months. To secure the
payment of his loan, Sy Lim executed a 'Contract of Pledge' covering his
three hundred (300) shares of stock in Respondent Corporation. Under
said contract, Sy Lim obliged himself to pay interest on his loan at the
rate of 10% per annum from the date of the execution of said contract.
Under said 'Contracts of Pledge,' Respondent[s] Guiok and Sy Lim
covenanted, inter alia, that:
'3.In the event of the failure of the PLEDGOR to pay the amount
within a period of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose the pledge upon the
said shares of stock hereby created by selling them same at
public or private sale with or without notice to the PLEDGOR, at
which sale the PLEDGEE may be the purchaser at his option; and
the PLEDGEE is hereby authorized and empowered at his option
to transfer the said shares of stock on the books of the
corporation to his own name and to hold the certificate issued in
lieu thereof under the terms of this pledge, and to sell the said
shares to issue to him and to apply the proceeds of the sale to
the payment of the said sum and interest, in the manner
hereinabove provided;

4.In the event of the foreclosure of this pledge and the sale of
the pledged certificate, any surplus remaining in the hands of the
PLEDGEE after the payment of the said sum and interest, and the
expenses, if any, connected with the foreclosure sale, shall be
paid by the PLEDGEE to the PLEDGOR;
5.Upon payment of the said amount and interest in full, the
PLEDGEE will, on demand of the PLEDGOR, redeliver to him the
said shares of stock by surrendering the certificate delivered to
him by the PLEDGOR or by retransferring each share to the
PLEDGOR, in the event that the PLEDGEE, under the option
hereby granted, shall have caused such shares to be transferred
to him upon the books of the issuing company.' (idem, supra)
Respondent Guiok and Sy Lim endorsed their respective shares of stock
in blank and delivered the same to the [p]etitioner." 7
However, Respondent Guiok and Sy Lim failed to pay their respective
loans and the accrued interests thereon to the [p]etitioner. In October,
1990, the [p]etitioner filed a 'Petition for Mandamus' against Respondent
Corporation, with the SEC entitled 'Lim Tay versus Go Fay &
Company. Inc., SEC Case No. 03894', praying that:
'PRAYER
WHEREFORE, premises considered, it is respectfully prayed that
an order be issued directing the corporate secretary of
[R]espondent Go Fay & Co, Inc. to register the stock transfers
and issue new certificates in favor of Lim Tay. It is likewise
prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to pay
all dividends due and unclaimed on the said certificates to
[P]laintiff Lim Tay. cdphil
Plaintiff further prays for such other relief just and equitable in
the premises.' (page 34, Rollo)
The [p]etitioner alleged, inter alia, in his Petition that the controversy
between him as stockholder and the Respondent Corporation was intra-
corporate in view of the obstinate refusal of the corporate secretary of
Respondent Corporation to record the transfer of the shares of stock of
Respondent Guiok and Sy Lim in favor of and under the name of the
[p]etitioner and to issue new certificates of stock to the [p]etitioner.
The Respondent Corporation filed its Answer to the Complaint and
alleged, as Affirmative Defense, that:
'AFFIRMATIVE DEFENSE '
7.Respondent repleads and incorporates herein by reference the
foregoing allegations.
8.The Complaint states no cause of action against [r]espondent.
9.Complainant is not a stockholder of [r]espondent. Hence, the
Honorable Commission has no jurisdiction to enter the present
controversy since their [sic] is no intracorporate relationship
between complainant and respondent.
10.Granting arguendo that a pledge was constituted over the
shareholdings of Sy Guiok in favor of the complainant and that
the former defaulted in the payment of his obligations to the
latter, the same did not automatically vest [i]n complainant
ownership of the pledged shares.' (page 37, Rollo)
In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate
of Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-In-
Intervention with the SEC alleging, inter alia, that:
'xxx xxx xxx
3.Deny specifically the allegation under paragraph 5 of the
Complaint that, failure to pay the loan within the contract period
automatically foreclosed the pledged shares of stocks and that
the share of stocks are automatically purchased by the plaintiff,
for being false and distorted, the truth being that pursuant to the
[sic] paragraph 3 of the contract of pledges, Annexes 'A' and 'B',
it is clear that upon failure to pay the amount within the
stipulated period, the pledgee is authorized to foreclose the
pledge and thereafter, to sell the same to satisfy the loan.
[H]owever, to this point in time, plaintiff has not performed any
operative act of foreclosing the shares of stocks of [i]ntervenors
in accordance with the Chattel Mortgage law, [n]either was there
any sale of stocks by way of public or private auction made
after foreclosure in favor of the plaintiff to speak about, and
therefore, the respondent company could not be force[d] to [sic]
by way of mandamus, to transfer the subject shares of stocks
from the name of your [i]ntervenors to that of the plaintiff in the
absence of clear and legal basis for such;
4.DENY specifically the allegations under paragraphs 6, 7 and 8 of
the complaint as to the existence of the alleged intracorporate
dispute between plaintiff and company for being without proper
and legal basis. In the first place, plaintiff is not a stockholder of
the respondent corporation; there was no foreclosure of shares
executed in accordance with the Chattel Mortgage Law
whatsoever; there were no sales consummated that would
transfer to the plaintiff the subject shares of stocks and therefore,
any demand to transfer the shares of stocks to the name of the
plaintiff has no legal basis. In the second place, [i]ntervenors had
been in the past negotiating possible compromise and at the
same time, had tendered payment of the loan secured by the
subject pledges but plaintiff refused unjustifiably to oblige and
accept payment o[r] even agree on the computation of the
principal amount of the loan and interest on top of a substantial
amount offered just to settle and compromise the indebtedness
of [i]ntervenors;
II.SPECIAL AFFIRMATIVE DEFENSES
Intervenors replead by way of reference all the foregoing
allegations to form part of the special affirmative defenses;
5.This Honorable Commission has no jurisdiction over the person
of the respondent and nature of the action, plaintiff having no
personality at all to compel respondent by way of mandamus to
perform certain corporate function[s]; prLL
6.The complaint states no cause of action;
7.That respondent is not [a] real party in interest;
8.The appropriation of the subject shares of stocks by plaintiff,
without compliance with the formality of law, amounted to
'[p]actum commis[s]orium' therefore, null and void;
9.Granting for the sake of argument only that there was a valid
foreclosure and sale of the subject st[o]cks in favor of the plaintiff
which [i]ntervenors deny still paragraph 5 of the contract
allows redemption, for which intervenors are willing to redeem
the share of stocks pledged;
10.Even the Chattel Mortgage law allowed redemption of the
[c]hattel foreclosed;
11.As a matter of fact, on several occasions, [i]ntervenors had
made representations with the plaintiff for the compromise and
settlement of all the obligations secured by the subject pledges
even offering to pay compensation over and above the value of
the obligations, interest[s] and dividends accruing to the share of
stocks but, plaintiff unjustly refused to accept the offer of
payment;' ( pages 39-42, Rollo)
The [r]espondents-[i]ntervenors prayed the SEC that judgment be
rendered in their favor, as follows:
'IV. PRAYER
It is respectfully prayed to this Honorable Commission after due
hearing, to dismiss the case for lack of merit, ordering plaintiff to
accept payment for the loans secured by the subject shares of
stocks and to pay plaintiff:
1.The sum of P50,000.00, as moral damages;
2.the sum of P50,000.00, as attorneys fees; and,
3.costs of suit.
Other reliefs just and equitable [are] likewise prayed for.' (pages
42-43, Rollo)
After due proceedings, the [h]earing [o]fficer promulgated a Decision
dismissing [p]etitioner's Complaint on the ground that although the SEC
had jurisdiction over the action, pursuant to the Decision of the Supreme
Court in the case of'Rural Bank of Salinas et. al. versus Court of Appeals,
et al., 210 SCRA 510', he failed to prove the legal basis for the secretary
of the Respondent Corporation to be compelled to register stock
transfers in favor of the [p]etitioner and to issue new certificates of
stock under his name (pages 67-77, Rollo) The [p]etitioner appealed the
Decision of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the
SEC promulgated a Decision, dismissing [p]etitioner's appeal on the
grounds that: (a) the issue between the [p]etitioner and the
[r]espondents being one involving the ownership of the shares of stock
pledged by Respondent Guiok and Sy Lim the SEC had no jurisdiction
over the action filed by the [p]etitioner; (b) the latter had no cause of
action for mandamus against the Respondent Corporation, the right of
ownership of the [p]etitioner over the 300 shares of stock pledged by
Respondent Guiok and Sy Lim not having been as yet, established,
preparatory to the institution of said Petition for Mandamus with the
SEC."
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
"In ascertaining whether or not the SEC had exclusive jurisdiction over
[p]etitioner's action, the [a]ppellate [c]ourt must delve into and
ascertain: (a) whether or not there is a need to enlist the expertise and
technical know-how of the SEC in resolving the issue of the ownership of
the shares of stock; (b) the status of the relationships of the parties;
[and] (c) the nature of the question that is the subject of the
controversy. Where the controversy is purely a civil matter resoluble by
civil law principles and there is no need for the application of the
expertise and technical know-how of the SEC, then the regular courts
have jurisdiction over the action." 8 [citations omitted]
On the issue of whether mandamus can be availed of by the petitioner the Court
of Appeals agreed with the SEC, viz:
". . . [T]he [p]etitioner failed to establish a clear and legal right to the
writ of mandamus prayed for by him . . .Mandamus will not issue to
enforce a right which is in substantial dispute or to which a substantial
doubt exists . . .The principal function of the writ of mandamus is to
command and expedite, and not to inquire and adjudicate and,
therefore it is not the purpose of the writ to establish a legal right, but
to enforce one which has already been established." 9 [citations
omitted] prLL

The Court of Appeals debunked petitioner's claim that he had acquired
ownership over the shares by virtue of novation, holding that respondents'
indorsement and delivery of the shares were pursuant to Articles 2093 and 2095
of the Civil Code and that petitioner's receipt of dividends was in compliance with
Article 2102 of the same Code. Petitioner's claim that he had acquired ownership
of the shares by virtue of prescription was likewise dismissed by Respondent
Court in this wise:
"The prescriptive period for the action of Respondent[s] Guiok and Sy
Lim to recover the shares of stock from the [p]etitioner accrued only
from the time they paid their loans and the interests thereon and
[made] a demand for their return. 10
Hence, the petitioner brought before us this Petition for Review on Certiorari in
accordance with Rule 45 of the Rules of Court.11
Assignment of Errors
Petitioner submits, for the consideration of this Court, these issues: 12
"(a)Whether the Securities and Exchange Commission had jurisdiction
over the complaint filed by the petitioner; and
(b)Whether the petitioner is entitled to the relief of mandamus as
against the respondent Go Fay & Co., Inc."
In addition, petitioner contends that it has acquired ownership of the shares
"through extraordinary prescription," pursuant to Article 1132 of the Civil Code,
and through respondents' subsequent acts, which amounted to a novation of the
contracts of pledge. Petitioner also claims that there was dacion en pago, in
which the shares of stock were deemed sold to petitioner, the consideration for
which was the extinguishment of the loans and the interests thereon. Petitioner
likewise claims that laches bars respondents from recovering the subject shares.
The Court's Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC
Claiming that the present controversy is intra-corporate and falls within the
exclusive jurisdiction of the SEC, petitioner relies heavily on Abejo v. De La
Cruz, 13 which upheld the jurisdiction of the SEC over a suit filed by an
unregistered stockholder seeking to enforce his rights. He also seeks support
from Rural Bank of Salinas, Inc. v. Court of Appeals, 14 which ruled that the right
of a transferee or an assignee to have stocks transferred to his name was an
inherent right flowing from his ownership of the said stocks.
The registration of shares in a stockholder's name, the issuance of stock
certificates, and the right to receive dividends which pertain to the said shares
are all rights that flow from ownership. The determination of whether or not a
shareholder is entitled to exercise the above-mentioned rights falls within the
jurisdiction of the SEC. However, if ownership of the shares is not clearly
established and is still unresolved at the time the action for mandamus is filed,
then jurisdiction lies with the regular courts.
Section 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC
as follows:
"SEC. 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 officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the interest of
the public and/or of stockholders, partners, members of associations or
organizations 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 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 appointment of directors, trustees,
officers or managers of such corporations, partnerships or associations;
(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 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
Committee created pursuant to this decree." 15
Thus, a controversy "among stockholders, partners or associates
themselves" 16 is intra-corporate in nature and falls within the jurisdiction of the
SEC. cda
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint.17 in the present case, however,
petitioner's claim that he was the owner of the shares of stock in question has
no prima faciebasis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. The
Complaint contained the following pertinent averments:
"xxx xxx xxx
3.On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received
three hundred (300) shares of stock of Go Fay & Co., Inc., from Sy
Guiok as, security for the payment of a loan of [f]orty [t]housand
[p]esos (P40,000.00) Philippine currency, the sum of which was payable
within six (6) months [with interest] at ten percentum (10%) per annum
from the date of the execution of the contract; a copy of this Contract of
Pledge is attached as Annex "A" and made part hereof ;
4.On the same date January 8, 1980, under a similar Contract of Pledge,
Lim Tay received three hundred (300) shares of stock of Go Fay & Co.,
Inc. from Alfonso Sy Lim as security for the payment of a loan of [f]orty
[t]housand [p]esos (P40,000.00) Philippine currency, the sum of which
was payable within six (6) months [with interest] at ten percentum
(10%) per annum from the date of the execution of the contract; copy
of this Contract of Pledge is attached as Annex "B" and made part
hereof ;
5.By the express terms of the agreements, upon failure of the borrowers
to pay the stated amounts within the contract period, the pledge is
foreclosed and the shares of stock are purchased by [p]laintiff, who is
expressly authorized and empowered to transfer the duly endorsed
shares of stock on the books of the corporation to his own name; . .
. 18 (emphasis supplied)
However, the contracts of pledge, which were made integral parts of the
Complaint, contain this common proviso:
"3.In the event of the failure of the PLEDGOR to pay the amount within
a period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without
notice to the PLEDGOR, at which sale the PLEDGEE may be the
purchaser at his option; and the PLEDGEE is hereby authorized and
empowered at his option, to transfer the said shares of stock on the
books of the corporation to his own name and to hold the certificate
issued in lieu thereof under the terms of this pledge, and to sell the said
shares to issue to him and to apply the proceeds of the sale to the
payment of the said sum and interest, in the manner hereinabove
provided; "
This contractual stipulation, which was part of the Complaint, shows that plaintiff
was merely authorized to foreclose the pledge upon maturity of the loans, not to
own them. Such foreclosure is not automatic, for it must be done in a public or
private sale. Nowhere did the Complaint mention that petitioner had in fact
foreclosed the pledge and purchased the shares after such foreclosure His status
as a mere pledgee does not, under civil law, entitle him to ownership of the
subject shares. It is also noteworthy that petitioner's Complaint did not aver that
said shares were acquired through extraordinary prescription, novation or laches.
Moreover, petitioner's claim, subsequent to the filing of the Complaint, that he
acquired ownership of the said shares through these three modes is not
indubitable and still has to be resolved. In fact, as will be shown, such allegation
has no merit. Manifestly, the Complaint by itself did not contain any prima
facie showing that petitioner was the owner of the shares of stocks. Quite the
contrary, it demonstrated that he was merely a pledgee, not an owner.
Accordingly, it failed to lay down a sufficient basis for the SEC to exercise
jurisdiction over the controversy. In fact, the very allegations of the Complaint
and its annexes negated the jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural
Bank of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo, the Abejo
spouses sold to Telectronic Systems, Inc. shares of stock in Pocket Bell
Philippines, Inc. Subsequent to such contract of sale, the corporate secretary,
Norberto Braga, refused to record the transfer of the shares in the corporate
books and instead asked for the annulment of the sale, claiming that he and his
wife had a preemptive right over some of the shares, and that his wife's shares
were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the contract had
already been perfected, thereby demonstrating that Telectronic Systems, Inc.
was already the prima facie owner of the shares and, consequently, a
stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled
later on, Telectronic Systems, Inc. had, in the meantime, title over the shares
from the time the sale was perfected until the time such sale was annulled. The
effects of an annulment operate prospectively and do not, as a rule, retroact to
the time the sale was made. Therefore, at the time the Bragas questioned the
validity of the transfers made by the Abejos, Telectronic Systems, Inc. was
already aprima facie shareholder of the corporation, thus making the dispute
between the Bragas and the Abejos "intra-corporate" in nature. Hence, the Court
held that "the issue is not on ownership of shares but rather the non-
performance by the corporate secretary of the ministerial duty of recording
transfers of shares of stock of the corporation of which he is secretary " 19

Unlike Abejo, however, petitioner's ownership over the shares in this case was
not yet perfected when the Complaint was filed. The contract of pledge certainly
does not make him the owner of the shares pledged. Further, whether
prescription effectively transferred ownership of the shares, whether there was a
novation of the contracts of pledge, and whether laches had set in were difficult
legal issues, which were unpleaded and unresolved when herein petitioner asked
the corporate secretary of Go Fay to effect the transfer, in his favor, of the
shares pledged to him. cda
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the
shares in favor of the respondents in that case. When the corporate secretary
refused to register the transfer, an action for mandamus was instituted.
Subsequently, a motion for intervention was filed, seeking the annulment of the
deeds of assignment on the grounds that the same were fictitious and
antedated, and that they were in fact donations because the considerations
therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas were
already prima facie shareholders when the deeds of assignment were
questioned. If the said deeds were to be annulled later on, respondents would
still be considered shareholders of the corporation from the time of the
assignment until the annulment of such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of mandamus, directing the corporate
secretary of respondent corporation to have the shares transferred to his name
in the corporate books, to issue new certificates of stock and to deliver the
corresponding dividends to him. 20
"In order that a writ of mandamus may issue, it is essential that the person
petitioning for the same has a clear legal right to the thing demanded and that it
is the imperative duty of the respondent to perform the act required. It neither
confers powers nor imposes duties and is never issued in doubtful cases. It is
simply a command to exercise a power already possessed and to perform a duty
already imposed." 21
In the present case, petitioner has failed to establish a clear legal right.
Petitioner's contention that he is the owner of the said shares is completely
without merit. Quite the contrary and as already shown, he does not have any
ownership rights at all. At the time petitioner instituted his suit at the SEC, his
ownership claim had no prima facie leg to stand on. At best, his contention was
disputable and uncertain. Mandamus will not issue to establish a legal right, but
only to enforce one that is already clearly established.
Without Foreclosure and
Purchase at Auction,
Pledgor Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged had passed to
him, upon Respondents Sy Guiok and Sy Lim's failure to pay their respective
loans. But on appeal, petitioner claimed that ownership over the shares had
passed to him, not via the contracts of pledge, but by virtue of prescription and
by respondents' subsequent acts which amounted to a novation of the contracts
of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not acquire ownership
of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code
states:
"The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This
sale shall be made at a public auction, and with notification to the
debtor and the owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the first auction the
thing is not sold, a second one with the same formalities shall be held;
and if at the second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged to give an
acquittance for his entire claim."
Furthermore, the contracts of pledge contained a common proviso, which we
quote again for the sake of clarity:
"3.In the event of the failure of the PLEDGOR to pay the amount within
a period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
created by selling the same at public or private sale with or without
notice to the PLEDGOR, at which sale the PLEDGEE may be the
purchaser at his option; and the PLEDGEE is hereby authorized and
empowered at his option to transfer the said shares of stock on the
books of the corporation to his own name, and to hold the certificate
issued in lieu thereof under the terms of this pledge, and to sell the said
shares to issue to him and to apply the proceeds of the sale to the
payment of the said sum and interest, in the manner hereinabove
provided;" 22
There is no showing that petitioner made any attempt to foreclose or sell the
shares through public or private auction, as stipulated in the contracts of pledge
and as required by Article 2112 of the Civil Code. Therefore, ownership of the
shares could not have passed to him. The pledgor remains the owner during the
pendency of the pledge and prior to foreclosure and sale, as explicitly provided
by Article 2103 of the same Code: LLphil
"Unless the thing pledged is expropriated, the debtor continues to be
the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to the
owner of the thing pledged in order to recover it from, or defend it
against a third person."
No Ownership
by Prescription
Petitioner did not acquire the shares by prescription either. The period of
prescription of any cause of action is reckoned only from the date the cause of
action accrued.
"Since a cause of action requires as an essential element not only a legal right of
the plaintiff and a correlative obligation of the defendant, but also an act or
omission of the defendant in violation of said legal right, the cause of action does
not accrue until the party obligated refuses, expressly or impliedly, to comply
with its duty." 23 Accordingly, a cause of action on a written contract accrues
when a breach or violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for
the redelivery of their certificates of stock upon payment of their debts to
petitioner, consonant with Article 2105 of the Civil Code, which reads:
"The debtor cannot ask for the return of the thing pledged against the
will of the creditor, unless and until he has paid the debt and its interest,
with expenses in a proper case." 24
Thus, the right to recover the shares based on the written contract of pledge
between petitioner and respondents would arise only upon payment of their
respective loans. Therefore, the prescriptive period within which to demand the
return of the thing pledged should begin to run only after the payment of the
loan and a demand for the thing has been made, because it is only then that
respondents acquire a cause of action for the return of the thing pledged.
Prescription should not begin to run on the action to demand the return of the
thing pledged while the loan still exists. This is because the right to ask for the
return of the thing pledged will not arise so long as the loan subsists. In the
present case, the prescriptive period did not begin to run when the loan became
due. On the other hand, it is petitioner's right to demand payment that may be in
danger of prescription.
Petitioner contends that he can be deemed to have acquired ownership over the
certificates of stock through extraordinary prescription, as provided for in Article
1132 of the Civil Code which states:
"Art. 1132. The ownership of movables prescribes through uninterrupted
possession for four years in good faith.
The ownership of personal property also prescribes through
uninterrupted possession for eight years, without need of any other
condition. . . ."
Petitioner's argument is untenable. What is required by Article 1132 is possession
in the concept of an owner. In the present case, petitioner's possession of the
stock certificates came about because they were delivered to him pursuant to
the contracts of pledge. His possession as a pledgee cannot ripen into ownership
by prescription. As aptly pointed out by Justice Jose C. Vitug:
"Acquisitive prescription is a mode of acquiring ownership by a
possessor through the requisite lapse of time. In order to ripen into
ownership, possession must be in the concept of an owner, public,
peaceful and uninterrupted. Thus, possession with a juridical title, such
as by a usufructory, a trustee, a lessee, agent or a pledgee, not being in
the concept of an owner, cannot ripen into ownership by acquisitive
prescription unless the juridical relation is first expressly repudiated and
such repudiation has been communicated to the other party." 25
Petitioner expressly repudiated the pledge, only when he filed his Complaint and
claimed that he was not a mere pledgee, but that he was already the owner of
the shares. Based on the foregoing, petitioner has not acquired the certificates of
stock through extraordinary prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue of a novation of the contract
of pledge. Novation is defined as "the extinguishment of an obligation by a
subsequent one which terminates it, either by changing its object or principal
conditions, by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor." 26 Novation of a
contract must not be presumed. "In the absence of an express agreement,
novation takes place only when the old and the new obligations are incompatible
on every point." 27
In the present case, novation cannot be presumed by (a) respondents'
indorsement and delivery of the certificates of stock covering the 600 shares, (b)
petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that
respondents have not instituted any action to recover the shares since 1980.

Respondents' indorsement and delivery of the certificates of stock were pursuant
to paragraph 2 of the contract of pledge which reads:
"2.The said certificates had been delivered by the PLEDGOR endorsed in
blank to be held by the PLEDGEE under the pledge as security for the
payment of the aforementioned sum and interest thereon accruing." 28
This stipulation did not effect the transfer of ownership to petitioner. It was
merely in compliance with Article 2093 of the Civil Code, 29 which requires that
the thing pledged be placed in the possession of the creditor or a third person of
common agreement; and Article 2095, 30 which states that if the thing pledged
are shares of stock, then the "instrument proving the right pledged" must be
delivered to the creditor. cdll
Moreover, the fact that respondents allowed the petitioner to receive dividends
pertaining to the shares was not meant to relinquish ownership thereof. As
stated by respondent corporation, the same was done pursuant to an agreement
between the petitioner and Respondents Sy Guiok and Sy Lim, following Article
2102 of the Civil Code which provides:
"If the pledge earns or produces fruits, income, dividends, or interests,
the creditor shall compensate what he receives with those which are
owing him; but if none are owing him, or insofar as the amount may
exceed that which is due, he shall apply it to the principal. Unless there
is a stipulation to the contrary, the pledge shall extend to the interest
and the earnings of the right pledged."
Novation cannot be inferred from the mere fact that petitioner has not, since
1980, instituted any action to recover the shares. Such action is in fact
premature, as the loan is still outstanding. Besides, as already pointed out,
novation is never presumed inferred.
No Dacion en Pago
in Favor of Petitioner
Neither can there be dacion en pago, in which the certificates of stock are
deemed sold to petitioner, the consideration for which is the extinguishment of
the loans and the accrued interests thereon. Dacion en pago is a form of
novation in which a change takes place in the object involved in the original
contract. Absent an explicit agreement, petitioner cannot simply presume dacion
en pago.
Laches Not
a Bar to Petitioner
Petitioner submits that "the inaction of the individual respondents with respect to
the recovery of the shares of stock serves to bar them from asserting rights over
said shares on the basis of laches." 31
Laches has been defined as "the failure or neglect, for an unreasonable length of
time, to do that which by exercising due diligence could or should have been
done earlier; it is negligence or omission to assert a right within a reasonable
time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it." 32
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all
the time to demand payment of the debt. More important, under the contracts of
pledge, petitioner could have foreclosed the pledges as soon as the loans
became due. But for still unknown or unexplained reasons, he failed to do so,
preferring instead to pursue his baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is
AFFIRMED. Costs against petitioner. LLphil
SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ ., concur.
Footnotes

47.
FIRST DIVISION
[G.R. No. 124535. September 28, 2001.]
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND
DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO,
OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and
JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY,
INC., petitioners, vs. HONORABLE COURT OF APPEALS,
HONORABLE COMMISSION EN BANC, SECURITIES AND
EXCHANGE COMMISSION, HONORABLE ENRIQUE L.
FLORES, JR., in his capacity as Hearing Officer, REYNALDO
VILLANUEVA, SR., AVELINA M. VILLANUEVA, CATALINO
VILLANUEVA, ANDRES GONZALES, AURORA LACERNA,
CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN
and ELENA USI, respondents.
Rosales Law Office for petitioners.
Amando D. Ignacio and Jose R. Dimayuga for private respondents.
SYNOPSIS
This is an appeal from the CA decision which upheld the decision of the
SEC which granted the preliminary injunction prayed for by private
respondents who claimed that the newly elected officers of petitioner-bank
should be enjoined from discharging their duties because private
respondents-stockholders of petitioner-bank were not notified of the
stockholders' meeting held on January 15, 1994 wherein said new set of
officers were elected.
The Supreme Court found the appeal meritless, ruling: that while
private respondents executed a deed of assignment of their shares in favor of
petitioners, there was no effective transfer of shares since the requirements
prescribed by the law for a valid transfer of shares of stock have not been
complied with. Consequently, petitioner, as mere assignees cannot enjoy the
status of stockholders, insofar as the assigned shares are concerned, and
private respondents cannot, as yet, be deprived of their rights as
stockholders, until the issue of ownership of the shares in question is finally
resolved. IaDcTC
SYLLABUS
1.COMMERCIAL LAW; CORPORATION CODE; TRANSFER OF SHARES OF STOCK;
REQUISITES FOR VALIDITY. We have uniformly held that for a valid transfer
of stocks, there must be strict compliance with the mode of transfer prescribed
by law. The requirements are: (a) There must be delivery of the stock certificate;
(b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and (c) To be valid against
third parties, the transfer must be recorded in the books of the corporation.
2.ID.; ID.; ID.; ID.; EFFECT OF NON-COMPLIANCE THEREWITH; CASE AT BAR.
While it may be true that there was an assignment of private respondents'
shares to the petitioners, said assignment was not sufficient to effect the transfer
of shares since there was no endorsement of the certificates of stock by the
owners, their attorneys-in-fact or any other person legally authorized to make
the transfer. Moreover, petitioners admit that the assignment of shares was not
coupled with delivery, the absence of which is a fatal defect. The rule is that the
delivery of the stock certificate duly endorsed by the owner is the operative act
of transfer of shares from the lawful owner to the transferee. Title may be
vested in the transferee only by delivery of the duly indorsed certificate of stock.
. . . Consequently, the petitioners, as mere assignees, cannot enjoy the status of
a stockholder, cannot vote nor be voted for, and will not be entitled to dividends,
insofar as the assigned shares are concerned. Parenthetically, the private
respondents cannot, as yet, be deprived of their rights as stockholders, until and
unless the issue of ownership and transfer of the shares in question is resolved
with finality.
3.ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; R.A. NO. 8799; SEC
JURISDICTION OVER CASES FALLING UNDER SEC. 5 OF PD NO. 902-A NOW
COGNIZABLE BY THE RTC; CASE AT BAR. While this case was pending,
Republic Act No. 8799 was enacted, transferring to the courts of general
jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all
cases enumerated under Section 5 of Presidential Decree No. 902-A. One of
those cases enumerated is any controversy "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." The instant
controversy clearly falls under this category of cases which are now cognizable
by the Regional Trial Court.
D E C I S I O N
YNARES-SANTIAGO, J p:
Before us is a petition for review on certiorari assailing the Decision of the Court
of Appeals dated February 27, 1996, as well as the Resolution dated March 29,
1996, in CA-G.R. SP No. 38861.
The instant controversy arose from a dispute between the Rural Bank of Lipa
City, Incorporated (hereinafter referred to as the Bank), represented by its
officers and members of its Board of Directors, and certain stockholders of the
said bank. The records reveal the following antecedent facts:
Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of
Lipa City, executed a Deed of Assignment, 1wherein he assigned his shares, as
well as those of eight (8) other shareholders under his control with a total of
10,467 shares, in favor of the stockholders of the Bank represented by its
directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime
thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an
Agreement 2 wherein they acknowledged their indebtedness to the Bank in the
amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt will
be paid out of the proceeds of the sale of their real property described in the
Agreement.
At a meeting of the Board of Directors of the Bank on November 15, 1993, the
Villanueva spouses assured the Board that their debt would be paid on or before
December 31 of that same year; otherwise, the Bank would be entitled to
liquidate their shareholdings, including those under their control. In such an
event, should the proceeds of the sale of said shares fail to satisfy in full the
obligation, the unpaid balance shall be secured by other collateral sufficient
therefor.
When the Villanueva spouses failed to settle their obligation to the Bank on the
due date, the Board sent them a letter 3demanding: (1) the surrender of all the
stock certificates issued to them; and (2) the delivery of sufficient collateral to
secure the balance of their debt amounting to P3,346,898.54. The Villanuevas
ignored the bank's demands, whereupon their shares of stock were converted
into Treasury Stocks. Later, the Villanuevas, through their counsel, questioned
the legality of the conversion of their shares. 4
On January 15, 1994, the stockholders of the Bank met to elect the new
directors and set of officers for the year 1994. The Villanuevas were not notified
of said meeting. In a letter dated January 19, 1994, Atty. Amado Ignacio,
counsel for the Villanueva spouses, questioned the legality of the said
stockholders' meeting and the validity of all the proceedings therein. In reply, the
new set of officers of the Bank informed Atty. Ignacio that the Villanuevas were
no longer entitled to notice of the said meeting since they had relinquished their
rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and Exchange
Commission (SEC), a petition for annulment of the stockholders' meeting and
election of directors and officers on January 15, 1994, with damages and prayer
for preliminary injunction 5 , docketed as SEC Case No. 02-94-4683. Joining them
as co-petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna,
Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named
respondents were the newly-elected officers and directors of the Rural Bank,
namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodio
and Juanita Bautista.
The Villanuevas' main contention was that the stockholders' meeting and election
of officers and directors held on January 15, 1994 were invalid because: (1) they
were conducted in violation of the by-laws of the Rural Bank; (2) they were not
given due notice of said meeting and election notwithstanding the fact that they
had not waived their right to notice; (3) they were deprived of their right to vote
despite their being holders of common stock with corresponding voting rights;
(4) their names were irregularly excluded from the list of stockholders; and (5)
the candidacy of petitioner Avelina Villanueva for directorship was arbitrarily
disregarded by respondent Bernardo Bautista and company during the said
meeting.
On February 16, 1994, the SEC issued a temporary restraining order enjoining
the respondents, petitioners herein, from acting as directors and officers of the
Bank, and from performing their duties and functions as such. 6
In their joint Answer, 7 the respondents therein raised the following defenses:
1)The petitioners have no legal capacity to sue;
2)The petition states no cause of action;
3)The complaint is insufficient;
4)The petitioners' claims had already been paid, waived,
abandoned, or otherwise extinguished;
5)The petitioners are estopped from challenging the conversion of
their shares.
Petitioners, respondents therein, thus moved for the lifting of the temporary
restraining order and the dismissal of the petition for lack of merit, and for the
upholding of the validity of the stockholders' meeting and election of directors
and officers held on January 15, 1994. By way of counterclaim, petitioners
prayed for actual, moral and exemplary damages.
On April 6, 1994, the Villanuevas' application for the issuance of a writ of
preliminary injunction was denied by the SEC Hearing Officer on the ground of
lack of sufficient basis for the issuance thereof. However, a motion for
reconsideration 8 was granted on December 16, 1994, upon finding that since
the Villanuevas' have not disposed of their shares, whether voluntarily or
involuntarily, they were still stockholders entitled to notice of the annual
stockholders' meeting was sustained by the SEC. Accordingly, a writ of
preliminary injunction was issued enjoining the petitioners from acting as
directors and officers of the bank.9

Thereafter, petitioners filed an urgent motion to quash the writ of preliminary
injunction, 10 challenging the propriety of the said writ considering that they had
not yet received a copy of the order granting the application for the writ of
preliminary injunction.
With the impending 1995 annual stockholders' meeting only nine (9) days away,
the Villanuevas filed an Omnibus Motion 11praying that the said meeting and
election of officers scheduled on January 14, 1995 be suspended or held in
abeyance, and that the 1993 Board of Directors be allowed, in the meantime, to
act as such. One (1) day before the scheduled stockholders meeting, the SEC
Hearing Officer granted the Omnibus Motion by issuing a temporary restraining
order preventing petitioners from holding the stockholders meeting and electing
the board of directors and officers of the Bank. 12
A petition for Certiorari and Annulment with Damages was filed by the Rural
Bank, its directors and officers before the SEC en banc, 13 naming as
respondents therein SEC Hearing Officer Enrique L. Flores, Jr., and the
Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. The said petition
alleged that the orders dated December 16, 1994 and January 13, 1995, which
allowed the issuance of the writ of preliminary injunction and prevented the bank
from holding its 1995 annual stockholders' meeting, respectively, were issued by
the SEC Hearing Officer with grave abuse of discretion amounting to lack or
excess of jurisdiction. Corollarily, the Bank, its directors and its officers
questioned the SEC Hearing Officer's right to restrain the stockholders' meeting
and election of officers and directors considering that the Villanueva spouses and
the other petitioners in SEC Case No. 02-94-4683 were no longer stockholders
with voting rights, having already assigned all their shares to the Bank.
In their Comment/Opposition, the Villanuevas and other private respondents
argued that the filing of the petition for certiorari was premature and there was
no grave abuse of discretion on the part of the SEC Hearing Officer, nor did he
act without or in excess of his jurisdiction.
On June 7, 1995, the SEC en banc denied the petition for certiorari in an
Order, 14 which stated:
In the case now before us, petitioners could not show any proof of
despotic or arbitrary exercise of discretion committed by the hearing
officer in issuing the assailed orders save and except the allegation that
the private respondents have already transferred their stockholdings in
favor of the stockholders of the Bank. This, however, is the very issue of
the controversy in the case a quo and which, to our mind, should
rightfully be litigated and proven before the hearing officer. This is so
because of the undisputed fact the (sic) private respondents are still in
possession of the stock certificates evidencing their stockholdings and as
held by the Supreme Court in Embassy Farms, Inc. v. Court of Appeals,
et al., 188 SCRA 492, citing Nava v. Peers Marketing Corp., the non-
delivery of the stock certificate does not make the transfer of the shares
of stock effective. For an effective transfer of stock, the mode of transfer
as prescribed by law must be followed.
We likewise find that the provision of the Corporation Code cited by the
herein petitioner, particularly Section 83 thereof, to support the claim
that the private respondents are no longer stockholders of the Bank is
misplaced. The said law applies to acquisition of shares of stock by the
corporation in the exercise of a stockholder's right of appraisal or when
the said stockholder opts to dissent on a specific corporate act in those
instances provided by law and demands the payment of the fair value of
his shares. It does not contemplate a "transfer" whereby the
stockholder, in the exercise of his right to dispose of his shares (jus
disponendi) sells or assigns his stockholdings in favor of another person
where the provisions of Section 63 of the same Code should be complied
with.
The hearing officer, therefore, had a basis in issuing the questioned
orders since the private respondents' rights as stockholders may be
prejudiced should the writ of injunction not be issued. The private
respondents are presumably stockholders of the Bank in view of the fact
that they have in their possession the stock certificates evidencing their
stockholdings. Until proven otherwise, they remain to be such and the
hearing officer, being the one directly confronted with the facts and
pieces of evidence in the case, may issue such orders and resolutions
which may be necessary or reasonable relative thereto to protect their
rights and interest in the meantime that the said case is still pending
trial on the merits.
A subsequent motion for reconsideration 15 was likewise denied by the SEC en
banc in a Resolution 16 dated September 29, 1995.
A petition for review was thus filed before the Court of Appeals, which was
docketed as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 and
the Resolution dated September 29, 1995 of the SEC en banc in SEC EB No. 440.
The ultimate issue raised before the Court of Appeals was whether or not the
SEC en banc erred in finding:
1.That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not
commit any grave abuse of discretion that would warrant the filing of a
petition for certiorari;
2.That the private respondents are still stockholders of the subject bank
and further stated that "it does not contemplate a transfer" whereby the
stockholders, in the exercise of his right to dispose of his shares (Jus
Disponendi) sells or assigns his stockholdings in favor of another person
where the provisions of Sec. 63 of the same Code should be complied
with; and
3.That the private respondents are presumably stockholders of the bank
in view of the fact that they have in their possession the stock
certificates evidencing their stockholdings.
On February 27, 1996, the Court of Appeals rendered the assailed
Decision 17 dismissing the petition for review for lack of merit. The appellate
court found that:
The public respondent is correct in holding that the Hearing Officer did
not commit grave abuse of discretion. The officer, in exercising his
judicial functions, did not exercise his judgment in a capricious,
whimsical, arbitrary or despotic manner. The questioned Orders issued
by the Hearing Officer were based on pertinent law and the facts of the
case.
Section 63 of the Corporation Code states: ". . . Shares of stock so
issued are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner . . . . No transfer,
however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of
the certificate or certificates and the number of shares transferred."
In the case at bench, when private respondents executed a deed of
assignment of their shares of stocks in favor of the Stockholders of the
Rural Bank of Lipa City, represented by Bernardo Bautista, Jaime
Custodio and Octavio Katigbak, title to such shares will not be effective
unless the duly indorsed certificate of stock is delivered to them. For an
effective transfer of shares of stock, the mode and manner of transfer as
prescribed by law should be followed. Private respondents are still
presumed to be the owners of the shares and to be stockholders of the
Rural Bank.
We find no reversible error in the questioned orders.
Petitioners' motion for reconsideration was likewise denied by the Court of
Appeals in an Order 18 dated March 29, 1996.
Hence, the instant petition for review seeking to annul the Court of Appeals'
decision dated February 27, 1996 and the resolution dated March 29, 1996. In
particular, the decision is challenged for its ruling that notwithstanding the
execution of the deed of assignment in favor of the petitioners, transfer of title to
such shares is ineffective until and unless the duly indorsed certificate of stock is
delivered to them. Moreover, petitioners faulted the Court of Appeals for not
taking into consideration the acts of disloyalty committed by the Villanueva
spouses against the Bank.
We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in affirming the order of
the SEC en banc, which in turn upheld the order of the SEC Hearing Officer, for
the said rulings were in accordance with law and jurisprudence.
The Corporation Code specifically provides:
SECTION 63.Certificate of stock and transfer of shares. The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice president, countersigned by
the secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stocks so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the parties, until
the transfer is recorded in the books of the corporation so as to show
the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation. (Emphasis ours)
Petitioners argue that by virtue of the Deed of Assignment, 19 private
respondents had relinquished to them any and all rights they may have had as
stockholders of the Bank. While it may be true that there was an assignment of
private respondents' shares to the petitioners, said assignment was not sufficient
to effect the transfer of shares since there was no endorsement of the
certificates of stock by the owners, their attorneys-in-fact or any other person
legally authorized to make the transfer. Moreover, petitioners admit that the
assignment of shares was not coupled with delivery, the absence of which is a
fatal defect. The rule is that the delivery of the stock certificate duly endorsed by
the owner is the operative act of transfer of shares from the lawful owner to the
transferee. 20 Thus, title may be vested in the transferee only by delivery of the
duly indorsed certificate of stock. 21

We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law. 22 The requirements
are: (a) There must be delivery of the stock certificate; (b) The certificate must
be endorsed by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and (c) To be valid against third parties, the
transfer must be recorded in the books of the corporation. As it is, compliance
with any of these requisites has not been clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite endorsement
and delivery, the assignment was valid between the parties, meaning the private
respondents as assignors and the petitioners as assignees. While the assignment
may be valid and binding on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the petitioners, as mere
assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted
for, and will not be entitled to dividends, insofar as the assigned shares are
concerned. Parenthetically, the private respondents cannot, as yet, be deprived
of their rights as stockholders, until and unless the issue of ownership and
transfer of the shares in question is resolved with finality.
There being no showing that any of the requisites mandated by law 23 was
complied with, the SEC Hearing Officer did not abuse his discretion in granting
the issuance of the preliminary injunction prayed for by petitioners in SEC Case
No. 02-94-4683 (herein private respondents). Accordingly, the order of the
SEC en banc affirming the ruling of the SEC Hearing Officer, and the Court of
Appeals decision upholding the SEC en banc order, are valid and in accordance
with law and jurisprudence, thus warranting the denial of the instant petition for
review.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect
their directors, the temporary restraining order issued by the SEC Hearing Officer
on January 13, 1995 must be lifted. However, private respondents shall be
notified of the meeting and be allowed to exercise their rights as stockholders
thereat.
While this case was pending, Republic Act No. 8799 24 was enacted, transferring
to the courts of general jurisdiction or the appropriate Regional Trial Court the
SEC's jurisdiction over all cases enumerated under Section 5 of Presidential
Decree No. 902-A. 25 One of those cases enumerated is any controversy "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." The instant controversy clearly falls under this category
of cases which are now cognizable by the Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches
of the Regional Trial Courts to try and decide cases formerly cognizable by the
SEC. For the Fourth Judicial Region, specifically in the Province of Batangas, the
RTC of Batangas City, Branch 32 is the designated court. 26
WHEREFORE, in view of all the foregoing, the instant petition for review
on certiorari is DENIED. The Decision and Resolution of the Court of Appeals
in CA-G.R. SP No. 38861 are hereby AFFIRMED. The case is ordered REMANDED
to the Regional Trial Court of Batangas City, Branch 32, for proper disposition.
The temporary restraining order issued by the SEC Hearing Officer dated January
13, 1995 is ordered LIFTED.
SO ORDERED.
Davide, Jr., C.J., Kapunan and Pardo, JJ., concur.
Puno, J., concurs in the result.
Footnotes

48.
SECOND DIVISION
[G.R. No. 139802. December 10, 2002.]
VICENTE C. PONCE, petitioner, vs. ALSONS CEMENT
CORPORATION, and FRANCISCO M. GIRON,
JR., respondents.
Quiason Makalintal Barot Torres and Ibarra for petitioner.
Estelito P. Mendoza for respondents.
SYNOPSIS
Petitioner herein filed a complaint with the SEC for mandamus and damages
against respondents. With his allegations, petitioner prayed for the SEC to issue
in his name certificates of stocks covering the 239,500 shares of stocks and its
legal increments and for the corporation to pay him damages. Respondent
moved to dismiss the complaint on the ground, among others, that it states no
cause of action. After respondents filed their reply, the SEC hearing officer
granted the motion to dismiss. According to the hearing officer, insofar as the
issuance of stock certificates is concerned, the real party-in-interest was Fausto
G. Gaid, or his estate, or his heirs. Gaid was an incorporator and an original
stockholder of the respondent corporation who subscribed and fully paid for
239,500 shares of stock. The petitioner tried to step into the shoes of Gaid and
thereby become a stockholder of the defendant corporation by demanding the
issuance of the stock certificate in his name. The SEC hearing officer decided
that the petitioner could not do as he prayed because there was no record of any
assignment or transfer in the books of the respondent corporation and there was
neither instruction nor authority from the transferor for such assignment or
transfer. Petitioner appealed the order of dismissal. The Commission en
banc reversed the decision of the hearing officer. The motion for reconsideration
having been denied, the respondents appealed to the Court of Appeals. The
Court of Appeals held that in the absence of any allegations that the transfer of
shares between Fausto Gaid and the petitioner was registered in the stock and
transfer book of respondent corporation, petitioner failed to state a cause of
action. Thus, the CA dismissed the complaint formandamus for failure to state a
cause of action. Hence, the instant petition for review on certiorari. At issue
herein was whether the Court of Appeals erred in holding that herein petitioner
had no cause of action for a writ of mandamus.
The Supreme Court ruled that petitioner had no cause of action and that his
petition for mandamus was properly dismissed. From the corporation's point of
view, the transfer is not effective until it is recorded. As between the corporation,
on one hand, and its stockholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its
stockholders are. cSCADE
SYLLABUS
1.MERCANTILE LAW; CORPORATION CODE; TRANSFER OF SHARES OF STOCKS;
SHOULD BE RECORDED IN THE STOCK AND TRANSFER BOOK OF A
CORPORATION; EFFECT OF FAILURE; APPLICATION IN CASE AT BAR.
Pursuant to Sec. 63 of the Corporation Code, a transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-existent as far
as the corporation is concerned. As between the corporation on the one hand,
and its shareholders and third persons on the other, the corporation looks only to
its books for the purpose of determining who its shareholders are. It is only
when the transfer has been recorded in the stock and transfer book that a
corporation may rightfully regard the transferee as one of its stockholders. From
this time, the consequent obligation on the part of the corporation to recognize
such rights as it is mandated by law to recognize arises. Hence, without such
recording, the transferee may not be regarded by the corporation as one among
its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance
with the requirements of Section 64 of the Corporation Code. This is the import
of Section 63 which states that "No transfer, however, shall be valid, except
between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred."
Unless and until such recording is made the demand for the issuance of stock
certificates to the alleged transferee has no legal basis.
2.ID.; ID.; CERTIFICATE OF STOCK, A TANGIBLE EVIDENCE OF THE STOCK
ITSELF AND OF THE VARIOUS INTERESTS THEREIN; IMPORTANCE OF
CERTIFICATE OF STOCK, CONSTRUED. In Tan vs. SEC, 206 SCRA 740 (1992),
we had occasion to declare that a certificate of stock is not necessary to render
one a stockholder in a corporation. But a certificate of stock is the tangible
evidence of the stock itself and of the various interests therein. The certificate is
the evidence of the holder's interest and status in the corporation, his ownership
of the share represented thereby. The certificate is in law, so to speak, an
equivalent of such ownership. It expresses the contract between the corporation
and the stockholder, but it is not essential to the existence of a share in stock or
the creation of the relation of shareholder to the corporation. In fact, it rests on
the will of the stockholder whether he wants to be issued stock certificates, and
a stockholder may opt not to be issued a certificate.
3.REMEDIAL LAW; SPECIAL CIVIL ACTIONS; PETITION FOR MANDAMUS; WHEN
NOT PROPER TO COMPEL THE REGISTRATION OF STOCK TRANSFER;
APPLICATION IN CASE AT BAR. The deed of undertaking with indorsement
presented by petitioner does not establish, on its face, his right to demand for
the registration of the transfer and the issuance of certificates of stocks.
In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition
for mandamus fails to state a cause of action where it appears that the petitioner
is not the registered stockholder and there is no allegation that he holds any
power of attorney from the registered stockholder, from whom he obtained the
stocks, to make the transfer. . . . In Rivera vs.Florendo, 144 SCRA 643, 657
(1986), we reiterated that a mere indorsement by the supposed owners of the
stock, in the absence of express instructions from them, cannot be the basis of
an action for mandamus and that the rights of the parties have to be threshed
out in an ordinary action. That Hager and Rivera involved petitions
for mandamus to compel the registration of the transfer, while this case is one
for issuance of stock, is of no moment. It has been made clear, thus far, that
before a transferee may ask for the issuance of stock certificates, he must first
cause the registration of the transfer and thereby enjoy the status of a
stockholder insofar as the corporation is concerned. A corporate secretary may
not be compelled to register transfers of shares on the basis merely of an
indorsement of stock certificates. With more reason, in our view, a corporate
secretary may not be compelled to issue stock certificates without such
registration. . . . Absent an allegation that the transfer of shares is recorded in
the stock and transfer book of respondent ALSONS, there appears no basis for a
clear and indisputable duty or clear legal obligation that can be imposed upon
the respondent corporate secretary, so as to justify the issuance of the writ
of mandamus to compel him to perform the transfer of the shares to petitioner.
The test of sufficiency of the facts alleged in a petition is whether or not,
admitting the facts alleged, the court could render a valid judgment thereon in
accordance with the prayer of the petition. This test would not be satisfied if, as
in this case, not all the elements of a cause of action are alleged in the
complaint. Where the corporate secretary is under no clear legal duty to issue
stock certificates because of the petitioner's failure to record earlier the transfer
of shares, one of the elements of the cause of action for mandamus is clearly
missing. IaHDcT
D E C I S I O N
QUISUMBING, J p:
This petition for review seeks to annul the decision 1 of the Court of Appeals, in
CA-G.R. SP No. 46692, which set aside the decision 2 of the Securities and
Exchange Commission (SEC) En Banc in SEC-AC No. 545 and reinstated the
order 3 of the Hearing Officer dismissing herein petitioner's complaint. Also
assailed is the CA's resolution 4 of August 10, 1999, denying petitioner's motion
for reconsideration. DTAaCE
On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a
complaint 5 with the SEC for mandamus and damages against defendants (now
respondents) Alsons Cement Corporation and its corporate secretary Francisco
M. Giron, Jr. In his complaint, petitioner alleged, among others, that:
xxx xxx xxx
5.The late Fausto G. Gaid was an incorporator of Victory Cement
Corporation (VCC), having subscribed to and fully paid 239,500 shares of
said corporation.
6.On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of
Undertaking" and "Indorsement" whereby the latter acknowledges that
the former is the owner of said shares and he was therefore
assigning/endorsing the same to the plaintiff. A copy of the said
deed/indorsement is attached as Annex "A".
7.On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC
for brevity).
8.On October 22, 1990, FCC was renamed Alsons Cement Corporation
(ACC for brevity) as shown by the Amended Articles of Incorporation of
ACC, a copy of which is attached as Annex "B".
9.From the time of incorporation of VCC up to the present, no
certificates of stock corresponding to the 239,500 subscribed and fully
paid shares of Gaid were issued in the name of Fausto G. Gaid and/or
the plaintiff.
10.Despite repeated demands, the defendants refused and continue to
refuse without any justifiable reason to issue to plaintiff the certificates
of stocks corresponding to the 239,500 shares of Gaid, in violation of
plaintiff's right to secure the corresponding certificate of stock in his
name. 6

Attached to the complaint was the Deed of Undertaking and Indorsement 7 upon
which petitioner based his petition formandamus. Said deed and indorsement
read as follows:
DEED OF UNDERTAKING
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, is the owner of the total subscription of Fausto
Gaid with Victory Cement Corporation in the total amount of TWO
HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED (P239,500.00)
PESOS and that Fausto Gaid does not have any liability whatsoever on
the subscription agreement in favor of Victory Cement Corporation.
(SGD.) VICENTE C. PONCE
February 8, 1968
CONFORME:
(SGD.) FAUSTO GAID
INDORSEMENT
I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED
THIRTY-NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of
Victory Cement Corporation to VICENTE C. PONCE.
(SGD.) FAUSTO GAID
With these allegations, petitioner prayed that judgment be rendered ordering
respondents (a) to issue in his name certificates of stocks covering the 239,500
shares of stocks and its legal increments and (b) to pay him damages. 8
Instead of filing an answer, respondents moved to dismiss the complaint on the
grounds that: (a) the complaint states no cause of action; mandamus is improper
and not available to petitioner; (b) the petitioner is not the real party in interest;
(c) the cause of action is barred by the statute of limitations; and (d) in any
case, the petitioner's cause of action is barred by laches. 9 They argued, inter
alia, that there being no allegation that the alleged "INDORSEMENT" was
recorded in the books of the corporation, said indorsement by Gaid to the
plaintiff of the shares of stock in question assuming that the indorsement was
in fact a transfer of stocks was not valid against third persons such as ALSONS
under Section 63 of the Corporation Code. 10 There was, therefore, no specific
legal duty on the part of the respondents to issue the corresponding certificates
of stock, andmandamus will not lie. 11
Petitioner filed his opposition to the motion to dismiss on February 19, 1996
contending that: (1) mandamus is the proper remedy when a corporation and its
corporate secretary wrongfully refuse to record a transfer of shares and issue the
corresponding certificates of stocks; (2) he is the proper party-in-interest since
he stands to be benefited or injured by a judgment in the case; (3) the statute of
limitations did not begin to run until defendant refused to issue the certificates of
stock in favor of the plaintiff on April 13, 1992.
After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr.
granted the motion to dismiss in an Order dated February 29, 1996, which held
that:
xxx xxx xxx
Insofar as the issuance of certificates of stock is concerned, the real
party in interest is Fausto G. Gaid, or his estate or his heirs. Gaid was an
incorporator and an original stockholder of the defendant corporation
who subscribed and fully paid for 239,500 shares of stock (Annex "B").
In accordance with Section 37 of the old Corporation Law (Act No. 1459)
obtaining in 1968 when the defendant corporation was incorporated, as
well as Section 64 of the present Corporation Code (Batas Pambansa
Blg. 68), a stockholder who has fully paid for his subscription together
with interest and expenses in case of delinquent shares, is entitled to
the issuance of a certificate of stock for his shares. According to
paragraph 9 of the Complaint, no stock certificate was issued to Gaid.
Comes now the plaintiff who seeks to step into the shoes of Gaid and
thereby become a stockholder of the defendant corporation by
demanding issuance of the certificates of stock in his name. This he
cannot do, for two reasons: there is no record of any assignment or
transfer in the books of the defendant corporation, and there is no
instruction or authority from the transferor (Gaid) for such assignment
or transfer. Indeed, nothing is alleged in the complaint on these two
points.
xxx xxx xxx
In the present case, there is not even any indorsement of any stock
certificate to speak of. What the plaintiff possesses is a document by
which Gaid supposedly transferred the shares to him. Assuming the
document has this effect, nevertheless there is neither any allegation
nor any showing that it is recorded in the books of the defendant
corporation, such recording being a prerequisite to the issuance of a
stock certificate in favor of the transferee. 12
Petitioner appealed the Order of dismissal. On January 6, 1997, the
Commission En Banc reversed the appealed Order and directed the Hearing
Officer to proceed with the case. In ruling that a transfer or assignment of stocks
need not be registered first before it can take cognizance of the case to enforce
the petitioner's rights as a stockholder, the Commission En Banc cited our ruling
in Abejo vs. De la Cruz, 149 SCRA 654 (1987) to the effect that:
. . . As the SEC maintains, "There is no requirement that a
stockholder of a corporation must be a registered one in order
that the Securities and Exchange Commission may take
cognizance of a suit seeking to enforce his rights as such
stockholder". This is because the SEC by express mandate has
"absolute jurisdiction, supervision and control over all
corporations" and is called upon to enforce the provisions of the
Corporation Code, among which is the stock purchaser's right to
secure the corresponding certificate in his name under the
provisions of Section 63 of the Code. Needless to say, any
problem encountered in securing the certificates of stock
representing the investment made by the buyer must be
expeditiously dealt with through
administrative mandamus proceedings with the SEC, rather than
through the usual tedious regular court procedure. . . .
Applying this principle in the case on hand, a transfer or assignment of
stocks need not be registered first before the Commission can take
cognizance of the case to enforce his rights as a stockholder. Also, the
problem encountered in securing the certificates of stock made by the
buyer must be expeditiously taken up through the so-called
administrative mandamus proceedings with the SEC than in the regular
courts. 13
The Commission En Banc also found that the Hearing Officer erred in holding
that petitioner is not the real party in interest.
xxx xxx xxx
As appearing in the allegations of the complaint, plaintiff-appellant is the
transferee of the shares of stock of Gaid and is therefore entitled to avail
of the suit to obtain the proper remedy to make him the rightful owner
and holder of a stock certificate to be issued in his name. Moreover,
defendant-appellees failed to show that the transferor nor his heirs have
refuted the ownership of the transferee. Assuming these allegations to
be true, the corporation has a mere ministerial duty to register in its
stock and transfer book the shares of stock in the name of the plaintiff-
appellant subject to the determination of the validity of the deed of
assignment in the proper tribunal. 14
Their motion for reconsideration having been denied, herein respondents
appealed the decision 15 of the SEC En Banc and the resolution 16 denying their
motion for reconsideration to the Court of Appeals.
In its decision, the Court of Appeals held that in the absence of any allegation
that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was
registered in the stock and transfer book of ALSONS, Ponce failed to state a
cause of action. Thus, said the CA, "the complaint for mandamus should be
dismissed for failure to state a cause of action." 17 Petitioner's motion for
reconsideration was likewise denied in a resolution 18 dated August 10, 1999.
Hence, the instant petition for review on certiorari alleging that:
I.. . . THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK
FILED BY PETITIONER FAILED TO STATE A CAUSE OF ACTION
BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE
SHARES (SUBJECT MATTER OF THE COMPLAINT) WAS
REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE
CORPORATION, CITING SECTION 63 OF THE CORPORATION
CODE.
II.. . . THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING
THE CASES OF "ABEJO VS. DE LA CRUZ", 149 SCRA 654
AND "RURAL BANK OF SALINAS, INC., ET AL. VS. COURT OF
APPEALS, ET AL.", G.R. NO. 96674, JUNE 26, 1992.
III.. . . THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A
1911 CASE, "HAGER VS. BRYAN", 19 PHIL. 138, TO DISMISS THE
COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK. 19
At issue is whether the Court of Appeals erred in holding that herein petitioner
has no cause of action for a writ of mandamus.HECaTD
Petitioner first contends that the act of recording the transfer of shares in the
stock and transfer book and that of issuing a certificate of stock for the
transferred shares involves only one continuous process. Thus, when a corporate
secretary is presented with a document of transfer of fully paid shares, it is his
duty to record the transfer in the stock and transfer book of the corporation,
issue a new stock certificate in the name of the transferee, and cancel the old
one. A transferee who requests for the issuance of a stock certificate need not
spell out each and every act that needs to be done by the corporate secretary,
as a request for issuance of stock certificates necessarily includes a request for
the recording of the transfer. Ergo, the failure to record the transfer does not
mean that the transferee cannot ask for the issuance of stock certificates.
Secondly, according to petitioner, there is no law, rule or regulation requiring a
transferor of shares of stock to first issue express instructions or execute a
power of attorney for the transfer of said shares before a certificate of stock is
issued in the name of the transferee and the transfer registered in the books of
the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911),
and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not
apply to this case. These cases contemplate a situation where a certificate of
stock has been issued by the company whereas in this case at bar, no stock
certificates have been issued even in the name of the original stockholder,
Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register the
transfer or to secure stock certificates in. his name, his cause of action is
deemed not to have accrued until respondent ALSONS denied his request.
Respondents, in their comment, maintain that the transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-existent in so
far as the corporation is concerned and no certificate of stock can be issued in
the name of the transferee. Until the recording is made, the transfer cannot be
the basis of issuance of a certificate of stock. They add that petitioner is not the
real party-in-interest, the real party-in-interest being Fausto Gaid since it is his
name that appears in the records of the corporation. They conclude that
petitioner's cause of action is barred by prescription and laches since 24 years
elapsed before he made any demand upon ALSONS.
We find the instant petition without merit. The Court of Appeals did not err in
ruling that petitioner had no cause of action, and that his petition
for mandamus was properly dismissed.
There is no question that Fausto Gaid was an original subscriber of respondent
corporation's 239,500 shares. This is clear from the numerous pleadings filed by
either party. It is also clear from the Amended Articles of
Incorporation 20 approved on April 9, 1995 21 that each share had a par value of
P1.00 per share. And, it is undisputed that petitioners had not made a previous
request upon the corporate secretary of ALSONS, respondent Francisco M. Giron
Jr., to record the alleged transfer of stocks.
The Corporation Code states that:
SEC. 63.Certificate of stock and transfer of shares. The capital stock
of stock corporations shall be divided into shares for which certificates
signed by the president or vice-president, countersigned by the
secretary or assistant secretary, sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares of stock so issued
are personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the transfer
is recorded in the books of the corporation so as to show the names of
the parties to the transaction, the date of the transfer, the number of
the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim
shall be transferable in the books of the corporation.
Pursuant to the foregoing provision, a transfer of shares of stock not recorded in
the stock and transfer book of the corporation is non-existent as far as the
corporation is concerned. 22 As between the corporation on the one hand, and
its shareholders and third persons on the other, the corporation looks only to its
books for the purpose of determining who its shareholders are. 23 It is only when
the transfer has been recorded in the stock and transfer book that a corporation
may rightfully regard the transferee as one of its stockholders. From this time,
the consequent obligation on the part of the corporation to recognize such rights
as it is mandated by law to recognize arises. HcISTE
Hence, without such recording, the transferee may not be regarded by the
corporation as one among its stockholders and the corporation may legally
refuse the issuance of stock certificates in the name of the transferee even when
there has been compliance with the requirements of Section 64 24 of the
Corporation Code. This is the import of Section 63 which states that "No transfer,
however, shall be valid, except between the parties, until the transfer is recorded
in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates
and the number of shares transferred." The situation would be different if the
petitioner was himself the registered owner of the stock which he sought to
transfer to a third party, for then he would be entitled to the remedy
of mandamus. 25
From the corporation's point of view, the transfer is not effective until it is
recorded. Unless and until such recording is made the demand for the issuance
of stock certificates to the alleged transferee has no legal basis. As between the
corporation on the one hand, and its shareholders and third persons on the
other, the corporation looks only to its books for the purpose of determining who
its shareholders are. 26 In other words, the stock and transfer book is the basis
for ascertaining the persons entitled to the rights and subject to the liabilities of
a stockholder. Where a transferee is not yet recognized as a stockholder, the
corporation is under no specific legal duty to issue stock certificates in the
transferee's name.
It follows that, as held by the Court of Appeals:
. . . until registration is accomplished, the transfer, though valid between
the parties, cannot be effective as against the corporation. Thus, in the
absence of any allegation that the transfer of the shares between Gaid
and the private respondent [herein petitioner] was registered in the
stock and transfer book of the petitioner corporation, the private
respondent has failed to state a cause of action. 27
Petitioner insists that it is precisely the duty of the corporate secretary, when
presented with the document of fully paid shares, to effect the transfer by
recording the transfer in the stock and transfer book of the corporation and to
issue stock certificates in the name of the transferee. On this point, the SEC En
Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals, 28 where we held
that:
For the petitioner Rural Bank of Salinas to refuse registration of the
transferred shares in its stock and transfer book, which duty is
ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. Thus, respondent Court of
Appeals did not err in upholding the decision of respondent SEC
affirming the Decision of its Hearing Officer directing the registration of
the 473 shares in the stock and transfer book in the names of private
respondents. At all events, the registration is without prejudice to the
proceedings in court to determine the validity of the Deeds of
Assignment of the shares of stock in question. AcHEaS
In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had
a Special Power of Attorney executed in her favor by Clemente Guerrero, the
registered stockholder. It gave Guerrero full authority to sell or otherwise dispose
of the 473 shares of stock registered in Clemente's name and to execute the
proper documents therefor. Pursuant to the authority so given, Melania assigned
the 473 shares of stock owned by Guerrero and presented to the Rural Bank of
Salinas the deeds of assignment covering the assigned shares. Melania Guerrero
prayed for the transfer of the stocks in the stock and transfer book and the
issuance of stock certificates in the name of the new owners thereof. Based on
those circumstances, there was a clear duty on the part of the corporate
secretary to register the 473 shares in favor of the new owners, since the person
who sought the transfer of shares had express instructions from and specific
authority given by the registered stockholder to cause the disposition of stocks
registered in his name.
That cannot be said of this case. The deed of undertaking with indorsement
presented by petitioner does not establish, on its face, his right to demand for
the registration of the transfer and the issuance of certificates of stocks.
In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition
for mandamus fails to state a cause of action where it appears that the petitioner
is not the registered stockholder and there is no allegation that he holds any
power of attorney from the registered stockholder, from whom he obtained the
stocks, to make the transfer, thus:
It appears, however, from the original as well as the amended petition,
that this petitioner is not the registered owner of the stock which he
seeks to have transferred, and except in so far as he alleges that he is
the owner of the stock and that it was "indorsed" to him on February 5
by the Bryan-Landon Company, in whose name it is registered on the
books of the Visayan Electric Company, there is no allegation that the
petitioner holds any power of attorney from the Bryan-Landon Company
authorizing him to make demand on the secretary of the Visayan Electric
Company to make the transfer, which petitioner seeks to have made
through the medium of the mandamus of this court.
Without discussing or deciding the respective rights of the parties which
might be properly asserted in an ordinary action or an action in the
nature of an equitable suit, we are all agreed that in a case such as that
at bar, a mandamus should not issue to compel the secretary of a
corporation to make a transfer of the stock on the books of the
company, unless it affirmatively appears that he has failed or refused so
to do, upon the demand either of the person in whose name the stock is
registered, or of some person holding a power of attorney for that
purpose from the registered owner of the stock. There is no allegation in
the petition that the petitioner or anyone else holds a power of attorney
from the Bryan-Landon Company authorizing a demand for the transfer
of the stock, or that the Bryan-Landon Company has ever itself made
such demand upon the Visayan Electric Company, and in the absence of
such allegation we are not able to say that there was such a clear
indisputable duty, such a clear legal obligation upon the respondent, as
to justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (Secs.
35 and 36 of Act No. 1459), 29 the mere indorsement of stock
certificates does not in itself give to the indorsee such a right to have a
transfer of the shares of stock on the books of the company as will
entitle him to the writ of mandamus to compel the company and its
officers to make such transfer at his demand, because, under such
circumstances the duty, the legal obligation, is not so clear and
indisputable as to justify the issuance of the writ. As a general rule and
especially under the above-cited statute, as between the corporation on
the one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who
its shareholders are, so that a mere indorsee of a stock certificate,
claiming to be the owner, will not necessarily be recognized as such by
the corporation and its officers, in the absence of express instructions of
the registered owner to make such transfer to the indorsee, or a power
of attorney authorizing such transfer. 30
In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere
indorsement by the supposed owners of the stock, in the absence of express
instructions from them, cannot be the basis of an action for mandamus and that
the rights of the parties have to be threshed out in an ordinary action.
That Hager and Rivera involved petitions for mandamus to compel the
registration of the transfer, while this case is one for issuance of stock, is of no
moment. It has been made clear, thus far, that before a transferee may ask for
the issuance of stock certificates, he must first cause the registration of the
transfer and thereby enjoy the status of a stockholder insofar as the corporation
is concerned. A corporate secretary may not be compelled to register transfers of
shares on the basis merely of an indorsement of stock certificates. With more
reason, in our view, a corporate secretary may not be compelled to issue stock
certificates without such registration. 31
Petitioner's reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987),
that notice given to the corporation of the sale of the shares and presentation of
the certificates for transfer is equivalent to registration is misplaced. In this case
there is no allegation in the complaint that petitioner ever gave notice to
respondents of the alleged transfer in his favor. Moreover, that case arose
between and among the principal stockholders of the corporation, Pocket Bell,
due to the refusal of the corporate secretary to record the transfers in favor of
Telectronics of the corporation's controlling 56% shares of stock which were
covered by duly endorsed stock certificates. As aforesaid, the request for the
recording of a transfer is different from the request for the issuance of stock
certificates in the transferee's name. Finally, in Abejo we did not say that transfer
of shares need not be recorded in the books of the corporation before the
transferee may ask for the issuance of stock certificates. The Court's statement,
that "there is no requirement that a stockholder of a corporation must be a
registered one in order that the Securities and Exchange Commission may take
cognizance of a suit seeking to enforce his rights as such stockholder among
which is the stock purchaser's right to secure the corresponding certificate in his
name," 32 was addressed to the issue of jurisdiction, which is not pertinent to
the issue at hand.
Absent an allegation that the transfer of shares is recorded in the stock and
transfer book of respondent ALSONS, there appears no basis for a clear and
indisputable duty or clear legal obligation that can be imposed upon the
respondent corporate secretary, so as to justify the issuance of the writ
of mandamus to compel him to perform the transfer of the shares to petitioner.
The test of sufficiency of the facts alleged in a petition is whether or not,
admitting the facts alleged, the court could render a valid judgment thereon in
accordance with the prayer of the petition. 33 This test would not be satisfied if,
as in this case, not all the elements of a cause of action are alleged in the
complaint. 34 Where the corporate secretary is under no clear legal duty to issue
stock certificates because of the petitioner's failure to record earlier the transfer
of shares, one of the elements of the cause of action for mandamus is clearly
missing. AaSCTD
That petitioner was under no obligation to request for the registration of the
transfer is not in issue. It has no pertinence in this controversy. One may own
shares of corporate stock without possessing a stock certificate. In Tan vs. SEC,
206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is
not necessary to render one a stockholder in a corporation. But a certificate of
stock is the tangible evidence of the stock itself and of the various interests
therein. The certificate is the evidence of the holder's interest and status in the
corporation, his ownership of the share represented thereby. The certificate is in
law, so to speak, an equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but it is not essential to the
existence of a share in stock or the creation of the relation of shareholder to the
corporation. 35 In fact, it rests on the will of the stockholder whether he wants to
be issued stock certificates, and a stockholder may opt not to be issued a
certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466
(1958), we held that considering that the law does not prescribe a period within
which the registration should be effected, the action to enforce the right does
not accrue until there has been a demand and a refusal concerning the transfer.
In the present case, petitioner's complaint formandamus must fail, not because
of laches or estoppel, but because he had alleged no cause of action sufficient
for the issuance of the writ.
WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court
of Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities and
Exchange Commission En Banc in SEC-AC No. 545 and reinstated the order of
the Hearing Officer, is hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Bellosillo, Mendoza, Austria-Martinez and Callejo, Sr., JJ., concur.
Footnotes

49.
FIRST DIVISION
[G.R. No. L-33320. May 30, 1983.]
RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE
NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
SYLLABUS
1.COMMERCIAL LAW; CORPORATION CODE; LIMITATIONS OF RIGHT OF
INSPECTION UNDER THE NEW CODE (B.P. BLG. 68). As may be noted,
among the changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following: the records must be kept
at the principal office of the corporation; the inspection must be made on
business days; the stockholder may demand a copy of the excerpts of the
records or minutes; and the refusal to allow such inspection shall subject the
erring officer or agent of the corporation to civil and criminal liabilities. However,
while seemingly enlarging the right of inspection, the new Code has prescribed
limitations to the same. It is now expressly required as a condition for such
examination that the one requesting it must not have been guilty of using
improperly any information secured through a prior examination, and that the
person asking for such examinations must be "acting in good faith and for a
legitimate purpose in making his demand."
2.ID.; ID.; ID.; UNQUALIFIED PROVISION UNDER THE PREVIOUS LAW, NOW
DISSIPATED BY THE CLEAR PROVISION OF SECTION 74 OF B.P. BLG. 68. The
unqualified provision on the right of inspection previously contained in Section
51, Act No. 1459, as amended, no longer holds true under the provisions of the
present law. The argument of the petitioner that the right granted to him under
Section 51 of the former Corporation law should not be dependent on the
propriety of his motive or purpose in asking for the inspection of the books of the
respondent bank loses whatever validity it might have had before the
amendment of the law. If there is any doubt in the correctness of the ruling of
the trial court that the right of inspection granted under Section 51 of the old
Corporation Law must be dependent on a showing of proper motive on the part
of the stockholder demanding the same, it now dissipated by the clear language
of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.
3.ID.; ID.; ID.; MODE OF ACQUISITION OF ONE SHARE OF STOCK, AS
EVIDENCE OF BAD FAITH AND ULTERIOR MOTIVE. Although the petitioner
has claimed that he has justifiable motives in seeking the inspection of the books
of the respondent bank, he has not set forth the reasons and the purposes for
which be desires such inspection, except to satisfy himself as to the truth of
published reports regarding certain transactions entered into by the respondent
bank and to inquire into their validity. The circumstances under which he
acquired one share of stock in the respondent bank purposely to exercise the
right of inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions
entered into by the respondent bank even before he became a stockholder. His
obvious purpose was to arm himself with materials which he can use against the
respondent bank for acts done by the latter when the petitioner was a total
stranger to the same. He could have been impelled by a laudable sense of civil
consciousness, but it could not be said that his purpose is germane to his
interest as a stockholder.
4.ID.; ID.; PROVIDES THAT CORPORATIONS CREATED BY CHARTERS SHALL BE
GOVERNED PRIMARILY BY SAID CHARTERS; RESPONDENT BANK WITH A
CHARTER OF ITS OWN IS NOT GOVERNED BY THE CORPORATION CODE.
The Philippine National Bank is not an ordinary corporation. Having a charter of
its own, it is not governed, as a rule, by the Corporation Code of the Philippines.
Section 4 of the said Code provides: "SEC. 4. Corporations created by special
laws or charters. Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or charter creating them
or applicable to them, supplemented by the provisions of this Code, insofar as
they are applicable." The provision of Section 74 of Batas Pambansa Blg. 68 of
the new Corporation Code with respect to the right of a stockholder to demand
an inspection or examination of the books of the corporation may not be
reconciled with the above-quoted provisions of the charter of the bank. It is not
correct to claim, therefore, that the right of inspection under Section 74 of the
new Corporation Code may apply in a supplementary capacity to the charter of
the respondent bank.
D E C I S I O N
VASQUEZ, J p:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of
Manila a special civil action for mandamus against the herein respondent praying
that the latter be ordered to allow him to look into the books and records of the
respondent bank in order to satisfy himself as to the truth of the published
reports that the respondent has guaranteed the obligation of Southern Negros
Development Corporation in the purchase of a US$23 million sugar-mill to be
financed by Japanese suppliers and financiers; that the respondent is financing
the construction of the P21 million Cebu-Mactan Bridge to be constructed by V.C.
Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of said transactions. The
petitioner has alleged had his written request for such examination was denied
by the respondent. The trial court having dismissed the petition for mandamus,
the instant appeal to review the said dismissal was filed. LLjur
The facts that gave rise to the subject controversy have been set forth by the
trial court in the decision herein sought to be reviewed, as follows:
"'Briefly stated, the following facts gathered from the stipulation of the
parties served as the backdrop of this proceeding.
'Previous to the present action, the petitioner instituted several cases in
this Court questioning different transactions entered into by the Bank
with other parties. First among them is Civil Case No. 69345 filed on
April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza
of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber
Corporation, Allis Chalmers and General Motors Corporation. In the
course of the hearing of said case on August 3, 1967, the personality of
herein petitioner to sue the bank and question the letters of credit it has
extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known
his intention to acquire one share of stock from Congressman Justiniano
Montano which, on the following day, August 30, 1967, was transferred
in his name in the books of the Bank.
'Subsequent to his aforementioned acquisition of one share of stock of
the Bank, petitioner, in his dual capacity as a taxpayer and stockholder,
filed the following cases involving the bank or the members of its Board
of Directors to wit:
'1.On October 18, 1967, Civil Case No. 71044 versus the
Board of Directors of the Bank; the National Investment and
Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev.
Co. or Saravia;
'2.On May 11, 1968, Civil Case No. 72936 versus Roberto
Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar
Central, Inc., Calinog-Lambunao Sugar Mill Integrated Farming,
Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.;
'3.On May 8, 1969, Civil Case No. 76427 versus Alfredo
Montelibano and the Directors of both the PNB and DBP;
'On January 11, 1969, however, petitioner addressed a letter to the
President of the Bank (Annex A, Pet.), requesting submission to look into
the records of its transactions covering the purchase of a sugar central
by the Southern Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar
Mills in Iloilo. On January 23, 1969, the Asst. Vice President and Legal
Counsel of the Bank answered petitioner's letter denying his request for
being not germane to his interest as a one share stockholder and for the
cloud of doubt as to his real intention and purpose in acquiring said
share. (Annex B, Pet.) In view of the Bank's refusal, the petitioner
instituted this action.'" (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in
its brief which he characterized as having been "correctly stated." (Petitioner-
Appellant's Brief, pp. 5-7.) LLjur
The court a quo denied the prayer of the petitioner that he be allowed to
examine and inspect the books and records of the respondent bank regarding
the transactions mentioned on the grounds that the right of a stockholder to
inspect the record of the business transactions of a corporation granted under
Section 51 of the former Corporation Law (Act No. 1459, as amended) is not
absolute, but is limited to purposes reasonably related to the interest of the
stockholder, must be asked for in good faith for a specific and honest purpose
and not gratify curiosity or for speculative or vicious purposes; that such
examination would violate the confidentiality of the records of the respondent
bank as provided in Section 16 of its charter, Republic Act No. 1300, as
amended; and that the petitioner has not exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the
single error to the lower court of having ruled that his alleged improper motive in
asking for an examination of the books and records of the respondent bank
disqualifies him to exercise the right of a stockholder to such inspection under
Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

"Sec. 51.. . . The record of all business transactions of the corporation
and the minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."
Petitioner maintains that the above-quoted provision does not justify the
qualification made by the lower court that the inspection of corporate records
may be denied on the ground that it is intended for an improper motive or
purpose, the law having granted such right to a stockholder in clear and
unconditional terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise, there is nothing
improper in his purpose for asking for the examination and inspection herein
involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No.
1459, as amended, regarding the right of a stockholder to inspect and examine
the books and records of a corporation. The former Corporation Law (Act No.
1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise
known as the "Corporation Code of the Philippines." The right of inspection
granted to a stockholder under Section 51 of Act No. 1459 has been retained,
but with some modifications. The second and third paragraphs of Section 74 of
Batas Pambansa Blg. 68 provide the following:
"The records of all business transactions of the corporation and the
minutes of any meeting shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours
on business days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal: and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose
in making his demand."
As may be noted from the above-quoted provisions, among the changes
introduced in the new Code with respect to the right of inspection granted to a
stockholder are the following the records must be kept at the principal office of
the corporation; the inspection must be made on business days; the stockholder
may demand a copy of the excerpts of the records or minutes; and the refusal to
allow such inspection shall subject the erring officer or agent of the corporation
to civil and criminal liabilities. However, while seemingly enlarging the right of
inspection, the new Code has prescribed limitations to the same. It is now
expressly required as a condition for such examination that the one requesting it
must not have been guilty of using improperly any information secured through a
prior examination, and that the person asking for such examination must be
"acting in good faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in
Section 51, Act No. 1459, as amended, no longer holds true under the provisions
of the present law. The argument of the petitioner that the right granted to him
under Section 51 of the former Corporation Law should not be dependent on the
propriety of his motive or purpose in asking for the inspection of the books of the
respondent bank loses whatever validity it might have had before the
amendment of the law. If there is any doubt in the correctness of the ruling of
the trial court that the right of inspection granted under Section 51 of the old
Corporation Law must be dependent on a showing of proper motive on the part
of the stockholder demanding the same, it is now dissipated by the clear
language of the pertinent provision contained in Section 74 of Batas Pambansa
Blg 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons
and the purposes for which he desires such inspection, except to satisfy himself
as to the truth of published reports regarding certain transactions entered into by
the respondent bank and to inquire into their validity. The circumstances under
which he acquired one share of stock in the respondent bank purposely to
exercise the right of inspection do not argue in favor of his good faith and proper
motivation. Admittedly he sought to be a stockholder in order to pry into
transactions entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which he can
use against the respondent bank for acts done by the latter when the petitioner
was a total stranger to the same. He could have been impelled by a laudable
sense of civic consciousness, but it could not be said that his purpose is germane
to his interest as a stockholder.
We also find merit in the contention of the respondent bank that the inspection
sought to be exercised by the petitioner would be violative of the provisions of its
charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said
charter provide respectively as follows:
"'Sec. 15.Inspection by Department of Supervision and Examination of
the Central Bank. The National Bank shall be subject to inspection by
the Department of Supervision and Examination of the Central Bank.'
'Sec. 16.Confidential information. The Superintendent of Banks and
the Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in
its custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order of a Court
of competent jurisdiction.'
'Sec. 30.Penalties for violation of the provisions of this Act. Any
director, officer, employee, or agent of the Bank, who violates or permits
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by
imprisonment of not more than five years, or both such fine and
imprisonment.'"
The Philippine National Bank is not an ordinary corporation. Having a charter of
its own, it is not governed, as a rule, by the Corporation Code of the Philippines.
Section 4 of the said Code provides:
"SEC. 4.Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to
them, supplemented by the provisions of this Code, insofar as they are
applicable."
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation
Code with respect to the right of a stockholder to demand an inspection or
examination of the books of the corporation may not be reconciled with the
above quoted provisions of the charter of the respondent bank. It is not correct
to claim, therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the charter of the
respondent bank. cdrep
WHEREFORE, the petition is hereby DISMISSED, without costs.
Melencio-Herrera, Plana and Gutierrez, Jr., JJ., concur.
Teehankee, concurs in the result.
Relova J., is on leave.