Corporation Law Case Digests

Corporation Law Case Digests
1. Guy v. Guy
G.R. No. 184068, 19 April 2016
FACTS
Goodland Company Inc. (GCI) is a family-owned corporation of the Guy
family duly created and existing under Philippine laws. Petitioner Simny G.
Guy (Simny) is a stockholder of record and a member of the BOD of the
corporation. Respondents are also GCI stockholders of record who were
allegedly elected as new directors by virtue of the assailed special
stockholders meeting held on 7 September 2004. On September 22, 2004,
or 15 days after the said meeting, the Simny received the notice about the
said hearing. On September 30, 2004, Simny, for himself and on behalf of
GCI and Grace Cheu (Cheu), filed a Complaint against respondents before
the RTC of Manila for the Nullification of the said Meeting and Election of
Directors with a prayer for TRO and/or WPI. Simny avered that there was no
previous notice to him and Cheu, that the meeting was not called by the
proper person and that the notices were not issued by the person who had
legal authority to do so. Respondent Gilbert Guy (Gilbert) argued that the
meeting was legally called and held, that the notice of meeting was signed
by an authorized officer (him, as Vice President) and sent in accordance with
the bylaws, and that Cheu was not a stockholder of record. The RTC
dismissed the complaint. The CA affirmed in toto the RTC ruling. Hence the
petition before the SC.
ISSUE
Whether the assailed special stockholders meeting was void.
RULING
No. Notice of the stockholders meeting was properly sent in
compliance with law and the by-laws of the corporation. For a stockholders'
special meeting to be valid, certain requirements must be met with respect
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to notice, quorum and place. In relation to Section 50 of B.P. 68, one of the
requirements is a previous written notice sent to all stockholders at least one
(1) week prior to the scheduled meeting, unless otherwise provided in the
by-laws. Under the by-laws, the notice shall be mailed not less than five (5)
days prior to the date set for the special meeting. The requirements under
the bylaws were met when Gilbert Guy caused for the mailing of the notice
on September 2, 2004 calling for the assailed special stockholders meeting.
Since the bylaws were clear that only mailing was required, the courts must
apply the law and must not add an additional requirement of actual receipt
of the notice prior to the date of meeting. It was proven that notice to Simny
was sent on Sept. 2, 2004 (5 days prior to the meeting).
The claim that the notice suffered fatal defects as it was not called by
the proper person was also without merit. Under the by-laws, special
meetings may be called by order of the President and must be called upon
the request of stockholders representing (1/3) of the outstanding stock
provided that the VP, if qualified shall exercise all the functions of the
president in absence or disability of the latter. It was not disputed that the
President suffered Alzheimers; that Gilbert was the VP; and that he
represented 79.99% (more than 1/3) of the outstanding stock of GCI. Thus,
the requirements under the bylaws were met. The requirement that the VP
be qualified must be construed to mean that he must not be disqualified
under the Corpo Code. The records do show that 1, he is a stockholder, and
2, he is neither also Secretary nor Treasurer. Hence, he is qualified to act as
President.
Cheu was not a stockholder of record and therefore not entitled to any
notice of meeting. Cheu alleged that she was considered a stockholder of
record for being in possession of stock certificate of Paulino and Benjamin. As
a rule, however, a person who desires to be recognized as a stockholder for
the prupose of exercising stockholders right must secure standing by having
his ownership of share recorded on the stock and transfer book. Thus, only
those whose ownership of shares are duly registered in the stock and

transfer book are considered stockholders of record and are entitled to all
rights of a stockholder. The requirements for transfer, not having been met,
Cheu is not a stockholder of record, and thus not entitled to notice.
2. Ricafort v. Hon. Dicdican

G.R. No. 202647-50, 9 March 2016
FACTS
Nationwide Development Corporation (NADECOR) is a domestic
corporation which is a holder of a Mining Production Sharing Agreement with
the DENR. Its regular annual stockholders' meeting (ASM) was held on
August 15, 2011 to elect its Board of Directors. However, on October 20,
2011, (2 months after the ASM), Corazon Ricafort (Corazon) (wife of JG
Ricafort) along with her children (Petitioners), filed a complaint before the
RTC to declare the August 15, 2011 ASM and all acts carried out pursuant
thereto, null and void alleging that they received notice about the ASM only
on August 16, 2011, a violation, according to them, of the 3-day notice rule
enshrined in the by-laws. Respondents however alleged that their complaint
was an election contest and thus barred under the 15-day rule under the
Interim Rules; that they were sufficiently notified as the notice was mailed on
August 11, 2011; and that they were properly represented by JG Ricafort by
virtue of an Irrevocable Proxy executed by the Petitioners in favor of JG
Ricafort. The RTC ruled in favor of Corazon and held null and void the August
15, 2011 ASM. The RTC noted that neither of the Petitioners were seeking
any elective position. Neither are they questioning the manner and validity of
the elections, and qualifications of the candidates for directorship.
Respondents assailed the decision before the CA and asked for a WPI of the
trial courts order. The CA granted the same, hence this Petition.
ISSUE

Was the action of the Petitioners time-barred? Were they properly

notified? Were they properly represented? Lets find out.
RULING
First of all, the action taken by the Petitioners was really an election
contest and under the Interim Rules said action was time-barred. Indeed, to
nullify the August 15, 2011 ASM would have had no practical effect except to
void the election of the Board of Directors. This case is in all fours with
Yujuico v. Quiambao wherein the SC ruled that where one of the reliefs
sought in the complaint is to nullify the election of the Board of Directors at
the ASM, the complaint involves an election contest. The Interim Rules
defines and election contest to refer to any controversy or dispute involving
title or claim to any elective office in a stock or non-stock corporation, the
validation of proxies, the manner and validity of elections, and the
qualifications of candidates, including the proclamation of winners, to the
office of director, trustee or other officer directly elected by the stockholders
in a close corporation or by members of a non-stock corporation where the
articles of incorporation or by-laws so provide.
Also, the petitioners have no cause of action because they were duly
represented at the August 15, 2011 ASM by their proxy, JG Ricafort by virtue
of an irrevocable proxy executed by the Petitioners in favor of JG Ricafort who
was proven to be present in the August 11, 2011 ASM and who said during
the said meeting to also act as proxy for Petitioners. Hence, lack of notice to
them is inconsequential.
The records also show that they were given due notice. It must be
noted that under the By-Laws, what is required is the mailing out of notices
by registered mail at least three days before the ASM, and this was proven to
have been properly complied with.
3. Mervic Realty Inc v. China Banking Corporation

G.R. No. 193748, 3 Feb 2016 (corporate rehab)
FACTS
On October 16, 2006, Mervic Realty and Viccy Realty jointly applied for
rehabilitation before the RTC of Malabon. The petitioners alleged that they
have a common president, Mario Siochi, and that a majority of their
stockholders and officers are members of the Siochi family. They further
alleged that the two companies suffered during the asian financial crisis and
as a result, are not unable to meet their obligations when they fall due.
Rehabilitation court then issued a stay order to suspend the
enforcement of claims against them and appointed a rehabilitation receiver.
Chinabank, a creditor of the two companies, opposed the rehabilitation
petition, alleging that it acquired title to and initiated extrajudicial
foreclosure proceedings over some of Mervics real properties. It argued that
the two companies should have filed separate petitions as they are separate
entities, notwithstanding the fact that majority of the stockholders, members
and officers belong to the Siochi family.
Chinabank also questioned the venue of the rehabilitation petition,
alleging that it should be the RTC where the principal office of the
corporation is located. As the articles of incorporation of the companies
provide that the principal place of business is Quezon City, it should have
been filed therein and not in Malabon.
RTC approved the rehabilitation plan and denied Chinabanks
opposition, ruling that there is no misjoinder of causes of action as there is a
single cause of action which is corporate rehabilitation.
CA ruled in favor of Chinabank and dismissed the petition on the
ground of improper venue, as the corporation, in a metaphysical sense, is
considered a resident of the place where its principal office is located.
Before the SC, Mervic and Viccy argued that its articles have been
amended in 1985 and that its principal place of business is now in Malabon.

They also reiterate that they are close family corporations and that it would
be impractical to file separate rehabilitation plans.
ISSUE
Whether the two corporations can jointly file a petition for
rehabilitation.
RULING
No, the 2000 Interim Rules on Corporate Rehabilitation does not allow
for the filing of a joint or consolidated rehabilitation petition.
The consolidation of petitions involving two separate entities is not
proper. Although the corporations had interlocking directors, owners, officers,
the two corporations are separate, each one with its own distinct personality.
In determining the feasibility of rehabilitation, the court evaluates the assets
and liabilities of each of these corporations separately and not jointly with
other corporations.
While the 2008 Rules on Corporate Rehabilitation allow a group of
companies to file a joint rehabilitation petition, this was not the rule in effect
when Mervic applied for rehabilitation. Neither did the Court apply the 2008
rules retroactively for the 2008 rules only allow retroactive application to
pending cases which have not undergone initial hearing.
As the rehabilitation court in this case had already conducted the initial
hearing before the effectivity of the 2008 rules, the same cannot be
retroactively applied to the present case.
The SC no longer delved on whether the rehabilitation petition was
properly filed in the RTC of Malabon.
4. POTC, PHILCOMSAT v. Sandiganbayan

G.R. No. 174462, 10 Feb 2016 (separate corporate personality)
FACTS

President Corazon Cojuangco Aquino, exercising revolutionary

government powers issued Executive Order Nos. 1 and 2, creating the
PCGG to recover properties amassed by the unseated President
Ferdinand Edralin Marcos, Sr. and his cronies.
PCGG Commissioner ordered the sequestration and takeover
POTC and PHILCOMSAT among others. POTC is a private corporation,
which is a main stockholder of PHILCOMSAT, a government-owned and
controlled corporation.
The Office of the Solicitor General (OSG), on behalf of the
Republic of the Philippines, filed a Complaint for Reconveyance,
Reversion, Accounting and Restitution, and Damages, docketed as Civil
Case No. 0009, against Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand E.
Marcos, Imelda R. Marcos, Ferdinand R. Marcos, Jr., Roberto S.
Benedicto, Juan Ponce Enrile, and Potenciano Ilusorio.
ISSUE
Whether or not the failure to properly implead POTC and PHILCOMSAT
as defendants in Civil Case No. 0009 is a fatal jurisdictional error.
RULING
Yes. Failure to implead POTC and PHILCOMSAT is a violation of the
fundamental principle that a corporation has a legal personality distinct and
separate from its stockholders; that, the filing of a complaint against a
stockholder is not ipso facto a complaint against the corporation.
Corporation, as a legal entity distinct and separate from its
stockholders, must be impleaded as defendants, giving it the opportunity to
be heard. The failure to properly implead POTC and PHILCOMSAT not only
violates the latters' legal personality, but is repugnant on POTC's and
PHILCOMSAT's right to due process. "[F]ailure to implead these corporations
as defendants and merely annexing a list of such corporations to the
complaints is a violation of their right to due process for it would in effect be

disregarding their distinct and separate personality without a hearing." As

already settled, a suit against individual stockholders is not a suit against the
corporation.
(note: There are other issues but are not related to Corpo)
5. Teng v. SEC
GR No. 184332, 17 Feb 2016
FACTS
Ting Ping purchased shares of TCL Sales Corporation from the
following:
a. 480 shares from Peter Chiu (Chiu) on February 2, 1979;
b. 1,400 shares on September 22, 1985 from his brother Teng Ching
Lay (Teng Ching), who was also the president and operations
manager of TCL; and
c. 1,440 shares from Ismaelita Maluto (Maluto) on September 2, 1989.
Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over
the management of TCL. To protect his shareholdings with TCL, Ting Ping on
August 31, 1989 requested TCL's Corporate Secretary, herein petitioner Teng,
to enter the transfer in the Stock and Transfer Book of TCL for the proper
recording of his acquisition. He also demanded the issuance of new
certificates of stock in his favor. TCL and Teng, however, refused despite
repeated demands. Because of their refusal, Ting Ping filed a petition for
mandamus with the SEC against TCL and Teng.
The mandamus case reached the Supreme Court and affirmed the
order of the SEC to record in the books of the corporation the acquisition of
share by Ting Ping and to issue new certificates of stock in the name of Ting
Ping.
After the finality of the Court's decision, the SEC issued a writ of
execution addressed to the Sheriff of the RTC of Manila. Teng, however, filed

on February 4, 2004 a complaint for interpleader where Teng sought to

compel Henry and Ting Ping to interplead and settle the issue of ownership
over the 1,400 shares, which were previously owned by Teng Ching.
RTC of Manila, rendered its Decision finding Henry to have a better
right to the shares of stock formerly owned by Teng Ching, except as to those
covered by Stock Certificate No. 011 covering 262.5 shares, among others.
An Ex Parte Motion for the Issuance of Alias Writ of Execution was filed by
Ting Ping where he sought the partial satisfaction of SEC en banc.
Teng and TCL filed their respective motions to quash. Teng pointed out,
however, that the annexes in Ting Ping's opposition did not include the
subject certificates of stock.
ISSUE:
Whether the surrender of the certificates of stock is a requisite before
registration of the transfer may be made in the corporate books and for the
issuance of new certificates in its stead.
RULING
A certificate of stock is a written instrument signed by the proper
officer of a corporation stating or acknowledging that the person named in
the document is the owner of a designated number of shares of its stock. It
is prima facie evidence that the holder is a shareholder of a corporation. A
certificate, however, is merely a tangible evidence of ownership of shares of
stock. It is not a stock in the corporation and merely expresses the contract
between the corporation and the stockholder. The shares of stock evidenced
by said certificates, meanwhile, are regarded as property and the owner of
such shares may, as a general rule, dispose of them as he sees fit, unless the
corporation has been dissolved, or unless the right to do so is properly
restricted, or the owner's privilege of disposing of his shares has been
hampered by his own action.

Under Sec 63 of the corporation code, certain minimum requisites

must be complied with for there to be a valid transfer of stocks, to wit: (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.
It is the delivery of the certificate, coupled with the endorsement by
the owner or his duly authorized representative that is the operative act of
transfer of shares from the original owner to the transferee.
The Court in a case has ruled that the right of a transferee/assignee to
have stocks transferred to his name is an inherent right flowing from his
ownership of the stocks. In transferring stock, the secretary of a corporation
acts in purely ministerial capacity, and does not try to decide the question of
ownership. If a corporation refuses to make such transfer without good
cause, it may, in fact, even be compelled to do so by mandamus.
Nevertheless, to be valid against third parties~ and the corporation,
the transfer must be recorded or registered in the books of corporation.
There are several reasons why registration of the transfer is necessary: one,
to enable the transferee to exercise all the rights of a stockholder; two, to
inform the corporation of any change in share ownership so that it can
ascertain the persons entitled to the rights and subject to the liabilities of a
stockholder; and three, to avoid fictitious or fraudulent transfers, among
others. Thus, in Chua Guan v. Samahang Mags as aka, Inc., the Court stated
that the only safe way to accomplish the hypothecation of share of stock is
for the transferee [a creditor, in this case] to insist on the assignment and
delivery of the certificate and to obtain the transfer of the legal title to him
on the books of the corporation by the cancellation of the certificate and the
issuance of a new one to him.
Upon registration of the transfer in the books of the corporation, the
transferee may now then exercise all the rights of a stockholder, which
include the right to have stocks transferred to his name.

In Bitong v. CA, the Court outlined the procedure for the issuance of
new certificates of stock in the name of a transferee: First, the certificates
must be signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the corporation.
x x x Second, delivery of the certificate is an essential element of its
issuance. x x x Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the
original certificate must be surrendered where the person requesting~ the
issuance of a certificate is a transferee from a stockholder.
The surrender of the original certificate of stock is necessary before the
issuance of a new one so that the old certificate may be cancelled. A
corporation is not bound and cannot be required to issue a new certificate
unless the original certificate is produced and surrendered. Surrender and
cancellation of the old certificates serve to protect not only the corporation
but the legitimate shareholder and the public as well, as it ensures that there
is only one document covering a particular share of stock.
In the case at bench, Ting Ping manifested from the start his intention
to surrender the subject certificates of stock to facilitate the registration of
the transfer and for the issuance of new certificates in his name. It would be
sacrificing substantial justice if the Court were to grant the petition simply
because Ting Ping is yet to surrender the subject certificates for cancellation
instead of ordering in this case such surrender and cancellation, and the
issuance of new ones in his name. The Court will not allow Teng and TCL to
frustrate Ting Ping's rights any longer.
6. Viva Shipping Lines Inc v. Keppel Philippines Mining Inc\

GR No. 177382, 17 Feb 2016
(Procedural only. Skip paragraph if you want)

Rule 43 of the Rules of Court prescribes the procedure to assail the

final orders and decisions in corporate rehabilitation cases filed under the
Interim Rules of Procedure on Corporate Rehabilitation. 1 Liberality in the
application of the rules is not an end in itself. It must be pleaded with factual
basis and must be allowed for equitable ends. There must be no indication
that the violation of the rule is due to negligence or design. Liberality is an
extreme exception, justifiable only when equity exists.
FACTS
On October 4, 2005, Viva Shipping Lines, Inc. filed a Petition for
Corporate Rehabilitation before the RTC of Lucena City.
According to Viva Shipping Lines, the devaluation of the Philippine
peso, increased competition, and mismanagement of its businesses made it
difficult to pay its debts as they became due. It also stated that "almost all
[its] vessels were rendered unserviceable either because of age and
deterioration that [it] can no longer compete with modern made vessels
owned by other operators."
In its Company Rehabilitation Plan, Viva Shipping Lines enumerated
possible sources of funding such as the sale of old vessels and commercial
lots of its sister company, Sto. Domingo Shipping Lines. It also proposed the
conversion of the Ocean Palace Mall into a hotel, the acquisition of two (2)
new vessels for shipping operations, and the "re-operation" 16 of an oil mill in
Buenavista, Quezon.
On October 19, 2005, the RTC found that Viva Shipping Lines' Amended
Petition to be "sufficient in form and substance," and issued a stay order.
In the Order dated October 30, 2006, the RTC lifted the stay order and
dismissed Viva Shipping Lines' Amended Petition for failure to show the
company's viability and the feasibility of rehabilitation.
Petitioner appealed the case to the CA however, it failed give notice to
its creditors (former employees who have money claims against the
petitioner) of its appeal.

The CA dismissed Viva Shipping Lines' Petition for Review in the

Resolution dated January 5, 2007.44 It found that Viva Shipping Lines failed to
comply with procedural requirements under Rule 43, The CA ruled that due
to the failure of Viva Shipping Lines to implead its creditors as respondents,
"there are no respondents who may be required to file a comment on the
petition, pursuant to Section 8 of Rule 43,"
Viva Shipping Lines moved for reconsideration. It argued that its
procedural misstep was cured when it served copies of the Petition on the
RTC and on its former employees.
ISSUE
First, whether the CA erred in dismissing petitioner Viva Shipping Lines'
Petition for Review on procedural grounds; and
Second, whether petitioner was denied substantial justice when the
Court of Appeals did not give due course to its petition.
RULING
Corporate rehabilitation is a remedy for corporations, partnerships, and
associations "who [foresee] the impossibility of meeting [their] debts when
they respectively fall due."
A corporation under rehabilitation continues with its corporate life and

activities to achieve solvency,95 or a position where the corporation is able to
pay its obligations as they fall due in the ordinary course of business.
Solvency is a state where the businesses' liabilities are less than its assets.
Corporate rehabilitation is a type of proceeding available to a business

that is insolvent.
In general, insolvency proceedings provide for predictability that

commercial obligations will be met despite business downturns. Stability in

the economy results when there is assurance to the investing public that
obligations will be reasonably paid. It is considered state policy.
Rehabilitation or liquidation shall be made with a view to ensure or

maintain certainty and predictability in commercial affairs, preserve and
maximize the value of the assets of these debtors, recognize creditor rights
and respect priority of claims, and ensure equitable treatment of creditors
who are similarly situated. When rehabilitation is not feasible, it is in the
interest of the State to facilitate a speedy and orderly liquidation of these
debtors' assets and the settlement of their obligations.
The rationale in corporate rehabilitation is to resuscitate businesses in

financial distress because "assets . . . are often more valuable when so
maintained than they would be when liquidated."98Rehabilitation assumes
that assets are still serviceable to meet the purposes of the business. The
corporation receives assistance from the court and a disinterested
rehabilitation receiver to balance the interest to recover and continue
ordinary business, all the while attending to the interest of its creditors to be
paid equitably. These interests are also referred to as the rehabilitative and
the equitable purposes of corporate rehabilitation.
There are instances when corporate rehabilitation can no longer be

achieved. When rehabilitation will not result in a better present value
recovery for the creditors, the more appropriate remedy is liquidation.
It does not make sense to hold, suspend, or continue to devalue

outstanding credits of a business that has no chance of recovery. In such
cases, the optimum economic welfare will be achieved if the corporation is
allowed to wind up its affairs in an orderly manner. Liquidation allows the
corporation to wind up its affairs and equitably distribute its assets among its
creditors.

Liquidation is diametrically opposed to rehabilitation. Both cannot be

undertaken at the same time. 108In rehabilitation, corporations have to
maintain their assets to continue business operations. In liquidation, on the
other hand, corporations preserve their assets in order to sell them. Without
these assets, business operations are effectively discontinued. The proceeds
of the sale are distributed equitably among creditors, and surplus is divided
or losses are re-allocated.
Proceedings in case of insolvency are not limited to rehabilitation. Our

laws have evolved to provide for different procedures where a debtor can
undergo judicially supervised reorganization or liquidation of its assets.
History of the laws on Corporate rehabilitation in the Philippines:
Corporate rehabilitation traces its roots to Act No. 1956 (Insolvency

Law of 1909). Under the Insolvency Law, a debtor in possession of sufficient
properties to cover all its debts but foresees the impossibility of meeting
them when they fall due may file a petition before the court to be declared in
a state of suspension of payments.111 This allows time for the debtor to
organize its affairs in order to achieve a state where it can comply with its
obligations.
The relief was also provided in the amendatory provisions of PD No.

902-A. Section 5 of PD No. 902-A states that the SEC has jurisdiction to
decide:
d) Petitions of corporations, partnerships or associations to be declared

in the state of suspension of payments in cases where the corporation,
partnership or association possesses sufficient property to cover all its debts
but foresees the impossibility of meeting them when they respectively fall
due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the management of a

Rehabilitation Receiver or Management Committee created pursuant to this

Decree.
In 2000, the jurisdiction of the Securities and Exchange Commission

over thesis cases was transferred to the RTC, by operation of Section 5.2 of
the Securities Regulation Code.114 In the same year, this court approved the
Interim Rules of Procedure on Corporate Rehabilitation. The Interim Rules of
Procedure on Corporate Rehabilitation provides a summary and non-
adversarial proceeding to expedite the resolution of cases for the benefit of
the corporation in need of rehabilitation, its creditors, and the public in
general.
Currently, the prevailing law and procedure for corporate rehabilitation

is the Financial Rehabilitation and Insolvency Act of 2010 (FRIA). The
Financial Rehabilitation Rules of Procedure was issued by this court on
August 27, 2013.
However, since the RTC acted on petitioner's Amended Petition before

FRIA was enacted, Presidential Decree No. 902-A and the Interim Rules of
Procedure on Corporate Rehabilitation were applied to this case.
Petitioner is not entitled to liberal construction of the procedural rules.
A corporate rehabilitation case cannot be decided without the

creditors' participation. The court's role is to balance the interests of the
corporation, the creditors, and the general public. Impleading creditors as
respondents on appeal will give them the opportunity to present their legal
arguments before the appellate court. The courts will not be able to balance
these interests if the creditors are not parties to a case. Ruling on petitioner's
appeal in the absence of its creditors will not result in judgment that is
effective, complete, and equitable.

This court cannot exercise its equity jurisdiction and allow petitioner to
circumvent the requirement to implead its creditors as respondents.
Tolerance of such failure will not only be unfair to the creditors, it is contrary
to the goals of corporate rehabilitation, and will invalidate the cardinal
principle of due process of law.
The failure of petitioner to implead its creditors as respondents cannot

be cured by serving copies of the Petition on its creditors. Since the creditors
were not impleaded as respondents, the copy of the Petition only serves to
inform them that a petition has been filed before the appellate court. Their
participation was still significantly truncated. Petitioner's failure to implead
them deprived them of a fair hearing. The appellate court only serves court
orders and processes on parties formally named and identified by the
petitioner. Since the creditors were not named as respondents, they could
not receive court orders prompting them to file remedies to protect their
property rights.
As this court has consistently ruled, "[t]he right to appeal is not a

natural right[,] nor a part of due process; it is merely a statutory privilege,
and may be exercised only in the manner and in accordance with the
provisions of the law."
In line with this, liberality in corporate rehabilitation procedure only

generally refers to the trial court, not to the proceedings before the appellate
court. The Interim Rules of Procedure on Corporate Rehabilitation covers
petitions for rehabilitation filed before the RTC. Thus, Rule 2, Section 2 of the
Interim Rules of Procedure on Corporate Rehabilitation, which refers to liberal
construction, is limited to the RTC. The liberality was given "to assist the
parties in obtaining a just, expeditious, and inexpensive disposition of the
case."

The party who seeks to avail [itself] of [an appeal] must comply with
the requirements of the rules. Failing to do so, the right to appeal is lost.
Rules of procedure are required to be followed, except only when for the
most persuasive of reasons, they may be relaxed to relieve a litigant of an
injustice not commensurate with the degree of his thoughtlessness in not
complying with the procedure prescribed.
Rehabilitation.
Professor Stephanie V. Gomez of the UP College of Law suggests

specific characteristics of an economically feasible rehabilitation plan:
1. The debtor has assets that can generate more cash if used in its daily
operations than if sold.
2. Liquidity issues can be addressed by a practicable business plan that
will generate enough cash to sustain daily operations.
3. The debtor has a definite source of financing for the proper and full
implementation of a Rehabilitation Plan that is anchored on realistic
assumptions and goals.
This court enumerated the characteristics of a rehabilitation plan that

is infeasible:
a. the absence of a sound and workable business plan;

b. baseless and unexplained assumptions, targets and goals;
c. speculative capital infusion or complete lack thereof for the execution
of the business plan;
d. cash flow cannot sustain daily operations; and
e. negative net worth and the assets are near full depreciation or fully
depreciated.
In addition to the tests of economic feasibility, Professor Stephanie V.

Gomez also suggests that the Financial and Rehabilitation and Insolvency Act
of 2010 emphasizes on rehabilitation that provides for better present value
recovery for its creditors.

Present value recovery acknowledges that, in order to pave way for

rehabilitation, the creditor will not be paid by the debtor when the credit falls
due. The court may order a suspension of payments to set a rehabilitation
plan in motion; in the meantime, the creditor remains unpaid. By the time
the creditor is paid, the financial and economic conditions will have been
changed. Money paid in the past has a different value in the future. 150 It is
unfair if the creditor merely receives the face value of the debt. Present
value of the credit takes into account the interest that the amount of money
would have earned if the creditor were paid on time.
Why the rehabilitation plan of petitioner is not feasible.
The RTC correctly dismissed petitioner's rehabilitation plan. It found that

petitioner's assets are non-performing. Petitioner admitted this in its
Amended Petition when it stated that its vessels were no longer serviceable.
In Wonder Book Corporation v. Philippine Bank of Communications, 154 a
rehabilitation plan is infeasible if the assets are nearly fully or fully
depreciated. This reduces the probability that rehabilitation may restore and
reinstate petitioner to its former position of successful operation and
solvency.
Petitioner's rehabilitation plan should have shown that petitioner has

enough serviceable assets to be able to continue its business. Yet, the plan
showed that the source of funding would be to sell petitioner's old vessels.
Disposing of the assets constituting petitioner's main business cannot result
in rehabilitation. A business primarily engaged as a shipping line cannot
operate without its ships. On the other hand, the plan to purchase new
vessels sacrifices the corporation's cash flow. This is contrary to the goal of
corporate rehabilitation, which is to allow present value recovery for
creditors. The plan to buy new vessels after selling the two vessels it
currently owns is neither sound nor workable as a business plan.

The other part of the rehabilitation plan entails selling properties of

petitioner's sister company. As pointed out by the RTC, this plan requires
conformity from the sister company. Even if the two companies have the
same directorship and ownership, they are still two separate juridical
entities.
7. Narra Nickel Mining and Development Corp. v. Redmont

Consolidated Mines Corp.
G.R. No. 195580, 28 January 2015 (grandfather rule)
FACTS
The present case is the motion for reconsideration of its April 21, 2014
Decision of the SC, which denied the Petition for Review on Certiorari under
Rule 45 and affirmed the October 1, 2010 Decision and February 15, 2011
Resolution of the CA.
The case arose from petitioners MPSA (Mineral Production Sharing
Agreements) applications, in which they asserted their respective rights to
the mining areas each applied for. Respondent Redmont, is itself an applicant
for exploration permits over the same mining areas.
Respondent filed petitions for the denial of petitioners applications on
the ground that petitioners were in actuality foreign corporations and are not
entitled to the MPSA to the Panel of Arbitrators (POA) of the Department of
Environment and Natural Resources (DENR) , which decided in favor of
respondent Redmont.
Upon appeal to the CA, it found that there was doubt as to petitioners
nationality since a 100% Canadian-owned firm, MBMI Resources, Inc. (MBMI),

effectively owns60% of the common stocks of the petitioners by owning

equity interest of petitioners other majority corporate shareholders.
ISSUE
Whether or not The Grand Father Rule should be applied.
RULING
The application of the Grandfather Rule is justified by the
circumstances of the case to determine the nationality of petitioners.
The application of the Grandfather Rule in the present case does not
eschew the Control Test.
Nowhere in that disposition did the Court foreclose the application of
the Control Test in determining which corporations may be considered as
Philippine nationals. Instead, to borrow Justice Leonens term, the Court used
the Grandfather Rule as a supplement to the Control Test so that the intent
underlying the averted Sec.2, Art. XII of the Constitution be given effect. The
following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the control test is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the ambit of Sec.
2, Art. XII of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When
in the mind of the Court, there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino equity ownership in the
corporation, then it may apply the grandfather rule.
The Grandfather Rule implements the intent of the Filipinization
provisions of the Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration,
development, and utilization of natural resources to Filipino citizens and
corporations or associations at least sixty per centum of whose capital is
owned by such citizens. Similarly, Section 3(aq) of the Philippine Mining Act
of 1995considers a corporation xxx registered in accordance with law at

least sixty per cent of the capital of which is owned by citizens of the
Philippines as a person qualified to undertake a mining operation.
Consistent with this objective, the Grandfather Rule was originally
conceived to look into the citizenship of the individuals who ultimately own
and control the shares of stock of a corporation for purposes of determining
compliance with the constitutional requirement of Filipino ownership.It
cannot, therefore, be denied that the framers of the Constitution have not
foreclosed the Grandfather Rule as a tool in verifying the nationality of
corporations for purposes of ascertaining their right to participate in
nationalized or partly nationalized activities.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is
the method by which the percentage of Filipino equity in a corporation
engaged in nationalized and/or partly nationalized areas of activities,
provided for under the Constitution and other nationalization laws, is
computed, in cases where corporate shareholders are present, by attributing
the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder. 4 Thus, to arrive at
the actual Filipino ownership and control in a corporation, both the direct and
indirect shareholdings in the corporation are determined.
How to determine citizenship of multi-tiered corporations.
In the case of a multi-tiered corporation, the stock attribution rule must
be allowed to run continuously along the chain of ownership until it finally
reaches the individual stockholders. This is in consonance with the
grandfather rule adopted in the Philippines under Section 96 of the
Corporation Code (BP Blg. 68) which provides that notwithstanding the fact
that all the issued stock of a corporation are held by not more than twenty
persons, among others, a corporation is nonetheless not to be deemed a
close corporation when at least two thirds of its voting stock or voting rights
is owned or controlled by another corporation which is not a close
corporation.

There can be no other Philippine citizens other than those falling within
the enumeration provided by the Constitution. Obviously, only natural
persons are susceptible of citizenship. Thus, for purposes of the
Constitutional and statutory restrictions on foreign participation in the
exploitation of mineral resources, a corporation investing in a mining joint
venture can never be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in] Pedro R. Palting, vs.
San Jose Petroleum [Inc.]. The Court held that a corporation investing in
another corporation engaged in a nationalized activity cannot beconsidered
as a citizen for purposes of the Constitutional provision restricting foreign
exploitation of natural resources:chanRoblesvirtualLawlibrary
xxxx
Accordingly, we opine that we must look into the citizenship of the individual
stockholders, i.e. natural persons, of that investor-corporation in order to
determine if the Constitutional and statutory restrictions are complied with. If
the shares of stock of the immediate investor corporation is in turn held and
controlled by another corporation, then we must look into the citizenship of
the individual stockholders of the latter corporation. In other words, if there
are layers of intervening corporations investing in a mining joint venture, we
must delve into the citizenship of the individual stockholders of each
corporation.
- The beneficial ownership is the key factor to determine ownership.
By law, a mining lease may be granted only to a Filipino citizen, or to a

corporation or partnership registered with the [SEC] at least 60% of the
capital of which is owned by Filipino citizens and possessing x x x. The sixty
percent Philippine equity requirement in mineral resource exploitation x x x

is intended to insure, among other purposes, the conservation of indigenous

natural resources, for Filipino posterity x x x. I think it is implicit in this
provision, even if it refers merely to ownership of stock in the corporation
holding the mining concession, that beneficial ownership of the right to
dispose, exploit, utilize, and develop natural resources shall pertain to
Filipino citizens, and that the nationality requirement is not satisfied unless
Filipinos are the principal beneficiaries in the exploitation of the countrys
natural resources. This criterion of beneficial ownership is tacitly adopted in
Section 44 of P.D. No. 463, above-quoted, which limits the service fee in
service contracts to 40% of the proceeds of the operation, thereby implying
that the 60-40 benefit-sharing ration is derived from the 60-40 equity
requirement in the Constitution.
xxxx
It is obvious that while payments to a service contractor may be justified as a

service fee, and therefore, properly deductible from gross proceeds, the
service contract could be employed as a means of going about or
circumventing the constitutional limit on foreign equity participation and the
obvious constitutional policy to insure that Filipinos retain beneficial
ownership of our mineral resources. Thus, every service contract scheme has
to be evaluated in its entirety, on a case to case basis, to determine
reasonableness of the total service fee x x x like the options available to
the contractor to become equity participant in the Philippine entity holding
the concession, or to acquire rights in the processing and marketing stages.
x x x (emphasis supplied)
The beneficial ownership requirement was subsequently used in tandem

with the situs of control to determine the nationality of a corporation in DOJ
Opinion No. 84, S. of 1988, through the Grandfather Rule, despite the fact

that both the investee and investor corporations purportedly satisfy the 60-
40 Filipino equity requirement:9chanroblesvirtuallawlibrary
the nationality requirement is not satisfied unless it meets the criterion of

beneficial ownership, i.e. Filipinos are the principal beneficiaries in the
exploration of natural resources (Op. No. 144, s. 1977; Op. No. 130, s. 1985),
and that in applying the same the primordial consideration is situs of
control, whether in a stock or non-stock corporationGrandfather Rule is
applied specifically in cases where the corporation has corporate
stockholders with alien stockholdings, otherwise, if the rule is not applied,
the presence of such corporate stockholders could diminish the effective
control of Filipinos.
where 100% of the capital stock is held by a trustee of funds for pension or
other employee retirement or separation benefits, the trustee is a Philippine
national if at least sixty percent (60%) of the fund will accrue to the benefit
of Philippine nationals. Likewise, Section 1(b) of the Implementing Rules of
the FIA provides that for stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential.
Application of the Grandfather Rule with the Control Test.
The Control Test can be, as it has been, applied jointly with the
Grandfather Rule to determine the observance of foreign ownership
restriction in nationalized economic activities. The Control Test and the
Grandfather Rule are not, as it were, incompatible ownership-determinant
methods that can only be applied alternative to each other. Rather, these
methods can, if appropriate, be used cumulatively in the determination of
the ownership and control of corporations engaged in fully or partly
nationalized activities, it is only when the Control Test is first complied with
that the Grandfather Rule may be applied. Put in another manner, if the

subject corporations Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreign-owned, in which case, the
need to resort to the Grandfather Rule disappears.
A corporation that complies with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino corporation if there is no doubt as
to who has the beneficial ownership and control of the corporation. In
that instance, there is no need for a dissection or further inquiry on the
ownership of the corporate shareholders in both the investing and investee
corporation or the application of the Grandfather Rule. 12As a corollary rule,
even if the 60-40 Filipino to foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the Grandfather Rule is necessary
if doubt exists as to the locus of the beneficial ownership and control. In
this case, a further investigation as to the nationality of the personalities
with the beneficial ownership and control of the corporate shareholders in
both the investing and investee corporations is necessary.
The doubt that demands the application of the Grandfather Rule in
addition to or in tandem with the Control Test is not confined to, or more
bluntly, does not refer to the fact that the apparent Filipino ownership of the
corporations equity falls below the 60% threshold. Rather, doubt refers to
various indicia that the beneficial ownership and control of the
corporation do not in fact reside in Filipino shareholders but in foreign
stakeholders.
In relation to the Anti-dummy Law.
The pertinent provisions of the Anti-Dummy Law in relation to the
minimum Filipino equity requirement in the Constitution, significant
indicators of the dummy status have been recognized in view of reports
that some Filipino investors or businessmen are being utilized or [are]
allowing themselves to be used as dummies by foreign investors specifically
in joint ventures for national resource exploitation. These indicators
are:chanRoblesvirtualLawlibrary

1. That the foreign investors provide practically all the funds for the
joint investment undertaken by these Filipino businessmen and their
foreign partner;
2. That the foreign investors undertake to provide practically all the
technological support for the joint venture;
3. That the foreign investors, while being minority stockholders,
manage the company and prepare all economic viability studies.
When foreigners contribute more capital to an enterprise, doubt exists
as to the actual control and ownership of the subject corporation even if the
60% Filipino equity threshold is met.
A doubt exists as to the extent of control and beneficial ownership of
MBMI over the petitioners and their investing corporate stockholders.
The fact that MBMI had practically provided all the funds in the
corporations: Sara Marie, Tesoro, Maridejos, Mcarthur, PLMDC and Narra
creates serious doubt as to the true extent of its (MBMI) control and
ownership over both there companies since, as observed by the SEC, a
reasonable investor would expect to have greater control and economic
rights than other investors who invested less capital than him. The
application of the Grandfather Rule is clearly called for.
8. PNB v Aznar
GR No. 171805, 30 May 2011 (corporate juridical personality)
FACTS
In 1958, Rural Insurance and Surety Company (RISCO) ceased
operation due to business reverses. In order to rehabilitate RISCO, the Aznars
contributed a P212k which was used to purchase three parcels of land. These
lands were registered in the name of RISCO while the amount contributed by
the Aznars constituted as liens and encumbrances annotated in the titles of

the 3 lots. The annotation of such encumbrances were made pursuant to a

special meeting of the Board of Directors of RISCO.
Thereafter, the properties were mortgaged and various annotations
were made on the titles, including a Notice of Attachment and writ of
execution. As a result of the execution, a Certificate of Sale was issued to
PNB as the highest bidder of the three parcels of land.
This then prompted the Aznars to file a petition to quiet their title on
the subject properties and prayed for the issuance of a TRO. The Aznars
alleged that the subsequent annotations (the mortgages) on the titles were
subject to the prior annotation of their liens and encumbrances. They also
argued that the subsequent writs and processes (during execution) were null
and void for lack of valid service upon RISCO and upon them, as
stockholders.
RTC ruled that RISCO was a mere trustee of the properties and hence,
all subsequent annotations to the titles were null and void. It also ordered
PNB to reconvey the property to the Aznars.
CA reversed the RTC ruling and stated that the monetary contributions
made by Aznar et al. to RISCO can only be characterized as a loan secured
by a lien on the subject lots, rather than an express trust. Thus, it merely
directed PNB to pay Aznar et al the amount of their contributions plus legal
interest.
ISSUE
Whether Aznar et al. has title to quiet over the subject properties.
RULING
No, Aznar et al. has no title over the properties.
The SC agreed with the CA that Minutes of the Special Meeting of the
RISCO Board merely show that a loan was contracted by RISCO from the
named stockholders. The SC did not agree with Aznar et al. that the
language of the Minutes created an express trust.

Trust is the right to the beneficial enjoyment of property, the legal title
to which is vested in another. It is fiduciary relationship that obliges the
trustee to deal with the proeprty for the benefit of the beneficiary. Trust
relations may be express or implied. An express trust is created by intention
of the trustor or parties. An implied trust comes into being by operation of
law. However, in order to create an express trust, the intention must be
manifested with reasonable certainty and cannot be inferred from loose and
vague declarations.
In the case at bar, there is no such reasonable certitude in the creation
of an express trust. In fact, perusal of the Minutes does not offer any
indication that the parties intended for Aznar et al. to become beneficiaries
under an express trust.
Hence, Aznar et al. had no right to ask for quieting of title of the proper
for they have no legal and/or equitable rights over the properties. At most,
Aznar et al., only had a right to be repaid the amount loaned to RISCO.
Unfortunately, the right to seek repayment or reimbursement is
already barred by prescription. The Minutes of the special meeting approved
on March 14, 1961 may be considered as a written contract between Aznar
et al., and RISCO. As such, Aznar et al., only had a period of 10 years to
enforce their claim. However, they did not file any action for reimbursement
or refund of their contributions against RISCO or even against PNB. Hence,
their right to refund or reimbursement of their contributions had long
prescribed.
Corporation has separate juridical existence.
A corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected. Hence,
the stockholder only has an inchoate right or interest over the properties of
the the corporation.
9. Commissioner of Customs v. Oilink International Corporation

G.R. No. 161759, 2 July 2014 (corporate juridical personality)
FACTS
On September 15, 1966, Union Refinery Corporation (URC) was
established under the Corporation Code of the Philippines. In the course of its
business undertakings, particularly in the period from 1991 to 1994, URC
imported oil products into the country. On January 11, 1996, Oilink was
incorporated for the primary purpose of manufacturing, importing, exporting,
buying, selling or dealing in oil and gas, and their refinements and by-
products at wholesale and retail of petroleum. URC and Oilink had
interlocking directors when Oilink started its business. The Customs
Commissioner wanted to collect special duties, VAT and excise taxes from
URC and later on also wanted to collect from Oilink URCs tax liability. Oilink
appealed to the CTA which declared null and void the Commissioner of
Customs assessment. The CA affirmed the Decision, thus the present
petition by the Commisioner.
ISSUE
Whether Oilink may also be held liable for URCs tax liability.
RULING
No. There lied no ground to pierce the veil of corporate existence. A
corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those of the persons composing it as
well as from any other legal entity to which it may be related. The separate
and distinct personality of the corporation is, however, a mere fiction
established by law for convenience and to promote the ends of justice. It
may not be used or invoked for ends that subvert the policy and purpose
behind its establishment, or intended by law to which the corporation owes
its being. This is true particularly when the fiction is used to defeat public
convenience, to justify wrong, to protectcfraud, to defend crime, to confuse

legitimate legal or judicial issues, to perpetrate deception or otherwise to

circumvent the law. This is likewise true where the corporate entity is being
used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In such instances, the veil of
corporate entity will be pierced or disregarded with reference to the
particular transaction involved.
In Philippine National Bank v. Ritratto Group, Inc., the SC outlined the
following circumstances that are useful in determining whether a subsidiary
is a mere instrumentality of the parent-corporation: 1. Control, not mere
majority or complete control, but complete domination, not only of finances
but of policy and business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own; 2. Such control must have been used by
the defendant to commit fraud or wrong, to perpetrate the violation of a
statutory or other positive legal duty, or dishonest and, unjust act in
contravention of plaintiff's legal rights; and 3. The aforesaid control and
breach of duty must proximately cause the injury or unjust loss complained
of. In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality, not form, and with how the corporation operated and
the individual defendant's relationship to the operation. Consequently, the
absence of any one of the foregoing elements does not authorize the
piercing of the corporate veil. Indeed, the doctrine of piercing the corporate
veil has no application in this case because the Commissioner of Customs did
not establish that Oilink had been set up to avoid the payment of taxes or
duties, or for purposes that would defeat public convenience, justify wrong,
protect fraud, defend crime, confuse legitimate legal or judicial issues,
perpetrate deception or otherwise circumvent the law. Besides, it was clear
that coming after Oilink was a mere afterthought as the Commissioner first
sought payment only from URC and only later on included Oilink.

10. Ico v. Systems Technology Institute Inc v. Fernandez

G.R. No. 185100, 9 July 2014 (corporate juridical personality)
FACTS
Respondent STI is an educational institution duly incorporated,
organized, and existing under Philippine laws. Respondents Monico V. Jacob
and Peter K. Fernandez are STI officers, the former being the President and
CEO and the latter Senior VP.
Petitioner Girly Ico, a masteral degree holder with doctorate units
earned, was hired as Faculty Member by STI College Makati. STI College
Makati is a wholly-owned subsidiary of STI.
At STI, petitioner served under contract from June1997 to March 1998.
From the years 1998-2002, she had been promoted to the position of Dean of
STI College-Paraaque, then appointed her as Full-Time Assistant Professor I
reporting directly to STIs Academic Services Division (ASD), then promoted
to the position of Dean under ASD, and assigned to STI College-Guadalupe.
Meanwhile, petitioners position as Dean was reclassified from "Job
Grade 4" to "Job Grade Manager B" with a monthly salary of P37,483.58 up
from the P27,000.00 salary petitioner was then receiving.
After petitioners stint as Dean of STI-Guadalupe, she was promoted to
the position of Chief Operating Officer (COO) of STI-Makati, under the same
position classification and salary level of "Job Grade Manager B". She
concurrently served as STI-Makati School Administrator.
During petitioners stint as COO and School Administrator of STI-
Makati, a Plan of Merger was executed between STI and STI College Makati,
whereby the latter would be absorbed by STI. The merger was approved by
the SEC. STI College Makati thus ceased to exist, and STI-Makati was placed
under STIs Education Management Division (EMD).
In a Memorandum, STI updated petitioners appointment as COO, "Job
Grade Manager B" with a gross monthly salary of P37,483.58. She was re-
appointed as COO of STI-Makati, under the supervision of the Academic

Services Group of the EMD and reporting directly to the Head thereof, herein
respondent Fernandez. However, petitioner was not given the salary
commensurate to her position as COO, which by this time appeared to be
pegged at P120,000.00. It likewise appears that she was not given benefits
and privileges which holders of equivalent positions were entitled to, such as
a car plan.
Two months after confirming petitioners appointment as STI-Makati
COO, another Memorandum was issued which was noted by respondent
Jacob cancelling petitioners COO assignment at STI-Makati, citing
managements decision to undertake an "organizational restructuring" in line
with the merger and appointing petitioner as STIs Compliance Manager with
the same "Job Grade Manager B" rank and salary level, reporting directly to
School Compliance Group Head Armand Paraiso.
According to STI, the "organizational re-structuring" was undertaken "in
order to streamline operations. In the process, the positions of Chief
Executive Officer and Chief Operating Officer of STI Makati were abolished."
On May 18, 2004, Fernandez summoned petitioner to his office, where
the following conversation which appears to have been recorded by
petitioner with the knowledge and consent of Fernandez took place:
F: (Fernandez) Im sure you know already why you are here.
P: (Petitioner) No, sir. Nanalo ba tayo sa Winners Circle
F: Girly, lets stop this. You will be pulled out [from] STI CollegeMakati[.] x x x [T]urn
over to Vicky Luz everything tomorrow.
P: Sir? What have I done? May I know what is the reason of (sic) an immediate
transfer and a short period of turn-over?
F: I dont trust you anymore. Ive been hearing too many things from [sic] you and as
your CEO, you dont submit to me FSP monthly. Me high school student ka na inenroll
para lang makasali sa basketball.
P: Sir, thats not true.
F: Would you like me to call Liezel? ([H]e stood up and called Ms. Liezel Diego)
P: Yes, sir.
F: Liezel, how many times did STI College-Makati submitted [sic] to you the FSP?

L: (Liezel Diego) Sir, sa akin po 2 beses peromeron pa po ke Ervie. Tanong ko lang po

ke Ervie kung ilan sa kanya.
P: Sir, can I have one minute to call STI College-Makati to fax the data of the
receiving copies of the FSP?
F: Irrelevant! I dont have time.
P: Sir, you will please put that in writing[. It] is a very strong accusation you are
making and I think I should defend myself.
F: No way! You cannot get anything from me. Why? So that when I will provide such
then you will go to Labor? (in a shouting manner)
P: Sir, what is this all about? Please tell me the real score. I am honest to you and I
believe I am performing well. Is this what I deserve?
F: Dont talk to me about honesty (again said in a shouting manner and fuming mad).
Girly, dont push me to the limit! Dont let me do things that you will regret later.
Dont be like Chito (Salazar, the former STI President) who have [sic] left STI without
proving to everybody whether [sic] he have [sic] done wrong or not. I dont want that
to happen to you!
P: Sir, can I have one minute to go outside. I can no longer bear this? (begging with
both hands [together] as a sign of surrender)
F: No! (still shouting) I dont have time. Heres the letter from HR[.] I want you to sign
this.
P: Sir, Im sorry but I will not sign. I think it should be HR who will give this to me.
F: You want me to call HR? You want me to call Atty. Pascua? You want me to call
people outside [to] witness that you refused to sign? (still shouting) I dont care if you
have a tape recorder there with you. After all, that will not be a [sic] valid evidence in
court.
xxxx
F: Ok. Dont make me loose [sic] my temper again (with a soft voice already). You just
sign this (giving to me the [May 18, 2004 Memorandum]). Dont go to Bohol
anymore. If ever you will win in the Winners Circle, you can get the trip just like what
happened to Redger (Agudo, the former COO of STI College-Makati).
P: Sir, what will be the consequence if I will not sign this?
F: I will file a case against you. What do you call this? (pausing for a little while then
uttered the word) Disobedience!
P: Ok, sir, but please I want to know what exactly my violation is (while signing the
paper). Now that we will be parting ways, I am still hoping that you can tell [sic] the
violations that I made, if there is any.

F: You can have it after 2-3 weeks time. Besides, we are not parting ways (with a
sarcastic smile). I am still your boss in Audit. Audit and Compliance is still under my
supervision.
P: Thank you, sir. (I went out in [sic] his room still trembling)
Petitioner reported to her new office at STIs School Compliance Group,
only to find out that all members of the department had gone to Baguio City
for a planning session. Petitioner, who was not apprised of the official trip,
was thus left behind. That same day, an official communication was
disseminated throughout STI, announcing Jacobs appointment as the new
STI President and CEO, Fernandez as the new COO of STI-Makati, and Luz as
the new STI-Makati School Administrator; however, petitioners appointment
as Compliance Manager was left out.
In a letter to Jacob, petitioner claimed that she became the victim of a
series of discriminatory acts and asserting that she was illegally demoted
and that her name was tarnished as a result of the demotion and transfer.
Jacob replied advising petitioner that her letter was forwarded to Fernandez
for comment.
Prior to that, during the 17th STI Leaders Convention, petitioners
achievement as a Silver Awardee for the 2004 STI Winners Circle Awards
was announced, but she did not attend, claiming that she was too
embarrassed to attend owing to the events leading to her transfer, which to
her was a demotion. STI withheld petitioners prize a South Korea trip
"pending the final result of the investigations being conducted" by STI
relative to irregularities and violations of company policies allegedly
committed by petitioner.
It appears that from May 28, 2004 up to June 10, 2004, STIs Corporate
Auditor/Audit Advisory Group conducted an audit of STI-Makati covering the
whole period of petitioners stint as COO/School Administrator therein. In a
report (Audit Report) later submitted to Fernandez, the auditors claim to
have discovered irregularities, specifically

1. Appointment papers of STI-Makati employees did not have the

written approval of Fernandez in his capacity as CEO;
2. There were instances where employees became regular after only
an abbreviated probationary period, and in some cases, the
employees did not undergo probation;
3. Petitioner failed to fully liquidate cash advances amounting to
P60,000.00, relative to the purchase of books;
4. There was a lack of internal controls in regard to cost of planning
sessions, liquidation reports, journal entries, use of petty cash fund,
and inventory; and
5. Petitioner and other employees falsified school records in order to
enable high school players to play for STI-Makatis volleyball team.
Fernandez cited the above Audit Report and recommended that an
investigation committee be formed to investigate petitioner for grave abuse
of authority, falsification, gross dishonesty, maligning and causing intrigues,
commission of acts tending to cast negativity upon his person (Fernandez),
and other charges. Fernandez recommended that petitioner be placed under
preventive suspension pending investigation.
Jacob approved Fernandezs recommendations, and a Memorandum
was issued placing petitioner under preventive suspension and banning her
entry to any of STIs premises effective June 22, 2004 up to July 16, 2004,
citing "(an) Audit investigation being conducted relative to the offenses" for
which petitioner was charged.
Petitioner received another Memorandum this time stating that
charges have already been filed against her allegedly "based on the Audit
Findings", yet making reference to the Memorandum placing her under
preventive suspension and without informing her of the particulars of the
charges or the results of the audit. Nor was a copy of the said audit findings
attached to the memorandum.
In a demand letter addressed to Jacob, petitioner protested anew her
alleged maltreatment, claiming illegal constructive dismissal and demanding

immediate reinstatement to her COO position and the payment of actual and
other damages, under pain of suit.
In a letter, petitioner was notified of a hearing scheduled for July 2,
2004 and required to submit her written explanation to the charges. It
appears, however, that petitioner did not receive the said letter. Petitioner
filed with the NLRC a labor case against herein respondents, Fabul and
Briones. The Complaint alleged illegal constructive dismissal and illegal
suspension, with claims for regularization as well as for underpayment of
salaries, holiday pay, service incentive leave, 13th -month pay, moral and
exemplary damages, and attorneys fees.
In a July 12, 2004 Memorandum to petitioner, STI lifted petitioners
suspension and ordered her to return to work on July 13, 2004, with full
salary from the time of her suspension.
In a July 13, 2004 electronic mail message sent to petitioner, the latter
was invited to a July 19, 2004 "meeting with the committee formed to act on
the complaint filed against petitioner by Fernandez.".
During the supposed scheduled meeting, petitioner was furnished with
several documents; however, no copy of the formal complaint or written
charge was given to her. The meeting was adjourned without the committee
setting another meeting for the submission of petitioners answer; nor was a
hearing set for the presentation of the parties evidence.
Thereafter, petitioner went on sanctioned leave of absence. After the
lapse of her approved leave, she reported for work several times. After
August 9, 2004, however, she no longer reported for work.
In a January 13, 2005 letter cum notice of termination signed by Jacob,
petitioner was dismissed from STI effective January 11, 2005.
The Labor Arbiter Decision.
Petitioner claimed that during her stint as COO of STI-Makati and up to
her transfer and appointment as Compliance Manager, she was
discriminated against and unfairly treated by respondents; that she was
denied a) the salary corresponding to the COO position in the amount of

P100,000.00 P120,000.00, b) her prizes as Winners Circle awardee, as well

as c) her benefits such as a car plan and honorarium of P8,500.00 monthly.
She likewise contended that her removal as STI-Makati COO and transfer to
the School Compliance Group as Compliance Manager was illegal and
constituted a demotion amounting to constructive dismissal, as she was not
given prior notice of the transfer; forced to give her written conformity
thereto; placed in an embarrassing situation thereafter; and never given any
task or work while she held such position. She added that the alleged
reorganization which caused her removal as STI-Makati COO was a sham,
calculated to ease her out in the guise of a restructuring; that she was
illegally placed under suspension for alleged offenses which respondents
could not substantiate and which she was not informed about; that she was
not accorded due process during the conduct of the purported investigation;
and that as a consequence of the discrimination and unfair treatment she
received from respondents, she suffered untold injury.
Petitioner thus prays for the following:
1. To reinstate complainant to her former position as COO without loss to [sic] her
seniority rights with backwages and other benefits, such the [sic] monthly
P8,500.00 honorarium, among others, to be paid until fully reinstated with the
necessary adjustments to equal the salary and benefits now being received by
her replacement, respondent Peter K. Fernandez.
2. To pay complainant the unpaid salary and benefits differential due her as COO
computed from November 5, 2002 to equal the salary and benefits of respondent
Peter K. Fernandez, plus the legal rate of interest thereon from the same date
until fully paid.
3. To pay the money equivalent, plus the legal rate [sic] interest thereon until fully
paid, of complainants awards as a Silver Awardee in its STI 17th Winners Circle,
consisting of the trip to Panglao, Bohol from May 25 to 27, 2004 and Korea from
September 21 to 24, 2004.
4. To pay complainant the unpaid Holiday Pay duly adjusted as above [sic] and with
legal interest thereon until fully paid.
5. To pay complainant the proportionate 13th [-]month pay for the current year with
legal interest thereon until fully paid.

6. To pay complainant moral damages in [sic] sum of P3 Million and exemplary

damages in the amount of P2 Million, including attorneys fees, and expenses of
litigation.
The respondents in claimed that petitioner was removed as STI-Makati
COO pursuant to a reorganization aimed at streamlining STIs operations
after the merger; as a result, the positions of STI-Makati CEO and COO were
abolished. They argued that petitioner was merely "laterally transferred" to
the School Compliance Group as Compliance Manager, and was not demoted
in rank; nor did she suffer a diminution in her salary and benefits, as the
positions of STI-Makati COO and Compliance Manager are equivalent in rank
as they both fall under "Job Grade Manager B". They added that petitioner
committed anomalies and irregularities which became the subject of an Audit
Report. They asserted that the abolition of a position in STI is a recognized
prerogative of management which may not be interfered with absent malice
or bad faith, and more so when done pursuant to a valid corporate
restructuring; the abolition of the CEO, COO, Treasurer, Corporate Secretary,
and Director positions in STI-Makati was pursued as a matter of course
because with the merger, STI-Makati ceased to exist as it was absorbed by
STI, and consequently these positions became unnecessary. Petitioners
transfer was justified as an exercise of STIs prerogative and right to transfer
its employees when called for, and was done reasonably, without malice or
bad faith, and without unnecessarily inconveniencing petitioner.
Respondents added that petitioners suspension was vital for the
protection of sensitive data and to ensure the smooth conduct of the
investigation, and in order that she may not gain access to sensitive
information which, if divulged to government agencies such as the CHED,
would result in the denial/withholding of permits to STI. On petitioners claim
for regularization, respondents claimed that this was unnecessary since
petitioner was already a regular employee of STI. Regarding petitioners
money claims, respondents argued that petitioner could not be entitled to
them, as she received all her salaries, benefits and entitlements during her

stint with STI. Finally, respondents contended that petitioner was not entitled
to damages and attorneys fees, since she was not illegally dismissed and, in
carrying out her transfer, they did not act with malice, bad faith, or in a
wanton and oppressive manner.
In her Reply, petitioner noted that while STI and STI College Makati
(Inc.) merged, there was in fact no restructuring that took place which
required her transfer and demotion; on the contrary, the merger created 29
additional vacant positions in STI. Petitioner added that no prior
announcement of the restructuring of STI-Makati was made, which thus
renders such reorganization of questionable integrity; instead, the merger
was utilized as a tool to ease her out, through the bogus reorganization. She
contended that Fernandez had prejudged her case even before an
investigation into the alleged anomalies could be conducted. Petitioner
likewise noted that even her appointment as Compliance Manager was a
sham, because no such vacant position existed within the School Compliance
Group, as the only two Compliance Manager positions were then occupied by
Eddie Musico and Reynaldo Gozum; the only other vacant positions in that
department were those for lower level Compliance Officers which meant that
she was effectively demoted. Petitioner claimed as well that her demotion
was highlighted by the fact that while she had a masteral degree and
doctorate units, all the others within the School Compliance Group
including her superior, Paraiso were mere bachelors degree holders.
Finally, petitioner maintained that the multiple charges lodged against
her were without basis, and respondents failed to prove them by adequate
evidence.
On the other hand, respondents maintained in their Reply that as to
salary and benefits, petitioner was not discriminated against, and was
merely given a compensation package commensurate to her rank as "Job
Grade Manager B", taking into consideration her length of service at STI. Her
salary was thus at par with those of other STI employees of equivalent rank
and similar durations of employment. Respondents asserted further that the

reorganization was not a ruse to ease petitioner out; it was necessary as a

means toward streamlining STIs operations. Fernandez characterized
petitioners account of their conversation as inaccurate. Respondents
likewise debunked petitioners claims that she was discriminated against
while she held the position of Compliance Manager, saying that this claim
was specious and exaggerated. They added that even though Fernandez was
later appointed COO of STI-Makati after petitioner was appointed Compliance
Manager, his work as such STI-Makati COO was limited to performance of
oversight functions, which functions he already performs as Senior VP of the
Education Management Division of STI. With regard to the July 19, 2004
meeting, respondents argued that nothing was achieved during said meeting
owing to petitioners and her counsels "quarrelsome attitude" and insistence
that she be furnished the written charges against her as well as the
supporting evidence or documents, which would have been unnecessary if
she only cooperated during said meeting and answered the charges against
her. They underscored the fact that during said meeting, petitioner was
furnished with a copy of the charges against her, including all other
documents, particularly the Audit Findings.
The Labor Arbiter Renaldo O. Hernandez issued a Decision in favor of
petitioner. The Labor Arbiter found that petitioner was illegally dismissed,
and respondents were guilty of malice and bad faith in the handling of her
case. He held that petitioners transfer which STI claimed was the result of
STIs restructuring was irregular, because at the time of such transfer, the
reorganization and restructuring of STI-Makati had already been effected;
STIs Memorandum confirming and renewing her appointment as STI-Makati
COO was precisely issued as a consequence of the merger and
reorganization. STIs claim that petitioners lateral transfer was necessary is
thus contrived.
The LA the position of Compliance Manager did not actually exist in
STIs new corporate structure; there were only two Compliance Manager
positions which were at the time occupied by Musico and Gozum, and the

only other vacant positions in the Compliance Group were for Compliance
Officers. In effect, petitioner was appointed to the position of a mere
Compliance Officer, which was lower in rank.
The Labor Arbiter held further that during the process of her illegal
transfer, petitioner was harassed, humiliated, and oppressed, thus:
1. On May 18, 2004, she was subjected to threats and intimidation by
Fernandez, the latter bullying and forcing her to receive the May 18,
2004 Memorandum while petitioner was inside his office;
2. On the day she reported to her new position as Compliance
Manager, the whole ComplianceGroup team left for a three-day out-
of-town planning session, without respondents informing her or
including her in the official event as she should be;
3. On May 20, 2004, an official written announcement was made
regarding Jacobs appointment as new STI President and CEO,
Fernandez as new STI-Makati COO, and Luz as new STI-Makati
School Administrator. Adding insult to injury, petitioners
appointment as Compliance Manager was intentionally left out;
4. Petitioner, given her illustrious career in STI having risen from the
ranks as a faculty member, to full-time professor, to Dean, and
finally to the position of STI-Makati COO, and having achieved
multiple awards and distinctions was thereafter treated "as a non-
entity" by respondents.
The Labor Arbiter added that the purported audit and investigation of
petitioners alleged irregularities was a sham, as the same was conducted
without official sanction from STI and without petitioners knowledge; it was
founded on hearsay evidence and based on charges known only to
Fernandez; it was conducted merely to conceal respondents shabby
treatment of petitioner, and without apprising petitioner of the written formal
charges against her.
Finally, respondents were adjudged guilty of malice, bad faith, acts
oppressive to labor and contrary to morals, good customs and public policy,

which caused upon petitioner suffering and humiliation entitling her to an

award of moral and exemplary damages, and attys fees.
Ruling of the NLRC.
Respondents interposed an appeal with the NLRC. The NLRC reversed
the Labor Arbiters Decision, finding that there was no illegal constructive
dismissal.
Petitioner moved for reconsideration, but the NLRC denied the same.
Ruling of the Court of Appeals.
Petitioner went up to the CA via certiorari. The CA denied the petition.
In sum, both the NLRC and CA found that petitioner was not
constructively dismissed, for the following reasons:
1. Petitioners position as STI-Makati COO was abolished as a
necessary result of the merger of STI and STI-Makati,and the
restructuring of STI aimed at streamlining its operations;
2. Petitioner was merely "laterally transferred" to the Compliance
Group as Compliance Manager, with no diminution in rank, salary
and benefits; and
3. The reorganization of STI was done in good faith and in the exercise
of the management prerogative. In the same manner, petitioners
transfer was a) made in the exercise of the management
prerogative to transfer employees when necessary; b) done in good
faith; and c)not unreasonable, inconvenient or prejudicial to her
interests.
ISSUES
a) WON there was constructive dismissal;
b) WON all respondents are liable.
RULING
The Petition is granted.

It appears that the position of STI-Makati COO was actually never

abolished. As a matter of fact, soon after petitioner was removed from the
position, Fernandez was appointed to take her place as STI-Makati COO; his
appointment was even publicly announced via an official communication
disseminated company-wide. This thus belies respondents claim that the
position of STI-Makati COO became unnecessary and was thus abolished.
Respondents may argue, as they did in their Reply to petitioners Position
Paper, that Fernandezs appointment as STI-Makati COO replacing petitioner
was merely for oversight purposes. Whatever the reason could be for
Fernandezs appointment as STI-Makati COO, the fact still remains that such
position continued to exist.
Next, petitioners appointment as Compliance Manager appears to be
contrived as well. At the time of petitioners appointment, the only two
Compliance Manager positions within STIs compliance department the
School Compliance Group were already filled up as they were then
occupied by Musico and Gozum. None of them has been dismissed or
resigned. Nor could petitioner have been appointed head of the department,
as Paraiso was very much in charge thereof, as its Compliance Group Head.
The only positions within the department that were at the time vacant were
those of Compliance Officers, which are of lower rank. In other words,
petitioner could not have been validly appointed as Compliance Manager, a
position within STI that was then very much occupied; if ever, petitioner took
the position of a mere Compliance Officer, the only vacant position within the
department.
Thirdly, even though it is claimed that from May 28, 2004 up to June
10, 2004, STIs Corporate Auditor/Audit Advisory Group conducted an audit of
STI Makati covering the whole period of petitioners stint as COO/School
Administrator, it appears that even prior to such audit, petitioners superior
Fernandez had already prejudged her case. The May 18, 2004 conversation
between petitioner and Fernandez inside the latters office is quite revealing.

The May 18 conversation between petitioner and Fernandez, taken in

conjunction with the Courts findings that the position of STI-Makati COO was
never abolished and that petitioners appointment as Compliance Manager
was contrived, confirms the view that petitioner was not transferred to the
School Compliance Group as a matter of necessity, but as punishment for her
perceived irregularities. In effect, petitioner was demoted and relegated to a
position of insignificance within STI, there to suffer for what her employer
alleged were transgressions committed by her. To all intents and purposes,
petitioner was punished even before she could be tried.
Fernandezs declarations during the May 18 conversation undoubtedly
provide the true motive behind petitioners removal as STI-Makati COO:
a. After "hearing too many things" about petitioner, Fernandez simply
lost confidence in her meaning that Fernandez had made up his
mind about petitioner after hearing rumors about her;
b. Fernandez accused petitioner of specific violations, without the
benefit of accurate information and without giving her the
opportunity to refute the accusations;
c. Fernandez has no time to listen to petitioners explanations, despite
her pleas to be heard;
d. Fernandez refused to provide petitioner with the evidence or other
basis for his accusations, in spite of petitioners request for him to
put the same in writing;
e. Fernandez has prejudged petitioner, and intimated to her that she
was dishonest, even before she could be heard; and
f. Fernandez threatened petitioner, that if she pushed him further, she
would suffer the fate of a former employee who was separated from
STI without the benefit of clearing his name. In other words, she
could find herself without a job at STI even before her innocence or
guilt could be established.
From the May 18 conversation alone, it can be seen that petitioners
fate in STI was a foregone conclusion. She was threatened to accept her fate
or else she would find herself without work, either through dismissal or

forced resignation. Evidently, she became the subject of an illegal

constructive dismissal in the guise of a transfer.
The supposed audit conducted by STIs Corporate Auditor/Audit
Advisory Group was a mere afterthought, as it was apparent that as early as
May 18, 2004, petitioner has been found guilty of whatever transgressions
she was being charged with. The same is true with her preventive
suspension; it was imposed with malice and bad faith, and calculated to
harass her further, if not trick her into believing that respondents were
properly addressing her case. All proceedings and actions taken in regard to
petitioners employment and case, beginning on May 18, 2004, were all but a
farce, done or carried out in bad faith, with the objective of harassing and
humiliating her, all in the fervent hope that she would fold up and quit.
Constructive dismissal exists where there is cessation of work because
continued employment is rendered impossible, unreasonable or unlikely, as
an offer involving a demotion in rank or a diminution in pay and other
benefits. Constructive dismissal may, likewise, exist if an act of clear
discrimination, insensibility, or disdain by an employer becomes so
unbearable on the part of the employee that it could foreclose any choice by
him except to forego his continued employment. In cases of a transfer of an
employee, the rule is settled that the employer is charged with the burden of
proving that its conduct and action are for valid and legitimate grounds such
as genuine business necessity and that the transfer is not unreasonable,
inconvenient or prejudicial to the employee. If the employer cannot
overcome this burden of proof, the employees transfer shall be tantamount
to unlawful constructive dismissal.
There is no doubt that petitioner was subjected to indignities and
humiliated by the respondents. She was bullied, threatened, shouted at, and
treated insolently by Fernandez on May 18, 2004 inside the latters own
office. She was shamed when, on her very first day at the School Compliance
Group, all of the employees of the department have gone on an official out-
of-town event without her and, as a result, she was left alone at the office for

several days. Respondents did not even have the courtesy to offer her the
opportunity to catch up with the group so that she could make it to the
event, even if belatedly. Then again, on May 20, 2004, STI made an official
companywide announcement of Jacobs appointment as new STI President
and CEO, Fernandez as new STI-Makati COO, and Luz as new STI-Makati
School Administrator, but petitioners appointment as new Compliance
Manager was inconsiderately excluded. Respondents made her go through
the rigors of a contrived investigation, causing her to incur unnecessary legal
expenses as a result of her hiring the services of counsel. Her well-deserved
awards and distinctions were unduly withheld in the guise of continuing
investigation which obviously was taking too long to conclude; investigation
began formally on May 28, 2004 (start of audit), yet by August 17 (date of
memorandum informing petitioner of the withholding of Korea travel award),
the investigation was still allegedly ongoing. She was deprived of the
privilege to attend company events where she would have received her well-
deserved awards with pride and honor, and her colleagues would have been
inspired by her in return. Certainly, respondents made sure that petitioner
suffered a humiliating fate and consigned to oblivion.
Indeed, petitioner could not be faulted for taking an indefinite leave of
absence, and for altogether failing to report for work after August 9, 2004.
Human nature dictates that petitioner should refuse to subject herself to
further embarrassment and indignities from the respondents and her
colleagues. All told, petitioner was deemed constructively dismissed as of
May 18, 2004. Finally, since the position of STI-Makati COO was never
abolished, it follows that petitioner should be reinstated to the very same
position, and there to receive exactly what Fernandez gets by way of
salaries, benefits, privileges and emoluments, without diminution in amount
and extent.
Nonetheless, the Court fails to discern any bad faith or
negligence on the part of respondent Jacob. The principal character
that figures prominently in this case is Fernandez; he alone

relentlessly caused petitioners hardships and suffering. He alone is

guilty of persecuting petitioner. Indeed, some of his actions were
without sanction of STI itself, and were committed outside of the
authority given to him by the school; they bordered on the personal,
rather than official. His superior, Jacob, may have been, for the most
part, clueless of what Fernandez was doing to petitioner. After all,
Fernandez was the Head of the Academic Services Group of the
EMD, and petitioner directly reported to him at the time; his
position enabled him to pursue a course of action with petitioner
that Jacob was largely unaware of.
A corporation, as a juridical entity, may act only through its
directors, officers and employees. Obligations incurred as a result of
the directors and officers acts as corporate agents, are not their
personal liability but the direct responsibility of the corporation
they represent. As a rule, they are only solidarily liable with the
corporation for the illegal termination of services of employees if
they acted with malice or bad faith.
To hold a director or officer personally liable for corporate
obligations, two requisites must concur: (1) it must be alleged in the
complaint that the director or officer assented to patently unlawful
acts of the corporation or that the officer was guilty of gross
negligence or bad faith; and (2) there must be proof that the officer
acted in bad faith.
11. Palm Avenue Holding Co. Inc v. Sandiganbayan

G.R. No. 173082, 6 August 2014
(corporate juridical personality)
(Consolidated cases)
FACTS

Through a writ of sequestration dated October 27, 1986, the

Presidential Commission on Good Government (PCGG) sequestered all the
assets, properties, records, and documents of the Palm Companies. Said
sequestered assets included 16,237,339 Benguet Corporation shares of
stock, registered in the name of the Palm Companies. The PCGG had relied
on a letter from the Palm Companies Attorney-in-Fact, Jose S. Sandejas,
specifically identifying Benjamin Kokoy Romualdez, a known crony of
former President Ferdinand E. Marcos, as the beneficial owner of the Benguet
Corporation shares in the Palm Companies name.
The Republic, represented by the PCGG, filed a complaint with the
Sandiganbayan. However, the complaint did not implead the palm
companies as respondents. It was only after several years that the
companies were impleaded in the case.
Urgent motion to lift the order of sequestrations were filed but such
was denied by the court.
On September 22, 2006, the Palm Companies filed a Motion to Release
Sequestered Funds with the Sandiganbayan. In a Resolution dated January
18, 2007, the Sandiganbayan granted said motion and ordered the release of
the sequestered funds for the purchase of additional shares in Benguet
Corporation.
On August 5, 2008, the Palm Companies filed a Motion to Order
Payment of Interest on Balance of the Sequestered Funds. Later, on
September 29, 2008, the Sandiganbayan granted the Palm Companies
motion to dismiss and dismissed the Republics complaint as to them. This
was affirmed by the Court in a Resolution 7 dated January 20, 2010 in G.R. No.
189771. The Sandiganbayan also granted the Palm Companies Motion to
Order Payment of Interest on Balance of the Sequestered Funds on October
28, 2009.
Thereafter, the Palm Companies filed another motion dated May 14,
2010, this time, to order the PCGG to release all the companies shares of

stock and funds in its custody. The Sandiganbayan then issued its October
21, 2010 Resolution, granting the companies foregoing motion.
The Palm companies filed a motion for bill of particulars, which was
granted. However, the answer of the Republic did not contain sufficient detail
on the properties alleged to be ill-gotten.
ISSUE
Whether or not the order of sequestration be lifted in view of the failure
of the PCGG to implead the Companies. And Whether or not the release of
the sequestrated properties was proper.
RULING
The Constitution mandates the Republic to file the corresponding
judicial action or proceedings within a six-month period (from its ratification
on February 2, 1987) in order to maintain sequestration, non-compliance
with which would result in the automatic lifting of the sequestration order.
The Courts ruling in Presidential Commission on Good Government v.
Sandiganbayan,12 which remains good law, reiterates the necessity of the
Republic to actually implead corporations as defendants in the complaint, out
of recognition for their distinct and separate personalities, failure to do so
would necessarily be denying such entities their right to due process. 13 Here,
the writ of sequestration issued against the assets of the Palm Companies is
not valid because the suit in Civil Case No. 0035 against Benjamin
Romualdez as shareholder in the Palm Companies is not a suit against the
latter. The Court has held, contrary to the assailed Sandiganbayan
Resolution in G.R. No. 173082, that failure to implead these corporations as
defendants and merely annexing a list of such corporations to the complaints
is a violation of their right to due process for it would be, in effect,
disregarding their distinct and separate personality without a hearing. 14
Here, the Palm Companies were merely mentioned as Item Nos. 47 and 48,
Annex A of the Complaint, as among the corporations where defendant
Romualdez owns shares of stocks. Furthermore, while the writ of

sequestration was issued on October 27, 1986, the Palm Companies were
impleaded in the case only in 1997, or already a decade from the ratification
of the Constitution in 1987, way beyond the prescribed period.
The fact that the beneficial owner of the corporations was impleaded
did not cure the defect.
The argument that the beneficial owner of these corporations was,
anyway, impleaded as party-defendant can only be interpreted as a tacit
admission of the failure to file the corresponding judicial action against said
corporations pursuant to the constitutional mandate. Whether or not the
impleaded defendant in Civil Case No. 0035 is indeed the beneficial owner of
the Palm Companies is a matter which the PCGG merely assumes and still
has to prove in said case.
The sequestration order issued against the Palm Companies is
therefore deemed automatically lifted due to the failure of the Republic to
commence the proper judicial action or to implead them therein within the
period under the Constitution. However, the lifting of the writ of
sequestration will not necessarily be fatal to the main case since the same
does not ipso facto mean that the sequestered properties are, in fact, not ill-
gotten.
There was failure to state a cause of action due to failure to give
sufficient details in its answer to the bill of particulars.
Finally, we sustain defendant-movants argument that the failure of the
plaintiff to sufficiently provide the ultimate and material facts they required
in their motion for bill of particulars, makes the third amended complaint
dismissible for failure to state a cause of action.
Simple justice demands that the Palm Companies must know what the
complaint against them is all about. The law requires no less.
Answers set forth by the plaintiff in its Bill of Particulars are indefinite
and deficient inasmuch as the question of what are the alleged illegally
acquired funds or properties of the Palm Avenue Companies which they are
liable to return, remains unanswered, a product of uncertainty.

In sum, the allegations contained in plaintiff Republics Bill of

Particulars are incomplete and indefinite as they merely express conclusions
of law and presumptions unsupported by factual premises.
12. Olongapo City v. Subic Water and Sewerage Co., Inc.

G.R. No. 171626, 6 August 2014
FACTS
Pursuant to PD 198, a law which authorized the creation of local water
districts, petitioner Olongapo City (petitioner) passed Resolution No. 161,
which transferred all its existing water facilities and assets under the
Olongapo City Public Utilities Department Waterworks Division, to the
jurisdiction and ownership of the Olongapo City Water District (OCWD).
PD 198 allows local water districts (LWDs)which have acquired an
existing water system of an LGU to enter into a contract to pay the
concerned LGU. In lieu of the LGUs share in the acquired water utility plant,
it shall be paid by the LWD an amount not exceeding three percent (3%) of
the LWDs gross receipts from water sales in any year.
Petitioner filed a complaint for sum of money and damages against OCWD.
Among others, petitioner alleged that OCWD failed to pay its electricity bills
to petitioner and remit its payment under the contract to pay
P26,798,223.70, pursuant to OCWDs acquisition of petitioners water
system.
In its answer, OCWD posed a counterclaim against petitioner for unpaid
water bills amounting to P3,080,357.00.15
In the interim, OCWD entered into a Joint Venture Agreement (JVA) with
Subic Bay Metropolitan Authority (SBMA), Biwater International Limited
(Biwater), and D.M. Consunji, Inc. (DMCI) on November 24, 1996. Pursuant to
this agreement, Subic Water a new corporate entity was incorporated.

On the same day, Subic Water was granted the franchise to take over
OCWDs water operations in Olongapo City.
To finally settle their money claims against each other, petitioner and
OCWD entered into a compromise agreement where petitioner and OCWD
offset their respective claims and counterclaims. OCWD also undertook to
pay to petitioner its net obligation amounting to P135,909,467.09, to be
amortized for a period of not exceeding 25 years at 24% per annum.
The compromise agreement also contained a provision regarding the parties
request that Subic Water, Philippines, which took over the operations of the
defendant Olongapo City Water District be made the co-maker for OCWDs
obligations. Mr. Noli Aldip, then chairman of Subic Water, acted as its
representative and signed the agreement on behalf of Subic Water.
Subsequently, the parties submitted the compromise agreement to RTC
Olongapo which the trial court approved and adopted it as its judgment in
Civil Case 580-0-90.
Pursuant to the compromise agreement and in payment of OCWDs
obligations to petitioner, petitioner and OCWD executed a Deed of
Assignment where OCWD assigned all of its rights in the JVA in favor of the
petitioner, including but not limited to the assignment of its shares, lease
payments, regulatory assistance fees and other receivables arising out of or
related to the Joint Venture Agreement and the Lease Agreement. On
December 15,1998, OCWD was judicially dissolved.
To enforce the compromise agreement, the petitioner filed a motion for
the issuance of a writ of execution with the trial court. The trial court granted
the motion, but did not issue the corresponding writ of execution.
Almost four years later, the petitioner, through its new counsel, filed a
notice of appearance with urgent motion/manifestation and prayed again for
the issuance of a writ of execution against OCWD. A certain Atty. Segundo
Mangohig, claiming to be OCWDs former counsel, filed a manifestation
alleging that OCWD had already been dissolved and that Subic Water is now
the former OCWD.

Because of this assertion, Subic Water also filed a manifestation

informing the trial court that as borne out by the articles of incorporation and
general information sheet of Subic Water, defendant OCWD is not Subic
Water. The manifestation also indicated that OCWD was only a 10%
shareholder of Subic Water; and that its 10% share was already in the
process of being transferred to petitioner pursuant to the Deed of
Assignment.
The trial court granted the motion for execution and directed its
issuance against OCWD and/or Subic Water. Because of this unfavorable
order, Subic Water filed a special appearance with motion to: (1) reconsider
order; and (2) quash writ of execution.
The trial court denied Subic Waters special appearance, motion for
reconsideration, and its motion to quash. Subic Water then filed a petition for
certiorari with the CA, imputing grave abuse of discretion amounting to lack
or excess of jurisdiction to RTC Olongapo.
The CAs Ruling
The CA granted Subic Waters petition for and reversed the trial courts
rulings.
The CA found that the writ of execution did not comply with Section 6, Rule
39 of the Rules of Court, to wit:
Section 6. Execution by motion or by independent action. A final and
executory judgment or order may be executed on motion within 5 years from
the date of its entry. After the lapse of such time, and before it is barred by
the statute of limitations, a judgment may be enforced by action. The revived
judgment may also be enforced by motion within 5 years from the date of its
entry and thereafter by action before it is barred by the statute of limitations.
A judgment on a compromise agreement is immediately executory and is

considered to have been entered on the date it was approved by the trial
court. Since the compromise agreement was approved and adopted by the
trial court on June 13, 1997, this should be the reckoning date for the

counting of the period for the filing of a valid motion for issuance of a writ of
execution. Petitioner thus had until June 13, 2002, to file its motion.
The CA further remarked that while it was true that a motion for
execution was filed by petitioner on May 7, 1999, and the same was granted
by the trial court in its July 23, 1999 order, no writ of execution was actually
issued.
As the CA looked at the case, petitioner, instead of following up with
the trial court the issuance of the writ of execution, did not do anything to
secure its prompt issuance. It waited another four years to file a second
motion for execution on May 30, 2003. By this time, the allowed period for
the filing of a motion for the issuance of the writ had already lapsed. Hence,
the trial courts July 29, 2003 order granting the issuance of the writ was null
and void for having been issued by a court without jurisdiction.
ISSUES
A. Procedural Aspect:
1. WON a petition for certiotari under Sec. 65 was proper;
2. WON the writ of the execution of a judgment could no longer be
made by mere motion after the prescribed five-year period had already
lapsed; and
3. WON Subic Water could still be subjected to a writ of execution,
since it was identified as OCWDs co-maker and successor-in-interest in
the compromise agreement.
B. Substantive Aspect (MAO NING IMPORTANTE):
1. WON Subic is solidarily liable with OCWD;
2. WON the action of Mr. Noli Aldip bound Subic;
3. WON Subic and OCWD are two separate and distinct entities.
RULING
The petition was DISMISSED for being the wrong remedy and for lack of
merit;

A. Procedural Law Aspect Certiorari is not a substitute for a lost appeal.

The instant petition should have been brought under Rule 45 in a
petition for review on certiorari.
But even without the procedural infirmity, the present recourse to us
has no basis on the merits and must be denied.
Execution by motion is only available within the five-year period from
entry of judgment.
Under Rule 39, Section 6, a judgment creditor has two modes in
enforcing the courts judgment. Execution may be either through motion or
an independent action.
Execution by motion is only available if the enforcement of the judgment was
sought within 5 years from the date of its entry. On the other hand, execution
by independent action is mandatory if the 5-year prescriptive period for
execution by motion had already elapsed. However, for execution by
independent action to prosper the Rules impose another limitation the
action must be filed before it is barred by the statute of limitations which,
under the Civil Code, is 10 years from the finality of the judgment.
Since the second motion was filed beyond the five-year prescriptive
period set by the Rules, then the writ of execution issued by the trial court on
July 31, 2003 was null and void for having been issued by a court already
ousted of its jurisdiction.
The issuance of the writ should have been a ministerial duty on the
part of the trial court. The petitioner could have easily compelled the court to
actually issue the writ by filing a manifestation. However, petitioner idly sat
and waited for the five-year period to lapse before it filed its second motion.
Having slept on its rights, petitioner had no one to blame but itself.
A writ of execution cannot affect a non- party to a case.
Strangers to a case are not bound by the judgment rendered in it.
Thus, a writ of execution can only be issued against a party.
Subic Water never participated in the proceedings in Civil Case No.
580-0-90, where OCWD and petitioner were the contending parties. Subic

Water only came into the picture when one Atty. Segundo Mangohig,
claiming to be OCWDs former counsel, manifested before the trial court that
OCWD had already been judicially dissolved and that Subic Water assumed
OCWDs personality.
In the present case, the compromise agreement, although signed by
Mr. Noli Aldip, did not carry the express conformity of Subic Water. Mr. Aldip
was never given any authorization to conform to or bind Subic Water in the
compromise agreement. Also, the agreement merely labeled Subic Water as
a co-maker. It did not contain any provision where Subic Water acknowledged
its solidary liability with OCWD.
Lastly, Subic Water did not voluntarily submit to the courts jurisdiction.
In fact, the motion it filed was only made as a special appearance, precisely
to avoid the courts acquisition of jurisdiction over its person. Without any
participation in the proceedings below, it cannot be made liable on the writ
of execution issued by the court a quo.
B. Substantive Law Aspect Solidary liability must be expressly stated.
The petitioner also argued that Subic Water could be held solidarily
liable under the writ of execution since it was identified as OCWDs co-maker
in the compromise agreement.
Solidary liability is not presumed. Art. 1207 of the Civil Code provides:
Art. 1207. x x x There is a solidary liability only when the obligation expressly
so states, or when the law or the nature of the obligation requires solidarity.
In Palmares v. CA, the Court did not hesitate to rule that although a
party to a promissory note was only labeled as a co maker, his liability was
that of a surety, since the instrument expressly provided for his joint and
several liability with the principal.
In the present case, the joint and several liability of Subic Water and OCWD
was nowhere clear in the agreement. The agreement simply and plainly
stated that petitioner and OCWD were only requesting Subic Water to be a
co-maker, in view of its assumption of OCWDs water operations. No

evidence was presented to show that such request was ever approved by
Subic Waters board of directors.
Under these circumstances, petitioner cannot proceed after Subic
Water for OCWDs unpaid obligations. The law explicitly states that solidary
liability is not presumed and must be expressly provided for. Not being a
surety, Subic Water is not an insurer of OCWDs obligations under the
compromise agreement. At best, Subic Water was merely a guarantor
against whom petitioner can claim, provided it was first shown that: a)
petitioner had already proceeded after the properties of OCWD, the principal
debtor; b) and despite this, the obligation under the compromise agreement,
remains to be not fully satisfied.61 But as will be discussed next, Subic Water
could not also be recognized as a guarantor of OCWDs obligations.
An officers actions can only bind the corporation if he had been
authorized to do so.
An examination of the compromise agreement reveals that it was not
accompanied by any document showing a grant of authority to Mr. Noli Aldip
to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity, primarily
acts through its board of directors, which exercises its corporate powers. In
this capacity, the general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a
corporation. Section 23 of the Corpo Code provides:
Section 23. The board of directors or trustees. Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year
until their successors are elected and qualified.
In Peoples Aircargo and Warehousing Co., Inc. v. CA, we held that
under Section 23 of the Corporation Code, the power and responsibility to

decide whether a corporation can enter into a binding contract is lodged with
the board of directors, subject to the articles of incorporation, by-laws, or
relevant provisions of law. As we have clearly explained in another case:
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that [the] authority to do so has
been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe
that it has conferred.
Mr. Noli Aldip signed the compromise agreement purely in his own
capacity. Moreover, the compromise agreement did not expressly provide
that Subic Water consented to become OCWDs co-maker. As worded, the
compromise agreement merely provided that both parties request Subic
Water which took over the operations of OCWD be made as co-maker. This
request was never forwarded to Subic Waters board of directors. Even if due
notification had been made, Subic Waters board does not appear to have
given any approval to such request. No document such as the minutes of
Subic Waters board of directors meeting or a secretarys certificate,
purporting to be an authorization to Mr. Aldip to conform to the compromise
agreement, was ever presented. In effect, Mr. Aldips act of signing the
compromise agreement was outside of his authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that
Subic Waters articles of incorporation or by-laws granted him such authority,
then the compromise agreement he signed cannot bind Subic Water. Subic
Water cannot likewise be made a surety or even a guarantor for OCWDs
obligations. OCWDs debts under the compromise agreement are its own
corporate obligations to petitioner.

OCWD and Subic Water are two separate and different entities.
Petitioner suggests that since Subic Water took over OCWDs water
operations in Olongapo City, it also acquired OCWDs juridical personality,
making the two entities one and the same.
This is untenable. Subic Water clearly demonstrated that it was a separate
corporate entity from OCWD. OCWD is just a ten percent 10% shareholder of
Subic Water. As a mere shareholder, OCWDs juridical personality cannot be
equated nor confused with that of Subic Water. It is basic in corporation law
that a corporation is a juridical entity vested with a legal personality
separate and distinct from those acting for and in its behalf and, in general,
from the people comprising it. Under this corporate reality, Subic Water
cannot be held liable for OCWDs corporate obligations in the same manner
that OCWD cannot be held liable for the obligations incurred by Subic Water
as a separate entity. The corporate veil should not and cannot be pierced
unless it is clearly established that the separate and distinct personality of
the corporation was used to justify a wrong, protect fraud, or perpetrate a
deception.
In Concept Builders, Inc. v. NLRC, the Court enumerated the possible
probative factors of identity which could justify the application of the
doctrine of piercing the corporate veil.
These are:
1) Stock ownership by one or common ownership of both corporations;
2) Identity of directors and officers;
3) The manner of keeping corporate books and records; and
4) Methods of conducting the business.
The burden of proving the presence of any of these probative factors
lies with the one alleging it. Unfortunately, petitioner simply claimed that
Subic Water took over OCWD's water operations in Olongapo City. Apart from
this allegation, petitioner failed to demonstrate any link to justify the
construction that Subic Water and OCWD are one and the same.

13. Lanuza Jr. v. BF Corporation

G.R. No. 174938, 1 October 2014
FACTS
BF Corporation entered into agreements with Shangri-La wherein it
undertook to construct for Shangri-La a mall and a multilevel parking
structure along EDSA.
Shangri-La had been consistently paying BF Corporation in accordance
with its progress billing statements. However, by October 1991, Shangri-La
started defaulting in payment.
BF Corporation alleged that Shangri-La induced BF Corporation to
continue with the construction of the buildings using its own funds and credit
despite Shangri-Las default. According to BF Corporation, ShangriLa
misrepresented that it had funds to pay for its obligations with BF
Corporation, and the delay in payment was simply a matter of delayed
processing of BF Corporations progress billing statements.
BF Corporation eventually completed the construction of the buildings.
Shangri-La allegedly took possession of the buildings while still owing BF
Corporation an outstanding balance. BF Corporation alleged that despite
repeated demands, Shangri-La refused to pay the balance owed to it. It also
alleged that the Shangri-Las directors were in bad faith in directing Shangri-
Las affairs. Therefore, they should be held jointly and severally liable with
Shangri-La for its obligations as well as for the damages that BF Corporation
incurred as a result of Shangri-Las default.
This case was first filed in the RTC but the CA ordered the submission
of the dispute to arbitration by virtue of an arbitration clause in their
contract.
Shangri-La filed an omnibus motion and BF Corporation an urgent
motion for clarification, both seeking to clarify the term, parties, and

whether Shangri-Las directors should be included in the arbitration

proceedings and served with separate demands for arbitration.
Petitioners argue that they cannot be held personally liable for
corporate acts or obligations. The corporation is a separate being, and
neither did they bind themselves personally nor did they undertake to
shoulder Shangri-Las obligations should it fail in its obligations.
ISSUE
Whether petitioners should be made parties to the arbitration
proceedings, pursuant to the arbitration clause.
RULING
Yes.
The Arbitral Tribunals decision, absolving petitioners from liability, and
its binding effect on BF Corporation, have rendered this case moot and
academic. The mootness of the case, however, had not precluded us from
resolving issues so that principles may be established for the guidance of the
bench, bar, and the public.
We rule that petitioners may be compelled to submit to the arbitration
proceedings in accordance with Shangri-Land BF Corporations agreement, in
order to determine if the distinction between Shangri-Las personality and
their personalities should be disregarded.
A corporation is an artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives it a distinct personality
and treats it as such. A corporation, in the legal sense, is an individual with a
personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives, and other juridical entities.
The law vests in corporations rights, powers, and attributes as if they were
natural persons with physical existence and capabilities to act on their own.
A consequence of a corporations separate personality is that consent
by a corporation through its representatives is not consent of the

representative, personally. Its obligations, incurred through official acts of its

representatives, are its own. A stockholder, director, or representative does
not become a party to a contract just because a corporation executed a
contract through that stockholder, director or representative.
Hence, a corporations representatives are generally not bound by the
terms of the contract executed by the corporation. They are not personally
liable for obligations and liabilities incurred on or in behalf of the corporation.
As a general rule, therefore, a corporations representative who did not
personally bind himself or herself to an arbitration agreement cannot be
forced to participate in arbitration proceedings made pursuant to an
agreement entered into by the corporation. He or she is generally not
considered a party to that agreement.
However, there are instances when the distinction between
personalities of directors, officers, and representatives, and of the
corporation, are disregarded. We call this piercing the veil of corporate
fiction.
Piercing the corporate veil is warranted when [the separate
personality of a corporation] is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues. It is also
warranted in alter ego cases where a corporation is merely a farce since it is
a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
When corporate veil is pierced, the corporation and persons who are
normally treated as distinct from the corporation are treated as one person,
such that when the corporation is adjudged liable, these persons, too,
become liable as if they were the corporation.
Based on the Sec 31 of the Corporation Code, a director, trustee, or
officer of a corporation may be made solidarily liable with it for all damages

suffered by the corporation, its stockholders or members, and other persons

in any of the following cases:
a) The director or trustee willfully and knowingly voted for or assented to
a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or bad faith in
directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary interest in
conflict with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following
instances:
a) When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
b) When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the
corporation; and
c) When a director, trustee or officer is made, by specific provision of
law, personally liable for his corporate action.
When there are allegations of bad faith or malice against corporate
directors or representatives, it becomes the duty of courts or tribunals to
determine if these persons and the corporation should be treated as one.
Without a trial, courts and tribunals have no basis for determining whether
the veil of corporate fiction should be pierced. The determination of these
circumstances must be made by one tribunal or court in a proceeding
participated in by all parties involved, including current representatives of
the corporation, and those persons whose personalities are impliedly the
same as the corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the corporate veil, the
corporate representatives are treated as the corporation itself and should be
held liable for corporate acts.
Hence, when the directors, as in this case, are impleaded in a case
against a corporation, alleging malice orbad faith on their part in directing

the affairs of the corporation, complainants are effectively alleging that the
directors and the corporation are not acting as separate entities. They are
alleging that the acts or omissions by the corporation that violated their
rights are also the directors acts or omissions. Complainants effectively pray
that the corporate veil be pierced because the cause of action between the
corporation and the directors is the same. In that case, complainants have no
choice but to institute only one proceeding against the parties.
It is because the personalities of petitioners and the corporation may later
be found to be indistinct that we rule that petitioners may be compelled to
submit to arbitration.
However, in ruling that petitioners may be compelled to submit to the
arbitration proceedings, we are not overturning Heirs of Augusto Salas
wherein this court affirmed the basic arbitration principle that only parties to
an arbitration agreement may be compelled to submit to arbitration.
Thus, in cases alleging solidary liability with the corporation or praying for
the piercing of the corporate veil, parties who are normally treated as distinct
individuals should be made to participate in the arbitration proceedings in
order to determine if such distinction should indeed be disregarded and, if
so, to determine the extent of their liabilities.
14. FVR Skills and Services Exponents Inc v. Josuel et al.,

G.R. No. 200857, 22 October 2014
Heads up: Fourth issue lang ang related sa ato topic, I think. Hihi
FACTS
The 28 respondents in this case were employees of petitioner FVR
Skills and Services Exponents, Inc., an independent contractor engaged in
the business of providing janitorial and other manpower services to its

clients. As early as 1998, some of the respondents had already been under
the petitioner's employ.
The petitioner entered into a Contract of Janitorial Service with
Robinsons Land Corporation. Both agreed that the petitioner shall supply
janitorial, manpower and sanitation services to Robinsons Place Ermita Mall
for a period of one year, from January 1, 2008 to December 31, 2008.
Pursuant to this, the respondents were deployed to Robinsons.
Halfway through the service contract, the petitioner asked the
respondents to execute individual contracts which stipulated that their
respective employments shall end on December 31, 2008, unless earlier
terminated.
The petitioner and Robinsons no longer extended their contract of
janitorial services. Consequently, the petitioner dismissed the respondents as
they were project employees whose duration of employment was dependent
on the petitioner's service contract with Robinsons.
The respondents filed a complaint for illegal dismissal with the NLRC.
They argued that they were not project employees; they were regular
employees who may only be dismissed for just or authorized causes. The
respondents also asked for payment of their unpaid wage differential, 13th
month pay differential, service incentive leave pay, holiday pay and
separation pay.
The labor arbiter ruled in the petitioner's favor. He held that the
respondents were not regular employees. They were project employees
whose employment was dependent on the petitioner's service contract with
Robinsons. Since this contract was not renewed, the respondents'
employment contracts must also be terminated.
The NLRC reversed the LA's ruling, and held that they were regular
employees. The NLRC considered that the respondents had been under the
petitioner's employ for more than a year already, some of them as early as
1998. Thus, as regular employees, the respondents may only be dismissed
for just or authorized causes, which the petitioner failed to show.

The CA dismissed the petitioner's certiorari petition and affirmed the

NLRC's decision noting that the petitioner individually hired the respondents
on various dates from 1998 to 2007, to work as janitors, service crews and
sanitation aides. These jobs were necessary or desirable to the petitioner's
business of providing janitorial, manpower and sanitation services to its
clients.
The continuing need for the respondents' services, which lasted for
more than a year, validated that the respondents were regular and not
project employees.
The CA also ruled that the fixed term employment contracts signed by
the respondents had no binding effect. The petitioner only used these
contracts to justify the respondents' illegal dismissal; the petitioner never
asked the respondents to execute any contract since their initial hiring. Only
after it became apparent that the petitioner's service contract with
Robinsons would not be renewed, did the petitioner ask the respondents to
sign their employment contracts. This circumstance, coupled with the threat
that the respondents would not be given their salaries if they would not sign
the contracts, showed the petitioner's intent to use the contracts to prevent
the respondents from attaining regular status.
Lastly, the CA held that petitioners Fulgencio V. Rana and Monina R.
Burgos, the president and general manager of FVR Skills and Services
Exponents, Inc., respectively, are solidarily liable with the corporation for the
payment of the respondents' monetary awards. As corporate officers, they
acted in bad faith when they intimidated the respondents in the course of
asking them to sign their individual employment contracts.
ISSUE
1. WON respondents were regular employees;
2. WON the employment contracts belatedly signed by the respondents were
valid;
3. Were the respondents illegally dismissed; and

4. WON Rana and Burgos should not be held solidarily liable with the
corporation for respondents' monetary claims; they have personalities
separate and distinct from the corporation.
RULING
Petition is denied.
The respondents are regular employees, not project employees.
Under Art. 294 of the NLRC, there are two kinds of regular employees:
(1) those who were engaged to perform activities which are usually
necessary or desirable in the usual business or trade of the employer; and
(2) those casual employees who became regular after one year of service,
whether continuous or broken, but only with respect to the activity for which
they have been hired.
The Court distinguished these two types of regular employees from a
project employee, or one whose employment was fixed for a specific project
or undertaking, whose completion or termination had been determined at
the time of engagement.
The primary standard in determining regular employment is the
reasonable connection between the particular activity performed by the
employee and the employer's business or trade.
Guided by this test, the Court concluded that the respondents' work as
janitors, service crews and sanitation aides, are necessary or desirable to the
petitioner's business of providing janitorial and manpower services to its
clients as an independent contractor.
Also, the respondents had already been working for the petitioner as
early as 1998. Even before the service contract with Robinsons, the
respondents were already under the petitioner's employ. They had been
doing the same type of work and occupying the same positions from the time
they were hired and until they were dismissed in January 2009. The
petitioner did not present any evidence to refute the respondents' claim that
from the time of their hiring until the time of their dismissal, there was no

gap in between the projects where they were assigned to. The petitioner
continuously availed of their services by constantly deploying them to its
clients.
The respondents' employment contracts, which were belatedly signed,
are voidable.
At the time of the respondents' dismissal, they had already been
continuously working for the petitioner for more than a year. Despite this,
they never signed any employment contracts with the petitioner, except the
contracts they belatedly signed when the petitioner's own contract of
janitorial services with Robinsons neared expiration.
For an employee to be validly categorized as a project employee, it is
necessary that the specific project or undertaking had been identified and its
period and completion date determined and made known to the employee at
the time of his engagement. This ensures that the employee is completely
apprised of the terms of his hiring and the corresponding rights and
obligations arising from his undertaking. Notably, the petitioner's service
contract with Robinsons was from January 1 to December 31, 2008. The
respondents were only asked to sign their employment contracts for their
deployment with Robinsons halfway through 2008, when the petitioner's
service contract was about to expire.
The Court finds the timing of the execution of the respondents'
respective employment contracts to be indicative of the petitioner's
calculated plan to evade the respondents' right to security of tenure, to
ensure their easy dismissal as soon as the Robinsons' contract expired. The
attendant circumstances cannot but raise doubts as to the petitioner's good
faith. If the petitioner really intended the respondents to be project
employees, then the contracts should have been executed right from the
time of hiring, or when the respondents were first assigned to Robinsons, not
when the petitioner's service contract was winding up. The petitioner's
failure to do so supports the conclusion that it had been in bad faith in
evading the respondents' right to security of tenure.

Moreover, under Art. 1390 of the NCC, contracts where the consent of
a party was vitiated by mistake, violence, intimidation, undue influence or
fraud, are voidable or annullable. The petitioner's threat of nonpayment of
the respondents' salaries clearly amounted to intimidation. Under this
situation, and the suspect timing when these contracts were executed, we
rule that these employment contracts were voidable and were effectively
questioned when the respondents filed their illegal dismissal complaint.
The respondents were illegally dismissed.
To be valid, an employee's dismissal must comply with the substantive
and procedural requirements of due process. Substantively, a dismissal
should be supported by a just or authorized cause. Procedurally, the
employer must observe the twin notice and hearing requirements in carrying
out an employee's dismissal.
Having already determined that the respondents are regular
employees and not project employees, and that the respondents' belated
employment contracts could not be given any binding effect for being signed
under duress, we hold that illegal dismissal took place when the petitioner
failed to comply with the substantive and procedural due process
requirements of the law.
The petitioner also asserts that the respondents' subsequent
absorption by Robinsons' new contractors - Fieldmen Janitorial Service
Corporation and Altaserv - negates their illegal dismissal. This reasoning is
patently erroneous. The charge of illegal dismissal was made only against
the petitioner which is a separate juridical entity from Robinsons' new
contractors; it cannot escape liability by riding on the goodwill of others.
Solidary liability of the petitioner's officers.
The Court modified the CA's ruling that Rana and Burgos, as the
petitioner's president and general manager, should be held solidarity liable
with the corporation for its monetary liabilities with the respondents.
A corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and, in general, from the

people comprising it. The general rule is that, obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole
liabilities.
A director or officer shall only be personally liable for the obligations of
the corporation, if the following conditions concur:
(1)the complainant alleged in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and
(2)the complainant clearly and convincingly proved such unlawful acts,
negligence or bad faith.
In the present case, the respondents failed to show the existence of
the first requisite. They did not specifically allege in their complaint that
Rana and Burgos willfully and knowingly assented to the petitioner's patently
unlawful act of forcing the respondents to sign the dubious employment
contracts in exchange for their salaries. The respondents also failed to prove
that Rana and Burgos had been guilty of gross negligence or bad faith in
directing the affairs of the corporation.
To hold an officer personally liable for the debts of the corporation, and
thus pierce the veil of corporate fiction, it is necessary to clearly and
convincingly establish the bad faith or wrongdoing of such officer, since bad
faith is never presumed. Because the respondents were not able to clearly
show the definite participation of Burgos and Rana in their illegal dismissal,
we uphold the general rule that corporate officers are not personally liable
for the money claims of the discharged employees, unless they acted with
evident malice and bad faith in terminating their employment.
15. Arco Pulp and Paper Co. Inc v. Lim

G.R. No. 206806, 25 June 2014
(piercing the corporate veil)

FACTS
Dan Lim supplies scrap papers, cartons and other raw materials under
the name Quality Paper and Plastic Products Enterprises to factories engaged
in the paper mill business. In 2007, he deliver scrap papers to Arco Pulp
through its CEO and President, Candida Santos. Allegedly, the parties agreed
that Arco would pay Lim the value of the raw materials or deliver to him their
finished products of equivalent value.
When Lim delivered the raw materials, Arco issued a post-dated check
as partial payment, with the assurance that the check will not bounce. The
check was dishonored on April 18,2007. On the same day however, Arco
executed a memorandum of agreement with a certain Eric Sy whereby Arco
bound to deliver its finished products to Megapack Corporation, owned by Sy,
with materials supplied by Dan.
On May 5, 2007, Lim filed a complaint for sum of money with the RTC.
RTC dismissed the complaint, holding that there was novation by virtue of
the memorandum of agreement.
CA reversed the RTC ruling and found that there was an alternative
obligation on the part of Arco.
ISSUES
a. Was the obligation of Arco extinguished by novation.
b. Is Santos solidarily liable with Arco?
RULING
A. No, there was no novation. The obligation between the parties was
an alternative obligation.
The facts reveal that the original contract provides that Lim shall
deliver scrap papers worth P7.2M to Arco. In return, Arco as the debtor had
the option to either (1) pay the price, or (2) deliver the finished products of
equivalent value to Lim. When Arco tendered a check to Lim in partial
payment for the scrap papers, it exercised its option to pay the price.

It must also be emphasized that novation must be clear and

unequivocal. It is never presumed. Furthermore, the consent of the creditor
must also be secured for the novation to be valid.
Perusal of the records show that Lim was not privy to the
memorandum of agreement. If the memorandum was intended to novate the
original agreement between the parties, Lim must have first agreed to the
substitution of Sy as his new debtor. The memorandum must also state in
clear and unequivocal terms that it has replaced the original obligation of
Arco. Neither of these circumstances is present.
B. Yes, Santos is solidarily liable with Arco.
Basic is the rule in corporation law that a corporation is a juridical
entity which is vested with a legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people comprising
it. Following this principle, obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities. A
director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation. Nevertheless, this legal
fiction may be disregarded if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
As a general rule, directors, officers, or employees of a corporation
cannot be held personally liable for obligations incurred by the corporation.
However, this veil of corporate fiction may be pierced if complainant is able
to prove, as in this case, that
(1) the officer is guilty of negligence or bad faith, and
(2) such negligence or bad faith was clearly and convincingly
proven.
Santos cannot be allowed to hide behind the corporate veil. When
petitioner Arco Pulp and Papers obligation to Lim became due and
demandable, she not only issued an unfunded check but also contracted with
a third party in an effort to shift petitioner Arco Pulp and Papers liability. She

unjustifiably refused to honor petitioner corporations obligations to

respondent. These acts clearly amount to bad faith. In this instance, the
corporate veil may be pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.
16. WPM International Trading Inc v. Labayen

G.R. No. 182770, 17 September 2014
(piercing the corporate veil)
FACTS
Fe Corazon Labayen is the owner of HBO Systems Consultants while
WPM is a domestic corporation engaged in the restaurant business, Warlito
Manlapaz being its president.
Sometime in 1990, WPM entered into a management contract with
Labayen which would allow the latter to operate, manage and rehabilitate
Quickbite, a restaurant owned and operated by WPM. Labayen then looked
for a contractor who would renovate two existing Quickbite outlets and thus
engaged the services of CLN Engineering services at the cost of P432k.
When the construction was finally completed, only P320,000 was paid
to CLN. It then filed a complaint for sum of money against Labayen and
Manlapaz. Labayen was later declared in default. RTC found Labayen liable to
pay CLN the balance with 12 interest.
Meanwhile, Labayen instituted a complaint for damages against WPM
and Manlapaz alleging that she was adjuged liable for a contract she entered
for and in behalf of WPM. Hence, she should be entitled to reimbursement.
She further alleged that her participation in the management agreement was
only to introducing Manlapaz to CLNs general manager and that it was
actually Manlapaz and CLN who agreed on the construction agreement.
RTC ruled that Labayen is entitled to indemnity from Manlapaz and
found that WPM is a mere instrumentality or busienss conduit of Manlapaz

and as such, they should be considered as one. RTC also found that Manlapaz
had complete control over WPM as he was chairman, president and treasurer
at the same time.
CA affirmed the decision and held that WPM is barred from raising the
lack of Labayens authority in view of their tacit ratification. CA likewise
agreed with the lower court that WPM and Manlapaz are one and the same.
ISSUE
Whether WPM is a mere instrumentality or alter ego of Manlapaz.
Rule: No.
The doctrine of piercing the corporate veil applies only in three basic
instances:
a. when the separate and distinct corporate personality defeats public
covenience, as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation;
b. in fraud cases, or when the corporate entity is used to justify a wrong,
protect a fraud, or defend a crime; or
c. is used in alter ego cases, where a corporation is essentially a farce
since it is a mere alter ego or business conduit of a person.
For piercing the corporate veil on the ground of alter ego theory, three
requisites must concur:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence.
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory right or other positive

legal duty, or dishonest and unjust act in contravention of plaintiffs legal

right; and
3. Control and breach of duty must have proximately caused the injury or
unjust loss complained of.
The absence of any of these elements prevents piercing the corporate veil.
Aside from the fact that Manlapaz was the principal stockholder of WPM,
records do not show that WPM was organized and controlled, and its affairs
conducted in a manner that made it merely an instrumentality, agency,
conduit or adjunct of Manlapaz. As held in Martinez v. Court of Appeals, the
mere ownership by a single stockholder of even all or nearly all of the capital
stocks of a corporation is not by itself a sufficient ground to disregard the
separate corporate personality. To disregard the separate juridical personality
of a corporation, the wrongdoing must be clearly and convincingly
established.
Here, the respondent failed to prove that Manlapaz, acting as president, had
absolute control over WPM. Even granting that he exercised a certain degree
of control over the finances, policies and practices of WPM, in view of his
position as president, chairman and treasurer of the corporation, such control
does not necessarily warrant piercing the veil of corporate fiction since there
was not a single proof that WPM was formed to defraud CLN or the
respondent, or that Manlapaz was guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and the respondent knew
and acted on the knowledge that they were dealing with WPM for the
renovation of the latters restaurant, and not with Manlapaz. That WPM later
reneged on its monetary obligation to CLN, resulting to the filing of a civil
case for sum of money against the respondent, does not automatically
indicate fraud, in the absence of any proof to support it.

Finally, the Court also emphasized that piercing the veil of corporate fiction is
frowned upon and thus, must be done with caution. It can only be doen if it
has been clearly established that the separate and distinct personality of the
corporation is used ot justify a wrong, protect fraud or perpetrate a
deception.
17. Hacienda Cataywa/Manuel Villanueva v. Lorezo, G.R. No. 179640, 18 March

2015 (piercing the corporate veil)
FACTS
On October 22, 2002, respondent Rosario Lorezo received a letter from the SSS
Western Visayas Group informing her that she cannot avail of their retirement benefits
since she has only paid 16 months. Such is 104 months short of the minimum
requirement of 120 months payment to be entitle to the benefit. She was also informed
that their investigation of her alleged employment under employer Hda. Cataywa could
not be confirmed because Manuel Villanueva was permanently residing in Manila and
Joemarie Villanueva denied having managed the farm. She was also advised of her
options: continue paying contributions as voluntary member; request for refund; leave
her contributions in-trust with the System, or file a petition before the Social Security
Commission (SSC) so that liabilities, if any, of her employer may be determined.
Aggrieved, respondent then filed her Amended Petition before the SSC. She
alleged that: she was employed as laborer in Hda. Cataywa managed by Jose Marie
Villanueva in 1970 but was reported to the SSS only in 1978; and that SSS contributions

were deducted from her wages from 1970 to 1995, but not all were remitted to the SSS
which, subsequently, caused the rejection of her claim. She also impleaded Talisay
Farms, Inc. by virtue of its Investment Agreement with Mancy and Sons Enterprises. She
also prayed that the veil of corporate fiction be pierced since she alleged that Mancy
and Sons Enterprises and Manuel and Jose Marie Villanueva are one and the same.
Petitioners Manuel and Jose Villanueva alleged that all farm workers of Hda.
Cataywa were reported and their contributions were duly paid and remitted to SSS. It
was the late Domingo Lizares, Jr. who managed and administered the hacienda. While,
Talisay Farms, Inc. filed a motion to dismiss on the ground of lack of cause of action in
the absence of an allegation that there was an employer-employee relationship between
Talisay Farms and respondent.
The SSC held that Rosario M. Lorezo was a regular employee subject to
compulsory coverage of Hda. Cataywa/Manuel Villanueva/ Mancy and Sons Enterprises,
Inc. within the period of 1970 to February 25, 1990. The SSS is ordered to pay petitioner
Rosario M. Lorezo her retirement benefit, upon the filing of the claim therefor, and to
inform this Commission of its compliance herewith.
The SSC denied petitioners' Motion for Reconsideration. The petitioner, then,
elevated the case before the CA where the case was dismissed outrightly due to
technicalities.
Following the denial of petitioners' Motion for Reconsideration of the CA,
petitioner filed with this Court the present petition.
ISSUE
(1) WON the Rosario Lorezo is a regular employee.
(2) WON Mancy and Sons Enterprises and Manuel and Jose Marie Villanueva are
one and the same thus allowing the veil of corporate fiction to be pierced.
RULING
First Issue.
The petition is partially meritorious.
Petitioners argue that the SSC did not give credence nor weight at all to the
existing SSS Form R-1A and farm bookkeeper Wilfredo Ibalobor. Petitioners insist that
after thirty long years, all the records of the farm were already destroyed by termites
and elements, thus, they relied on the SSS Form R-1A as the only remaining source of
information available. Petitioners also alleged that respondent was a very casual worker.

This Court disagrees.

It was settled that there is no particular form of evidence required to Drove the
existence of the employer-employee relationship. Any competent and relevant evidence
to prove such relationship may be admitted. Petitioners erred in insisting that, due to
passage of time, SSS Form R-1A is the only remaining source of information available to
prove when respondent started working for them. However, such form merely reflected
the time in which the petitioners reported the respondent for coverage of the SSS
benefit. They failed to substantiate their claim that it was only in 1978 that respondent
reported for work.
The records are bereft of any showing that Demetria Denaga and Susano Jugue
harbored any ill will against the petitioners prompting them to execute false affidavit.
There lies no reason for this Court not to afford full faith and credit to their testimonies.
Denaga, in her Joint Affidavit with Jugue, stated that she and respondent started
working in Hda. Cataywa in 1970 and like her, she was reported to the SSS on
December 19, 1978. It was also revealed in the records that the SSC found that Denaga
was employed by Manuel Villanueva at Hda. Cataywa from 1970 to December 1987.
Jurisprudence has identified the three types of employees mentioned in the
provision of the Labor Code: (1) regular employees or those who have been engaged to
perform activities that are usually necessary or desirable in the usual business or trade
of the employer; (2) project employees or those whose employment has been fixed for a
specific project or undertaking, the completion or termination of which has been
determined at the time of their engagement, or those whose work or service is seasonal
in nature and is performed for the duration of the season; and (3) casual employees or
those who are neither regular nor project employees.
Farm workers generally fall under the definition of seasonal employees. It was
also consistently held that seasonal employees may be considered as regular
employees when they are called to work from time to time. They are in regular
employment because of the nature of the job, and not because of the length of time
they have worked. However, seasonal workers who have worked for one season only
may not be considered regular employees.
The nature of the services performed and not the duration thereof, is
determinative of coverage under the law. To be exempted on the basis of casual
employment, the services must not merely be irregular, temporary or intermittent, but
the same must not also be in connection with the business or occupation of the
employer. Thus, it is erroneous for the petitioners to conclude that the respondent was a

very casual worker simply because the SSS form revealed that she had 16 months of
contributions. It does not, in any way, prove that the respondent performed a job which
is not in connection with the business or occupation of the employer to be considered as
casual employee.
The test (regular employee) is whether the particular activity performed by the
employee is usually necessary or desirable in the usual business or trade of the
employer. The connection can be determined by considering the nature of the work
performed and its relation to the scheme of the particular business or trade in its
entirety. Also, if the employee has been performing the job for at least one year, even if
the performance is not continuous or merely intermittent, the law deems the repeated
and continuing need for its performance as sufficient evidence of the necessity if not
indispensability of that activity to the business. Hence, the employment is also
considered regular, but only with respect to such activity, while such activity exists.
A reading of the records would reveal that petitioners failed to dispute the
allegation that the respondent performed hacienda work. They merely alleged that
respondent was a very casual worker because she only rendered work for 16 months.
Thus, respondent is considered a regular seasonal worker and not a casual worker as
the petitioners alleged.
This Court has classified farm workers as regular seasonal employees who are
called to work from time to time and the nature of their relationship with the employer
is such that during the off season, they are temporarily laid off; but reemployed during
the summer season or when their services may be needed. Respondent, therefore, as a
farm worker is only a seasonal employee. Since petitioners provided that the cultivation
of sugarcane is only for 6 months, respondent cannot be considered as regular
employee during the months when there is no cultivation.
Second Issue.
Lastly, petitioners aver that there is no legal basis to pierce the veil of
corporation entity.
It was held in Rivera v. United Laboratories, Inc. that
While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a

corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation. To
disregard the separate juridical personality of a corporation, the wrongdoing must be
established clearly and convincingly. It cannot be presumed.
This Court has cautioned against the inordinate application of this doctrine,
reiterating the basic rule that "the corporate veil may be pierced only if it becomes a
shield for fraud, illegality or inequity committed against a third person.
The Court has expressed the language of piercing doctrine when applied to alter
ego cases, as follows: Where the stock of a corporation is owned by one person whereby
the corporation functions only for the benefit of such individual owner, the corporation
and the individual should be deemed the same.
This Court agrees with the petitioners that there is no need to pierce the
corporate veil. Respondent failed to substantiate her claim that Mancy and Sons
Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She
based her claim on the SSS form wherein Manuel Villanueva appeared as employer.
However, this does not prove, in any way, that the corporation is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a
shield to confuse the legitimate issues, warranting that its separate and distinct
personality be set aside. Also, it was not alleged nor proven that Mancy and Sons
Enterprises, Inc. functions only for the benefit of Manuel Villanueva, thus, one cannot be
an alter ego of the other.

18. Forest Hills Golf and Country Club Inc v. Gardpro Inc., G.R. No. 164686, 22
October 2014 (articles of incorporation; by-laws)
FACTS
In March 1993, Fil-Estate Properties, Inc., (FEPI), a party to a Project Agreement to
develop the Forest Hills Residential Estates and the Forest Hills Golf and Country Club,
undertook to market the golf club shares of Forest Hills for a fee. In July 1995, FEPI
assigned its rights and obligations under the Project Agreement to Fil- Estate Golf and
Development, Inc. (FEGDI).
FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc., (FEMAI) to market and
offer for sale the shares of stocks of Forest Hills. Its President, Leandro de Mesa,
oriented the sales staff on the info that would usually be inquired about by prospective
buyers. He made it clear that membership in the Club was a privilege, such that
purchasers of shares of stock would not automatically become members, but must
apply for and comply with all the requirements in order to qualify them for membership,
subject to the approval of the Board of Directos (BOD).
In 1996, Gardpro, Inc. bought class C common shares of stock, which were special
corporate shares that entitled the registered owner to designate two nominees or
representatives for membership in the Club.
In October 1997, Ramon Albert, the General Manager of the Club, notified the
shareholders that it was already accepting applications for membership. In that regard,
Gardpro designated Fernando R. Martin and Rolando N. Reyes to be its corporate
nominees; hence, the two applied for membership in the Club. Forest Hills charged them
membership fees of P50,000.00 each, prompting Martin to immediately call up Albert
and complain about being thus charged despite having been assured that no such fees
would be collected from them. With Albert assuring that the fees were temporary, both
nominees of Gardpro paid the fees. At that time, the P45,000.00 membership fees of
corporate members were increased to P75,000.00 per nominee by virtue of the August
26, 1997 resolution of the BOD. Any nominee who paid the fees within a specified
period was entitled to a discount of P25,000.00. Both nominees of Gardpro were then
admitted as members upon approval of their applications by the BOD. Later, Gardpro
decided to change its designated nominees, and Forest Hills charged Gardpro new
membership fees of P75,000.00 per nominee. When Gardpro refused to pay, the
replacement did not take place.

On July 7, 1999, Gardpro filed a complaint in the SEC, which Forest Hills duly answered.
Martin and Reyes testified that when the shares of stock were being marketed, nothing
about payment of membership fees was explained to them; that upon his inquiry, a
certain Ms. Cacho, an agent of FEMAI, had told Martin that if a corporation bought class
C common shares, its nominees would be automatically entitled to become members
of the Club; that all that the corporation would have to do thereafter was to pay the
monthly dues; that Albert had assured Martin that the membership fees he had paid
would be refunded; and that Martin was not furnished copies of the by-laws of Forest
Hills.
SEC Hearing Officer Natividad T. Querijero rendered her decision ordering defendant to
restrain from collecting membership fees for the 2 replacement members; the
membership fees already paid shall be applied as membership fees for the 2
replacement members; and to pay complainant attorneys fees.
The SEC En Banc affirmed the findings of Hearing Officer Querijero.
The CA denied Forest Hills the petition for review, and affirmed the ruling of the SEC:
What is at issue is the interpretation of a By-law provision regarding membership in the
Club.
The procedure for acquiring membership is outlined in the provisions of the By-laws,
where the end result is the approval of the BOD of the application for membership
submitted both by the juridical entity holding shares in the Club, and the designated
nominee or representative.
The CA denied the motion for reconsideration of Forest Hills.
ISSUE
WON under the by-laws of the club, it is authorized to collect new membership fees for
replacement nominees of Class C members.
RULING
The petition is unmeritorious.
Replacement nominees of Gardpro were not required to pay membership fees.
Forest Hills was not authorized under its articles of incorporation and by-laws to collect
new membership fees for the replacement nominees of Gardpro.
There is no question that Gardpro held class C common stocks that entitled it to two
memberships in the Club. Its nominees could be admitted as regular members upon
approval of the BOD but only one nominee for each class C share as designated in the

resolution could vote as such. A regular member was then entitled to use all the
facilities and privileges of the Club. In that regard, Gardpro could only designate as its
nominees/representatives its officers whose functions and office were defined by its own
by-laws.
The membership in the Club was a privilege, it being clear that the mere purchase of a
share in the Club did not immediately qualify a juridical entity for membership.
Admission for membership was still upon the favorable action of the BOD of the Club.
Under Section 2.2.7 of its by-laws, the application form was accomplished by the
chairman of the board, president or chief executive officer of the applicant juridical
entity. The designated nominees also accomplished their respective application forms,
duly proposed and seconded, and the nominees were evaluated as to their
qualifications. The nominees automatically became ineligible for membership once they
ceased to be officers of the corporate member under its by-laws upon certification of
such loss of tenure by a responsible officer of the corporate member.
Under Section 2.2.6 of the Clubs by-laws, membership fees of P45,000.00 must be paid
by the applicant within 30 days from the approval of the application before the share
could be registered in the Stock and Transfer Books of the Club. Non-payment of the
membership fees within the 30-day period would be deemed a withdrawal of the
application. The amount of the fees could be waived, increased or decreased by the
BOD. Pursuant to the Clubs articles of incorporation and by-laws, the membership fees
should be paid by the corporate member. Based on the procedure set forth in Section
2.2.7 of the by-laws, the applicant was the juridical entity, not its nominee or nominees.
Although the nominee or nominees also accomplished their application forms for
membership in the Club, it was the corporate member that was obliged to pay the
membership fees in its own capacity because the share was registered in its name in
the Stock and Transfer Book.
Corporations buy shares in clubs in order to invest for earnings. Their purchases may
also be to reward their corporate executives by having them enjoy the facilities and
perks concomitant to the club memberships. When Gardpro purchased and registered
its ownership of the class C common shares, it did not only invest for earnings
because it also became entitled to nominate two of its officers in the Club as set forth in
its seventh purpose of the articles of incorporation and Section 2.2.2 of the by-laws, to
wit:
Articles of Incorporation
x x x x

SEVENTH
x x x x
That this Corporation is an exclusive club and is organized on a non-profit basis for the
sole benefit of its member/members. Ownership of a share shall entitle the registered
owner to the use of all the sports and other facilities of the club, but subject to the
terms and conditions herein prescribed, to the By-laws of the corporation, and to the
policies, rules and regulations as may from time to time be promulgated by the Board of
Directors.
By-Laws
xxxx
2.2.2 Subject to compliance with rules and regulations, a Regular Member is entitled to
use all the facilities and privileges of the Club. x x x
The use of the recreational facilities of the Club is commonly known as playing rights of
the corporate member or its nominees.
The articles of incorporation of Forest Hills and Section 2.2.2 of its by-laws recognized
the right of the corporate member to replace the nominees, subject to the payment of
the transfer fee in such amount as the Board of Directors determined for every change.
The replacement could take place for any of the following reasons, namely: (a) if the
nominee should cease to be an officer of the corporate member; or (b) if the corporate
member should request the replacement. In case of a replacement, the playing rights
would also be transferred to the new nominees.
According to the second paragraph of Section 13.6 of the by-laws, the transfer of
playing rights entailed the payment of P10,000.00. Yet, Section 2.2.2 of the by-laws
stipulated a transfer fee for every replacement. This warranted the conclusion that
Gardpro should pay to Forest Hills the transfer fee of P10,000.00 because it desired to
change its nominees.
There was an inconsistency between the by-laws of Forest Hills and the affidavit of
Albert as to the amounts of the membership fees of corporate members. On one hand,
Section 13.7 (Membership Fees) of the by-laws stated that the membership fee of
P45,000.00 x x x for corporate members must be paid by the applicant; on the other,
Alberts affidavit alleged that each nominee shall pay the P75,000.00 membership
fee. To resolve the inconsistency, the by-laws should prevail because they constituted
the private statutes of the corporation and its members and must be strictly complied
with and applied to the letter.
Martin attested that he and Reyes, as the nominees of Gardpro, paid P50,000.00 each

as membership fees. With the payment of the fees being the personal obligation of
Gardpro, the Court leaves the matter to the internal determination of Gardpro and its
nominees.
The relevant provisions of the articles of incorporation and the by-laws of Forest Hills
governed the relations of the parties as far as the issues between them were concerned.
Indeed, the articles of incorporation of Forest Hills defined its charter as a corporation
and the contractual relationships between Forest Hills and the State, between its
stockholders and the State, and between Forest Hills and its stockholder; hence, there
could be no gainsaying that the contents of the articles of incorporation were binding
not only on Forest Hills but also on its shareholders. On the other hand, the by-laws
were the self-imposed rules resulting from the agreement between Forest Hills and its
members to conduct the corporate business in a particular way. In that sense, the by-
laws were the private statutes by which Forest Hills was regulated, and would
function. The charter and the by-laws were thus the fundamental documents governing
the conduct of Forest Hills corporate affairs; they established norms of procedure for
exercising rights, and reflected the purposes and intentions of the incorporators. Until
repealed, the by-laws were a continuing rule for the government of Forest Hills and its
officers, the proper function being to regulate the transaction of the incidental business
of Forest Hills. The by-laws constituted a binding contract as between Forest Hills and its
members, and as between the members themselves. Every stockholder governed by
the by-laws was entitled to access them. The by-laws were self-imposed private laws
binding on all members, directors and officers of Forest Hills. The prevailing rule is that
the provisions of the articles of incorporation and the by-laws must be strictly complied
with and applied to the letter.
In construing and applying the provisions of the articles of incorporation and the by-laws
of Forest Hills, the CA has leaned on the plain meaning rule embodied in Article 1370 of
the Civil Code, to the effect that if the terms of the contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control.
The CA was also guided by Article 1374 of the Civil Code, which declares that [t]he
various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly. Verily, all
stipulations of the contract are considered and the whole agreement is rendered valid
and enforceable, instead of treating some provisions as superfluous, void, or inoperable.


19. Lopez Realty Inc v. Spouses Tanjangco, G.R. No. 154291, 12 November
2014 (by-laws; meetings)
20. Yujuico v. Quiambao, G.R. No. 180416, 2 June 2014 (right to inspect
corporate books)
21. Ching v. Subic Bay Golf and Country Club Inc, G.R. No. 174353, 10
September 2014 (derivative suit)
Facts:
Petitioners are stockholders with 1 stock each worth $22,000 per stock of
respondent (SBGSI).
The Articles of Incorporation provide: ...Shareholders shall be entitled only

to a pro-rata share of the assets of the Club at the time of its dissolution or
liquidation.
However, on June 27, 1996, an amendment to the Articles of Incorporation

was approved by the Securities and Exchange Commission (SEC), wherein the
above provision was changed as follows:
...In accordance with the Lease and Development Agreement by and between
Subic Bay Metropolitan Authority and The Universal International Group of
Taiwan, where the golf courseand clubhouse component thereof was assigned
to the Club, the shareholders shall not have proprietary rights or interests
over the properties of the Club.
Petitioners claimed in the Complaint that defendant corporation did not
disclose to them the above amendment which allegedly makes the shares
non-proprietary, as it takes away the right of the shareholders to participate
in the pro-rata distribution of the assets of the corporation after its

dissolution. According to petitioners, this is in fraud of the stockholders who

only discovered the amendment when they filed a case for injunction to
restrain the corporation from suspending their rights to use all the facilities
of the club. Furthermore, petitioners alleged that the Board of Directors and
officers of the corporation did not call any stockholders meeting from the
time of the incorporation, in violation of Section 50 of the Corporation Code
and the By-Laws of the corporation. Neither did the defendant directors and
officers furnish the stockholders with the financial statements of the
corporation nor the financial report of the operation of the corporation in
violation of Section 75 of the Corporation Code. Petitioners also claim that on
August 15, 1997, SBGCCI presented to the SEC an amendment to the By-Laws
of the corporation suspending the voting rights of the shareholders except for
the five founders shares. Said amendment was allegedly passed without any
stockholders meeting or notices to the stockholders in violation of Section 48
of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the
management of the corporation allegedly committed by the Board of Directors
and officers of the corporation
On July 8, 2003, the RTC issued an Order dismissing the Complaint. The RTC
held that the action is a derivative suit, but The RTC held that petitioners
failed to exhaust their remedies within the respondent corporation itself. The
RTC further observed that petitioners Ching and Wellington were not
authorized by their co-petitioner Subic Bay Golfers and Shareholders Inc. to
file the Complaint, and therefore had no personality to file the same on behalf
ofthe said shareholders corporation. According to the RTC, the shareholdings
of petitioners comprised of two shares out of the 409 alleged outstanding
shares or 0.24% is an indication that the action is a nuisance or harassment
suit which may be dismissed either motu proprio or upon motion in
accordance with Section 1(b) of the Interim Rules of Procedure for Intra-
Corporate Controversies.18
Petitioners Ching and Wellington elevated the case to the Court of Appeals,
which rendered the assailed Decision affirming that of the RTC.
Issue:

Whether or not there was derivative suit and whether or not Petitioners can
file the instant case
Held:
We find the petition unmeritorious.
At the outset, it should be noted that the Complaint in question appears to
have been filed only by the two petitioners, namely Nestor Ching and Andrew
Wellington, who each own one stock in the respondent corporation SBGCCI.
While the caption of the Complaint also names the "Subic Bay Golfers and
Shareholders Inc. for and in behalf of all its members," petitioners did not
attach any authorization from said alleged corporation or its members to file
the Complaint. Thus, the Complaint is deemed filed only by petitioners and
not by SBGSI.
On the issue of whether the Complaint is indeed a derivative suit, we are
mindful of the doctrine that the nature of an action, as well as which court or
body has jurisdiction over it, isdetermined based on the allegations contained
in the complaint of the plaintiff, irrespective of whether or not the plaintiff is
entitled to recover upon all or some of the claims asserted therein. 20
We have also held that the body rather than the title of the complaint
determines the nature of an action.
In Cua, Jr. v. Tan,22 the Court previously elaborated on the distinctions among
a derivative suit, anindividual suit, and a representative or class suit:
A derivative suit must be differentiated from individual and representative or
class suits, thus:
"Suits by stockholders or members of a corporation based on wrongful or
fraudulent acts of directors or other persons may be classified intoindividual
suits, class suits, and derivative suits. Where a stockholder or member is
denied the right of inspection, his suit would be individual because the wrong
is done to him personally and not to the other stockholders or the
corporation. Where the wrong is done to a group of stockholders, as where
preferred stockholders rights are violated, a class or representative suitwill
be proper for the protection of all stockholders belonging to the same group.
But where the acts complained of constitute a wrong to the corporation itself,
the cause of action belongs to the corporation and not to the individual
stockholder or member. Although in most every case of wrong to the
corporation, each stockholder is necessarily affected because the value of his

interest therein would be impaired, this fact of itself is not sufficient to give
him an individual cause of action since the corporation is a person distinct
and separate from him, and can and should itself sue the wrongdoer.
Otherwise, not only would the theory of separate entity be violated, but there
would be multiplicity of suits as well as a violation of the priority rights of
creditors. Furthermore,there is the difficulty of determining the amount of
damages that should be paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are committed
by the directors or trustees themselves, a stockholder or member may find
that he has no redress because the former are vested by law with the right to
decide whether or notthe corporation should sue, and they will never be
willing to sue themselves. The corporation would thus be helpless to seek
remedy. Because of the frequent occurrence of such a situation, the common
law gradually recognized the right of a stockholder to sue on behalf of a
corporation in what eventually became known as a "derivative suit." It has
been proven to be an effective remedy of the minority against the abuses of
management. Thus, an individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the corporation
refuse to sue orare the ones to be sued or hold the control of the corporation.
In such actions, the suing stockholder is regarded as the nominal party, with
the corporation as the party in interest."
The reliefs sought in the Complaint, namely that of enjoining defendants from
acting as officers and Board of Directors of the corporation, the appointment
of a receiver, and the prayer for damages in the amount of the decrease in the
value of the sharesof stock, clearly show that the Complaint was filed to curb
the alleged mismanagement of SBGCCI. The causes of action pleaded by
petitioners do not accrue to a single shareholder or a class of shareholders
but to the corporation itself.
However, as minority stockholders, petitioners do not have any statutory right
to override the business judgments of SBGCCIs officers and Board of
Directors on the ground of the latters alleged lackof qualification to manage
a golf course. Contraryto the arguments of petitioners, Presidential Decree
No. 902-A, which is entitled REORGANIZATION OF THE SECURITIES AND
EXCHANGE COMMISSION WITH ADDITIONAL POWERS AND PLACING THE SAID

AGENCY UNDER THE ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE

PRESIDENT, does not grant minority stockholders a cause of action against
waste and diversion by the Board of Directors, but merely identifies the
jurisdiction of the SEC over actionsalready authorized by law or jurisprudence.
It is settled that a stockholders right to institute a derivative suit is not
based on any express provisionof the Corporation Code, or even the
Securities Regulation Code, but is impliedly recognized when the said laws
make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.
The legal standing of minority stockholders to bring derivative suits is not a
statutory right, there being no provision in the Corporation Code or related
statutes authorizing the same, but is instead a product of jurisprudence
based on equity. However, a derivative suit cannot prosper without first
complying with the legal requisites for its institution. 24
Section 1, Rule 8 of the Interim Rules of Procedure Governing IntraCorporate
Controversies imposes the following requirements for derivative suits:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with particularity
in the complaint, to exhaust all remedies available under the articles of
incorporation, by-laws, laws or rules governing the corporation or partnership
to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second and
fourth requisites above.
With regard, however, to the second requisite, we find that petitioners failed
to state with particularity in the Complaint that they had exerted all
reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, and laws or rules governing the corporation to obtain
the relief they desire. The Complaint contained no allegation whatsoever of
any effort to avail of intra-corporate remedies. Indeed, even if petitioners
thought it was futile to exhaust intra-corporate remedies, they should have
stated the same in the Complaint and specified the reasons for such opinion.
Failure to do so allows the RTC to dismiss the Complaint, even motu proprio,

in accordance with the Interim Rules. The requirement of this allegation in the
Complaint is not a useless formality which may be disregarded at will. 1wphi1 We
ruled in Yu v. Yukayguan
The obvious intent behind the rule is to make the derivative suit the final
recourse of the stockholder, after all other remedies to obtain the relief
sought had failed.

22. Villamor v. Umale, G.R. No. 172843, 24 September 2014 (derivative suit)
Facts:
On March 1, 2004, PPC obtained an option to lease portions of Mid-Pasig's property, including the
6
Rockland area occupied by MC Home Depot. cralawlawlibrary
7
On November 11, 2004, PPC's board of directors issued a resolution waiving all its rights, interests,
and participation in the option to lease contract in favor o the law firm of Atty. Alfredo Villamor, Jr.
(Villamor), petitioner in G.R. No. 172843. PPC received no consideration for this waiver in favor of
Villamor's law firm.
On November 22, 2004, PPC, represented by Villamor, entered into a memorandum of agreement
9
(MOA) with MC Home Depot. Under the MO A, MC Home Depot would continue to occupy the area as
PPC's sublessee for four (4) years, renewable for another four (4) years, at a monthly rental of
10
P4,500,000.00 plus goodwill of P18,000,000.00. cralawlawlibrary
In compliance with the terms of the MOA, MC Home Depot issued 20 post-dated checks representing
rental payments for one year and the goodwill money. The checks were given to Villamor who did not
11
turn these or the equivalent amount over to PPC, upon encashment. cralawlawlibrary
12
Hernando Balmores, a stockholder and director of PPC, wrote a letter addressed to PPJC's directors,
13
He informed them that Villamor should be made to deliver to PPC and account for MC Home Depot's
14
checks or their equivalent value. cralawlawlibrary
Due to the alleged inaction of the directors, respondent Balmores filed with the RTC an intra-corporate
controversy complaint against petitioners for their alleged devices or schemes amounting to fraud or
misrepresentation "detrimental to the interest of the Corporation and its stockholders."
According to the trial court, PPC's entitlement to the checks was doubtful. The resolution issued by
PPC's board of directors; waiving its rights to the option to lease contract in favor of Villamor's law
firm, must be accorded prima facie validity.
The trial court also found that there was "no clear and positive showing of dissipation, loss, wastage,
or destruction of [PPC's] assets . . . [that was] prejudicial to the interest of the minority stockholders,

26
parties-litigants or the general public." The board's failure to recover the disputed amounts was not
27
an indication of mismanagement resulting in the dissipation of assets. cralawlawlibrary
28
The trial court noted that PPC was earning substantial rental income from its other sub-lessees. cralawlawlibrary
The trial court added that the failure to implead PPC was. fatal. PPC should have been impleaded as an
indispensable party, without which, there would be no final determination of the action.
Upon appeal, CA reversed the trial court's decision, and issued a new order placing PPC under
receivership and creating an interim management committee.
In reversing tie trial court order/resolution, the Court of Appeals considered the danger of dissipation,
35
wastage, and loss of PPC's assets if the review of the trial court's judgment would be delayed. cralawlawlibrary
The Court of Appeals ruled that the case filed by respondent Balmores with the trial court "[was] a
derivative suit because there were allegations of fraud or ultra vires acts
-Respondent Balmores' action in
the trial court is not a derivative suit
56
A derivative suit is an action filed by stockholders to enforce a corporate action. It is an exception to
57
the general rule that the corporation's power to sue is exercised only by the board of directors or
58
trustees. cralawlawlibrary
Individual stockholders may be allowed to sue on behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate the rights of the corporation or are the ones to be
59
sued and are in control of the corporation. It is allowed when the "directors [or officers] are guilty of
60
breach of . . . trust, [and] not of mere error of judgment." In derivative suits, the real party in
61
interest is the corporation, and the suing stockholder is a mere nominal party. Thus, this court
noted: chanRoblesvirtualLawlibrary

The Court has recognized that a stockholder's right to institute a

derivative suit is not based on any express provision of the
Corporation Code, or even the Securities Regulation Code, but is
impliedly recognized when the said laws make corporate directors
or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. In effect, the suit
is an action for specific performance of an obligation, owed by the
corporation to the stockholders, to assist its rights of action when
the corporation has been put in default by the wrongful refusal of
the directors or management to adopt suitable measures for its
6
protection.
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate Controversies (Interim Rules)
63
provides the five (5) requisites for filing derivative suits: chanRoblesvirtualLawlibrary
SECTION 1. Derivative action. - A stockholder or member may bring

an action in the name of a corporation or association, as the case
may be, provided, that: chanRoblesvirtualLawlibrary
( He was a stockholder or member at the time the acts or

1transactions subject of the action occurred and at the time the
) action was filed;
( He exerted all reasonable efforts, and alleges the same with
2particularity in the complaint, to exhaust all remedies available
) under the articles of incorporation, by-laws, laws or rules
governing the corporation or partnership to obtain the relief he
desires;
( No appraisal rights are available for the act or acts complained of;
3and
)
( The suit is not a nuisance or harassment suit.
4

In case of nuisance or harassment suit, the court shall forthwith

dismiss the case.
The fifth requisite for filing derivative suits, while not included in the enumeration, is implied in the
first paragraph of Rule 8, Section 1 of the Interim Rules: The action brought by the stockholder or
member must be "in the name of [the] corporation or association. ..." This requirement has already
been settled in jurisprudence.
64
Thus, in Western Institute of Technology, Inc., et al v. Solas, et al, this court said that "[a]mong 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.
69
Moreover, it is important that the corporation be made a party to the case. cralawlawlibrary
70
This court explained in Asset Privatization Trust v. Court of Appeals why it is a condition sine qua
non that the corporation be impleaded as party in derivative suits. Thus: chanRoblesvirtualLawlibrary
Not only is the corporation an indispensible party, but it is also the

present rule that it must be served with process.
The reasons given for not allowing direct individual suit are: chanRoblesvirtualLawlibrary
( . . . "the universally recognized doctrine that a stockholder in a corporation has

1no title legal or equitable to the corporate property; that both of. these are in
) the corporation itself for the benefit of the stockholders." In other words, to
allow shareholders to sue separately would conflict with the separate corporate
entity principle;
( . . . that the prior rights of the creditors may be prejudiced. Thus, our Supreme
2Court held in the case of Evangelista v. Santos, that '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. . .";

( the filing of such suits would conflict with the duty of the management to sue for
3the protection of all concerned;
)
(4) it would produce wasteful multiplicity of suits; and
( it would involve confusion in ascertaining the effect of partial recovery by an
5 72
individual on the damages recoverable by the corporation for the same act.
)
While it is true that the basis for allowing stockholders to file derivative suits on behalf of
corporations is based on equity, the above legal requisites for its filing must necessarily be complied
73
with for its institution. cralawlawlibrary
Respondent Balmores' action in the trial court failed to satisfy all the requisites of a derivative suit.
Section 81 of the Corporation Code provides the instances of appraisal right: chanRoblesvirtualLawlibrary
SEC. 81. Instances of appraisal right. Any stockholder of a

corporation shah1 have the right to dissent and demand payment of
the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the

effect of changing or restricting the rights of any stockholders
or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of
extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or

other disposition of all or substantially all of the corporate
property and assets as provided in this Code; and
3. In case of merger or consolidation.
Section 82 of the Corporation Code provides that the stockholder may exercise the right if he or she
voted against the proposed corporate action and if he made a written demand for payment on the
corporation within thirty (30) days after the date of voting.

Granting that (a) respondent Balmores' attempt to communicate with the other PPC directors already
comprised all the available remedies that he could have exhausted and (b) the corporation was under
74
full- control of petitioners that exhaustion of remedies became impossible or futile, respondent
Balmores failed to allege that appraisal rights were not available for the acts complained of here.
Neither did respondent Balmores implead PPC as party in the case nor did he allege that he was filing
on behalf of the corporation.
In this case, respondent Balmores filed an individual suit. His intent was very clear from his manner of
describing the nature of his action; His intent was also explicit from his prayer.
Respondent Balmores did not bring the action for the benefit of the corporation. Instead, he was
alleging that the acts of PPC's directors, specifically the waiver of rights in favor of Villamor's law firm
and their failure to take back the MC Home Depot checks from Villamor, were detrimental to his
individual interest as a stockholder. In filing an action, therefore, his intention was to vindicate his
individual interest and not PPC's or a group of stockholders'.
The essence of a derivative suit is that it must be filed on behalf of the corporation. This is because
the cause of action belongs, primarily, to the corporation. The stockholder who sues on behalf of a
corporation is merely a nominal party.
Respondent Balmores' intent to file an individual suit removes it from the coverage of derivative suits.
-Respondent Balmores has no
cause of action that would entitle
him to the reliefs sought
Corporations have a personality that is separate and distinct from their stockholders and directors. A
wrong to the corporation does not necessarily create an individual cause of action. "A cause of action
80
is the act or omission by which a party violates the right of another." A cause of action must pertain
to complainant if he or she is to be entitled to the reliefs sought.
PPC will not be bound by a decision granting the application for the appointment of a receiver or
management committee. Since it was not impleaded in the complaint, the courts did not acquire

jurisdiction over it. On this matter, it is an indispensable party, without which, no final determination
can be had.
- Appointment of a management
committee was not proper
Assuming that respondent Balmores has an individual cause of action, the Court of Appeals still erred
in placing PPC under receivership and in creating and appointing a management committee.
A corporation may be placed under receivership, or management committees may be created to

preserve properties involved in a suit and to protect the rights of the parties under the control and
83
supervision of the court. Management committees and receivers are appointed when the
corporation is in imminent danger of "(1) [dissipation, loss, wastage or destruction of assets or other
properties; and (2) [p]aralysation of its business operations that may be prejudicial to' the interest of
84
the minority stockholders, parties-litigants, or the general public." cralawlawlibrary
Applicants for the appointment of a receiver or management committee need to establish the
confluence of these two requisites. This is because appointed receivers and management committees
will immediately take over the management of the corporation and will have the management powers
specified in law.
PPC waived its rights, without any consideration in favor of Villamor. The checks were already in
Villamor's possession. Some of the checks may have already been encashed. This court takes judicial
notice that the goodwill money of PI 8,000,000.00 and the rental payments of P4,500,000.00 every
month are not meager amounts only to be waived without any consideration. It is, therefore, enough
to constitute loss or dissipation of assets under the Interim Rules.
Respondent Balmores, however, failed to show that there was an imminent danger of paralysis of
PPC's business operations. Apparently, PPC was- earning substantial amounts from its other sub-
lessees. Respondent Balmores did not prove otherwise. He, therefore, failed to show at least one of
the requisites for appointment of a receiver or management committee


23. Abad v. PCSC, G.R. No. 200620, 18 March 2015 (intra-corporate dispute;
jurisdiction)

24. Alabang Development Corporation v. Alabang Hills Village Association,

G.R. No. 187456, 2 June 2014 (dissolution and liquidation)

25. Banc of Commerce v. Radio Philippines Network Inc., G.R. No. 195615, 21
April 2014 (merger and consolidation)

Facts: In late 2001, Traders Royal Bank (TRB) proposed to sell to Bank of Commerce
(Bancommerce) for P10.4B its banking business. Bancommerce agreed, subject to prior
approval of BSP. BSP agreed provided that TRB and Bancommerce would set up an
escrow fund of P50M with another bank to cover TRB liabilities for contingent claims
that may subsequently be adjudged against it, which liabilities were excluded from the
purchase.
Hence, a Purchase and Assumption Agreement was entered into by Bancommerce and
TRB wherein the latter acquired specified assets and liabilities but excluding liabilities
arising from judicial actions which were tobe covered by the P50M in escrow.
Sometime in 2002, TRB was ordered by the Court in the case of Traders Royal Bank v.
RPN, to pay P9.7M in actual damages and 12% interest. RPN later filed a motion for
execution in the RTC against TRB but rather than proceed with the P50M escrow fund, it
filed a Supplemental Motion for Execution where it described TRB as now Bancommerce
based on the assumption that TRB had been merged into Bancommerce.
Bancommerce questioned the jurisdiction of the RTC and denied the merger between
TRB and Bancommerce. However, the RTC granted the motion for execution. It held that
the P&A was a mere tool to effectuate a merger and/or consolidation between TRB nd
Bancom. Bancommerce then filed a petition for certiorari with the CA.
CA denied the petition, alleging that the RTC order was clear that Bancommerce was not
being made to answer for the liabilities of TRB, but rather the assets or properties of
TRB under Bancommerces possession and custody.
Issue: Whether there has been a merger/consolidation between TRB and

Bancommerce.
Ruling: No.
There was no merger between TRB and Bancommerce

Merger is a re-organization of two or more corporations that results in their
consolidating into a single corporation, which is one of the constituent corporations, one

disappearing or dissolving and the other surviving. To put it another way, merger is the
absorption of one or more corporations by another existing corporation, which retains its
identity and takes over the rights, privileges, franchises, properties, claims, liabilities
and obligations of the absorbed corporation(s). The absorbing corporation continues its
existence while the life or lives of the other corporation(s) is or are terminated.
In the case at bar, no merger took place between TRB and Bancommerce as the
requirements and procedures for a merger were absent. A merger does not become
effective upon the mere agreement of the constituent corporations. All the requirements
specified in law must be complied with in order for merget to take effect. Sec. 79 of the
Corpo Code provides that merger shall be effective only upon the issuance by the SEC
of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with distinct corporate
personalities. What happened is that TRB sold and Bancommerce purchased identified
recorded assets of TRB in consideration of Bancommerces assumption of identified
recorded liabilities including booked contingent accounts. There is no law that prohibits
this kind of transaction especially when it is done openly and with appropriate
government approval.
No De Facto Merger either

The dissenting opinion of Justice Mendoza finds, however, that a "de facto" merger
existed between TRB and Bancommerce considering that (1) the P & A Agreement
between them involved substantially all the assets and liabilities of TRB; (2) in an Ex
Parte Petition for Issuance of Writ of Possession filed in a case, Bancommerce qualified
TRB, the petitioner, with the words "now known as Bancommerce;" and (3) the BSP
issued a Circular Letter (series of 2002) advising all banks and non-bank financial
intermediaries that the banking activities and transaction of TRB and Bancommerce
were consolidated and that the latter continued the operations of the former.
However, the ponente, J. Abad, held that the idea of a de facto merger came about
because prior to the Corporation Code, no law authorized the merger or consolidation of
Philippine corporations. Now, under the Corporation Code, a de facto merger can be
pursued by one corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation. The acquiring

corporation would end up with the business enterprise of the target corporation;
whereas, the target corporation would end up with basically its only remaining assets
being the shares of stock of the acquiring corporation.
No de facto merger took place in this case because TRB did not get in exchange for the
banks assets and liabilities an equivalent value in Bancommerce shares of stock.
Furthermore, the BIR treated the transaction between the two banks as purely a sale of
specified assets and liabilities when it rendered its opinion on the tax consequences of
the transaction given that there is a difference in tax treatment between a sale and a
merger or consolidation.
When is an acquiring/transferee corporation liable for debts and liabilities of

the transferor
It is pointed out that under common law, if one corporation sells or otherwise transfers
all its assets to another corporation, the latter is not liable for the debts and liabilities of
the transferor if it has acted in good faith and has paid adequate consideration for the
assets, except:
(1) where the purchaser expressly or impliedly agrees to assume such debts;
(2) where the transaction amounts to a consolidation or merger of the corporations;
(3) where the purchasing corporation is merely a continuation of the selling
corporation; and
(4) where the transaction is entered into fraudulently in order to escape liability for
such debts.
Since there had been no merger, Bancommerce cannot be considered as TRBs

successor-in-interest and against which the courts decision may be enforced.
Bancommerce did not hold the former TRBs assets in trust for it as to subject them to
garnishment for the satisfaction of the latters liabilities to RPN. Bancommerce bought
and acquired those assets and thus, became their absolute owner.

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What are the circumstances under which an acquiring corporation can be held liable for the debts and liabilities of the transferor corporation?

Corporation Law Case Digests

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Bance | Benitez | Cheng | Damasing | Ratilla

2. Ricafort v. Hon. Dicdican

Bance | Benitez | Cheng | Damasing | Ratilla

Was the action of the Petitioners time-barred? Were they properly

3. Mervic Realty Inc v. China Banking Corporation

Bance | Benitez | Cheng | Damasing | Ratilla

G.R. No. 193748, 3 Feb 2016 (corporate rehab)

Bance | Benitez | Cheng | Damasing | Ratilla

4. POTC, PHILCOMSAT v. Sandiganbayan

Bance | Benitez | Cheng | Damasing | Ratilla

President Corazon Cojuangco Aquino, exercising revolutionary

Bance | Benitez | Cheng | Damasing | Ratilla

disregarding their distinct and separate personality without a hearing." As

Bance | Benitez | Cheng | Damasing | Ratilla

on February 4, 2004 a complaint for interpleader where Teng sought to

Bance | Benitez | Cheng | Damasing | Ratilla

Under Sec 63 of the corporation code, certain minimum requisites

Bance | Benitez | Cheng | Damasing | Ratilla

6. Viva Shipping Lines Inc v. Keppel Philippines Mining Inc\

Bance | Benitez | Cheng | Damasing | Ratilla

Rule 43 of the Rules of Court prescribes the procedure to assail the

Bance | Benitez | Cheng | Damasing | Ratilla

The CA dismissed Viva Shipping Lines' Petition for Review in the

A corporation under rehabilitation continues with its corporate life and

Corporate rehabilitation is a type of proceeding available to a business

In general, insolvency proceedings provide for predictability that

Bance | Benitez | Cheng | Damasing | Ratilla

Rehabilitation or liquidation shall be made with a view to ensure or

The rationale in corporate rehabilitation is to resuscitate businesses in

There are instances when corporate rehabilitation can no longer be

It does not make sense to hold, suspend, or continue to devalue

Bance | Benitez | Cheng | Damasing | Ratilla

Liquidation is diametrically opposed to rehabilitation. Both cannot be

Proceedings in case of insolvency are not limited to rehabilitation. Our

History of the laws on Corporate rehabilitation in the Philippines:

Corporate rehabilitation traces its roots to Act No. 1956 (Insolvency

The relief was also provided in the amendatory provisions of PD No.

d) Petitions of corporations, partnerships or associations to be declared

Bance | Benitez | Cheng | Damasing | Ratilla

Rehabilitation Receiver or Management Committee created pursuant to this

In 2000, the jurisdiction of the Securities and Exchange Commission

Currently, the prevailing law and procedure for corporate rehabilitation

However, since the RTC acted on petitioner's Amended Petition before

Petitioner is not entitled to liberal construction of the procedural rules.

A corporate rehabilitation case cannot be decided without the

Bance | Benitez | Cheng | Damasing | Ratilla

The failure of petitioner to implead its creditors as respondents cannot

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Bance | Benitez | Cheng | Damasing | Ratilla

Professor Stephanie V. Gomez of the UP College of Law suggests

This court enumerated the characteristics of a rehabilitation plan that

a. the absence of a sound and workable business plan;