RATIONALE OF CASES

CONCESSION THEORY

1. INTL EXPRESS TRAVEL & TOUR SERVICES, INC. V. CA

It is a basic postulate that before a corporation may acquire juridical personality, the State
must give its consent either in the form of a special law or a general enabling act, and the
procedure and conditions provided under the law for the acquisition of such juridical
personality must be complied with. Although the statutory grant to an association of the
powers to purchase, sell, lease and encumber property can only be construed the grant of a
juridical personality to such an association nevertheless, the failure to comply with the
statutory procedure and conditions does not warrant a finding that such association acquired
a juridical personality, even when it adopts constitution and by-laws.

DIFFERENCE OF CORPO FROM PARTNERSHIP & SOLE PROPRIETORSHIP

1. PIONEER INSURANCE & SURETY CORP. VS COURT OF APPEALS

It is ordinarily held that persons who attempt, but fail, to form a corporation and who
carry on business under the corporate name occupy the position of partners inter
se. Thus, where persons associate themselves together under articles to purchase
property to carry on a business, and their organization is so defective, as to come short of
creating a corporation within the statute, they become in legal effect partners inter se, and
their rights as members of the company to the property acquired by the company will be
recognized.

However, such a relation does not necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist , and it should be implied only when
necessary to do justice between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged
partnership and contribution .

TWO CORPORATE FRANCHISES

1. J.R.S. BUSINESS CORP. VS. IMPERIAL INSURANCE, INC.

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 The primary franchise of a corporation that is, the right to exist as such, is vested "in the
individuals who compose the corporation and not in the corporation itself", and cannot be
conveyed in the absence of a legislative authority to do so, but the specific or secondary
franchises of a corporation are vested in the corporation and may ordinarily be
conveyed or mortgaged under a general power granted to a corporation to dispose of
its property, except such special or secondary franchises as are charged with a public use.

The right to operate a messenger and express delivery service, by virtue of a legislative
enactment, is admittedly a secondary franchise under the law, and is subject to levy and
sale on execution together and including all the property necessary for the enjoyment
thereof. The law, however, indicates the procedure under which the secondary franchise and
the properties necessary for its enjoyment may be sold under execution. Said franchise
can be sold under execution, when such sale is especially decreed and ordered in the
judgment and it becomes effective only when the sale is confirmed by the Court after
due notice (Sec. 56, Corp. Law).

Incidentally, the trade name or business name corresponds to the initials of the
President of the petitioner corporation and there can be no serious dispute regarding the
fact that a trade name or business name and capital stock are necessarily included in
the enjoyment of the franchise. Like that of a franchise, the law mandates, that property
necessary for the enjoyment of said franchise, can only be sold to satisfy a judgment debt if
the decision especially so provides. As we have stated heretofore, no such directive appears
in the decision. Moreover, a trade name or business name cannot be sold separately
from the franchise, and the capital stock of the petitioner corporation or any other
corporation, because it represents the interest and is the property of stockholders in the
corporation, who can only be deprived thereof in the manner provided by law

ARTIFICIAL BEING

1. SECOSA VS. HEIRS OF FRANCISCO

When an injury is caused by the negligence of an employee, there instantly arises a

presumption that there was negligence on the part of the employer, which however, may
be rebutted by a clear evidence showing on the part of the employer that it exercised the
care and diligence of a good father of a family in the selection and supervision of his
employee.

In this case, the corporation was held solidary liable with its employee, but the president
of the corporation was not held solidary liable with the employee of the corporation
because

A corporation has a personality separate from that of its stockholders or

members. The doctrine of veil of corporation treats as separate and distinct the
affairs of a corporation and its officers and stockholders. As a rule, a corporation will
be looked upon as a legal entity, unless and until sufficient reason to the contrary
appears. When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons. Also, the corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities among members of the

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 corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it.

CORPORATIONS & MORAL DAMAGES

1. CRYSTAL vs. BANK OF THE PHILIPPINE ISLANDS

General Rule: A corporation, being an artificial person, cannot experience physical

sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or
social humiliation which are basis for moral damages under Art. 2217 of the Civil Code.

Exception: However, if a corporation has good reputation, and such was besmirched, it
may be a ground for the award of moral damages.

While the Court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis
of the damage and its causal relation to the defendants acts. This is so because
moral damages, though incapable of pecuniary estimation, are in the category of an
award designed to compensate the claimant for actual injury suffered and not to impose
a penalty on the wrongdoer.

SEPARATE JURIDICAL PERSONALITY & PIERCING THE CORPORATE VEIL

1. CONCEPT BUILDERS, INC. VS NLRC

In the case, the SC summarized the FACTORS that are to be considered when
the corporate mask may be lifted and the corporate veil pierced, or when to consider a
corporation as but the alter ego of the controlling person or of another corporation:

a. Stock ownership by one or common ownership of both corporations.

b. Identity of directors and officers.
c. The manner of keeping corporate books and records.
d. Methods of conducing the business.
The SC adopted the following TESTS in determining the applicability of the
doctrine of piercing the veil of corporate fiction:
a. CONTROL, not merely of complete stock control, but COMPLETE
DOMINATION, not only of finances but of policy and business practice in
respect to the transaction attacked that the corporate entity as to this
transaction had at the time to separate mind, will or existence of its own.

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 b. Such control MUST HAVE BEEN USED by the defendant to commit FRAUD
or WRONG, to perpetuate a violation of statutory or other positive legal duty,
or dishonest and unjust act in contravention of plaintiffs legal rights.
c. The control and breach of duty must PROXIMATELY CAUSE the injury or
unjust loss complained of.

2. MARUBENI VS LIRAG

There was no consultancy agreement. The testimonial and documentary evidence

did not support Lirags claims. The testimony of Lirags witnesses comes from the fact that
they learned about the oral consultancy only from Lirag.
Assuming that there was a contract for consultancy services, still Lirag could not
claim fees from projects that Marubeni were not awarded to Marubeni. In the Bureau of
Posts project, it was Sanritsu, and not Marubeni which was awarded. The latter did not even
join the bidding. Lirag clarified that he wasnt providing services for Sanritsu, but still claimed
the 6% commission because Marubeni and Sanritsu are sister companies thereby implying
the need to pierce the veil of corporate fiction. Marubeni is allegedly the supplier and
contractor while Sanritsu is the subcontractor. They also come from the same country.
Nevertheless, piercing the veil requires more than these circumstances. The wrongdoing
must be clearly and convincingly established.
Contrary to the trial courts finding that Lirag was made to believe that he was hired
to provide the consultancy services, Shoichi One, an officer of Marubeni testified that it was
Lirag who insisted on providing the services even if Marubeni Phils. had no such authority to
hire him, as this was subject to approval of the head office in Japan. If the Tokyo office
agrees to hire a consultant, it would give a power of attorney to its Gen. Manager in Manila
to enter into such agreement. However, Marubeni did not wish to participate in the bidding,
hence there was no need for consultancy services.

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ALTER EGO PIERCING
1. ARNOLD VS WILLETS AND PATTERSON LTD.
The Court held that the language of piercing the doctrine of corporate fiction when applied to
alter ego cases are 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.

2. LA CAMPANA COFFE FACTORY VS KAISAHAN NG MANGGAGAWA

Tan Tong and his family owned and controlled 2 corporations, one engaged in sale of
coffee and the other in starch. Both the corporations had one office, one management & one
payroll, and the laborers of both corporations are interchangeable.
The 60 members of the labor associations in the 2 factories demanded higher wages
to La Campana Starch and Coffee Factory. Lacampana sought dismissal of the case on
the ground that the Starch and the Coffee factory are 2 distinct juridical persons. The court
disregarded the corporate fiction & treated the 2 companies as one.

3. MARIANO VS PETRON CORP.

In the case the foreign parent company ESSO Eastern leased a large parcel of land
with AURE group as lessor, the purpose of such lease is for the benefit of ESSO Philippines,
its subsidiary company. ESSO Phils. Took over the possession of the leased premises.
The court held ESSO phils. As a mere alter ego of ESSO Eastern.
Courts are loathed to pierce the fictive veil of corporate personality,
cognizant of the core doctrine in Corporation Law vesting on corporations legal
personality distinct from their shareholders (individual or corporate), Thus
fascilitating the conduct of corporate business.
However, the fiction gives way to reality when the corporate personality is
foisted to justify wrong, protect fraud, or defend crime, thwarting the ends of
justice. The fiction holds even lesser sway of subsidiary corporations whose
shares are wholly if not almost wholly owned by its parent company. The
structural and systems overlap inherent in parent company & subsidiary relations
often render the subsidiary as a mere local branch, agency, or adjunct of the
foreign parent company.

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LIABILITY UNDER PROMOTERS CONTRACTS
1. CAGAYAN FISHING DEVT. CO VS SANDIKO

RATIFICATION is the key element in upholding the validity and

enforceability of Promoters contracts. Without the ratification of a corporation
after its due incorporation, a contract entered into in behalf of a corporation yet to
be organized or still in the process of incorporation is void against the
corporation.

In the case, the court found out that the transactions involving the
properties were treated not as corporate assets but as personal assets of the
Taboras, supported by the fact that the title of such parcels of land were not even
registered in the name of the corporation. In fact, to this day, the lands remain
inscribed in the name of Tabora. The defendant always regarded Tabora as the
owner of the lands. He dealt with Tabora directly. Jose Ventura, president of
plaintiff Cagayan Fishing dev. Co., intervene only to sign the contract in behalf of
the plaintiff. Even PNB, mortgagee of the 4 parcels of land, always treated
Tabora as the owner of the same. These all pointed out the Bona Fide lack of
ratification of the deed of sale of the lands in favor of the corporation.(Villanueva,
p147)

2. RIZAL LIGHT & ICE CO V. MUN. OF RIZAL

A franchise awarded in favor of a corporation was sought to be annulled on the

ground that at the time the application was filed, the corporation was then only in the
process of incorporation. In dismissing the action in, the Court held that although a
franchise may be treated as a contract, the subsequent incorporation of the applicant
corporation after the grant of the franchise, not only perfected a contract between
the respondent Municipality and Morong Electric but cured the deficiency pointed out
by the petitioner in the application of Morong Electric. (Villanueva, p148)

While a franchise cannot take effect until the grantee corporation is organized,
the franchise may, nevertheless, be applied for before the company is fully organized. A
grant of a street franchise is valid although the corporation is not created until
afterwards. The reason is that a privilege of this character is a mere license to the
corporation until it accepts the grant and complies with its terms and conditions.

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 SUMMARY OF CAGAYAN FISHING AND RIZAL LIGHT CASE

An important aspect in both cases is the importance of having organized corporate

enterprise, and not merely the existence of juridical personality, to allow for ratification to
validate the contract as against the corporation. Rizal Light quoted from American Corporate
Authorities that a company is not completely incorporated at the time a secondary franchise or
license is given, does not affect the validity of the grant, but what is essential is the Corporation
is organized or that the companys organization is complete. This emphasizes the principles
under the business enterprise doctrine that what is essential for commencement of a
corporation is the existence of the business organization upon which a license or grant is
pursued. This is in contrast with the situation in Cagayan Fishing where it seemed that even at
the time of the litigation, and even the 3 rd-party (Sandiko) was well aware that the subject titles
to the parcels of land were still not registered in the name of the corporate entity.

3. CARAM JR. V. COURT OF APPEALS

Investors who were not moving spirit behind the organization of the corporation,
but who were merely convinced to invest in the proposed corporate venture on the basis
of feasibility study undertaken, are not liable personally with the corporation for the cost
of such feasibility study. The most that can be said is that they benefited from such
services, but that surely is no justification to hold them personally liable therefor.
Otherwise, all the other stockholders of the corporation, including those who came in
later, and regardless of the amount of their shareholdings, would be equally and
personally liable also with the petitioners for the claims of the private respondents.

There was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As a bona
fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts
as duly authorized by its officers and directors.

CORPORATION BY ESTOPPEL

1. PEOPLE V. GARCIA

The court held that an individual cannot avoid his liabilities to the public as an
incorporator of a corporatin whose incorporation was not consummated, when he held
himself out to the public as officer of the corporation and received money from applicants
who availed their services, thus:

For engaging in recruitment of workers without obtaining the necessary license

from the POEA, Botero should suffer the consequences of Ricorns illegal act for if the
offender is a corporation, partnership, association or entity, the penalty shall be imposed
upon the officer or officers of the corporation, partnership, association or entity

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 responsible for violation; The evidence shows that appellant Botero was one of the
incorporators of Ricorn. For reasons that cannot be discerned from the records, Ricorns
incorporation was not consummated. Even then, appellant cannot avoid his liabilities to
the public as an incorporator of Ricorn. He and his co-accused Garcia held themselves
out to the public as officers of Ricorn. They received money from applicants who availed
of their services. They are thus estopped from claiming that they are not liable as
corporate officials of Ricorn. 31Section 25 of the Corporation Code provides that all
persons who assume to act as a corporation knowing it to be without authority to
do so shall be liable as general partners for all the debts, liabilities and damages
incurred or arising as a result thereof:

Provided, however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of corporate personality.

2. LIM TONG LIM V. PHIL. FISHING GEAR INDUSTRIES INC

The court that it is not only those who actually participated in the contract or
transactions that can be held as general partner, but also that the liability for a contract
entered into on behalf of an unincorporated association or ostensible corporation may lie
in a person who may not have directly transacted on its behalf, but reaped benefits from
the contract, thus:
In such case, all those who benefit from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for contracts they
impliedly assented to or took advantage of. Under the law on Estoppel, those acting on
behalf of a corporation and those benefited by it, knowing it to be without valid existence,
are held liable as general partners.

3. PIONEER INSURANCE V. CA
With respect to passive investors to the venture who themselves believed in good
faith that there was already a registered corporation, they are completely insulated from
any liability including what they invested or promised to invest in the venture, as held in
the case, where the liabilities of parties to a corporate venture was sought to be
determined when it was shown that the corporation intended to be formed was never
duly incorporated.

SHARES DO NOT GUARANTEE SHAREHOLDERS PROPORTIONATE PERCENTAGE

OF OWNERSHIP OVER THE CORPO ASSETS.
1. MAGSAYSAY-LABRADOR vs. COURT OF APPEALS
Supreme Court characterized a stockholders interest in corporate contracts,
transactions and properties:

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 If it exists at all, is indirect, contingent remote, conjectural, consequential
and collateral. At the very least their interest is purely inchoate or in sheer
expectancy of a right in the management of the corporation and to share in the
profits thereof and the properties and assets thereof on dissolution after the
payment of the corporate debts and obligations.
The stockholders cannot intervene in the case in which the
corporation is a party under the rule that if parties with a conjectural,
consequential, collateral, expectant and remote interest were allowed to
intervene, proceedings would become unnecessarily complicated, expensive and
interminable.

TRUST FUND DOCTRINE

1. PHILIPPINE TRUST CO. VS. RIVERA

It is an established doctrine that subscriptions to the capital of a corporation

constitute a fund to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of his debts.
A corporation has no power to release an original subscriber to its capital
stock from the obligation of paying his shares, without a valuable consideration for
such release.

THEORIES ON LIABILITY FOR WTERED STOCKS:

1. PNB VS BITULOK SAWMILL, INC.

It is a well settled principle that with all the vast powers lodged in the president, he is still
devoid of the prerogative of suspending the operations of a statute or any of its terms. The
power of suspending laws is lodged with the legislature, which has indicated that the
obligation for the payment for subscription by the defendants shall be governed by the
Corporation Law. The president could not suspend the effectivity of the Corporation Law;
therefore the defendants remain liable for the balance of their subscriptions.
The case gives the essence of a subscription contract- It is indeed a species of
contract in general under the Law on Contracts, but the principle in Corporate Law
prevail, one of which is that when one enters into a subscription agreement, one cannot
deny the obligation to pay, even when the corporation becomes insolvent.
When one enters into a subscription agreement, the principles of Corporate Law
becomes part and parcel of the contract. The case therefore hold that any contradiction to
modify the condition of the obligation to pay is essentially void. It does not avoid the
subscription agreement, but avoids the condition. The obligation to pay then becomes a
purely simple obligation.

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