BUSINESS ORGANIZATION 2 (3) the control and breach of duty must proximately cause the injury or

NILTantay unjust loss complained of.

III-Manresa
The absence of these elements prevents piercing the corporate veil. The
Case Digests evidence on record fails to show that these elements are present,
especially given the fact that plaintiffs’ complaint had pleaded that CLC
TITLE I is a corporation duly organized and existing under the laws of the
GENERAL PROVISIONS Philippines.
Definitions and Classifications

Section 1 – ABS-CBN Vs. CA (310 SCRA 572)

Title of the Code. - This Code shall be known as "The Corporation
Code of the Philippines". Facts:

Section 2 – ABS-CBN and Viva executed a Film Exhibition Agreement whereby

Corporation defined. A corporation is an artificial being created by Viva gave ABS-CBN an exclusive right to exhibit some Viva films.
operation of law, having the right of succession and the powers, Sometime in December 1991, in accordance with paragraph 2.4 of said
attributes and properties expressly authorized by law or incident to its agreement stating that:
existence.

A. Artificial Being 2.4 ABS-CBN shall have the right of first refusal to
the next twenty-four (24) Viva films for TV telecast
Child Learning Center Vs. Tagorio (476 SCRA 236) under such terms as may be agreed upon by the
parties hereto, provided, however, that such right
Facts: shall be exercised by ABS-CBN from the actual
offer in writing.

Timothy was a Grade IV student at Marymount School, an academic

institution operated and maintained by Child Learning Center, Inc. Viva, through defendant Del Rosario, offered ABS-CBN, through its
(CLC). In the afternoon of March 5, 1991, between 1 and 2 p.m., vice-president Charo Santos-Concio, a list of three (3) film packages
Timothy entered the boy’s comfort room at the third floor of the (36 title) from which ABS-CBN may exercise its right of first refusal
Marymount building to answer the call of nature. He, however, found under the afore-said agreement. ABS-CBN, however through Mrs.
himself locked inside and unable to get out. Timothy started to panic Concio, "can tick off only ten (10) titles" (from the list) "we can
and so he banged and kicked the door and yelled several times for purchase" and therefore did not accept said list. The titles ticked off by
help. When no help arrived he decided to open the window to call for Mrs. Concio are not the subject of the case at bar except the film
help. In the process of opening the window, Timothy went right ''Maging Sino Ka Man."
through and fell down three stories. Timothy was hospitalized and
given medical treatment for serious multiple physical injuries. Del Rosario approached ABS-CBN's Ms. Concio, with a list consisting
of 52 original movie titles including the 14 titles subject of the present
An action under Article 2176 of the Civil Code was filed by respondents case, as well as 104 re-runs from which ABS-CBN may choose another
against the CLC, the members of its Board of Directors, namely 52 titles, as a total of 156 titles, proposing to sell to ABS-CBN airing
Spouses Edgardo and Sylvia Limon, Alfonso Cruz, Carmelo Narciso rights over this package of 52 originals and 52 re-runs for
and Luningning Salvador, and the Administrative Officer of P60,000,000.00 of which P30,000,000.00 will be in cash and
Marymount School, Ricardo Pilao. P30,000,000.00 worth of television spots.

The court a quo found in favor of respondents and ordered petitioners Also, Del Rosario and ABS-CBN general manager, Eugenio Lopez III,
CLC and Spouses Limon to pay respondents, jointly and severally, met to discuss the package proposal of Viva. What transpired in that
P200,253.12 as actual and compensatory damages, P200,000 as moral lunch meeting is the subject of conflicting versions. Mr. Lopez testified
damages, P50,000 as exemplary damages, P100,000 as attorney’s fees that he and Mr. Del Rosario allegedly agreed that ABS-CRN was
and the costs of the suit. granted exclusive film rights to fourteen (14) films for a total
consideration of P36 million; that he allegedly put this agreement as to
The trial court disregarded the corporate fiction of CLC and held the the price and number of films in a "napkin'' and signed it and gave it to
Spouses Limon personally liable because they were the ones who Mr. Del Rosario. On the other hand, Del Rosario denied having made
actually managed the affairs of the CLC. any agreement with Lopez regarding the 14 Viva films; denied the
existence of a napkin in which Lopez wrote something; and insisted
Issue: that what he and Lopez discussed at the lunch meeting was Viva's film
package offer of 104 films (52 originals and 52 re-runs) for a total price
W/N there is basis for “piercing the veil of corporate entity” in of P60 million. Mr. Lopez promising [sic]to make a counter proposal
resolving the issue of alleged personal liability of petitioners Edgardo which came in the form of a proposal contract.
L. Limon and Sylvia S. Limon

Ruling: Del Rosario and Mr. Graciano Gozon of RBS Senior vice-president for
Finance discussed the terms and conditions of Viva's offer to sell the
There was no basis to pierce CLC’s separate corporate personality. To 104 films, after the rejection of the same package by ABS-CBN.
disregard the corporate existence, the plaintiff must prove:
After the rejection of ABS-CBN and following several negotiations and
(1) Control by the individual owners, not mere majority or complete meetings Del Rosario and Viva's President Teresita Cruz, in
stock ownership, resulting in complete domination not only of finances consideration of P60 million, signed a letter of agreement granting
but of policy and business practice in respect to a transaction so that RBS the exclusive right to air 104 Viva-produced and/or acquired films
the corporate entity as to this transaction had at the time no separate including the fourteen (14) films subject of the present case.
mind, will or existence of its own;

(2) such control must have been used by the defendant to commit fraud Thus, ABS-CBN filed a complaint for specific performance with a
or wrong, to perpetuate the violation of a statutory or other positive prayer for a writ of preliminary injunction and/or temporary
legal duty, or a dishonest and unjust act in contravention of the restraining order against Republic Broadcasting Corporation, Viva
plaintiff’s legal right; and Production, and Vicente Del Rosario.

1
RTC issued a temporary restraining order enjoining RBS from On September 28, 1987, a team of Meralco’s inspectors conducted a
proceeding with the airing, broadcasting, and televising of the fourteen surprise inspection of the electric meters installed at the DCIM
VIVA films subject of the controversy, starting with the film Maging building, witnessed by Ultra’s representative, Mr. Willie Abangan. The
Sino Ka Man, which was scheduled to be shown on private two meters were found to be allegedly tampered with and did not
respondents RBS' channel 7 at seven o'clock in the evening of said date. register the actual power consumption in the building. The results of
the inspection were reflected in the Service Inspection Reports
prepared by the team.
Issue:

W/N RBS as a corporation is entitled to moral damages Meralco informed TEC of the results of the inspection and demanded
from the latter the payment of P7,040,401.01 representing its
Ruling: unregistered consumption from February 10, 1986 until September 28,
1987, as a result of the alleged tampering of the meters. TEC received
the letters on January 7, 1988. Since Ultra was in possession of the
Article 2217 of the NCC defines what are included in moral damages,
subject building during the covered period, TEC’s Managing Director,
while Article 2219 enumerates the cases where they may be recovered,
Mr. Bobby Tan, referred the demand letter to Ultra which, in turn,
Article 2220 provides that moral damages may be recovered in
informed TEC that its Executive Vice-President had met with
breaches of contract where the defendant acted fraudulently or in bad
petitioner’s representative. Ultra further intimated that assuming that
faith. RBS's claim for moral damages could possibly fall only under
there was tampering of the meters, petitioner’s assessment was
item (10) of Article 2219, thereof which reads:
excessive. For failure of TEC to pay the differential billing, petitioner
disconnected the electricity supply to the DCIM building on April 29,
(10) Acts and actions referred to in Articles 21, 26, 1988.
27, 28, 29, 30, 32, 34, and 35.
TEC demanded from petitioner the reconnection of electrical service,
Moral damages are in the category of an award designed to compensate claiming that it had nothing to do with the alleged tampering but the
the claimant for actual injury suffered and not to impose a penalty on latter refused to heed the demand. Hence, TEC filed a complaint on
the wrongdoer. The award is not meant to enrich the complainant at May 27, 1988 before the Energy Regulatory Board (ERB) praying that
the expense of the defendant, but to enable the injured party to obtain electric power be restored to the DCIM building. The ERB immediately
means, diversion, or amusements that will serve to obviate then moral ordered the reconnection of the service but petitioner complied with it
suffering he has undergone. It is aimed at the restoration, within the only on October 12, 1988 after TEC paid P1,000,000.00, under protest.
limits of the possible, of the spiritual status quo ante, and should be The complaint before the ERB was later withdrawn as the parties
proportionate to the suffering inflicted. Trial courts must then guard deemed it best to have the issues threshed out in the regular courts.
against the award of exorbitant damages; they should exercise Prior to the reconnection, or on June 7, 1988, petitioner conducted a
balanced restrained and measured objectivity to avoid suspicion that it scheduled inspection of the questioned meters and found them to have
was due to passion, prejudice, or corruption on the part of the trial been tampered anew.
court.
Meanwhile, on April 25, 1988, petitioner conducted another
The award of moral damages cannot be granted in favor of a inspection, this time, in TEC’s NS Building. The inspection allegedly
corporation because, being an artificial person and having existence revealed that the electric meters were not registering the correct power
only in legal contemplation, it has no feelings, no emotions, no senses, consumption. Petitioner, thus, sent a letter dated June 18, 1988
It cannot, therefore, experience physical suffering and mental anguish, demanding payment of P280,813.72 representing the differential
which call be experienced only by one having a nervous system. The billing. TEC denied petitioner’s allegations and claim in a letter dated
statement in People v. Manero and Mambulao Lumber Co. v. PNB that June 29, 1988. Petitioner, thus, sent TEC another letter demanding
a corporation may recover moral damages if it "has a good reputation payment of the aforesaid amount, with a warning that the electric
that is debased, resulting in social humiliation" is an obiter dictum. On service would be disconnected in case of continued refusal to pay the
this score alone the award for damages must be set aside, since RBS is differential billing. To avert the impending disconnection of electrical
a corporation. service, TEC paid the above amount, under protest.

On January 13, 1989, TEC and TPC filed a complaint for damages
MERALCO Vs. TEAM Electronics (540 SCRA 62) against petitioner and Ultra before the Regional Trial Court (RTC) of
Pasig. The trial court rendered a Decision in favor of TEC and TPC,
Facts: and against Ultra and Meralco declaring the latter jointly and severally
liable.
T.E.A.M. Electronics Corporation (TEC) was formerly known as NS
Electronics (Philippines), Inc. before 1982 and National Semi- Issue:
Conductors (Phils.) before 1988. TEC is wholly owned by Technology
Electronics Assembly and Management Pacific Corporation (TPC). On W/N a corporation is entitled to moral damages
the other hand, Manila Electric Company (Meralco) is a utility
company supplying electricity in the Metro Manila area. Ruling:

TEC’s claim was premised allegedly on the damage to its goodwill and
Meralco and NS Electronics (Philippines), Inc., the predecessor-in- reputation.
interest of TEC, were parties to two separate contracts denominated as
Agreements for the Sale of Electric Energy. Under the aforesaid As a rule, a corporation is not entitled to moral damages because, not
agreements, Meralco undertook to supply TEC’s building known as being a natural person, it cannot experience physical suffering or
Dyna Craft International Manila (DCIM). Another contract was sentiments like wounded feelings, serious anxiety, mental anguish and
entered into for the supply of electric power to TEC’s NS Building. moral shock. The only exception to this rule is when the corporation
has a reputation that is debased, resulting in its humiliation in the
In September 1986, TEC, under its former name National Semi- business realm. But in such a case, it is imperative for the claimant to
Conductors (Phils.) entered into a Contract of Lease with Ultra present proof to justify the award. It is essential to prove the existence
Electronics Industries, Inc. (Ultra) for the use of the former’s DCIM of the factual basis of the damage and its causal relation to petitioner’s
building for a period of five years or until September 1991. Ultra was, acts. In the present case, the records are bereft of any evidence that the
however, ejected from the premises on February 12, 1988 by virtue of a name or reputation of TEC/TPC has been debased as a result of
court order, for repeated violation of the terms and conditions of the petitioner’s acts.
lease contract.

2
 corporation; or when the corporation is used as a cloak or cover for
Nisce Vs. Equitable Bank (516 SCRA 231) fraud or illegality; or to work injustice; or where necessary to achieve
equity or for the protection of the creditors. In those cases where valid
Facts: grounds exist for piercing the veil of corporate entity, the corporation
will be considered as a mere association of persons. The liability will
Sometime in 1984, Natividad opened an account in PCI Bank Paseo directly attach to them.
de Roxas branch to cater her needs for easy access to foreign In applying the “instrumentality” or “alter ego” doctrine, the courts are
exchange. Thereafter, Natividad deposited $20,500 as was issued a concerned with reality and not form, with how the corporation
passbook. Upon her request, the bank transferred $20,000 to PCI operated and the individual defendant’s relationship to that operation.
Capital Asia Ltd. in Hong Kong via cable order.
Petitioners failed to adduce sufficient evidence to justify the piercing of
PCI owns almost all of the shares of PCI Capital. the veil of corporate entity and render respondent Bank liable for the
US$20,000.00 deposit of petitioner Natividad Nisce as debtor.
In 1994, Equitable and PCI bank merged.

In 1996, the spouses Nisce secured a P20,000,000 loan from the Bank. Manacop Vs. Equitable-PCI (468 SCRA 256)
To secure the payment of the loan, they mortgaged 2 real estate
properties located in Makati. Another loan was also covered by a real Facts:
estate mortgage. They were able to pay partial payments to the loan.
However, they defaulted in their payments thereafter. The spouses Lavine Loungewear Manufacturing, Inc. insured its buildings and
offered their dollar account to setoff the indebtedness. However, the supplies against fire with Philippine Fire and Marine Insurance
bank made no response on the offer. Corporation, Rizal Surety and Insurance Company, Tabacalera
Insurance Company, First Lepanto-Taisho Insurance Corporation,
Equitable PCI bank filed a petition for extrajudicial foreclosure before Equitable Insurance Corporation and Reliance Insurance Corporation.
the Regional Trial Court (RTC). The spouses, on the other hand, filed a
complaint for Nullity of the Suretyship agreement, damages and legal Except for Policy issued by First Lepanto, all the insurance policies
compensation, with a prayer for injunctive relief against the bank and provide that the loss, if any, shall be payable to Equitable Banking
the Sheriff. Corporation-Greenhills Branch, as their interest may appear.

The RTC granted the injunctive relief. The Court of Appeals reversed On August 1, 1998, a fire gutted Lavine’s buildings and their contents
the trial court’s decision. Hence this petition. thus claims were made against the policies.

The petitioners maintain that the $20,000 dollar deposit should be Certain insurance companies released the proceeds directly to
setoff against their loan account with Equitable claiming that the bank Equitable Bank despite Chandru’s request that payments be made first
is their debtor insofar as their deposit is concerned. to Lavine who shall thereafter pay Equitable Bank.

Issue: In behalf of Lavine, a Petition for the Issuance of a Writ of Preliminary

Injunction with Prayer for Temporary Restraining Order was filed
W/N PCI Capital and Equitable Bank be treated as one entity so as to against Philfire, Rizal Surety, TICO, First Lepanto and Equitable Bank.
permit compensation between Equitable and the spouses?
The Trial Court rendered a decision ordering the defendant Bank to
Ruling: refund the plaintiff the overpayment made to the Bank and the
defendant Insurance companies to pay plaintiff the unpaid insurance
No, they cannot be treated as one entity. Therefore, there cannot be proceeds, among others.
compensation between them. Under the Article 1278, for compensation
to take place, the petitioners were burdened to establish, among others, On April 3, 2002, the intervenors filed a Motion for Execution Pending
that each one of the obligors be bound principally, and that he be at the Appeal on the following grounds: (a) TICO was on the brink of
same time a principal creditor of the other. insolvency; (b) Lavine was in imminent danger of extinction; and (c)
any appeal from the trial court’s judgment would be merely dilatory.
When Natividad Nisce deposited her US$20,500.00 with the PCIB,
PCIB became the debtor of petitioner. However, when upon Judge Lavina granted the motion for execution pending appeal and
petitioner’s request, the amount of US$20,000.00 was transferred to issued a writ of execution on May 20, 2002, which was implemented
PCI Capital (which forthwith issued Certificate of Deposit No. 01612), the following day.
PCI Capital, in turn, became the debtor of Natividad Nisce.
The Court of Appeals, however, voided the writ of execution pending
Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, appeal.
PCI Capital [PCI Express Padala (HK) Ltd.] has an independent and
separate juridical personality from that of the respondent Bank, its Issue:
parent company; hence, any claim against the subsidiary is not a claim
against the parent company and vice versa. W/N the Court of Appeals committed an error in voiding the writ of
execution pending appeal.
The fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated
as one entity. If used to perform legitimate functions, a subsidiary’s Ruling:
separate existence shall be respected, and the liability of the parent
corporation, as well as the subsidiary shall be confined to those arising No. The issuance of the execution pending appeal was not justified
in their respective business. A corporation has a separate personality under the circumstances of the case. The Court of Appeals correctly
distinct from its stockholders and from other corporations to which it reversed the order.
may be conducted. This separate and distinct personality of a
corporation is a fiction created by law for convenience and to prevent The general rule is that only judgments, which have become final and
injustice. executory, may be executed. Since the execution of a judgment pending
appeal is an exception to the general rule, the existence of good reason
The veil of separate corporate personality may be lifted when, inter is essential.
alia, the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation or where the corporation is so Petitioners assert that Lavine’s financial distress is sufficient reason to
organized and controlled and its affairs are so conducted as to make it order execution pending appeal. Citing Borja v. Court of Appeals, they
merely an instrumentality, agency, conduit or adjunct of another claim that execution pending appeal may be granted if the prevailing

3
party is already of advanced age and in danger of extinction. they were the only ones who became incorporators of FGT. They
transferred the assets of TVI to FGT.
Borja is not applicable to the case at bar because its factual milieu is
different. In Borja, the prevailing party was a natural person who, at Thus, the petitioners had acted in bad faith to defraud the bank since
76 years of age, “may no longer enjoy the fruit of the judgment before they succeeded in hiding the chattels preventing the sheriff to foreclose
he finally passes away.” Lavine, on the other hand, is a juridical entity the mortgage. Therefore, they are the ones personally liable to the bank
whose existence cannot be likened to a natural person. Its precarious for the payment of the loan and not TVI.
financial condition is not by itself a compelling circumstance
warranting immediate execution and does not outweigh the long-
standing general policy of enforcing only final and executory Petron Vs. NLRC (505 SCRA 596)
judgments.
Facts:

Mendoza Vs. Banco Real (470 SCRA 68)

Petron Corporation, a corporation duly organized and existing under
the laws of the Philippines, is engaged in the refining, sale and
Facts:
distribution of petroleum and other related products, while its co-
petitioner Peter C. Maligro was the former Visayas Operations
Edgardo Yatoko and Manuel Mendoza are Preseident and General
Assistant Manager of Petron’s Visayas-Mindanao District Office at
Manager of Technical Video Inc., respectively. They were authorized by
Lahug, Cebu City.
the Board of Directors of TVI through a Resolution to apply for and
secure a loan from the Pasay City Banco Real Development Bank now
LBC Bank. Petron, through its Cebu District Office, hired Chito S. Mantos, an
Industrial Engineer, as a managerial, professional and technical
The bank extended a loan of P500,000.00 to TVI, and in turn employee with initial designation as a Bulk Plant Engineering Trainee.
Mendoza, in his capacity as General Manager, executed a promissory He attained regular employment status on November 15, 1990 and was
note and chattel mortgage over 195 units of Beta video machines and later on designated as a Bulk Plant Relief Supervisor, remaining as
their equipment and accessories belonging to TVI in favor of the bank. such for the next five years while being assigned to the different plants
and offices of Petron within the Visayas area.
Subsequently, TVI and two other video firms, Fox Video and Galactica
Video, organized a new corporation named FGT Video Network Inc.
and was registered with the SEC. Mendoza was the concurrent It was while assigned at Petron’s Cebu District Office with Peter
President of FGT and Operating General Manager of TVI. Thus, the Maligro as his immediate superior, when Mantos, thru a Notice of
office of TVI had to be transferred to the building of FGT for easier Disciplinary Action was received by him that he was suspended for
monitoring of the distribution and marketing aspects of the business. 30 days for violating company rules and regulations regarding Absence
Without Leave (AWOL), not having reported for work during the
For TVI’s failure to pay its loan upon maturity, the bank filed a petition period August 5 to 27, 1996.
for Extra Judicial Foreclosure and Sale of Chattel Mortgage. However
the Sheriff’s Report/Return shows that TVI is no longer doing business Subsequently, in a notice Termination of Services bearing date
at its given address; that its General Manager, Mendoza, is presently November 20, 1996 and received by him on November 25, 1996,
employed with FGT; that Mr. Mendoza denied any knowledge of the Mantos’ services were altogether terminated effective December 1,
whereabouts of the mortgaged video machines. 1996, by reason of his continued absences from August 28, 1996
onwards, as well as for Insubordination/Discourtesy for making false
Meanwhile, in another case, where FGT and Mendoza were defendants, accusations against his superior.
the RTC issued a search warrant. The agents of the NBI confiscated at
the offices of FGT 638 machines and equipment including the 195 Beta
machines mortgaged with the bank. The machines and equipment were Mantos filed with the National Labor Relations Commission, Regional
left in the custody of NBI until the petition for certiorari in that case Arbitration Branch (NLRC-RAB), Cebu City, a complaint for illegal
has been resolved with finality. dismissal and other monetary claims against Petron and/or Peter C.
Maligro.
Thereafter the bank filed a complaint for collection of a sum of money
against TVI, FGT and petitioners. Petitioners specifically denied that For their part, Petron and Maligro averred that Mantos was dismissed
the loan is purely a corporate indebtedness. for just and valid causes.

Issue:
The Labor Arbiter declared Mantos to have been constructively
W/N Mendoza and Yatoko are personally liable for TVI’s indebtedness dismissed but ruled that only Petron could be held liable to him for
with the bank separation pay in lieu of reinstatement and the cash equivalent of his
certificate of stocks, less his personal accountabilities.
Ruling:
The NLRC reversed the findings of the Labor Arbiter regarding
Yes, they are personally liable. Mantos’ constructive dismissal as of November 1, 1996 and considered
him to have been illegally dismissed only on December 1, 1996. In the
The general rule is that obligations incurred by a corporation, acting same decision, the NLRC adjudged Maligro solidarily liable with
through its directors, officers or employees, are its sole liabilities. Petron.
However, the veil with which the law covers and isolates the
corporation from its directors, officers or employees will be lifted when
the corporation is used by any of them as a cloak or cover for fraud or Issue:
illegality or injustice.
W/N Maligro is liable for the dismissal of Mantos
In the case at bar, the fraud was committed by Mendoza and Yatoko to
the prejudice of the bank. They transferred the Beta video machines
from TVI to FGT without the consent of the bank. Also, upon inquiry of Ruling:
the sheriff, Mendoza declined knowledge of the whereabouts of the
mortgaged video machines. Settled is the rule in this jurisdiction that a corporation is invested by
law with a legal personality separate and distinct from those acting for
Further, the TVI is petitioner’s mere alter ego or business conduit. and in its behalf and, in general, from the people comprising it. Thus,
They control the affairs of TVI. Among its stockholders or directors, obligations incurred by corporate officers acting as corporate agents
4
are not theirs but the direct accountabilities of the corporation they he desire to do so, provided, the value of such machines is deducted
represent. True, solidary liabilities may at times be incurred by from his and Wako's capital contributions, which will be paid to him.
corporate officers, but only when exceptional circumstances so Yamamoto was requested to inform Atty Doce of his comments on the
warrant. For instance, in labor cases, corporate directors and officers letter.
may be held solidarily liable with the corporation for the termination of
employment if done with malice or in bad faith. On the basis of such letter, Yamamoto attempted to recover the
machineries and equipment which were, by Yamamoto's admission,
part of his investment in the corporation,but he was frustrated by
In the present case, the apparent basis for the NLRC in holding
respondents, drawing Yamamoto to file before the Regional Trial Court
petitioner Maligro solidarily liable with Petron were its findings that (1)
(RTC) of Makati a complaint against them for replevin.
the Investigation Committee was created a day after the summons in
NLRC RAB-VII Case was received, with Maligro no less being the
RTC issued a writ of replevin.
chairman thereof; and (2) the basis for the charge of insubordination
was the private respondent’s alleged making of false accusations
In their Answer with Counterclaim, respondents claimed that the
against Maligro.
machineries and equipment subject of replevin form part of
Yamamoto's capital contributions in consideration of his equity in NLII
Those findings, however, cannot justify a finding of personal liability and should thus be treated as corporate property; and that the above-
on the part of Maligro inasmuch as said findings do not point to said letter of Atty. Doce to Yamamoto was merely a proposal,
Maligro’s extreme personal hatred and animosity with the respondent. "conditioned on [Yamamoto's] sell-out to . . . Nishino of his entire
It cannot, therefore, be said that Maligro was motivated by malice and equity," which proposal was yet to be authorized by the stockholders
bad faith in connection with private respondent’s dismissal from the and Board of Directors of NLII.
service.
The trial court decided the case in favor of Yamamoto
If at all, what said findings show are the illegality itself of private On appeal, the Court of Appeals reversed the RTC decision and
respondent’s dismissal, the lack of just cause therefor and the non- dismissed the complaint.
observance of procedural due process. Verily, the creation of the
investigation committee and said committee’s consideration of the The Court of Appeals having denied his Motion for Reconsideration,
insubordination charge against the private respondent, were merely Yamamoto filed the present petition.
aimed to cover up the illegal dismissal or to give it a semblance of
legality.
Issue:
Besides, the fact that Maligro himself was the committee chairman is
not itself sufficient to impute bad faith on his part or attribute bias W/N the advice in the letter of Atty. Doce that Yamamoto may retrieve
against him. It is undisputed that Maligro was private respondent’s the machineries and equipment, which admittedly was part of his
superior, being Petron’s Operations Assistant Manager for Visayas and investment, bound the corporation.
Mindanao. It is thus logical for him to be part of the committee that
will investigate private respondent’s alleged infractions of company
rules and regulations. As well, the committee was composed of three Ruling:
other Petron officers as members, and nowhere is there any showing
that Maligro, as committee chairman, influenced the other committee The Court holds in the negative.
members to side against the private respondent.
Without a Board Resolution authorizing respondent Nishino to act for
and in behalf of the corporation, he cannot bind the latter. Under the
In any event, it must be stressed that private respondent’s allegation of Corporation Law, unless otherwise provided, corporate powers are
bad faith on the part of Maligro was not established in this case. exercised by the Board of Directors.

Urging this Court to pierce the veil of corporate fiction, Yamamoto

Yamamoto Vs. Nishino Leather (551 SCRA 447) argues that Ikuo, Yoshinobu, and Yamamoto were the owners thereof,
the presence of other stockholders being only for the purpose of
Facts: complying with the minimum requirements of the law. What course of
action the Company decides to do or not to do depends not on the
Ryuichi Yamamoto (Yamamoto), a Japanese national, organized under "other members of the Board of Directors". It depends on what Ikuo
Philippine laws Wako Enterprises Manila, Incorporated (WAKO), a and Yoshinobu decide. The Company is but a mere instrumentality of
corporation engaged principally in leather tanning, now known as Ikuo [and] Yoshinobu.
Nishino Leather Industries, Inc. (NLII), one of herein respondents.
While the veil of separate corporate personality may be pierced when
In 1987, Yamamoto and the other respondent, Ikuo Nishino (Nishino), the corporation is merely an adjunct, a business conduit, or alter ego of
also a Japanese national, forged a Memorandum of Agreement under a person, the mere ownership by a single stockholder of even all or
which they agreed to enter into a joint venture wherein Nishino would nearly all of the capital stocks of a corporation is not by itself a
acquire such number of shares of stock equivalent to 70% of the sufficient ground to disregard the separate corporate personality.
authorized capital stock of WAKO.
The elements determinative of the applicability of the doctrine of
Eventually, Nishino and his brother Yoshinobu Nishino (Yoshinobu) piercing the veil of corporate fiction follow:
acquired more than 70% of the authorized capital stock of WAKO, "1. Control, not mere majority or complete stock control, but complete
reducing Yamamoto's investment therein to, by his claim, 10% less domination, not only of finances but of policy and business practice in
than 10% according to Nishino. 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
The corporate name of WAKO was later changed to, as reflected earlier, its own;
its current name NLII.
2. Such control must have been used by the defendant to commit
Negotiations subsequently ensued in light of a planned takeover of fraud or wrong, to perpetuate the violation of a statutory or other
NLII by Nishino who would buy-out the shares of stock of Yamamoto. positive legal duty, or dishonest and unjust act in contravention of the
In the course of the negotiations, Yoshinobu and Nishino's counsel plaintiff's legal rights; and
Atty. Emmanuel G. Doce (Atty. Doce) advised Yamamoto by letter
dated October 30, 1991, which stated that he (Yamamoto) may take 3. The aforesaid control and breach of duty must proximately cause
out the machineries (his contributions) for his own use and sale should the injury or unjust loss complained of.

5
The absence of any one of these elements prevents "piercing the After a series of negotiations between the APT and KAWASAKI, they
corporate veil." In applying the `instrumentality' or `alter ego' agreed that the latter's right of first refusal be "exchanged" for the right
doctrine, the courts are concerned with reality and not form, with to top by 5% the highest bid for the said shares. It was also agreed that
how the corporation operated and the individual defendant's Philyards Holdings, Inc. (PHI) would exercise KAWASAKI’s right to
relationship to that operation." top.

In relation to the second element, to disregard the separate juridical

At the public bidding, J.G. Summit Holdings, Inc. submitted a bid and
personality of a corporation, the wrongdoing or unjust act in
was declared the highest bidder. PHI then exercised its right to top.
contravention of a plaintiff's legal rights must be clearly and
convincingly established; it cannot be presumed. Without a
demonstration that any of the evils sought to be prevented by the However, J.G. Summit opposed the offer of PHI to top its bid
doctrine is present, it does not apply. contending that since PHILSECO is a landholding company,
KAWASAKI could exercise its right of first refusal only up to 40% of
In the case at bar, there is no showing that Nishino used the separate the shares of PHILSECO due to the constitutional prohibition on
personality of NLII to unjustly act or do wrong to Yamamoto in landholding by corporations with more than 40% foreign-owned
contravention of his legal rights. equity.

Yamamoto argues, that promissory estoppel lies against respondents,

thus: Under the doctrine of promissory estoppel….estoppel may arise It further argues that since KAWASAKI already held at least 40%
from the making of a promise, even though without consideration, if it equity in PHILSECO, the right of first refusal was inutile and could not
was intended that the promise should be relied upon and in fact it was subsequently be converted into the right to top.
relied upon, and if a refusal to enforce it would be virtually to sanction
the perpetration of fraud or would result in other injustice. Issue:

In paragraph twelve (12) of the Letter, Yamamoto was expressly

advised that he could take out the Machinery if he wanted to so, W/N KAWASAKI had a valid right of first refusal over PHILSECO
provided that the value of said machines would be deducted from his shares under the JVA considering that PHILSECO owned land until the
capital contribution time of the bidding and KAWASAKI already held 40% of PHILSECO’s
equity.
To sanction respondents' attempt to evade their obligation would be to
sanction the perpetration of fraud and injustice against petitioner. It Ruling:
bears noting, however, that the aforementioned paragraph 12 of the
letter is followed by a request for Yamamoto to give his "comments on
all the above, soonest The Supreme Court upholds the validity of the mutual rights of first
refusal under the JVA between KAWASAKI and NIDC.
What was thus proffered to Yamamoto was not a promise, but a mere
offer, subject to his acceptance. Without acceptance, a mere offer The right of first refusal is a property right of PHILSECO shareholders,
produces no obligation KAWASAKI and NIDC, under the terms of their JVA. This right allows
them to purchase the shares of their co-shareholder before they are
It is settled that the property of a corporation is not the property of its offered to a third party.
stockholders or members. Under the trust fund doctrine, the capital
stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors which are The agreement of co-shareholders to mutually grant this right to each
preferred over the stockholders in the distribution of corporate assets. other does not constitute a violation of the provisions of the
The distribution of corporate assets and property cannot be made to Constitution limiting land ownership to Filipinos and Filipino
depend on the whims and caprices of the stockholders, officers, or corporations.
directors of the corporation unless the indispensable conditions and
procedures for the protection of corporate creditors are followed. If the foreign shareholdings of a landholding corporation exceeds 40%,
it is not the foreign stockholders’ ownership of the shares which is
JG Summit Vs. CA (450 SCRA 169) adversely affected but the capacity of the corporation to own land - that
is, the corporation becomes disqualified to own land.
Facts:

This finds support under the basic corporate law principle that the
corporation and its stockholders are separate juridical entities. The
National Investment and Development Corporation (NIDC) entered right of first refusal over shares pertains to the shareholders whereas
into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, the capacity to own land pertains to the corporation.
Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation and
management of the Philippine Shipyard and Engineering Corporation
(PHILSECO). Hence, the fact that PHILSECO owns land cannot deprive stockholders
of their right of first refusal. No law disqualifies a person from
purchasing shares in a landholding corporation even if the latter will
Under the JVA, the NIDC and KAWASAKI will contribute for the exceed the allowed foreign equity, what the law disqualifies is the
capitalization of PHILSECO in the proportion of 60%-40% corporation from owning land.
respectively. Moreover, the parties were granted the right of first
refusal should either of them decide to sell, assign or transfer its Tupaz Vs. CA (465 SCRA 398)
interest in the joint venture.
Facts:
NIDC transferred all its rights, title and interest in PHILSECO to the
National Government. Thereafter, the Asset Privatization Trust (APT)
was named the trustee of the National Government's share in Jose C. Tupaz IV and Petronila C. Tupaz was Vice-President for
PHILSECO. Operations and Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation (“El Oro Corporation”). El Oro Corporation had
The APT deemed it best to sell the National Government's share in a contract with the Philippine Army to supply the latter with “survival
PHILSECO to private entities. bolos.”

6
 To finance the purchase of the raw materials for the survival bolos, petitioner Jose Tupaz bound himself personally liable for El Oro
petitioners, on behalf of El Oro Corporation, applied with respondent Corporation’s debts. Not being a party to the trust receipt dated 30
Bank of the Philippine Islands (“respondent bank”) for two commercial September 1981, petitioner Petronila Tupaz is not liable under such
letters of credit. The letters of credit were in favor of El Oro trust receipt.
Corporation’s suppliers, Tanchaoco Manufacturing Incorporated
(“Tanchaoco Incorporated”) and Maresco Rubber and Retreading
However, respondent bank’s suit against petitioner Jose Tupaz stands
Corporation (“Maresco Corporation”). Respondent bank granted
despite the Court’s finding that he is liable as guarantor only. First,
petitioners’ application and issued Letter of Credit No. 2-00896-3 for
excussion is not a pre-requisite to secure judgment against a guarantor.
P564,871.05 to Tanchaoco Incorporated and Letter of Credit No. 2-
The guarantor can still demand deferment of the execution of the
00914-5 for P294,000 to Maresco Corporation.
judgment against him until after the assets of the principal debtor shall
have been exhausted. Second, the benefit of excussion may be waived.
Simultaneous with the issuance of the letters of credit, petitioners Under the trust receipt dated 30 September 1981, petitioner Jose
signed trust receipts in favor of respondent bank. Jose C. Tupaz Tupaz waived excussion when he agreed that his “liability in the
IV signed, in his personal capacity, a trust receipt corresponding to guaranty shall be DIRECT AND IMMEDIATE, without any need
Letter of Credit to Tanchaoco. He bound himself to sell the goods whatsoever on the part of respondent bank to take any steps or exhaust
covered by the letter of credit and to remit the proceeds to respondent any legal remedies.” The clear import of this stipulation is that
bank, if sold, or to return the goods, if not sold, on or before 29 petitioner Jose Tupaz waived the benefit of excussion under his
December 1981. Likewise, the petitioners signed, in their capacities as guarantee.
officers of El Oro Corporation, a trust receipt corresponding to Letter
of Credit to Maresco. They bound themselves to sell the goods covered
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation’s
by that letter of credit and to remit the proceeds to respondent bank, if
principal debt and other accessory liabilities as stipulated in the trust
sold, or to return the goods, if not sold, on or before 8 December 1981.
receipt and as provided by law under the trust receipt dated 30
September 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the
raw materials to El Oro Corporation, respondent bank paid the former
Woodchild Holdings Vs. Roxas (436 SCRA 235)
P564,871.05 and P294,000, respectively.

Facts:
Petitioners did not comply with their undertaking under the trust
receipts. Respondent bank made several demands for payments but El
Oro Corporation made partial payments only. On 27 June 1983 and 28 The respondent Roxas Electric and Construction Company, Inc.
June 1983, respondent bank’s counsel and its representative (RECCI) was the owner of two parcels of land, identified as Lot 1 (Lot
respectively sent final demand letters to El Oro Corporation. El Oro No. 491-A-3-B-1 ) Lot 2 (Lot No. 491-A-3-B-2). A portion of Lot No.
Corporation replied that it could not fully pay its debt because the 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road
Armed Forces of the Philippines had delayed paying for the survival accessing to the Sumulong Highway, Antipolo, Rizal.
bolos.
At a special meeting, the RECCI's Board of Directors approved a
resolution authorizing the corporation, through its president, Roberto
Respondent bank charged petitioners with estafa.
B. Roxas, to sell Lot 2 at a price and under such terms and conditions
which he deemed most reasonable and advantageous to the
The trial court rendered judgment acquitting petitioners of estafa on corporation; and to execute, sign and deliver the pertinent sales
reasonable doubt. However, the trial court found petitioners solidarily documents and receive the proceeds of the sale for and on behalf of the
liable with El Oro Corporation for the balance of El Oro Corporation’s company.
principal debt under the trust receipts.
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot 2 on
which it planned to construct its warehouse building, and a portion of
Issue:
the adjoining lot, Lot 1, so that its 45-foot container van would be able
to readily enter or leave the property. One of the terms incorporated in
W/N the Tupaz’s were liable for the debt of the Corporation under the Jonathan Dy's (WHI President) offer included: a.) that the area of
trust receipts 7,213 square meters of the subject property already includes the area
on which the right of way traverses from the main lot (area) towards
the exit to the Sumulong Highway as shown in the location plan ; b.) in
Ruling: the event that the right of way is insufficient for the buyer's purposes,
the seller agrees to sell additional square meter from his current
A corporation, being a juridical entity, may act only through its adjacent property to allow the buyer to full access and full use of the
directors, officers, and employees. Debts incurred by these individuals, property.
acting as such corporate agents, are not theirs but the direct liability of
the corporation they represent. As an exception, directors or officers Roxas indicated his acceptance of the offer. A Deed of Absolute Sale
are personally liable for the corporation’s debts only if they so was executed in favor of WHI, under the conditions that RECCI agrees
contractually agree or stipulate. to give WHI the beneficial use of and a right of way from Sumulong
Highway to the property herein conveyed and an additional 25 square
meters in the corner of Lot 1, as turning and/or maneuvering area for
In the trust receipt dated 9 October 1981, petitioners signed below this Vendee's vehicles. RECCI agrees that in the event that the right of way
clause as officers of El Oro Corporation. Thus, under petitioner is insufficient for WHI’s use, it will sell additional square meters from
Petronila Tupaz’s signature are the words “Vice-Pres–Treasurer” and its current adjacent property to give WHI full access and full use of the
under petitioner Jose Tupaz’s signature are the words “Vice-Pres– property.
Operations.” By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation’s obligation. In the meantime, WHI complained to Roberto Roxas that the vehicles
Hence, for the trust receipt dated 9 October 1981, we sustain of RECCI were parked on a portion of the property over which WHI
petitioners’ claim that they are not personally liable for El Oro had been granted a right of way. Roxas promised to look into the
Corporation’s obligation. matter. Dy and Roxas discussed the need of the WHI to buy a 500-
square-meter portion of Lot 1 as provided for in the deed of absolute
For the trust receipt dated 30 September 1981, the dorsal portion of sale. However, Roxas died soon thereafter. WHI demanded that RECCI
which petitioner Jose Tupaz signed alone, we find that he did so in his sell a portion of Lot 1 for its beneficial use but RECCI rejected the
personal capacity. Petitioner Jose Tupaz did not indicate that he was demand of WHI.
signing as El Oro Corporation’s Vice-President for Operations. Hence,

7
In this petition, WHI contends that when RECCI sold Lot 2, it was well Toh Vs. Solid Bank (408 SCRA 544)
aware of its obligation to provide the petitioner with a means of ingress
to or egress from the property to the Sumulong Highway, since the
Facts:
latter had no adequate outlet to the public highway. WHI further
asserts that it agreed to buy the property because of the grant by the
respondent of a right of way and an option in its favor to buy a portion SOLID BANK CORPORATION AGREED TO EXTEND an "omnibus
of the adjacent property; that the RECCI never objected to Roxas' line" credit facility worth P10 million in favor of respondent First
acceptance of its offer to purchase the property and the terms and Business Paper Corporation (FBPC). The terms and conditions of the
conditions therein; the respondent even allowed Roxas to execute the agreement as well as the checklist of documents necessary to open the
deed of absolute sale in its behalf; that WHI dealt with RECCI in good credit line were stipulated in a "letter-advise" of the Bank dated 16 May
faith. 1993 addressed to FBPC and to its President, Kenneth Ng Li. The
"letter-advise" was effective upon "compliance with the documentary
requirements."
Issue:

W/N RECCI is bound by the provisions in the deed of absolute sale The documents essential for the credit facility and submitted for this
which was entered into by its president, Roberto Roxas with Woodchild purpose were the (a) Board Resolution or excerpts of the Board of
Holdings Directors Meeting, duly ratified by a Notary Public, authorizing the
loan and security arrangement as well as designating the officers to
Ruling: negotiate and sign for FBPC specifically stating authority to mortgage,
pledge and/or assign the properties of the corporation; (b) agreement
RECCI was not bound by such agreement. RECCI did not authorize to purchase Domestic Bills; and, (c) Continuing Guaranty for any and
Roxas to grant a right of way over a portion of Lot 1 in favor of the all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh,
petitioner, and an option for the respondent to buy a portion of the said and respondent-spouses Kenneth and Ma. Victoria Ng Li. The spouses
property. Hence, the respondent was not bound by such provisions Luis Toh and Vicky Tan Toh were then Chairman of the Board and
contained in the deed of absolute sale. Vice-President, respectively, of FBPC, while respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li was President and General
A corporation is a juridical person separate and distinct from its Manager, respectively, of the same corporation.
stockholders or members. Accordingly, the property of the corporation
is not the property of its stockholders or members and may not be sold On 10 May 1993, more than thirty (30) days from date of the "letter-
by the stockholders or members without express authorization from advise," petitioner-spouses Luis Toh and Vicky Tan Toh and
the corporation's board of directors. Section 23 of BP 68, otherwise respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the
known as the Corporation Code of the Philippines, provides: required Continuing Guaranty, which was embodied in a public
document prepared solely by respondent Bank. The Continuing
"SEC. 23. The Board of Directors or Trustees. Unless otherwise Guaranty set forth no maximum limit on the indebtedness that
provided in this Code, the corporate powers of all corporations formed respondent FBPC may incur and for which the sureties may be liable,
under this Code shall be exercised, all business conducted and all stating that the credit facility "covers any and all existing indebtedness
property of such corporations controlled and held by the board of of, and such other loans and credit facilities which may hereafter be
directors or trustees to be elected from among the holders of stocks, or granted to FIRST BUSINESS PAPER CORPORATION."
where there is no stock, from among the members of the corporation,
who shall hold office for one (1) year and until their successors are
elected and qualified." The effectivity of the Continuing Guaranty was not contingent upon
any event or cause other than the written revocation thereof with
A corporation may act only through its board of directors or, when notice to the Bank that may be executed by the sureties.
authorized either by its by-laws or by its board resolution, through its
officers or agents in the normal course of business. The general On 16 June 1993 respondent FBPC started to avail of the credit facility
principles of agency govern the relation between the corporation and and procure letters of credit. On 17 November 1993 FBPC opened
its officers or agents, subject to the articles of incorporation, by-laws, thirteen (13) letters of credit and obtained loans totaling
or relevant provisions of law. Generally, the acts of the corporate P15,227,510.00. As the letters of credit were secured, FBPC through its
officers within the scope of their authority are binding on the officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as
corporation. However, acts done by such officers beyond the scope of signatories executed a series of trust receipts over the goods allegedly
their authority cannot bind the corporation unless it has ratified such purchased from the proceeds of the loans.
acts expressly or tacitly, or is estopped from denying them:

The Supreme Court rejected WHI’s submission that, in allowing Roxas On 14 January 1994 the Bank served a demand letter upon FBPC and
to execute the contract to sell and the deed of absolute sale and failing Luis Toh invoking the acceleration clause in the trust receipts of FBPC
to reject or disapprove the same, the respondent thereby gave him and claimed payment for P10,539,758.68 as unpaid overdue accounts
apparent authority to grant a right of way and an option for the on the letters of credit plus interests and penalties within twenty-four
respondent to sell a portion thereof to the petitioner. Absent estoppel (24) hours from receipt thereof. The Bank also invoked the Continuing
or ratification, apparent authority cannot remedy the lack of the Guaranty executed by petitioner-spouses Luis Toh and Vicky Tan Toh
written power required. who were the only parties known to be within national jurisdiction to
answer as sureties for the credit facility of FBPC.
It bears stressing that apparent authority is based on estoppel and can
arise from two instances: 1.) the principal may knowingly permit the Petitioners asserted, it was impossible and absurd for them to have
agent to so hold himself out as having such authority, and in this way, freely and consciously executed the surety on 10 May 1993, the date
the principal becomes estopped to claim that the agent does not have appearing on its face since beginning March of that year they had
such authority; 2.) the principal may so clothe the agent with the already divested their shares in FBPC and assigned them in favor of
indicia of authority as to lead a reasonably prudent person to believe Kenneth Ng Li although the deeds of assignment were notarized only
that he actually has such authority. There can be no apparent authority on 14 June 1993. Petitioners also contended that through FBPC Board
of an agent without acts or conduct on the part of the principal and Resolution dated 12 May 1993 petitioner Luis Toh was removed as an
such acts or conduct of the principal must have been known and relied authorized signatory for FBPC and replaced by Kenneth Ng Li, Ma.
upon in good faith and as a result of the exercise of reasonable Victoria Ng Li and Redentor Padilla for all the transactions of FBPC
prudence by a third person as claimant and such must have produced a with respondent Bank. They even resigned from their respective
change of position to its detriment. The apparent power of an agent is positions in FBPC as reflected in the 12 June 1993 Secretary's
to be determined by the acts of the principal and not by the acts of the Certificate submitted to the Securities and Exchange Commission as
agent. Luis Toh was succeeded as Chairman by respondent Ma. Victoria Ng

8
Li, while one Mylene C. Padilla took the place of petitioner Vicky Tan as sureties. In the same manner, we cannot disregard the provisions of
Toh as Vice-President. the "letter-advise" in sizing up the panoply of commercial obligations
between the parties herein.
The trial court described the Continuing Guaranty as effective only
while petitioner-spouses were stockholders and officers of FBPC since The grace period granted by respondent Bank represents
respondent Bank compelled petitioners to underwrite FBPC's unceremonious abandonment and forfeiture of the fifteen percent
indebtedness as sureties without the requisite investigation of their (15%) marginal deposit and the twenty-five percent (25%) partial
personal solvency and capability to undertake such risk. The lower payment as fixed in the "letter-advise." These payments are
court also believed that the Bank knew of petitioners' divestment of unmistakably additional securities intended to protect both respondent
their shares in FBPC and their subsequent resignation as officers Bank and the sureties in the event that the principal debtor FBPC
thereof as these facts were obvious from the numerous public becomes insolvent during the extension period. Compliance with these
documents that detailed the changes and substitutions in the list of requisites was not waived by petitioners in the Continuing Guaranty.
authorized signatories for transactions between FBPC and the Bank, For this unwarranted exercise of discretion, respondent Bank bears the
including the many trust receipts being signed by persons other than loss; due to its unauthorized extensions to pay granted to FBPC,
petitioners, as well as the designation of new FBPC officers which came petitioner-spouses Luis Toh and Vicky Tan Toh are discharged as
to the notice of the Bank's Vice-President Jose Chan Jr. and other sureties under the Continuing Guaranty.
officers.
Finally, the foregoing omission or negligence of respondent Bank in
Issue: failing to safe-keep the security provided by the marginal deposit and
the twenty-five percent (25%) requirement results in the material
alteration of the principal contract, i.e., the "letter-advise," and
W/N the petitioners are personally liable to the bank
consequently releases the surety. This inference was admitted by the
Bank through the testimony of its lone witness that "[w]henever this
Ruling: obligation becomes due and demandable, except when you roll it over,
(so) there is novation there on the original obligations." As has been
said, "if the suretyship contract was made upon the condition that the
The Continuing Guaranty is a valid and binding contract of petitioner- principal shall furnish the creditor additional security, and the security
spouses as it is a public document that enjoys the presumption of being furnished under these conditions is afterwards released by the
authenticity and due execution. Luis Toh and Vicky Tan Toh creditor, the surety is wholly discharged, without regard to the value of
"voluntarily affixed their signatures" on the surety agreement and were the securities released, for such a transaction amounts to an alteration
thus "at some given point in time willing to be liable under those of the main contract."
forms." In the absence of clear, convincing and more than
preponderant evidence to the contrary, our ruling cannot be otherwise.
B. Piecing the Veil of Corporate Entity
Similarly, there is no basis for petitioners to limit their responsibility
thereon so long as they were corporate officers and stockholders of Heirs of Pajarillo Vs. CA (537 SCRA 96)
FBPC. Nothing in the Continuing Guaranty restricts their contractual
undertaking to such condition or eventuality. In fact the obligations
Facts:
assumed by them therein subsist "upon the undersigned, the heirs,
executors, administrators, successors and assigns of the undersigned,
and shall inure to the benefit of, and be enforceable by you, your Panfilo Pajarillo was the owner and operator of several buses plying
successors, transferees and assigns," and that their commitment "shall certain routes in Metro Manila. He used the name PVP Liner in his
remain in full force and effect until written notice shall have been buses. Private respondents were employed as drivers, conductors and
received by the Bank that it has been revoked by the undersigned." conductresses by Panfilo.
Verily, if petitioners intended not to be charged as sureties after their
withdrawal from FBPC, they could have simply terminated the During their employment, private respondents worked at least four
agreement by serving the required notice of revocation upon the Bank times a week and allegedly, they were not given emergency cost of
as expressly allowed therein. living allowance (ECOLA), 13th month pay and legal holiday pay and
service incentive pay.
In Garcia v. Court of Appeals we ruled – Regarding the
Thereafter, private respondents and several co-employees formed a
petitioner's claim that he is liable only as a corporate officer
union called “Samahan ng mga Manggagawa ng Panfilo V. Pajarillo”.
of WMC, the surety agreement shows that he signed the
At the same time, upon learning of the said union, Panfilo and his
same not in representation of WMC or as its president but in
children and relatives also formed a company union where they acted
his personal capacity. He is therefore personally bound.
as its directors and officers.
There is no law that prohibits a corporate officer from
binding himself personally to answer for a corporate debt.
In August 1997, respondent union filed a Complaint for unfair labor
While the limited liability doctrine is intended to protect the
practices and illegal deduction before the Labor Arbiter with Panfilo V
stockholder by immunizing him from personal liability for
Pajarillo Liner as private respondent. Notifications and summons were
the corporate debts, he may nevertheless divest himself of
sent to Panfilo V Pajarillo, President/Manager, Panfilo V . Pajarillo
this protection by voluntarily binding himself to the payment
Liner.
of the corporate debts. The petitioner cannot therefore take
refuge in this doctrine that he has by his own acts effectively
Another Complaint was later filed for violation of labor standards laws
waived.
and private respondents this time were PVP Liner Inc. and Panfilo V
Pajarillo, as its General Manager. The Registry Return Receipt was
But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety addressed to PVP Liner Inc and was signed by a certain Irene G.
agreement they signed so must we also hold respondent Bank to its Pajarillo.
representations in the "letter-advise" of 16 May 1993. Particularly, as to
the extension of the due dates of the letters of credit, we cannot exclude Panfilo denied the charges in the complaints. He died during the
from the Continuing Guaranty the preconditions of the Bank that were course of the proceedings.
plainly stipulated in the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the provisions of cognate The two cases were consolidated and when it reached the NLRC, it
agreements whenever convenient to enforce its contractual rights, such ordered the reinstatement of and payment of backwages, ECOLA, 13 th
as, when it harnessed a provision in the trust receipts executed by month pay, legal holiday pay and service incentive leave pay to private
respondent FBPC to declare its entire indebtedness as due and respondents. This was later on upheld by the Court of Appeals.
demandable and thereafter to exact payment thereof from petitioners
9
Issue: The Motion to Quash the Informations filed by petitioner on the
ground that the material allegations therein did not amount to estafa
1. W/N PVP Liner Inc was improperly impleaded because it is a was granted.
non-existing corporation;
2. W/N CA misapplied in piercing the veil of Corporate Entity
In the meantime, the Court rendered judgment in Allied Banking
of PVP Pajarillo Liner, Inc.
Corporation v. Ordoñez, holding that the penal provision of P.D. No.
115 encompasses any act violative of an obligation covered by the trust
receipt; it is not limited to transactions involving goods which are to be
Ruling:
sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that "the non-payment of
The Supreme Court held that Panfilo V Pajarillo Liner and PVP Liner
the amount covered by a trust receipt is an act violative of the
are one and the same entity belonging to one and the same person,
obligation of the entrustee to pay."
Panfilo. When PVP Liner Inc and Panfilo V Pajarillo Liner were
impleaded as party-respondents, it was Panfilo, through counsel, who
answered the complaint and filed the position papers, motions for On February 27, 1995, respondent bank re-filed the criminal complaint
reconsiderations and appeals. It was Panfilo, through counsel, who for estafa against petitioner before the Office of the City Prosecutor of
participated in the hearings and proceedings. Manila which ruled that there was no probable cause to charge
petitioner with violating P.D. No. 115, as petitioner’s liability was only
The Supreme Court also found that Panfilo started his transportation civil, not criminal, having signed the trust receipts as surety.
business as the sole owner and operator of passenger buses utilizing
the name PVP Liner for his buses. After being charged by respondent
union of unfair labor practices, illegal deductions, illegal dismissal and Respondent bank appealed the resolution to the Department of Justice
violation of labor standard laws, Panfilo transformed his (DOJ) via petition for review.
transportation business into a family corporation namely PV Pajarillo
Liner. He and petitioners were the incorporators, stockholders and The Secretary of Justice issued Resolution No. 250 granting the
officers therein. PV Pajarillo Inc and the sole proprietorship of Panfilo petition and reversing the assailed resolution of the City Prosecutor.
have the same business address and also used the name PVP Liner in According to the Justice Secretary, the petitioner, as Senior Vice-
its buses. Further, the license to operate or franchise of the sole President of PBMI, executed the 13 trust receipts and as such, was the
proprietorship was merely transferred to PV Pajarillo Liner, Inc. one responsible for the offense. Thus, the execution of said receipts is
enough to indict the petitioner as the official responsible for violation
Thus, the doctrine of Piercing the Veil of Corporate Entity was properly of P.D. No. 115. The Justice Secretary also declared that petitioner
applied in this case. It is a fundamental principle of corporation law could not contend that P.D. No. 115 covers only goods ultimately
that a corporation is an entity separate and distinct from its destined for sale, as this issue had already been settled in Allied
stockholders and from other corporations to which it may be Banking Corporation v. Ordoñez.
connected. However, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to
promote justice. Hence, when it is used to defeat public convenience, The Justice Secretary further stated that the respondent bound himself
justify wrong, protect fraud or defend crime, or is used as a device to under the terms of the trust receipts not only as a corporate official of
defeat labor laws, this separate personality of the corporation may be PBMI but also as its surety; hence, he could be proceeded against in
disregarded or the veil of the corporate fiction pierced. two (2) ways: first, as surety and second, as the corporate official
responsible for the offense under P.D. No. 115, via criminal
prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of
Ching Vs. Secretary Of Justice (481 SCRA 609) corporate officers "without prejudice to the civil liabilities arising from
the criminal offense." Thus, according to the Justice Secretary, the civil
Facts: liability imposed is clearly separate and distinct from the criminal
liability of the accused under P.D. No. 115.

Alfredo Ching was the Senior Vice-President of Philippine Blooming

Mills, Inc. (PBMI). Sometime in September to October 1980, PBMI, Conformably with the Resolution of the Secretary of Justice, the City
through petitioner, applied with the Rizal Commercial Banking Prosecutor filed 13 Informations against petitioner for violation of P.D.
Corporation for the issuance of commercial letters of credit to finance No. 115 before the RTC of Manila. The cases were docketed as Criminal
its importation of assorted goods.3 Cases No. 99-178596 to 99-178608 and consolidated for trial before
Branch 52 of said court. Petitioner filed a motion for reconsideration,
which the Secretary of Justice denied in a Resolution dated January 17,
Respondent bank approved the application, and irrevocable letters of 2000.
credit were issued in favor of petitioner. The goods were purchased and
delivered in trust to PBMI. Petitioner signed 13 trust receipts as surety,
acknowledging delivery of the goods. Petitioner then filed a petition for certiorari, prohibition and
mandamus with the CA, assailing the resolutions of the Secretary of
Justice.
Under the receipts, petitioner agreed to hold the goods in trust for the
said bank, with authority to sell but not by way of conditional sale,
pledge or otherwise; and in case such goods were sold, to turn over the The CA upheld the assailed resolutions of the Secretary of Justice for
proceeds thereof as soon as received, to apply against the relative the following reasons: (a) petitioner, being the Senior Vice-President of
acceptances and payment of other indebtedness to respondent bank. In PBMI and the signatory to the trust receipts, is criminally liable for
case the goods remained unsold within the specified period, the goods violation of P.D. No. 115; (b) the issue raised by the petitioner, on
were to be returned to respondent bank without any need of demand. whether he violated P.D. No. 115 by his actuations, had already been
Thus, said "goods, manufactured products or proceeds thereof, resolved and laid to rest in Allied Bank Corporation v. Ordoñez; and (c)
whether in the form of money or bills, receivables, or accounts separate petitioner was estopped from raising the City Prosecutor’s delay in the
and capable of identification" were respondent bank�s property. final disposition of the preliminary investigation because he failed to
do so in the DOJ.

When the trust receipts matured, petitioner failed to return the goods
to respondent bank, or to return their value amounting to Thus, petitioner filed the instant petition.
P6,940,280.66 despite demands. Thus, the bank filed a criminal
complaint for estafa against petitioner in the Office of the City Issue:
Prosecutor of Manila.
W/N Ching is criminally liable for violation of P.D. No. 115

10
Ruling: because of the nature of the crime and the penalty therefor. A
corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. However, a
Section 13 of PD 115 which states in part, viz:
corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and
xxx If the violation or offense is committed by a corporation, imprisonment as penalty, a corporation may be prosecuted and, if
partnership, association or other judicial entities, the penalty provided found guilty, may be fined.
for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the
When a criminal statute designates an act of a corporation or a crime
offense, without prejudice to the civil liabilities arising from the
and prescribes punishment therefor, it creates a criminal offense
criminal offense.
which, otherwise, would not exist and such can be committed only by
the corporation. But when a penal statute does not expressly apply to
There is no dispute that it was the respondent, who as senior vice- corporations, it does not create an offense for which a corporation may
president of PBM, executed the thirteen (13) trust receipts. As such, the be punished. On the other hand, if the State, by statute, defines a crime
law points to him as the official responsible for the offense. Since a that may be committed by a corporation but prescribes the penalty
corporation cannot be proceeded against criminally because it cannot therefor to be suffered by the officers, directors, or employees of such
commit crime in which personal violence or malicious intent is corporation or other persons responsible for the offense, only such
required, criminal action is limited to the corporate agents guilty of an individuals will suffer such penalty. Corporate officers or employees,
act amounting to a crime and never against the corporation itself. through whose act, default or omission the corporation commits a
Thus, the execution by respondent of said receipts is enough to indict crime, are themselves individually guilty of the crime.
him as the official responsible for violation of PD 115.
The principle applies whether or not the crime requires the
"Parenthetically, respondent is estopped to still contend that PD 115 consciousness of wrongdoing. It applies to those corporate agents who
covers only goods which are ultimately destined for sale and not goods, themselves commit the crime and to those, who, by virtue of their
like those imported by PBM, for use in manufacture. This issue has managerial positions or other similar relation to the corporation, could
already been settled in the Allied Banking Corporation case, supra, be deemed responsible for its commission, if by virtue of their
where he was also a party, when the Supreme Court ruled that PD 115 relationship to the corporation, they had the power to prevent the act.
is not limited to transactions in goods which are to be sold (retailed), Moreover, all parties active in promoting a crime, whether agents or
reshipped, stored or processed as a component or a product ultimately not, are principals. Whether such officers or employees are benefited
sold but covers failure to turn over the proceeds of the sale of entrusted by their delictual acts is not a touchstone of their criminal liability.
goods, or to return said goods if unsold or disposed of in accordance Benefit is not an operative fact.
with the terms of the trust receipts.
In this case, petitioner signed the trust receipts in question. He cannot,
The respondent bound himself under the terms of the trust receipts not thus, hide behind the cloak of the separate corporate personality of
only as a corporate official of PBM but also as its surety. It is evident PBMI. In the words of Chief Justice Earl Warren, a corporate officer
that these are two (2) capacities which do not exclude the other. cannot protect himself behind a corporation where he is the actual,
Logically, he can be proceeded against in two (2) ways: first, as surety present and efficient actor.
and, secondly, as the corporate official responsible for the offense
under PD 115, the present case is an appropriate remedy under our
Hi-Cement Vs. Insular Bank (534 SCRA 269)
penal law.

Facts:
Petitioner asserts that the appellate court’s ruling is erroneous because
(a) the transaction between PBMI and respondent bank is not a trust
receipt transaction; (b) he entered into the transaction and was sued in Enrique Tan and Lilia Tan (spouses Tan) were the controlling
his capacity as PBMI Senior Vice-President; (c) he never received the stockholders of E.T. Henry & Co., Inc. (E.T. Henry), a company
goods as an entrustee for PBMI, hence, could not have committed any engaged in the business of processing and distributing bunker fuel.
dishonesty or abused the confidence of respondent bank; and (d) PBMI Among E.T. Henry's customers were Hi-Cement Corporation (Hi-
acquired the goods and used the same in operating its machineries and Cement), Riverside Mills Corporation (Riverside) and Kanebo
equipment and not for resale. Cosmetics Philippines, Inc. (Kanebo). For their purchases, these
corporations issued postdated checks to E.T. Henry.
In the case at bar, the transaction between petitioner and respondent
bank falls under the trust receipt transactions envisaged in P.D. No. E.T. Henry and Insular Bank were into “re-discounting” of checks.
115. Respondent bank imported the goods and entrusted the same to
PBMI under the trust receipts signed by petitioner, as entrustee, with
From 1979 to 1981, E.T. Henry was able to re-discount its clients'
the bank as entruster.
checks (with deeds of assignment) with respondent. However, in
February 1981, 20 checks of Hi-Cement (which were crossed and which
Although petitioner signed the trust receipts merely as Senior Vice- bore the restriction “deposit to payee’s account only”) were dishonored.
President of PBMI and had no physical possession of the goods, he So were the checks of Riverside and Kanebo.
cannot avoid prosecution for violation of P.D. No. 115.
Respondent filed a complaint for sum of money in the then Court of
Though the entrustee is a corporation, nevertheless, the law specifically First Instance of Rizal against E.T. Henry, the spouses Tan, Hi-Cement
makes the officers, employees or other officers or persons responsible (including its general manager and its treasurer as signatories of the
for the offense, without prejudice to the civil liabilities of such postdated crossed checks), Riverside and Kanebo.
corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such
Hi-Cement filed its answer alleging, among others, that: (1) its general
officers or employees are vested with the authority and responsibility
manager and treasurer were not authorized to issue the postdated
to devise means necessary to ensure compliance with the law and, if
crossed checks in E.T. Henry's favor; (2) the deed of assignment
they fail to do so, are held criminally accountable; thus, they have a
purportedly executed by Hi-Cement assigning them to respondent only
responsible share in the violations of the law.
bore the conformity of its treasurer and (3) respondent was not a
holder in due course as it should not have discounted them for being
If the crime is committed by a corporation or other juridical entity, the “crossed checks.”
directors, officers, employees or other officers thereof responsible for
the offense shall be charged and penalized for the crime, precisely
11
In their answer (with counterclaim against respondent and cross- Fraud is an allegation of fact that demands clear and convincing
claims against Hi-Cement, Riverside and Kanebo), E.T. Henry and the evidence. It is never presumed.
spouses Tan claimed that: (1) the drawers of the postdated checks
failed to honor them due to the adverse economic conditions prevailing
Second, the mere ownership by a single stockholder or by another
at the time respondent presented them for payment; (2) the extra-
corporation of all or nearly all of the capital stock of a corporation is
judicial sale of the mortgaged Sucat property was void due to gross
not of itself sufficient ground for disregarding the separate corporate
inadequacy of the bid price and (3) their loans were subjected to a
personality. For this ground to stand in this case, there must be proof
usurious interest rate of 21% p.a.
that the spouses Tan: (1) had control or complete domination of E.T.
Henry’s finances and that the latter had no separate existence with
On June 30, 1989, the trial court rendered a decision which ordered respect to the act complained of; (2) used such control to commit fraud
E.T. Henry, Spouses Tan, Hi-Cement, Riverside and Kanebo to pay the or wrong and (3) the control was the proximate cause of the loss or
face value of the post dated checks. injury complained of by respondent. The records of this case do not
show that these elements were present.
Riverside and Kanebo did not appeal the decision to the CA which
affirmed it in toto. Hence, these petitions.

On the other hand, E.T. Henry and the spouses Tan essentially contend General Credit Corp. Vs. Alsons (513 SCRA 225)
that the lower courts erred in: (1) applying the doctrine of piercing the
veil of the corporate entity to make the spouses Tan solidarily liable
Facts:
with E.T. Henry; (2) not ruling on their cross-claims and
counterclaims, and (3) not declaring the foreclosure of E.T. Henry's
Sucat property as void. General Credit Corporation, then known as Commercial Credit
Corporation (CCC), established CCC franchise companies in different
urban centers of the country. In furtherance of its business, GCC had,
In their petition, E.T. Henry and the spouses Tan argue that the lower
as early as 1974, applied for and was able to secure license from the
courts erred in applying the “piercing the veil of corporate entity”
then Central Bank of the Philippines and the Securities and Exchange
doctrine to their case. They claim that both the trial and appellate
Commission to engage also in quasi-banking activities.
courts failed to cite the reasons why the doctrine was relevant to them.

On the other hand, respondent CCC Equity Corporation (EQUITY, for

Issue:
brevity) was organized in November 1994 by GCC for the purpose of,
among other things, taking over the operations and management of the
W/N the Trial Court and the Court of Appeals erred in applying the various franchise companies. At a time material hereto, Alsons
piercing the veil of Corporate entity and holding the spouses Tan Development and Investment Corporation and Conrado, Nicasio,
personally liable for the face value of the postdated checks Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja
(hereinafter the Alcantara family, for convenience), each owned, just
like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC
Ruling:
Davao and CCC Cebu.

The Supreme Court agreed with petitioners E.T. Henry and the spouses
In December 1980, ALSONS and the Alcantara family, for a
Tan in this respect.
consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings – a total of 101,953 shares, more or less – in the CCC
If any general rule can be laid down, it is that the corporation will be franchise companies to EQUITY. On January 2, 1981, EQUITY issued
looked upon as a legal entity until sufficient reasons to the contrary ALSONS et al., a “bearer” promissory note for P2,000,000.00 with a
appear. It is only when the fiction or notion of legal entity is used to one-year maturity date, at 18% interest per annum, with provisions for
defeat public convenience, justify wrong, perpetuate fraud or defend damages and litigation costs in case of default.
crime that the law will shred the corporate legal veil and regard it as a
mere association of persons. This is referred to as the doctrine of
Some four years later, the Alcantara family assigned its rights and
piercing the veil of corporate entity.
interests over the bearer note to ALSONS which thenceforth became
the holder thereof. But even before the execution of the assignment
E.T. Henry's corporate veil should not have been pierced at all. deal aforestated, letters of demand for interest payment were already
sent to EQUITY, through its President, Wilfredo Labayen, who pleaded
inability to pay the stipulated interest, EQUITY no longer then having
First, the trial court failed to provide a clear ground why the doctrine assets or property to settle its obligation nor being extended financial
was used. It merely stated that it agreed with respondent’s arguments support by GCC.
but did not explain why the doctrine was relevant to petitioner E.T.
Henry's and the spouses Tan’s case. On the other hand, the CA held:
ALSONS, having failed to collect on the bearer note aforementioned,
filed a complaint for a sum of money against EQUITY and GCC. GCC is
…It appears that spouses Tan are controlling being impleaded as party-defendant for any judgment ALSONS might
stockholders of E.T. Henry & Co., Inc. as well as its secure against EQUITY and, under the doctrine of piercing the veil of
authorized signatories. The business of the corporate fiction, against GCC, EQUITY having been organized as a
corporation was conducted solely for the benefit of tool and mere conduit of GCC.
the spouses Tan who colluded with Hi-Cement in
defrauding respondent. As the lower court cited…
It is a settled law in this and other jurisdictions Answering with a cross-claim against GCC, EQUITY stated by way of
that when the corporation is a mere alter ego of a special and affirmative defenses that it (EQUITY): a) was purposely
person, same being true when the corporation is organized by GCC for the latter to avoid CB Rules and Regulations on
controlled, and its affairs are so conducted to make DOSRI (Directors, Officers, Stockholders and Related Interest)
it merely an instrumentality, agency or conduit of limitations, and that it acted merely as intermediary or bridge for loan
another. transactions and other dealings of GCC to its franchises and the
investing public; and b) is solely dependent upon GCC for its funding
requirements, to settle, among others, equity purchases made by
Similarly, the CA left a gaping hole by failing to provide the basis for its investors on the franchises; hence, GCC is solely and directly liable to
ruling that E.T. Henry and the spouses Tan defrauded respondent. It ALSONS, the former having failed to provide …EQUITY the necessary
did not also state what act constituted the fraud. funds to meet its obligations to ALSONS.
12
GCC stressed that it is a distinct and separate entity from EQUITY and it did serve, as an instrumentality or adjunct of GCC. With the view we
alleging, in essence that the business relationships with each other take of this case, GCC did not adduce any evidence, let alone rebut the
were always at arm’s length. testimonies and documents presented by ALSONS, to establish the
prevailing circumstances adverted to that provided the justifying
occasion to pierce the veil of corporate fiction between GCC and
The trial court, finds that EQUITY was but an instrumentality or
EQUITY. ALSONS) maybe (sic) without sufficient property with which
adjunct of GCC and declaring them as jointly and severally liable to
to settle its obligations. For, after all, GCC was the entity which
Alsons.
initiated and benefited immensely from the fraudulent scheme
Issue: perpetrated in violation of the law.

W/N there is basis of piercing the veil of corporate fiction

Given the foregoing considerations, it behooves the petitioner, as a
Ruling: matter of law and equity, to assume the legitimate financial obligation
of a cash-strapped subsidiary corporation which it virtually controlled
to such a degree that the latter became its instrument or agent. The
A corporation is an artificial being vested by law with a personality
facts, as found by the courts a quo, and the applicable law call for this
distinct and separate from those of the persons composing it as well as
kind of disposition. Or else, the Court would be allowing the wrong use
from that of any other entity to which it may be related. The first
of the fiction of corporate veil.
consequence of the doctrine of legal entity of the separate personality
of the corporation is that a corporation may not be made to answer for
acts and liabilities of its stockholders or those of legal entities to which Aratea Vs. Suico (518 SCRA 501)
it may be connected or vice versa.
Facts:
The notion of separate personality, however, may be disregarded
under the doctrine – “piercing the veil of corporate fiction” – as in fact
Petitioners Aratea and Canonigo are the controlling stockholders of
the court will often look at the corporation as a mere collection of
Samar Mining Development Corporation (SAMDECO), a domestic
individuals or an aggregation of persons undertaking business as a
corporation engaged in mining operations in San Isidro, Wright,
group, disregarding the separate juridical personality of the
Western Samar. On the other hand, private respondent Suico is a
corporation unifying the group. Another formulation of this doctrine is
businessman engaged in export and general merchandise.
that when two (2) business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal Sometime in 1989, Suico entered into a Memorandum of
fiction that two corporations are distinct entities and treat them as Agreement (MOA) with SAMDECO. Armed with the proper board
identical or one and the same. resolution, Aratea and Canonigo signed the MOA as the duly
authorized representatives of the corporation. Under the MOA, Suico
would extend loans and cash advances to SAMDECO in exchange
Whether the separate personality of the corporation should be pierced,
for the grant of the exclusive right to market fifty percent (50%) of
hinges on obtaining facts appropriately pleaded or proved. However,
the total coal extracted by SAMDECO from its mining sites in San
any piercing of the corporate veil has to be done with caution, albeit the
Isidro, Wright, Western Samar.
Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. After all, the
concept of corporate entity was not meant to promote unfair objectives. Pursuant to the MOA, Suico started releasing loans and cash advances
to SAMDECO, still through Aratea and Suico. SAMDECO started
operations in its mining sites to gather the coal. As agreed in the MOA,
Authorities are agreed on at least three (3) basic areas where piercing
fifty percent (50%) of the coals produced were offered by Suico to
the veil, with which the law covers and isolates the corporation from
different buyers. However, SAMDECO, again through Aratea and
any other legal entity to which it may be related, is allowed. These are:
Canonigo, prevented the full implementation of the marketing
1) defeat of public convenience, as when the corporate fiction is used as
arrangement by not accepting the prices offered by Suico’s coal buyers
vehicle for the evasion of an existing obligation; 2) fraud cases or when
even though such prices were competitive and fair enough, giving no
the corporate entity is used to justify a wrong, protect fraud, or defend
other explanation for such refusal other than saying that the price was
a crime; or 3) alter ego cases, where a corporation is merely a farce
too low. Aratea and Canonigo did not also set any criterion or standard
since it is a mere alter ego or business conduit of a person, or where the
with which any price offer would be measured against. Because he
corporation is so organized and controlled and its affairs are so
failed to close any sale of his 50% share of the coal-produce and gain
conducted as to make it merely an instrumentality, agency, conduit or
profits therefrom, Suico could not realize payment of the loans and
adjunct of another corporation.
advances he extended to SAMDECO.

The CA found valid grounds to pierce the corporate veil of petitioner

SAMDECO, on the other hand, successfully disposed of its 50% share
GCC, there being justifiable basis for such action. When the appellate
of the coal-produce. Even with said coal sales, however, SAMDECO
court spoke of a justifying factor, the reference was to what the trial
absolutely made no payment of its loan obligations to Suico, despite
court said in its decision, namely: the existence of “certain
demands.
circumstances [which], taken together, gave rise to the ineluctable
conclusion that … [respondent] EQUITY is but an instrumentality or
adjunct of [petitioner] GCC.” Aratea and Canonigo eventually sold the mining rights and passed on
the operations of SAMDECO to Southeast Pacific Marketing, Inc.
(SPMI). They also sold their shares in SAMDECO to SPMI’s President,
Foremost of what referred to as “certain circumstances” are the
Arturo E. Dy without notice to, or consent of Suico, in violation of the
commonality of directors, officers and stockholders and even sharing
MOA.
of office between petitioner GCC and respondent EQUITY; certain
financing and management arrangements between the two, allowing
the petitioner to handle the funds of the latter; the virtual domination Hence, in the RTC of Cebu City, Suico filed a complaint for a Sum of
if not control wielded by the petitioner over the finances, business Money and Damages against SAMDECO, Aratea, Canonigo, and Seiko
policies and practices of respondent EQUITY; and the establishment of Philippines, Inc. (SEIKO, which was later substituted by SPMI and
respondent EQUITY by the petitioner to circumvent CB rules. Arturo E. Dy).

It bears to stress at this point that the facts and the inferences drawn On 5 January 1998, the trial court came out with its decision rendering
therefrom, upon which the two (2) courts below applied the piercing judgment for Suico and orders all the defendants SAMDECO, SPMI,
doctrine, stand, for the most part, undisputed. Among these is, to Dy, SEIKO, Benito Aratea, Ponciana Canonigo to solidarily pay the
reiterate, the matter of EQUITY having been incorporated to serve, as Suico the principal obligation of P3.5 million plus 5% interest per
13
month reckoned from March 1989 until fully paid; while defendants Petitioners Aratea and Canonigo, despite having separate and distinct
Aratea & Canonigo should solidarily pay plaintiff the balance on the personalities from SAMDECO may be held personally liable for the
principal amounting to P978,440.00 plus 5% interest per month loans and advances made by Suico to SAMDECO which they represent
reckoned from March 1989 until fully paid. In addition all defendants on account of their bad faith in carrying out the business of the
are hereby ordered solidarily to pay damages. corporation.

Issue: Petitioners Aratea and Canonigo acted in bad faith when they, as
officers of SAMDECO, unreasonably prevented Suico from selling his
W/N Aratea and Canonigo be held personally liable for the loans, cash part of the coal-produce of the mining site, in gross violation of their
advances and capital infusion made to Suico MOA. This resulted in Suico not being unable to realize profits from
his 50% share of the coal-produce, from which Suico could obtain part
of the payment for the loans and advances he made in favor of
Ruling: SAMDECO. Moreover, petitioners also acted in bad faith when they
sold, transferred and assigned their proprietary rights over the mining
area in favor of SPMI and Dy, thereby causing SAMDECO to grossly
SAMDECO must generally be treated as separate and distinct entity violate its MOA with Suico. Suico suffered grave injustice because he
from petitioners Aratea and Canonigo unless there are facts and was prevented from acquiring the opportunity to obtain payment of his
circumstances that would justify the Court to pierce the veil of loans and cash advances, while petitioners Aratea and Canonigo
corporate fiction and treat them as one and the same. From the facts, profited from the sale of their shareholdings in SAMDECO in favor of
as found by the trial court and reechoed by the appellate court, the SPMI and Dy. These facts duly established Aratea and Canonigo’s
Court has no reason to doubt that Suico was very well aware that he personal liability as officers/stockholders of SAMDECO and their
was dealing with SAMDECO and that Aratea and Canonigo were mere solidary liability with SAMDECO for its obligations in favor of Suico for
authorized representatives acting for and in behalf of the corporation. the loans and cash advances received by the corporation.
In fact, Suico took note that Aratea and Canonigo were duly authorized
by the corresponding board resolution. There were no indications
whatsoever that Suico was misled to believe that the loans and cash ASJ Corporation Vs. Evangelista (546 SCRA 300)
advances were initially intended for the personal benefit of Aratea
and/or Canonigo, and that the corporation was only used thereafter for
the purpose of hiding behind the veil of corporate fiction to evade Facts:
personal liability. The evidence sufficiently established that all loans
and cash advances were used for the mining operations of SAMDECO, Spouses Efren and Maura Evangelista, under the name and style of
and there were neither allegations nor proofs to the contrary. Absent R.M. Sy Chicks, are engaged in the large-scale business of buying
any proof of fraud or double dealing, therefore, the doctrine on broiler eggs, hatching them, and selling their hatchlings (chicks) and
piercing the veil of corporate entity would not apply. egg by-products in Bulacan and Nueva Ecija. For the incubation and
hatching of these eggs, respondents availed of the hatchery services of
ASJ Corp., a corporation duly registered in the name of San Juan and
The general rule is that obligations incurred by the corporation, acting
his family.
through its directors, officers and employees, are its sole liabilities.
There are times, however, when solidary liabilities may be incurred but
only when exceptional circumstances warrant such as in the following Sometime in 1991, Evangelista delivered to ASJ various quantities of
cases: eggs, whether successfully hatched or not. Each delivery was reflected
in a “Setting Report”. Initially, the service fees were paid upon release
of the eggs and by-products to respondents. But as their business went
1. When directors and trustees or, in appropriate cases, the officers of a along, Evangelista’s delays on their payments were tolerated by San
corporation: Juan, who just carried over the balance, as there may be, into the next
delivery, out of keeping goodwill with respondents.

(a) vote for or assent to patently unlawful acts of the In February 1993, on several occasions, Evangelista went to the
corporation; hatchery to pick up the chicks and by-products, but San Juan refused
to release the same unless respondents fully settle their accounts.
Respondents, thereafter, tendered some amount and believing firmly
(b) act in bad faith or with gross negligence in that the total value of the eggs delivered was more than sufficient to
directing the corporate affairs; cover the outstanding balance, respondents promised to settle their
accounts only upon proper accounting by San Juan. San Juan disliked
the idea and threatened to impound their vehicle and detain them at
(c) are guilty of conflict of interest to the prejudice of the the hatchery compound if they should come back unprepared to fully
corporation, its stockholders or members, and other persons; settle their accounts with him.

Subsequently, respondents directed their errand boy, Allan Blanco, to

2. When a director or officer has consented to the ssuance of watered pick up the chicks and by-products and also to ascertain if San Juan
stocks or who, having knowledge thereof, did not forthwith file with the was still willing to settle amicably their differences. Unfortunately, San
corporate secretary his written objection thereto; Juan was firm in his refusal and reiterated his threats on respondents.
Fearing San Juan’s threats, respondents never went back to the
hatchery.
3. When a director, trustee or officer has contractually agreed or
stipulated to hold himself personally and solidarily liable with the Respondents filed with the RTC an action for damages based on
corporation; or petitioners’ retention of the chicks and by-products covered by Setting
Report Nos. 108 to 113. On July 8, 1996, the RTC ruled in favor of
respondents and disregarded the corporate fiction of ASJ Corp., and
4. When a director, trustee or officer is made, by specific provision of held it and San Juan solidarily liable to respondents.
law, personally liable for his corporate action.
Both parties appealed to the Court of Appeals but the Court of Appeals
denied both appeals. The Court of Appeals, applying the doctrine of
In labor cases, particularly, corporate directors and officers are piercing the veil of corporate fiction, considered ASJ Corp. and San
solidarily liable with the corporation for the termination of Juan as one entity, after finding that there was no bona fide intention
employment of corporate employees done with malice or in bad faith. to treat the corporation as separate and distinct from San Juan and his
wife Iluminada.
14
 The amount of returned and dishonored checks, together with interest,
Issue: penalty and other charges, shall be debited from any of our accounts
with any of [the bank’s] branches, and if the credit balance thereof is
W/N the Court of Appeals erred when it pierced the veil of corporate insufficient, we undertake to pay [the bank] the deficiency
fiction and held ASJ Corpo. and Antonio San Juan as one entity immediately. And they authorized the PCIB-Greenhills x x x at [its]
option and without notice, to set-off or apply to the payment of any
dishonored/returned check, interest, penalty and other charges, any
and all monies which may be in [its] hands on deposit or otherwise
Ruling: belonging to us.

No. The Court of Appeals is correct. The doctrine of piercing the veil of Francisco deposited four dollar checks totaling US$651,000 in his joint
corporate fiction finds application in the instant case. account with Erlinda at the PCIB-Greenhills. The checks were cleared
and paid by Chase Manhattan Bank, but they were subsequently
The Supreme Court held that although no hard and fast rule can be dishonored for insufficient funds. Chase Manhattan Bank thus
accurately laid down under which the juridical personality of a debited the amount of the dishonored checks from the account of
corporate entity may be disregarded; the following probative factors of PCIB-Greenhills which it maintained with it.
identity justify the application of the doctrine of piercing the veil of
corporate fiction in this case: Having received notice of the debiting by Chase Manhattan Bank of
(1) San Juan and his wife own the bulk of sales of ASJ Corp.; US$651,000 from its account, PCIB-Greenhills debited US$85,000
(2) The lot where the hatchery plant is located is owned by the from Francisco and Erlinda’s joint account as partial payment of the
San Juan spouses; US$651,000 dishonored checks.
(3) ASJ Corp. had no other properties or assets, except for the
hatchery plant and the lot where it is located; In the meantime or on May 17, 1998, Gliane remitted US$42,300 to the
(4) San Juan is in complete control of the corporation; above-said joint account of Francisco at the PCIB-Greenhills. Before
(5) There is no bona fide intention to treat ASJ Corp. as a that, however, Francisco himself had asked Custodio to desist from
different entity from San Juan; and remitting dollars to him from Saudi Arabia because PCIB-Greenhills
(6) The corporate fiction of AJ Corp. was used by San Juan to had imposed a higher exchange rate on him (Francisco).
insulate himself from the legitimate claims of respondents,
defeat public convenience, justify wrong, defend crime, and Having gotten wind of Gliane’s remittance of dollars to the joint
evade a corporation’s subsidiary liability for damages. account of Francisco, Custodio instructed Gliane to request, as the
latter did, for the amendment of the designated beneficiary from
Francisco to Belarmino Cortez and/or Rhodora Cruz who maintained a
Therefore, the decision of the Court of Appeals, after applying the
joint account in PCIB-Greenhills. PCIB’s affiliate bank in Saudi Arabia
doctrine of piercing the veil of corporate fiction, holding petitioners
transmitted the request to PCIB-Ermita, Manila which in turn
ASJ Corporation and Antonio San Juan solidarily liable to respondents
transmitted it to PCIB-Greenhills.
Efren and Maura Evangelista for the unjustified retention of the chicks
and egg by-products covered by Setting Report Nos. 108 to 113 is
At the time the request for change of beneficiary was received,
correct.
however, PCIB-Greenhills had set off the US$42,300 remitted by
Gliane against Francisco’s remaining balance of his obligation under
PCIB Vs. Custodio (545 SCRA 367) the FBPLA (US$651,000 minus the US$85,000 earlier debited or
US$566,000).
Facts: The Area Manager for PCIB-Chinese Banking Group, Marilyn Tan
(Marilyn), to whom Custodio attributed the instruction to set-off the
Dennis Custodio had a door-to-door dollar remittance business. While US$42,300 remittance against Francisco’s obligation to PCIB-
Wilfredo D. Gliane was one of his agents in Saudi Arabia. As agent of Greenhills, explained to Custodio that the amendment was no longer
Custodio, Gliane collected dollars from overseas workers in Saudi feasible as the US$42,300 remitted by Gliane had already been applied
Arabia to be remitted to their beneficiaries in the Philippines. as partial payment of his (Francisco’s) outstanding obligation with
PCIB-Greenhills. She thus advised Custodio to take the matter up with
In their transactions, Custodio and Gliane availed of the services of the Francisco as she did not know of any arrangement between him and
Express Padala desk of Philippine Commercial and International Bank Francisco.
(PCIB), now Banco de Oro-EPCI, Inc., at its affiliate bank, the Al Rahji
Bank in Saudi Arabia. The procedure they adopted in remitting dollars Custodio and Gliane thereafter filed on July 1, 1998 a complaint against
was to course them through regular clients of PCIB who, having PCIB, Marilyn and Francisco, for specific performance and damages
established a good relationship with the bank, enjoyed special foreign before the Regional Trial Court (RTC) of Makati, to recover the
exchange rates with it. One of those clients was respondent Rolando US$42,300, damages and attorney’s fees. They alleged that PCIB failed
Francisco who maintained joint accounts, including those with his wife to perform its obligation to deliver the sum of money they remitted
and Erlinda Chua. through it to their beneficiaries, and that Francisco wrongfully
appropriated or consented to the appropriation of the aforesaid
Francisco and his wife, purportedly on behalf of ROL-ED Traders remittance as payment of his loan account with the bank.
Group Corporation (ROL-ED), a company said to be owned and
controlled by Francisco, entered into a Foreign Bills Purchase Line By Decision of January 30, 2002, Branch 134 of the Makati RTC,
Agreement (FBPLA) in the amount of P70 Million Pesos with the PCIB- finding that PCIB was negligent and that Francisco, albeit not
Greenhills bank which would purchase checks and demand drafts, negligent, may not be unjustly enriched, found them jointly and
among other things, drawn on “U.S. Bank,” the proceeds of which severally liable to pay Custodio and Gliane damages, attorney’s fees
would be advanced to Francisco by the bank without going through the and costs.
regular 23-day clearing period. Under the FBPLA, the spouses made
the following undertaking, that “If a check is returned/dishonored for
any reason whatsoever, we shall immediately, without need of demand, The Court of Appeals, by Decision of August 11, 2004, granted the
pay [the bank] the amount of the check, together with the interest at appeal of PCIB and accordingly reversed the trial court’s April 26, 2002
the rate of Order-modified decision. It freed PCIB of any liability and held
** percent (%) per annum x x x and penalty at the rate of Francisco solely liable to Custodio and Gliane.
twelve percent (12%) per annum, computed from the date of
purchase of the check to the date of full payment.
Issue:
** - prevailing market rate

15
W/N Francisco’s personality is separate from ROL-ED to justify his In his Decision dated June 10, 1999, the LA absolved Uytengsu from
freedom from liability any liability, holding that the latter did not act in bad faith and in
excess of his authority. Nevertheless, the LA found Mandaue Dinghow
liable, ordering the same to pay private respondents their respective
Ruling:
separation pay in the total amount of P122,720.00. Private respondents
filed their Motion for Reconsideration claiming, among others, that
Francisco raised this argument for the first time in his motion for Mandaue Dinghow was only made to pay without including Uytengsu;
reconsideration of the appellate court’s original Decision. that some of them were not awarded separation pay in the said
Points of law, theories, issues and arguments not adequately brought to decision; and that Mandaue Dinghow and Uytengsu deliberately
the attention of the trial court ordinarily will not be considered by a intended to dismiss the private respondents. Private respondents
reviewing court as they cannot be raised for the first time on appeal prayed that Mandaue Dinghow and Uytengsu be ordered, jointly and
because this would be offensive to the basic rules of fair play, justice, severally, to pay all the private respondents’ separation pay, medical
and due process. It would be unfair to the adverse party who would allowance, attorney’s fees and the penalty for failure to file notice of
have no opportunity to present further evidence material to the new closure. Thus, in an Order dated June 10, 1999, the LA awarded an
theory which it could have done had it been aware of it at the time of additional amount of P104,377.00 as separation pay to the other
the hearing before the trial court. private respondents.
On February 9, 2001, the NLRC issued an Entry of Judgment certifying
Furthermore, in his Answer with Compulsory Counterclaim, Francisco that the aforementioned decision had become final and executory on
claimed that “[h]e never instructed nor authorized the defendant bank December 4, 2000. On May 28, 2001, a Writ of Execution was issued
to apply the U.S. dollar remittances to pay his loan obligation with by the LA. However, when the said writ could not be executed, as
the said bank”. Mandaue Dinghow could no longer be found and had transferred
elsewhere; invoking the doctrine of piercing the veil of corporate
Francisco thus virtually admitted in these two cited pleadings that the fiction, private respondents moved that the LA, in the exercise of his
loan to which the US$42,300 remittance was applied was his. As the equity jurisdiction, issue an alias writ of execution directing the Sheriff
object of pleadings is to draw the lines of battle, so to speak, between to execute the judgment against Mandaue Dinghow and Uytengsu.
the litigants and to indicate fairly the nature of the claims or defenses Thus, on February 18, 2002, the LA issued an Order decreeing that a
of both parties, a party cannot subsequently take a position contrary to, writ of execution be issued against the properties of the
or inconsistent, with his pleadings. Unless a party alleges palpable officers/stockholders of Mandaue Dinghow. On April 16, 2002, an
mistake or denies such admission, judicial admissions cannot be Alias Writ of Execution was issued. On April 24, 2002, Mandaue
controverted. Dinghow and Uytengsu filed a Motion to Quash the Writ of Execution.
On May 14, 2002, the Sheriff submitted his Report manifesting that the
Therefore, as the US$42,300 remittance was applied to, by his own said Alias Writ was served on Mandaue Dinghow and Uytengsu, and
admission, Francisco’s loan, the set-off was valid. Notices of Garnishment were served on the banks. Thus, Uytengsu’s
bank deposits were frozen. On May 20, 2002, the LA denied
Parenthetically too, while Francisco claims that the loan in question Uytengsu’s Motion to Quash the Writ of Execution. Uytengsu filed a
was that of ROL-ED and not his, he, as earlier stated, deposited the Motion for Reconsideration and/or Appeal from the said Order before
US$651,000 checks in his joint account with Erlinda and not in the the NLRC. In its Decision dated March 12, 2003, the NLRC denied the
account of ROL-ED. said appeal, holding that Uytengsu is jointly and severally liable with
Mandaue Dinghow on the ground that he is the President/Chairman of
At all events, while a corporation is clothed with a personality separate Mandaue Dinghow and that the latter is no longer existing.
and distinct from the persons composing it, the veil of separate Uytengsu went to the CA via a petition for certiorari under Rule 65 of
corporate personality may be lifted when it is used as a shield to the Rules of Civil Procedure, but the CA dismissed the said petition for
confuse legitimate issues, or where lifting the veil is necessary to certiorari on the following grounds: (1) the petition failed to indicate
achieve equity or for the protection of the creditors. In the case at bar, the full names of all private respondents and their respective complete
there can be no mistake that Francisco belatedly invoked the separate addresses; (2) the certificate of non-forum shopping attached to the
identity of ROL-ED to evade his liability to PCIB. petition was merely signed by Uytengsu without attaching the
appropriate board resolution or secretary’s certificate showing his
authority to file the said petition in behalf of Mandaue Dinghow; and
Mandaue Dinghow Vs. NLRC (547 SCRA 402) (3) Mandaue Dinghow and Uytengsu failed to file a motion for
reconsideration of the NLRC decision before going to the CA on
Facts: certiorari, without justifying the reasons for such failure.
Issue:
W/N the Doctrine of Piercing the Veil of Corporate Fiction was
Petitioner Henry Uytengsu was the President and the former General properly invoked
Manager of the Mandaue Dinghow Dimsum House Co., Inc. (Mandaue
Dinghow), a duly organized corporation which used to engage in the Ruling:
restaurant business. Mandaue Dinghow used to operate the Mandaue
Dinghow Dimsum House (the restaurant) which was located along A.C. A corporation is invested by law with a personality separate and
Cortes Avenue, Mandaue City. distinct from those of the persons composing it as well as from that of
In the course of this restaurant business, private respondents Felix any other legal entity to which it may be related. Because of this, the
Pacaldo, Imelda Montellano, Luzviminda Cuenca, Anamay doctrine of piercing the veil of corporate fiction must be exercised with
Delarmente, Rema Ramos, Pedro Dayagmil, Serina Casquejo, Ricky caution.
Nano, Erwin Limatog, Leila Rosales, Ranulfo General, Nestor Camia
and Anesia Blanca (private respondents) were employed, on various In Malayang Samahan ng mga Manggagawa sa M. Greenfield v.
dates, by Mandaue Dinghow as food handlers, waiters, helpers and Ramos, this Court reiterated the rule that corporate directors and
checkers among others, all with a daily wage of P160.00. officers are solidarily liable with the corporation for the termination of
However, due to business losses, the establishment of numerous malls employees done with malice or bad faith. It has been held that bad
in Cebu City, the gradual dwindling of the number of customers, the faith does not connote bad judgment or negligence; it imports a
rising cost of operations, the great increase in rentals and the lack of a dishonest purpose or some moral obliquity and conscious doing of
viable alternative location, the restaurant closed down. On August 31, wrong; it means breach of a known duty through some motive or
1998, private respondents were terminated from the service as a result interest or ill will; it partakes of the nature of fraud.
of this closure. The restaurant filed a Notice of Retrenchment with the In this case, it is worth mentioning that the LA in his Decision dated
Department of Labor and Employment (DOLE) on September 8, 1998. June 10, 1999, expressly absolved Uytengsu from any liability, holding
Consequently, private respondents filed a case for Illegal Dismissal that the latter did not act in bad faith and in excess of his authority.
before the Labor Arbiter (LA) against Mandaue Dinghow and/or Such finding was not assailed by the private respondents nor did the
Uytengsu, praying for the payment of separation pay, medical NLRC in its Decision dated October 24, 2000 overrule the same. The
allowance, penalty for failure to notify the DOLE and attorney’s fees. liability of Uytengsu was never discussed in the said NLRC decision

16
which, to the detriment of the private respondents, had lapsed into W/N CDCP (PNCC) is jointly and solidarily liable with UITC
finality.
Construction & Dev’t Corp.Vs. Cuenca (466 SCRA 711)
Ruling:
Facts:
Ultra International Trading Corporation (UITC) applied for a surety
bond from Malayan Insurance Co., Inc. (MICI), to guarantee its credits, No.
indebtedness, obligations and liabilities of any kind to Goodyear Tire
and Rubber Company of the Philippines.
We do not agree with the CA ruling that the petitioner is liable under
MICI approved the application and issued MICO Bond No. 65734 for the indemnity agreement. On this point, the CA ratiocinated that the
an amount not exceeding P600,000.00. The surety bond was valid for petitioner is liable, considering that it is the majority stockholder of
12 months, and was renewed several times, the last time being on May UITC and the materials from Goodyear were purchased by UITC for
15, 1983. and in its behalf.

UITC, Edilberto Cuenca, and Rodolfo Cuenca executed an Indemnity The petitioner cannot be made directly liable to MICI under the
Agreement in favor of MICI to protect the latter’s interest. indemnity agreement on the ground that it is UITC’s majority
stockholder. It bears stressing that the petitioner was not a party
Edilberto was then the President, while Rodolfo was a member of the defendant in the main action. MICI did not assert any claim against the
Board of Directors of UITC. Edilberto signed the indemnity agreement petitioner, nor was the petitioner impleaded in the third-party
in his official and personal capacity, while Rodolfo signed in his complaint on the ground of its direct liability to MICI.
personal capacity only. In the said agreement, UITC, Edilberto and
Rodolfo bound themselves jointly and severally to indemnify MICI of
any payment it would make under the surety bond. Petitioner CDCP (PNCC) was brought into the action by respondent
Rodolfo simply for a “remedy over.” No cause of action was asserted by
On Feb 18, 1983, Goodyear sent to MICI a letter informing it of the MICI against it. The petitioner’s liability could only be based on its
Default of UITC on its obligation. alleged assumption of respondent Rodolfo’s liability under the
indemnity agreement. Since the petitioner’s liability is grounded on
After failure of UITC, Edilberto and Rodolfo to settle their obligation that of respondent Rodolfo’s, it is imperative that the latter be first
with Goodyear, MICI was constrained to pay Goodyear P600,000.oo. adjudged liable to MICI before the petitioner may be held liable.

After demand for reimbursement, UITC, Edilberto and Rodolfo still In any case, petitioner CDCP(PNCC), as majority stockholder, may not
failed to pay MICI which prompted the latter to file a complaint for be held liable for UITC’s obligation. A corporation, upon coming into
collection of money against them. existence, is invested by law with a personality separate and distinct
from those persons composing it as well as from any other legal entity
UITC asked MICI to delay the filing of any suit as the CDCP (now to which it may be related. The veil of corporate fiction may only be
PNCC) had initiated a review of UITC’s financial plans to enable it to disregarded in cases where the corporate vehicle is being used to defeat
pay its creditors. It is given that UITC was a subsidiary of CDCP, with public convenience, justify a wrong, protect fraud, or defend a crime.
the latter owning 78% of UITC’s shares of stock. Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself
On July 23, 1983, UITC wrote MICI proposing the following: sufficient ground for disregarding the separate corporate personality.
 Immediate payment of P150,000.00. To disregard the separate juridical personality of a corporation, the
 Balance payable P50,000.00 per month until the obligation wrongdoing must be clearly and convincingly established.
is fully liquidated.
 Interest and penalty charges are to be waived
Pamplona Plantation Co Vs. Tinghil (450 SCRA 421)
Facts:
In the mean time, Rodolfo filed a 3 rd party complaint against petitioner Petitioner Pamplona Plantations Company, Inc. was organized for the
CDCP (now PNCC) alleging that the latter had assumed the liability of purpose of taking over the operations of the coconut and sugar
Rodolfo in the indemnity agreement. plantation of Hacienda Pamplona located in Pamplona, Negros
Oriental.
CA affirmed in toto the decision of the RTC. The appellate court held
When the company took over the operation, it did not absorb all the
that UITC had impliedly authorized Edilberto and Rodolfo to procure
workers of Hacienda Pamplona. Some, however, were hired by the
the surety bond and the indemnity agreement; hence, UITC was liable.
company during harvest season as coconut hookers or ‘sakador,’
Moreover, UITC was estopped from questioning Edilberto and
coconut filers, coconut haulers, coconut scoopers or ‘lugiteros,’ and
Rodolfo’s authority to enter into the indemnity agreement in its behalf,
charcoal makers.
considering that it had already partially paid P150,000.00 to MICI.
The appellate court added that Edilberto and Rodolfo, having signed
Sometime in 1995, Pamplona Plantation Leisure Corporation was
the indemnity agreement also in their personal capacity, would
established for the purpose of engaging in the business of operating
ordinarily be personally liable under the said agreement; but because
tourist resorts, hotels, and inns, with complementary facilities, such as
MICI failed to appeal the decision of the RTC, it had effectively waived
restaurants, bars, boutiques, service shops, entertainment, golf
its right to hold them liable on its claim.
courses, tennis courts, and other land and aquatic sports and leisure
facilities.
The appellate court noted that UITC was a subsidiary company of
CDCP (PNCC) because the latter holds almost 78% of UITC’s stocks. As The Pamplona Plantation Labor Independent Union (PAPLIU)
such, UITC would purchase materials from suppliers such as Goodyear, conducted an organizational meeting wherein several respondents who
in behalf of CDCP. are either union members or officers participated in said meeting.

Upon learning that some of the respondents attended the said meeting,
Petitioner maintains that the mere fact that the materials purchased Petitioner Jose Luis Bondoc, manager of the company, did not allow
from Goodyear were delivered to it does not warrant the piercing of the respondents to work anymore in the plantation.
corporate veil so as to treat the two corporations as one entity, absent
sufficient and clear showing that it was purposely used as a shield to Hereafter, respondents filed their respective complaints with the NLRC
defraud creditors. against petitioners for unfair labor practice, illegal dismissal,
underpayment, overtime pay, premium pay for rest day and holidays,
Issue: service incentive leave pay, damages, attorney’s fees and 13 th month
pay.

17
 may be pierced in any of the instances cited in order to promote
Respondent Carlito Tinghil amended his complaint to implead substantial justice.
Pamplona Plantation Leisure Corporation.
In the present case, the corporations have basically the same
Labor Arbiter Jose G. Gutierrez rendered a decision finding incorporators and directors and are headed by the same official. Both
respondents, except Rufino Bacubac, Antonio Cañolas and Felix Torres use only one office and one payroll and are under one management. In
who were complainants in another case, to be entitled to separation their individual Affidavits, respondents allege that they worked under
pay. the supervision and control of Petitioner Bondoc -- the common
managing director of both the petitioner-company and the leisure
Petitioner-company & Bondoc appealed the Labor Arbiter’s decision to corporation. Some of the laborers of the plantation also work in the
the NLRC. The NLRC reversed the Labor Arbiter’s ruling that golf course. Thus, the attempt to make the two corporations appear as
respondents, except Carlito Tinghil, failed to implead Pamplona two separate entities, insofar as the workers are concerned, should be
Plantation Leisure Corporation, an indispensable party and that there viewed as a devious but obvious means to defeat the ends of the law.
exist no employer-employee relation between the parties. Such a ploy should not be permitted to cloud the truth and perpetrate
an injustice.
Respondents filed a motion for reconsideration which was denied by
the NLRC. In any event, there is no need to implead the leisure corporation
because, insofar as respondents are concerned, the leisure corporation
Respondents elevated the case to the CA. Guided by the fourfold test and petitioner-company are one and the same entity.
for determining the existence of an employer-employee relationship; Jardine Davis Vs. JRB Realty (463 SCRA 555)
the CA held that respondents were employees of petitioner- Facts:
company. Hence, their dismissal was illegal.
In 1979-1980, JRB Realty, Inc. built a nine-storey building, named
Petitioner-company & Bondoc contended that the CA should have
Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo
dismissed the case for the failure of respondents to implead the
Village, Makati City. An air conditioning system was needed for the
Pamplona Plantation Leisure Corporation, an indispensable party, for
Blanco Law Firm housed at the second floor of the building. On March
being the true and real employer. Allegedly, respondents admitted that
13, 1980, the respondent’s Executive Vice-President, Jose R. Blanco,
they had been employed by the leisure corporation and/or engaged to
accepted the contract quotation of Mr. A.G. Morrison, President of
perform activities that pertained to its business.
Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of
Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning
Further, as the NLRC allegedly noted in their individual complaints,
equipment with a net total selling price of P99,586.00. Thereafter, two
respondents specifically averred that they had worked in the “golf
(2) brand new packaged air conditioners of 10 tons capacity each to
course” and performed related jobs in the “recreational facilities” of the
deliver 30,000 kcal or 120,000 BTUH were installed by Aircon. When
leisure corporation. Hence, petitioner-company claim that, as a sugar
the units with rotary compressors were installed, they could not deliver
and coconut plantation company separate and distinct from the
the desired cooling temperature. Despite several adjustments and
Pamplona Plantation Leisure Corporation, the petitioner-company is
corrective measures, the respondent conceded that Fedders Air
not the real party in interest.
Conditioning USA’s technology for rotary compressors for big capacity
conditioners like those installed at the Blanco Center had not yet been
Issue:
perfected. The parties thereby agreed to replace the units with
reciprocating/semi-hermetic compressors instead. In a Letter dated
W/N Pamplona Plantation Company, Inc. is separate and distinct from
March 26, 1981, Aircon stated that it would be replacing the units
Pamplona Plantation Leisure Corporation, and that the latter was an
currently installed with new ones using rotary compressors, at the
indispensable party that should have been impleaded for being the true
earliest possible time. Regrettably, however, it could not specify a date
and real employer
when delivery could be effected.
Ruling:
TempControl Systems, Inc. (a subsidiary of Aircon until 1987)
No. undertook the maintenance of the units, inclusive of parts and
services. In October 1987, the respondent learned, through newspaper
An examination of the facts reveals that, for both the coconut ads, that Maxim Industrial and Merchandising Corporation (Maxim,
plantation and the golf course, there is only one management which for short) was the new and exclusive licensee of Fedders Air
the laborers deal with regarding their work. A portion of the plantation Conditioning USA in the Philippines for the manufacture, distribution,
(also called Hacienda Pamplona) had actually been converted into a sale, installation and maintenance of Fedders air conditioners. The
golf course and other recreational facilities. The weekly payrolls issued respondent requested that Maxim honor the obligation of Aircon, but
by petitioner-company bore the name Pamplona Plantation Co., Inc. It the latter refused. Considering that the ten-year period of prescription
is also a fact that respondents all received their pay from the same was fast approaching, to expire on March 13, 1990, the respondent then
person, Petitioner Bondoc -- the managing director of the company. instituted, on January 29, 1990, an action for specific performance
Since the workers were working for a firm known as Pamplona with damages against Aircon & Refrigeration Industries, Inc., Fedders
Plantation Co., Inc., the reason they sued their employer through that Air Conditioning USA, Inc., Maxim Industrial & Merchandising
name was natural and understandable. Corporation and petitioner Jardine Davies, Inc. The latter was
impleaded as defendant, considering that Aircon was a subsidiary of
True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona the petitioner.
Plantation Leisure Corporation appear to be separate corporate
entities. But it is settled that this fiction of law cannot be invoked to
further an end subversive of justice. On May 17, 1996, the RTC rendered its Decision, ordering the Jardine
Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial
The principle requiring the piercing of the corporate veil mandates and Merchandising Corporation, jointly and severally:
courts to see through the protective shroud that distinguishes one
corporation from a seemingly separate one. The corporate mask may 1. To deliver, install and place into operation the two (2)
be removed and the corporate veil pierced when a corporation is the brand new units of Fedders unitary packaged airconditioning
mere alter ego of another. Where badges of fraud exist, where public units each of 10 tons capacity with rotary compressors to
convenience is defeated, where a wrong is sought to be justified deliver 30,000 kcal or 120,000 BTUH to the second floor of
thereby, or where a separate corporate identity is used to evade the Blanco Center building, or to pay plaintiff the current
financial obligations to employees or to third parties, the notion of price for two such units;
separate legal entity should be set aside and the factual truth upheld.
When that happens, the corporate character is not necessarily
abrogated. It continues for other legitimate objectives. However, it

18
 2. To reimburse plaintiff the amount of P556,551.55 as and kindred articles; and to erect, or buy, lease, manage, or
for the unsaved electricity bills from October 21, 1981 up to otherwise acquire manufactories, warehouses, and depots for
April 30, 1995; and another amount of P185,951.67 as and manufacturing, assemblage, repair and storing, buying,
for repair costs; selling, and dealing in the aforesaid appliances, accessories
and products. …
3. To pay plaintiff P50,000.00 as and for attorney’s fees;
and The existence of interlocking directors, corporate officers and
shareholders, which the respondent court considered, is not enough
justification to pierce the veil of corporate fiction, in the absence of
4. Cost of suit.
fraud or other public policy considerations. But even when there is
dominance over the affairs of the subsidiary, the doctrine of piercing
The petitioner filed its notice of appeal with the CA, alleging that the the veil of corporate fiction applies only when such fiction is used to
trial court erred in holding it liable because it was not a party to the defeat public convenience, justify wrong, protect fraud or defend
contract between JRB Realty, Inc. and Aircon, and that it had a crime. To warrant resort to this extraordinary remedy, there must be
personality separate and distinct from that of Aircon. proof that the corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice. Any piercing of the corporate veil has to
be done with caution. The wrongdoing must be clearly and
On March 23, 2000, the CA affirmed the trial court’s ruling in toto; convincingly established. It cannot just be presumed.
hence, this petition.

In the instant case, there is no evidence that Aircon was formed or

Issue: utilized with the intention of defrauding its creditors or evading
its contracts and obligations. There was nothing fraudulent in the
W/N the Court of Appeals erred in holding Jardine liable for the acts of Aircon in this case. Aircon, as a manufacturing firm of air
alleged contractual breach of Aircon solely because the latter was conditioners, complied with its obligation of providing two air
formerly Jardine’s subsidiary conditioning units for the second floor of the Blanco Center in
good faith, pursuant to its contract with the respondent.
Unfortunately, the performance of the air conditioning units did
Ruling: not satisfy the respondent despite several adjustments and
corrective measures.
While it is true that Aircon is a subsidiary of the petitioner, it does not We sustain the petitioner’s separateness from that of Aircon in this
necessarily follow that Aircon’s corporate legal existence can just be case. It bears stressing that the petitioner was never a party to the
disregarded. In Velarde v. Lopez, Inc., the Court categorically held that contract. Privity of contracts takes effect only between parties, their
a subsidiary has an independent and separate juridical personality, successors-in-interest, heirs and assigns. The petitioner, which has
distinct from that of its parent company; hence, any claim or suit a separate and distinct legal personality from that of Aircon, cannot,
against the latter does not bind the former, and vice versa. In applying therefore, be held liable.
the doctrine, the following requisites must be established: (1) control,
not merely majority or complete stock control; (2) such control must
have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or MR Dulay Vs. CA (225 SCRA 678)
dishonest acts in contravention of plaintiff’s legal rights; and (3) the Facts:
aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.
Manuel R. Dulay Enterprises, Inc, a domestic corporation owned a
property covered by TCT No. 17880 and known as Dulay Apartment
The records bear out that Aircon is a subsidiary of the petitioner only consisting of sixteen (16) apartment units on a six hundred eighty-nine
because the latter acquired Aircon’s majority of capital stock. It, (689) square meters lot, more or less, located at Seventh Street (now
however, does not exercise complete control over Aircon; nowhere can Buendia Extension) and F.B. Harrison Street, Pasay City.
it be gathered that the petitioner manages the business affairs of
Aircon. Indeed, no management agreement exists between the
petitioner and Aircon, and the latter is an entirely different entity from Petitioner Corporation through its president, Manuel Dulay, obtained
the petitioner. various loans for the construction of its hotel project, Dulay
Continental Hotel (now Frederick Hotel). It even had to borrow money
from Virgilio Dulay to be able to continue the hotel project. As a result
Jardine Davies, Inc., incorporated as early as June 28, 1946, is of said loan, Virgilio Dulay occupied one of the unit apartments of the
primarily a financial and trading company. Its Articles of Incorporation subject property since 1973 while at the same time managing the Dulay
states among many others that the purposes for which the said Apartment at his shareholdings in the corporation was subsequently
corporation was formed, are as follows: increased by his father.

(a) To carry on the business of merchants, commission Manuel Dulay by virtue of Board Resolution sold the subject property
merchants, brokers, factors, manufacturers, and agents; to spouses Maria Theresa and Castrense Veloso in the amount of
P300,000.00 as evidenced by the Deed of Absolute Sale. Thereafter,
(b) Upon complying with the requirements of law applicable TCT No. 17880 was cancelled and TCT No. 23225 was issued to Maria
thereto, to act as agents of companies and underwriters Theresa Veloso. Subsequently, Manuel Dulay and spouses Veloso
doing and engaging in any and all kinds of insurance executed a Memorandum to the Deed of Absolute Sale of December 23,
business. 1976 dated December 9, 1977 giving Manuel Dulay within (2) years or
until December 9, 1979 to repurchase the subject property for
P200,000.00 which was, however, not annotated either in TCT No.
On the other hand, Aircon, incorporated on December 27, 1952, is a 17880 or TCT No. 23225.
manufacturing firm. Its Articles of Incorporation states that its purpose
is mainly –
On December 24, 1976, Maria Veloso, without the knowledge of
Manuel Dulay, mortgaged the subject property to Manuel A. Torres for
To carry on the business of manufacturers of commercial a loan of P250,000.00 which was duly annotated as Entry No. 68139 in
and household appliances and accessories of any form, TCT No. 23225.
particularly to manufacture, purchase, sell or deal in air
conditioning and refrigeration products of every class and
description as well as accessories and parts thereof, or other
19
Upon the failure of Maria Veloso to pay Torres, the subject property It is relevant to note that although a corporation is an entity which has
was sold on April 5, 1978 to Torres as the highest bidder in an a personality distinct and separate from its individual stockholders or
extrajudicial foreclosure sale as evidenced by the Certificate of Sheriff's members, the veil of corporate fiction may be pierced when it is used to
Sale issued on April 20, 1978. defeat public convenience justify wrong, protect fraud or defend crime.
The privilege of being treated as an entity distinct and separate from its
stockholder or members is therefore confined to its legitimate uses and
On July 20, 1978, Maria Veloso executed a Deed of Absolute
is subject to certain limitations to prevent the commission of fraud or
Assignment of the Right to Redeem in favor of Manuel Dulay assigning
other illegal or unfair act. When the corporation is used merely as an
her right to repurchase the subject property from Torres as a result of
alter ego or business conduit of a person, the law will regard the
the extra sale held on April 25, 1978.
corporation as the act of that person. The Supreme Court had
repeatedly disregarded the separate personality of the corporation
As neither Maria Veloso nor her assignee Manuel Dulay was able to where the corporate entity was used to annul a valid contract executed
redeem the subject property within the one year statutory period for by one of its members.
redemption, Torres filed an Affidavit of Consolidation of Ownership
with the Registry of Deeds of Pasay City and TCT No. 24799 was
Petitioners' claim that the sale of the subject property by its president,
subsequently issued to Manuel Torres on April 23, 1979.
Manuel Dulay, to spouses Veloso is null and void as the alleged Board
Resolution was passed without the knowledge and consent of the other
On October 1, 1979, Torres filed a petition for the issuance of a writ of members of the board of directors cannot be sustained. Appellant
possession against spouses Veloso and Manuel Dulay. However, when Virgilio E. Dulay's protestations of complete innocence to the effect
Virgilio Dulay was never authorized by the Corporation to sell or that he never participated nor was even aware of any meeting or
mortgage the subject property, the trial court ordered private resolution authorizing the mortgage or sale of the subject premises is
respondent Torres to implead the Corporation as an indispensable difficult to believe. On the contrary, he is very much privy to the
party but the latter moved for the dismissal of his petition which was transactions involved. To begin with, he is an incorporator and one of
granted in an Order dated April 8, 1980. the board of directors designated at the time of the organization of
Manuel R. Dulay Enterprise, Inc. In ordinary parlance, the said entity
is loosely referred to as a "family corporation". The nomenclature, if
Issue: imprecise, however, fairly reflects the cohesiveness of a group and the
parochial instincts of the individual members of such an aggrupation of
W/N the sale of the subject property between private respondents which Manuel R. Dulay Enterprises, Inc. is typical: four-fifths of its
spouses Veloso and Manuel Dulay has no binding effect on petitioner incorporators being close relatives namely, three (3) children and their
corporation as Board Resolution No. 18 which authorized the sale of father whose name identifies their corporation.
the subject property was resolved without the approval of all the
members of the board of directors and said Board Resolution was Besides, the fact that petitioner Virgilio Dulay on June 24, 1975
prepared by a person not designated by the corporation to be its executed an affidavit that he was a signatory witness to the execution of
secretary the post-dated Deed of Absolute Sale of the subject property in favor of
Torres indicates that he was aware of the transaction executed between
Ruling: his father and private respondents and had, therefore, adequate
knowledge about the sale of the subject property to private
respondents.
Section 101 of the Corporation Code of the Philippines provides:

Consequently, Petitioner Corporation is liable for the act of Manuel

Unless the by-laws provide otherwise, any action by the directors of a Dulay and the sale of the subject property to private respondents by
close corporation without a meeting shall nevertheless be deemed valid Manuel Dulay is valid and binding.
if:

Section 3 –
1. Before or after such action is taken, written consent
thereto is signed by all the directors, or Classes of corporations. Corporation formed or organized under
this Code may be stock or non-stock corporations. Corporations which
2. All the stockholders have actual or implied knowledge of have capital stock divided into shares and are authorized to distribute
the action and make no prompt objection thereto in writing; to the holders of such shares dividends or allotments of the surplus
or profits on the basis of the shares held are stock corporations. All other
corporations are non-stock corporations.

3. The directors are accustomed to take informal action with

the express or implied acquiesce of all the stockholders, or
CIR Vs. Club Filipino (5 SCRA 321)

4. All the directors have express or implied knowledge of the

action in question and none of them makes prompt objection Facts:
thereto in writing.

The "Club Filipino, Inc. de Cebu,", is a civic corporation organized

If a directors' meeting is held without call or notice, an action taken under the laws of the Philippines with an original authorized capital
therein within the corporate powers is deemed ratified by a director stock of P22,000.00, which was subsequently increased to
who failed to attend, unless he promptly files his written objection with P200,000.00. Neither in the articles or by-laws are there a provision
the secretary of the corporation after having knowledge thereof. relative to dividends and their distribution, although it is covenanted
that upon its dissolution, the Club's remaining assets, after paying
In the instant case, Petitioner Corporation is classified as a close debts, shall be donated to a charitable Philippine Institution in Cebu.
corporation and consequently a board resolution authorizing the sale
or mortgage of the subject property is not necessary to bind the The Club owns and operates a club house, a bowling alley, a golf course
corporation for the action of its president. At any rate, corporate action (on a lot leased from the government), and a bar-restaurant where it
taken at a board meeting without proper call or notice in a close sells wines and liquors, soft drinks, meals and short orders to its
corporation is deemed ratified by the absent director unless the latter members and their guests. The bar-restaurant was a necessary
promptly files his written objection with the secretary of the incident to the operation of the club and its golf-course. The club is
corporation after having knowledge of the meeting which, in his case, operated mainly with funds derived from membership fees and dues.
Virgilio Dulay failed to do.
20
Whatever profits it had, were used to defray its overhead expenses and operation. From the extrinsic evidence adduced, the Tax Court
to improve its golf-course. In1951 as a result of a capital surplus, concluded that the Club is not engaged in the business as a barkeeper
arising from the re-valuation of its real properties, the value or price of and restaurateur.
which increased, the Club declared stock dividends; but no actual cash
dividends were distributed to the stockholders.
Moreover, for a stock corporation to exist, two requisites must be
complied with, to wit: (1) a capital stock divided into shares and (2) an
In 1952, a BIR agent discovered that the Club has never paid authority to distribute to the holders of such shares, dividends or
percentage tax on the gross receipts of its bar and restaurant, although allotments of the surplus profits on the basis of the shares held. In the
it secured licenses. The Collector of Internal Revenue assessed against case at bar, nowhere in its articles of incorporation or by-laws could be
and demanded from the Club, the following sums: — found an authority for the distribution of its dividends or surplus
profits. Strictly speaking, it cannot, therefore, be considered a stock
corporation, within the contemplation of the corporation law.
As percentage tax on its gross receipts during the tax years
1946 to 1951 P9,599.07
A tax is a burden, and, as such, it should not be deemed imposed upon
fraternal, civic, non-profit, nonstock organizations, unless the intent to
Surcharge therein 2,399.77
the contrary is manifest and patent" (Collector v. BPOE Elks Club, et
al., supra ), which is not the case in the present appeal.
As fixed tax for the years 1946 to 1952 70.00
Having arrived at the conclusion that respondent Club is not engaged
Compromise penalty 500.00 in the business as an operator of a bar and restaurant, and therefore,
not liable for fixed and percentage taxes, it follows that it is not liable
for any penalty, much less of a compromise penalty.
The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the instant
petition for review. Section 4 –

Issue: Corporations created by special laws or charters. Corporations

created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to
W/N the Club is liable for the taxes assessed by the CIR
them, supplemented by the provisions of this Code, insofar as they are
Ruling: applicable.

Section 182, of the Tax Code states, "Unless otherwise provided, every Cuenca Vs. Atas (535 SCRA 48)
person engaging in a business on which the percentage tax is imposed
shall pay in full a fixed annual tax of ten pesos for each calendar year or
fraction thereof in which such person shall engage in said business." Facts:
Section 183 provides in general that "the percentage taxes on business
shall be payable at the end of each calendar quarter in the amount Cuenca was an incorporator, President, and Chief Executive Officer of
lawfully due on the business transacted during each quarter; etc." the then Construction Development Corporation of the Philippines
(CDCP), now PNCC, from its incorporation in 1966 until 1983.
Section 191, same Tax Code, provides "Percentage tax . . . Keepers of Sometime in 1977, CDCP was granted a franchise under Presidential
restaurants, refreshment parlors and other eating places shall pay a tax Decree No. 1113 to construct, operate, and maintain toll facilities of the
three per centum , and keepers of bar and cafes where wines or liquors North and South Luzon Expressway. In the course of its operations, it
are served five per centum of their gross receipts . . .". It has been held incurred substantial credit obligations from both private and
that the liability for fixed and percentage taxes, as provided by these government sources.
sections, does not ipso facto attach by mere reason of the operation of a
bar and restaurant. For the liability to attach, the operator thereof must However, its unpaid obligations ballooned so much that by 1983, it
be engaged in the business as a barkeeper and restaurateur. The plain became impossible for it to settle its maturing and overdue accounts
and ordinary meaning of business is restricted to activities or affairs with various GFIs, namely, the Philippine National Bank (PNB),
where profit is the purpose or livelihood is the motive, and the term Development Bank of the Philippines (DBP), National Development
business when used without qualification, should be construed in its Company (NDC), Government Service Insurance System (GSIS), Land
plain and ordinary meaning, restricted to activities for profit or Bank of the Philippines (LBP), and PhilippinG Export and Foreign
livelihood. Loan Guarantee Corporation (PEFLGC), now known as the Trade and
Investment Development Corporation of the Philippines.
It is conceded that the Club derived profit from the operation of its bar
and restaurant, but such fact does not necessarily convert it into a On February 23, 1983, then President Ferdinand E. Marcos issued
profit-making enterprise. The bar and restaurant are necessary Letter of Instruction No. (LOI) 1295, directing the creditor GFIs to
adjuncts of the Club to foster its purposes and the profits derived convert into CDCP’s shares of stock the following: (1) all of the direct
therefrom are necessarily incidental to the primary object of obligations of CDCP and those of its wholly-owned subsidiaries,
developing and cultivating sports for the healthful recreation and including, but not limited to loans, credits, accrued interests, fees and
entertainment of the stockholders and members. That a Club makes advances in any currency outstanding as of December 31, 1982; (2) the
some profit, does not make it a profit-making Club. As has been direct obligations of CDCP maturing in 1983; and (3) obligations
remarked a club should always strive, whenever possible, to have maturing in 1983 which were guaranteed by the GFIs.
surplus.
On April 25, 1983, a special stockholders’ meeting, presided by
The facts that the capital stock of the respondent Club is divided into petitioner, was held whereby stockholders representing more than two-
shares, does not detract from the finding of the trial court that it is not thirds (2/3) of the outstanding capital stock of CDCP approved the
engaged in the business of operator of bar and restaurant. What is increase of its authorized capital stock from PhP 1.6 to 2.7 billion in
determinative of whether or not the Club is engaged in such business is accordance with LOI 1295. Thus, the CDCP, pursuant to said letter,
its object or purpose, as stated in its articles and by-laws. It is a familiar converted some of its obligations to GFIs into equity.
rule that the actual purpose is not controlled by the corporate form or
by the commercial aspect of the business prosecuted, but may be
shown by extrinsic evidence, including the by-laws and the method of

21
The total subscription of the above issuance of shares of stock pursuant acquired asset corporation removed it from the category of a GOCC.
to LOI 1295 amounted to PhP 1,405,202,000 or 1.4 billion. Thus, while the SEC has no jurisdiction over GOCCs with original
charter or created by special law primarily because they are governed
by their charters, it retains jurisdiction over government-acquired asset
Thus, with the implementation of LOI 1295, respondents-GFIs became
corporations. Therefore, the SEC may compel PNCC to hold a
the majority stockholders of CDCP to the extent of 70% of the
stockholders’ meeting for the purpose of electing members of the
authorized capital stocks. The change in the corporation’s ownership
latter’s board of directors.
was made public through various announcements. CDCP was later
renamed to PNCC to reflect the Philippine Government stockholding,
and became a government-acquired asset corporation. Consequently, HDMF Vs. COA (432 SCRA 126)
the various GFIs were given seats in the Board of Directors of PNCC
and participated in the management of the company.
Facts:

Meanwhile, sometime in 1988, pursuant to Administrative Order Nos.

Republic Act No. 6971, “An Act to Encourage Productivity and
14 and 64, DBP, PNB, PEFLGC, and NDC transferred their interests in
Maintain Industrial Peace by Providing Incentives to Both Labor and
PNCC to the Republic of the Philippines which in turn conveyed them
Capital,” was approved on November 22, 1990, and took effect on
to the Asset Privatization Trust (APT), now the Privatization and
December 9, 1990.
Management Office, for disposition to the private sector pursuant to
the government’s privatization program.
Section 3 of said Act states:
On May 31, 1996, more than a decade after LOI 1295 was implemented,
petitioner filed a complaint before the SEC SICD docketed as SEC Case Sec. 3. Coverage.-- This Act shall apply to all business
No. 05-96-5357 entitled Rodolfo M. Cuenca v. PNCC, et al., for the enterprises with or without existing and duly recognized or
SEC to determine and declare whether the GFIs were registered certified labor organizations, including government-owned
stockholders of PNCC and the number of shares held by each of them and controlled corporations performing proprietary
and to compel PNCC to call and hold regular stockholders’ meetings functions. It shall cover all employees and workers including
and election of directors every year. casual, regular, supervisory and managerial employees.

Petitioner averred that while PNCC issued the above specified The Secretary of Labor and Employment and the Secretary of Finance
certificates of stock to the GFIs pursuant to LOI 1295, the GFIs promulgated the Rules Implementing Republic Act No. 6971 on June 4,
however refused to cancel and never did cancel the loans in their books 1991. Rule II of said implementing rules provides:
as payment for the shares issued in their names by PNCC as “they
considered it to be a diminution of the value of their investments.”
Thus, petitioner claimed that some of the GFIs refused to accept Section 1. Coverage. These Rules shall apply to:
delivery of the stock certificates from PNCC while others were not even
aware of the issuance of the certificates of stock in their names. (a) All business enterprises with or without existing
Consequently, respondents-GFIs continued to charge and receive duly recognized or certified labor organizations,
payments for their loan and interest charges from PNCC though these including government-owned and controlled
loans were supposed to have been converted into common stock in corporations performing proprietary functions;
1983 pursuant to LOI 1295.
(b) All employees and workers including casual,
Issue: regular, rank-and-file, supervisory and managerial
employees.
W/N the GFIs have actually cancelled PNCC’s loan in their books and
W/N PNCC is a GOCC On November 21, 1991, petitioner HDMF granted Productivity
Incentive Bonus equivalent to one month salary plus allowance to all
Ruling: its personnel pursuant to Republic Act No. 6971, and its Implementing
Rules.

Yes.
The HDMF granted said bonus despite the advice on August 26, 1991 of
Undersecretary Salvador Enriquez of the Department of Budget and
First, it is undisputed that shares of stock were issued to the GFIs Management (DBM) to all government-owned and controlled
converting part of their outstanding loan credit to equity with PNCC. corporations (GOCCs) and government financial institutions (GFIs)
The certificates of stock issued attest to this fact. Moreover, the with original charters performing proprietary functions to defer
administrative body below had duly debunked any irregularity in the payment of the productivity incentive bonus to their employees,
face of these certificates of stock. Second, the records and accounts of pending the issuance of a definite ruling by the Office of the President
PNCC duly reflected such debt-to-equity conversion as attested to by on the matter.
the independent auditors from Carlos J. Valdes & Co., Certified Public
Accountants, in the comparative Financial Statements covering the
years 1982 and 1983. Third, the due issuance of the shares of stock in On December 27, 1991, the Department of Labor and Employment and
the names of the GFIs was corroborated by PNCC’s stock transfer the Department of Finance issued the Supplemental Rules
agent, Caval Securities Registry, Inc. Fourth, the Deed of Confirmation Implementing Republic Act No. 6971, which provides, thus:
and its Supplement erased any doubt as to the implementation of LOI
1295. Thus, based on these reasons, there can be no doubt as to the Section 1.—Paragraph (a) Section 1, Rule II of the Rules
implementation of LOI 1295. Corollarily, the shares of stock subject of Implementing RA 6971, shall be amended to read as follows:
the instant case issued to the GFIs were for value and thus cannot be
considered as void or “watered stocks.”
Coverage. These Rules shall apply to:

Finally, it has been settled in Philippine National Construction

Corporation v. Pabion that PNCC is an acquired asset corporation and (a) All business enterprises with or without existing
not a government-owned and/or controlled corporation (GOCC). In duly certified labor organizations including government-
said case, we held that PNCC did not lose its status as a private owned and controlled corporations performing proprietary
corporation upon acquisition by the government through GFIs of the functions which are established solely for business or profit
majority of its shares of stock. Our determination that PNCC is an or gain and accordingly excluding those created,

22
 maintained or acquired in pursuance of a policy of PhilSy Vs. COA (534 SCRA 112)
the state, enunciated in the constitution or by law,
and those whose officers and employees are Facts:
covered by the Civil Service. The Philippine Society for the Prevention of Cruelty to Animals was
incorporated as a juridical entity over one hundred years ago by virtue
Thus, the grant of productivity incentive bonus to the HDMF personnel of Act No. 1285, enacted on January 19, 1905, by the Philippine
in the total amount of P5,136,710.91 was disallowed in audit under Commission. The petitioner, at the time it was created, was composed
Notice of Disallowance No. 96-006-101 (91). The disallowance was of animal aficionados and animal propagandists. The objects of the
based on COA Decision No. 96-288, dated June 4, 1996, stating that petitioner, as stated in Section 2 of its charter, shall be to enforce laws
Republic Act No. 6971 does not apply to government-owned or relating to cruelty inflicted upon animals or the protection of animals
controlled corporations or to government financial institutions with in the Philippine Islands, and generally, to do and perform all things
original charters performing proprietary functions, such as the HDMF. which may tend in any way to alleviate the suffering of animals and
promote their welfare.

HDMF, through its President and Chief Executive Officer, Zorayda At the time of the enactment of Act No. 1285, the original Corporation
Amelia C. Alonzo, requested for the lifting of the disallowance. Alonzo Law, Act No. 1459, was not yet in existence. Act No. 1285 antedated
argued that Republic Act No. 6971 applies to the employees of HDMF both the Corporation Law and the constitution of the Securities and
since the coverage of the said law includes government-owned and Exchange Commission. Important to note is that the nature of the
controlled corporations performing proprietary functions, and the petitioner as a corporate entity is distinguished from the sociedad
supplemental rules excluding it from coverage was issued after the anonimas under the Spanish Code of Commerce.
HDMF had already granted the productivity incentive bonus to its
employees. For the purpose of enhancing its powers in promoting animal welfare
and enforcing laws for the protection of animals, the petitioner was
The Commission on Audit affirmed the audit disallowance. initially imbued under its charter with the power to apprehend
violators of animal welfare laws. In addition, the petitioner was to
share one-half (1/2) of the fines imposed and collected through its
Issue: efforts for violations of the laws related thereto.
W/N HDMF is a GOCC with original charter performing proprietary
Subsequently, however, the power to make arrests as well as the
functions and is therefore excluded from the coverage of RA 6971
privilege to retain a portion of the fines collected for violation of
Ruling: animal-related laws were recalled by virtue of Commonwealth Act
(C.A.) No. 148.
The provisions of RA 6971, taken together, reveal the legislative intent On December 1, 2003, an audit team from respondent Commission on
to include only government-owned and controlled corporations Audit (COA) visited the office of the petitioner to conduct an audit
performing proprietary functions within its coverage. survey pursuant to COA Office Order No. 2003-051 dated November
18, 2003 addressed to the petitioner. The petitioner demurred on the
Petitioner is a government-owned and controlled corporation ground that it was a private entity not under the jurisdiction of COA.
performing proprietary functions with original charter or created by
special law, specifically Presidential Decree (PD) No. 1752, amending
PD No. 1530. As such, petitioner HDMF is covered by the Civil Service Issue:
pursuant to Article IX, Section 2(1) of the 1987 Constitution, and,
therefore, excluded from the coverage of Republic Act No. 6971. W/N the petitioner is a private entity not subject to the jurisdiction of
COA

Since Republic Act No. 6971 intended to cover only government-owned Ruling:
and controlled corporations incorporated under the general
Yes, the PSPCA is a private entity.
corporation law, the power of administrative officials to promulgate
rules in the implementation of the statute is necessarily limited to what The “charter test” as it stands today provides:
is intended and provided for in the legislative enactment. Hence, the
Supplemental Rules clarified that government-owned and controlled [T]he test to determine whether a corporation is
corporations performing proprietary functions which are “created, government owned or controlled, or private in
maintained or acquired in pursuance of a policy of the state, nature is simple. Is it created by its own charter
enunciated in the constitution or by law, and those whose officers and for the exercise of a public function, or by
employees are covered by the Civil Service” are excluded from the incorporation under the general corporation
coverage of Republic Act No. 6971. law? Those with special charters are government
corporations subject to its provisions and its
Therefore, even if petitioner HDMF granted the Productivity Incentive employees are under the jurisdiction of the Civil
Bonus before the Supplemental Rules were issued clarifying that Service Commission, and are compulsory
petitioner was excluded from the coverage of Republic Act No. 6971, members of the Government Service Insurance
the employees of HDMF did not acquire a vested right over said bonus System. xxx
because they were not entitled to it under Republic Act No. 6971.
The petitioner is correct in stating that the charter test is predicated, at
best, on the legal regime established by the 1935 Constitution, Section
Moreover, the DBM advised petitioner herein, HDMF, on August 26, 7, Article XIII, which states:
1991, to defer payment of the productivity incentive bonus to their
employees, pending the issuance of a definite ruling by the Office of the Sec. 7. The National Assembly shall not,
President on the matter. Despite said advice, the Board of Trustees of except by general law, provide for the formation,
HDMF opted to grant the said bonus on a voluntary basis as stated in organization, or regulation of private corporations,
its Resolution No. 91-549, Series of 1991. It expressed its “concern over unless such corporations are owned or controlled
the welfare of the officers and employees of the Fund rather than by the Government or any subdivision or
adhering to the stringent technicality of the law.” The Board, therefore, instrumentality thereof.
was aware that possibly HDMF may not be covered by Republic Act
No. 6971. It should have exercised prudence by awaiting the definite The foregoing proscription has been carried over to the 1973 and the
ruling on the coverage to prevent legal problems. 1987 Constitutions. Section 16 of Article XII of the present
Constitution provides:

23
 Sec. 16. The Congress shall not, except exercise those powers generally accorded to private corporations, such
by general law, provide for the formation, as the powers to hold property, to sue and be sued, to use a common
organization, or regulation of private corporations. seal, and so forth. It may adopt by-laws for its internal operations: the
Government-owned or controlled corporations petitioner shall be managed or operated by its officers “in accordance
may be created or established by special charters with its by-laws in force.”
in the interest of the common good and subject to
the test of economic viability. Third. The employees of the petitioner are registered and covered by
the Social Security System at the latter’s initiative, and not through the
Section 16 is essentially a re-enactment of Section 7 of Article XVI of Government Service Insurance System, which should be the case if the
the 1935 Constitution and Section 4 of Article XIV of the 1973 employees are considered government employees. This is another
Constitution. indication of petitioner’s nature as a private entity.

Fourth. The fact that a certain juridical entity is impressed with public
And since the underpinnings of the charter test had been introduced by interest does not, by that circumstance alone, make the entity a public
the 1935 Constitution and not earlier, it follows that the test cannot corporation, inasmuch as a corporation may be private although its
apply to the petitioner, which was incorporated by virtue of Act No. charter contains provisions of a public character, incorporated solely
1285, enacted on January 19, 1905. Settled is the rule that laws in for the public good. This class of corporations may be considered
general have no retroactive effect, unless the contrary is provided. All quasi-public corporations, which are private corporations that render
statutes are to be construed as having only a prospective operation, public service, supply public wants, or pursue other eleemosynary
unless the purpose and intention of the legislature to give them a objectives. While purposely organized for the gain or benefit of its
retrospective effect is expressly declared or is necessarily implied from members, they are required by law to discharge functions for the public
the language used. In case of doubt, the doubt must be resolved benefit. Examples of these corporations are utility, railroad,
against the retrospective effect. warehouse, telegraph, telephone, water supply corporations and
transportation companies. It must be stressed that a quasi-public
There are a few exceptions. Statutes can be given retroactive effect in corporation is a species of private corporations, but the
the following cases: (1) when the law itself so expressly provides; (2) in qualifying factor is the type of service the former renders to the public:
case of remedial statutes; (3) in case of curative statutes; (4) in case of if it performs a public service, then it becomes a quasi-public
laws interpreting others; and (5) in case of laws creating new rights. corporation.
None of the exceptions is present in the instant case.

The general principle of prospectivity of the law likewise applies to Act

No. 1459, otherwise known as the Corporation Law, which had been The true criterion, therefore, to determine whether a corporation is
enacted by virtue of the plenary powers of the Philippine Commission public or private is found in the totality of the relation of the
on March 1, 1906, a little over a year after January 19, 1905, the time corporation to the State. If the corporation is created by the State as
the petitioner emerged as a juridical entity. Even the Corporation Law the latter’s own agency or instrumentality to help it in carrying out its
respects the rights and powers of juridical entities organized governmental functions, then that corporation is considered public;
beforehand. otherwise, it is private. Applying the above test, provinces, chartered
cities, and barangays can best exemplify public corporations. They are
In a legal regime where the charter test doctrine cannot be applied, the created by the State as its own device and agency for the
mere fact that a corporation has been created by virtue of a special law accomplishment of parts of its own public works.
does not necessarily qualify it as a public corporation.
Fifth. The respondents argue that since the charter of the petitioner
As stated, at the time the petitioner was formed, the applicable law was requires the latter to render periodic reports to the Civil Governor,
the Philippine Bill of 1902, and, emphatically, as also stated above, no whose functions have been inherited by the President, the petitioner is,
proscription similar to the charter test can be found therein. therefore, a government instrumentality. This contention is
inconclusive. By virtue of the fiction that all corporations owe their
The textual foundation of the charter test, which placed a limitation on very existence and powers to the State, the reportorial requirement is
the power of the legislature, first appeared in the 1935 Constitution. applicable to all corporations of whatever nature, whether they are
However, the petitioner was incorporated in 1905 by virtue of Act No. public, quasi-public, or private corporations—as creatures of the State,
1258, a law antedating the Corporation Law (Act No. 1459) by a year, there is a reserved right in the legislature to investigate the activities of
and the 1935 Constitution, by thirty years. There being neither a a corporation to determine whether it acted within its powers. In other
general law on the formation and organization of private corporations words, the reportorial requirement is the principal means by which the
nor a restriction on the legislature to create private corporations by State may see to it that its creature acted according to the powers and
direct legislation, the Philippine Commission at that moment in history functions conferred upon it.
was well within its powers in 1905 to constitute the petitioner as a
private juridical entity.
NADECO Vs. PVB (192 SCRA 257)
The amendments introduced by C.A. No. 148 made it clear that the
petitioner was a private corporation and not an agency of the Facts:
government. This was evident in Executive Order No. 63, issued by
then President of the Philippines Manuel L. Quezon, declaring that the Agrix Marketing, Inc. had executed in favor of Philippine Veterans
revocation of the powers of the petitioner to appoint agents with Bank a real estate mortgage over three (3) parcels of land situated in
powers of arrest “corrected a serious defect” in one of the laws existing Los Banos, Laguna. During the existence of the mortgage, Agrix went
in the statute books. bankrupt. It was for the expressed purpose of salvaging this and the
other Agrix companies that PD No. 1717 was issued by Pres. Marcos.
As a curative statute, and based on the doctrines so far discussed, C.A. PD No. 1717 was ordered to rehabilitate the Agrix Group of Companies
No. 148 has to be given retroactive effect, thereby freeing all doubt as to be administered mainly by National Development Company. The
to which class of corporations the petitioner belongs, that is, it is a law outlined the procedure for filing claims against the Agrix
quasi-public corporation, a kind of private domestic corporation, which companies and created a Claims Committee to process these claims.
the Court will further elaborate on under the fourth point. Especially relevant is Section 4 thereof providing that “all mortgages
and other liens presently attaching to any of the assets of the dissolved
Second, a reading of petitioner’s charter shows that it is not subject to corporations are hereby extinguished.
control or supervision by any agency of the State, unlike government-
owned and -controlled corporations. No government representative Pursuant to PD No. 1717, PVB filed a claim with the Agrix Claim
sits on the board of trustees of the petitioner. Like all private Committee for the payment of its loan credit. In the meantime, the
corporations, the successors of its members are determined voluntarily New Agrix, Inc. and the NADECO, invoking Section 4 of the enactment,
and solely by the petitioner in accordance with its by-laws, and may filed a petition for the cancellation of the mortgage lien in favor of

24
Agrix. The PVB took steps to extrajudicially foreclose the mortgage, point to emphasize that a private corporation is created for the private
prompting NADECO to file a second case to stop the foreclosure. The purpose, benefit, aim and end of its members or stockholders.
two cases were consolidated. Necessarily, said members or stockholders should be given a free hand
to choose who will compose the governing body of their corporation.
The RTC annulled not only the challenged provision but the entire PD But this is not the case here and this clearly indicates that petitioners
No. 1717 on the grounds that the presidential exercise of the legislative are not private corporations.
power was a violation of separation of powers, the law impaired the
obligations of contracts, and the decree violated the equal protection
clause. The COA also denied petitioner’s request for COA to stop charging
auditing fees as well as petitioner’s request for COA to refund all
Issue: auditing fees already paid.
W/N PD No. 1717 is valid
Issue:
Ruling:
PD No. 1717 is an invalid exercise of police power, not being in Whether a Local Water District (“LWD”) created under PD 198, as
conformity with the traditional requirements of a lawful subject and a amended, is a government-owned or controlled corporation subject to
lawful method. The extinction of the mortgage and other liens and of the audit jurisdiction of COA
the interest and other charges pertaining to the legitimate creditors of
Agrix constitutes taking without due process of law, and this is
compounded by the reduction of the secured creditors to the category Ruling:
of unsecured creditors in violation of the equal protection clause.
Moreover, the new corporation is neither owned nor controlled by the The Constitution and existing laws mandate COA to audit all
government. The NADECO was merely required to extend a loan of not government agencies, including government-owned and controlled
more than P10,000,000.00 to New Agrix, Inc. Pending payment corporations (“GOCCs”) with original charters. An LWD is a GOCC
thereof, NDC would undertake the management of the corporation but with an original charter.
with the obligation of making periodic reports to the Agrix board of
directors. After payment of the loan, the said board can then appoint The COA’s audit jurisdiction extends not only to government “agencies
its management. The stocks of the new corporations are to be issued to or instrumentalities,” but also to “government-owned and controlled
the old investors and stockholders of Agrix upon proof of their claims corporations with original charters” as well as “other government-
against the abolished corporation. They shall then be the owners of the owned or controlled corporations” without original charters.
new corporation. New Agrix is entirely private and should have been
organized under the Corporation Law in accordance with the above-
cited constitutional provision. Section 16, Article XII of the Constitution provides:

The decree also interferes with purely private agreements without any
demonstrated connection with the public interest; there is likewise an Sec. 16. The Congress shall not, except by general law,
impairment of the obligation of contract. provide for the formation, organization, or regulation of
private corporations. Government-owned or controlled
corporations may be created or established by special
charters in the interest of the common good and subject to
Feliciano Vs. COA (419 SCRA 364) the test of economic viability.
Facts:
The Constitution emphatically prohibits the creation of private
A Special Audit Team from COA Regional Office audited the accounts corporations except by a general law applicable to all citizens. The
of Leyte Metropolitan Water District. Subsequently, LMWD received a purpose of this constitutional provision is to ban private corporations
letter from COA requesting payment of auditing fees. As General created by special charters, which historically gave certain individuals,
Manager of LMWD, Feliciano sent a reply informing COA’s Regional families or groups special privileges denied to other citizens.
Director that the water district could not pay the auditing fees. The
Regional Director referred petitioner’s reply to the COA Chairman. In short, Congress cannot enact a law creating a private corporation
with a special charter. Such legislation would be unconstitutional.
Thereafter, Feliciano wrote COA through the Regional Director asking Private corporations may exist only under a general law. If the
for refund of all auditing fees LMWD previously paid to COA.COA corporation is private, it must necessarily exist under a general law.
Chairman Celso D. Gangan denied his requests. Petitioner filed a Stated differently, only corporations created under a general law can
motion for reconsideration on 31 March 2000, which COA denied on qualify as private corporations. Under existing laws, that general law is
30 January 2001. the Corporation Code, except that the Cooperative Code governs the
incorporation of cooperatives.

On 13 March 2001, petitioner filed this instant petition. Attached to

the petition were resolutions of the Visayas Association of Water The Constitution authorizes Congress to create government-owned or
Districts (VAWD) and the Philippine Association of Water Districts controlled corporations through special charters. Since private
(PAWD) supporting the petition. corporations cannot have special charters, it follows that Congress can
create corporations with special charters only if such corporations are
government-owned or controlled.
The COA ruled that this Court has already settled COA’s audit
jurisdiction over local water districts in Davao City Water District
v. Civil Service Commission and Commission on Audit, as Obviously, LWDs are not private corporations because they are not
follows: created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation
Code states that “All corporations organized under this code shall file
The above-quoted provision [referring to Section 3(b) PD 198] with the Securities and Exchange Commission articles of incorporation
definitely sets to naught petitioners’ contention that they are private x x x.” LWDs have no articles of incorporation, no incorporators and
corporations. It is clear therefrom that the power to appoint the no stockholders or members. There are no stockholders or members to
members who will comprise the members of the Board of Directors elect the board directors of LWDs as in the case of all corporations
belong to the local executives of the local subdivision unit where such registered with the Securities and Exchange Commission. The local
districts are located. In contrast, the members of the Board of mayor or the provincial governor appoints the directors of LWDs for a
Directors or the trustees of a private corporation are elected from fixed term of office. Significantly, petitioners are not created
among members or stockholders thereof. It would not be amiss at this under the said code, but on the contrary, they were created
25
pursuant to a special law and are governed primarily by its Section 6 -
provision.
Classification of shares. - The shares of stock of stock corporations
LWDs exist by virtue of PD 198, which constitutes their special charter. may be divided into classes or series of shares, or both, any of which
Since under the Constitution only government-owned or controlled classes or series of shares may have such rights, privileges or
corporations may have special charters, LWDs can validly exist only if restrictions as may be stated in the articles of incorporation: Provided,
they are government-owned or controlled. To claim that LWDs are That no share may be deprived of voting rights except those classified
private corporations with a special charter is to admit that their and issued as "preferred" or "redeemable" shares, unless otherwise
existence is constitutionally infirm. provided in this Code: Provided, further, That there shall always be a
class or series of shares which have complete voting rights. Any or all of
Unlike private corporations, which derive their legal existence and the shares or series of shares may have a par value or have no par value
power from the Corporation Code, LWDs derive their legal existence as may be provided for in the articles of incorporation: Provided,
and power from PD 198. however, That banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not be permitted to
issue no-par value shares of stock.
Clearly, LWDs exist as corporations only by virtue of PD 198, which
expressly confers on LWDs corporate powers. Section 6 of PD
198 provides that LWDs “shall exercise the powers, rights and Preferred shares of stock issued by any corporation may be given
privileges given to private corporations under existing laws.” Without preference in the distribution of the assets of the corporation in case of
PD 198, LWDs would have no corporate powers. Thus, PD 198 liquidation and in the distribution of dividends, or such other
constitutes the special enabling charter of LWDs. The ineluctable preferences as may be stated in the articles of incorporation which are
conclusion is that LWDs are government-owned and controlled not violative of the provisions of this Code: Provided, That preferred
corporations with a special charter. shares of stock may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation, may fix the
terms and conditions of preferred shares of stock or any series thereof:
The phrase “government-owned and controlled corporations with Provided, That such terms and conditions shall be effective upon the
original charters” means GOCCs created under special laws and not filing of a certificate thereof with the Securities and Exchange
under the general incorporation law. Commission.

Certainly, the government owns and controls LWDs. The government Shares of capital stock issued without par value shall be deemed fully
organizes LWDs in accordance with a specific law, PD 198. There is no paid and non-assessable and the holder of such shares shall not be
private party involved as co-owner in the creation of an LWD. Just liable to the corporation or to its creditors in respect thereto: Provided;
prior to the creation of LWDs, the national or local government owns That shares without par value may not be issued for a consideration
and controls all their assets. The government controls LWDs because less than the value of five (P5.00) pesos per share: Provided, further,
under PD 198 the municipal or city mayor, or the provincial governor, That the entire consideration received by the corporation for its no-par
appoints all the board directors of an LWD for a fixed term of six years. value shares shall be treated as capital and shall not be available for
The board directors of LWDs are not co-owners of the LWDs. LWDs distribution as dividends.
have no private stockholders or members. The board directors and
other personnel of LWDs are government employees subject to civil
service laws and anti-graft laws. A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.

While Section 8 of PD 198 states that “No public official shall serve as
director” of an LWD, it only means that the appointees to the board of Except as otherwise provided in the articles of incorporation and stated
directors of LWDs shall come from the private sector. Once such in the certificate of stock, each share shall be equal in all respects to
private sector representatives assume office as directors, they become every other share.
public officials governed by the civil service law and anti-graft laws.
Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article Where the articles of incorporation provide for non-voting shares in
IX-B of the Constitution declaring that the civil service includes the cases allowed by this Code, the holders of such shares shall
“government-owned or controlled corporations with original charters.” nevertheless be entitled to vote on the following matters:

If LWDs are neither GOCCs with original charters nor GOCCs without 1. Amendment of the articles of incorporation;
original charters, then they would fall under the term “agencies or
instrumentalities” of the government and thus still subject to COA’s
audit jurisdiction. However, the stark and undeniable fact is that the 2. Adoption and amendment of by-laws;
government owns LWDs. Section 45 of PD 198 recognizes government
ownership of LWDs when Section 45 states that the board of directors 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
may dissolve an LWD only on the condition that “another public substantially all of the corporate property;
entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto.” The implication is clear
that an LWD is a public and not a private entity. 4. Incurring, creating or increasing bonded indebtedness;

Section 5 – 5. Increase or decrease of capital stock;

Corporators and incorporators, stockholders and members. -

6. Merger or consolidation of the corporation with another corporation
Corporators are those who compose a corporation, whether as
or other corporations;
stockholders or as members. Incorporators are those stockholders or
members mentioned in the articles of incorporation as originally
forming and composing the corporation and who are signatories 7. Investment of corporate funds in another corporation or business in
thereof. accordance with this Code; and

Corporators in a stock corporation are called stockholders or 8. Dissolution of the corporation.

shareholders. Corporators in a non-stock corporation are called
members.

26
Except as provided in the immediately preceding paragraph, the vote financial ruin of a banking institution that would have resulted in
necessary to approve a particular corporate act as provided in this Code adverse repercussions, not only to its depositors and creditors, but also
shall be deemed to refer only to stocks with voting rights. to the banking industry as a whole. The directive, in limiting the
exercise of a right granted by law to a corporate entity, may thus be
considered as an exercise of police power. It has, however, been settled
Republic Planters Vs. Agana (269 SCRA 1) that the Constitutional guaranty of non-impairment of obligations of
contract is limited by the exercise of the police power of the state, the
Facts: reason being that public welfare is superior to private rights.

Robes-Francisco Realty and Development Corporation secured a loan The respondent judge also stated that since the stock certificate
from Republic Planters Bank in the amount of P120,000.00. As part of granted the private respondents the right to receive a quarterly
the proceeds of the loan, preferred shares of stocks were issued to the dividend of One Per Centum (1%) cumulative and participating, it
Corporation, through its officers then, Adalia F. Robes and one Carlos "clearly and unequivocably indicates that the same are "interest
F. Robes. In other words, instead of giving the legal tender totaling to bearing stocks" or stocks issued by a corporation under an agreement
the full amount of the loan, which is P120,000.00, Republic lent such to pay a certain rate of interest thereon. As such, private respondents
amount partially in the form of money and partially in the form of become entitled to the payment thereof as a matter of right without
stock certificates numbered 3204 and 3205, each for 400 shares with a necessity of a prior declaration of dividend." There is no legal basis for
par value of P10.00 per share, or for P4,000.00 each, for a total of this observation.
P8,000.00. Said stock certificates were in the name of Adalia F. Robes
and Carlos F. Robes, who subsequently, however, endorsed his shares
in favor of Adalia F. Robes. Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend without
the approval of stockholders, representing not less than two-thirds
Said certificates of stock bear the following terms and conditions: The (2/3) of the outstanding capital stock at a regular or special meeting
Preferred Stock shall have the following rights, preferences, duly called for the purpose. These provisions underscore the fact that
qualifications and limitations, to wit: payment of dividends to a stockholder is not a matter of right but a
matter of consensus. Furthermore, "interest bearing stocks", on which
1. Of the right to receive a quarterly dividend of One Per Centum (1%), the corporation agrees absolutely to pay interest before dividends are
cumulative and participating. paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or
surplus only. Clearly, the respondent judge, in compelling the
xxx xxx xxx 2. That such preferred shares may be redeemed, by the petitioner to redeem the shares in question and to pay the
system of drawing lots, at any time after two (2) years from the date of corresponding dividends, committed grave abuse of discretion
issue at the option of the Corporation. . . amounting to lack or excess of jurisdiction in ignoring both the terms
and conditions specified in the stock certificate, as well as the clear
Thereafter, private respondents proceeded against petitioner and filed mandate of the law.
a Complaint anchored on private respondents' alleged rights to collect
dividends under the preferred shares in question and to have petitioner Anent the issue of prescription, this Court so holds that the claim of
redeem the same under the terms and conditions of the stock private respondent is already barred by prescription as well as laches.
certificates. Art. 1144 of the New Civil Code provides that a right of action that is
founded upon a written contract prescribes in ten (10) years. The
The trial court rendered the herein assailed decision in favor of private letter-demand made by the private respondents to the petitioner was
respondents. In ordering petitioner to pay private respondents the face made only on January 5, 1979, or almost eighteen years after receipt of
value of the stock certificates as redemption price, plus 1% quarterly the written contract in the form of the stock certificate.
interest thereon until full payment.
Moreover, the claim of the private respondents is also barred by laches.
Issue: Laches has been defined as the failure or neglect, for an unreasonable
length of time, to do that which by exercising due diligence could or
should have been done earlier; it is negligence or omission to assert a
W/N the Republic Planters may be compelled to redeem its preferred right within a reasonable time, warranting a presumption that the
stocks party entitled to assert it either has abandoned it or declined to assert
it.
Ruling:
Considering that the terms and conditions set forth in the stock
While the stock certificate does allow redemption, the option to do so certificate clearly indicate that redemption of the preferred shares may
was clearly vested in the petitioner bank. The redemption therefore is be made at any time after the lapse of two years from the date of issue,
clearly the type known as "optional". Thus, except as otherwise private respondents should have taken it upon themselves, after the
provided in the stock certificate, the redemption rests entirely with the lapse of the said period, to inquire from the petitioner the reason why
corporation and the stockholder is without right to either compel or the said shares have not been redeemed. As it is, not only two years had
refuse the redemption of its stock. Furthermore, the terms and lapsed, as agreed upon, but an additional sixteen years passed before
conditions set forth therein use the word "may". It is a settled doctrine the private respondents saw it fit to demand their right. The petitioner,
in statutory construction that the word "may" denotes discretion, and at the time it issued said preferred shares to the private respondents in
cannot be construed as having a mandatory effect. 1961, could not have known that it would be suffering from chronic
reserve deficiency twelve years later. Had the private respondents been
vigilant in asserting their rights, the redemption could have been
The redemption of said shares cannot be allowed. As pointed out by the effected at a time when the petitioner bank was not suffering from any
petitioner, the Central Bank made a finding that said petitioner has financial crisis.
been suffering from chronic reserve deficiency, and that such finding
resulted in a directive, issued on January 31, 1973 by then Gov. G.S.
Licaros of the Central Bank, to the President and Acting Chairman of Castillo Vs. Balinghasay (440 SCRA 443)
the Board of the petitioner bank prohibiting the latter from redeeming
any preferred share, on the ground that said redemption would reduce Facts:
the assets of the Bank to the prejudice of its depositors and creditors.
Redemption of preferred shares was prohibited for a just and valid
reason. The directive issued by the Central Bank Governor was
obviously meant to preserve the status quo, and to prevent the
27
Castillo and Balinghasay are stockholders of Medical Center was inserted in the provision governing the grant of voting powers to
Paranaquq, Inc., with the former holding Class “B” shares and the Class “A” shareholders. This particular amendment is relevant for it
latter owning Class “A” shares. speaks of a law providing for exceptions to the exclusive grant of voting
rights to Class “A” stockholders. Which law was the amendment
referring to? The determination of which law to apply is necessary.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue,
There are two laws being cited and relied upon by the parties in this
Sucat, Parañaque City. It was organized sometime in September 1977.
case. In this instance, the law in force at the time of the 1992
At the time of its incorporation, Act No. 1459, the old Corporation Law
amendment was the Corporation Code (B.P. Blg. 68), not the
was still in force and effect.
Corporation Law (Act No. 1459), which had been repealed by then.

The Article VII of MCPI’s original Articles of Incorporation, as

We find and so hold that the law referred to in the amendment to
approved by the Securities and Exchange Commission (SEC) was
Article VII refers to the Corporation Code and no other law. At the
amended twice and the latest amendment provide as follows:
time of the incorporation of MCPI in 1977, the right of a corporation to
classify its shares of stock was sanctioned by Section 5 of Act No. 1459.
SEVENTH: That the authorized capital stock of the corporation is The law repealing Act No. 1459, B.P. Blg. 68, retained the same grant
THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows: of right of classification of stock shares to corporations, but with a
significant change. Under Section 6 of B.P. Blg. 68, the requirements
and restrictions on voting rights were explicitly provided for, such that
CLASS NO. OF SHARES PAR VALUE “no share may be deprived of voting rights except those classified and
“A” 1,000 P1,000.00 issued as “preferred” or “redeemable” shares, unless otherwise
“B” 31,000 1,000.00 provided in this Code” and that “there shall always be a class or series
of shares which have complete voting rights. ” Section 6 of the
Except when otherwise provided by law, only holders of Corporation Code being deemed written into Article VII of the Articles
Class “A” shares have the right to vote and the right to be of Incorporation of MCPI, it necessarily follows that unless Class “B”
elected as directors or as corporate officers. shares of MCPI stocks are clearly categorized to be “preferred” or
“redeemable” shares, the holders of said Class “B” shares may not be
deprived of their voting rights. Note that there is nothing in the
The SEC approved the foregoing amendment on September 22, 1993. Articles of Incorporation nor an iota of evidence on record to show that
Class “B” shares were categorized as either “preferred” or “redeemable”
On February 9, 2001, the shareholders of MCPI held their annual shares. The only possible conclusion is that Class “B” shares fall under
stockholders’ meeting and election for directors. During the course of neither category and thus, under the law, are allowed to exercise voting
the proceedings, respondent Rustico Jimenez, citing Article VII, as rights.
amended, and notwithstanding MCPI’s history, declared over the
objections of herein petitioners, that no Class “B” shareholder was One of the rights of a stockholder is the right to participate in the
qualified to run or be voted upon as a director. In the past, MCPI had control and management of the corporation that is exercised through
seen holders of Class “B” shares voted for and serve as members of the his vote. The right to vote is a right inherent in and incidental to the
corporate board and some Class “B” share owners were in fact ownership of corporate stock, and as such is a property right. The
nominated for election as board members. Nonetheless, Jimenez went stockholder cannot be deprived of the right to vote his stock nor may
on to announce that the candidates holding Class “A” shares were the the right be essentially impaired, either by the legislature or by the
winners of all seats in the corporate board. The petitioners protested, corporation, without his consent, through amending the charter, or the
claiming that Article VII was null and void for depriving them, as Class by-laws.
“B” shareholders, of their right to vote and to be voted upon, in
violation of the Corporation Code, as amended.
Neither do we find merit in respondents’ position that Section 6 of the
Corporation Code cannot apply to MCPI without running afoul of the
On March 22, 2001, after their protest was given short shrift, herein non-impairment clause of the Bill of Rights. Section 148 of the
petitioners filed a Complaint for Injunction, Accounting and Damages, Corporation Code expressly provides that it shall apply to corporations
docketed as Civil Case No. CV-01-0140 before the RTC of Parañaque in existence at the time of the effectivity of the Code. Hence, the non-
City, Branch 258. Said complaint was founded on two (2) principal impairment clause is inapplicable in this instance. When Article VII of
causes of action, namely: the Articles of Incorporation of MCPI were amended in 1992, the board
of directors and stockholders must have been aware of Section 6 of the
a. Annulment of the declaration of directors of the MCPI made Corporation Code and intended that Article VII be construed in
during the February 9, 2001 Annual Stockholders’ Meeting, and for the harmony with the Code, which was then already in force and effect.
conduct of an election whereat all stockholders, irrespective of the Since Section 6 of the Corporation Code expressly prohibits the
classification of the shares they hold, should be afforded their right to deprivation of voting rights, except as to “preferred” and “redeemable”
vote and be voted for; and shares, then Article VII of the Articles of Incorporation cannot be
construed as granting exclusive voting rights to Class “A” shareholders,
to the prejudice of Class “B” shareholders, without running afoul of the
b. Stockholders’ derivative suit challenging the validity of a contract letter and spirit of the Corporation Code.
entered into by the Board of Directors of MCPI for the operation of the
ultrasound unit.
Garcia Vs. Lim Chu Sing (59 Phil 562)

Subsequently, the complaint was amended to implead MCPI as party-

plaintiff for purposes only of the second cause of action. Facts:

Issue: The debt which is the subject matter of the complaint was not really an
indebtedness of the Lim Chu Sing but of Lim Cuan Sy, who had an
account with the Mercantile Bank in the form of "trust receipts"
W/N holders of Class “B” shares of the MCPI may be deprived of the guaranteed by the Lim Chu as surety and with chattel mortgage
right to vote and be voted for as directors in MCPI securities. The Mercantile Bank, without the knowledge and consent of
Lim Chu, foreclosed the chattel mortgage and privately sold the
Ruling: property covered thereby. Inasmuch as Lim Cuan Sy failed to comply
with his obligations, the plaintiff required the defendant, as surety, to
sign a promissory note for the sum of P19,105.17 payable in the manner
When Article VII of the Articles of Incorporation of MCPI was hereinbefore stated. The defendant had been paying the corresponding
amended in 1992, the phrase “except when otherwise provided by law” installments until the debt was reduced to the sum of P9,105.17

28
claimed in the complaint. The defendant is the owner of shares of stock In view of Reese desire that upon his death, Mantrasco and its own two
of the plaintiff Mercantile Bank of China amounting to P10,000. The subsidiaries, Mantrasco (Guam) Inc. and the Port Motors Inc. would
plaintiff bank is now under liquidation. continue under the management of respondents, a trust agreement on
his and respondent’s interest in Mantrasco was executed.
The proceeds of the sale of the mortgaged chattels together with other
payments made were applied to the amount of the promissory note in Upon Reese death, the projected transfer of his shares in the name of
question, leaving the balance which the plaintiff now seeks to collect. Mnatrasco could, not, however, be immediately effected for lack of
sufficient funds to cover initial payment on the shares.
Issue:
After Mantrasco made a partial payment of Reese’s share, the
certificate for the 24,700 shares in Reese’s name was cancelled and a
W/N it is proper to compensate the Lim Chu Sing indebtedness of
new certificate was issued in the name of Mantrasco. When the entire
P9,105.17, which is claimed in the complaint, with the sum of P10,000
purchase of Reese’s shares was finally paid in full, the trust agreement
representing the value of his shares of stock with the Mercantile Bank
was terminated and the trustees delivered to Mantrasco all the shares
of China
which they were holding in trust.

Ruling:
When the BIR examine the Mantrasco’s book, it found out that 24,700
shares had been proportionately distributed to the respondents and the
A share of stock or the certificate thereof is not indebtedness to the respondents failed to declare the said stock dividends as part of their
owner nor evidence of indebtedness and, therefore, it is not a credit. taxable income. The BIR concluded that the distribution of Reese’s
Stockholders, as such, are not creditors of the corporation. It is the shares as stock dividends was in effect a distribution of the “asset or
prevailing doctrine of the American courts, repeatedly asserted in the property of the corporation as may be gleaned from the payment of
broadest terms, that the capital stock of a corporation is a trust fund to cash for the redemption of said stock and distributing the same as
be used more particularly for the security of creditors of the stock dividends.
corporation, who presumably deal with it on the credit of its capital
stock. Therefore, the defendant-appellant Lim Chu Sing not being a
Issue:
creditor of the Mercantile Bank of China, although the latter is a
creditor of the former, there is no sufficient ground to justify
compensation (art. 1195, Civil Code). W/N the 24,700 shares declared as stock dividends were treasury
shares
Section 7 -
Ruling:
Founders' shares. - Founders' shares classified as such in the
articles of incorporation may be given certain rights and privileges not No.
enjoyed by the owners of other stocks, provided that where the
exclusive right to vote and be voted for in the election of directors is Treasury shares are stocks issued and fully paid for and reacquired by
granted, it must be for a limited period not to exceed five (5) years the corporation either by purchase, donation, forfeiture or other
subject to the approval of the Securities and Exchange Commission. means. Treasury shares are therefore issued shares but being in the
The five-year period shall commence from the date of the aforesaid treasury they do not have the status of outstanding shares.
approval by the Securities and Exchange Commission. Consequently, although a treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued, sold again, such share, as
Section 8 - long as it is held by the corporation as a treasury shares, participates
neither in dividends, because dividends cannot be declared by the
corporation to itself, nor in the meetings of the corporation as voting
Redeemable shares. - Redeemable shares may be issued by the stock, for otherwise equal distribution of voting powers among the
corporation when expressly so provided in the articles of incorporation. stockholders will be effectively lost and the directors will be able to
They may be purchased or taken up by the corporation upon the perpetuate their control of the corporation though it still represents a
expiration of a fixed period, regardless of the existence of unrestricted paid –for interest in the property of the corporation.
retained earnings in the books of the corporation, and upon such other
terms and conditions as may be stated in the articles of incorporation,
which terms and conditions must also be stated in the certificate of Under the trust agreement between the parties, it is their manifest
stock representing said shares. intention to treat the 24,700 shares of Reese as absolutely outstanding
shares of Reese’s estate until they were fully paid. Such being the true
nature of the 24, 700 shares, their declaration as treasury stock
Section 9 - dividend in 1958 was a complete nullity and plainly violative of public
policy. A stock dividend being one payable in capital stock, cannot be
Treasury shares. - Treasury shares are shares of stock which have declared out of outstanding corporate stock, but only from retained
been issued and fully paid for, but subsequently reacquired by the earnings.
issuing corporation by purchase, redemption, donation or through
some other lawful means. Such shares may again be disposed of for a
Where corporate earnings are used to purchase outstanding stock
reasonable price fixed by the board of directors.
treated as treasury stock as a technical but prohibited device, to avoid
effects of income taxation, distribution of said corporate earnings in
CIR Vs. Manning (66 SCRA 14) the form of stock dividends will subject stockholders receiving them to
income tax.
Facts:
SMC Vs. Sandiganbayan (340 SCRA 289)
Manila Trading and Supply Co. (MANTRASCO) had an authorized
capital stock of P2,500,000 divided into 25,000 common shares; Facts:
24,700 of these were owned by Julius Reese and the rest, at 100 shares
each by the three respondents Manning, McDonald and Simmons. The Coconut Industry Investment Fund Holding Companies sold
33,133,266 shares of the outstanding capital stock of San Miguel

29
Corporation to Andres Soriano III of the SMC Group payable in four placed under its possession or control said property, or any building or
(4) installments. office wherein any such property and any records pertaining thereto
may be found, including 'business enterprises and entities,' - - - for
the purpose of preventing the destruction, concealment or
Andres Soriano III paid the initial P500 million to the UCPB as
dissipation of, and otherwise conserving and preserving the
administrator of the CIIF. The sale was transacted through the stock
same - - - until it can be determined, through appropriate judicial
exchange and the shares were registered in the name of Anscor-
proceedings, whether the property was in truth 'ill-gotten,' i.e. acquired
Hagedorn Securities, Inc. (AHSI).
through or as a result of improper or illegal use or the conversion of
funds belonging to the government or any of its branches,
The Presidential Commission on Good Government (PCGG) then led instrumentalities, enterprises, banks or financial institutions, or by
by the former President of the Senate, the Honorable Jovito R. taking undue advantage of official position, authority, relationship,
Salonga, sequestered the shares of stock subject of the sale. Due to the connection or influence, resulting in unjust enrichment of the
sequestration, the SMC Group suspended payment of the balance of ostensible owner and grave damage and prejudice to the State."
the purchase price of the subject stocks. In retaliation, the UCPB Group
rescinded the sale.
The order of the Sandiganbayan regarding the subject treasury shares
is merely preservative in nature. When the petitioners and UCPB
Thereafter, the UCPB and CIIF Holding Companies went to court. They Group filed their Joint Manifestation of Implementation of the
filed a complaint with the Regional Trial Court of Makati against the Compromise Agreement and of Withdrawal of Petition, the
petitioners for confirmation of rescission of sale with damages. The Sandiganbayan cautioned that "the PCGG, the UCPB and the SMC
petitioners assailed in this Court the jurisdiction of the Makati RTC on Group shall always act with due regard to the sequestered character
the ground that primary jurisdiction was vested with the PCGG since of the shares of stock involved as well as the fruits thereof, more
the SMC shares were sequestered shares. On August 10, 1988, we particularly to prevent the loss or dissipation of their value ."
upheld the petitioners. We ordered, among others, the dismissal of the The caution was wisely given in view of the many contested provisions
rescission case filed in the Makati RTC without prejudice to the of the Compromise Agreement. For one, the Sandiganbayan observed
ventilation of the parties' claims before the Sandiganbayan. that the conversion of the SMC shares to treasury shares will result in a
change in the status of the sequestered shares in that:
The record shows that the petitioners and the UCPB Group were able
to thresh out their dispute extra-judicially. In March 1990, they signed 1. When the SMC converts these common shares to treasury stock, it is
a Compromise Agreement and Amicable Settlement. converting those outstanding shares into the corporation's property for
which reason treasury shares do not earn dividends.
They likewise agreed to pay an "arbitration fee " of 5,500,000 SMC
shares composed of 3,858,831 “A” shares and 1,641,169 “B” shares to 2. The retained dividends which would have accrued to those shares
the PCGG to be held in trust for the Comprehensive Agrarian Reform if converted to treasury would go into the corporation and
Program. enhance the corporation as a whole. The enhancement to the specific
sequestered shares, however, would be only to the extent aliquot in
relation to all the other outstanding SMC shares.
On March 23, 1990, the petitioners and the UCPB Group filed with the
Sandiganbayan a Joint Petition for Approval of the
Compromise Agreement and Amicable Settlement. 3. By converting the 26.45 million shares of stock into treasury shares,
the SMC has altered not only the voting power of those shares of
stock since treasury shares do not vote, but the SMC will have actually
On March 29, 1990, the Sandiganbayan motu proprio directed that enhanced the voting strength of the other outstanding shares of stock
copies of the Joint Petition be furnished to E. Cojuangco, Jr., M. to the extent that these 26.45 million shares no longer vote.
Lobregat and others who are defendants in Civil Case No. 0033. The
same SMC shares are the subject of Civil Case No. 0033 and alleged as
part of the alleged ill-gotten wealth of former President Marcos and his These significant changes in the character of the SMC shares cannot be
"cronies." denied. In Commissioner of Internal Revenue vs. Manning., we
explained the limited nature of treasury shares.
The Republic of the Philippines, through the Office of the Solicitor
General (OSG), opposed the Compromise Agreement and Amicable For another, the payment to the PCGG of an arbitration fee in the
Settlement. It contended that the involved coco-levy funds are public form of 5,500,000 of SMC shares is denounced as illegal, shocking and
funds. As public funds, the coco-levy funds, in any form or unconscionable. COCOFED, et al. have assailed the legal right of
transformation, are beyond or "outside the commerce," and perforce PCGG to act as arbiter as well as the fairness of its acts as arbiter.
not within the private disposition of private individuals. COCOFED, et al. estimate that the value of the SMC shares given to
PCGG as arbitration fee which allegedly is not deserved, can run to
P1,966,635,000.00This is a serious allegation and the
The Sandiganbayan issued Resolution requiring SMC to deliver the Sandiganbayan cannot be charged with grave abuse of discretion when
25.45 million SMC treasury shares to the PCGG. On March 18, 1992, it it ordered that SMC should be temporarily dispossessed of the
denied petitioners' Motion for Reconsideration and further ordered subject treasury shares and that SMC should pay their
SMC to pay dividends on the said treasury shares and to deliver them dividends while the Compromise Agreement involving them
to the PCGG. is still under question.

Issue: Petitioners cannot rely on the case of First Phil. Holdings Corp. vs.
Sandiganbayan to justify their insistence that the P500 million
W/N the Sandiganbayan gravely abused its discretion in ordering SMC payment made by Soriano III should be validated. They contend that
to deliver its treasury shares to PCGG and to pay dividends on said the rules encouraging amicable settlement in civil cases should apply to
treasury shares cases involving sequestered properties. In First Phil. Holdings , this
Court gave due course to the petition and ordered the Sandiganbayan
to approve the PCGG Resolution lifting the sequestration of MERALCO
Ruling: shares. We noted that the Republic of the Philippines has agreed to
settle the controversy and the agreement will not in any way prejudice
In the exercise of its discretion, the Sandiganbayan can require a the rights of third persons.
party-litigant to deliver a sequestered property to the PCGG. We held
in Baseco vs. PCGG that "the power of the PCGG to sequester In the cases at bar, the record is clear that the Republic of the
property claimed to be 'ill-gotten' means to place or cause to be Philippines, through the Office of the Solicitor General, vigorously
30
opposed the Compromise Agreement on legal and moral grounds. Filipinas Orient Airways should alone be liable for its corporate acts as
COCOFED, et al. also opposed and contend that the conversion of the duly authorized by its officers and directors.
SMC shares into treasury shares is highly prejudicial to the interests of
the coconut farmers. It cannot be gainsaid that if it is later proved that
In the light of these circumstances, we hold that the petitioners cannot
SMC is not the lawful owner of the shares in question, what the
be held personally liable for the compensation claimed by the private
adjudged lawful owner will receive are treasury shares with diminished
respondent for the services performed by him in the organization of the
value. The impugned order of the Sandiganbayan was issued to avoid
corporation. To repeat, the petitioners did not contract such services. It
this mischief.
was only the results of such services that Barretto and Garcia presented
to them and which persuaded them to invest in the proposed airline.
TITLE II The most that can be said is that they benefited from such services, but
INCORPORATION AND ORGANIZATION that surely is no justification to hold them personally liable therefor.
OF PRIVATE CORPORATIONS Otherwise, all the other stockholders of the corporation, including
those who came in later, and regardless of the amount of their share
holdings, would be equally and personally liable also with the
Section 10 - petitioners for the claims of the private respondent.

Number and qualifications of incorporators. - Any number of Pioneer Insurance Vs. CA ( 175 SCRA 668)
natural persons not less than five (5) but not more than fifteen (15), all
of legal age and a majority of whom are residents of the Philippines,
may form a private corporation for any lawful purpose or purposes. Facts:
Each of the incorporators of s Stock Corporation must own or be a
subscriber to at least one (1) share of the capital stock of the Jacob S. Lim was engaged in the airline business as owner-operator of
corporation. Southern Air Lines (SAL) a single proprietorship.

Caram Vs. CA (151 SCRA 372) Japan Domestic Airlines (JDA) and Lim entered into and executed a
sales contract for the sale and purchase of two (2) DC-3A Type aircrafts
Facts: and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft arrived in
Manila on June 7,1965 while the other aircraft, arrived in Manila on
The petitioners were not really involved in the initial steps that finally July 18,1965.
led to the incorporation of the Filipinas Orient Airways. The project
study was undertaken by the private respondent at the request of
Barretto and Garcia who, upon its completion, presented it to the Pioneer Insurance and Surety Corporation as surety executed and
petitioners to induce them to invest in the proposed airline. The study issued its Surety Bond in favor of JDA, in behalf of its principal, Lim,
could have been presented to other prospective investors. At any rate, for the balance price of the aircrafts and spare parts.
the airline was eventually organized on the basis of the project study
with the petitioners as major stockholders and, together with Barretto It appears that Border Machinery and Heavy Equipment Company,
and Garcia, as principal officers. Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
Constancio Maglana contributed some funds used in the purchase of
RTC ruled that since Barretto was the moving spirit in the pre- the above aircrafts and spare parts. The funds were supposed to be
organization work of corporation based on his experience and their contributions to a new corporation proposed by Lim to expand
expertise, hence he was logically compensated in the amount of his airline business. They executed two (2) separate indemnity
P200,000.00 shares of stock not as industrial partner but more for his agreements in favor of Pioneer, one signed by Maglana and the other
technical services that brought to fruition the corporation. By the same jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The
token, Arellano should be similarly compensated not only for having indemnity agreements stipulated that the indemnitors principally
actively participated in the preparation of the project study for several agree and bind themselves jointly and severally to indemnify and hold
months and its subsequent revision but also in his having been and save harmless Pioneer from and against any/all damages, losses,
involved in the pre-organization of the defendant corporation, in the costs, damages, taxes, penalties, charges and expenses of whatever
preparation of the franchise, in inviting the interest of the financiers kind and nature which Pioneer may incur in consequence of having
and in the training and screening of personnel. For these special become surety upon the bond/note and to pay, reimburse and make
services of the plaintiff the amount of P50,000.00 as compensation is good to Pioneer, its successors and assigns, all sums and amounts of
reasonable. money which it or its representatives should or may pay or cause to be
paid or become liable to pay on them of whatever kind and nature.

Issue:
Lim executed in favor of Pioneer as deed of chattel mortgage as
security for the latter's suretyship in favor of the former. It was
W/N the petitioners themselves are also and personally liable for such stipulated therein that Lim transfer and convey to the surety the two
expenses and, if so, to what extent aircrafts. The deed was duly registered with the Office of the Register of
Deeds of the City of Manila and with the Civil Aeronautics
Ruling: Administration pursuant to the Chattel Mortgage Law and the Civil
Aeronautics Law, respectively.

The petitioners were not involved in the initial stages of the

organization of the airline, which were being directed by Barretto as Lim defaulted on his subsequent installment payments prompting JDA
the main promoter. It was he who was putting all the pieces together, to request payments from the surety. Pioneer paid a total sum of
so to speak. The petitioners were merely among the financiers whose P298,626.12.
interest was to be invited and who were in fact persuaded, on the
strength of the project study, to invest in the proposed airline. Pioneer then filed a petition for the extrajudicial foreclosure of the said
chattel mortgage before the Sheriff of Davao City. The Cervanteses and
Significantly, there was no showing that the Filipinas Orient Airways Maglana, however, filed a third party claim alleging that they are co-
was a fictitious corporation and did not have a separate juridical owners of the aircrafts,
personality, to justify making the petitioners, as principal stockholders
thereof, responsible for its obligations. As a bona fide corporation, the

31
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an contributions to a proposed corporation which was never formed
application for a writ of preliminary attachment against Lim and because the petitioner reneged on their agreement. Maglana alleged in
respondents, the Cervanteses, Bormaheco and Maglana. his cross-claim:

The trial court rendered a decision holding Lim liable to pay Pioneer Applying therefore the principles of law earlier cited to the facts of the
but dismissed Pioneer's complaint against all other defendants. case, necessarily, no de facto partnership was created among the
parties which would entitle the petitioner to a reimbursement of the
supposed losses of the proposed corporation. The record shows that
The appellate court modified the trial court's decision in that the
the petitioner was acting on his own and not in behalf of his other
plaintiffs’ complaint against all the defendants was dismissed. In all
would-be incorporators in transacting the sale of the airplanes and
other respects the trial court's decision was affirmed.
spare parts.

Section 11 –

Issue:
Corporate term. - A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
What legal rules govern the relationship among co-investors whose dissolved or unless said period is extended. The corporate term as
agreement was to do business through the corporate vehicle but who originally stated in the articles of incorporation may be extended for
failed to incorporate the entity in which they had chosen to invest? periods not exceeding fifty (50) years in any single instance by an
How are the losses to be treated in situations where their contributions amendment of the articles of incorporation, in accordance with this
to the intended 'corporation' were invested not through the corporate Code; Provided, That no extension can be made earlier than five (5)
form? years prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.
Ruling:

These questions are premised on the petitioner's theory that as a result Alhambra Vs. SEC (24 SCRA 269)
of the failure of respondents Bormaheco, Spouses Cervantes,
Constancio Maglana and petitioner Lim to incorporate, a de facto Alhambra Cigar and Cigarette Manufacturing Company, Inc. was duly
partnership among them was created, and that as a consequence of incorporated under Philippine laws on January 15, 1912. By its
such relationship all must share in the losses and/or gains of the corporate articles it was to exist for fifty (50) years from incorporation.
venture in proportion to their contribution. The petitioner, therefore, Its term of existence expired on January 15, 1962. On that date, it
questions the appellate court's findings ordering him to reimburse ceased transacting business, entered into a state of liquidation.
certain amounts given by the respondents to the petitioner as their
contributions to the intended corporation.
Thereafter, a new corporation — Alhambra Industries, Inc. — was
formed to carry on the business of Alhambra. On May 1, 1962,
While it has been held that as between themselves the rights of the Alhambra's stockholders, by resolution named Angel S. Gamboa
stockholders in a defectively incorporated association should be trustee to take charge of its liquidation.
governed by the supposed charter and the laws of the state relating
thereto and not by the rules governing partners, it is ordinarily held
that persons who attempt, but fail, to form a corporation and who carry On June 20, 1963 — within Alhambra's three-year statutory period for
on business under the corporate name occupy the position of partners liquidation - Republic Act 3531 was enacted into law. It amended
inter se. Thus, where persons associate themselves together under Section 18 of the Corporation Law; it empowered domestic private
articles to purchase property to carry on a business, and their corporations to extend their corporate life beyond the period fixed by
organization is so defective as to come short of creating a corporation the articles of incorporation for a term not to exceed fifty years in any
within the statute, they become in legal effect partners inter se, and one instance. Previous to Republic Act 3531, the maximum non-
their rights as members of the company to the property acquired by the extendible term of such corporations was fifty years.
company will be recognized. So, where certain persons associated
themselves as a corporation for the development of land for irrigation On July 15, 1963, at a special meeting, Alhambra's board of directors
purposes, and each conveyed land to the corporation, and two of them resolved to amend paragraph "Fourth" of its articles of incorporation to
contracted to pay a third the difference in the proportionate value of extend its corporate life for an additional fifty years, or a total of 100
the land conveyed by him, and no stock was ever issued in the years from its incorporation.
corporation, it was treated as a trustee for the associates in an action
between them for an accounting, and its capital stock was treated as
partnership assets, sold, and the proceeds distributed among them in On August 26, 1963, Alhambra's stockholders, representing more than
proportion to the value of the property contributed by each. However, two-thirds of its subscribed capital stock, voted to approve the
such a relation does not necessarily exist, for ordinarily persons foregoing resolution. The "Fourth" paragraph of Alhambra's articles of
cannot be made to assume the relation of partners, as between incorporation was thus altered to read:
themselves, when their purpose is that no partnership shall exist, and
it should be implied only when necessary to do justice between the FOURTH. That the term for which said corporation is to exist is fifty
parties; thus, one who takes no part except to subscribe for stock in a (50) years from and after the date of incorporation, and for an
proposed corporation which is never legally formed does not become additional period of fifty (50) years thereafter.
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. A On October 28, 1963, Alhambra's articles of incorporation as so
partnership relation between certain stockholders and other amended certified correct by its president and secretary and a majority
stockholders, who were also directors, will not be implied in the of its board of directors, were filed with respondent Securities and
absence of an agreement, so as to make the former liable to contribute Exchange Commission (SEC).
for payment of debts illegally contracted by the latter
On November 18, 1963, SEC, however, returned said amended articles
It is therefore clear that the petitioner never had the intention to form a of incorporation to Alhambra's counsel with the ruling that Republic
corporation with the respondents despite his representations to them. Act 3531 "which took effect only on June 20, 1963, cannot be availed of
This gives credence to the cross-claims of the respondents to the effect by the said corporation, for the reason that its term of existence had
that they were induced and lured by the petitioner to make

32
already expired when the said law took effect in short, said law has no The contract of lease provides that the term of the lease is for twenty
retroactive effect." years beginning from the date of the contract and "is extendable for
another term of twenty years at the option of the LESSEE should its
term of existence be extended in accordance with law." The contract
On December 3, 1963, Alhambra's counsel sought reconsideration of
also states that the lessee agrees to "use the property as factory site and
SEC's ruling aforesaid, refiled the amended articles of incorporation.
for that purpose to construct whatever buildings or improvements may
SEC, however, issued an order denying the reconsideration sought.
be necessary or convenient and/or . . . for any purpose it may deem fit;
and before the termination of the lease to remove all such buildings
Alhambra now invokes the jurisdiction of this Court to overturn the and improvements"
conclusion below.
In accordance with the contract, PBM introduced on the land,
Issue: buildings, machineries and other useful improvements. These
constructions and improvements were registered with the Registry of
Deeds of Rizal and annotated at the back of the respondents'
W/N Alhambra could extend the term of its corporation existence certificates of title.

Ruling: Subsequently, PBM executed in favor of Philippine National Bank a

deed of assignment, conveying and transferring all its rights and
From July 15 to October 28, 1963, when Alhambra made its attempt to interests under the contract of lease which it executed with private
extend its corporate existence, its original term of fifty years had respondents. The assignment was for and in consideration of the loans
already expired (January 15, 1962); it was in the midst of the three-year granted by PNB to PBM. The deed of assignment was registered and
grace period statutorily fixed in Section 77 of the Corporation Law, annotated at the back of the private respondents' certificates of title as
thus: On November 6, 1963 and December 23, 1963 respectively, PBM
executed in favor of PNB a real estate mortgage for a loan of
P100,000.00 and an addendum to real estate mortgage for another
SEC. 77. Every corporation whose charter expires by its own limitation loan of P1,590,000.00, covering all the improvements constructed by
or is annulled by forfeiture or otherwise, or whose corporate existence PBM on the leased premises. These mortgages were registered and
for other purposes is terminated in any other manner, shall annotated at the back of respondents' certificates.
nevertheless be continued as a body corporate for three years after the
time when it would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and of enabling it PBM filed a petition for registration of improvements in the titles of
gradually to settle and close its affairs, to dispose of and convey its real property owned by private respondents.
property and to divide its capital stock, but not for the purpose of
continuing the business for which it was established. Private respondents filed a motion in the same proceedings which was
given a different case number to wit, LRC Case No. R-2744, because of
Plain from the language of the provision is its meaning: continuance of the payment of filing fees for the motion. The motion sought to cancel
a "dissolved" corporation as a body corporate for three years has for its the annotations on respondents' certificates of title pertaining to the
purpose the final closure of its affairs, and no other; the corporation is assignment by PBM to PNB of the former's leasehold rights, inclusion
specifically enjoined from "continuing the business for which it was of improvements and the real estate mortgages made by PBM in favor
established". The liquidation of the corporation's affairs set forth in of PNB, on the ground that the contract of lease entered into between
Section 77 became necessary precisely because its life had ended. For PBM and respondents-movants had already expired by the failure of
this reason alone, the corporate existence and juridical personality of PBM and/or its assignee to exercise the option to renew the second 20-
that corporation to do business may no longer be extended. year lease commencing on March 1, 1974 and also by the failure of PBM
to extend its corporate existence in accordance with law. The motion
also states that since PBM failed to remove its improvements on the
Worth bearing in mind, at this juncture, is the basic development of leased premises before the expiration of the contract of lease, such
corporation law. improvements shall accrue to respondents as owners of the land.

The common law rule, at the beginning, was rigid and inflexible in that On April 22, 1982, respondent court issued an order directing the
upon its dissolution, a corporation became legally dead for all cancellation of the inscriptions on respondents' certificates of title.
purposes. Statutory authorizations had to be provided for its
continuance after dissolution "for limited and specified purposes
incident to complete liquidation of its affairs". Thus, the moment a Petitioner PNB filed a motion for reconsideration of the above order of
corporation's right to exist as an "artificial person" ceases, its corporate the respondent court but the latter denied it. Private respondents filed
powers are terminated "just as the powers of a natural person to take a motion for entry of final judgment and issuance of a writ of execution
part in mundane affairs cease to exist upon his death". There is of the order. The court granted the aforesaid motion for entry of final
nothing left but to conduct, as it were, the settlement of the estate of a judgment and ordered the Register of Deeds of Pasig, Rizal to cancel
deceased juridical person. the entries on respondents' certificates of title stated in the order.

PNB Vs. CFI (209 SCRA 294) Petitioner PNB filed an omnibus motion to set aside the entry of
judgment as ordered by the respondent court on the ground that it has
no prior notice or knowledge of the order of respondent court and that
Facts: while there was a certification from the Bureau of Posts that three
registry notices were sent to petitioner's counsel, there was no
Private respondents are the registered owners of three parcels of land allegation or certification whatsoever that said notices were actually
in Pasig, Metro Manila covered by OCT No. 853, TCT Nos. 32843 and received by the addressee.
32897 of the Registry of Deeds of Rizal.
Issue:
Private respondents entered into a contract of lease with Philippine
Blooming Mills, Co., Inc., whereby the letter shall lease the W/N the Trial Court gravely abused its discretion in issuing an order
aforementioned parcels of land as factory site. PBM was duly organized directing the cancellation of the inscriptions on respondents'
and incorporated on January 19, 1952 with a corporate term of twenty- certificates of title
five (25) years. This leasehold right of PBM covering the parcels of land
was duly annotated at the back of the above stated certificates of title.
Ruling:
33
First, on the issue of prior notice and knowledge of the order: to be a body corporate for the purpose of continuing the business for
which it was organized. But it shall nevertheless be continued as a body
corporate for three years after the time when it would have been so
Section 8 of Rule 13 of the Rules of Court, as amended, provides that
dissolved, for the purpose of prosecuting and defending suits by or
service by registered mail is complete upon actual receipt by the
against it and enabling it gradually to settle and close its affairs, to
addressee; but if he fails to claim his mail from the post office within
dispose of and convey its property and to divide its assets (Sec. 122,
five (5) days from the date of first notice of the postmaster, service shall
Corporation Code). There is no need for the institution of a proceeding
take effect at the expiration of such time. The fair and just application
for quo warranto to determine the time or date of the dissolution of a
of that exception depends upon the conclusive proof that the first
corporation because the period of corporate existence is provided in
notice was sent by the postmaster to the addressee. The best evidence
the articles of incorporation. When such period expires and without
of that fact would be the certification from the postmaster (Barrameda
any extension having been made pursuant to law, the corporation is
v. Castillo, L-27211, July 6, 1977, 78 SCRA 1).
dissolved automatically insofar as the continuation of its business is
concerned. The quo warranto proceeding under Rule 66 of the Rules
In the instant case, the respondent court found that the postmaster's of Court, as amended, may be instituted by the Solicitor General only
certification stated that three (3) notices of the registered mail which for the involuntary dissolution of a corporation on the following
contained the order of June 28, 1982 denying the motion for grounds: a) when the corporation has offended against a provision of
reconsideration of the order of April 22, 1982, were sent to petitioner an Act for its creation or renewal; b) when it has forfeited its privileges
PNB's counsel at Escolta, Manila which is the address stated in the and franchises by non-user; c) when it has committed or omitted an act
record of the case. The factual findings of the trial court bear great which amounts to a surrender of its corporate rights, privileges or
weight and are binding upon this Court. Hence, as between the denial franchises; d) when it has mis-used a right, privilege or franchise
of the petitioners' counsel that he received the notice of the registered conferred upon it by law, or when it has exercised a right, privilege or
mail and the postmaster's certification that said notices were sent to franchise in contravention of law. Hence, there is no need for the SEC
him, the postmaster's claim should prevail. The postmaster has the to make an involuntary dissolution of a corporation whose corporate
official duty to send notices of registered mail and the presumption is term had ended because its articles of incorporation had in effect
that official duty was regularly performed. expired by its own limitation.

Second, on the issue that the court has no jurisdiction to hear the case Considering the foregoing in relation to the contract of lease between
but the SEC as it raised as issues the corporate existence of PBM: the parties herein, when PBM's corporate life ended on January 19,
1977 and its 3-year period for winding up and liquidation expired on
January 19, 1980, the option of extending the lease was likewise
Private respondent's motion with the respondent court was for the terminated on January 19, 1977 because PBM failed to renew or extend
cancellation of the entries on their titles on the ground that the its corporate life in accordance with law. From then on, the
contract of lease executed between them and PBM had expired. This respondents can exercise their right to terminate the lease pursuant to
action is civil in nature and is within the jurisdiction of the respondent the stipulations in the contract.
court. The circumstance that PBM as one of the contracting parties is a
corporation whose corporate term had expired and which fact was
made the basis for the termination of the lease is not sufficient to Section 12 –
confer jurisdiction on the Securities and Exchange Commission over
the case. Presidential Decree No. 902-A, as amended, enumerates the
cases over which the SEC has exclusive jurisdiction and authority to Minimum capital stock required of stock corporations. -
resolve. The case at bar is not covered by the enumeration. Stock corporations incorporated under this Code shall not be required
to have any minimum authorized capital stock except as otherwise
specifically provided for by special law, and subject to the provisions of
Third, on the issue of whether the cancellation of the entries on the following section.
respondent's certificates of title is valid and proper, We find that the
respondent court did not act in excess of its jurisdiction, in ordering
the same. Section 13 -

The contract of lease expressly provides that the term of the lease shall Amount of capital stock to be subscribed and paid for the
be twenty years from the execution of the contract but can be extended purposes of incorporation. - At least twenty-five percent (25%) of
for another period of twenty years at the option of the lessee should the the authorized capital stock as stated in the articles of incorporation
corporate term be extended in accordance with law. Clearly, the option must be subscribed at the time of incorporation, and at least twenty-
of the lessee to extend the lease for another period of twenty years can five (25%) per cent of the total subscription must be paid upon
be exercised only if the lessee as corporation renews or extends its subscription, the balance to be payable on a date or dates fixed in the
corporate term of existence in accordance with the Corporation Code contract of subscription without need of call, or in the absence of a
which is the applicable law. Contracts are to be interpreted according fixed date or dates, upon call for payment by the board of directors:
to their literal meaning and should not be interpreted beyond their Provided, however, That in no case shall the paid-up capital be less
obvious intendment. Thus, in the instant case, the initial term of the than five Thousand (P5,000.00) pesos.
contract of lease which commenced on March 1, 1954 ended on March
1, 1974. PBM as lessee continued to occupy the leased premises beyond Section 14 -
that date with the acquiescence and consent of the respondents as
lessor. Records show however, that PBM as a corporation had a
corporate life of only twenty-five (25) years which ended on January Contents of the articles of incorporation. - All corporations
19, 1977. It should be noted however that PBM allowed its corporate organized under this code shall file with the Securities and Exchange
term to expire without complying with the requirements provided by Commission articles of incorporation in any of the official languages
law for the extension of its corporate term of existence. duly signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by
this Code or by special law:
Section 11 of Corporation Code provides that a corporation shall exist
for a period not exceeding fifty (50) years from the date of
incorporation unless sooner dissolved or unless said period is 1. The name of the corporation;
extended.
2. The specific purpose or purposes for which the corporation is being
Upon the expiration of the period fixed in the articles of incorporation incorporated. Where a corporation has more than one stated purpose,
in the absence of compliance with the legal requisites for the extension the articles of incorporation shall state which is the primary purpose
of the period, the corporation ceases to exist and is dissolved ipso and which is/are he secondary purpose or purposes: Provided, That a
facto. When the period of corporate life expires, the corporation ceases
34
non-stock corporation may not include a purpose which would change SECOND: That the purpose or purposes for which such
or contradict its nature as such; corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
3. The place where the principal office of the corporation is to be
located, which must be within the Philippines; THIRD: That the principal office of the corporation is located
in the City/Municipality of .............................................,
Province of .................................................., Philippines;
4. The term for which the corporation is to exist;

FOURTH: That the term for which said corporation is to exist

5. The names, nationalities and residences of the incorporators;
is ................ years from and after the date of issuance of the
certificate of incorporation;
6. The number of directors or trustees, which shall not be less than five
(5) nor more than fifteen (15);
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
7. The names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors or trustees are duly
NAME NATIONALITY RESIDENCE
elected and qualified in accordance with this Code;

.................... ............................. ....................................

8. If it be a stock corporation, the amount of its authorized capital stock
in lawful money of the Philippines, the number of shares into which it
is divided, and in case the share are par value shares, the par value of .................... ............................. ....................................
each, the names, nationalities and residences of the original
subscribers, and the amount subscribed and paid by each on his
.................... ............................. ....................................
subscription, and if some or all of the shares are without par value,
such fact must be stated;
.................... ............................. ....................................
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount .................... ............................. ....................................
contributed by each; and

10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
SIXTH: That the number of directors or trustees of the
corporation shall be .............; and the names, nationalities
The Securities and Exchange Commission shall not accept the articles and residences of the first directors or trustees of the
of incorporation of any stock corporation unless accompanied by a corporation are as follows:
sworn statement of the Treasurer elected by the subscribers showing
that at least twenty-five (25%) percent of the authorized capital stock of
the corporation has been subscribed, and at least twenty-five (25%) of NAME NATIONALITY RESIDENCE
the total subscription has been fully paid to him in actual cash and/or
in property the fair valuation of which is equal to at least twenty-five .................... ............................. ....................................
(25%) percent of the said subscription, such paid-up capital being not
less than five thousand (P5,000.00) pesos.
.................... ............................. ....................................

Section 15 -
.................... ............................. ....................................

Forms of Articles of Incorporation. - Unless otherwise

prescribed by special law, articles of incorporation of all domestic .................... ............................. ....................................
corporations shall comply substantially with the following form:
.................... ............................. ....................................

ARTICLES OF INCORPORATION SEVENTH: That the authorized capital stock of the

OF corporation is .................................................
__________________________ (P......................) PESOS in lawful money of the Philippines,
(Name of Corporation) divided into ............... shares with the par value
of ................................... (P.......................) Pesos per share.
KNOW ALL MEN BY THESE PRESENTS:
(In case all the share are without par value):
The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have this That the capital stock of the corporation is ...........................
day voluntarily agreed to form a (stock) (non-stock) shares without par value. (In case some shares have par
corporation under the laws of the Republic of the value and some are without par value): That the capital stock
Philippines; of said corporation consists of ........................ shares of
which ....................... shares are of the par value
AND WE HEREBY CERTIFY: of .............................. (P.....................) PESOS each, and of
which ................................ shares are without par value.

FIRST: That the name of said corporation shall be

EIGHTH: That at least twenty five (25%) per cent of the
authorized capital stock above stated has been subscribed as
".............................................., INC. or CORPORATION"; follows:

35
Name of Subscriber Nationality No of Share Amount ................................................

Subscribed Subscribed ................................................

........................ .................... .................... .....................

(Names and signatures of the incorporators)

........................ .................... .................... .....................

SIGNED IN THE PRESENCE OF:

........................ .................... .................... .....................

............................................
........................ .................... .................... .....................

.............................................
........................ .................... .................... .....................

(Notarial Acknowledgment)
NINTH: That the above-named subscribers have paid at least
twenty-five (25%) percent of the total subscription as follows:

Name of Subscriber Amount Subscribed Total Paid-In TREASURER'S AFFIDAVIT

................................. ................................ ..................... REPUBLIC OF THE PHILIPPINES )

................................. ................................ ..................... CITY/MUNICIPALITY OF ) S.S.

................................. ................................ ..................... PROVINCE OF )

................................. ................................ ..................... I, ...................................., being duly sworn, depose and say:

................................. ................................ ..................... That I have been elected by the subscribers of the
corporation as Treasurer thereof, to act as such until my
successor has been duly elected and qualified in accordance
(Modify Nos. 8 and 9 if shares are with no par value. In case with the by-laws of the corporation, and that as such
the corporation is non-stock, Nos. 7, 8 and 9 of the above Treasurer, I hereby certify under oath that at least 25% of the
articles may be modified accordingly, and it is sufficient if authorized capital stock of the corporation has been
the articles state the amount of capital or money contributed subscribed and at least 25% of the total subscription has been
or donated by specified persons, stating the names, paid, and received by me, in cash or property, in the amount
nationalities and residences of the contributors or donors of not less than P5,000.00, in accordance with the
and the respective amount given by each.) Corporation Code.

TENTH: That ....................................... has been elected by .......................................

the subscribers as Treasurer of the Corporation to act as
such until his successor is duly elected and qualified in
accordance with the by-laws, and that as such Treasurer, he (Signature of Treasurer)
has been authorized to receive for and in the name and for
the benefit of the corporation, all subscription (or fees) or SUBSCRIBED AND SWORN to before me, a Notary Public,
contributions or donations paid or given by the subscribers for and in the City/Municipality of ..................................
or members. Province of .........................................., this ............. day
of ........................., 19 ........; by ............................................
ELEVENTH: (Corporations which will engage in any business with Res. Cert. No. ..................... issued at .................
or activity reserved for Filipino citizens shall provide the on ......................, 19 ..........
following):

"No transfer of stock or interest which shall reduce the NOTARY PUBLIC
ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing laws My commission expires on ......................, 19 ........
shall be allowed or permitted to recorded in the proper
books of the corporation and this restriction shall be
indicated in all stock certificates issued by the corporation." Doc. No. ...............;

IN WITNESS WHEREOF, we have hereunto signed these Page No. ...............;

Articles of Incorporation, this ................... day
of .............................., 19 ........... in the City/Municipality
Book No. ..............;
of ........................................, Province
of ................................................., Republic of the
Philippines. Series of 19..... (7a)

................................................ Sec. 16. Amendment of Articles of Incorporation. - Unless

otherwise prescribed by this Code or by special law, and for legitimate

36
purposes, any provision or matter stated in the articles of incorporation On June 22, 1977, it registered its corporate and business name with
may be amended by a majority vote of the board of directors or trustees the Bureau of Domestic Trade.
and the vote or written assent of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, without prejudice to Industrial Refractories Corporation of the Philippines, on the other
the appraisal right of dissenting stockholders in accordance with the hand, was incorporated on August 23, 1979 originally under the name
provisions of this Code, or the vote or written assent of at least two- "Synclaire Manufacturing Corporation". It amended its Articles of
thirds (2/3) of the members if it be a non-stock corporation. Incorporation on August 23, 1985 to change its corporate name to
"Industrial Refractories Corp. of the Philippines". It is engaged in the
The original and amended articles together shall contain all provisions business of manufacturing all kinds of ceramics and other products,
required by law to be set out in the articles of incorporation. Such except paints and zincs.
articles, as amended shall be indicated by underscoring the change or
changes made, and a copy thereof duly certified under oath by the Both companies are the only local suppliers of monolithic gunning mix.
corporate secretary and a majority of the directors or trustees stating
the fact that said amendment or amendments have been duly approved
by the required vote of the stockholders or members, shall be Discovering that IRCP was using such corporate name, RCP filed on
submitted to the Securities and Exchange Commission. April 14, 1988 with the Securities and Exchange Commission (SEC) a
petition to compel petitioner to change its corporate name on the
ground that its corporate name is confusingly similar with that of
The amendments shall take effect upon their approval by the Securities petitioner’s such that the public may be confused or deceived into
and Exchange Commission or from the date of filing with the said believing that they are one and the same corporation.
Commission if not acted upon within six (6) months from the date of
filing for a cause not attributable to the corporation.
The SEC decided in favor of RCP and against the IRCP declaring the
latter’s corporate name ‘Industrial Refractories Corporation of the
Sec. 17. Grounds when articles of incorporation or Philippines’ as deceptively and confusingly similar to that of RCP’s
amendment may be rejected or disapproved. - The Securities corporate name ‘Refractories Corporation of the Philippines’.
and Exchange Commission may reject the articles of incorporation or Accordingly, respondent is hereby directed to amend its Articles of
disapprove any amendment thereto if the same is not in compliance Incorporation by deleting the name ‘Refractories Corporation of the
with the requirements of this Code: Provided, That the Commission Philippines’ in its corporate name within thirty (30) days from finality
shall give the incorporators a reasonable time within which to correct of this Decision. Likewise, respondent is hereby ordered to pay the
or modify the objectionable portions of the articles or amendment. The petitioner the sum of P50,000.00 as attorney’s fees."
following are grounds for such rejection or disapproval:

Petitioner appealed to the SEC En Banc, arguing that it does not have
1. That the articles of incorporation or any amendment thereto is not any jurisdiction over the case, and that respondent RCP has no right to
substantially in accordance with the form prescribed herein; the exclusive use of its corporate name as it is composed of generic or
common words. The SEC En Banc modified the appealed decision in
2. That the purpose or purposes of the corporation are patently that petitioner was ordered to delete or drop from its corporate name
unconstitutional, illegal, immoral, or contrary to government rules and only the word "Refractories".
regulations;
Petitioner IRCP elevated the decision of the SEC En Banc through a
3. That the Treasurer's Affidavit concerning the amount of capital stock petition for review on certiorari to the Court of Appeals which then
subscribed and/or paid if false; rendered the herein assailed decision. The appellate court upheld the
jurisdiction of the SEC over the case and ruled that the corporate
names of petitioner IRCP and respondent RCP are confusingly or
4. That the percentage of ownership of the capital stock to be owned by deceptively similar, and that respondent RCP has established its prior
citizens of the Philippines has not been complied with as required by right to use the word "Refractories" as its corporate name. The
existing laws or the Constitution. appellate court also found that the petition was filed beyond the
reglementary period.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan Issue:
associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and
other corporations governed by special laws shall be accepted or (1) W/N jurisdiction is vested with the regular courts as the present
approved by the Commission unless accompanied by a favorable case is not one of the instances provided in P.D. 902-A;
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law. (2) W/N respondent RCP is not entitled to use the generic name
"refractories"; and
Sec. 18. Corporate name. - No corporate name may be allowed by
the Securities and Exchange Commission if the proposed name is (3) W/N there is no confusing similarity between their corporate
identical or deceptively or confusingly similar to that of any existing names
corporation or to any other name already protected by law or is
patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall issue Ruling:
an amended certificate of incorporation under the amended name.
The jurisdiction of the SEC is not merely confined to the adjudicative
Industrial Refractories Vs. CA (390 SCRA 252) functions provided in Section 5 of P.D. 902-A, as amended. By express
mandate, it has absolute jurisdiction, supervision and control over all
corporations. It also exercises regulatory and administrative powers to
Facts: implement and enforce the Corporation Code, one of which is Section
18, which provides:
Refractories Corporation of the Philippines (RCP) is a corporation duly
organized on October 13, 1976 for the purpose of engaging in the "SEC. 18. Corporate name. -- No corporate name may be allowed by the
business of manufacturing, producing, selling, exporting and otherwise Securities and Exchange Commission if the proposed name is identical
dealing in any and all refractory bricks, its by-products and derivatives. or deceptively or confusingly similar to that of any existing corporation

37
or to any other name already protected by law or is patently deceptive, finality, and are binding upon this Court, unless it is shown that it had
confusing or contrary to existing laws. When a change in the corporate arbitrarily disregarded or misapprehended evidence before it to such
name is approved, the Commission shall issue an amended certificate an extent as to compel a contrary conclusion had such evidence been
of incorporation under the amended name." properly appreciated. And even without such proof of actual confusion
between the two corporate names, it suffices that confusion is probable
or likely to occur.
It is the SEC’s duty to prevent confusion in the use of corporate names
not only for the protection of the corporations involved but more so for
the protection of the public and it has authority to de-register at all PC Javier & Sons Vs. CA (462 SCRA 36)
times and under all circumstances corporate names which in its
estimation are likely to generate confusion. Clearly therefore, the
Facts:
present case falls within the ambit of the SEC’s regulatory powers.

P.C. Javier and Sons Services, Inc., Plaintiff Corporation, for short,
Likewise untenable is petitioner’s argument that there is no confusing
applied with First Summa Savings and Mortgage Bank, later on
or deceptive similarity between petitioner and respondent RCP’s
renamed as PAIC Savings and Mortgage Bank, Defendant Bank, for
corporate names. Section 18 of the Corporation Code expressly
short, for a loan accommodation under the Industrial Guarantee Loan
prohibits the use of a corporate name which is "identical or deceptively
Fund (IGLF) for P1.5 Million. Plaintiff Corporation through Pablo C.
or confusingly similar to that of any existing corporation or to any
Javier was advised that its loan application was approved and that the
other name already protected by law or is patently deceptive, confusing
same shall be forwarded to the Central Bank (CB) for processing and
or contrary to existing laws". The policy behind the foregoing
release.
prohibition is to avoid fraud upon the public that will have occasion to
deal with the entity concerned, the evasion of legal obligations and
duties, and the reduction of difficulties of administration and The CB released the loan to Defendant Bank in two (2) tranches of
supervision over corporation. P750,000 each. The first tranche was released to the Plaintiff
Corporation on May 18, 1981 in the amount of P750,000.00 and the
second tranche was released to Plaintiff Corporation on November 21,
Pursuant thereto, the Revised Guidelines in the Approval of Corporate
1981 in the amount of P750,000.00. From the second tranche release,
and Partnership Names specifically requires that: (1) a corporate name
the amount of P250,000.00 was deducted and deposited in the name
shall not be identical, misleading or confusingly similar to one already
of Plaintiff Corporation under a time deposit.
registered by another corporation with the Commission; and (2) if the
proposed name is similar to the name of a registered firm, the
proposed name must contain at least one distinctive word different Plaintiffs claim that the loan releases were delayed; that the amount of
from the name of the company already registered. P250,000.00 was deducted from the IGLF loan of P1.5 Million and
placed under time deposit; that Plaintiffs were never allowed to
withdraw the proceeds of the time deposit because Defendant Bank
As held in Philips Export B.V. vs. Court of Appeals , to fall within
intended this time deposit as automatic payments on the accrued
the prohibition of the law, two requisites must be proven, to wit:
principal and interest due on the loan. Defendant Bank, however,
claims that only the final proceeds of the loan in the amount of
(1) that the complainant corporation acquired a prior right over the use P750,000.00 was delayed the same having been released to Plaintiff
of such corporate name; and Corporation only on November 20, 1981, but this was because of the
shortfall in the collateral cover of Plaintiff’s loan; that this second
tranche of the loan was precisely released after a firm commitment was
(2) the proposed name is either: (a) identical, or (b) deceptively or
made by Plaintiff Corporation to cover the collateral deficiency through
confusingly similar to that of any existing corporation or to any other
the opening of a time deposit using a portion of the loan proceeds in
name already protected by law; or (c) patently deceptive, confusing or
the amount of P250,000.00 for the purpose; that in compliance with
contrary to existing law.
their commitment to submit additional security and open time deposit,
Plaintiff Javier in fact opened a time deposit for P250,000.00 and on
As regards the first requisite, it has been held that the right to the February 15, 1983, executed a chattel mortgage over some machineries
exclusive use of a corporate name with freedom from infringement by in favor of Defendant Bank; that thereafter, Plaintiff Corporation
similarity is determined by priority of adoption. In this case, defaulted in the payment of its IGLF loan with Defendant Bank hence
respondent RCP was incorporated on October 13, 1976 and since then Defendant Bank sent a demand letter dated November 22, 1983,
has been using the corporate name "Refractories Corp. of the reminding Plaintiff Javier to make payments because their accounts
Philippines". Meanwhile, IRCP was incorporated on August 23, 1979 have been long overdue; that on May 2, 1984, Defendant Bank sent
originally under the name "Synclaire Manufacturing Corporation". It another demand letter to Plaintiff spouses informing them that since
only started using the name "Industrial Refractories Corp. of the they have defaulted in paying their obligation, their mortgage will now
Philippines" when it amended its Articles of Incorporation on August be foreclosed; that when Plaintiffs still failed to pay, Defendant Bank
23, 1985, or nine (9) years after respondent RCP started using its initiated extrajudicial foreclosure of the real estate mortgage executed
name. Thus, being the prior registrant, respondent RCP has acquired by Plaintiff spouses and accordingly the auction sale of the property
the right to use the word "Refractories" as part of its corporate name. was scheduled by the Ex–Officio Sheriff on May 9, 1984.

Anent the second requisite, in determining the existence of confusing The instant complaint was filed to forestall the extrajudicial
similarity in corporate names, the test is whether the similarity is such foreclosure sale of a piece of land covered by Transfer Certificate of
as to mislead a person using ordinary care and discrimination and the Title (TCT) No. 473216 mortgaged by petitioner corporation in favor of
Court must look to the record as well as the names themselves. First Summa Savings and Mortgage Bank which bank was later
Petitioner’s corporate name is "Industrial Refractories Corp. of the renamed as PAIC Savings and Mortgage Bank, Inc. It likewise asked for
Phils.", while respondent’s is "Refractories Corp. of the Phils." the nullification of the Real Estate Mortgages it entered into with First
Obviously, both names contain the identical words "Refractories", Summa Savings and Mortgage Bank. The supplemental complaint
"Corporation" and "Philippines". The only word that distinguishes added several defendants who scheduled for public auction other real
petitioner from respondent RCP is the word "Industrial" which merely estate properties contained in the same real estate mortgages and
identifies a corporation’s general field of activities or operations. We covered by TCTs No. N-5510, No. 426872, No. 506346 and Original
need not linger on these two corporate names to conclude that they are Certificate of Title No. 10146.
patently similar that even with reasonable care and observation,
confusion might arise. It must be noted that both cater to the same
Several extrajudicial foreclosures of the mortgaged properties were
clientele, i.e.¸ the steel industry. In fact, the SEC found that there were
scheduled but were temporarily restrained by the RTC notwithstanding
instances when different steel companies were actually confused
the denial of petitioners’ prayer for a writ of preliminary injunction. In
between the two, especially since they also have similar product
an Order dated 10 December 1990, the RTC ordered respondents-
packaging. Such findings are accorded not only great respect but even
38
sheriffs to maintain the status quo and to desist from further Philips Export Vs. CA (206 SCRA 457)
proceeding with the extrajudicial foreclosure of the mortgaged
properties.
Facts:

Issue:
Petitioner Philips Export B.V. (PEBV), a foreign corporation
organized under the laws of the Netherlands, not engaged in business
W/N Public Respondent Court gravely erred when it sustained the here, is the registered owner of the trademarks PHILIPS and PHILIPS
dismissal of petitioners’ complaint and in affirming the right of the SHIELD EMBLEM under Certificate of Registration Nos. R-1641 and
respondent bank to collect the IGLF loans in lieu of first summa R-1674, respectively issued by the Philippine Patent Office (now the
savings and mortgage bank which originally granted said loans Bureau of Patents, Trademarks and Technology Transfer).

Petitioners Philips Electrical Lamps, Inc. and Philips

Ruling:
Industrial Development, Inc., authorized users of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on
Their defense that they should first be formally notified of the change August 29 and May 25, 1956, respectively. All petitioner corporations
of corporate name of First Summa Savings and Mortgage Bank to PAIC belong to the PHILIPS Group of Companies.
Savings and Mortgage Bank, Inc., before they will continue paying their
loan obligations to respondent bank presupposes that there exists Private Respondent Standard Philips Corporation, was issued
a requirement under a law or regulation ordering a bank that a Certificate of Registration by respondent Commission on 19 May
changes its corporate name to formally notify all its debtors . 1982.
After going over the Corporation Code and Banking Laws, as well as
the regulations and circulars of both the SEC and the Bangko Sentral Petitioners filed a letter complaint with the Securities & Exchange
ng Pilipinas (BSP), we find that there is no such requirement. This Commission (SEC) asking for the cancellation of the word "PHILIPS"
being the case, this Court cannot impose on a bank that changes its from Private Respondent's corporate name in view of the prior
corporate name to notify a debtor of such change absent any law, registration with the Bureau of Patents of the trademark "PHILIPS"
circular or regulation requiring it. Such act would be judicial and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner
legislation. The formal notification is, therefore, discretionary on the PEBV, and the previous registration of Petitioners Philips Electrical
bank. Unless there is a law, regulation or circular from the SEC or BSP and Philips Industrial with the SEC.
requiring the formal notification of all debtors of banks of any change
in corporate name, such notification remains to be a mere internal As a result of Private Respondent's refusal to amend its Articles of
policy that banks may or may not adopt. Incorporation, petitioners filed with the SEC, a Petition, praying for the
issuance of a Writ of Preliminary Injunction, alleging, that the use of
the word PHILIPS amounts to an infringement and clear violation of
In the case at bar, though there was no evidence showing that Petitioner's exclusive right to use the same considering that both
petitioners were furnished copies of official documents showing the parties engage in the same business.
First Summa Savings and Mortgage Bank’s change of corporate name
to PAIC Savings and Mortgage Bank, Inc., evidence abound that they Private Respondent countered that Petitioner PEBBV has no legal
had notice or knowledge thereof. Several documents establish this capacity to sue; that its use of its corporate name is not at all similar to
fact. Petitioners' trademark PHILIPS when considered in its entirety; and
that its products consisting of chain rollers, belts, bearings and cutting
First, letter dated 16 July 1983 signed by Raymundo V. Blanco, saw are grossly different from Petitioners' electrical products.
Accountant of Petitioner Corporation, addressed to PAIC Savings and
Mortgage Bank, Inc. Part of said letter reads: “In connection with your The SEC Hearing Officer ruled against the issuance of such Writ and
inquiry as to the utilization of funds we obtained from the former First dismissed the Petition for lack of merit. The hearing officer of SEC
Summa Savings and Mortgage Bank . . .” Second, Board Resolution of declared that it found no sufficient ground for the granting of
petitioner corporation signed by Pablo C. Javier, Sr. on 24 August 1983 injunctive relief on the basis of the testimonial and documentary
authorizing him to execute a Chattel Mortgage over certain machinery evidence presented, it cannot order the removal or cancellation of the
in favor of PAIC Savings and Mortgage Bank, Inc. Third, Secretary’s word "PHILIPS" from Private Respondent's corporate name on the
Certificate signed by Fortunato E. Gabriel, Corporate Secretary of basis of the same evidence adopted in toto during trial on the merits.
petitioner corporation, on 01 September 1983, certifying that a board Besides, Section 18 of the Corporation Code (infra) is
resolution was passed authorizing Mr. Pablo C. Javier, Sr. to execute a applicable only when the corporate names in question are
chattel mortgage on the corporation’s equipment that will serve as identical. Here, there is no confusing similarity between Petitioners'
collateral to cover the IGLF loan with PAIC Savings and Mortgage and Private Respondent's corporate names as those of the Petitioners
Bank, Inc. Fourth, undated letter signed by Pablo C. Javier, Sr. and PEBV contain at least two words different from that of the Respondent.
addressed to PAIC Savings and Mortgage Bank, Inc., authorizing Mr. Petitioners' Motion for Reconsideration was likewise denied.
Victor F. Javier, General Manager of petitioner corporation, to secure
from PAIC Savings and Mortgage Bank, Inc. certain documents for his On appeal, the SEC en banc affirmed the dismissal declaring that the
signature. corporate names of Petitioners and Private Respondent hardly breed
confusion inasmuch as each contains at least two different words and
rules out any possibility of confusing one for the other.
From the foregoing documents, it cannot be denied that petitioner
corporation was aware of First Summa Savings and Mortgage Bank’s The Court of Appeals swept aside Petitioners' claim that following the
change of corporate name to PAIC Savings and Mortgage Bank, Inc. ruling in Converse Rubber Corporation v. Universal Converse Rubber
Knowing fully well of such change, petitioner corporation has no valid Products, Inc., et al, the word PHILIPS cannot be used as part of
reason not to pay because the IGLF loans were applied with and Private Respondent's corporate name as the same constitutes a
obtained from First Summa Savings and Mortgage Bank. First Summa dominant part of Petitioners' corporate names. In so holding, the
Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Appellate Court observed that the Converse case is not four-square
Inc., are one and the same bank to which petitioner corporation is with the present case inasmuch as the contending parties in Converse
indebted. A change in the corporate name does not make a new are engaged in a similar business, that is, the manufacture of rubber
corporation, whether effected by a special act or under a general law. It shoes. Upholding the SEC, the Appellate Court concluded that "private
has no effect on the identity of the corporation, or on its property, respondent's products consisting of chain rollers, belts, bearings and
rights, or liabilities. The corporation, upon such change in its name, is cutting saw are unrelated and non-competing with petitioners'
in no sense a new corporation, nor the successor of the original products i.e. electrical lamps such that consumers would not in any
corporation. It is the same corporation with a different name, and its probability mistake one as the source or origin of the product of the
character is in no respect changed. other."

39
The Appellate Court denied Petitioners' Motion for Reconsideration reading of Petitioner's corporate names, to wit: PHILIPS EXPORT
hence this Petition which was given due course. B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS
INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude
Issue: that "PHILIPS" is, indeed, the dominant word in that all the companies
affiliated or associated with the principal corporation, PEBV, are
W/N Section 18 of the Corporation Code is applicable in the case at known in the Philippines and abroad as the PHILIPS Group of
bar? Companies.

RULING Respondents maintain that Petitioners did not present an iota of proof
of actual confusion or deception of the public much less a single
Yes. purchaser or their product who has been deceived or confused or
showed any likelihood of confusion. It is settled, that proof of actual
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115, confusion need not be shown. It suffices that confusion is probably or
the Court declared that a corporation's right to use its likely to occur.
corporate and trade name is a property right, a right in rem,
which it may assert and protect against the world in the same It may be that Private Respondent's products also consist of
manner as it may protect its tangible property, real or chain rollers, belts, bearing and the like while petitioners deal
personal, against trespass or conversion. It is regarded, to a principally with electrical products. It is significant to note, that even
certain extent, as a property right and one which cannot be impaired or the Director of Patents had denied Private Respondent's application for
defeated by subsequent appropriation by another corporation in the registration of the trademarks "Standard Philips & Device" for chains,
same field. rollers, belts, bearings and cutting saw. That office held that PEBV "had
shipped to its subsidiaries in the Philippines equipment, machines and
A name is peculiarly important as necessary to the very existence of a their parts which fall under international class where chains, rollers,
corporation. Its name is one of its attributes, an element of its belts, bearings and cutting saw, the goods in connection with which
existence, and essential to its identity. The general rule as to Respondent is seeking to register "STANDARD PHILIPS , also belong.
corporations is that each corporation must have name by
which it is to sue and be sued and do all legal acts. The name of Furthermore, the records show that among Private Respondent's
a corporation in this respect designates the corporation in the same primary purposes in its Articles of Incorporation are the following: "To
manner as the name of an individual designates the person; and the buy, sell, barter, trade, manufacture, import, export or otherwise
right to use its corporate name is as much a part of the corporate acquire, dispose of, and deal with any kind of goods, wares, and
franchise as any other privilege granted. merchandise such as but not limited to plastics, carbon products, office
stationery and supplies, hardware parts, electrical wiring devices,
A corporation acquires its name by choice and need not select a name electrical component parts and/or complement of industrial,
identical with or similar to one already appropriated by a senior agricultural or commercial machineries, constructive supplies,
corporation while an individual's name is thrust upon him. A electrical supplies and other merchandise except food, drugs, and
corporation can no more use a corporate name in violation cosmetics and to carry on such business as manufacturer, distributor,
of the rights of others than an individual can use his name dealer, indentor, factor, manufacturer's representative capacity for
legally acquired so as to mislead the public and injure domestic or foreign companies."
another.
For its part, Philips Electrical also includes, among its primary
Our own Corporation Code, in its Section 18, expressly provides purposes, the following: "To develop, manufacture and deal in
that: electrical products, including electronic, mechanical and other similar
"No corporate name may be allowed by the Securities and products ".
Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing Given Private Respondent's underlined primary purpose,
corporation or to any other name already protected by law or nothing could prevent it from dealing in the same line of
is patently deceptive, confusing or contrary to existing law. business of electrical devices, products or supplies which fall
Where a change in the corporate name is approved, the under its primary purposes. Besides, there is showing that Private
commission shall issue an amended certificate of Respondent not only manufactured and sold ballasts for fluorescent
incorporation under the amended name." lamps with their corporate name printed thereon but also advertised
the same as, Standard Philips. As aptly pointed out by Petitioners,
To come within its scope of the statutory prohibition, two Private respondent's choice of 'PHILIPS' as part of its corporate name
requisites must be proven, namely: (1) that the complainant STANDARD PHILIPS CORPORATION, tends to show said
corporation acquired a prior right over the use of such corporate name; respondent's intention to ride on the popularity and established
and (2) the proposed name is either: (a) identical or (b) deceptively or goodwill of said petitioner's business throughout the world". The
confusingly similar to that of any existing corporation or to any other subsequent appropriator of the name or one confusingly similar
name already protected by law; or (c) patently deceptive, confusing or thereto usually seeks an unfair advantage, a free ride on another's
contrary to existing law. goodwill.

The right to the exclusive use of a corporate name with In allowing Private Respondent the continued use to its corporate
freedom from infringement by similarity is determined by name, the SEC maintains that the corporate names of Petitioners
priority of adoption. In this regard, there is no doubt with respect to PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
Petitioners' prior adoption of the name "PHILIPS" as part of its DEVELOPMENT, INC. contain at least two words different from that
corporate name. Petitioners Philips Electrical and Philips Industrial of the corporate name of respondent STANDARD PHILIPS
were incorporated on August 29 and May 25, 1956, respectively, while CORPORATION, which words will readily identify Private Respondent
Respondent Standard Philips was issued a Certificate of Registration from Petitioners and vice-versa, under the Guidelines in the Approval
on April 19, 1982, twenty-six (26) years later. Petitioner PEBV has also of Corporate and Partnership Names formulated by the SEC, the
used the trademark "PHILIPS" on electrical lamps of all types and their proposed name "should not be similar to one already used by another
accessories since September 30, 1922, as evidenced by Certificate of corporation or partnership. If the proposed name contains a word
Registration No. 1651. already used as part of the firm name or style of a registered company,
the proposed name must contain two other words different from the
The second requisite no less exists in this case. In determining the company already registered".
existence of confusing similarity in corporate names, the test
is whether the similarity is such as to mislead a person using What is lost sight of is that PHILIPS is a trademark or trade
ordinary care and discrimination. In so doing, the Court must name which was registered as far back as 1922. Petitioners,
look to the record as well as the names themselves. While the corporate therefore, have the exclusive right to its use which must be
names of Petitioners and Private Respondent are not identical, a free from any infringement by similarity.

40
 W/N the Honorable Court of Appeals failed to consider and properly
A corporation has an exclusive right to the use of its name, which may apply the exceptions established by jurisprudence in the application of
be protected by injunction upon a principle similar to that upon which section 18 of the corporation code to the instant case
persons are protected in the use of trademarks and tradenames.
Notably, too, Private Respondents' name actually contains only a single
Ruling:
word, that is, "STANDARD", different from that of Petitioners
inasmuch as the inclusion of the term "Corporation" or "Corp." merely
serves the purpose of distinguishing the corporation from partnerships Section 18 of the Corporation Code provides:
and other business organizations.

In support of its application for the registration of its Articles of Corporate Name. — No corporate name may be allowed by the
Incorporation with the SEC, Private Respondent had submitted an Securities and Exchange Commission if the proposed name is identical
undertaking "manifesting its willingness to change its corporate name or deceptively or confusingly similar to that of any existing corporation
in the event another person, firm or entity has acquired a prior right to or to any other name already protected by law or is patently deceptive,
the use of the said firm name or one deceptively or confusingly similar confusing or is contrary to existing laws. When a change in the
to it." Private Respondent must now be held its undertaking. corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
"As a general rule, parties organizing a corporation must choose a
name at their peril; and the use of a name similar to one adopted by Corollary thereto, the pertinent portion of the SEC Guidelines on
another corporation, whether a business or a nonbusiness or nonprofit Corporate Names states:
organization if misleading and likely to injure it in the exercise of its
corporate functions, regardless of intent, may be prevented by the
corporation having the prior right, by a suit for injunction against the (d) If the proposed name contains a word similar to a word already
new corporation to prevent the use of the name. used as part of the firm name or style of a registered company, the
proposed name must contain two other words different from the name
of the company already registered;

Ang Mga Kaanib Vs. Iglesia (372 SCRA 171)

Parties organizing a corporation must choose a name at their peril; and
the use of a name similar to one adopted by another corporation,
Facts: whether a business or a nonprofit organization, if misleading or likely
to injure in the exercise of its corporate functions, regardless of intent,
Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan may be prevented by the corporation having a prior right, by a suit for
(Church of God in Christ Jesus, the Pillar and Ground of Truth), is a injunction against the new corporation to prevent the use of the name.
non-stock religious society or corporation registered in 1936. Sometime
in 1976, one Eliseo Soriano and several other members of Respondent Petitioner claims that it complied with the aforecited SEC guideline by
Corporation disassociated themselves from the latter and succeeded in adding not only two but eight words to their registered name, to wit:
registering on March 30, 1977 a new non-stock religious society or "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, petitioner
corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at argues, effectively distinguished it from respondent corporation.
Saligan ng Katotohanan
The additional words "Ang Mga Kaanib” and " Sa Bansang Pilipinas,
The respondent corporation filed with the SEC a petition to compel the Inc ." in petitioner's name are, as correctly observed by the SEC, merely
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan descriptive of and also referring to the members, or kaanib, of
to change its corporate name which the SEC rendered judgment in respondent who are likewise residing in the Philippines. These words
favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, can hardly serve as an effective differentiating medium necessary to
Haligi at Saligan ng Katotohanan to change its corporate name to avoid confusion or difficulty in distinguishing petitioner from
another name that is not similar or identical to any name already used respondent. This is especially so, since both petitioner and respondent
by a corporation, partnership or association registered with the corporations are using the same acronym — H.S.K.; not to mention the
Commission. No appeal was taken from said decision. fact that both are espousing religious beliefs and operating in the same
place. Parenthetically, it is well to mention that the acronym H.S.K.
It appears that during the pendency of SEC Case Soriano, et al., caused used by petitioner stands for " Haligi at Saligan ng Katotohanan ."
the registration on April 25, 1980 of petitioner corporation, Ang Mga
Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Then, too, the records reveal that in holding out their corporate name
Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan ng to the public, petitioner highlights the dominant words " IGLESIA NG
Katotohanan. DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG
KATOTOHANAN," which is strikingly similar to respondent's
Again the respondent corporation filed before the SEC a petition corporate name, thus making it even more evident that the additional
praying that petitioner be compelled to change its corporate name and words " Ang Mga Kaanib " and " Sa Bansang Pilipinas, Inc.", are
be barred from using the same or similar name on the ground that the merely descriptive of and pertaining to the members of respondent
same causes confusion among their members as well as the public. corporation.

On November 20, 1995, the SEC rendered a decision ordering Significantly, the only difference between the corporate names of
petitioner to change its corporate name. petitioner and respondent are the words SALIGAN and SUHAY. These
words are synonymous — both mean ground, foundation or support.
Hence, this case is on all fours with Universal Mills Corporation v.
Petitioner appealed to the SEC En Banc which affirmed the above Universal Textile Mills, Inc ., where the Court ruled that the corporate
decision upon a finding that petitioner's corporate name was identical names Universal Mills Corporation and Universal Textile Mills, Inc.,
or confusingly or deceptively similar to that of respondent's corporate are undisputedly so similar that even under the test of "reasonable care
name. and observation" confusion may arise.

The CA also affirmed the decision of the SEC En Banc upon petitioner’s Furthermore, the wholesale appropriation by petitioner of respondent's
petition for review. Petitioner's motion for reconsideration was denied corporate name cannot find justification under the generic word rule.
by the Court of Appeals. We agree with the Court of Appeals' conclusion that a contrary ruling
would encourage other corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.
Issue:
41
The fact that there are other non-stock religious societies or MR Holdings is not doing business in the Philippines within the
corporations using the names Church of the Living God, Inc., Church of meaning of the law.
God Jesus Christ the Son of God the Head, Church of God in Christ &
By the Holy Spirit, and other similar names, is of no consequence. It A review of the ruling of the court does not pose much complexity as
does not authorize the use by petitioner of the essential and the principles governing a foreign corporation’s right to sue in local
distinguishing feature of respondent's registered and protected courts have long been settled by our Corporation Law. These principles
corporate name. may be condensed in three statements:

1. If a foreign corporation does business in the Philippines

Certainly, ordering petitioner to change its corporate name is not a
without a license, it cannot sue before the Philippine courts;
violation of its constitutionally guaranteed right to religious freedom.
2. If a foreign corporation is not doing business in the
In so doing, the SEC merely compelled petitioner to abide by one of the
Philippines, it needs no license to sue before Philippine
SEC guidelines in the approval of partnership and corporate names,
courts on an isolated transaction or on a cause of action
namely its undertaking to manifest its willingness to change its
entirely independent of any business transaction; and,
corporate name in the event another person, firm, or entity has
3. If a foreign corporation does business in the Philippines with
acquired a prior right to the use of the said firm name or one
the required license, it can sue before Philippine courts on
deceptively or confusingly similar to it.
any transaction.

Section 19 – The Corporation Code is silent as to what constitutes “doing” or

“transacting” business in the Philippines. But jurisprudence held that
the term implies a continuity of commercial dealings and
Commencement of corporate existence. - A private corporation arrangements, and contemplates, to that extent, the performance of
formed or organized under this Code commences to have corporate acts or works or the exercise of some of the functions normally incident
existence and juridical personality and is deemed incorporated from to, and in progressive prosecution of, the purpose and object for which
the date the Securities and Exchange Commission issues a certificate of the corporation was organized.
incorporation under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body The test to determine whether a corporation is “doing business,” is
politic and corporate under the name stated in the articles of whether the foreign corporation is continuing the body or substance of
incorporation for the period of time mentioned therein, unless said the business or enterprise for which it was organize, or whether it has
period is extended or the corporation is sooner dissolved in accordance substantially retired fro it and turned it over to another. There are
with law. other statutes defining the term “doing business” and as may be
observed, one common denominator among them all is the concept of
“continuity.”
MR Holdings Vs. Bajar (380 SCRA 617)
In this case, the CA categorized as “doing business” MR holdings’
Facts: participation under the Assignment agreements. This is untenable. The
expression “doing business should not be given such a strict and literal
construction as to make it apply to any corporate dealing. The purpose
Asian Development Bank (ADB) agreed to extend to Marcopper Mining or business for which petitioner was organized is not discernible in the
Corporation (Marcopper) a loan under a “Principal Loan Agreement” records. No effort was exerted by the CA to establish the nexus between
and “Complementary Loan Agreement.” ADB and Placer Dome, Inc. petitioner’s business and the acts supposed to constitute “doing
(Placer Dome), a foreign corporation which owns 40% of Marcopper, business.” Thus, whether the assignment contracts were incidental to
executed a “Support and Standby Credit agreement, where Placer petitioner’s business or were continuation thereof is beyond
agreed to provide Marcopper with cash flow support for the payment of determination.
its obligations to ADB. To secure the loan, Marcoper executed in favor
of ADB a “Deed of Real Estate and Chattel Mortgage.” Also, the CA’s ruling that MR Holdings has the intention to continue
Marcopper’s business is based purely on conjectures and speculation.
Marcopper defaulted in the payment of its loan. Placer Dome, in There was no showing that there are overt acts of the petitioner that
fulfillment of its undertaking under the Support and Standby Credit would raise the conclusion that indeed, it had the intention of
Agreement, agreed to have its subsidiary corporation, petitioner MR continuing Marcopper’s business.
Holding, Ltd. (MR Holding), assumed Marcopper’s obligation to ADB.
Consequently, in a deed of assignment, ADB assigned to MR holding In sum, MR Holdings was engaged only in isolated acts or transactions.
all its rights, interests and obligation under the loan agreements. Single or isolated acts or transactions of foreign corporations are not
Marcopper likewise executed a “Deed of Assignment in favor of MR regarded as a doing or carrying on of business.
Holding consisting of several machineries and real properties.

Meanwhile, Solidbank obtained a partial judgment against Marcopper Silverio Vs. Filipino Business Consultants (466 SCRA 584)
from the RTC. Upon Solidbank’s motion, the RTC of Manila issued a
writ of execution pending appeal against Marcopper. The sheriff issued
Facts:
notices of levy on Marcopper’s personal and real properties including
those properties subject of the assignments above-mentioned.
Ricardo S. Silverio, Jr., Esses Development Corporation and Tri-Star
MR Holding served a Third-Party Claim upon the sheriffs. It was Farms, Inc., petitioners, and Filipino Business Consultants, Inc.
denied. Because of that MR holding commenced with the RTC a (“FBCI”), respondent, are wrangling over possession of a 62 hectares
complaint for reinvidication of properties with prayer for preliminary land in Calatagan, Batangas (“Calatagan Property”). Silverio, Jr. is the
injunction with temporary restraining order against the respondents. President of Esses and Tri-Star. Esses and Tri-Star were in possession
The application was denied by the RTC on the ground that MR Holding of the Calatagan Property and registered in the names of Esses and Tri-
has no legal capacity to sue, it being a foreign corporation doing Star.
business in the Philippines without license. Its decision was affirmed
by the Court of Appeals. Esses and Tri-Star executed a Deed of Sale with Assumption of
Mortgage in favor of FBCI. However, Esses and Tri-Star failed to
Issue: redeem the Calatagan Property.

W/N MR Holdings is “doing business” in the Philippines Thus, FBCI filed a Petition for Consolidation of Title of the Calatagan
Property with the RTC Balayan. Subsequently, the Calatagan Property
Ruling: in the names of Esses and Tri-Star was cancelled and a new TCT was

42
issued in FBCI’s name. Thereafter, a writ of possession was issued in Private respondents Auto Truck Corporation, Alliance Marketing
FBCI’s name. FBCI then entered the Calatagan Property. Corporation, Speed Distributing, Inc., Active Distributing, Inc. and
Action Company are corporations formed, organized and existing
Silverio, Jr., Esses and Tri-Star consequently filed a petition for relief under Philippine laws and which owned real properties covered under
from judgment and the recall of the writ of possession alleging that the the Torrens system.
judgment by default is void because the RTC Balayan did not acquire
jurisdiction over them.
When Pastor Y. Lim died intestate herein petitioner, as surviving
spouse and duly represented by her nephew George Luy, filed a joint
The RTC Balayan nullified and set aside the judgment by default and
petition for the administration of the estate of Pastor Y. Lim before the
the writ of possession. The RTC Balayan also issued an Order to restore
Regional Trial Court of Quezon City.
possession of the Calatagan Property to Silverio, Jr., Esses and Tri-
Star. On May 8, 2000, a writ of possession was issued in favor of
petitioners. Private respondent corporations, whose properties were included in
the inventory of the estate of Pastor Y. Lim, then filed a motion for the
On May 23, 2000, FBCI filed with the RTC Balayan an Urgent Ex- lifting of lis pendens and motion for exclusion of certain properties
Parte Motion to Suspend Enforcement of Writ of Possession on the from the estate of the decedent.
ground of supervening event. FBCI pointed out that it is now the new
owner of Esses and Tri-Star having purchased the “substantial and
controlling shares of stocks” of the two corporations. The Regional Trial Court sitting as a probate court granted the private
respondents' twin motions ordering the Register of Deeds of Quezon
City to lift, expunge or delete the annotation of lis pendens on 5
Issue: Transfer Certificates of Title and it is hereby further ordered that the
properties covered by the same titles as well as those properties by
W/N the acquisition of Esses and Tri-Star by FBCI is a supervening Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236
event, which is a sufficient ground to stay the execution of a writ of are excluded from these proceedings.
possession.
Subsequently, Rufina Luy Lim filed a verified amended petition which
Ruling: contained the following averments: that the late Pastor Y. Lim
personally owned during his lifetime the certain business entities
No. The acquisition of Esses and Tri-Star by FBCI cannot be including private respondents; that although the above business
considered as a supervening event, which is a sufficient ground to stay entities dealt and engaged in business with the public as corporations,
execution. all their capital, assets and equity were however, personally owned by
the late Pastor Y Lim. Hence the alleged stockholders and officers
The court may stay immediate execution of a judgment when appearing in the respective articles of incorporation of the above
supervening events, occurring subsequent to the judgment, bring about business entities were mere dummies of Pastor Y. Lim, and they were
a material change in the situation of the parties. To justify the stay of listed therein only for purposes of registration with the Securities and
immediate execution, the supervening events must have a direct effect Exchange Commission; that Pastor Lim, likewise, had Time, Savings
on the matter already litigated and settled. Or, the supervening events and Current Deposits with the following banks: (a) Metrobank, Grace
must create a substantial change in the rights or relation of the parties, Park, Caloocan City and Quezon Avenue, Quezon City Branches and (b)
which would render execution of a final judgment unjust, impossible or First Intestate Bank (formerly Producers Bank), Rizal Commercial
inequitable making it imperative to stay immediate execution in the Banking Corporation and in other banks whose identities are yet to be
interest of justice. determined; that the some real properties, although registered in the
name of the above entities, were actually acquired by Pastor Y. Lim
FBCI’s acquisiton of the “substantial and controlling shares of stocks” during his marriage with petitioner; that the aforementioned
of Esses and Tri-Star does not create a subtantial change in the rights properties and/or real interests left by the late Pastor Y. Lim, are all
or relations of the parties that would entitle FBCI to possession of the conjugal in nature, having been acquired by him during the existence
Calatagan Property, a corporate property of Esses and Tri-Star. Esses of his marriage with petitioner and that there are other real and
and Tri-Star, just like FBCI, are corporations. A Corporation has a personal properties owned by Pastor Y. Lim which petitioner could not
personality distinct from its stockholders. as yet identify.

FBCI’s alleged controlling shareholdings in Esses and Tri-Star merely

represents a proportionate or aliquot interest in the properties of the The Regional Trial Court acting on petitioner's motion issued an order
two corporations. Such controlling shareholdings do not vest FBCI ordering the Registry of Deeds of Quezon City to reinstate the
with any legal right or title to any of Esses and Tri-Star’s corporate annotation of lis pendens in case said annotation had already been
properties. Even assuming that FBCI is the controlling shareholder of deleted and/or cancelled said on the TCTs’.
Esses and Tri-Star does not legally make it the owner of the Calatagan
Property, which is legally owned by Esses and Tri-Star as distinct On 04 September 1995, the probate court appointed Rufina Lim as
juridical persons. As such, FBCI is not entitled to the possession of any special administrator and Miguel Lim and Lawyer Donald Lee, as co-
definite portion of the Calatagan Property or any of Esses and Tri-Stars special administrators of the estate of Pastor Y. Lim, after which letters
properties or assets. FBCI is not a co-owner or tenant in common of the of administration were accordingly issued.
Calatagan Property or any of Esses and Tri-Star’s corporate properties.

Possession of the Calatagan Property must be restored to Esses and Private respondent filed a special civil action for certiorari, with an
Tri-Star to their representative, Silverio, Jr. urgent prayer for a restraining order or writ of preliminary injunction,
before the Court of Appeals questioning the orders of the Regional
Trial Court, sitting as a probate court.
Lim Vs. CA (323 SCRA 102)

The Court of Appeals granted the instant special civil action for
Facts: certiorari. The impugned orders issued by respondent court on July 4,
1995 and September 12, 1995 are hereby nullified and set aside. The
Rufina Luy Lim is the surviving spouse of late Pastor Y. Lim whose impugned order issued by respondent on September 15, 1995 is
estate is the subject of probate proceedings in Special Proceedings "In nullified insofar as petitioner corporations" bank accounts and records
Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by are concerned.
George Luy, Petitioner".
Issue:

43
W/N the properties of private respondent corporations are properly reliance reposed by petitioner on the affidavits executed by Teresa Lim
part of the decedent's estate including the private respondent and Lani Wenceslao is unavailing considering that the aforementioned
corporations themselves documents possess no weighty probative value pursuant to the hearsay
rule. Besides it is imperative for us to stress that such affidavits are
inadmissible in evidence inasmuch as the affiants were not at all
Ruling:
presented during the course of the proceedings in the lower court. To
put it differently, for this Court to uphold the admissibility of said
No. documents would be to relegate from Our duty to apply such basic rule
of evidence in a manner consistent with the law and jurisprudence.
It is settled that a corporation is clothed with personality separate and
distinct from that of the persons composing it. It may not generally be Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs .
held liable for that of the persons composing it. It may not be held LEONIDAS finds pertinence:
liable for the personal indebtedness of its stockholders or those of the
entities connected with it.
Affidavits are classified as hearsay evidence since they are not generally
prepared by the affiant but by another who uses his own language in
Rudimentary is the rule that a corporation is invested by law with a writing the affiant's statements, which may thus be either omitted or
personality distinct and separate from its stockholders or members. In misunderstood by the one writing them. Moreover, the adverse party is
the same vein, a corporation by legal fiction and convenience is an deprived of the opportunity to cross-examine the affiants. For this
entity shielded by a protective mantle and imbued by law with a reason, affidavits are generally rejected for being hearsay, unless the
character alien to the persons comprising it. affiant themselves are placed on the witness stand to testify thereon.

Nonetheless, the shield is not at all times invincible. Thus, in FIRST As to the order of the lower court, dated 15 September 1995, the Court
PHILIPPINE INTERNATIONAL BANK vs . COURT OF APPEALS, We of Appeals correctly observed that the Regional Trial Court, Branch 93
enunciated: acted without jurisdiction in issuing said order; The probate court had
no authority to demand the production of bank accounts in the name of
the private respondent corporations.
. . . When the fiction is urged as a means of perpetrating a fraud or an
illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly Reynoso Vs. CA (345 SCRA 335)
or generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or
Sometime in the early 1960s, the Commercial Credit Corporation, a
stockholders who compose it will be lifted to allow for its consideration
financing and investment firm, decided to organize franchise
merely as an aggregation of individuals. . .
companies in different parts of the country, wherein it shall hold thirty
percent (30%) equity. Employees of the CCC were designated as
Piercing the veil of corporate entity requires the court to see through resident managers of the franchise companies. Petitioner Bibiano O.
the protective shroud which exempts its stockholders from liabilities Reynoso, IV was designated as the resident manager of the franchise
that ordinarily, they could be subject to, or distinguishes one company in Quezon City, known as the Commercial Credit Corporation
corporation from a seemingly separate one, were it not for the existing of Quezon City.
corporate fiction.
CCC-QC entered into an exclusive management contract with CCC
The corporate mask may be lifted and the corporate veil may be whereby the latter was granted the management and full control of the
pierced when a corporation is just but the alter ego of a person or of business activities of the former. Under the contract, CCC-QC shall sell,
another corporation. Where badges of fraud exist, where public discount and/or assign its receivables to CCC. Subsequently, however,
convenience is defeated; where a wrong is sought to be justified this discounting arrangement was discontinued pursuant to the so-
thereby, the corporate fiction or the notion of legal entity should come called “DOSRI Rule”, prohibiting the lending of funds by corporations
to naught. to its directors, officers, stockholders and other persons with related
interests therein.
Further, the test in determining the applicability of the doctrine of
piercing the veil of corporate fiction is as follows: 1) Control, not mere On account of the new restrictions imposed by the Central Bank policy
majority or complete stock control, but complete domination, not only by virtue of the DOSRI Rule, CCC decided to form CCC Equity
of finances but of policy and business practice in respect to the Corporation, (hereinafter, “CCC-Equity”), a wholly-owned subsidiary,
transaction attacked so that the corporate entity as to this transaction to which CCC transferred its thirty (30%) percent equity in CCC-QC,
had at the time no separate mind, will or existence of its own; (2) Such together with two seats in the latter’s Board of Directors.
control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
Under the new set-up, several officials of Commercial Credit
duty, or dishonest and unjust act in contravention of plaintiffs legal
Corporation, including petitioner Reynoso, became employees of CCC-
right; and (3) The aforesaid control and breach of duty must
Equity. While petitioner continued to be the Resident Manager of CCC-
proximately cause the injury or unjust loss complained of. The absence
QC, he drew his salaries and allowances from CCC-Equity.
of any of these elements prevents "piercing the corporate veil".
Furthermore, although an employee of CCC-Equity, petitioner, as well
as all employees of CCC-QC, became qualified members of the
Mere ownership by a single stockholder or by another corporation of Commercial Credit Corporation Employees Pension Plan.
all or nearly all of the capital stock of a corporation is not of itself a
sufficient reason for disregarding the fiction of separate corporate
As Resident Manager of CCC-QC, petitioner, in order to boost the
personalities.
business activities of CCC-QC, deposited his personal funds in the
company. In return, CCC-QC issued to him its interest-bearing
Moreover, to disregard the separate juridical personality of a promissory notes.
corporation, the wrong-doing must be clearly and convincingly
established. It cannot be presumed.
A complaint for sum of money with preliminary attachment was
instituted by CCC-QC against petitioner, who had in the meantime
Granting arguendo that the Regional Trial Court in this case was not been dismissed from his employment by CCC-Equity. The complaint
merely acting in a limited capacity as a probate court, petitioner was subsequently amended in order to include Hidelita Nuval,
nonetheless failed to adduce competent evidence that would have petitioner’s wife, as a party defendant. The complaint alleged that
justified the court to impale the veil of corporate fiction. Truly, the petitioner embezzled the funds of CCC-QC amounting to P1,300,593.11.
44
Petitioner denied having unlawfully used funds of CCC-QC and Ruling:
asserted that the sum of P1,300,593.11 represented his money
placements in CCC-QC, as shown by twenty-three (23) checks which he
It is the contention of GCC that it is a corporation separate and distinct
issued to the said company.
from CCC-QC and, therefore, its properties may not be levied upon to
satisfy the monetary judgment in favor of petitioner. In short,
The Court finds the complaint without merit. Accordingly, said respondent raises corporate fiction as its defense. Hence, we are
complaint is hereby DISMISSED. By reason of said complaint, necessarily called upon to apply the doctrine of piercing the veil of
defendant Bibiano Reynoso IV suffered degradation, humiliation and corporate entity in order to determine if General Credit Corporation,
mental anguish. Thus, the Court declared CCC liable to Reynoso. formerly CCC, may be held liable for the obligations of CCC-QC.

Both parties appealed to the then Intermediate Appellate Court. The The defense of separateness will be disregarded where the business
appeal of Commercial Credit Corporation of Quezon City was affairs of a subsidiary corporation are so controlled by the mother
dismissed for failure to pay docket fees. Petitioner, on the other hand, corporation to the extent that it becomes an instrument or agent of its
withdrew his appeal. parent. But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience, justify
Hence, the decision became final and, accordingly a Writ of Execution
wrong, protect fraud or defend crime.
was issued. However, the judgment remained unsatisfied. CCC-QC
alleged that the possession of its premises and records had been taken
over by CCC. It is obvious that the use by CCC-QC of the same name of Commercial
Credit Corporation was intended to publicly identify it as a component
of the CCC group of companies engaged in one and the same business,
Meanwhile, in 1983, CCC became known as the General Credit
i.e. , investment and financing. Aside from CCC-Quezon City, other
Corporation.
franchise companies were organized such as CCC-North Manila and
CCC-Cagayan Valley. The organization of subsidiary corporations as
The Regional Trial Court of Quezon City issued an Order directing what was done here is usually resorted to for the aggrupation of capital,
General Credit Corporation to file its comment on petitioner’s motion the ability to cover more territory and population, the decentralization
for alias writ of execution. General Credit Corporation filed a Special of activities best decentralized, and the securing of other legitimate
Appearance and Opposition alleging that it was not a party to the case, advantages. But when the mother corporation and its subsidiary cease
and therefore petitioner should direct his claim against CCC-QC and to act in good faith and honest business judgment, when the corporate
not General Credit Corporation. Petitioner filed his reply, stating that device is used by the parent to avoid its liability for legitimate
the CCC-QC is an adjunct instrumentality, conduit and agency of CCC. obligations of the subsidiary, and when the corporate fiction is used to
Furthermore, petitioner invoked the decision of the Securities and perpetrate fraud or promote injustice, the law steps in to remedy the
Exchange Commission in SEC Case No. 2581, entitled, “Avelina G. problem. When that happens, the corporate character is not necessarily
Ramoso, et al., Petitioner versus General Credit Corp., et al., abrogated. It continues for legitimate objectives. However, it is pierced
Respondents,” where it was declared that General Credit Corporation, in order to remedy injustice, such as that inflicted in this case.
CCC-Equity and other franchised companies including CCC-QC were
declared as one corporation.
Factually and legally, the CCC had dominant control of the business
operations of CCC-QC. The exclusive management contract insured
Thus, the Regional Trial Court of Quezon City ordered the issuance of that CCC-QC would be managed and controlled by CCC and would not
an alias writ of execution. General Credit Corporation filed an Omnibus deviate from the commands of the mother corporation. In addition to
Motion, alleging that SEC Case No. 2581 was still pending appeal, and the exclusive management contract, CCC appointed its own employee,
maintaining that the levy on properties of the General Credit petitioner, as the resident manager of CCC-QC.
Corporation by the deputy sheriff of the court was erroneous.
Petitioner’s designation as “resident manager” implies that he was
Petitioner insisted that General Credit Corporation is just the new placed in CCC-QC by a superior authority. In fact, even after his
name of Commercial Credit Corporation; hence, General Credit assignment to the subsidiary corporation, petitioner continued to
Corporation and Commercial Credit Corporation should be treated as receive his salaries, allowances, and benefits from CCC, which later
one and the same entity. became respondent General Credit Corporation. Not only that.
Petitioner and the other permanent employees of CCC-QC were
qualified members and participants of the Employees Pension Plan of
The Regional Trial Court of Quezon City denied the Omnibus Motion CCC.
and issued an Order directing the issuance of an alias writ of execution.

There are other indications in the record which attest to the

The Court of Appeals rendered a decision that the respondent court's applicability of the identity rule in this case, namely: the unity of
refusal to issue a restraining order as having been rendered moot by interests, management, and control; the transfer of funds to suit their
our Resolution of 7 April 1992 which, by way of injunctive relief, individual corporate conveniences; and the dominance of policy and
provided that "the respondents and their representatives are hereby practice by the mother corporation insure that CCC-QC was an
enjoined from conducting an auction sale (on execution) of petitioner's instrumentality or agency of CCC.
properties as well as initiating similar acts of levying (upon) and selling
on execution other properties of said petitioner". The injunction thus
granted, as modified by the words in parenthesis, shall remain in force As petitioner stresses, both CCC and CCC-QC were engaged in the
until Civil Case No. 61777 shall have been finally terminated. same principal line of business involving a single transaction process.
Under their discounting arrangements, CCC financed the operations of
CCC-QC. The subsidiary sold, discounted, or assigned its accounts
In SP No. 27683, we grant the petition for certiorari and accordingly receivables to CCC.
NULLIFY and SET ASIDE, for having been issued in excess of
jurisdiction, the Order of 13 February 1992 in Civil Case No. Q-30583
as well as any other order or process through which the petitioner is Faced with the financial obligations which CCC-QC had to satisfy, the
made liable under the judgment in said Civil Case No. Q-30583. mother firm closed CCC-QC, in obvious fraud of its creditors. CCC-QC,
instead of opposing its closure, cooperated in its own demise.
Conveniently, CCC-QC stated in its opposition to the motion for alias
Issue: writ of execution that all its properties and assets had been transferred
and taken over by CCC.
W/N the judgment in favor of petitioner may be executed against
respondent General Credit Corporation
45
Under the foregoing circumstances, the contention of respondent did not pay. In response to the first demand letter, petitioners
General Credit Corporation, the new name of CCC, that the corporate promised to reply within fifteen (15) days, but they did not do so.
fiction should be appreciated in its favor is without merit.
Pursuant to the consultancy agreement, respondent claimed a
Paraphrasing the ruling in Claparols v. Court of Industrial Relations, commission of six percent (6%) of the total contract price, or a total of
reiterated in Concept Builders Inc. v. National Labor Relations, it is P6,000,000.00, or in the alternative, that he be paid the same amount
very obvious that respondent “seeks the protective shield of a corporate by way of damages or as the reasonable value of the services he
fiction whose veil the present case could, and should, be pierced as it rendered to petitioners, and further claimed twenty percent (20%) of
was deliberately and maliciously designed to evade its financial the amount recoverable as attorney's fees and the costs of suit.
obligation of its employees.”
Petitioners denied the consultancy agreement. Petitioner Ryohei
If the corporate fiction is sustained, it becomes a handy deception to Kimura did not have the authority to enter into such agreement in
avoid a judgment debt and work an injustice. The decision raised to us behalf of Marubeni. Only Mr. Morihiko Maruyama, the general
for review is an invitation to multiplicity of litigation. As we stated in manager, upon issuance of a special power of attorney by the principal
Islamic Directorate vs. Court of Appeals, the ends of justice are not office in Tokyo, Japan, could enter into any contract in behalf of the
served if further litigation is encouraged when the issue is corporation. Mr. Maruyama did not discuss with respondent Lirag any
determinable based on the records. of the matters alleged in the complaint, nor agreed to the payment of
commission. Moreover, Marubeni did not participate in the bidding for
the Bureau of Post project, nor benefited from the supposed project.
A court judgment becomes useless and ineffective if the employer, in
Thus, petitioners moved for the dismissal of the complaint.
this case CCC as a mother corporation, is placed beyond the legal reach
of the judgment creditor who, after protracted litigation, has been
found entitled to positive relief. Courts have been organized to put an The trial court promulgated a decision and ruled that respondent is
end to controversy. This purpose should not be negated by an entitled to a commission. Respondent was led to believe that there
inapplicable and wrong use of the fiction of the corporate veil. existed an oral consultancy agreement. Hence, he performed his part of
the agreement and helped petitioners get the project.

Issue:
Marubeni Vs. Lirag (362 SCRA 620)
(1) W/N there was a consultancy agreement between petitioners and
respondent; and corollary to this,
Facts:

(2) W/N respondent is entitled to receive a commission if there was, in

Marubeni Corporation is a foreign corporation organized and existing
fact, a consultancy agreement
under the laws of Japan. It was doing business in the Philippines
through its duly licensed, wholly owned subsidiary, Marubeni
Philippines Corporation. Petitioners Ryoichi Tanaka, Ryohei Kimura Ruling:
and Shoichi One were officers of Marubeni assigned to its Philippine
branch.
As a general rule, factual findings of the Court of Appeals are
conclusive on the parties and are not reviewed by the Supreme Court —
Felix Lirag filed with the Regional Trial Court, Makati a complaint for and they carry even more weight when the Court of Appeals affirmed
specific performance and damages claiming that petitioners owed him the factual findings of the trial court. It is not the function of the
the sum of P6,000,000.00 representing commission pursuant to an Supreme Court to weigh anew the evidence passed upon by the Court
oral consultancy agreement with Marubeni. Lirag claimed that Ryohei of Appeals. Moreover, only questions of law may be raised before the
Kimura hired his consultancy group for the purpose of obtaining Supreme Court in a petition for review under Rule 45 of the Revised
government contracts of various projects. Kimura authorized him to Rules of Court.
work on the following projects: (1) National Telephone Project, (2)
Regional Telecommunications Project; (3) Cargo Handling Equipment;
However, the rule is subject to exceptions, such as when the conclusion
(4) Maritime Communications; (5) Philippine National Railways
is grounded on speculation, surmises, or conjectures, as in the instant
Depot; and (6) Bureau of Posts (Phase II). Petitioners promised to pay
case.
him six percent (6%) consultancy fee based on the total costs of the
projects obtained.
An assiduous scrutiny of the testimonial and documentary evidence
extant leads us to the conclusion that the evidence could not support a
The consultancy agreement was not reduced into writing because of the
solid conclusion that a consultancy agreement, oral or written, was
mutual trust between Marubeni and the Lirag family. Their close
agreed between petitioners and respondent. Respondent attempted to
business and personal relationship dates back to 1960, when
fortify his own testimony by presenting several corroborative
respondent's family was engaged in the textile fabric manufacturing
witnesses. However, what was apparent in the testimonies of these
business, in which Marubeni supplied the needed machinery,
witnesses was the fact that they learned about the existence of the
equipment, spare parts and raw materials.
consultancy agreement only because that was what respondent told
them.
In compliance with the agreement, respondent Lirag made
representations with various government officials, arranged for
In civil cases, he who alleges a fact has the burden of proving it; a mere
meetings and conferences, relayed pertinent information as well as
allegation is not evidence. He must establish his cause by a
submitted feasibility studies and project proposals, including pertinent
preponderance of evidence, which respondent failed to establish in the
documents required by petitioners. As petitioners had been impressed
instant case.
with respondent's performance, six (6) additional projects were given
to his group under the same undertaking.
Assuming for the sake of argument that an oral consultancy agreement
has been perfected between the parties, respondent Lirag could not still
One of the projects handled by respondent Lirag, the Bureau of Post
claim fees on the project that has not been awarded to Marubeni.
project, amounting to P100,000,000.00 was awarded to the
"Marubeni-Sanritsu tandem." Despite respondent's repeated formal
verbal demands for payment of the agreed consultancy fee, petitioners If respondent's contentions were to be taken as truth, he would be
entitled to 6% consulting fee based on the total cost of the projects

46
obtained, or on success basis. However, even respondent admitted that collection suit, he filed a counter permissive counterclaim for the
the Bureau of Post project was not awarded to Marubeni, but to unpaid attorney's fees.
Sanritsu. Marubeni did not even join the bidding for the Bureau of Post
project.
The trial court ruled in favor of private respondents and found that
Gregorio Manuel indeed rendered legal services to the Francisco family
Respondent could not claim from Sanritsu because of the absence of in Special Proceedings Number 7803 — "In the Matter of Intestate
any agreement between him and the latter. Estate of Benita Trinidad". Said court also found that his legal services
were not compensated despite repeated demands, and thus ordered
petitioner to pay him the amount of fifty thousand (P50,000.00) pesos.
Respondent tried to justify his commission of roughly about
P6,000,000.00 in the guise that Marubeni and Sanritsu are sister
corporations, thereby implying the need to pierce the veil of corporate The trial court also decided the case in favor of petitioner in regard to
fiction. Respondent claimed that Marubeni as the supplier and real the petitioner's claim for money, but also allowed the counter-claim of
contractor of the project hired and sub-contracted the project to private respondents. Both parties appealed. On April 15, 1991, the
Sanritsu. Not because two foreign companies came from the same Court of Appeals sustained the trial court's decision.
country and closely worked together on certain projects would the
conclusion arise that one was the conduit of the other, thus piercing the
Hence, the present petition.
veil of corporate fiction.

Issue:
To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be
presumed. The separate personality of the corporation may be W/N the corporation is liable for the attorneys’ fees owing to the
disregarded only when the corporation is used as a cloak or cover for private respondents
fraud or illegality, or to work injustice, or where necessary for the
protection of creditors. We could not just rely on respondent's
testimony regarding the existence of the "Marubeni-Sanritsu tandem" Ruling:
to justify his claim for payment of commission. This conclusion is too
conjectural to be believed. Basic in corporation law is the principle that a corporation has a
separate personality distinct from its stockholders and from other
Aside from the self-serving testimony of respondent regarding the corporations to which it may be connected. However, under the
existence of a close working relationship between Marubeni and doctrine of piercing the veil of corporate entity, the corporation's
Sanritsu, there was nothing that would support the conclusion that separate juridical personality may be disregarded, for example, when
Sanritsu was an agent of Marubeni. the corporate identity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Also, where the corporation is a
mere alter ego or business conduit of a person, or where the
In the instant case, the parties did not reach the second stage as the corporation is so organized and controlled and its affairs are so
headquarters in Tokyo, Japan did not see it fit to hire a consultant as conducted as to make it merely an instrumentality, agency, conduit or
they decided not to participate in the bidding. Hence, no consultancy adjunct of another corporation, then its distinct personality may be
agreement was perfected, whether oral or written. There was no ignored. In these circumstances, the courts will treat the corporation as
absolute acceptance of respondent's offer of consultancy services. a mere aggrupation of persons and the liability will directly attach to
them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of
In light of the foregoing, we rule that the preponderance of evidence
justice, will be justifiably set aside.
established no consultancy agreement between petitioners and
respondent from which the latter could anchor his claim for a six
percent (6%) consultancy fee on a project that was not awarded to In our view, however, given the facts and circumstances of this case,
petitioners. the doctrine of piercing the corporate veil has no relevant application
here. Respondent court erred in permitting the trial court's resort to
this doctrine. The rationale behind piercing a corporation's identity in
Francisco Motors Vs. CA (309 SCRA 72)
a given case is to remove the barrier between the corporation from the
persons comprising it to thwart the fraudulent and illegal schemes of
Facts: those who use the corporate personality as a shield for undertaking
certain proscribed activities. However, in the case at bar, instead of
holding certain individuals or persons responsible for an alleged
Francisco Motors filed a complaint against Spouses Gregorio and
corporate act, the situation has been reversed. It is the petitioner as a
Librada Manuel to recover three thousand four hundred twelve and six
corporation which is being ordered to answer for the personal liability
centavos (P3,412.06), representing the balance of the jeep body
of certain individual directors, officers and incorporators concerned.
purchased by the Manuels from petitioner; an additional sum of twenty
Hence, it appears to us that the doctrine has been turned upside down
thousand four hundred fifty-four and eighty centavos (P20,454.80)
because of its erroneous invocation. Note that according to private
representing the unpaid balance on the cost of repair of the vehicle;
respondent Gregorio Manuel his services were solicited as counsel for
and six thousand pesos (P6,000.00) for cost of suit and attorney's fees.
members of the Francisco family to represent them in the intestate
To the original balance on the price of jeep body were added the costs
proceedings over Benita Trinidad's estate. These estate proceedings did
of repair.
not involve any business of petitioner.

Private respondents interposed a counterclaim for unpaid legal

Note also that he sought to collect legal fees not just from certain
services by Gregorio Manuel in the amount of fifty thousand pesos
Francisco family members but also from Petitioner Corporation on the
(P50,000) which was not paid by the incorporators, directors and
claims that its management had requested his services and he acceded
officers of the petitioner.
thereto as an employee of petitioner from whom it could be deduced he
was also receiving a salary. His move to recover unpaid legal fees
Private respondent Gregorio Manuel alleged that, while he was through a counterclaim against Francisco Motors Corporation, to offset
petitioner's Assistant Legal Officer, he represented members of the the unpaid balance of the purchase and repair of a jeep body could only
Francisco family in the intestate estate proceedings of the late Benita result from an obvious misapprehension that petitioner's corporate
Trinidad. However, even after the termination of the proceedings, his assets could be used to answer for the liabilities of its individual
services were not paid. Said family members, he said, were also directors, officers, and incorporators. Such result if permitted could
incorporators, directors and officers of petitioner. Hence to petitioner's easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly iniquitous to petitioner.

47
Furthermore, considering the nature of the legal services involved, Ellice and Margo filed against Alicia, Guia and Rita with the Securities
whatever obligation said incorporators, directors and officers of the and Exchange Commission (SEC) a petition for accounting and
corporation had incurred, it was incurred in their personal capacity. restitution by the directors and officers and prayed that they be allowed
When directors and officers of a corporation are unable to compensate to inspect the corporate books and documents of Ellice. So that, Alicia,
a party for a personal obligation, it is far-fetched to allege that the Rita and Guia initiated a complaint against Ellice and Margo praying
corporation is perpetuating fraud or promoting injustice, and be for, among others, the nullification of the elections of directors and
thereby held liable therefor by piercing its corporate veil. While there officers of both Margo and Ellice; the nullification of all board
are no hard and fast rules on disregarding separate corporate identity, resolutions issued by Margo f by Ellice and the return of all titles to real
we must always be mindful of its function and purpose. A court should property in the name of Margo and Ellice, as well as all corporate
be careful in assessing the milieu where the doctrine of piercing the papers and records of both Margo and Ellice which are in the
corporate veil may be applied. Otherwise an injustice, although possession and control of the respondents.
unintended, may result from its erroneous application.
These two cases were consolidated.
The personality of the corporation and those of its incorporators,
directors and officers in their personal capacities ought to be kept
Meanwhile, during the pendency of the SEC cases, the shares of stock
separate in this case. The claim for legal fees against the concerned
of Alicia and Ofelia Gala in Ellice were levied and sold at public auction
individual incorporators, officers and directors could not be properly
to satisfy a judgment rendered against them in a Civil Case entitled
directed against the corporation without violating basic principles
“Regines Condominium v. Ofelia (Gala) Panes and Alicia Gala”.
governing corporations. Moreover, every action — including a
counterclaim — must be prosecuted or defended in the name of the real
party in interest. It is plainly an error to lay the claim for legal fees of Thereafter, the SEC rendered a Joint Decision in two SEC Cases,
private respondent Gregorio Manuel at the door of petitioner (FMC) Dismissing the petition in SEC Case against Alicia, Rita and Guia,
rather than individual members of the Francisco family. enjoining Ellice and Margo to perform corporate acts as directors and
officers thereof, nullifying the election of the new sets of Board of
Directors and Officers of Ellice and Margo, ordering Raul Gala to
Section 20 – return all the titles of real properties in the names of Ellice and Margo
which were unlawfully taken and held by him and directing the Ellice
De facto corporations. - The due incorporation of any corporation to return to herein Alicia all corporate papers, records of both Ellice
claiming in good faith to be a corporation under this Code, and its right and Margo which are in their possession and control.
to exercise corporate powers, shall not be inquired into collaterally in
any private suit to which such corporation may be a party. Such inquiry Thus, Ellice and Margo appealed to the SEC En Banc, which reversed
may be made by the Solicitor General in a quo warranto proceeding. and set aside the decision of the Hearing Officer and a new one hereby
rendered. Accordingly, Alicia Gala and Guia G. Domingo are ordered as
Gala Vs. Ellice-Agro-Industrial (418 SCRA728) follows:

Facts: (1) jointly and solidarily pay ELLICE and/or MARGO the amount of
P700,000.00 representing the consideration for the unauthorized sale
of a parcel of land to Lucky Homes and Development Corporation;
The spouses Manuel and Alicia Gala, their children Guia Domingo,
Ofelia Gala, Raul Gala, and Rita Benson, and their encargados Virgilio
Galeon and Julian Jader formed and organized the Ellice Agro- (2) jointly and severally pay ELLICE and MARGO the proceeds of sales
Industrial Corporation. As payment for their subscriptions, the Gala of agricultural products averaging P120,000.00 per month from
spouses transferred several parcels of land located in the provinces of February 17, 1988;
Quezon and Laguna to Ellice. Manuel Gala, Alicia Gala and Ofelia Gala
subscribed to an additional 3,299 shares, 10,652.5 shares and 286.5 (3) jointly and severally indemnify the appellants P90,000.00 as
shares, respectively. The spouses Manuel and Alicia also acquired an attorney’s fees;
additional 550 shares and 281 shares, respectively.
(4) jointly and solidarily pay the costs of suit;
Subsequently, Guia Domingo, Ofelia Gala, Raul Gala, Virgilio Galeon
and Julian Jader incorporated the Margo Management and
Development Corporation (Margo). Manuel Gala sold 13,314 of his (5) turn over to the individual appellants the corporate records of
shares in Ellice to Margo. Then, Alicia Gala transferred 1,000 of her ELLICE and MARGO in their possession; and
shares in Ellice to a certain Victor de Villa who transferred said shares
to Margo. A few months later, Alicia transferred 854.3 of her shares to (6) desist and refrain from interfering with the management of ELLICE
Ofelia Gala, 500 to Guia Domingo and 500 to Raul Gala. and MARGO.

Years later, Manuel Gala transferred all of his remaining holdings in Petitioners filed a petition for review with the Court of Appeals which
Ellice, amounting to 2,164 shares to Raul Gala and Alicia Gala dismissed the petition for review and affirmed the decision of the SEC
transferred 10,000 of her shares to Margo. En Banc.

In 1990, a special stockholders’ meeting of Margo was held, where a Hence, this petition.
new board of directors was elected. The newly-elected board elected a
new set of officers where Raul Gala was elected as chairman, president
and general manager. During the meeting, the board approved several Issue:
actions, including the commencement of proceedings to annul certain
dispositions of Margo’s property made by Alicia Gala. The board also I
resolved to change the name of the corporation to MRG Management
and Development Corporation.
WHETHER OR NOT THE LOWER COURT ERRED IN NOT
DECLARING AS ILLEGAL AND CONTRARY TO PUBLIC POLICY
Similarly, a special stockholders’ meeting of Ellice was held to elect a THE PURPOSES AND MANNER IN WHICH RESPONDENT
new board of directors. A new set of corporate officers was elected and CORPORATIONS WERE ORGANIZED – WHICH WERE, E.G. TO (1)
where Raul Gala was also elected as chairman, president and general “PREVENT THE GALA ESTATE FROM BEING BROUGHT UNDER
manager. THE COVERAGE” OF THE COMPREHENSIVE AGRARIAN REFORM

48
PROGRAM (CARP) AND (2) PURPORTEDLY FOR “ESTATE laws, for the doctrine of primary jurisdiction precludes a court from
PLANNING.” arrogating unto itself the authority to resolve a controversy the
jurisdiction over which is initially lodged with an administrative body
of special competence. Since primary jurisdiction over any violation of
II
Section 13 of Republic Act No. 3844 that may have been committed is
vested in the Department of Agrarian Reform Adjudication Board
WHETHER OR NOT THE LOWER COURT ERRED (1) IN (DARAB), then it is with said administrative agency that the petitioners
SUSPICIOUSLY RESOLVING THE CASE WITHIN TWO (2) DAYS must first plead their case. With regard to their claim that Ellice and
FROM RECEIPT OF RESPONDENTS’ COMMENT; AND (2) IN NOT Margo were meant to be used as mere tools for the avoidance of estate
MAKING A DETERMINATION OF THE ISSUES OF FACTS AND taxes, suffice it say that the legal right of a taxpayer to reduce the
INSTEAD RITUALLY CITING THE FACTUAL FINDINGS OF THE amount of what otherwise could be his taxes or altogether avoid them,
COMMISSION A QUO WITHOUT DISCUSSION AND ANALYSIS; by means which the law permits, cannot be doubted.

III The petitioners’ allegation that Ellice and Margo were run without any
of the typical corporate formalities, even if true, would not merit the
grant of any of the relief set forth in their prayer. We cannot disregard
WHETHER OR NOT THE LOWER COURT ERRED IN RULING THAT the corporate entities of Ellice and Margo on this ground. At most, such
THE ORGANIZATION OF RESPONDENT CORPORATIONS WAS allegations, if proven to be true, should be addressed in an
NOT ILLEGAL FOR DEPRIVING PETITIONER RITA G. BENSON OF administrative case before the SEC.
HER LEGITIME.

Thus, even if Ellice and Margo were organized for the purpose of
IV exempting the properties of the Gala spouses from the coverage of land
reform legislation and avoiding estate taxes, we cannot disregard their
WHETHER OR NOT THE LOWER COURT ERRED IN NOT separate juridical personalities.
PIERCING THE VEILS OF CORPORATE FICTION OF
RESPONDENTS CORPORATIONS ELLICE AND MARGO. 2.

Ruling: Next, petitioners make much of the fact that the Court of Appeals
promulgated its assailed Decision a mere two days from the time the
1. respondents filed their Comment. They alleged that the appellate court
could not have made a deliberate study of the factual questions in the
case, considering the sheer volume of evidence available. In support of
The petitioners’ first contention in support of this theory is that the this allegation, they point out that the Court of Appeals merely adopted
purposes for which Ellice and Margo were organized should be the factual findings of the SEC En Banc verbatim, without deliberation
declared as illegal and contrary to public policy. They claim that the and analysis.
respondents never pursued exemption from land reform coverage in
good faith and instead merely used the corporations as tools to
circumvent land reform laws and to avoid estate taxes. Specifically, In People v. Mercado, it was ruled that the speed with which a lower
they point out that respondents have not shown that the transfers of court disposes of a case cannot thus be attributed to the injudicious
the land in favor of Ellice were executed in compliance with the performance of its function. The two-day period between the filing of
requirements of Section 13 of R.A. 3844. Furthermore, they alleged petitioners’ Comment and the promulgation of the decision was
that respondent corporations were run without any of the conventional sufficient time to consider their arguments and to incorporate these in
corporate formalities. the decision. As long as the lower court does not sacrifice the orderly
administration of justice in favor of a speedy but reckless disposition of
a case, it cannot be taken to task for rendering its decision with due
At the outset, the Court holds that petitioners’ contentions impugning dispatch.
the legality of the purposes for which Ellice and Margo were organized,
amount to collateral attacks which are prohibited in this jurisdiction.
Section 20 of the Corporation Code provides that “the due Furthermore, well-settled is the rule that the factual findings of the
incorporation of any corporation claiming in good faith to be a Court of Appeals are conclusive on the parties and are not reviewable
corporation under this Code, and its right to exercise corporate powers, by the Supreme Court. They carry even more weight when the Court of
shall not be inquired into collaterally in any private suit to which such Appeals affirms the factual findings of a lower fact-finding body.
corporation maybe a party. Such inquiry may be made by the Solicitor Likewise, the findings of fact of administrative bodies, such as the SEC,
General in a quo warranto proceeding.” will not be interfered with by the courts in the absence of grave abuse
of discretion on the part of said agencies, or unless the aforementioned
findings are not supported by substantial evidence.
The best proof of the purpose of a corporation is its articles of
incorporation and by-laws. The articles of incorporation must state the
primary and secondary purposes of the corporation, while the by-laws However, in the interest of equity, this Court has reviewed the factual
outline the administrative organization of the corporation, which, in findings of the SEC En Banc, which were affirmed in toto by the Court
turn, is supposed to insure or facilitate the accomplishment of said of Appeals, and has found no cogent reason to disturb the same.
purpose. Indeed, we are convinced that the arguments raised by the petitioners
are nothing but unwarranted conclusions of law. Specifically, they
insist that the Gala spouses never meant to part with the ownership of
In the case at bar, a perusal of the Articles of Incorporation of Ellice the shares which are in the names of their children and encargados ,
and Margo shows no sign of the allegedly illegal purposes that and that all transfers of property to these individuals are supposedly
petitioners are complaining of. It is well to note that, if a corporation’s void for being absolutely simulated for lack of consideration. However,
purpose, as stated in the Articles of Incorporation, is lawful, then the as correctly held by the SEC En Banc, the transfers were only relatively
SEC has no authority to inquire whether the corporation has purposes simulated, inasmuch as the evident intention of the Gala spouses was
other than those stated, and mandamus will lie to compel it to issue the to donate portions of their property to their children and encargados .
certificate of incorporation.

3.
Assuming there was even a grain of truth to the petitioners’ claims
regarding the legality of what are alleged to be the corporation’s true
purposes, we are still precluded from granting them relief. We cannot In an attempt to bolster their theory that the organization of the
address here their concerns regarding circumvention of land reform respondent corporations was illegal, the petitioners aver that the

49
legitime pertaining to petitioners Rita G. Benson and Guia G. Domingo execution against Jose M. Aruego, as the real defendant , stating,
from the estate of their father had been subject to unwarranted "plaintiff's counsel and the Sheriff of Manila discovered that there is no
reductions as a result thereof. In sum, they claim that stockholdings in such entity as University Publishing Co., Inc. " Plaintiff annexed to his
Ellice which the late Manuel Gala had assigned to them were petition a certification from the securities and Exchange Commission
insufficient to cover their legitimes, since Benson was only given two dated July 31, 1961, attesting: "The records of this Commission do not
shares while Domingo received only sixteen shares out of a total show the registration of UNIVERSITY PUBLISHING CO., INC., either
number of 35,000 issued shares. as a corporation or partnership." "University Publishing Co., Inc."
countered by filing, through counsel (Jose M. Aruego's own law firm), a
"manifestation" stating that "Jose M. Aruego is not a party to this
The reliefs sought by petitioners should have been raised in a
case," and that, therefore, plaintiff's petition should be denied.
proceeding for settlement of estate, rather than in the present intra-
corporate controversy. If they are genuinely interested in securing that
part of their late father’s property which has been reserved for them in Issue:
their capacity as compulsory heirs, then they should simply exercise
their actio ad supplendam legitimam , or their right of completion of
W/N University Publishing can be considered a corporation
legitime. Such relief must be sought during the distribution and
considering that it is not registered with the SEC
partition stage of a case for the settlement of the estate of Manuel Gala,
filed before a court which has taken jurisdiction over the settlement of
said estate. Ruling:

4. The fact of non-registration of University Publishing Co., Inc. in the

Securities and Exchange Commission has not been disputed.
Defendant would only raise the point that "University Publishing Co.,
Finally, the petitioners pray that the veil of corporate fiction that
Inc.," and not Jose M. Aruego, is the party defendant; thereby
shroud both Ellice and Margo be pierced, consistent with their earlier
assuming that "University Publishing Co., Inc." is an existing
allegation that both corporations were formed for purposes contrary to
corporation with an independent juridical personality. Precisely,
law and public policy. In sum, they submit that the respondent
however, on account of the non-registration it cannot be considered a
corporations are mere business conduits of the deceased Manuel Gala
corporation, not even a corporation de facto. It has therefore no
and thus may be disregarded to prevent injustice, the distortion or
personality separate from Jose M. Aruego; it cannot be sued
hiding of the truth or the “letting in” of a just defense.
independently.

However, to warrant resort to the extraordinary remedy of piercing the

The corporation-by-estoppel doctrine has not been invoked. At any
veil of corporate fiction, there must be proof that the corporation is
rate, the same is inapplicable here. Aruego represented a non-existent
being used as a cloak or cover for fraud or illegality, or to work
entity and induced not only the plaintiff but even the court to believe in
injustice. The petitioners have failed to prove that Ellice and Margo
such representation. He signed the contract as "President" of
were being used as thus. They have not presented any evidence to show
"University Publishing Co., Inc.," stating that this was "a corporation
how the separate juridical entities of Ellice and Margo were used by the
duly organized and existing under the laws of the Philippines," and
respondents to commit fraudulent, illegal or unjust acts. Hence, this
obviously misled plaintiff (Mariano A. Albert) into believing the same.
contention, too, must fail.
One who has induced another to act upon his willful misrepresentation
that a corporation was duly organized and existing under the law,
Albert Vs. University Publishing (13 SCRA 84) cannot thereafter set up against his victim the principle of corporation
by estoppel.
Facts:
"University Publishing Co., Inc." purported to come to court, answering
the complaint and litigating upon the merits. But as stated, "University
Mariano A. Albert sued University Publishing Co., Inc. Plaintiff alleged
Publishing Co., Inc." has no independent personality; it is just a name.
inter alia that defendant was a corporation duly organized and existing
Jose M. Aruego was, in reality, the one who answered and litigated,
under the laws of the Philippines. Defendant, through Jose M. Aruego,
through his own law firm as counsel. He was in fact, if not, in name, the
its President, entered into a contract with Albert whereby it agreed to
defendant.
pay plaintiff P30,000.00 for the exclusive right to publish his revised
Commentaries on the Revised Penal Code and for his share in previous
sales of the book's first edition; that defendant had undertaken to pay In Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting
in eight quarterly installments of P3,750.00 starting July 15, 1948; that or purporting to act on behalf of a corporation which has no valid
per contract failure to pay one installment would render the rest due; existence assumes such privileges and obligations and becomes
and that defendant had failed to pay the second installment. personally liable for contracts entered into or for other acts performed
as such agent." Had Jose M. Aruego been named as party defendant
instead of, or together with, "University Publishing Co., Inc.," there
Defendant admitted plaintiff's allegation of defendant's corporate
would be no room for debate as to his personal liability. Since he was
existence; admitted the execution and terms of the contract dated July
not so named, the matters of "day in court" and "due process" have
19, 1948; but alleged that it was plaintiff who breached their contract
arisen.
by failing to deliver his manuscript. Furthermore, defendant
counterclaimed for damages.
The evidence is patently clear that Jose M. Aruego, acting as
representative of a non-existent principal, was the real party to the
Plaintiff died before trial and Justo R. Albert, his estate's
contract sued upon; that he was the one who reaped the benefits
administrator, was substituted for him. The Court renders judgment in
resulting from it, so much so that partial payments of the consideration
favor of the plaintiff and against the defendant the University
were made by him; that he violated its terms, thereby precipitating the
Publishing Co., Inc., ordering the defendant to pay the administrator
suit in question; and that in the litigation he was the real defendant.
Justo R. Albert, the sum of P23,000.00 with legal [rate] of interest
Perforce, in line with the ends of justice, responsibility under the
from the date of the filing of this complaint until the whole amount
judgment falls on him.
shall have been fully paid. The defendant shall also pay the costs. The
counterclaim of the defendant is hereby dismissed for lack of evidence.
We need hardly state that should there be persons who under the law
are liable to Aruego for reimbursement or contribution with respect to
As aforesaid, we reduced the amount of damages to P15,000.00, to be
the payment he makes under the judgment in question, he may, of
executed in full. Thereafter, on July 22, 1961, the court a quo ordered
course, proceed against them through proper remedial measures.
issuance of an execution writ against University Publishing Co., Inc.
Plaintiff, however, on August 10, 1961, petitioned for a writ of
50
Section 21 – need not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the sale
and operation of the boats would be divided equally among them also
Corporation by estoppel. - All persons who assume to act as a shows that they had indeed formed a partnership.
corporation knowing it to be without authority to do so shall be liable
as general partners for all debts, liabilities and damages incurred or
arising as a result thereof: Provided, however, That when any such Moreover, it is clear that the partnership extended not only to the
ostensible corporation is sued on any transaction entered by it as a purchase of the boat, but also to that of the nets and the floats. The
corporation or on any tort committed by it as such, it shall not be fishing nets and the floats, both essential to fishing, were obviously
allowed to use as a defense its lack of corporate personality. acquired in furtherance of their business. It would have been
inconceivable for Lim to involve himself so much in buying the boat
but not in the acquisition of the aforesaid equipment, without which
On who assumes an obligation to an ostensible corporation as such, the business could not have proceeded.
cannot resist performance thereof on the ground that there was in fact
no corporation.
Given the preceding facts, it is clear that there was, among petitioner,
Chua and Yao, a partnership engaged in the fishing business. They
Lim Tong Lim Vs. Phil. Fishing (418 SCRA 431) purchased the boats, which constituted the main assets of the
partnership, and they agreed that the proceeds from the sales and
Facts: operations thereof would be divided among them.

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Verily, petitioner entered into a business agreement with Chua and
Peter Yao entered into a Contract dated February 7, 1990, for the Yao, in which debts were undertaken in order to finance the acquisition
purchase of fishing nets of various sizes from the Philippine Fishing and the upgrading of the vessels which would be used in their fishing
Gear Industries, Inc. (herein respondent). They claimed that they were business. The sale of the boats, as well as the division among the three
engaged in a business venture with Petitioner Lim Tong Lim, who of the balance remaining after the payment of their loans, proves
however was not a signatory to the agreement. The total price of the beyond cavil that F/B Lourdes , though registered in his name, was not
nets amounted to P532,045. Four hundred pieces of floats worth his own property but an asset of the partnership. It is not uncommon
P68,000 were also sold to the Corporation. to register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself.
After all, he is the brother of the creditor, Jesus Lim.
The buyers, however, failed to pay for the fishing nets and the floats;
hence, private respondents filed a collection suit against Chua, Yao and
Petitioner Lim Tong Lim with a prayer for a writ of preliminary We stress that it is unreasonable — indeed, it is absurd — for petitioner
attachment. The suit was brought against the three in their capacities to sell his property to pay a debt he did not incur, if the relationship
as general partners, on the allegation that "Ocean Quest Fishing among the three of them was merely that of lessor-lessee, instead of
Corporation" was a nonexistent corporation as shown by a Certification partners.
from the Securities and Exchange Commission.
Corporation by Estoppel
On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of Petitioner argues that under the doctrine of corporation by estoppel,
Attachment and that Chua, Yao and Lim, as general partners, were liability can be imputed only to Chua and Yao, and not to him. Again,
jointly liable to pay respondent. we disagree.

The trial court ruled that a partnership among Lim, Chua and Yao Sec. 21 of the Corporation Code of the Philippines provides:
existed based (1) on the testimonies of the witnesses presented and (2)
on a Compromise Agreement executed by the three in a Civil Case
which Chua and Yao had brought against Lim in the RTC of Malabon, Sec. 21. Corporation by estoppel . — All persons who assume to act as a
for (a) a declaration of nullity of commercial documents; (b) a corporation knowing it to be without authority to do so shall be liable
reformation of contracts; (c) a declaration of ownership of fishing as general partners for all debts, liabilities and damages incurred or
boats; (d) an injunction and (e) damages. 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
Lim appealed to the Court of Appeals which affirmed the RTC. allowed to use as a defense its lack of corporate personality.

Issue: One, who assumes an obligation to an ostensible corporation as such,

cannot resist performance thereof on the ground that there was in fact
W/N by their acts, Lim, Chua and Yao could be deemed to have entered no corporation.
into a partnership
Thus, even if the ostensible corporate entity is proven to be legally
Ruling: nonexistent, a party may be estopped from denying its corporate
existence. "The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be
Art. 1767 — By the contract of partnership, two or more persons bind incompetent to act and appropriate for itself the power and attributes
themselves to contribute money, property, or industry to a common of a corporation as provided by law; it cannot create agents or confer
fund, with the intention of dividing the profits among themselves. authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at
their own risk. And as it is an elementary principle of law that a person
Chua, Yao and Lim had decided to engage in a fishing business, which
who acts as an agent without authority or without a principal is himself
they started by buying boats worth P3.35 million, financed by a loan
regarded as the principal, possessed of all the right and subject to all
secured from Jesus Lim who was petitioner's brother. In their
the liabilities of a principal, a person acting or purporting to act on
Compromise Agreement, they subsequently revealed their intention to
behalf of a corporation which has no valid existence assumes such
pay the loan with the proceeds of the sale of the boats, and to divide
privileges and obligations and becomes personally liable for contracts
equally among them the excess or loss. These boats, the purchase and
entered into or for other acts performed as such agent.
the repair of which were financed with borrowed money, fell under the
term "common fund" under Article 1767. The contribution to such fund

51
The doctrine of corporation by estoppel may apply to the alleged and as President of the Federation and impleaded the Federation as an
corporation and to a third party. In the first instance, an alternative defendant. Petitioner sought to hold Henri Kahn liable for
unincorporated association, which represented it to be a corporation, the unpaid balance for the tickets purchased by the Federation on the
will be estopped from denying its corporate capacity in a suit against it ground that Henri Kahn allegedly guaranteed the said obligation.
by a third person who relied in good faith on such representation. It
cannot allege lack of personality to be sued to evade its responsibility
Henri Kahn filed averred that the petitioner has no cause of action
for a contract it entered into and by virtue of which it received
against him either in his personal capacity or in his official capacity as
advantages and benefits.
president of the Federation. He maintained that he did not guarantee
payment but merely acted as an agent of the Federation which has a
On the other hand, a third party who, knowing an association to be separate and distinct juridical personality.
unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence in
On the other hand, the Federation failed to file its answer, hence, was
a suit brought against the alleged corporation. In such case, all those
declared in default by the trial court.
who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable
for contracts they impliedly assented to or took advantage of. In due course, the trial court rendered judgment and ruled in favor of
the petitioner and declared Henri Kahn personally liable for the unpaid
obligation of the Federation.
There is no dispute that the respondent, Philippine Fishing Gear
Industries, is entitled to be paid for the nets it sold. The only question
here is whether petitioner should be held jointly liable with Chua and Only Henri Kahn elevated the above decision to the Court of Appeals
Yao. Petitioner contests such liability, insisting that only those who which reversed the trial court.
dealt in the name of the ostensible corporation should be held liable.
Since his name does not appear on any of the contracts and since he
never directly transacted with the respondent corporation, ergo, he Issue:
cannot be held liable.
W/N Henri Kahn personally liable for the obligation of the
Unquestionably, petitioner benefited from the use of the nets found unincorporated PFF, having negotiated with petitioner and contracted
inside F/B Lourdes, the boat which has earlier been proven to be an the obligation in behalf of the PFF, made a partial payment and
asset of the partnership. He in fact questions the attachment of the assured petitioner of fully settling the obligation
nets, because the Writ has effectively stopped his use of the fishing
vessel. Ruling:

Although it was never legally formed for unknown reasons, this fact Before an entity may be considered as a national sports association,
alone does not preclude the liabilities of the three as contracting parties such entity must be recognized by the accrediting organization, the
in representation of it. Clearly, under the law on estoppel, those acting Philippine Amateur Athletic Federation under R.A. 3135, and the
on behalf of a corporation and those benefited by it, knowing it to be Department of Youth and Sports Development under P.D. 604. This
without valid existence, are held liable as general partners. fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri
Technically, it is true that petitioner did not directly act on behalf of the Kahn attached to his motion for reconsideration before the trial court a
corporation. However, having reaped the benefits of the contract copy of the constitution and by-laws of the Philippine Football
entered into by persons with whom he previously had an existing Federation. Unfortunately, the same does not prove that said
relationship, he is deemed to be part of said association and is covered Federation has indeed been recognized and accredited by either the
by the scope of the doctrine of corporation by estoppel. Philippine Amateur Athletic Federation or the Department of Youth
and Sports Development. Accordingly, we rule that the Philippine
Football Federation is not a national sports association within the
Int’l Express Vs. CA (343 SCRA 674) purview of the aforementioned laws and does not have corporate
existence of its own.
Facts:
Thus being said, it follows that private respondent Henry Kahn should
be held liable for the unpaid obligations of the unincorporated
International Express Travel and Tour Services, Inc., through its
Philippine Football Federation. It is a settled principal in corporation
managing director, wrote a letter to the Philippine Football Federation
law that any person acting or purporting to act on behalf of a
(Federation), through its president private respondent Henri Kahn,
corporation which has no valid existence assumes such privileges and
wherein the former offered its services as a travel agency to the latter.
becomes personally liable for contract entered into or for other acts
The offer was accepted.
performed as such agent. As president of the Federation, Henri Kahn is
presumed to have known about the corporate existence or non-
Petitioner secured the airline tickets for the trips of the athletes and existence of the Federation. We cannot subscribe to the position taken
officials of the Federation to the South East Asian Games in Kuala by the appellate court that even assuming that the Federation was
Lumpur as well as various other trips to the People's Republic of China defectively incorporated; the petitioner cannot deny the corporate
and Brisbane. The total cost of the tickets amounted to P449,654.83. existence of the Federation because it had contracted and dealt with
For the tickets received, the Federation made two partial payments, the Federation in such a manner as to recognize and in effect admit its
both in September of 1989, in the total amount of P176,467.50. existence. The doctrine of corporation by estoppel is mistakenly
applied by the respondent court to the petitioner. The application of
the doctrine applies to a third party only when he tries to escape
On 4 October 1989, petitioner wrote the Federation, through the
liability on a contract from which he has benefited on the irrelevant
private respondent a demand letter requesting for the amount of
ground of defective incorporation. In the case at bar, the petitioner is
P265,894.33. On 30 October 1989, the Federation, through the Project
not trying to escape liability from the contract but rather is the one
Gintong Alay, paid the amount of P31,603.00. On 27 December 1989,
claiming from the contract.
Henri Kahn issued a personal check in the amount of P50,000 as
partial payment for the outstanding balance of the Federation.
Thereafter, no further payments were made despite repeated demands. Merril Lynch Vs. CA (211 SCRA 824)

This prompted petitioner to file a civil case before the Regional Trial Facts:
Court of Manila. Petitioner sued Henri Kahn in his personal capacity

52
On November 23, 1987, Merrill Lynch Futures, Inc. (hereafter, simply statute does not provide that the contract shall be void, but merely fixes
ML FUTURES) filed a complaint with the Regional Trial Court at a special penalty for violation of the statute. . . ."
Quezon City against the Spouses Pedro M. Lara and Elisa G. Lara for
the recovery of a debt and interest thereon, damages, and attorney's
The doctrine was adopted by this Court as early as 1924 in Asia
fees.
Banking Corporation v. Standard Products Co., in which the following
pronouncement was made:
ML FUTURES is a a non-resident foreign corporation, not doing
business in the Philippines, duly organized and existing under and by
The general rule that in the absence of fraud of person who has
virtue of the laws of the state of Delaware, U.S.A.;" as well as b) a
contracted or otherwise dealt with an association in such a way as to
"futures commission merchant" duly licensed to act as such in the
recognize and in effect admit its legal existence as a corporate body is
futures markets and exchanges in the United States, . . .essentially
thereby estopped to deny its corporate existence in any action leading
functioning as a broker. . .(executing) orders to buy and sell futures
out of or involving such contract or dealing, unless its existence is
contracts received from its customers on U.S. futures exchanges.
attacked for causes which have arisen since making the contract or
other dealing relied on as an estoppel and this applies to foreign as
It also defined a "futures contract" as a "contractual commitment to well as domestic corporations .
buy and sell a standardized quantity of a particular item at a specified
future settlement date and at a price agreed upon, with the purchase or
There would seem to be no question that the Laras received benefits
sale being executed on a regulated futures exchange."
generated by their business relations with ML FUTURES. Those
business relations, according to the Laras themselves, spanned a period
ML FUTURES alleged it entered into a Futures Customer Agreement of seven (7) years; and they evidently found those relations to be of
with the defendant spouses in virtue of which it agreed to act as the such profitability as warranted their maintaining them for that not
latter's broker for the purchase and sale of futures contracts in the U.S. insignificant period of time; otherwise, it is reasonably certain that they
Pursuant to the contract, orders to buy and sell futures contracts were would have terminated their dealings with ML FUTURES much, much
transmitted to ML FUTURES by the Lara Spouses "through the earlier. In fact, even as regards their last transaction, in which the
facilities of Merrill Lynch Philippines, Inc., a Philippine corporation Laras allegedly suffered a loss in the sum of US$160,749.69, the Laras
and a company servicing plaintiffs customers. The Lara Spouses "knew nonetheless still received some monetary advantage, for ML FUTURES
and were duly advised that Merrill Lynch Philippines, Inc. was not a credited them with the amount of US$75,913.42 then due to them, thus
broker in futures contracts," and that it "did not have a license from the reducing their debt to US$84,836.27. Given these facts, and assuming
Securities and Exchange Commission to operate as a commodity that the Lara Spouses were aware from the outset that ML FUTURES
trading advisor (i e ., 'an entity which, not being a broker, furnishes had no license to do business in this country and MLPI, no authority to
advice on commodity futures to persons who trade in futures act as broker for it, it would appear quite inequitable for the Laras to
contracts'). evade payment of an otherwise legitimate indebtedness due and owing
to ML FUTURES upon the plea that it should not have done business
in this country in the first place, or that its agent in this country, MLPI,
The Lara Spouses actively traded in futures contracts, including "stock
had no license either to operate as a "commodity and/or financial
index futures" for four years or so, i e ., from 1983 to October, 1987,
futures broker."
there being more or less regular accounting and corresponding
remittances of money (or crediting or debiting) made between the
spouses and ML FUTURES. Because of a loss amounting said spouses Considerations of equity dictate that, at the very least, the issue of
became indebted to ML FUTURES for the ensuing balance of whether the Laras are in truth liable to ML FUTURES and if so in what
US$84,836.27, which the latter asked them to pay. However, the Lara amount, and whether they were so far aware of the absence of the
Spouses however refused to pay this balance, "alleging that the requisite licenses on the part of ML FUTURES and its Philippine
transactions were null and void because Merrill Lynch Philippines, correspondent, MLPI, as to be estopped from alleging that fact as
Inc., the Philippine company servicing accounts of plaintiff, had no defense to such liability, should be ventilated and adjudicated on the
license to operate as a 'commodity and/or financial futures broker.” merits by the proper trial court.

Issue: Section 22 -

W/N ML FUTURES may sue in Philippine Courts to establish and Effects on non-use of corporate charter and continuous
enforce its rights against said spouses, in light of the undeniable fact inoperation of a corporation. - If a corporation does not formally
that it had transacted business in this country without being licensed to organize and commence the transaction of its business or the
do so construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be
Ruling: deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a
If it be true that during all the time that they were transacting with ML ground for the suspension or revocation of its corporate franchise or
FUTURES, the Laras were fully aware of its lack of license to do certificate of incorporation.
business in the Philippines, and in relation to those transactions had
made payments to, and received money from it for several years, the
question is whether or not the Lara Spouses are now estopped to This provision shall not apply if the failure to organize, commence the
impugn ML FUTURES' capacity to sue them in the courts of the forum. transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
The rule is that a party is estopped to challenge the personality of a Commission.
corporation after having acknowledged the same by entering into a
contract with it. And the "doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic corporations;" "one
who has dealt with a corporation of foreign origin as a corporate entity TITLE III
is estopped to deny its corporate existence and capacity." The principle BOARD OF DIRECTORS/TRUSTEES/OFFICERS
"will be applied to prevent a person contracting with a foreign
corporation from later taking advantage of its noncompliance with the Section 23 –
statutes, chiefly in cases where such person has received the benefits of
the contract, where such person has acted as agent for the corporation
and has violated his fiduciary obligations as such, and where the

53
The board of directors or trustees. - Unless otherwise provided in to pay a basic fine of P5,000 and a daily fine of P500 for continuing
this Code, the corporate powers of all corporations formed under this violations.
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 Aggrieved, petitioner went to the Court of Appeals on certiorari
stock, from among the members of the corporation, who shall hold contending that the SEC acted with grave abuse of discretion or lack or
office for one (1) year until their successors are elected and qualified. excess of jurisdiction in issuing the above orders. The appellate court
issued a temporary restraining order on July 26, 1996, and a writ of
preliminary injunction on August 26, 1996.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his
name on the books of the corporation. Any director who ceases to be On June 17, 1998, the appellate court dismissed the petition. It ruled
the owner of at least one (1) share of the capital stock of the that the power to regulate petitioner’s fees was included in the general
corporation of which he is a director shall thereby cease to be a power given to the SEC under Section 40 of The Revised Securities Act
director. Trustees of non-stock corporations must be members thereof. to regulate, supervise, examine, suspend or otherwise discontinue, the
a majority of the directors or trustees of all corporations organized operation of securities-related organizations like petitioner.
under this Code must be residents of the Philippines.
The appellate court likewise denied petitioner’s motion for
Phil. Ass’n of Stock Transfer Vs. CA (536 SCRA 61) reconsideration. Hence, this appeal.

Facts: Issue:

Philippine Association of Stock Transfer and Registry Agencies, Inc. is W/N the SEC acted with grave abuse of discretion or lack or excess of
an association of stock transfer agents principally engaged in the jurisdiction in issuing the controverted Orders of July 8 and 11, 1996
registration of stock transfers in the stock-and-transfer book of
corporations. Ruling:

Petitioner’s Board of Directors unanimously approved a resolution Before its repeal, Section 47 of The Revised Securities Act clearly gave
allowing its members to increase the transfer processing fee they the SEC the power to enjoin the acts or practices of securities-related
charge their clients from P45 per certificate to P75 per certificate, organizations even without first conducting a hearing if, upon proper
effective July 1, 1996; and eventually to P100 per certificate, effective investigation or verification, the SEC is of the opinion that there exists
October 1, 1996. The resolution also authorized the imposition of a the possibility that the act or practice may cause grave or irreparable
processing fee for the cancellation of stock certificates at P20 per injury to the investing public, if left unrestrained. Section 47 clearly
certificate effective July 1, 1996. According to petitioner, the rates had provided,
to be increased since it had been over five years since the old rates were
fixed and an increase of its fees was needed to sustain the financial
viability of the association and upgrade facilities and services. SEC. 47. Cease and desist order.—The
Commission, after proper investigation or
verification, motu proprio, or upon verified
Public respondent Securities and Exchange Commission (SEC) allowed complaint by any aggrieved party, may issue a
petitioner to impose the P75 per certificate transfer fee and P20 per cease and desist order without the necessity of a
certificate cancellation fee effective July 1, 1996. But, approval of the prior hearing if in its judgment the act or practice,
additional increase of the transfer fees to P100 per certificate effective unless restrained may cause grave or
October 1, 1996, was withheld until after a public hearing. The SEC irreparable injury or prejudice to the
issued a letter-authorization to this effect on June 20, 1996. investing public or may amount to fraud or
violation of the disclosure requirements of this Act
Thereafter, on June 24, 1996, the Philippine Association of Securities and the rules and regulations of the Commission.
Brokers and Dealers, Inc. registered its objection to the measure (Emphasis supplied.)
advanced by petitioner and requested the SEC to defer its
implementation. The SEC advised petitioner to hold in abeyance the xxxx
implementation of the increases until the matter was cleared with all
the parties concerned. Petitioner nonetheless proceeded with the
implementation of the increased fees. Said section enforces the power of general supervision of the SEC
under Section 40 of the then Revised Securities Act.
On July 2, 1996, following a complaint from the Philippine Stock
Exchange, the SEC again sent petitioner a second letter strongly urging As a securities-related organization under the jurisdiction and
petitioner to desist from implementing the new rates in the interest of supervision of the SEC by virtue of Section 40 of The Revised Securities
all participants in the security market. Act and Section 3 of Presidential Decree No. 902-A, petitioner was
under the obligation to comply with the July 8, 1996 Order. Defiance
of the order was subject to administrative sanctions provided in
Petitioner also argued that the imposition of the processing fee was a Section 46 of The Revised Securities Act.
management prerogative, which was beyond the SEC’s authority to
regulate absent an express rule or regulation.
Petitioner failed to show that the SEC, which undoubtedly possessed
the necessary expertise in matters relating to the regulation of the
On July 8, 1996, the SEC issued Order enjoining petitioner from securities market, gravely abused its discretion in finding that there
imposing the new fees. was a possibility that the increase in fees and imposition of cancellation
fees will cause grave or irreparable injury or prejudice to the investing
During the hearing, petitioner admitted that it had started imposing public. Indeed, petitioner did not advance any argument to counter the
the fees. It further admitted that aside from the questioned fees, it had SEC’s finding. Thus, there appears to be no substantial reason to
likewise started imposing fees ranging from P50 to P500 for report of nullify the July 8, 1996 Order. This is true, especially considering that,
shareholdings or list of certificates; certification of shareholdings or as pointed out by the OSG, petitioner’s fee increases have far-reaching
other stockholder information requested by external auditors and effects on the capital market. Charging exorbitant processing fees
validation of status of certificates, all without prior approval of the could discourage many small prospective investors and curtail the
Commission. Thus, for violating its orders, the SEC ordered petitioner infusion of money into the capital market and hamper its growth.

54
In Philippine Stock Exchange, Inc. v. Court of Appeals, the Court held
that the SEC is without authority to substitute its judgment for that of 1.) Whether or not the term “to file in behalf of the Metropolitan Cebu
the corporation’s board of directors on business matters so long as the Water District expropriation and other cases” include the grant of
board of directors acts in good faith. This Court notes, however, that authority to sign the certificate of non- forum shopping for and in
this case involves, not whether petitioner’s actions pertained to behalf of the MCWD.
management prerogatives or whether petitioner acted in good faith.
Rather, this case involves the question of whether the SEC had the 2.) Whether or not the consent of the Board of Directors of the Water
power to enjoin petitioner’s planned increase in fees after the SEC had District is a condition sine qua non to the grant of CPC by the NWRB
determined that said act if pursued may cause grave or irreparable upon operators of waterworks within the service area of the Water
injury or prejudice to the investing public. Petitioner was fined for District.
violating the SEC’s cease-and-desist order which the SEC had issued to
protect the interest of the investing public, and not simply for Ruling:
exercising its judgment in the manner it deems appropriate for its
business. 1. The term “to file in behalf of the Metropolitan Cebu Water District
expropriation and other cases” did not include the grant of power to
sign the certificate of non- forum shopping for and in behalf of the
The regulatory and supervisory powers of the Commission under
MCWD.
Section 40 of the then Revised Securities Act, in our view, were broad
enough to include the power to regulate petitioner’s fees. Indeed,
While the questioned resolution sufficiently identifies the kind of cases
Section 47 gave the Commission the power to enjoin motu proprio any
which Engr. Paredes may file in petitioner’s behalf, the same does not
act or practice of petitioner which could cause grave or irreparable
authorize him for the specific act of signing verifications and
injury or prejudice to the investing public. The intentional omission in
certifications against forum- shopping for it merely authorizes him to
the law of any qualification as to what acts or practices are subject to
file cases in behalf of the corporation. There is no mention of signing
the control and supervision of the SEC under Section 47 confirms the
verifications or for that matter, any document of whatever nature.
broad extent of the SEC’s regulatory powers over the operations of
securities-related organizations like petitioner.
A board resolution purporting to authorize a person to sign documents
in behalf of the corporation must explicitly vest such authority.
The SEC’s authority to issue the cease-and-desist order being
indubitable under Section 47 in relation to Section 40 of the then Under Rule 13, Section 2 of the Rules of Court, filing is the act of
Revised Securities Act, and there being no showing that the SEC presenting the pleading or other paper to the clerk of court. Since the
committed grave abuse of discretion in finding basis to issue said signing of verifications and certifications against forum- shopping is
order, we rule that the Court of Appeals committed no reversible error not integral to the act of filing, this may not be deemed as necessarily
in affirming the assailed orders. For its open and admitted defiance of included in an authorization merely to file cases.
a lawful cease-and-desist order, petitioner was held appropriately
liable for the payment of the penalty imposed on it in the SEC’s July 11, Engr. Paredes not having been authorized to sign the verification and
1996 Order. certification of non- forum shopping, the instant petition may be
dismissed outright.
Metro Cebu Vs. Adala (526 SCRA 465) 2. The consent of the Board of Directors of MCWD was needed in
granting a CPC to the respondent based on the express provision of
In 2002, Adala (respondent) applied for the issuance of a Certificate of Section 47 of PD 198.
Public Convenience (CPC) with the National Water Resources Board
(NWRB) to operate and maintain waterworks system in certain parts of However, this cannot be the basis of MCWD in opposing against the
Cebu City. application of respondent Adala because Section 47 of PD 198 was held
by the Court to be unconstitutional since this provision vests an
At the initial hearing, when Adala submitted proof of compliance with exclusive franchise upon public utilities. This is found by the Court to
the jurisdictional requirements, the MCWD (petitioner) appeared be repugnant to Article XIV Section 5 of the 1973 Constitution that
through its lawyers to oppose the application. franchise, certificate or authorization for public utility which is
exclusive in character shall not be granted (the 1973 Constitution was
Petitioner prayed for the denial of the application on the following the basis of declaring the provision unconstitutional because PD 198
grounds: was enacted into law when the 1973 Constitution was still in force).

1. petitioner’s Board of Directors had not consented to the Therefore, Section 47 of PD 198 cannot be relied upon by the petitioner
issuance of the franchise applied for, such consent being in support of its opposition against respondent’s application.
mandatory as set forth in Section 47 of PD 198 , which
regulates local water utilities.; Manila Metal Container Vs. PNB (511 SCRA 444)
2. the proposed waterworks would interfere with the
petitioner’s water supply which it has the right to protect;
3. the water needs of the residents in the subject area was Facts:
already being well served by the petitioner.
Petitioner was the owner of a 8,015 square meter parcel of land located
NWRB dismissed the petitioner’s opposition and found that the
in Mandaluyong (now a City), Metro Manila. The property was
respondent was qualified to operate a waterworks system.
covered by Transfer Certificate of Title (TCT) No. 332098 of the
Registry of Deeds of Rizal. To secure a P900,000.00 loan it had
The Petitioner appealed the case but the same was dismissed by the
obtained from respondent Philippine National Bank (PNB), petitioner
RTC of Cebu City.
executed a real estate mortgage over the lot. Respondent PNB later
granted petitioner a new credit accommodation of P1,000,000.00;
The respondent, on the other hand, averred that the petitioner’s
and, on November 16, 1973, petitioner executed an Amendment of
General Manager Engr. Paredes who filed the present petition and
Real Estate Mortgage over its property. On March 31, 1981, petitioner
signed the accompanying verification and certification of non- forum
secured another loan of P653,000.00 from respondent PNB, payable in
shopping, was not specifically authorized by the Board of Directors for
quarterly installments of P32,650.00, plus interests and other charges.
that purpose and that the resolution only stated that Engr. Paredes was
authorized to file in behalf of the MCWD expropriation and other cases
and this did not include the signing of the certificate of non- forum On August 5, 1982, respondent PNB filed a petition for extrajudicial
shopping. Petition must be dismissed. foreclosure of the real estate mortgage and sought to have the property
sold at public auction for P911,532.21, petitioner’s outstanding
Issue/s:

55
obligation to respondent PNB as of June 30, 1982, plus interests and Petitioner rejected respondent’s proposal in a letter dated July 14,
attorney’s fees. 1988. It maintained that respondent PNB had agreed to sell the
property for P1,574,560.47, and that since its P725,000.00
downpayment had been accepted, respondent PNB was proscribed
After due notice and publication, the property was sold at public
from increasing the purchase price of the property. Petitioner averred
auction on September 28, 1982 where respondent PNB was declared
that it had a net balance payable in the amount of P643,452.34.
the winning bidder for P1,000,000.00. The Certificate of Sale issued
Respondent PNB, however, rejected petitioner’s offer to pay the
in its favor was registered with the Office of the Register of Deeds of
balance of P643,452.34 in a letter dated August 1, 1989.
Rizal, and was annotated at the dorsal portion of the title on February
17, 1983. Thus, the period to redeem the property was to expire on
February 17, 1984. Issue:

Since petitioner failed to redeem the property, the Register of Deeds W/N petitioner and respondent PNB had entered into a perfected
cancelled TCT No. 32098 on June 1, 1984, and issued a new title in contract for petitioner to repurchase the property from respondent
favor of respondent PNB. Petitioner’s offers had not yet been acted
upon by respondent PNB.
Ruling:

Meanwhile, the Special Assets Management Department (SAMD) had

In this case, petitioner had until February 17, 1984 within which to
prepared a statement of account, and as of June 25, 1984 petitioner’s
redeem the property. However, since it lacked the resources, it
obligation amounted to P1,574,560.47. This included the bid price of
requested for more time to redeem/repurchase the property under
P1,056,924.50, interest, advances of insurance premiums, advances on
such terms and conditions agreed upon by the parties. The request,
realty taxes, registration expenses, miscellaneous expenses and
which was made through a letter dated August 25, 1983, was referred
publication cost. When apprised of the statement of account, petitioner
to the respondent’s main branch for appropriate action.
remitted P725,000.00 to respondent PNB as “deposit to repurchase,”
and Official Receipt No. 978191 was issued to it.
When the petitioner was told that respondent did not allow “partial
redemption,” it sent a letter to respondent’s President reiterating its
Notwithstanding SAMD recommendation to the management of PNB
offer to purchase the property. There was no response to petitioner’s
that petitioner be allowed to repurchase the property for
letters dated February 10 and 15, 1984.
P1,574,560.00, the PNB management informed petitioner that it was
rejecting the offer and the recommendation of the SAMD. It was
suggested that petitioner purchase the property for P2,660,000.00, its The statement of account prepared by the SAMD stating that the net
minimum market value. Respondent PNB gave petitioner until claim of respondent as of June 25, 1984 was P1,574,560.47 cannot be
December 15, 1984 to act on the proposal; otherwise, its P725,000.00 considered an unqualified acceptance to petitioner’s offer to purchase
deposit would be returned and the property would be sold to other the property. The statement is but a computation of the amount which
interested buyers. petitioner was obliged to pay in case respondent would later agree to
sell the property, including interests, advances on insurance premium,
advances on realty taxes, publication cost, registration expenses and
On June 4, 1985, respondent PNB informed petitioner that the PNB
miscellaneous expenses.
Board of Directors had accepted petitioner’s offer to purchase the
property, but for P1,931,389.53 in cash less the P725,000.00 already
deposited with it. On page two of the letter was a space above the There is no evidence that the SAMD was authorized by respondent’s
typewritten name of petitioner’s President, Pablo Gabriel, where he Board of Directors to accept petitioner’s offer and sell the property for
was to affix his signature. However, Pablo Gabriel did not conform to P1,574,560.47. Any acceptance by the SAMD of petitioner’s offer
the letter but merely indicated therein that he had received it. would not bind respondent. As this Court ruled in AF Realty
Petitioner did not respond, so PNB requested petitioner in a letter Development, Inc. vs. Diesehuan Freight Services, Inc.:
dated June 30, 1988 to submit an amended offer to repurchase.
Section 23 of the Corporation Code expressly provides that
Meanwhile, on June 17, 1993, petitioner’s Board of Directors approved the corporate powers of all corporations shall be exercised by
Resolution No. 3-004, where it waived, assigned and transferred its the board of directors. Just as a natural person may
rights over the property covered by TCT No. 33099 and TCT No. 37025 authorize another to do certain acts in his behalf, so may the
in favor of Bayani Gabriel, one of its Directors. Thereafter, Bayani board of directors of a corporation validly delegate some of
Gabriel executed a Deed of Assignment over 51% of the ownership and its functions to individual officers or agents appointed by it.
management of the property in favor of Reynaldo Tolentino, who later
moved for leave to intervene as plaintiff-appellant. On July 14, 1993,
the CA issued a resolution granting the motion, and likewise granted Thus, contracts or acts of a corporation must be made either by the
the motion of Reynaldo Tolentino substituting petitioner MMCC, as board of directors or by a corporate agent duly authorized by the board.
plaintiff-appellant, and his motion to withdraw as intervenor. Absent such valid delegation/authorization, the rule is that, the
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with the
The CA rendered judgment on May 11, 2000 affirming the decision of performance of authorized duties of such director, is held not binding
the RTC. It declared that petitioner obviously never agreed to the on the corporation.
selling price proposed by respondent PNB (P1,931,389.53) since
petitioner had kept on insisting that the selling price should be lowered
to P1,574,560.47. Clearly therefore, there was no meeting of the minds Thus, a corporation can only execute its powers and transact its
between the parties as to the price or consideration of the sale. business through its Board of Directors and through its officers and
agents when authorized by a board resolution or its by-laws.

The CA ratiocinated that petitioner’s original offer to purchase the

subject property had not been accepted by respondent PNB. In fact, it It appears that the SAMD had prepared a recommendation for
made a counter-offer through its June 4, 1985 letter specifically on the respondent to accept petitioner’s offer to repurchase the property even
selling price; petitioner did not agree to the counter-offer; and the beyond the one-year period; it recommended that petitioner be allowed
negotiations did not prosper. Moreover, petitioner did not pay the to redeem the property and pay P1,574,560.00 as the purchase price.
balance of the purchase price within the sixty-day period set in the Respondent later approved the recommendation that the property be
June 4, 1985 letter of respondent PNB. Consequently, there was no sold to petitioner. But instead of the P1,574,560.47 recommended by
perfected contract of sale, and as such, there was no contract to the SAMD and to which petitioner had previously conformed,
rescind. respondent set the purchase price at P2,660,000.00. In fine,
respondent’s acceptance of petitioner’s offer was qualified, hence can

56
be at most considered as a counter-offer. If petitioner had accepted corporation, PROVIDED THAT Philippine sovereignty over natural
this counter-offer, a perfected contract of sale would have arisen; as it resources and full control over the enterprise undertaking the EDU
turns out, however, petitioner merely sought to have the counter-offer activities remain firmly in the State.
reconsidered. This request for reconsideration would later be rejected
by respondent.
BPI Leasing Vs. CA (416 SCRA 4)

We do not agree with petitioner’s contention that the

Facts:
P725,000.00 it had remitted to respondent was “earnest money” which
could be considered as proof of the perfection of a contract of sale
under Article 1482 of the New Civil Code. BLC is a corporation engaged in the business of leasing properties. For
the calendar year 1986, BLC paid the Commissioner of Internal
Revenue (CIR) a total of P1,139,041.49 representing 4% "contractor’s
Thus, the P725,000.00 was merely a deposit to be applied as part of
percentage tax" then imposed by Section 205 of the National Internal
the purchase price of the property, in the event that respondent would
Revenue Code (NIRC), based on its gross rentals from equipment
approve the recommendation of SAMD for respondent to accept
leasing for the said year amounting to P27,783,725.42.
petitioner’s offer to purchase the property for P1,574,560.47. Unless
and until the respondent accepted the offer on these terms, no
perfected contract of sale would arise. Absent proof of the concurrence The CIR issued Revenue Regulation which provided that finance and
of all the essential elements of a contract of sale, the giving of earnest leasing companies registered under Republic Act 5980 shall be subject
money cannot establish the existence of a perfected contract of sale. to gross receipt tax of 5%-3%-1% on actual income earned. This means
that companies registered under Republic Act 5980, such as BLC, are
not liable for "contractor’s percentage tax" under Section 205 but are,
It appears that although respondent requested petitioner to conform to
instead, subject to "gross receipts tax" under Section 260 (now Section
its amended counter-offer, petitioner refused and instead requested
122) of the NIRC. Since BLC had earlier paid the aforementioned
respondent to reconsider its amended counter-offer. Petitioner’s
"contractor’s percentage tax," it re-computed its tax liabilities under
request was ultimately rejected and respondent offered to refund its
the "gross receipts tax" and arrived at the amount of P361,924.44.
P725,000.00 deposit.

BLC filed a claim for a refund with the CIR for the amount of
In sum, then, there was no perfected contract of sale between
P777,117.05, representing the difference between the P1,139,041.49 it
petitioner and respondent over the subject property.
had paid as "contractor’s percentage tax" and P361,924.44 it should
have paid for "gross receipts tax." Four days later, to stop the running
of the prescriptive period for refunds, petitioner filed a petition for
review with the CTA.
La Bugal-Blaan Vs. Ramos (421 SCRA 158)
The CTA dismissed the petition and denied BLC’s claim of refund. The
CTA held that Revenue Regulation 19-86, as amended, may only be
Ruling:
applied prospectively such that it only covers all leases written on or
after January 1, 1987, as stated under Section 7 of said revenue
We shall now look closer at the plain language of the Charter and regulation.
examining the logical inferences. The drafters chose to emphasize and
highlight agreements x x x involving either technical or financial
The CTA ruled that, since BLC’s rental income was all received prior to
assistance in relation to foreign corporations’ participation in large-
1986, it follows that this was derived from lease transactions prior to
scale EDU. The inclusion of this clause on “technical or financial
January 1, 1987, and hence, not covered by the revenue regulation.
assistance” recognizes the fact that foreign business entities and
multinational corporations are the ones with the resources and know-
how to provide technical and/or financial assistance of the magnitude A motion for reconsideration of the CTA’s decision was filed, but was
and type required for large-scale exploration, development and denied in a resolution dated July 26, 1995. BLC then appealed the case
utilization of these resources. to the Court of Appeals, which issued the aforementioned assailed
decision and resolution. Hence, the present petition.
Definitely, as business persons well know and as a matter of judicial
notice, this matter is not just a question of signing a promissory note or The respondents argue that the petition should be dismissed on the
executing a technology transfer agreement. Foreign corporations ground that the Verification/Certification of Non-Forum Shopping was
usually require that they be given a say in the management, for signed by the counsel of record and not by BLC, through a duly
instance, of day-to-day operations of the joint venture. They would authorized representative, in violation of Supreme Court Circular 28-
demand the appointment of their own men as, for example, operations 91.
managers, technical experts, quality control heads, internal auditors or
comptrollers. Furthermore, they would probably require seats on the
Issue:
Board of Directors -- all these to ensure the success of the enterprise
and the repayment of the loans and other financial assistance and to
make certain that the funding and the technology they supply would W/N BLC complies with the requirement on Verification/Certification
not go to waste. Ultimately, they would also want to protect their of Non-Forum Shopping
business reputation and bottom lines.
Ruling:
In short, the drafters will have to be credited with enough pragmatism
and savvy to know that these foreign entities will not enter into such
“agreements involving assistance” without requiring arrangements for In BA Savings Bank v. Sia , it was held that the certificate of non-
the protection of their investments, gains and benefits. forum shopping may be signed, for and on behalf of a corporation, by a
specifically authorized lawyer who has personal knowledge of the facts
required to be disclosed in such document. This ruling, however, does
Thus, by specifying such “agreements involving assistance,” the not mean that any lawyer, acting on behalf of the corporation he is
drafters necessarily gave implied assent to everything that these representing, may routinely sign a certification of non-forum shopping.
agreements necessarily entailed; or that could reasonably be deemed The Court emphasizes that the lawyer must be "specifically authorized"
necessary to make them tenable and effective, including management in order validly to sign the certification.
authority with respect to the day-to-day operations of the enterprise
and measures for the protection of the interests of the foreign

57
Corporations have no powers except those expressly conferred upon corporation, likewise, pointed out that even if the petitioner was
them by the Corporation Code and those that are implied by or are entitled to the said additional benefits, his claim had already
incidental to its existence. These powers are exercised through their prescribed. It further averred that it had no policy to grant vacation
board of directors and/or duly authorized officers and agents. Hence, and sick leave credits to the petitioner.
physical acts, like the signing of documents, can be performed only by
natural persons duly authorized for the purpose by corporate bylaws or
In his Affidavit dated May 19, 1998, Lim denied making any such
by specific act of the board of directors.
verbal promise to his son-in-law on the grant of unlimited vacation and
sick leave credits and the cash conversion thereof. Lim averred that
The records are bereft of the authority of BLC’s counsel to institute the the petitioner had received vacation and sick leave benefits from 1994
present petition and to sign the certification of non-forum shopping. to 1996. Moreover, assuming that he did make such promise to the
While said counsel may be the counsel of record for BLC, the petitioner, the same had not been confirmed or approved via resolution
representation does not vest upon him the authority to execute the of the respondent corporation’s board of directors.
certification on behalf of his client. There must be a resolution issued
by the board of directors that specifically authorizes him to institute
It was further pointed out that as per the Memorandum dated
the petition and execute the certification, for it is only then that his
November 6, 1981, only regular employees and managerial and
actions can be legally binding upon BLC.
confidential employees falling under Category I were entitled to
vacation and sick leave credits. The petitioner, whose position did not
BLC however insists that there was substantial compliance with SC fall under Category I, was, thus, not entitled to the benefits under the
Circular No. 28-91 because the verification/certification was issued by said memorandum. The respondent corporation alleged that this was
a counsel who had full personal knowledge that no other petition or admitted by the petitioner himself and affirmed by Raoul Rodrigo, its
action has been filed or is pending before any other tribunal. According incumbent executive vice-president and general manager.
to BLC, said counsel’s law firm has handled this case from the very
beginning and could very well attest and/or certify to the absence of an
The Labor Arbiter ruled in favor of the petitioner.
instituted or pending case involving the same or similar issues.

The NLRC, by majority vote, rendered judgment granting the appeal of

The argument of substantial compliance deserves no merit, given the
the respondent corporation, reversing and setting aside the decision of
Court’s ruling in Mendigorin v. Cabantog :
the Labor Arbiter.

…The CA held that there was substantial compliance with the Rules of
Also the CA rendered judgment affirming the decision of the NLRC and
Court, citing Dimagiba vs. Montalvo, Jr. [202 SCRA 641] to the effect
dismissing the petition.
that a lawyer who assumes responsibility for a client's cause has the
duty to know the entire history of the case, especially if any litigation is
commenced. This view, however, no longer holds authoritative value in Issue:
the light of Digital Microwave Corporation vs. CA [328 SCRA 286],
where it was held that the reason the certification against forum
shopping is required to be accomplished by petitioner himself is that W/N the petitioner is entitled, based on the documentary and
only the petitioner himself has actual knowledge of whether or not he testimonial evidence on record, to the cash value of his vacation and
has initiated similar actions or proceedings in other courts or tribunals. sick leave credits in the total amount of P7,080,546.00
Even counsel of record may be unaware of such fact. To our mind, this
view is more in accord with the intent and purpose of Revised Circular Ruling:
No. 28-91.
While the petitioner was unequivocal in claiming that the respondent
Clearly, therefore, the present petition lacks the proper certification as corporation, through its president and chairman of the board of
strictly required by jurisprudence and the Rules of Court. directors, obliged itself, as a matter of policy, to grant him the cash
value of his vacation and sick leave credits upon his retirement, he was
Kwok Vs. Phil. Carpet (457 SCRA 465) burdened to prove his claim by substantial evidence. The petitioner
failed to discharge this burden.

Facts:
For a contract to be binding on the parties thereto, it need not be in
writing unless the law requires that such contract be in some form in
Donald Kwok and his father-in-law Patricio L. Lim, along with some order that it may be valid or enforceable or that it be executed in a
other stockholders, established a corporation, the Philippine Carpet certain way, in which case that requirement is absolute and
Manufacturing Corporation (PCMC). The petitioner became its general independent. Indeed, corporate policies need not be in writing.
manager, executive vice-president and chief operations officer. Lim, Contracts entered into by a corporate officer or obligations or
on the other hand, was its president and chairman of the board of prestations assumed by such officer for and in behalf of such
directors. When the petitioner retired 36 years later or on October 31, corporation are binding on the said corporation only if such officer
1996, he was receiving a monthly salary of P160,000.00. He demanded acted within the scope of his authority or if such officer exceeded the
the cash equivalent of what he believed to be his accumulated vacation limits of his authority, the corporation has ratified such contracts or
and sick leave credits during the entire length of his service with the obligations.
respondent corporation, i.e., from November 16, 1965 to October 31,
1996, in the total amount of P7,080,546.00 plus interest. However, the
respondent corporation refused to accede to the petitioner’s demands, In the present case, the petitioner relied principally on his testimony to
claiming that the latter was not entitled thereto. prove that Lim made a verbal promise to give him vacation and sick
leave credits, as well as the privilege of converting the same into cash
upon retirement. The Court agrees that those who belong to the upper
The respondent corporation denied all these, claiming that upon the corporate echelons would have more privileges. However, the Court
petitioner’s retirement, he received the amount of P6,902,387.19 cannot presume the existence of such privileges or benefits. The
representing all the benefits due him. Despite this, the petitioner again petitioner was burdened to prove not only the existence of such
demanded P7,080,546.00, which demand was without factual and benefits but also that he is entitled to the same, especially considering
legal basis. The respondent corporation asserted that the chairman of that such privileges are not inherent to the positions occupied by the
its board of directors and its president/vice-president had unlimited petitioner in the respondent corporation, son-in-law of its president or
discretion in the use of their time, and had never been required to file not.
applications for vacation and sick leaves; as such, the said officers were
not entitled to vacation and sick leave benefits. The respondent

58
Even assuming that PCMC President Patricio Lim did promise refundable within two weeks should AF Realty disapprove Ranullo's
petitioner the cash conversion of his leaves, we agree with respondent action on the matter.
that this cannot bind the company in the absence of any Board
resolution to that effect. We must stress that the personal act of the
AF Realty confirmed its intention to buy the lot. Hence, Ranullo asked
company president cannot bind the corporation. As explicitly stated by
Polintan for the board resolution of Dieselman authorizing the sale of
the Supreme Court in People’s Aircargo and Warehousing Co., Inc. v.
the property. However, Polintan could only give Ranullo the original
Court of Appeals:
copy of TCT No. 39849, the tax declaration and tax receipt for the lot,
and a photocopy of the Articles of Incorporation of Dieselman.
“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
Manuel F. Cruz, Sr., President of Dieselman, acknowledged receipt of
corporation. A corporation is a juridical person, separate and distinct
the said P300,000.00 as "earnest money" but required AF Realty to
from its stockholders and members, ‘having xxx powers, attributes and
finalize the sale at P4,000.00 per square meter. AF Realty replied
properties expressly authorized by law or incident to its existence.’…
that it has paid an initial down payment of P300,000.00 and is willing
to pay the balance.
“… the power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in
However, Mr. Cruz, Sr. terminated the offer and demanded from AF
the board, subject to the articles of incorporation, by-laws, or relevant
Realty the return of the title of the lot earlier delivered by Polintan.
provisions of law.”

Claiming that there was a perfected contract of sale between them, AF

Petitioner maintains that the PCMC Board of Directors has granted its
Realty filed with the Regional Trial Court, Branch 160, Pasig City a
President, Patricio Lim, awesome powers to grant benefits to its
complaint for specific performance against Dieselman and Cruz, Jr..
employees, adding that the Board has always given its consent to the
The complaint prays that Dieselman be ordered to execute and deliver
way Lim ran the affairs of the company especially on matters relating
a final deed of sale in favor of AF Realty. In its amended complaint, AF
to the benefits that its corporate officers enjoyed.
Realty asked for payment of P1,500,000.00 as compensatory damages;
P400,000.00 as attorney's fees; and P500,000.00 as exemplary
True, jurisprudence holds that the president of a corporation possesses damages.
the power to enter into a contract for the corporation when “the
conduct on the part of both the president and corporation [shows] that
Meanwhile, on July 30, 1988, Dieselman and Midas Development
he had been in the habit of acting in similar matters on behalf of the
Corporation (Midas) executed a Deed of Absolute Sale 13 of the same
company and that the company had authorized him so to act and had
property. The agreed price was P2,800.00 per square meter. Midas
recognized, approved and ratified his former and similar actions.”
delivered to Dieselman P500,000.00 as down payment and deposited
the balance of P5,300,000.00 in escrow account with the PCIBank.
In the case at bar, however, there is no showing that PCMC had either
recognized, approved or ratified the cash conversion of petitioner’s
Constrained to protect its interest in the property, Midas filed on April
leave credits as purportedly promised to him by Lim. On the contrary,
3, 1989 a Motion for Leave to Intervene in Civil Case No. 56278. Midas
PCMC has steadfastly maintained that “the Company, through the
alleged that it has purchased the property and took possession thereof,
Board, has long adopted the policy of granting its earlier mentioned
hence Dieselman cannot be compelled to sell and convey it to AF
corporate officers unlimited leave benefits denying them the privilege
Realty. The trial court granted Midas' motion.
of converting their unused vacation or sick leave benefits into their
cash equivalent.”
Issue:
AF Realty Vs. Dieselman (373 SCRA 385)
Who between petitioner AF Realty and respondent Midas has a right
over the subject lot
Facts:

Ruling:
Dieselman Freight Service Co. is a domestic corporation and a
registered owner of a parcel of commercial lot consisting of 2,094
square meters, located at 104 E. Rodriguez Avenue, Barrio Ugong, Section 23 of the Corporation Code expressly provides that the
Pasig City, Metro Manila. The property is covered by Transfer corporate powers of all corporations shall be exercised by the board of
Certificate of Title No. 39849 issued by the Registry of Deeds of the directors. Just as a natural person may authorize another to do certain
Province of Rizal. acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed
by it. Thus, contracts or acts of a corporation must be made either by
Manuel C. Cruz, Jr., a member of the board of directors of Dieselman,
the board of directors or by a corporate agent duly authorized by the
issued a letter denominated as "Authority To Sell Real Estate" to
board. Absent such valid delegation/authorization, the rule is that the
Cristeta N. Polintan, a real estate broker of the CNP Real Estate
declarations of an individual director relating to the affairs of the
Brokerage. Cruz, Jr. authorized Polintan "to look for a buyer/buyers
corporation, but not in the course of, or connected with, the
and negotiate the sale" of the lot at P3,000.00 per square meter, or a
performance of authorized duties of such director, is held not binding
total of P6,282,000.00. Cruz, Jr. has no written authority from
on the corporation.
Dieselman to sell the lot.

In the instant case, it is undisputed that respondent Cruz, Jr. has no

In turn, Cristeta Polintan, through a letter dated May 19, 1988,
written authority from the board of directors of respondent Dieselman
authorized Felicisima ("Mimi") Noble to sell the same lot.
to sell or to negotiate the sale of the lot, much less to appoint other
persons for the same purpose. Respondent Cruz, Jr.'s lack of such
Felicisima Noble then offered for sale the property to AF Realty & authority precludes him from conferring any authority to Polintan
Development, Inc. (AF Realty) at P2,500.00 per square meter. Zenaida involving the subject realty. Necessarily, neither could Polintan
Ranullo, board member and vice-president of AF Realty, accepted the authorize Felicisima Noble. Clearly, the collective acts of respondent
offer and issued a check in the amount of P300,000.00 payable to the Cruz, Jr., Polintan and Noble cannot bind Dieselman in the purported
order of Dieselman. Polintan received the check and signed an contract of sale.
"Acknowledgement Receipt" indicating that the amount of
P300,000.00 represents the partial payment of the property but
Petitioner AF Realty maintains that the sale of land by an unauthorized
agent may be ratified where, as here, there is acceptance of the benefits
59
involved. In this case the receipt by respondent Cruz, Jr. from AF The Chief State Prosecutor dismissed the appeal for having been filed
Realty of the P300,000.00 as partial payment of the lot effectively out of time. Petitioner's lawyer received a copy of the letter-resolution
binds respondent Dieselman. dismissing the appeal on January 20, 1995.

Involved in this case is a sale of land through an agent . Thus, the The Trial Court denied and dismissed the petition for mandamus of
law on agency under the Civil Code takes precedence. This is well petitioner.
stressed in Yao Ka Sin Trading vs. Court of Appeals :
Issue:
"Since a corporation, such as the private respondent, can act only
through its officers and agents, all acts within the powers of said
W/N mandamus will lie
corporation may be performed by agents of its selection ; and,
except so far as limitations or restrictions may be imposed by special
charter, by-law, or statutory provisions, the same general Ruling:
principles of law which govern the relation of agency for a
natural person govern the officer or agent of a corporation,
of whatever status or rank, in respect to his power to act for No.
the corporation ; and agents when once appointed , or
members acting in their stead , are subject to the same rules, Chief State Prosecutor in refusing to order the filing of information for
liabilities, and incapacities as are agents of individuals and violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in
private persons ." (Emphasis supplied) excess of jurisdiction or with grave abuse of discretion.

Pertinently, Article 1874 of the same Code provides: First, with respect to the agreement between Concord and Victor Ang
Siong to amicably settle their difference, we find this resort to an
"ART. 1874. When a sale of piece of land or any interest therein is alternative dispute settlement mechanism as not contrary to law,
through an agent , the authority of the latter shall be in writing ; public policy, or public order. Efforts of parties to solve their disputes
otherwise, the sale shall be void ." (Emphasis supplied) outside of the courts are looked on with favor, in view of the clogged
dockets of the judiciary.

Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima

Ranullo were not authorized by respondent Dieselman to sell its lot, Second, it is not disputed in the instant case that Concord, a domestic
the supposed contract is void. Being a void contract, it is not corporation, was the payee of the bum check, not petitioner. Therefore,
susceptible of ratification by clear mandate of Article 1409 of the Civil it is Concord, as payee of the bounced check, which is the injured party.
Code., thus: Since petitioner was neither a payee nor a holder of the bad check, he
had neither the personality to sue nor a cause of action against Vic Ang
Siong. Under Section 36 of the Corporation Code, read in relation to
"ART. 1409. The following contracts are inexistent and void from Section 23, it is clear that where a corporation is an injured party, its
the very beginning : power to sue is lodged with its board of directors or turstees.

x x x (7) Those expressly prohibited or declared void by law Petitioner failed to show any proof that he was authorized or deputized
or granted specific powers by Concord's board of director to sue Victor
And Siong for and on behalf of the firm. Clearly, petitioner as a
" These contracts cannot be ratified . Neither can the right to set
minority stockholder and member of the board of directors had no
up the defense of illegality be waived." (Emphasis supplied)
such power or authority to sue on Concord's behalf. Nor can we uphold
his act as a derivative suit. For a derivative suit to prosper, it is
Upon the other hand, the validity of the sale of the subject lot to required that the minority stockholder suing for and on behalf of the
respondent Midas is unquestionable. As aptly noted by the Court of corporation must allege in his complaint that he is suing on a
Appeals, the sale was authorized by a board resolution of respondent derivative cause of action on behalf of the corporation and all other
Dieselman dated May 27, 1988. stockholders similarly situated who may wish to join him in the suit.
There is no showing that petitioner has complied with the foregoing
requisites. It is obvious that petitioner has not shown any clear legal
Tam Wing Tak Vs. Makasiar (350 SCRA 475)
right which would warrant the overturning of the decision of public
respondents to dismiss the complaint against Vic Ang Siong. A public
Facts: prosecutor, by the nature of his office, is under no compulsion to file
criminal information where no clear legal justification has been shown,
and no sufficient evidence of guilt nor prima facie case has been
Tam Wing Tak, in his capacity as director of Concord-World presented by the petitioner. No reversible error may be attributed to
Properties, Inc., a domestic corporation, filed an affidavit-complaint the court a quo when it dismissed petitioner's special civil action for
with the Quezon City Prosecutor's Office, charging Vic Ang Siong with mandamus.
violation of B.P. Blg. 22. Docketed by the Prosecutor as I.S. No. 93-
15886, the complaint alleged that a check for the amount of
P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was BA Savings Bank Vs. Sia (336 SCRA 484)
dishonored when presented for encashment.
Facts:
Vic Ang Siong sought the dismissal of the case on two grounds: First,
that petitioner had no authority to file the case on behalf of Concord,
The Court of Appeals issued a Resolution denying due course to a
the payee of the dishonored check, since the firm's board of directors
Petition for Certiorari filed by BA Savings Bank, on the ground that
had not empowered him to act on its behalf. Second, he and Concord
“the Certification on anti-forum shopping incorporated in the petition
had already agreed to amicably settle the issue after he made a partial
was signed not by the duly authorized representative of the petitioner,
payment of P19,000,000.00 on the dishonored check.
as required under Supreme Court Circular No. 28-91, but by its
counsel, in contravention of said circular x x x.”
The City Prosecutor dismissed the complaint on the following grounds:
(1) that petitioner lacked the requisite authority to initiate the criminal
A Motion for Reconsideration was subsequently filed by the petitioner,
complaint for and on Concord's behalf; and (2) that Concord and Vic
attached to which was a BA Savings Bank Corporate Secretary’s
Ang Siong had already agreed upon the payment of the latter's balance
Certificate, dated August 14, 1997. The Certificate showed that the
on the dishonored check.
60
petitioner’s Board of Directors approved a Resolution on May 21, 1996, position to verify the truthfulness and the correctness of the allegations
authorizing the petitioner’s lawyers to represent it in any action or in the Complaint” and “to know and to certify if an action x x x had
proceeding before any court, tribunal or agency; and to sign, execute already been filed and pending with the courts.”
and deliver the Certificate of Non-forum Shopping, among others.
Circular 28-91 was prescribed by the Supreme Court to prohibit and
On October 24, 1997, the Motion for Reconsideration was denied by penalize the evils of forum shopping. We see no circumvention of this
the Court of Appeals on the ground that Supreme Court Revised rationale if the certificate was signed by the corporation’s specifically
Circular No. 28-91 “requires that it is the petitioner, not the counsel, authorized counsel, who had personal knowledge of the matters
who must certify under oath to all of the facts and undertakings required in the Circular. In Bernardo v. NLRC, we explained that a
required therein.” literal interpretation of the Circular should be avoided if doing so
would subvert its very rationale. Said the Court:
Issue:
“x x x. Indeed, while the requirement as to certificate of non-forum
shopping is mandatory, nonetheless the requirements must not be
W/N Supreme Court Revised Circular No. 28-91 allows a corporation
interpreted too literally and thus defeat the objective of preventing the
to authorize its counsel to execute a certificate of non-forum shopping
undesirable practice of forum-shopping.”
for and on its behalf

Finally, we stress that technical rules of procedure should be used to

Ruling:
promote, not frustrate, justice. While the swift unclogging of court
dockets is a laudable objective, the granting of substantial justice is an
A corporation, such as the petitioner, has no powers except those even more urgent ideal.
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation
MWSS Vs. CA (297 SCRA 287)
exercises said powers through its board of directors and/or its duly
authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly authorized Facts:
for the purpose by corporate bylaws or by a specific act of the board of
directors. “All acts within the powers of a corporation may be
MWSS leased around one hundred twenty eight (128) hectares of its
performed by agents of its selection; and, except so far as limitations or
land to CHGCCI for twenty five (25) years and renewable for another
restrictions which may be imposed by special charter, by-law, or
fifteen (15) years or until the year 2005, with the stipulation allowing
statutory provisions, the same general principles of law which govern
the latter to exercise a right of first refusal should the subject property
the relation of agency for a natural person govern the officer or agent of
be made open for sale. The terms and conditions of respondent
a corporation, of whatever status or rank, in respect to his power to act
CHGCCI's purchase thereof shall nonetheless be subject to presidential
for the corporation; and agents once appointed, or members acting in
approval.
their stead, are subject to the same rules, liabilities and incapacities as
are agents of individuals and private persons.”
Pursuant to Letter of instruction (LOI) issued on July 29,1976 by then
President Ferdinand E. Marcos directing MWSS to negotiate the
In the present case, the corporation’s board of directors issued a
cancellation of the MWSS-CHGCCI lease agreement for the disposition
Resolution specifically authorizing its lawyers “to act as their agents in
of the subject property, Oscar Ilustre, then General Manager of MWSS,
any action or proceeding before the Supreme Court, the Court of
sometime in November of 1980 informed respondent CHGCCI,
Appeals, or any other tribunal or agency; and to sign, execute and
through its president herein respondent Pablo Roman, Jr., of its
deliver in connection therewith the necessary pleadings, motions,
preferential right to buy the subject property which was up for sale.
verification, affidavit of merit, certificate of non-forum shopping and
Valuation thereof was to be made by an appraisal company of
other instruments necessary for such action and proceeding.” The
petitioner MWSS' choice, the Asian Appraisal Co., Inc. which, on
Resolution was sufficient to vest such persons with the authority to
January 30, 1981, pegged a fair market value of P40.00 per square
bind the corporation and was specific enough as to the acts they were
meter or a total of P53,800,000.00 for the subject property.
empowered to do.

Upon being informed that petitioner MWSS and respondent CHGCCI

In the case of natural persons, Circular 28-91 requires the parties
had already agreed in principle on the purchase of the subject property,
themselves to sign the certificate of non-forum shopping. However,
President Marcos expressed his approval of the sale as shown in his
such requirement cannot be imposed on artificial persons, like
marginal note on the letter sent by respondents Jose Roxas and Pablo
corporations, for the simple reason that they cannot personally do the
Roman, Jr. dated December 20, 1982.
task themselves. As already stated, corporations act only through their
officers and duly authorized agents. In fact, physical actions, like the
signing and the delivery of documents, may be performed, on behalf of The Board of Trustees of petitioner MWSS thereafter passed
the corporate entity, only by specifically authorized individuals. Resolution 36-83, approving the sale of the subject property in favor of
respondent SILHOUETTE, as assignee of respondent CHGCCI, at the
appraised value given by Asian Appraisal Co., Inc.
It is noteworthy that the Circular does not require corporate officers to
sign the certificate. More important, there is no prohibition against
authorizing agents to do so. The MWSS-SILHOUETTE sales agreement eventually pushed through.
Per the Agreement dated May 11, 1983 covering said purchase, the total
price for the subject property is P50,925,200, P25 Million of which was
In fact, not only was BA Savings Bank authorized to name an agent to
to be paid upon President Marcos' approval of the contract and the
sign the certificate; it also exercised its appointing authority reasonably
balance to be paid within one (1) year from the transfer of the title to
well. For who else knows of the circumstances required in the
respondent SILHOUETTE as vendee with interest at 12% per annum.
Certificate but its own retained counsel. Its regular officers, like its
The balance was also secured by an irrevocable letter of credit. A
board chairman and president, may not even know the details required
Supplemental Agreement was forged between petitioner MWSS and
therein.
respondent SILHOUETTE on August 11, 1983 to accurately identify the
subject property.
Consistent with this rationale, the Court en banc in Robern
Development Corporation v. Judge Jesus Quitain has allowed even an
Subsequently, respondent SILHOUETTE, under a deed of sale dated
acting regional counsel of the National Power Corporation to sign,
July 26, 1984, sold to respondent AYALA about sixty-seven (67)
among others, the certificate of non-forum shopping required by
hectares of the subject property at P110.00 per square meter. Of the
Circular 28-91. The Court held that the counsel was “in the best
61
total price of around P74 Million, P25 Million was to be paid by outstanding capital stock, or if there be no capital stock, a majority of
respondent AYALA directly to petitioner MWSS for respondent the members entitled to vote. The election must be by ballot if
SILHOUETTE's account and P2 Million directly to respondent requested by any voting stockholder or member. In stock corporations,
SILHOUETTE. P11,600,000 was to be paid upon the issuance of title in every stockholder entitled to vote shall have the right to vote in person
favor of respondent AYALA, and the remaining balance to be payable or by proxy the number of shares of stock standing, at the time fixed in
within one (1) year with 12% per annum interest. the by-laws, in his own name on the stock books of the corporation, or
where the by-laws are silent, at the time of the election; and said
Respondent AYALA developed the land it purchased into a prime stockholder may vote such number of shares for as many persons as
residential area now known as the Ayala Heights Subdivision. there are directors to be elected or he may cumulate said shares and
give one candidate as many votes as the number of directors to be
elected multiplied by the number of his shares shall equal, or he may
Almost a decade later, petitioner MWSS on March 26, 1993 filed an distribute them on the same principle among as many candidates as he
action against all herein named respondents before the Regional Trial shall see fit: Provided, That the total number of votes cast by him shall
Court of Quezon City seeking for the declaration of nullity of the not exceed the number of shares owned by him as shown in the books
MWSS-SILHOUETTE sales agreement and all subsequent conveyances of the corporation multiplied by the whole number of directors to be
involving the subject property, and for the recovery thereof with elected: Provided, however, That no delinquent stock shall be voted.
damages. Unless otherwise provided in the articles of incorporation or in the by-
laws, members of corporations which have no capital stock may cast as
many votes as there are trustees to be elected but may not cast more
Respondent AYALA filed its answer pleading the affirmative defenses
than one vote for one candidate. Candidates receiving the highest
of (1) prescription, (2) laches, (3) waiver/estoppel/ratification, (4) no
number of votes shall be declared elected. Any meeting of the
cause of action, (5) non-joinder of indispensable parties, and (6) non-
stockholders or members called for an election may adjourn from day
jurisdiction of the court for non-specification of amount of damages
to day or from time to time but not sine die or indefinitely if, for any
sought.
reason, no election is held, or if there not present or represented by
proxy, at the meeting, the owners of a majority of the outstanding
On June 10, 1993; the trial court issued an Order dismissing the capital stock, or if there be no capital stock, a majority of the member
complaint of petitioner MWSS on grounds of prescription, laches, entitled to vote.
estoppel and non-joinder of indispensable parties.
Bataan Shipyard Vs. PCGG (150 SCRA 181)
Issue:
Facts:
W/N the MWSS-SILHOUETTE sales agreement and all subsequent
conveyances involving the questioned property was valid
BASECO describes itself in its petition as "a shiprepair and
shipbuilding company * * incorporated as a domestic private
Ruling: corporation * * (on Aug. 30, 1972) by a consortium of Filipino
shipowners and shipping executives. Its main office is at Engineer
Yes. Island, Port Area, Manila, where its Engineer Island Shipyard is
housed, and its main shipyard is located at Mariveles Bataan." Its
Articles of Incorporation disclose that its authorized capital stock is
It is the claim of petitioner MWSS that Mr. Ilustre was never given the P60,000,000.00 divided into 60,000 shares, of which 12,000 shares
authority by its Board of Trustees to enter into the "initial agreement" with a value of P12,000,000.00 have been subscribed, and on said
of December 20, 1982 and therefore, the sale of the subject property is subscription, the aggregate sum of P3,035,000.00 has been paid by the
invalid. incorporators. The same articles Identify the incorporators, numbering
fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3)
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6)
Petitioner MWSS misses the point. The perceived infirmity in the
Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9)
"initial agreement" can be cured by ratification. So settled is the
Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12)
precept that ratification can be made by the corporate board either
Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and
expressly or impliedly. Implied ratification may take various forms —
(15) Rodolfo Torres.
like silence or acquiescence; by acts showing approval or adoption of
the contract; or by acceptance and retention of benefits flowing
therefrom. Both modes of ratification have been made in this case. By 1986, however, of these fifteen (15) incorporators, six (6) had ceased
to be stockholders, namely: (1) Generoso Tanseco, (2) Antonio
Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw
There was express ratification made by the Board of petitioner MWSS
Torres, and (6) Rodolfo Torres. As of this year, 1986, there were twenty
when it passed Resolution No. 36-83 approving the sale of the subject
(20) stockholders listed in BASECO's Stock and Transfer Book.
property to respondent SILHOUETTE and authorizing Mr. Ilustre, as
General Manager, "to sign for and in behalf of the MWSS the contract
papers and other pertinent documents relative thereto." Implied Barely six months after its incorporation, BASECO acquired from
ratification by "silence or acquiescence" is revealed from the acts of National Shipyard & Steel Corporation, or NASSCO, a government-
petitioner MWSS in (a) sending three (3) demand letters for the owned or controlled corporation, the latter's shipyard at Mariveles,
payment of the purchase price, (b) accepting P25 Million as Bataan, known as the Bataan National Shipyard (BNS), and — except
downpayment, and (c) accepting a letter of credit for the balance, as for NASSCO's Engineer Island Shops and certain equipment of the
hereinbefore mentioned. It may well be pointed out also that nowhere BNS, consigned for future negotiation — all its structures, buildings,
in petitioner MWSS' complaint is it alleged that it returned the shops, quarters, houses, plants, equipment and facilities, in stock or in
amounts, or any part thereof, covering the purchase price to any of the transit. This it did in virtue of a "Contract of Purchase and Sale with
respondents-vendees at any point in time. This is only indicative of Chattel Mortgage" executed on February 13, 1973. The price was
petitioner MWSS' acceptance and retention of benefits flowing from P52,000,000.00. As partial payment thereof, BASECO delivered to
the sales transactions which is another form of implied ratification. NASSCO a cash bond of P11,400,000.00, convertible into cash within
twenty-four (24) hours from completion of the inventory undertaken
pursuant to the contract. The balance of P41,600,000.00, with interest
Section 24 – at seven percent (7%) per annum, compounded semi-annually, was
stipulated to be paid in equal semi-annual installments over a term of
Election of directors or trustees. - At all elections of directors or nine (9) years, payment to commence after a grace period of two (2)
trustees, there must be present, either in person or by representative years from date of turnover of the shipyard to BASECO.
authorized to act by written proxy, the owners of a majority of the

62
Subsequently, the price of P52,000,000.00 was reduced by more than vote sequestered stock of corporations, granted to it by the President of
one-half, to P24,311,550.00, about eight (8) months later. A document the Philippines through a Memorandum dated June 26, 1986. That
to this effect was executed. This agreement bore the intervention of Memorandum authorizes the PCGG, "pending the outcome of
President Marcos. Certain other transactions of BASECO bore the proceedings to determine the ownership of * * (sequestered) shares of
intervention of President Marcos. stock," "to vote such shares of stock as it may have sequestered in
corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of
In September, 1977, two (2) reports were submitted to President
Incorporation, etc." The Memorandum should be construed in such a
Marcos regarding BASECO. The first was contained in a letter dated
manner as to be consistent with, and not contradictory of the Executive
September 5, 1977 of Hilario M. Ruiz, BASECO president. The second
Orders earlier promulgated on the same matter. There should be no
was embodied in a confidential memorandum dated September 16,
exercise of the right to vote simply because the right exists, or because
1977 of Capt. A.T. Romualdez. They further disclose the fine hand of
the stocks sequestered constitute the controlling or a substantial part of
Marcos in the affairs of BASECO, and that of a Romualdez, a relative by
the corporate voting power. The stock is not to be voted to replace
affinity.
directors, or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program or practice of the corporation
In the context of the proceedings at bar, the actuality of the control by except for demonstrably weighty and defensible grounds, and always in
President Marcos of BASECO has been sufficiently shown. the context of the stated purposes of sequestration or provisional
takeover, i.e., to prevent the dispersion or undue disposal of the
corporate assets. Directors are not to be voted out simply because the
Other evidence submitted to the Court by the Solicitor General proves power to do so exists. Substitution of directors is not to be done
that President Marcos not only exercised control over BASECO, but without reason or rhyme, should indeed be shunned if possible, and
also that he actually owns well nigh one hundred percent of its undertaken only when essential to prevent disappearance or wastage of
outstanding stock. corporate property, and always under such circumstances as assure
that the replacements are truly possessed of competence, experience
Thus, BASECO was sequestered by the government through the PCGG. and probity.
Pursuant to the order of sequestration, the PCGG was ordered to
ensure the continuity of these companies as going concerns, the care In the case at bar, there was adequate justification to vote the
and maintenance of these assets until such time that the Office of the incumbent directors out of office and elect others in their stead because
President through the Commission on Good Government should the evidence showed prima facie that the former were just tools of
decide otherwise, to report to the Commission on Good Government President Marcos and were no longer owners of any stock in the firm, if
periodically. The order includes also the production of certain they ever were at all. This is why, in its Resolution of October 28, 1986;
documents such as including 1. Stock Transfer Book 2. Legal this Court declared that —
documents, such as: 2.1. Articles of Incorporation; 2.2. By-Laws; 2.3.
Minutes of the Annual Stockholders Meeting from 1973 to 1986; 2.4.
Minutes of the Regular and Special Meetings of the Board of Directors Petitioner has failed to make out a case of grave abuse or excess of
from 1973 to 1986; 2.5. Minutes of the Executive Committee Meetings jurisdiction in respondents' calling and holding of a stockholders'
from 1973 to 1986; 2.6.Existing contracts with meeting for the election of directors as authorized by the Memorandum
suppliers/contractors/others. of the President * * (to the PCGG) dated June 26, 1986, particularly,
where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear
Thereafter, some BASECO Officers Hilario M. Ruiz, Manuel S. to be properties and assets owned and belonging to the government
Mendoza, Moises M. Valdez, Gilberto Pasimanero, and Benito R. itself and over which the persons who appear in this case on behalf of
Cuesta I, advising of the termination of their services by the PCGG. BASECO have failed to show any right or even any shareholding in said
corporation.
Issue:
It must however be emphasized that the conduct of the PCGG
What is the scope and extent of the powers that may be wielded by the nominees in the BASECO Board in the management of the company's
PCGG with regard to the properties or businesses placed under affairs should henceforth be guided and governed by the norms herein
sequestration or provisionally taken over laid down. They should never for a moment allow themselves to forget
that they are conservators, not owners of the business; they are
fiduciaries, trustees, of whom the highest degree of diligence and
Ruling: rectitude is, in the premises, required.

The PCGG cannot exercise acts of dominion over property sequestered,

Section 25 –
frozen or provisionally taken over. AS already earlier stressed with no
little insistence, the act of sequestration; freezing or provisional
takeover of property does not import or bring about a divestment of Corporate officers, quorum. - Immediately after their election, the
title over said property; does not make the PCGG the owner thereof. In directors of a corporation must formally organize by the election of a
relation to the property sequestered, frozen or provisionally taken over, president, who shall be a director, a treasurer who may or may not be a
the PCGG is a conservator, not an owner. Therefore, it can not director, a secretary who shall be a resident and citizen of the
perform acts of strict ownership; and this is especially true in the Philippines, and such other officers as may be provided for in the by-
situations contemplated by the sequestration rules where, unlike cases laws. Any two (2) or more positions may be held concurrently by the
of receivership, for example, no court exercises effective supervision or same person, except that no one shall act as president and secretary or
can upon due application and hearing, grant authority for the as president and treasurer at the same time.
performance of acts of dominion.
The directors or trustees and officers to be elected shall perform the
The PCGG may thus exercise only powers of administration over the duties enjoined on them by law and the by-laws of the corporation.
property or business sequestered or provisionally taken over, much like Unless the articles of incorporation or the by-laws provide for a greater
a court-appointed receiver, such as to bring and defend actions in its majority, a majority of the number of directors or trustees as fixed in
own name; receive rents; collect debts due; pay outstanding debts; and the articles of incorporation shall constitute a quorum for the
generally do such other acts and things as may be necessary to fulfill its transaction of corporate business, and every decision of at least a
mission as conservator and administrator. majority of the directors or trustees present at a meeting at which there
is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of
So, too, it is within the parameters of these conditions and
the board.
circumstances that the PCGG may properly exercise the prerogative to

63
Directors or trustees cannot attend or vote by proxy at board meetings. The case arose from a Complaint-Affidavit filed by petitioner Marietta
K. Ilusorio (Marietta) for robbery, qualified trespass to dwelling, and
violation of Presidential Decree (P.D.) No. 1829 against private
Cagayan Valley Vs. CIR (545 SCRA 10) respondents Sylvia K. Ilusorio (Sylvia), Cristina A. Ilusorio (Cristina),
Jovito Castro (Jovito), and five (5) John Does.
Facts:
Petitioner alleges:
 that she, Erlinda K. Ilusorio (Erlinda), Ramon K. Ilusorio,
Petitioner, a corporation duly organized and existing under Philippine and Shereen K. Ilusorio, owns and controls the majority of
laws, is a duly licensed retailer of medicine and other pharmaceutical the shares of stock of Lakeridge Corporation (Lakeridge), the
products. It operates two drugstores one in Tuguegarao and other in registered owner of Penthouse Unit 43-C (Penthouse Unit
Roxas, Isabela, under the name and style of “Mercury Drug”. 43-C) of the Pacific Plaza Condominium (Pacific Plaza) in
Ayala Avenue, Makati City
Petitioner alleged that in 1995, it granted 20% sales discounts to
qualified senior citizens on purchases of medicine pursuant to RA 7432  that Erlinda as Chairperson and President of Lakeridge, for 8
and its implementing rules and regulations. That same year, the years has been the present and lawful occupant of Penthouse
company operated at a loss. Also, instead of treating the sales discounts Unit 43-C;
as tax credit, they were made deductions to gross sales.
 that, sometime in October 1999, Erlinda left for USA, giving
The following year, petitioner filed with the BIR a claim for tax
Marietta full authority to take care and oversee, and secure
refund/tax credit. The latter’s inaction compelled petitioner to file on
Penthouse Unit 43-C through a letter addressed to the
March 18, 1998 a petition for review before the CTA in order to
management of the Pacific Plaza;
forestall the 2-year prescriptive period provided by the tax code.

Subsequently, the case was elevated to the CA. The court issued a  that on November 2, 1999, Sylvia and Cristina, with several
resolution dismissing the petition on procedural grounds. The CA held unidentified persons, with the consent of Jovito, Chief
that the person who signed the verification and certification of absence Security of the Pacific Plaza, forcibly entered Penthouse Unit
of forum shopping, a certain Jacinto J. Concepcion, President of 43-C by breaking its door and locks and allegedly caused the
petitioner-corporation, failed to adduce proof that he was duly loss of documents and jewelry (this incident was subject of a
authorized by the board of directors to do so. robbery case before the Office of the City Prosecutor of
Makati City);
Issue:
 that on November 6, 1999, five (5) unidentified persons, with
W/N a president of a corporation may sign a verification and Jovito’s permission, forcibly entered Penthouse Unit 43-C by
certification without need of a board resolution? breaking its door and locks, replacing it with new ones, and
thus preventing her entrance;
Ruling:
Private Respondents’ answer:
Yes.  agreed hat the registered owner of Penthouse Unit 43-C is
Lakeridge Development Corporation,
The Court had held, in a line of cases, that the following officials may
sign the verification and certification without need of a board  denied that petitioner and the other persons named in the
resolution. Complaint-Affidavit own and control the majority shares and
1. the Chairperson of the Board of Directors; that Erlinda is the chairperson and president of Lakeridge.
2. the President of a corporation;
3. the General Manager or Acting General  To buttress this allegation, they submitted copies of the
Manager; updated General Information Sheet filed with the Securities
4. the Personnel Officer; and and Exchange Commission (SEC), Secretary’s Certification
5. an Employment Specialist in a labor case. dated November 8, 1999, and SEC Certificate of Corporate
Filing/Information dated November 3, 1999, all showing the
While the above list is not exclusive, the determination of the stockholders, the officers, and the members of the board of
sufficiency and the authority was done on a case to case basis. The directors of Lakeridge.
rationale is to justify the authority of corporate officers or
representatives of the corporation to sign the verification or certificate
 They also alleged that the authority given by Erlinda to
against forum shopping, being “in a position to verify the
Marietta was without force and effect, being ultra vires, in
truthfulness and correctness of the allegations in the
the absence of any board resolution to support it.
petition”. The required submission of the board resolution is
grounded on the basic precept that corporate powers are exercised by
the board directors, and not solely by an officer of the corporation.  They also noted that the letter of authority, while dated
October 7, 1999, was received by the management of the
The Court ruled that petitioner substantially complied with Sec 4 and 5 Pacific Plaza only on November 3, 1999, which was after the
Rule 7 of the 1997 Revised Rules of Civil Procedure, as regards the November 2, 1999 incident described in the Complaint-
certificate on non-forum shopping. Affidavit.

First, the requisite board resolution has been submitted albeit belatedly  They also submitted a copy of Lakeridge’s letter dated
by petitioner. October 20, 1999 to the Pacific Plaza Condominium
Association, Inc., received by the latter on October 29, 1999,
Second, the President of petitioner is in a position to verify the stating that Lakeridge had not authorized any lease or sale of
truthfulness and correctness of the allegations in the petition. Penthouse Unit 43-C.

 They also averred that Marietta was not authorized by the

Third, the President of petitioner has signed the complaint before the
board of directors of Lakeridge to institute the criminal case
CTA at the inception of this judicial claim for refund or tax credit.
and that Erlinda’s residence was not at the Pacific Plaza but
in Antipolo, Rizal.
Ilusorio Vs. Ilusorio (540 SCRA 182)
 More importantly, they alleged that there could not be
Facts: robbery and qualified trespass to dwelling because, as

64
 officers of Lakeridge, they had the right to enter Penthouse operated by petitioner corporation Elcee Farms. Complainants alleged
Unit 43-C. that petitioner Corazon Saguemuller was the president of Elcee Farms,
but records disclosed that it was her son, Konrad Saguemuller, who
Jovito on his part said that the breaking of the door and locks was was the president thereof. Some of the complainants allegedly worked
really an act of maintenance on the property upon the written request in Hacienda Trinidad as early as 1960. On 27 April 1987, Elcee Farms
of Sylvia as one of the legitimate owners of the unit. entered into a Lease Agreement with Garnele Aqua Culture
Corporation (Garnele). Nevertheless, most of the private respondents
The Prosecutor dismissed the charges for lack of probable cause. He continued to work in Hacienda Trinidad. On appeal, they presented
found that, Sylvia, being among the legitimate owners of and who had payrolls and Social Security System (SSS) Forms E-4 issued during the
on several occasions visited the unit, had the authority to do so for the period that Garnele leased the hacienda, naming Elcee Farms as their
effective maintenance of the unit. Marietta’s motion for employer.
reconsideration of the Resolution was denied. She elevated the case to
the Department of Justice; however, the DOJ Secretary denied the Subsequently, Garnele sub-leased Hacienda Trinidad to Daniel Hilado,
same. Finally, petitioner sought recourse in the Court of Appeals which who operated HILLA. The contract of lease executed between Garnele
denied her petition for lack of merit. Hence, the petition to the and Daniel Hilado stipulated the continued employment of 120 of
Supreme Court. the former’s employees by the latter, but the contract was silent as to
the benefits which may accrue to the employees as a consequence of
Issue: their employment with Elcee Farms. Thus, private respondents were
allowed to continue working in Hacienda Trinidad, under the
WN the private respondents were representatives of LAKERIDGE and management of HILLA. Soon after HILLA took over, Daniel Hilado
are authorized to break open the doors of Penthouse Unit 43-C of entered into a Collective Bargaining Agreement (CBA) with the United
Pacific Plaza Condominium and gain entry thereto? Sugar Farmers’ Organization (USFO).
Ruling:
Due to their refusal to join the labor union, the private respondents
Yes, the private respondents has authority to break open the doors of were terminated by HILLA.
the unit and gain entry thereto.
On 26 December 1990, SAILO and 144 complainants, including the 131
In this case, the Court found no compelling reason to deviate from our
private respondents herein, filed against Elcee Farms, Corazon
policy of non-interference with the investigating prosecutor’s findings
Saguemuller, HILLA and its officers, Ray Hilado and Roberto
of absence of probable cause. It is admitted by both parties that the
Montaño, a complaint for illegal dismissal with reinstatement with
registered owner of Penthouse Unit 43-C is Lakeridge. Aside from the
back wages and separation pay with damages before the Labor Arbiter.
allegation of Marietta, there is no sufficient evidence on record that
Erlinda was indeed the lawful occupant of the unit. In fact, the letter
dated October 7, 1999, by which she claimed Erlinda gave her authority The Labor Arbiter dismissed their claim for damages and denied all
to occupy, oversee, and secure Penthouse Unit 43-C, and belatedly claims made against Elcee Farms, Corazon Saguemuller, Rey Hilado
received by the management of the Pacific Plaza on November 3, 1999, and Roberto Montaño.
was signed by Erlinda “for LAKERIDGE” without the appropriate
resolution of Lakeridge’s board of directors to support it. Likewise,
Marietta is not armed with any board resolution authorizing her to Complainants appealed and argued that they had an employer-
institute the criminal charges against the private respondents. employee relationship with Elcee Farms before HILLA took possession
of the hacienda in November 1990. They pointed out that Elcee Farms
Furthermore, Sylvia and Cristina were able to establish by competent failed to present proof that they were employed by Garnele to
evidence that they were then the Vice-President and the Assistant Vice- substantiate the existence of a valid lease agreement between Elcee
President of Lakeridge, respectively. As such officers, they would, Farms and Garnele. They also pleaded that the closed shop provision
ostensibly, have the right and authority to freely enter and perform acts of the CBA between HILLA and USFO cannot be made to apply to the
of maintenance of Penthouse Unit 43-C. The right could include complainants, who were members of another union.
breaking open the door and replacing its locks, apparently due to loss
of the keys. Issue:

As to the criminal charges filed, the Supreme Court said that:

We hold that the evidence adduced does not support a finding of W/N the private respondents are entitled to the award of separation
probable cause for the offenses defined in the provisions cited (Article pay and moral damages
293 and 299 of the RPC and PD 1829. Marietta failed to prove, by
competent evidence, that: (1) Penthouse Unit 43-C was the dwelling Ruling:
place of Erlinda; (2) she has authority over the said unit; (3) Sylvia and
Cristina had no authority to enter the unit and conduct acts of
maintenance thereon; and (4) Sylvia and Cristina were armed when Moral damages are recoverable when the dismissal of an employee is
they effected entrance. Based on these circumstances, the charges of attended by bad faith or fraud or constitutes an act oppressive to labor,
robbery and qualified trespass to dwelling must inevitably fail. or is done in a manner contrary to good morals, good customs or public
Perforce, the charge against Jovito for violation of P.D. No. 1829 policy. Exemplary damages, on the other hand, are recoverable when
should also be dismissed. the dismissal was done in a wanton, oppressive, or malevolent manner.

Elcee Farms Vs. NLRC (512 SCRA 602) Bad faith on the part of Elcee Farms is shown by the act of simulating a
lease agreement with Garnele in order to evade paying private
respondents the proper amount of separation benefits based on the
Facts: number of years they worked in the hacienda, as provided by the Labor
Code. Records show that Elcee Farms did not pay any separation
Pampelo Semillano and one hundred forty-three (143) other benefits to the private respondents when they allegedly leased the
complainants, represented by the labor union, Sugar Agricultural hacienda to Garnele, and again when the hacienda was leased to Daniel
Industrial Labor Organization (SAILO), filed this complaint for illegal Hilado. When the employees filed their complaint with the Labor
dismissal with prayer for reinstatement with back wages, or in the Arbiter, Elcee Farms, using the simulated lease agreement with
alternative, separation pay, with damages against Elcee Farms, Garnele, tried to deny liability by claiming that their claims had already
Corazon Saguemuller, Hilla Corporation (HILLA), Rey Hilado, and prescribed. It claimed that the lease agreement with Garnele, which
Roberto Montaño. Private respondents alleged that they were all was allegedly executed in 1987, effectively terminated the employer-
regular farm workers in Hacienda Trinidad, which was owned and employee relationship before the complaint was filed in 1990, or more

65
than three years after. These unlaudable acts undermine the workers’ In the present case, the employees believed that petitioner Corazon
statutory rights for which moral damages may be awarded. Saguemuller was the president of Elcee Farms because the employees
would approach her if they needed help, as well as the fact that her
sons were the officers of Elcee Farms and Garnele. Beyond these bare
Liability for separation pay is provided under Article 283 of the
suppositions, no evidence, oral or documentary, was presented to
Labor Code. From this provision, three requirements are
prove that Corazon Saguemuller was truly the President of Elcee
enumerated in cases of cessation of business operations of an
Farms. Nor was there even proof that she was in active management of
employer company not due to business reverses: (1) service of a
the corporation and had dictated policies for implementation by the
written notice to the employees and to the MOLE (now the
corporation. Extending help to private respondents certainly did not
Secretary of Labor and Employment) at least one month before
automatically vest upon her the position of President of the
the intended date thereof; (2) the cessation of or withdrawal from
corporation. There, likewise, appears to be no evidence on record that
business operations must be bona fide in character; and (3)
she acted maliciously or in bad faith in terminating the services of the
payment to the employees of termination pay amounting to at
private respondents; nor has it been shown that she has in any way
least one-half month pay for each year of service, or one month
consented to the simulated lease contract executed by her sons which
pay, whichever is higher.
effectively terminated the services of the private respondents.

In the present case, Elcee Farms effectively ceased to operate and

Pamplona Vs. Acosta (510 SCRA 249)
manage Hacienda Trinidad when, through Garnele, it leased the
hacienda to Daniel Hilado. The validity of the aforementioned lease
was not questioned by any of the parties. There is no question that Facts:
the lease to Daniel Hilado effectively terminated the employer-
employee relationship between Elcee Farms and the farmworkers.
There were originally 66 complainants in the case before the Labor
Private respondents Pampelo Semillano and Roel Benignos testified
Arbiter for underpayment, overtime pay, premium pay for rest day and
that HILLA took possession of the hacienda in 1990 and managed the
holiday, service incentive leave pay, damages, attorney’s fees, and 13th
same. Clearly, there was a cessation of operations of Elcee Farms,
month pay. The complainants claimed that they were regular rank and
which renders it liable for separation pay to its employees, under
file employees of the Pamplona Plantation Co., Inc. (petitioner) with
Section 283 of the Labor Code.
different hiring periods, work designations, and salary rates.
Petitioner, however, denied this, alleging that some of the
This Court, nonetheless, finds merit in the petitioners’ allegation that complainants are seasonal employees, some are contractors, others
Corazon Saguemuller should not be subsidiarily liable with Elcee were hired under the pakyaw system, while the rest were hired by the
Farms for separation pay and damages. It is basic that a corporation is Pamplona Plantation Leisure Corporation, which has a separate and
invested by law with a personality separate and distinct from those of distinct entity from it.
the persons composing it as well as from that of any other legal entity
to which it may be related. Mere ownership by a single stockholder or
In a Decision dated September 30, 1998, the Labor Arbiter (LA) held
by another corporation of all or nearly all of the capital stock of a
petitioner and its manager, Jose Luis Bondoc, liable for underpayment
corporation is not of itself sufficient ground for disregarding the
as complainants were regular employees of petitioner. They were also
separate corporate personality. In the case of Santos v. National Labor
held guilty of illegal dismissal with regard to complainants Joselito
Relations Commission, a corporate officer was not held liable for the
Tinghil and Pedro Emperado.
obligations incurred by the corporation, where the corporate officer
was not even shown to have had a direct hand in the dismissal of the
employee enough to attribute to him an unlawful act. On appeal to the National Labor Relations Commission (NLRC), the
LA’s Decision was reversed and another one was entered dismissing all
the complaints per Decision dated June 30, 2000. It was the NLRC’s
In the case of Malayang Samahan ng mga Manggagawa sa M.
finding that the complaint should have been directed against the
Greenfield. v. Ramos, the Court restated the rule that corporate
Pamplona Plantation Leisure Corporation since complainants’
directors and officers are solidarily liable with the corporation for the
individual affidavits contained the allegations that their tasks pertained
termination of employees done with malice or bad faith. Bad faith was
to their work “in the golf course.”
defined by the Court thus: “It has been held that bad faith does not
connote bad judgment or negligence; it imports a dishonest purpose or
some moral obliquity and conscious doing of wrong; it means breach of Issue:
a known duty through some motive or interest or ill will; it partakes of
the nature of fraud.”
W/N Petitioner’s Manager is personally liable for corporate acts which
is not in accord with law
In A.C. Ransom, the corporate entity was a family corporation and
execution against it could not be implemented because of the
disposition post-haste of its leviable assets evidently in order to evade Ruling:
its just and due obligations. The doctrine of “piercing the veil of
corporate fiction” was thus clearly appropriate. Chua likewise involved The rule is that officers of a corporation are not personally liable for
another family corporation, and this time the conflict was between two their official acts unless it is shown that they have exceeded their
brothers occupying the highest ranking positions in the company. authority. However, the legal fiction that a corporation has a
There were incontrovertible facts which pointed to extreme personal personality separate and distinct from stockholders and members may
animosity that resulted, evidently in bad faith, in the easing out from be disregarded if it is used as a means to perpetuate fraud or an illegal
the company of one of the brothers by the other. act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
In the case of Naguiat v. National Labor Relations Commission, the
Court applied the doctrine found in the case of A. C. Ransom Labor Moreover, a corporate officer is not personally liable for the money
Untion- CCLU v. National Labor Relations Commission. There was a claims of discharged corporate employees unless he acted with evident
cessation of the operations of the employer-corporation and, thus, a malice and bad faith in terminating their employment.
problem as to who shall pay the employees. In holding the president
solidarily liable, the Court considered that he had actively engaged in
the management and operations of the corporation. Nevertheless, it Under Section 25 of the Corporation Code, three officers are
absolved from liability the vice-president, since no evidence on the specifically provided for which a corporation must have: president,
extent of his participation in the management or operation of the secretary, and treasurer. The law, however, does not limit corporate
business was proffered. officers to these three. Section 25 gives corporations the widest
latitude to provide for such other offices, as they may deem necessary.

66
The by-laws may and usually do provide for such other officers, e.g., While it may be true that barely one month and seven days from the
vice-president, cashier, auditor, and general manager. date of deposit, respondent FMIC demanded the withdrawal of
P86,057,646.72 through the issuance of a check payable to itself, the
same was made as a result of the fraudulent and unauthorized transfer
In this case, there is no basis from which it may be deduced that
by petitioner BPI FB of its P80 million deposit to Tevesteco’s savings
Bondoc, as manager of petitioner, is also a corporate officer such that
account. Certainly, such was a normal reaction of respondent as a
he may be held liable for the money claims awarded in favor of
depositor to petitioner’s failure in its fiduciary duty to treat its account
respondents. Even assuming that he is a corporate officer, still, there is
with the highest degree of care.
no showing that he acted with evident malice and bad faith. Bondoc
may have signed and approved the payrolls; nevertheless, it does not
follow that he had a direct hand in determining the amount of Under this circumstance, the withdrawal of deposit by respondent
respondents’ corresponding salaries and other benefits. Bondoc, FMIC before the one-year maturity date did not change the nature of
therefore, should not have been held liable together with petitioner. its time deposit to one of demand deposit.

BPI Family Vs.First Metro (429 SCRA 30) In its attempt to evade any liability therefor, petitioner now impugns
the validity of the subject agreement on the ground that its Branch
Manager, Jaime Sebastian, overstepped the limits of his authority in
Facts:
accepting respondent’s deposit with 17% interest per annum. We have
held that if a corporation knowingly permits its officer, or any other
First Metro Investment Corporation (FMIC), respondent, is an agent, to perform acts within the scope of an apparent authority,
investment house organized under Philippine laws. Petitioner, Bank of holding him out to the public as possessing power to do those acts, the
Philippine Islands Family Savings Bank, Inc. is a banking corporation corporation will, as against any person who has dealt in good faith with
also organized under Philippine laws. the corporation through such agent, be estopped from denying such
authority.
FMIC, through its Executive Vice President Antonio Ong, opened
current account no. 8401-07473-0 and deposited METROBANK check Significantly, the transaction was actually acknowledged and ratified by
no. 898679 of P100 million with BPI Family Bank(BPI-FB) San petitioner when it paid respondent in advance the interest for one year.
Francisco del Monte Branch (Quezon City). Ong made the deposit upon Thus, petitioner is estopped from denying that it authorized its Branch
request of his friend, Ador de Asis, a close acquaintance of Jaime Manager to enter into an agreement with respondent’s Executive Vice
Sebastian, then Branch Manager of BPI-FB San Francisco del Monte President concerning the deposit with the corresponding 17% interest
Branch. Sebastian’s aim was to increase the deposit level in his per annum.
Branch.
Martinez Vs. CA (438 SCRA 130)
BPI-FB, through Sebastian, guaranteed the payment of P14,667,687.01
representing 17% per annum interest of P100 million deposited by
Facts:
FMIC. The latter, in turn, assured BPI-FB that it will maintain its
deposit of P100 million for a period of one year on condition that the
interest of 17% per annum is paid in advance. BPI International Finance is a foreign corporation not doing business
in the Philippines, with office address at the Bank of America Tower, 12
Harcourt Road, Central Hongkong. It was a deposit-taking company
This agreement between the parties was reached through their
organized and existing under and by virtue of the laws of Hongkong,
communications in writing.
and was also engaged in investment banking operations therein.

Subsequently, BPI-FB paid FMIC 17% interest or P14,667,687.01 upon

Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in
clearance of the latter’s check deposit.
Hongkong, with a paid-up capital of HK$10,000. The registered
shareholders of the CLL in Hongkong were the Overseas Nominee, Ltd.
However, on August 29, 1989, on the basis of an Authority to Debit and Shares Nominee, Ltd., which were mainly nominee shareholders.
signed by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI In Hongkong, the nominee shareholder of CLL was Baker & McKenzie
FB transferred P80 million from FMIC’s current account to the savings Nominees, Ltd., a leading solicitor firm. However, beneficially, the
account of Tevesteco Arrastre – Stevedoring, Inc. (Tevesteco). company was equally owned by Messrs. Ramon Siy, Ricardo Lopa,
Wilfrido C. Martinez, and Miguel J. Lacson. The registered office
address of CLL in Hongkong was 22/F, Prince’s Building, also the
FMIC denied having authorized the transfer of its funds to Tevesteco, office address of Price Waterhouse & Co., a large accounting firm in
claiming that the signatures of Ong and David were falsified. Hongkong.
Thereupon, to recover immediately its deposit, FMIC, on September
12, 1989, issued BPI FB check no. 129077 for P86,057,646.72 payable
to itself and drawn on its deposit with BPI FB SFDM branch. But The bulk of the business of the CLL was the importation of molasses
upon presentation for payment on September 13, 1989, BPI FB from the Philippines, principally from the Mar Tierra Corporation, and
dishonored the check as it was “drawn against insufficient funds” the resale thereof in the international market. However, Mar Tierra
(DAIF). Corporation also sold molasses to its customers. Wilfrido C. Martinez
was the president of Mar Tierra Corporation, while its executive vice-
president was Blamar Gonzales. About 42% of the capital stock of Mar
Consequently, FMIC filed with the Regional Trial Court, Branch 146, Tierra Corporation was owned by RJL Martinez Fishing Corporation
Makati City Civil Case No. 89-5280 against BPI FB. FMIC likewise (RJL), the leading tuna fishing outfit in the Philippines.
caused the filing by the Office of the State Prosecutors of an
Information for estafa against Ong, de Asis, Sebastian and four others.
However, the Information was dismissed on the basis of a demurrer to BPI International Finance (then AIFL) granted CLL a letter of credit in
evidence filed by the accused. the amount of US$3,000,000. Wilfrido Martinez signed the letter
agreement with the respondent for the CLL.
Issue:
The CLL opened a money market placement with the respondent
bearing MMP No. 063, with an initial placement of US$390,000. The
W/N BPI-FB clothed its Branch Manager with apparent authority to CLL also opened and maintained a foreign currency account and a
enter into such a patently illegal arrangement deposit account with the respondent. The authorized signatory in both
accounts of CLL was Wilfrido C. Martinez. Some instructions also
Ruling: came from Gonzales, to be confirmed by Wilfrido Martinez. Ruben
67
Martinez and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson The mere fact that the majority stockholder of Mar Tierra Corporation
became joint account holders of the said money market placements. is the RJL, and that the petitioner, along with Jose and Luis Martinez,
owned about 42% of the capital stock of RJL, do not constitute
sufficient evidence that the latter corporation, and/or the petitioner
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra
and his brothers, had complete domination of Mar Tierra Corporation.
Corporation, sent to the respondent a telex confirming his telephone
It does not automatically follow that the said corporation was used by
conversation with Michael Sung/Bing Matoto requesting the
the petitioner for the purpose of committing fraud or wrong, or to
respondent to transfer US$340,000 to Account No. FCD SA 18402-7,
perpetrate an injustice on the respondent.
registered in the name of Mar Tierra Corporation, Philippine Banking
Corporation, Union Cement Building, Port Area, Manila, as payee, with
the following specific instructions: (a) there should be no mention of There is no evidence on record that the petitioner had any involvement
Wilfrido Martinez or Mar Tierra Corporation; (b) the telex instruction in the purchases of molasses by Wilfrido Martinez, Gonzales and
should be signed only by Wilfrido Martinez and sent only through the Lacson, and the subsequent sale thereof to the CLL, through Mar
telex machine of Mar Tierra Corporation; and, (c) the final Tierra Corporation. On the contrary, the evidence on record shows
confirmation of the transfer should be made by telephone call. that the CLL purchased molasses from Mar Tierra Corporation and
Gonzales requested the respondent, in the same telex, to confirm its paid for the same through the credit facility granted by the respondent
total available account so that instructions on the transfer of the funds to the CLL. The CLL, thereafter, made remittances to Mar Tierra
to FCD SA 18402-7 could be formalized. Corporation from its deposit account and MMP Nos. 063 and 084 with
the respondent. The close business relationship of the two
corporations does not warrant a finding that Mar Tierra Corporation
Sung informed Gonzales that the account available was approximately
was but a conduit of the CLL.
US$340,000, considering the CLL deposit account and the money
market placements. On October 14, 1980, the respondent received a
telex from Wilfrido C. Martinez requesting that the transfer of Likewise, the respondent failed to adduce preponderant evidence to
US$340,000 from the deposit account of the CLL or any deposit prove that the Mar Tierra Corporation and the RJL were so organized
available be effected by telegraphic transfer as soon as possible to their and controlled, its affairs so conducted as to make the latter
account, payee FCD SA 18402-7, Philippine Banking Corporation, Port corporation merely an instrumentality, agency, conduit or adjunct of
Area, Manila. On October 21, 1980, Wilfrido Martinez wrote the the former or of Wilfrido Martinez, Gonzales, and Lacson for that
respondent confirming his request for the transfer of US$340,000 to matter, or that such corporations were organized to defraud their
“their” account, FCD SA 18402-7, with the Philippine Banking creditors, including the respondent. The mere fact, therefore, that the
Corporation, through Wells Fargo Bank of New York, Philippine businesses of two or more corporations are interrelated is not a
Banking Corporation Account No. FCDU SA No. 003-019205. justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights.
The respondent complied with the request of the CLL, through Wilfrido
Martinez and Gonzales, and remitted US$340,000 as instructed.
However, instead of deducting the amount from the funds in the CLL Also, the mere fact that part of the proceeds of the sale of molasses
foreign currency or deposit accounts and/or MMP Nos. 063 and 084, made by Mar Tierra Corporation to the CLL may have been used by the
the respondent merely “posted” the US$340,000 as an account latter as deposits in its deposit account with the respondent or in the
receivable of the CLL since, at that time, the money market placements money market placements in MMP Nos. 063 and 084, or that the
had not yet matured. When the money market placements matured, funds of Mar Tierra Corporation and the CLL with the respondent were
however, the respondent did not collect the US$340,000 therefrom. mingled, and their disposition controlled by Wilfrido Martinez, does
Instead, the respondent allowed the CLL and/or Wilfrido C. Martinez not constitute preponderant evidence that the petitioner, Wilfrido
to withdraw, up to July 3, 1981, the bulk of the CLL deposit account Martinez and Lacson used the Mar Tierra Corporation and the RJL to
and MMP Nos. 084 and 063; hence, it failed to secure reimbursement defraud the respondent. The respondent treated the CLL and Mar
for the US$340,000 from the said deposit account and/or money Tierra Corporation as separate entities and considered them as one and
market placements. the same entity only when Wilfrido C. Martinez and/or Blamar
Gonzales failed to pay the US$340,000 remitted by the respondent to
FCD SA 18402-7. This being the case, there is no factual and legal
In the meantime, the respondent demanded from the CLL, Wilfrido
basis to hold the petitioner liable to the respondent for the said
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, the
amount.
payment of the US$340,000 remitted by it to FCD SA 18402-7, per
instructions of Gonzales and Wilfrido Martinez. No remittance was
made to the respondent. Petitioner Ruben Martinez denied knowledge Section 26 –
of any such remittance, as well as any liability for the amount thereof.
Report of election of directors, trustees and officers. - Within
On June 17, 1983, the respondent filed a complaint against the CLL, thirty (30) days after the election of the directors, trustees and officers
Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, of the corporation, the secretary, or any other officer of the
with the RTC of Kaloocan City for the collection of the principal corporation, shall submit to the Securities and Exchange Commission,
amount of US$340,000, with a plea for a writ of preliminary the names, nationalities and residences of the directors, trustees, and
attachment. officers elected. Should a director, trustee or officer die, resign or in
any manner cease to hold office, his heirs in case of his death, the
Issue: secretary, or any other officer of the corporation, or the director,
trustee or officer himself, shall immediately report such fact to the
Securities and Exchange Commission.
W/N the petitioner is obliged to reimburse to the respondent the
principal amount of US$340,000
Premium Marble Vs. CA (264 SCRA 11)
Ruling:
Facts:
In this case, the respondent failed to adduce the quantum of evidence
necessary to prove any valid ground for the piercing of the veil of On July 18, 1986, Premium Marble Resources, Inc. (Premium),
corporate entity of Mar Tierra Corporation, or of RJL for that matter, assisted by Atty. Arnulfo Dumadag as counsel, filed an action for
and render the petitioner liable for the respondent’s claim, jointly and damages against International Corporate Bank:
severally, with Wilfrido Martinez and Lacson.
Sometime in August to October 1982, Ayala Investment and
Development Corporation issued three (3) checks.

68
On August to October 1982, former officers of the plaintiff corporation in their General Information Sheet with the SEC, as of 1986 appears to
headed by Saturnino G. Belen, Jr., without any authority from the be the set of officers elected in March 1981.
plaintiff deposited the above-mentioned checks to the current account
of his conduit corporation, Intervest Merchant Finance (Intervest)
We agree with the finding of public respondent Court of Appeals, that
"in the absence of /any board resolution from its board of directors
The plaintiff has demanded upon the defendant to restitute the amount the [sic] authority to act for and in behalf of the corporation, the
representing the value of the checks but defendant refused. present action must necessarily fail. The power of the corporation to
sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers. Thus, the issue of authority and the
Premium prayed that judgment be rendered ordering defendant bank
invalidity of plaintiff-appellant 's subscription which is still pending,
to pay the amount of P31,663.88 representing the value of the checks.
is a matter that is also addressed, considering the premises, to the
sound judgment of the Securities & Exchange Commission."
Meantime, the same corporation, i.e., Premium, but this time
represented by Siguion Reyna, Montecillio and Ongsiako Law Office as
By the express mandate of the Corporation Code (Section 26), all
counsel, filed a motion to dismiss on the ground that the filing of the
corporations duly organized pursuant thereto are required to submit
case was without authority from its duly constituted board of directors
within the period therein stated (30 days) to the Securities and
as shown by the excerpt of the minutes of the Premium's board of
Exchange Commission the names, nationalities and residences of the
directors' meeting.
directors, trustees and officers elected.

In its opposition, Premium thru Atty. Dumadag contended that the

Sec. 26 of the Corporation Code provides, thus:
persons who signed the board resolution namely Belen, Jr., Nograles &
Reyes, are not directors of the corporation and were allegedly former
officers and stockholders of Premium who were dismissed for various Sec. 26. Report of election of directors, trustees
irregularities and fraudulent acts; that Siguion Reyna Law office is the and officers. � Within thirty (30) days after the
lawyer of Belen and Nograles and not of Premium and that the Articles election of the directors, trustees and officers of
of Incorporation of Premium shows that Belen, Nograles and Reyes are the corporation, the secretary, or any other officer
not majority stockholders. of the corporation, shall submit to the Securities
and Exchange Commission, the names,
nationalities and residences of the directors,
On the other hand, Siguion Reyna Law firm as counsel of Premium
trustees and officers elected. . . .
asserted that it is the general information sheet filed with the Securities
and Exchange Commission, among others, that is the best evidence
that would show who are the stockholders of a corporation and not the Evidently, the objective sought to be achieved by Section 26 is to give
Articles of Incorporation since the latter does not keep track of the the public information, under sanction of oath of responsible officers,
many changes that take place after new stockholders subscribe to of the nature of business, financial condition and operational status of
corporate shares of stocks. the company together with information on its key officers or managers
so that those dealing with it and those who intend to do business with
it may know or have the means of knowing facts concerning the
Issue:
corporation's financial resources and business responsibility.

Whether or not the filing of the case for damages against private
The claim, therefore, of petitioners as represented by Atty. Dumadag,
respondent was authorized by a duly constituted Board of Directors of
that Zaballa, et al., are the incumbent officers of Premium has not been
the petitioner corporation.
fully substantiated. In the absence of an authority from the board of
directors, no person, not even the officers of the corporation, can
Ruling: validly bind the corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Monfort Hermanos Vs. Antonio Monfort (434 SCRA 27)
Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo
Millare, presented the Minutes of the meeting of its Board of Directors
Facts:
held on April 1, 1982, as proof that the filing of the case against private
respondent was authorized by the Board. On the other hand, the
second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles Monfort Hermanos Agricultural Development Corporation, a domestic
and Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to private corporation, is the registered owner of a farm, fishpond and
show that Premium did not authorize the filing in its behalf of any suit sugar cane plantation known as Haciendas San Antonio II, Marapara,
against the private respondent International Corporate Bank. Pinanoag and Tinampa-an, all situated in Cadiz City. It also owns one
unit of motor vehicle and two units of tractors. The same allowed
Ramon H. Monfort, its Executive Vice President, to breed and maintain
However, it appears from the general information sheet and the
fighting cocks in his personal capacity at Hacienda San Antonio.
Certification issued by the SEC on August 19, 1986 that as of March 4,
1981, the officers and members of the board of directors of the
Premium Marble Resources, Inc. were: In 1997, the group of Antonio Monfort III, through force and
intimidation, allegedly took possession of the 4 Haciendas, the produce
thereon and the motor vehicle and tractors, as well as the fighting
Alberto C. Nograles - President/Director
cocks of Ramon H. Monfort.
Fernando D. Hilario - Vice
President/Director
Augusto I. Galace - Treasurer Two cases were filed pursuant to such act by Antonio.
Jose L.R. Reyes - Secretary/Director
Pido E. Aquilar - Director
First, the Corporation, represented by its President, Ma. Antonia M.
Saturnino G. Belen, Jr. - Chairman of
Salvatierra, and Ramon H. Monfort, in his personal capacity, filed
the Board.
against the group of Antonio Monfort III, a complaint for delivery of
motor vehicle, tractors and 378 fighting cocks, with prayer for
While the Minutes of the Meeting of the Board on April 1, 1982 states injunction and damages.
that the newly elected officers for the year 1982 were Oscar Gan, Mario
Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show
proof that this election was reported to the SEC. In fact, the last entry
69
The group of Antonio Monfort III contended that Ma. Antonia M. In the instant case, the six signatories to the March 31, 1997 Board
Salvatierra has no capacity to sue on behalf of the Corporation because Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
the Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Monfort to represent the Corporation, were: Ma. Antonia M.
Ramon H. Monfort to represent the Corporation is void as the Salvatierra, President; Ramon H. Monfort, Executive Vice President;
purported Members of the Board who passed the same were not validly Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M.
elected officers of the Corporation. Yusay; and Ester S. Monfort, Secretary.

Second, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a However, the names of the last four (4) signatories to the said Board
complaint for forcible entry, preliminary mandatory injunction with Resolution do not appear in the 1996 General Information Sheet
temporary restraining order and damages against the group of Antonio submitted by the Corporation with the SEC. Under said General
Monfort III. It contended that the latter through force and Information Sheet the composition of the Board is as follows:
intimidation, unlawfully took possession of the 4 Haciendas and
deprived the Corporation of the produce thereon.
1. Ma. Antonia M. Salvatierra (Chairman);
2. Ramon H. Monfort (Member);
Antonio Monfort III alleged that they are possessing and controlling 3. Antonio H. Monfort, Jr., (Member);
the Haciendas and harvesting the produce therein on behalf of the 4. Joaquin H. Monfort (Member);
corporation and not for themselves. They likewise raised the 5. Francisco H. Monfort (Member) and
affirmative defense of lack of legal capacity of Ma. Antonia M. 6. Jesus Antonio H. Monfort (Member).
Salvatierra to sue on behalf of the Corporation.
There is thus a doubt as to whether Paul M. Monfort, Yvete M.
These two cases were consolidated. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly
elected Members of the Board legally constituted to bring suit in behalf
of the Corporation.
Issue:

In the case at bar, the fact that four of the six Members of the Board
W/N Ma. Antonia M. Salvatierra has the legal capacity to sue on behalf
listed in the 1996 General Information Sheetare already dead at the
of the Corporation
time the March 31, 1997 Board Resolution was issued, does not
automatically make the four signatories (i.e., Paul M. Monfort, Yvete
Ruling: M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said
Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board.
A corporation has no power except those expressly conferred on it by This is because it was not established that they were duly elected to
the Corporation Code and those that are implied or incidental to its replace the said deceased Board Members.
existence. In turn, a corporation exercises said powers through its
board of directors and/or its duly authorized officers and agents. Thus,
it has been observed that the power of a corporation to sue and be sued A corporation is mandated to inform the SEC of the names and the
in any court is lodged with the board of directors that exercises its change in the composition of its officers and board of directors within
corporate powers. In turn, physical acts of the corporation, like the 30 days after election if one was held, or 15 days after the death,
signing of documents, can be performed only by natural persons duly resignation or cessation of office of any of its director, trustee or officer
authorized for the purpose by corporate by-laws or by a specific act of if any of them died, resigned or in any manner, ceased to hold office.
the board of directors. This, the Corporation failed to do. The alleged election of the directors
and officers who signed the March 31, 1997 Board Resolution was held
on October 16, 1996, but the SEC was informed thereof more than two
Corollary thereto, corporations are required under Section 26 of the years later, or on November 11, 1998. The 4 Directors appearing in the
Corporation Code to submit to the SEC within thirty (30) days after the 1996 General Information Sheet died between the years 1984 – 1987,
election the names, nationalities and residences of the elected but the records do not show if such demise was reported to the SEC.
directors, trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic
corporations properly informed of their organizational operational What further militates against the purported election of those who
status, the SEC issued the following rules: signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996 meeting
where the questioned officers were elected. The issue of legal capacity
xxx xxx xxx of Ma. Antonia M. Salvatierra was raised before the lower court by the
group of Antonio Monfort III as early as 1997, but the Minutes of said
2. A General Information Sheet shall be filed with this October 16, 1996 meeting was presented by the Corporation only in its
Commission within thirty (30) days following the date of the annual September 29, 1999 Comment before the Court of Appeals.
stockholders’ meeting. No extension of said period shall be allowed, Moreover, the Corporation failed to prove that the same October 16,
except for very justifiable reasons stated in writing by the President, 1996 Minutes was submitted to the SEC. In fact, the 1997 General
Secretary, Treasurer or other officers, upon which the Commission may Information Sheet submitted by the Corporation does not reflect the
grant an extension for not more than ten (10) days. names of the 4 Directors claimed to be elected on October 16, 1996.

2.A. Should a director, trustee or officer die, resign or in any Considering the foregoing, we find that Ma. Antonia M. Salvatierra
manner, cease to hold office, the corporation shall report such fact to failed to prove that four of those who authorized her to represent the
the Commission with fifteen (15) days after such death, resignation or Corporation were the lawfully elected Members of the Board of the
cessation of office. Corporation. As such, they cannot confer valid authority for her to sue
on behalf of the corporation.
3. If for any justifiable reason, the annual meeting has to be
postponed, the company should notify the Commission in writing of Section 27 –
such postponement.
Disqualification of directors, trustees or officers. - No person
The General Information Sheet shall state, among others, the convicted by final judgment of an offense punishable by imprisonment
names of the elected directors and officers, together with for a period exceeding six (6) years, or a violation of this Code
their corresponding position title… committed within five (5) years prior to the date of his election or

70
appointment, shall qualify as a director, trustee or officer of any impossible for the PCGG to carry out its duties as conservator if the
corporation. Board or officers do not cooperate, are hostile or antagonistic to the
conservator's objectives.

Cojuangco Vs. Roxas (195 SCRA 797)

Thus, it is necessary to achieve a balancing of or reconciliation between
the stockholder's right to vote and the conservator's statutory duty to
Issue: recover and in the process thereof, to conserve assets, thought to be ill-
gotten wealth, until final judicial determination of the character of such
W/N the Presidential Commission on Good Government (PCGG) may assets or until a final compromise agreement between the parties is
vote the sequestered shares of stock of San Miguel Corporation (SMC) reached.
and elect its members of the board of directors
In BASECO, the court ruled that, there should be no exercise of the
Ruling: right to vote simply because the right exists, or because the stocks
sequestered constitute the controlling or a substantial part of the
corporate voting power. The stock is not to be voted to replace
Representatives of the corporate shares present at the meeting claimed directors, or revise the articles or by-laws, or otherwise bring about
that the shares are not under sequestration; or that if they are under substantial changes in policy, program of practice of the corporation
sequestration, the PCGG had no right to vote the same. except for demonstrably weighty and defensible grounds, and always in
the context of the stated purposes of sequestration or provisional
takeover, i e ., to prevent the dispersion or undue disposal of the
The PCGG claimed it represented 85,756,279 shares at the meeting
corporate assets. Directors are not to be voted out simply because the
including the corporate shares which corresponded to 1,286,744,185
power to do so exists. Substitution of directors is not to be done
votes which in turn were distributed equally among the fifteen (15)
without reason or rhyme, should indeed be shunned if at all possible,
candidates who were declared elected.
and undertaken only when essential to prevent disappearance or
wastage of corporate property, and always under such circumstances
Petitioners allege that the 27,211,770 shares or a total of 408,176,550 as to assure that the replacements are truly possessed of competence,
votes representing the corporate shares, were illegally cast by PCGG experience and probity.
and should be counted in favor of petitioners. The petitioners assert
that is they were allowed to vote their corresponding shares
In the case at bar, there was adequate justification to vote the
accordingly, then they would obtain enough votes to be elected.
incumbent directors out of office and elect others in their stead because
the evidence showed prima facie that the former were just tools of
The PCGG has no right to vote the sequestered shares of petitioners President Marcos and were no longer owners of any stock in the firm, if
including the sequestered corporate shares. Only their owners, duly they ever were at all.
authorized representatives or proxies may vote the said shares.
Consequently, the election of private respondents Adolfo Azcuna,
Edison Coseteng and Patricio Pineda as members of the board of Section 28 –
directors of SMC for 1990-1991 should be set aside.
Removal of directors or trustees. - Any director or trustee of a
However, petitioners cannot be declared duly elected members of the corporation may be removed from office by a vote of the stockholders
board of directors thereby. An election for the purpose should be held holding or representing at least two-thirds (2/3) of the outstanding
where the questioned shares may be voted by their owners and/or their capital stock, or if the corporation be a non-stock corporation, by a vote
proxies. Such election may be held at the next shareholders' meeting in of at least two-thirds (2/3) of the members entitled to vote: Provided,
April 1991 or at such date as may be set under the by-laws of SMC. That such removal shall take place either at a regular meeting of the
corporation or at a special meeting called for the purpose, and in either
case, after previous notice to stockholders or members of the
Private respondents in both cases are hereby declared to be de facto corporation of the intention to propose such removal at the meeting. A
officers who in good faith assumed their duties and responsibilities as special meeting of the stockholders or members of a corporation for the
duly elected members of the board of directors of the SMC. They are purpose of removal of directors or trustees, or any of them, must be
thereby legally entitled to the emoluments of the office including called by the secretary on order of the president or on the written
salary, fees and other compensation attached to the office until they demand of the stockholders representing or holding at least a majority
vacate the same. of the outstanding capital stock, or, if it be a non-stock corporation, on
the written demand of a majority of the members entitled to vote.
Nevertheless, the right of the Government, represented by the PCGG, Should the secretary fail or refuse to call the special meeting upon such
as conservator of sequestered assets must be adequately protected. demand or fail or refuse to give the notice, or if there is no secretary,
the call for the meeting may be addressed directly to the stockholders
or members by any stockholder or member of the corporation signing
The important rights of stockholders are the following: the demand. Notice of the time and place of such meeting, as well as of
the intention to propose such removal, must be given by publication or
by written notice prescribed in this Code. Removal may be with or
a) the right to vote;
without cause: Provided, That removal without cause may not be used
to deprive minority stockholders or members of the right of
b) the right to receive dividends; representation to which they may be entitled under Section 24 of this
Code.
c) the right to receive distributions upon liquidation of the corporation;
and d) the right to inspect the books of the corporation. Raniel Vs. Jochico (517 SCRA 221)

It is through the right to vote that the stockholder participates in the Facts:
management of the corporation. The right to vote, unlike the rights to
receive dividends and liquidating distributions, is not a passive thing
because management or administration is, under the Corporation Petitioners are Ma. Victoria Pag-ong – director of Nephro and
Code, vested in the board of directors, with certain reserved powers Nectarina Raniel – director and acting corporate secretary and
residing in the stockholders directly. The board of directors and administrator of Nephro.
executive committee (or management committee) and the corporate
officers selected by the board may make it very difficult if not

71
Respondents are Paul Jochico, John Steffens, Surya Viriya – removal of directors or trustees or any of them, must be called by the
incorporators and directors of Nephro. secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or if it be a non-stock corporation, on the
The conflict started when petitioners questioned respondents' plan to
written demand of a majority of the members entitled to vote. x x x
enter into a joint venture with the Butuan Doctors' Hospital and
Notice of the time and place of such meeting, as well as of the intention
College, Inc. sometime in December 1997. Because of this, petitioners
to propose such removal, must be given by publication or by written
claim that respondents tried to compel them to waive and assign their
notice as prescribed in this Code. x x x Removal may be with or
shares with Nephro but they refused. Thereafter, Raniel sought an
without cause: Provided, That removal without cause may not be
indefinite leave of absence due to stress, but this was denied by
used to deprive minority stockholders or members of the right of
Jochico, as Nephro President. Raniel, nevertheless, did not report for
representation to which they may be entitled under Section 24 of this
work, causing Jochico to demand an explanation from her why she
Code. (Emphasis supplied)
should not be removed as Administrator and Corporate Secretary.
Raniel replied, expressing her sentiments over the disapproval of her
request for leave and respondents' decision with regard to the Butuan Petitioners do not dispute that the stockholders' meeting was held in
venture. accordance with Nephro's By-Laws. The ownership of Nephro's
outstanding capital stock is distributed as follows: Jochico - 200
shares; Steffens - 100 shares; Viriya - 100 shares; Raniel - 75 shares;
On January 30, 1998, Jochico issued a Notice of Special Board Meeting
and Pag-ong - 25 shares, or a total of 500 shares. A two-thirds vote of
on February 2, 1998. Despite receipt of the notice, petitioners did not
Nephro's outstanding capital stock would be 333.33 shares, and during
attend the board meeting. In said meeting, the Board passed several
the Stockholders' Special Meeting held on February 16, 1998, 400
resolutions ratifying the disapproval of Raniel's request for leave,
shares voted for petitioners' removal. Said number of votes is more
dismissing her as Administrator of Nephro, declaring the position of
than enough to oust petitioners from their respective positions as
Corporate Secretary vacant, appointing Otelio Jochico as the new
members of the board, with or without cause.
Corporate Secretary and authorizing the call of a Special Stockholders'
Meeting on February 16, 1998 for the purpose of the removal of
petitioners as directors of Nephro. Section 29 –

Otelio Jochico issued the corresponding notices for the Special Vacancies in the office of director or trustee. - Any vacancy
Stockholders' Meeting to be held on February 16, 1998 which were occurring in the board of directors or trustees other than by removal by
received by petitioners on February 2, 1998. Again, they did not attend the stockholders or members or by expiration of term, may be filled by
the meeting. The stockholders who were present removed the the vote of at least a majority of the remaining directors or trustees, if
petitioners as directors of Nephro. Thus, petitioners filed a case before still constituting a quorum; otherwise, said vacancies must be filled by
the SEC. the stockholders in a regular or special meeting called for that purpose.
A director or trustee so elected to fill a vacancy shall be elected only or
Both the SEC and the CA held that Pag-ong's removal as director and the unexpired term of his predecessor in office.
Raniel's removal as director and officer of Nephro were valid. For its
part, the SEC ruled that the Board of Directors had sufficient ground to A directorship or trusteeship to be filled by reason of an increase in the
remove Raniel as officer due to loss of trust and confidence, as her number of directors or trustees shall be filled only by an election at a
abrupt and unauthorized leave of absence exhibited her disregard of regular or at a special meeting of stockholders or members duly called
her responsibilities as an officer of the corporation and disrupted the for the purpose, or in the same meeting authorizing the increase of
operations of Nephro. directors or trustees if so stated in the notice of the meeting.

The CA upheld the SEC's conclusions, adding further that the special Section 30 –
stockholders' meeting on February 16, 1998 was likewise validly held.
The CA also ruled that Pag-ong's removal as director of Nephro was
justified as it was due to her "undenied delay in the release of Nephro's Compensation of directors. - In the absence of any provision in
medical supplies from the warehouse of the Fly-High Brokerage where the by-laws fixing their compensation, the directors shall not receive
she was an officer, on top of her and her co-petitioner Raniel's absence any compensation, as such directors, except for reasonable pre diems:
from the aforementioned directors' and stockholders' meetings of Provided, however, That any such compensation other than per diems
Nephro despite due notice." may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total
Issue: yearly compensation of directors, as such directors, exceed ten (10%)
percent of the net income before income tax of the corporation during
W/N only the stockholders or members have the power to remove the the preceding year.
directors or trustees elected by them
Western Institute Vs. Salas (278 SCRA 216)
Ruling:
Facts:
Only stockholders or members have the power to remove the directors
or trustees elected by them, as laid down in Section 28 of the Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-
Corporation Code, which provides in part: Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same
family, are the majority and controlling members of the Board of
SEC. 28. Removal of directors or trustees. -- Any director or Trustees of Western Institute of Technology, Inc. (WIT, for short), a
trustee of a corporation may be removed from office by a stock corporation engaged in the operation, among others, of an
vote of the stockholders holding or representing at least two- educational institution. According to petitioners, the minority
thirds (2/3) of the outstanding capital stock, or if the stockholders of WIT, sometime on June 1, 1986 in the principal office
corporation be a non-stock corporation, by a vote of at least two-thirds of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In
(2/3) of the members entitled to vote: Provided, that such removal attendance were other members of the Board including one of the
shall take place either at a regular meeting of the corporation or at a petitioners Reginald Villasis. Prior to aforesaid Special Board Meeting,
special meeting called for the purpose, and in either case, after copies of notice thereof, dated May 24, 1986, were distributed to all
previous notice to stockholders or members of the corporation of the Board Members. The notice allegedly indicated that the meeting to be
intention to propose such removal at the meeting. A special meeting of held on June 1, 1986 included Item No. 6 which states:
the stockholders or members of a corporation for the purpose of
72
 Possible implementation of Art. III, Sec. 6 of the Amended Section 31 –
By-Laws of Western Institute of Technology, Inc. on
compensation of all officers of the corporation.
Liability of directors, trustees or officers. - Directors or trustees
who willfully and knowingly vote for or assent to patently unlawful acts
In said meeting, the Board of Trustees passed Resolution granting of the corporation or who are guilty of gross negligence or bad faith in
monthly compensation to the private respondents as corporate officers directing the affairs of the corporation or acquire any personal or
retroactive June 1, 1985 pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting
Issue: therefrom suffered by the corporation, its stockholders or members
and other persons.

W/N the private respondents are entitled to compensation

When a director, trustee or officer attempts to acquire or acquires, in
violation of his duty, any interest adverse to the corporation in respect
Ruling: of any matter which has been reposed in him in confidence, as to which
equity imposes a disability upon him to deal in his own behalf, he shall
be liable as a trustee for the corporation and must account for the
Section of the Corporation Code provides:
profits which otherwise would have accrued to the corporation.

Sec. 30. Compensation of directors — In the absence of any provision

in the by-laws fixing their compensation, the directors shall not receive Cebu Country Club Vs. Elizagaque (542 SCRA 65)
any compensation, as such directors , except for reasonable per diems:
Provided, however , That any such compensation (other than per Facts:
diems) may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a
regular or special stockholders' meeting. In no case shall the total Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation
yearly compensation of directors, as such directors , exceed ten (10%) operating as a non-profit and non-stock private membership club,
percent of the net income before income tax of the corporation during having its principal place of business in Banilad, Cebu City.
the preceding year. [Emphasis ours] Petitioners herein are members of its Board of Directors. Sometime in
1987, San Miguel Corporation, a special company proprietary member
of CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice
There is no argument that directors or trustees, as the case may be, are President and Operations Manager for the Visayas and Mindanao, as a
not entitled to salary or other compensation when they perform special non-proprietary member. The designation was thereafter
nothing more than the usual and ordinary duties of their office. This approved by the CCCI’s Board of Directors. In 1996, respondent filed
rule is founded upon a presumption that directors/trustees render with CCCI an application for proprietary membership. The
service gratuitously, and that the return upon their shares adequately application was indorsed by CCCI’s two (2) proprietary members,
furnishes the motives for service, without compensation. Under the namely: Edmundo T. Misa and Silvano Ludo.
foregoing section, there are only two (2) ways by which members of the
board can be granted compensation apart from reasonable per diems:
(1) when there is a provision in the by-laws fixing their compensation;
and (2) when the stockholders representing a majority of the
As the price of a proprietary share was around the P5 million range,
outstanding capital stock at a regular or special stockholders' meeting
Benito Unchuan, then president of CCCI, offered to sell respondent a
agree to give it to them.
share for only P3.5 million. Respondent, however, purchased the
share of a certain Dr. Butalid for only P3 million. Consequently, on
This proscription, however, against granting compensation to September 6, 1996, CCCI issued Proprietary Ownership Certificate No.
directors/trustees of a corporation is not a sweeping rule. Worthy of 1446 to respondent. During the meetings dated April 4, 1997 and May
note is the clear phraseology of Section 30 which states: ". . . [T]he 30, 1997 of the CCCI Board of Directors, action on respondent’s
directors shall not receive any compensation, as such directors , . . . ." application for proprietary membership was deferred. In another
The phrase as such directors is not without significance for it delimits Board meeting held on July 30, 1997, respondent’s application was
the scope of the prohibition to compensation given to them for services voted upon. Subsequently, or on August 1, 1997, respondent received
performed purely in their capacity as directors or trustees. The a letter from Julius Z. Neri, CCCI’s corporate secretary, informing him
unambiguous implication is that members of the board may receive that the Board disapproved his application for proprietary
compensation, in addition to reasonable per diems, when they render membership. On August 6, 1997, Edmundo T. Misa, on behalf of
services to the corporation in a capacity other than as respondent, wrote CCCI a letter of reconsideration. As CCCI did not
directors/trustees. answer, respondent, on October 7, 1997, wrote another letter of
reconsideration. Still, CCCI kept silent. On November 5, 1997,
respondent again sent CCCI a letter inquiring whether any member of
In the case at bench, Resolution No. 48, s. 1986 granted monthly
the Board objected to his application. Again, CCCI did not reply.
compensation to private respondents not in their capacity as members
Consequently, on December 23, 1998, respondent filed with the
of the board, but rather as officers of the corporation, more particularly
Regional Trial Court (RTC), Branch 71, Pasig City a complaint for
as Chairman, Vice-Chairman, Treasurer and Secretary of Western
damages against petitioners, docketed as Civil Case No. 67190. After
Institute of Technology.
trial, the RTC rendered its Decision dated February 14, 2001 in favor of
respondent.
Clearly, therefore, the prohibition with respect to granting
compensation to corporate directors/trustees as such under Section 30
is not violated in this particular case. Consequently, the last sentence of
Section 30 which provides: Issue:

. . . . . . . In no case shall the total yearly compensation of directors, as W/N in disapproving respondent’s application for proprietary
such directors , exceed ten (10%) percent of the net income before membership with CCCI, petitioners are liable to respondent for
income tax of the corporation during the preceding year. (Emphasis damages, and if so, whether their liability is joint and several
ours]

Ruling:
does not likewise find application in this case since the compensation is
being given to private respondents in their capacity as officers of WIT
and not as board members.
73
Obviously, the CCCI Board of Directors, under its Articles of Anent the award of exemplary damages, Article 2229 allows it by way
Incorporation, has the right to approve or disapprove an application of example or correction for the public good. Nonetheless, since
for proprietary membership. But such right should not be exercised exemplary damages are imposed not to enrich one party or impoverish
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on another but to serve as a deterrent against or as a negative incentive to
Human Relations provide restrictions, thus: curb socially deleterious actions, we reduce the amount from
P1,000,000.00 to P25,000.00 only.

Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and On the matter of attorney’s fees and litigation expenses, Article 2208 of
observe honesty and good faith. the same Code provides, among others, that attorney’s fees and
expenses of litigation may be recovered in cases when exemplary
damages are awarded and where the court deems it just and equitable
that attorney’s fees and expenses of litigation should be recovered, as in
Article 21. Any person who willfully causes loss or injury to this case. In any event, however, such award must be reasonable, just
another in a manner that is contrary to morals, good customs and equitable. Thus, we reduce the amount of attorney’s fees
or public policy shall compensate the latter for the damage. (P500,000.00) and litigation expenses (P50,000.00) to P50,000.00
and P25,000.00, respectively.

In rejecting respondent’s application for proprietary membership, we

find that petitioners violated the rules governing human relations, the
basic principles to be observed for the rightful relationship between
Lastly, petitioners’ argument that they could not be held jointly and
human beings and for the stability of social order. The trial court and
severally liable for damages because only one (1) voted for the
the Court of Appeals aptly held that petitioners committed fraud and
disapproval of respondent’s application lacks merit.
evident bad faith in disapproving respondent’s applications. This is
contrary to morals, good custom or public policy. Hence, petitioners
are liable for damages pursuant to Article 19 in relation to Article 21 of
the same Code.
SEC. 31. Liability of directors, trustees or officers. — Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence
or bad faith in directing the affairs of the corporation or acquire any
It is thus clear that respondent was left groping in the dark wondering
personal or pecuniary interest in conflict with their duty as such
why his application was disapproved. He was not even informed that a
directors, or trustees shall be liable jointly and severally for all
unanimous vote of the Board members was required. When he sent a
damages resulting therefrom suffered by the corporation, its
letter for reconsideration and an inquiry whether there was an
stockholders or members and other persons.
objection to his application, petitioners apparently ignored him.
Certainly, respondent did not deserve this kind of treatment. Having
been designated by San Miguel Corporation as a special non- Garcia Vs. Social Security (540 SCRA 456)
proprietary member of CCCI, he should have been treated by
petitioners with courtesy and civility. At the very least, they should
Facts:
have informed him why his application was disapproved.

Petitioner Immaculada L. Garcia, Eduardo de Leon, Ricardo de Leon,

Pacita Fernandez, and Consuelo Villanueva were directors of Impact
The exercise of a right, though legal by itself, must nonetheless be in Corporation. The corporation was engaged in the business of
accordance with the proper norm. When the right is exercised manufacturing aluminum tube containers and operated two factories.
arbitrarily, unjustly or excessively and results in damage to another, a One was a “slug” foundry-factory located in Cuyapo, Nueva Ecija, while
legal wrong is committed for which the wrongdoer must be held the other was an Extrusion Plant in Cainta, Metro Manila, which
responsible. It bears reiterating that the trial court and the Court of processed the “slugs” into aluminum collapsible tubes and similar
Appeals held that petitioners’ disapproval of respondent’s application containers for toothpaste and other related products.
is characterized by bad faith.
Records show that around 1978, Impact Corporation started
encountering financial problems. By 1980, labor unrest besieged the
corporation. In March 1983, Impact Corporation filed with the
As to petitioners’ reliance on the principle of damnum absque injuria Securities and Exchange Commission (SEC) a Petition for Suspension
or damage without injury, suffice it to state that the same is misplaced. of Payments.
In Amonoy v. Gutierrez, we held that this principle does not apply
when there is an abuse of a person’s right, as in this case.
On 8 May 1985, the union of Impact Corporation filed a Notice of
Strike with the Ministry of Labor which was followed by a declaration
of strike on 28 July 1985. Subsequently, the Ministry of Labor certified
the labor dispute for compulsory arbitration to the National Labor
As to the appellate court’s award to respondent of moral damages, we Relations Commission (NLRC) in an Order dated 25 August 1985. The
find the same in order. Under Article 2219 of the New Civil Code, Ministry of Labor, in the same Order, noted the inability of Impact
moral damages may be recovered, among others, in acts and actions Corporation to pay wages, 13th month pay, and SSS remittances due to
referred to in Article 21. We believe respondent’s testimony that he cash liquidity problems.
suffered mental anguish, social humiliation and wounded feelings as a
result of the arbitrary denial of his application. However, the amount
of P2,000,000.00 is excessive. While there is no hard-and-fast rule The Social Security System (SSS), through its Legal and Collection
in determining what would be a fair and reasonable amount of moral Division (LCD), filed a case before the SSC for the collection of
damages, the same should not be palpably and scandalously excessive. unremitted SSS premium contributions withheld by Impact
Moral damages are not intended to impose a penalty to the wrongdoer, Corporation from its employees.
neither to enrich the claimant at the expense of the defendant. Taking
into consideration the attending circumstances here, we hold that an In her Answer with Counterclaim dated 20 May 1999, petitioner
award to respondent of P50,000.00, instead of P2,000,000.00, as averred that Impact Corporation had ceased operations in 1980. In her
moral damages is reasonable. defense, she insisted that she was a mere director without managerial

74
functions, and she ceased to be such in 1982. Even as a stockholder The situation of petitioner, as a director of Impact Corporation when
and director of Impact Corporation, petitioner contended that she said corporation failed to remit the SSS premium contributions falls
cannot be made personally liable for the corporate obligations of exactly under the fourth situation. Section 28(f) of the Social Security
Impact Corporation since her liability extended only up to the extent of Law imposes a civil liability for any act or omission pertaining to the
her unpaid subscription, of which she had none since her subscription violation of the Social Security Law, to wit:
was already fully paid.

Issue: (f) If the act or omission penalized by this Act be

committed by an association, partnership, corporation
or any other institution, its managing head, directors or
W/N Garcia is liable for the unremitted SSS premiums of the
partners shall be liable to the penalties provided in this
employees
Act for the offense.

Ruling:

Section 31 of the Corporation Code, stipulating on the liability of In fact, criminal actions for violations of the Social Security Law
directors, trustees, or officers, provides: are also provided under the Revised Penal Code. The Social
Security Law provides, in Section 28 thereof, to wit:
SEC. 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently (h) Any employer who, after deducting the
unlawful acts of the corporation or who are guilty of gross negligence monthly contributions or loan amortizations from
or bad faith in directing the affairs of the corporation or acquire any his employees’ compensation, fails to remit the
personal or pecuniary interest in conflict with their duty as such said deductions to the SSS within thirty (30) days
directors, or trustees shall be liable jointly and severally for all damages from the date they became due shall be presumed
resulting therefrom suffered by the corporation, its stockholders or to have misappropriated such contributions or
members and other persons. loan amortizations and shall suffer the penalties
provided in Article Three hundred fifteen of the
Revised Penal Code.
Basic is the rule that a corporation is invested by law with a personality
separate and distinct from that of the persons composing it as well as (i) Criminal action arising from a violation of the
from that of any other legal entity to which it may be related. A provisions of this Act may be commenced by the
corporation is a juridical entity with legal personality separate and SSS or the employee concerned either under this
distinct from those acting for and in its behalf and, in general, from the Act or in appropriate cases under the Revised
people comprising it. Following this, the general rule applied is that Penal Code: x x x.
obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer, and
employee of a corporation are generally not held personally liable for
obligations incurred by the corporation. Respondents would like this Court to apply another exception to the
rule that the persons comprising a corporation are not personally liable
for acts done in the performance of their duties.
Being a mere fiction of law, however, there are peculiar situations or
valid grounds that can exist to warrant the disregard of its independent
being and the lifting of the corporate veil. This situation might arise The rationale cited by respondents in the two preceding paragraphs
when a corporation is used to evade a just and due obligation or to need not have been applied because the personal liability for the
justify a wrong, to shield or perpetrate fraud, to carry out other similar unremitted SSS premium contributions and the late penalty thereof
unjustifiable aims or intentions, or as a subterfuge to commit injustice attaches to the petitioner as a director of Impact Corporation during
and so circumvent the law. the period the amounts became due and demandable by virtue of a
direct provision of law.
Taking a cue from the above provision, a corporate director, a trustee
or an officer, may be held solidarily liable with the corporation in the Carag Vs. NLRC (520 SCRA 28)
following instances:
Facts:
When directors and trustees or, in appropriate cases, the officers of a
corporation—
National Federation of Labor Unions (NAFLU) and Mariveles Apparel
Corporation Labor Union (MACLU) (collectively, complainants), on
1. vote for or assent to patently unlawful acts of the behalf of all of MAC’s rank and file employees, filed a complaint against
corporation; MAC for illegal dismissal brought about by its illegal closure of
2. act in bad faith or with gross negligence in business. Complainants alleged that on July 8, 1993, without notice
directing the corporate affairs; of any kind filed in accordance with pertinent provisions of
3. are guilty of conflict of interest to the prejudice of the Labor Code, MAC ceased operations with the intention of
the corporation, its stockholders or members, and completely closing its shop or factory. Such intention was manifested
other persons. in a letter, allegedly claimed by MAC as its notice filed only on the
4. When a director or officer has consented to the same day that the operations closed.
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the
Complainants moved to implead Carag and David. Atty. Joshua L.
corporate secretary his written objection thereto.
Pastores (Atty. Pastores), as counsel for respondents, submitted a
position paper dated 21 February 1994 and stated that complainants
5. When a director, trustee or officer has
should not have impleaded Carag and David because MAC is actually
contractually agreed or stipulated to hold himself
owned by a consortium of banks. Carag and David own shares in MAC
personally and solidarily liable with the
only to qualify them to serve as MAC’s officers.
Corporation.
6. When a director, trustee or officer is made, by
specific provision of law, personally liable for his Arbiter Ortiguerra rendered her Decision dated 17 June 1994 granting
corporate action. the motion to implead Carag and David. In the same Decision, Arbiter

75
Ortiguerra declared Carag and David solidarily liable with MAC to requirements, but it is not illegal in the sense that it constitutes an
complainants. unlawful or criminal act.

Issue: For a wrongdoing to make a director personally liable for debts of the
corporation, the wrongdoing approved or assented to by the director
must be a patently unlawful act. Mere failure to comply with the
W/N Carag and David be held personally liable for the closure of MAC
notice requirement of labor laws on company closure or dismissal of
employees does not amount to a patently unlawful act. Patently
Ruling: unlawful acts are those declared unlawful by law which imposes
penalties for commission of such unlawful acts. There must be a law
declaring the act unlawful and penalizing the act.
Carag was not issued summons, not accorded a conciliatory
conference, not ordered to submit a position paper, not accorded a
hearing, not given an opportunity to present his evidence, and not Arbiter Ortiguerra’s asserted that “when the company had already
notified that the case was submitted for resolution. Thus, we hold that ceased operations and there is no way by which a judgment in favor of
Arbiter Ortiguerra’s Decision is void as against Carag for utter absence employees could be satisfied, corporate officers can be held jointly and
of due process. severally liable with the company.” This assertion echoes the
complainants’ claim that Carag is personally liable for MAC’s debts to
complainants “on the basis of Article 212(e) of the Labor Code, as
The rule is that a director is not personally liable for the debts of the amended,” which says:
corporation, which has a separate legal personality of its own. Section
31 of the Corporation Code lays down the exceptions to the rule, as
follows: ‘Employer’ includes any person
Liability of directors, trustees or officers. - acting in the interest of an employer,
Directors or trustees who wilfully and knowingly directly or indirectly. The term shall not
vote for or assent to patently unlawful acts of the include any labor organization or any of its
corporation or who are guilty of gross negligence officers or agents except when acting as
or bad faith in directing the affairs of the employer. (Emphasis supplied)
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors
Indeed, complainants seek to hold Carag personally liable for the debts
or trustees shall be liable jointly and severally for
of MAC based solely on Article 212(e) of the Labor Code. This is the
all damages resulting therefrom suffered by the
specific legal ground cited by complainants, and used by Arbiter
corporation, its stockholders or members and
Ortiguerra, in holding Carag personally liable for the debts of MAC.
other persons.

We have already ruled in McLeod v. NLRC and Spouses Santos v.

NLRC that Article 212(e) of the Labor Code, by itself, does not
Section 31 makes a director personally liable for corporate debts if he
make a corporate officer personally liable for the debts of the
wilfully and knowingly votes for or assents to patently
corporation. The governing law on personal liability of directors for
unlawful acts of the corporation. Section 31 also makes a director
debts of the corporation is still Section 31 of the Corporation Code.
personally liable if he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.
The ruling in A.C. Ransom Labor Union-CCLU v. NLRC, which the
Court of Appeals cited, does not apply to this case. We quote pertinent
Complainants did not allege in their complaint that Carag wilfully and
portions of the ruling, thus:
knowingly voted for or assented to any patently unlawful act of MAC.
Complainants did not present any evidence showing that Carag wilfully
and knowingly voted for or assented to any patently unlawful act of The foregoing was culled from Section 2 of RA 602, the Minimum
MAC. Neither did Arbiter Ortiguerra make any finding to this effect in Wage Law. Since RANSOM is an artificial person, it must have an
her Decision. officer who can be presumed to be the employer, being the “person
acting in the interest of (the) employer” RANSOM. The corporation,
only in the technical sense, is the employer.
Complainants did not also allege that Carag is guilty of gross
negligence or bad faith in directing the affairs of MAC. Complainants
did not present any evidence showing that Carag is guilty of gross The responsible officer of an employer corporation can be held
negligence or bad faith in directing the affairs of MAC. Neither did personally, not to say even criminally, liable for non-payment of back
Arbiter Ortiguerra make any finding to this effect in her Decision. wages. That is the policy of the law. x x x x

Arbiter Ortiguerra stopped there and did not make any finding that (c) If the policy of the law were otherwise, the corporation employer
Carag is guilty of bad faith or of wanton violation of labor standard can have devious ways for evading payment of back wages. In the
laws. Arbiter Ortiguerra did not specify what act of bad faith Carag instant case, it would appear that RANSOM, in 1969,
committed, or what particular labor standard laws he violated. foreseeing the possibility or probability of payment of back
wages to the 22 strikers, organized ROSARIO to replace
RANSOM, with the latter to be eventually phased out if the 22
To hold a director personally liable for debts of the corporation, and
strikers win their case. RANSOM actually ceased operations on
thus pierce the veil of corporate fiction, the bad faith or wrongdoing of
May 1, 1973, after the December 19, 1972 Decision of the Court of
the director must be established clearly and convincingly. Bad faith is
Industrial Relations was promulgated against RANSOM.
never presumed. Bad faith does not connote bad judgment or
negligence. Bad faith imports a dishonest purpose. Bad faith means
breach of a known duty through some ill motive or interest. Bad faith Clearly, in A.C. Ransom, RANSOM, through its President, organized
partakes of the nature of fraud. Neither does bad faith arise ROSARIO to evade payment of backwages to the 22 strikers. This
automatically just because a corporation fails to comply with the notice situation, or anything similar showing malice or bad faith on the part of
requirement of labor laws on company closure or dismissal of Patricio, does not obtain in the present case.
employees. The failure to give notice is not an unlawful act because the
law does not define such failure as unlawful. Such failure to give notice
Thus, the rule is still that the doctrine of piercing the corporate veil
is a violation of procedural due process but does not amount to an
applies only when the corporate fiction is used to defeat public
unlawful or criminal act. Such procedural defect is called illegal
convenience, justify wrong, protect fraud, or defend crime. In the
dismissal because it fails to comply with mandatory procedural
absence of malice, bad faith, or a specific provision of law making a

76
corporate officer liable, such corporate officer cannot be made and a sworn certification of non-forum shopping as provided
personally liable for corporate liabilities. Neither Article 212[e] in the third paragraph of section 3, Rule 46.
nor Article 273 (now 272) of the Labor Code expressly makes
any corporate officer personally liable for the debts of the
Pertinent portions of Section 3, Rule 46 provides:
corporation.

Section 3. Contents and filing of petition; effect of non-compliance

Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of
with requirements. – . . .
Appeals to hold Carag personally liable for the separation pay owed by
MAC to complainants based alone on Article 212(e) of the Labor Code.
Article 212(e) does not state that corporate officers are personally liable The petitioner shall also submit together with the petition a sworn
for the unpaid salaries or separation pay of employees of the certification that he has not theretofore commenced any other action
corporation. The liability of corporate officers for corporate debts involving the same issues in the Supreme Court, the Court of Appeals
remains governed by Section 31 of the Corporation Code. or different divisions thereof, or any other tribunal or agency; if there is
such other action or proceeding, he must state the status of the same;
and if he should thereafter learn that a similar action or proceeding has
Pet Plans Vs. CA (443 SCRA 510)
been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any other tribunal or agency,
Facts: he undertakes to promptly inform the aforesaid courts and other
tribunal or agency thereof within five (5) days therefrom.
Petitioner PET PLANS, Incorporated is a company engaged in the
business of selling educational, pension and memorial plans while co- . . .
petitioner Adrian V. Ocampo is its President.
The failure of the petitioner to comply with any of the foregoing
PET PLANS employed Jaime M. Abad as its Sales Operations requirements shall be sufficient ground for the dismissal of the
Manager/District Manager, assigning him to its branch office in Aparri, petition.
Cagayan. Later Abad was reassigned as a Trust Manager, a position
which is next lower in rank than the one he was then occupying. The
In CA-G.R. SP No. 62410, a certain Rolando M. Espino signed the
reasons for his demotion are his failure to comply with the sales quota
Verification and Certification attached to the petition for certiorari, as
for the years 1998 and 1999, to recruit manpower and to develop his
the duly authorized representative of petitioners. However, no proof
agency. Thus, Abad filed a complaint with the National Labor
was presented to show that Espino is indeed the authorized
Relations Commission (NLRC), Regional Arbitration Branch No. 02,
representative of petitioners. As a consequence, CA-G.R. SP No. 62410
Tuguegarao, Cagayan for illegal dismissal/demotion, damages, non-
was dismissed by the Court of Appeals.
payment of basic wages, 13th month pay and other monetary incentives
against PET PLANS and Ocampo.
Subsequent to such dismissal, however, petitioners filed a motion for
reconsideration attaching thereto a certificate issued by Espino, who is
The Executive Labor Arbiter Ricardo N. Olairez rendered a decision,
also the corporate secretary of PET PLANS, indicating that on
declaring complainant illegally dismissed and ordering respondents
December 2, 2000, the Board of Directors of petitioner corporation
jointly and severally to reinstate him to his former position without
issued a resolution authorizing him to represent the corporation in all
loss of seniority rights with full backwages and other benefits
cases filed by or against it, “giving him full authority to enter into an
computed at P26,533.00 basic pay including 13 th month pay and
amicable settlement, to submit to alternative modes of dispute
allowances from June 16 to December 31, 1999, and P144, 910.35
resolution, and to enter into stipulations or admissions of facts and of
unpaid basic wages including 13th month pay for 1996 to 1998 plus ten
documents, as well as to sign, execute and deliver all pleadings,
percent attorney’s fees. The reinstatement aspect is immediately
agreements, papers and documents and do all those necessary to carry
executory even pending appeal. In case reinstatement is no longer
into effect the herein resolution.” The Secretary’s Certificate was
feasible complainant shall be paid separation pay of one month
accompanied by a certification issued by herein petitioner Ocampo, the
compensation pay including allowances for every year of service. All
President/CEO of petitioner corporation, attesting to the fact that
other claims are hereby dismissed.
Espino is indeed the Corporate Secretary of petitioner corporation, and
that he is authorized to represent petitioner corporation in all cases
Issue: filed by or against it, which includes the authority to sign, execute and
deliver all pleadings, agreements, papers and documents.
W/N the Court of Appeals acted with grave abuse of discretion when it
dismissed petitioners’ special civil action for certiorari on the ground In the present case, a reading of the subject resolution issued by the
that petitioners failed to comply with the provisions of the Rules of Board of Directors of PET PLANS, shows that it authorizes Espino to
Court on verification and certificate of non-forum shopping represent only PET PLANS, not its co-petitioner, Ocampo. Nothing in
the records at hand indicates that Espino is clothed with special
authority to represent Ocampo. Hence, Espino does not represent
Ruling:
Ocampo, in the filing of CA-G.R. SP No. 62410. As such, Ocampo,
being a petitioner in his own right, should have also signed the
Section 1. Petition for certiorari. – When any tribunal, board or officer verification and certificate of non-forum shopping attached to the
exercising judicial or quasi-judicial functions has acted without or in petition of CA-G.R. SP No. 62410. Ordinarily, Ocampo should have
excess of its or his jurisdiction, or with grave abuse of discretion been considered a nominal party as he was merely impleaded by
amounting to lack or excess of jurisdiction, and there is no appeal, or complainant in his capacity as the president of PET PLANS and no
any plain, speedy, and adequate remedy in the ordinary course of law, a specific claim or charge against him, in his personal capacity, was
person aggrieved thereby may file a verified petition in the proper alleged in the complaint filed with the NLRC, Regional Arbitration
court, alleging the facts with certainty and praying that judgment be Branch. However, considering that the Labor Arbiter’s decision made
rendered annulling or modifying the proceedings of such tribunal, him jointly and solidarily liable with PET PLANS, he has become a real
board or officer, and granting such incidental reliefs as law and justice party-in-interest whose stake, subsequent to the Labor Arbiter’s
may require. decision, have become distinct from those of Petitioner Corporation.
As such, it becomes inevitable for him to sign the verification and
certificate of non-forum shopping.
The petition shall be accompanied by a certified true copy of
the judgment, order or resolution subject thereof, copies of
all pleadings and documents relevant and pertinent thereto, Section 3, Rule 46 of the Rules of Court requires that the petitioner
shall sign the certificate of non-forum shopping. In the case of

77
corporations, the physical act of signing may be performed in behalf of of the Malabon Fish Brokers Association, Inc. within 30 days from
the corporate entity by specifically authorized individuals for the finality of the decision. According to the hearing officer, from its
simple reason that corporations, as artificial persons, cannot do the incorporation, the MFBAI had only 35 legitimate members, and
task themselves. However, in the case of natural persons, the Rule respondent Luisito T. Santos was not listed as one of them.
requires the parties themselves to sign the certificate of non-forum
shopping. The reason for such a requirement is that the petitioner
The decision was appealed to the SEC which was, however, dismissed.
himself, or in case of a corporation, its duly authorized representative,
This prompted Valle, Jr., et al. to elevate the decision to the Court of
knows better than anyone else whether a separate case has been filed
Appeals (CA) via petition for review.
or pending which involves substantially the same issues.

Meanwhile, Mariano Guison died intestate. On April 30, 1990, the

In the present case, it cannot be said with certainty that Espino knows
Heirs of Mariano Guison and petitioner Norma Symaco, then President
beyond doubt that Ocampo has not filed before any court or tribunal a
and Chairman of the Board of Directors of petitioner R.N. Symaco
separate case related to the present petition and the petition in CA-G.R.
Trading Corporation (Symaco Corporation), executed an unnotarized
SP No. 62410. In Loquias vs. Office of the Ombudsman, we held that
contract of lease over a portion of the property previously leased to
failure of one of the petitioners to sign the verification and certificate
MFBAI.
against forum shopping constitutes a defect in the petition, which is a
ground for dismissing the same. While we have held in rulings
subsequent to Loquias that this rule may be relaxed, petitioners must Norma Symaco was then also a member of the MFBAI Board of
comply with two conditions: first, petitioners must show justifiable Directors.
cause for their failure to personally sign the certification and; second,
they must also be able to prove that the outright dismissal of the
petition would seriously impair the orderly administration of justice. In Symaco Corporation had the stallholders evicted from the market, and
the present case, we find that petitioners failed to prove the presence of filed a complaint for forcible entry against them with the Metropolitan
these conditions. The dismissal by the Court of Appeals of CA-G.R. SP Trial Court which the MeTC issued a writ of preliminary mandatory
No. 62410 should have put petitioners on guard as to the basic injunction against the defendants. It rendered judgment in favor of the
procedural requirements in filing the petition. Notwithstanding such plaintiff corporation on October 11, 1990.
dismissal and their subsequent filing of a motion for reconsideration,
petitioners still failed to substantially comply with the requirements of On May 31, 1990, the CA rendered judgment affirming the SEC
the Rules by the failure of Ocampo to sign the certificate of non-forum decision in SEC Case No. 2521. The decision became final and
shopping. In the present petition filed before us, PET PLANS once executory.
again failed to submit proof that it has authorized Espino to file the
present petition or to sign the verification and certificate against forum
shopping attached thereto. Likewise, petitioner Ocampo again failed to On October 29, 1990, respondent Santos, for and in behalf of the
sign the certificate of non-forum shopping. We cannot allow a party to MFBAI, filed a complaint for the annulment of the April 30, 1990
gain an advantage from its flagrant disregard of the Rules. Contract of Lease between the Heirs of Mariano Guison and defendant
Symaco Corporation, with injunctive relief, against petitioners Estate
of Mariano Guison, Symaco Corporation, and Norma Symaco in the
RN Symaco Vs. Santos (467 SCRA 312) Regional Trial Court (RTC) of Malabon.

Facts: Respondent Santos alleged, inter alia, that as an MFBAI member, he

was a nominal party; he filed the derivative suit for and in behalf of
Respondent Malabon Fish Brokers Association, Inc. (MFBAI) was a MFBAI. He further alleged that the April 30, 1990 Contract of Lease
non-stock corporation established to erect and operate the Malabon executed by the defendants was null and void since it was executed by
Fish Brokers Association Fish Market, aimed at promoting the Symaco Corporation, through Norma Symaco, who was the president
economic welfare of its members in their business of buying and selling and chairman of the Board of Directors of the said corporation and still
fish and other marine products. Linda Sioson was elected as treasurer a member of the MFBAI Board of Directors; hence, the contract was
of the corporation. executed in violation of the principle of corporate opportunity under
Sections 31 and 34 of the Corporation Code of the Philippines.

On April 30, 1980, Mariano Guison, as lessor, and the MFBAI, as

lessee, executed a contract of lease over a portion of five parcels of land Issue:
located in Malabon, Metro Manila. Included in the lease agreement
was a portion of his property occupied by Rudy Symaco along Estrella W/N Norma Symaco and/or R.N. Symaco Trading Corp. violates the
Street, Malabon, Metro Manila. doctrine of corporate opportunity

The MFBAI, thus, constructed the market on the leased property where Ruling:
its members installed their respective stalls.
No.
On August 13, 1983, a group of MFBAI members, led by Marcos Valle,
Jr., approved the corporation’s By-Laws.
Santos was not a legitimate MFBAI member; hence, he had no
standing to file a derivative suit for and in its behalf. One of the
On August 18, 1983, another set of MFBAI members, led by Lino requisites of a derivative suit is that the party bringing the suit should
Buhain, met and amended the By-Laws which the Securities and be a stockholder/member at the time of the action or transaction
Exchange Commission (SEC) approved on September 7, 1983. complained of. The right to sue derivatively is an attribute of corporate
However, Valle, Jr. and ten others filed a petition with the SEC against ownership which, to be exercised, requires that the injury alleged be
Buhain, et al. for the nullification of the amended By-Laws; to give due indirect as far as the stockholders/members are concerned, and direct
course to the By-Laws approved on August 13, 1983; and to declare only insofar as the corporation is concerned. The whole purpose of the
them (Valle, Jr., et al.) as the duly-established members of the law authorizing a derivative suit is to allow the stockholder/member to
corporation’s Board of Directors. The case was docketed as SEC Case enforce rights which are derivative (secondary) in nature. A derivative
No. 2521. action is a suit by a shareholder/member to enforce a corporate cause
of action.
The SEC Hearing Officer rendered a Decision ordering the dismissal of
the petition, and directing the hold-over officers to call for a All the MFBAI members are not indispensable parties in a derivative
membership meeting to elect the new Board of Directors and Officers suit. It is enough that a member or a minority of such members file a

78
derivative suit for and in behalf of the corporation. After all, the Corporation failed to comply with the demand of the Bank. On
members/stockholders who filed a derivative suit are merely nominal November 23, 1992, the Bank sent another letter to the [Corporation]
parties, the real party-in-interest being the corporation itself for and in demanding payment of its account which, by November 23, 1992, had
whose behalf the suit is filed. Any monetary benefits under the decision amounted to P7,283,913.33. The Corporation again failed to comply
of the court shall pertain to the corporation. with the demand of the Bank.

In light of the foregoing, there is no longer a need for the Court to still “On January 6, 1993, the Bank filed a complaint against the
resolve the other issues on whether Symaco violated the doctrine of Corporation Sps. Jong-Won Hong and the Sps. Teresita R. Cu, for ‘Sum
corporate opportunity. of Money’ with a plea for the issuance of a writ of preliminary
attachment.
Solid Bank Vs. Mindanao Ferro (464 SCRA 409)
“In dismissing the complaint against the individual [respondents], the
Court a quo found and declared that [petitioner] failed to adduce a
Facts:
morsel of evidence to prove the personal liability of the said
[respondents] for the claims of [petitioner] and that the latter
“The Maria Cristina Chemical Industries (MCCI) and three (3) Korean impleaded the [respondents], in its complaint and amended complaint,
corporations, namely, the Ssangyong Corporation, the Pohang Iron and solely to put more pressure on the Defendant Corporation to pay its
Steel Company and the Dongil Industries Company, Ltd., decided to obligations to [petitioner].
forge a joint venture and establish a corporation, under the name of the
Mindanao Ferroalloy Corporation (Corporation for brevity) with
Issue:
principal offices in Iligan City. Ricardo P. Guevara was the President
and Chairman of the Board of Directors of the Corporation. Jong-Won
Hong, the General Manager of Ssangyong Corporation, was the Vice- W/N the individual respondents can be held jointly and solidary liable
President of the Corporation for Finance, Marketing and
Administration. So was Teresita R. Cu. On November 26, 1990, the
Ruling:
Board of Directors of the Corporation approved a ‘Resolution’
authorizing its President and Chairman of the Board of Directors or
Teresita R. Cu, acting together with Jong-Won Hong, to secure an Basic is the principle that a corporation is vested by law with a
omnibus line in the aggregate amount of P30,000,000.00 from the personality separate and distinct from that of each person composing
Solidbank. or representing it. Equally fundamental is the general rule that
corporate officers cannot be held personally liable for the consequences
of their acts, for as long as these are for and on behalf of the
“In the meantime, the Corporation started its operations sometime in
corporation, within the scope of their authority and in good faith. The
April, 1991. Its indebtedness ballooned to P200,453,686.69 compared
separate corporate personality is a shield against the personal liability
to its assets of only P65,476,000.00. On May 21, 1991, the Corporation
of corporate officers, whose acts are properly attributed to the
secured an ordinary time loan from the Solidbank in the amount of
corporation.
P3,200,000.00. Another ordinary time loan was granted by the Bank
to the Corporation on May 28, 1991, in the amount of P1,800,000.00
or in the total amount of P5,000,000.00, due on July 15 and 26, 1991, Respondent Guevara was not personally liable for the contracts. First,
respectively. it is beyond cavil that he was duly authorized to act on behalf of the
corporation; and that in negotiating the loans with petitioner, he did so
in his official capacity. Second, no sufficient and specific evidence was
“However, the Corporation and the Bank agreed to consolidate and, at
presented to show that he had acted in bad faith or gross negligence in
the same time, restructure the two (2) loan availments, the same
that negotiation. Third, he did not hold himself personally and
payable on September 20, 1991. The Corporation executed ‘Promissory
solidarily liable with the corporation. Neither is there any specific
Note No. 96-91-00865-6’ in favor of the Bank evidencing its loan in the
provision of law making him personally answerable for the subject
amount of P5,160,000.00, payable on September 20, 1991. Teresita Cu
corporate acts.
and Jong-Won Hong affixed their signatures on the note. To secure
the payment of the said loan, the Corporation, through Jong-Won
Hong and Teresita Cu, executed a ‘Deed of Assignment’ in favor of the On the other hand, Respondents Cu and Hong signed the Promissory
Bank covering its rights, title and interest to ‘The entire proceeds of Note without the word “by” preceding their signatures, atop the
drafts drawn under Irrevocable Letter of Credit No. M-S-041-2002080 designation “Maker/Borrower” and the printed name of the
opened with The Mitsubishi Bank Ltd. – Tokyo dated June 13, 1991 for corporation, as follows:
the account of Ssangyong Japan Corporation, 7F. Matsuoka-Tamura-
Cho Bldg., 22-10, 5-Chome, Shimbashi, Minato-Ku, Tokyo, Japan up to
the extent of US$197,679.00’ __(Sgd) Cu/Hong__
(Maker/Borrower)
MINDANAO FERROALLOY
“The Corporation likewise executed a ‘Quedan’, by way of additional
security, under which the Corporation bound and obliged to keep and
hold, in trust for the Bank or its Order, ‘Ferrosilicon for While their signatures appear without qualification, the inference that
US$197,679.00’. Jong-Won Hong and Teresita Cu affixed their they signed in their individual capacities is negated by the following
signatures thereon for the Corporation. The Corporation, also, through facts: 1) the name and the address of the corporation appeared on the
Jong-Won Hong and Teresita Cu, executed a ‘Trust Receipt space provided for “Maker/Borrower”; 2) Respondents Cu and Hong
Agreement’, by way of additional security for said loan, the Corporation had only one set of signatures on the instrument, when there should
undertaking to hold in trust, for the Bank, as its property, the have been two, if indeed they had intended to be bound solidarily -- the
following: ‘1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S- first as representatives of the corporation, and the second as
041-2002080 for account of Ssangyong Japan Corporation, Tokyo, themselves in their individual capacities; 3) they did not sign under the
Japan for US$197,679.00 Ferrosilicon to expire September 20, 1991. spaces provided for “Co-maker,” and neither were their addresses
‘2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the reflected there; and 4) at the back of the Promissory Note, they signed
following: Ferrosilicon for US$197,679.00’ above the words “Authorized Representative.”

“However, shortly after the execution of the said deeds, the Moreover, it is axiomatic that solidary liability cannot be lightly
Corporation stopped its operations. The Corporation failed to pay its inferred. Under Article 1207 of the Civil Code, “there is a solidary
loan availments from the Bank inclusive of accrued interest. On liability only when the obligation expressly so states, or when the law
February 11, 1992, the Bank sent a letter to the Corporation demanding or the nature of the obligation requires solidarity.” Since solidary
payment of its loan availments inclusive of interests due. The liability is not clearly expressed in the Promissory Note and is not

79
required by law or the nature of the obligation in this case, no On due dates, Caltex presented the said checks for payment. However,
conclusion of solidary liability can be made. Three (3) checks were dishonored by the drawee bank, for the reason
that they were “drawn against insufficient funds.” Another check was,
likewise, dishonored with the notation “account closed.” Hence, Caltex,
Furthermore, nothing supports the alleged joint liability of the
through Dalao, made verbal demands to INSURECO for the
individual petitioners because, as correctly pointed out by the two
replacement of the dishonored checks with either manager’s checks or
lower courts, the evidence shows that there is only one debtor: the
cash, to no avail. On May 6, 1992, Caltex sent a confirmation telegram
corporation. In a joint obligation, there must be at least two debtors,
informing INSURECO of the dishonor of the said checks, and again
each of whom is liable only for a proportionate part of the debt; and the
demanded their replacement, but received no reply.
creditor is entitled only to a proportionate part of the credit.

On July 6, 1992, Caltex filed criminal complaints for violation of B.P.

Moreover, it is rather late in the day to raise the alleged joint liability,
Blg. 22 against Marigomen and Dalao with the Office of the City
as this matter has not been pleaded before the trial and the appellate
Prosecutor of Bacolod City. They were, thereafter, charged with three
courts. Before the lower courts, petitioner anchored its claim solely on
counts of violation of B.P. Blg. 22 in three separate Informations filed
the alleged joint and several (or solidary) liability of the individual
with the RTC of Bacolod City, and docketed as Criminal Case Nos.
respondents. Petitioner must be reminded that an issue cannot be
13012 to 13014.
raised for the first time on appeal, but seasonably in the proceedings
before the trial court.
Issue:
So too, the Promissory Note in question is a negotiable instrument.
Under Section 19 of the Negotiable Instruments Law, agents or W/N Marigomen could be held civilly liable for the bouncing checks
representatives may sign for the principal. Their authority may be issued to Caltex
established, as in other cases of agency. Section 20 of the law provides
that a person signing “for and on behalf of a [disclosed] principal or in
Ruling:
a representative capacity x x x is not liable on the instrument if he was
duly authorized.”
For violation of B.P. Blg. 22 to be committed, the prosecution must
prove the following essential elements:
The authority of Respondents Cu and Hong to sign for and on behalf of
the corporation has been amply established by the Resolution of
Minfaco’s Board of Directors, stating that “Atty. Ricardo P. Guevara (1) the making, drawing, and issuance of any check to apply
(President and Chairman), or Ms. Teresita R. Cu (Vice President), for account or for value;
acting together with Mr. Jong Won Hong (Vice President), be as they
are hereby authorized for and in behalf of the Corporation to: 1.
Negotiate with and obtain from (petitioner) the extension of an (2) the knowledge of the maker, drawer, or issuer that at the
omnibus line in the aggregate of P30 million x x x; and 2. Execute and time of issue there are no sufficient funds in or credit
deliver all documentation necessary to implement all of the foregoing.” with the drawee bank for the payment of such check in
full upon its presentment; and

Further, the agreement involved here is a “contract of adhesion,” which

was prepared entirely by one party and offered to the other on a “take it (3) the subsequent dishonor of the check by the drawee bank
or leave it” basis. Following the general rule, the contract must be read for insufficiency of funds or credit or dishonor for the
against petitioner, because it was the party that prepared it, more so same reason had not the drawer, without any valid
because a bank is held to high standards of care in the conduct of its cause, ordered the bank to stop payment.
business.
It is difficult for the prosecution to prove the second element of the
In the totality of the circumstances, we hold that Respondents Cu and crime because the knowledge on the part of the maker, drawer or issuer
Hong clearly signed the Note merely as representatives of Minfaco. that at the time of issue he does not have sufficient funds or credit with
the drawee bank for the payment of such checks in full upon its
presentation is a state of the mind. However, Section 2 of B.P. Blg. 22
Marigomen Vs. People (459 SCRA 169) provides that if the prosecution proves that the making, drawing and
issuing of a check, payment of which is refused by the drawee bank
because of insufficiency of funds or credit with the said bank within 90
Facts:
days from the date of the check, such shall be prima facie evidence of
the second element of the crime. The drawee or maker of the check
Caltex Philippines, Inc. (Caltex) is engaged in the sale of gasoline and may overcome the prima facie evidence, either by paying the amount
oil products to its customers, one of which was the Industrial Sugar of the check, or by making arrangements for its payment in full within
Resources, Inc. (INSURECO), with offices at the Bacolod Murcia five banking days after receipt of notice that such check was not paid by
Milling Corporation Compound in Bacolod City. Caltex had granted a the drawee bank.
credit line to INSURECO, and the latter purchased gasoline and
lubricants from Caltex through its sales representative in Negros
Contrary, to the respondent’s contention, the ruling of the Court in Lao
Occidental and Bacolod City. The finance officer of INSURECO was
v. Court of Appeals is applicable in this case. In acquitting the
Ofelia Marigomen, while John V. Dalao was the assistant to the general
petitioner therein, the Court explained:
manager. They were authorized to draw and sign checks against the
account of INSURECO at the Far East Bank and Trust Company,
Bacolod City Branch. Caltex had agreed for INSURECO to pay its The absence of a notice of dishonor necessarily deprives an accused an
purchases via postdated checks, which were delivered to Caltex upon opportunity to preclude a criminal prosecution. Accordingly,
the release of the purchased oil products. procedural due process clearly enjoins that a notice of dishonor be
actually served on petitioner. Petitioner has a right to demand – and
the basic postulates of fairness require - that the notice of dishonor be
As evidenced by separate delivery receipts, INSURECO bought and
actually sent to and received by her to afford her the opportunity to
took delivery of oil products from Caltex. In payment thereof,
avert prosecution under B.P. Blg. 22.
postdated checks drawn and signed by Marigomen and Dalao against
its account with the Far East Bank and Trust Company, Bacolod City
Branch, were issued in favor of Caltex. Moreover, the notice of dishonor must be in writing; a verbal notice is
not enough. The rationale for this was explained by the Court in
Domagsang v. Court of Appeals, to wit:

80
Petitioner counters that the lack of a written notice of dishonor is fatal. For her part, respondent Hao claimed that the suit was brought under
The Court agrees. the concept of a derivative suit. Respondent maintained that when the
directors or trustees refused to file a suit even when there was a
demand from stockholders, a derivative suit was allowed.
While, indeed, Section 2 of B.P. Blg. 22 does not state that the notice of
dishonor be in writing, taken in conjunction, however, with Section 3
of the law, i.e., “that where there are no sufficient funds in or credit Issue:
with such drawee bank, such fact shall always be explicitly stated in
the notice of dishonor or refusal,” a mere oral notice or demand to pay
W/N the Lydia Hao’s filing of criminal case no. 285721 was in the
would appear to be insufficient for conviction under the law.
nature of a derivative suit

Thus, if the drawer or maker is an officer of a corporation, the notice of

Ruling:
dishonor to the said corporation is not notice to the employee or officer
who drew or issued the check for and in its behalf. The Court explained
in Lao v. Court of Appeals, to wit: In Western Institute, we said:

In this light, the postulate of Respondent Court of Appeals that Here, however, the case is not a derivative suit but is merely an appeal
“(d)emand on the Corporation constitutes demand on appellant on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with
(herein petitioner),” is erroneous. Premiere has no obligation to the RTC of Iloilo for estafa and falsification of public document.
forward the notice addressed to it to the employee concerned, Among the basic requirements for a derivative suit to prosper is that
especially because the corporation itself incurs no criminal liability the minority shareholder who is suing for and on behalf of the
under B.P. Blg. 22 for the issuance of a bouncing check. Responsibility corporation must allege in his complaint before the proper forum that
under B.P. Blg. 22 is personal to the accused; hence, personal he is suing on a derivative cause of action on behalf of the corporation
knowledge of the notice of dishonor is necessary. Consequently, and all other shareholders similarly situated who wish to join. . . .This
constructive notice to the corporation is not enough to satisfy due was not complied with by the petitioners either in their complaint
process. Moreover, it is petitioner, as an officer of the corporation, who before the court a quo nor in the instant petition which, in part, merely
is the latter’s agent for purposes of receiving notices and other states that “this is a petition for review on certiorari on pure questions
documents, and not the other way around. It is but axiomatic that of law to set aside a portion of the RTC decision in Criminal Cases Nos.
notice to the corporation, which has a personality distinct and separate 37097 and 37098” since the trial court’s judgment of acquittal failed to
from the petitioner, does not constitute notice to the latter. impose civil liability against the private respondents. By no amount of
equity considerations, if at all deserved, can a mere appeal on the civil
aspect of a criminal case be treated as a derivative suit.
In this case, the prosecution failed to present any employee of the
PT&T to prove that the telegrams from the offended party were in fact
transmitted to INSURECO and that the latter received the same. Moreover, in Western Institute, we said that a mere appeal in the civil
Furthermore, there is no evidence on record that the petitioner ever aspect cannot be treated as a derivative suit because the appeal lacked
received the said telegrams from INSURECO, or that separate copies the basic requirement that it must be alleged in the complaint that the
thereof were transmitted to and received by the petitioner. shareholder is suing on a derivative cause of action for and in behalf of
the corporation and other shareholders who wish to join.
In fine, the respondent failed to prove the second element of the crime.
Hence, the petitioner should be acquitted of the crimes charged. Under Section 36 of the Corporation Code, read in relation to Section
23, where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. An individual stockholder is
Chua Vs. CA (443 SCRA 259)
permitted to institute a derivative suit on behalf of the corporation
wherein he holds stocks in order to protect or vindicate corporate
Facts: rights, whenever the officials of the corporation refuse to sue, or are the
ones to be sued, or hold the control of the corporation. In such actions,
the suing stockholder is regarded as a nominal party, with the
Lydia Hao, treasurer of Siena Realty Corporation, filed a complaint-
corporation as the real party in interest.
affidavit with the City Prosecutor of Manila charging Francis Chua and
his wife, Elsa Chua, of four counts of falsification of public documents
pursuant to Article 172 in relation to Article 171 of the Revised Penal A derivative action is a suit by a shareholder to enforce a corporate
Code. The charge reads: cause of action. The corporation is a necessary party to the suit. And
the relief which is granted is a judgment against a third person in favor
of the corporation. Similarly, if a corporation has a defense to an action
Said accused prepared, certified, and falsified the Minutes of
against it and is not asserting it, a stockholder may intervene and
the Annual Stockholders meeting of the Board of Directors of
defend on behalf of the corporation.
the Siena Realty Corporation, duly notarized before a Notary
Public, Atty. Juanito G. Garcia and entered in his Notarial
Registry as Doc No. 109, Page 22, Book No. IV and Series of In Criminal Case No. 285721, the complaint was instituted by
1994, and therefore, a public document, by making or respondent against petitioner for falsifying corporate documents whose
causing it to appear in said Minutes of the Annual subject concerns corporate projects of Siena Realty Corporation.
Stockholders Meeting that one LYDIA HAO CHUA was Clearly, Siena Realty Corporation is an offended party. Hence, Siena
present and has participated in said proceedings, when in Realty Corporation has a cause of action. And the civil case for the
truth and in fact, as the said accused fully well knew that said corporate cause of action is deemed instituted in the criminal action.
Lydia C. Hao was never present during the Annual
Stockholders Meeting held on April 30, 1994 and neither has
However, the board of directors of the corporation in this case did not
participated in the proceedings thereof to the prejudice of
institute the action against petitioner. Private respondent was the one
public interest and in violation of public faith and
who instituted the action. Private respondent asserts that she filed a
destruction of truth as therein proclaimed.
derivative suit in behalf of the corporation. This assertion is inaccurate.
Not every suit filed in behalf of the corporation is a derivative suit. For
Petitioner had argued before the Court of Appeals that respondent had a derivative suit to prosper, it is required that the minority stockholder
no authority whatsoever to bring a suit in behalf of the Corporation suing for and on behalf of the corporation must allege in his complaint
since there was no Board Resolution authorizing her to file the suit. that he is suing on a derivative cause of action on behalf of the
corporation and all other stockholders similarly situated who may wish
to join him in the suit. It is a condition sine qua non that the
corporation be impleaded as a party because not only is the
81
corporation an indispensable party, but it is also the present rule that it Issue:
must be served with process. The judgment must be made binding
upon the corporation in order that the corporation may get the benefit
W/N the offcers of Meycauyan may be held for indirect contempt
of the suit and may not bring subsequent suit against the same
defendants for the same cause of action. In other words, the
corporation must be joined as party because it is its cause of action that Ruling:
is being litigated and because judgment must be a res adjudicata
against it.
Meycauayan’s Executive Vice-President Juan M. Lamson, Jr. guilty of
indirect contempt. We also find that Meycauayan committed forum
In the criminal complaint filed by herein respondent, nowhere is it shopping, and thus Meycauayan and its Executive Vice President Juan
stated that she is filing the same in behalf and for the benefit of the M. Lamson, Jr. are guilty of direct contempt.
corporation. Thus, the criminal complaint including the civil aspect
thereof could not be deemed in the nature of a derivative suit
Meycauayan’s obstinate refusal to abide by the Court’s Decision in G.R.
No. 118436 has no basis in view of this Court’s clear pronouncement to
The recourse of the complainant to the respondent Court of Appeals the contrary. The fact that this Court specifically ordered the
was, however, proper. The petition was brought in her own name and cancelation of Meycauayan’s titles to the disputed parcels of land in the
in behalf of the Corporation. Although, the corporation was not a Resolution dated 29 July 1998 should have laid to rest the issue of
complainant in the criminal action, the subject of the falsification was whether the Decision and Resolution in G.R. No. 118436 is binding on
the corporation’s project and the falsified documents were corporate Meycauayan. Clearly, Meycauayan’s defiance of this Court’s Decision
documents. Therefore, the corporation is a proper party in the petition and Resolution by filing an action for reconveyance, quieting of title
for certiorari because the proceedings in the criminal case directly and and damages involving the same parcels of land which this Court
adversely affected the corporation. already decided with finality constitutes indirect contempt under
Section 3(d), Rule 71 of the Rules of Civil Procedure. Section 3(d) of
Rule 71 reads:
Heirs of Trinidad de Leon Vs. CA (422 SCRA 101)

SEC. 3. Indirect contempt to be punished after charge and hearing. –

Facts:
After a charge in writing has been filed, and an opportunity given to the
respondent to comment thereon within such period as may be fixed by
This is a petition to cite for indirect contempt the officers of the court and to be heard by himself or counsel, a person guilty of any
Meycauayan Central Realty Corporation (“Meycauayan”) for defying of the following acts may be punished for indirect contempt:
the final and executory Decision and Resolution of this Court in G.R.
No. 118436 entitled “Heirs of Manuel A. Roxas and Trinidad de Leon
xxx
Vda. De Roxas v. Court of Appeals and Maguesun Management &
Development Corporation” (“G.R. No. 118436”).
(d) Any improper conduct tending, directly or indirectly, to
impede, obstruct, or degrade the administration of justice;
This petition stems from a case filed by Trinidad de Leon Vda. De
Roxas to set aside the decree of registration over two unregistered
parcels of land in Tagaytay City granted to Maguesun Management and In Halili, et al. v. CIR, et al., this Court explained the concept of
Development Corporation (“Maguesun”) before the Regional Trial contempt of court:
Court on the ground of actual fraud. The trial court dismissed the
petition to set aside the decree of registration. On appeal, the Court of
Appeals denied the petition for review and affirmed the findings of the Contempt of court is a defiance of the authority, justice or dignity of the
trial court. On 21 March 1997, this Court reversed the appellate court’s court; such conduct as tends to bring the authority and administration
decision in G.R. No. 118436. of the law into disrespect or to interfere with or prejudice parties
litigant or their witnesses during litigation.

On 22 May 1997, Meycauayan filed a Petition for Intervention in G.R.

No. 118436. Meycauayan alleged that on 14 May 1992, it purchased Contempt of court is defined as a disobedience to the Court by acting in
three parcels of land from Maguesun which form part of the property opposition to its authority, justice and dignity. It signifies not only a
awarded to the heirs of Trinidad de Leon Vda. De Roxas (“Roxas willful disregard or disobedience of the court’s orders, but such
heirs”). Meycauayan contended that since it is a purchaser in good conduct as tends to bring the authority of the court and the
faith and for value, the Court should afford it the opportunity to be administration of law into disrepute or in some manner to impede the
heard. Meycauayan contends that the adverse decision in G.R. No. due administration of justice.
118436 cannot impair its rights as a purchaser in good faith and for
value. Meycauayan’s continuing resistance to this Court’s judgment is an
affront to the Court and to the sovereign dignity with which it is
The Court resolves to GRANT petitioners’ Motion for Clarification clothed. Meycauayan’s persistent attempts to raise issues long since
together with the Supplement theretoordering the Register of Deeds laid to rest by a final and executory judgment of no less than the
shall CANCEL OCT No. 0-515 and all its derivative titles, highest tribunal of the land constitute contumacious defiance of the
namely, TCT Nos. T-25625, T-25626, T-25627, T-25628, T-25688, T- authority of this Court and impede the speedy administration of
25689, and T-25690, the latter three being already in the justice.
name of Meycauayan Realty and Development Corporation
(also designated as “Meycauayan Central Realty, Inc.” and In this case, Meycauayan Executive Vice President Juan M. Lamson,
“Meycauayan Realty Corporation”). Jr. caused the preparation and the filing of the Petition for Intervention
in G.R. No. 118436 and the Complaint for Reconveyance, Damages and
On 20 April 1999, Meycauayan filed a Complaint for reconveyance, Quieting of Title with the trial court. Juan M. Lamson, Jr. signed the
damages and quieting of title with the trial court entitled “Meycauayan verification and certification of non-forum shopping for the Petition for
Central Realty Corp. v. Heirs of Manuel A. Roxas and Trinidad de Leon Intervention and the Complaint for Reconveyance, Damages and
Vda. de Roxas, Maguesun Management and Development Corp., Quieting of Title. “Even though a judgment, decree, or order is
Register of Deeds of Tagaytay City, City Assessor of Tagaytay City and addressed to the corporation only, the officers, as well as the
Land Registration Authority.” The Complaint is almost an exact corporation itself, may be punished for contempt for disobedience to
reproduction of the Petition for Intervention filed by Meycauayan its terms, at least if they knowingly disobey the court’s mandate, since a
before this Court. lawful judicial command to a corporation is in effect a command to the
officers.” Thus, for improper conduct tending to impede the orderly

82
administration of justice, Meycauayan Executive Vice President Juan Issue:
M. Lamson, Jr. should be fined ten thousand pesos (P10,000).
W/N respondents Jesus Typoco and Tan Yu are solidarily liable with
Moreover, Meycauayan’s act of filing a Complaint for Reconveyance, MPC
Quieting of Title and Damages raising the same issues in its Petition for
Intervention, which this Court had already denied, also constitutes
Ruling:
forum shopping.

These two respondents are not liable.

In this case, the Court had already rejected Meycauayan’s claim on the
subject lots when the Court denied Meycauayan’s Petition for
Intervention in G.R. No. 118436. The Court ruled that there had been Section 31 of the Corporation Code (Batas Pambansa Blg. 68) provides:
no intervening rights of an innocent purchaser for value involving the
lots in dispute. The Decision of this Court in G.R. No. 118436 is already
final and executory. The filing by Meycauayan of an action to re- “Section 31. Liability of directors, trustees or officers. Directors or
litigate the title to the same property, which this Court had already trustees who willfully and knowingly vote for or assent to patently
adjudicated with finality, is an abuse of the court’s processes and unlawful acts of the corporation or who are guilty of gross negligence
constitutes direct contempt. or bad faith x x x shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders and
other persons.”
Section 5 of Rule 7 of the Rules of Court provides that “if the acts of the
party or his counsel clearly constitute willful and deliberate forum
shopping, the same shall be a ground for summary dismissal with The personal liability of corporate officers validly attaches only when
prejudice and shall constitute direct contempt, as well as a cause for (a) they assent to a patently unlawful act of the corporation; or (b) they
administrative sanctions.” The fact that Meycauayan did mention in its are guilty of bad faith or gross negligence in directing its affairs; or (c)
certification of non-forum shopping its attempt to intervene in G.R. they incur conflict of interest, resulting in damages to the corporation,
No. 118436, which this Court denied, does not negate the existence of its stockholders or other persons.
forum shopping. This disclosure does not exculpate Meycauayan for
deliberately seeking a friendlier forum for its case and re-litigating an The records are bereft of any evidence that Typoco acted in bad faith
issue which this Court had already decided with finality. with gross or inexcusable negligence, or that he acted outside the scope
of his authority as company president. The unilateral termination of
The general rule is that a corporation and its officers and agents may the Contract during the existence of the TRO was indeed contemptible
be held liable for contempt. A corporation and those who are officially -- for which MPC should have merely been cited for contempt of court
responsible for the conduct of its affairs may be punished for contempt at the most -- and a preliminary injunction would have then stopped
in disobeying judgments, decrees, or orders of a court made in a case work by the second contractor. Besides, there is no showing that the
within its jurisdiction. unilateral termination of the Contract was null and void.

Under Section 1 of Rule 71 of the Rules of Court, direct contempt is Respondent Tan is not an officer or a director of MPC. His
punishable by a fine not exceeding two thousand pesos (P2,000) or participation is limited to an alleged conversation between him and
imprisonment not exceeding ten (10) days, or both, if committed Engineer Mario Cornista, petitioner’s project manager. Supposedly,
against a Regional Trial Court or a court of equivalent or higher rank. the former verbally agreed therein to guarantee the payment of the
Hence, Meycauayan and its Executive Vice President Juan M. Lamson, latter’s progress billings. We find no satisfactory evidence to show
Jr. are each fined P2,000 for direct contempt of court for forum respondent’s alleged solidary liability to petitioner.
shopping.
Section 32 –
HL Carlos Vs. MARINA (421 SCRA 428)
Dealings of directors, trustees or officers with the
Facts: corporation. - A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
MARINA PROPERTIES CORPORATION is engaged in the business of
real estate development. On May 10, 1988, MPC entered into a
contract with H.L. CARLOS CONSTRUCTION, INC. to construct Phase 1. That the presence of such director or trustee in the board meeting in
III of a condominium complex called MARINA BAYHOMES which the contract was approved was not necessary to constitute a
CONDOMINIUM PROJECT, consisting of townhouses and villas, quorum for such meeting;
totaling 31 housing units, for a total consideration of P38,580,609.00,
within a period of 365 days from receipt of ‘Notice to Proceed’. The 2. That the vote of such director or trustee was nor necessary for the
original completion date of the project was May 16, 1989, but it was approval of the contract;
extended to October 31, 1989 with a grace period until November 30,
1989.
3. That the contract is fair and reasonable under the circumstances;
and
“The contract was signed by Jovencio F. Cinco, president of MPC, and
Honorio L. Carlos, president of HLC.
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
“On December 15, 1989, HLC instituted this case for sum of money
against not only MPC but also against the latter’s alleged president,
Jesus K. Typoco, Sr. and Tan Yu, seeking the payment of various sums Where any of the first two conditions set forth in the preceding
with an aggregate amount of P14 million pesos. paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
The trial court rendered for H.L. CARLOS CONSTRUCTION, INC. and or of at least two-thirds (2/3) of the members in a meeting called for
as against MARINA PROPERTIES CORPORATION, TAN YU, and the purpose: Provided, That full disclosure of the adverse interest of
JESUS K. TYPOCO, SR., who are hereby ordered to pay, jointly and the directors or trustees involved is made at such meeting: Provided,
severally, the petitioner. however, That the contract is fair and reasonable under the
circumstances.

83
Mead Vs. McCullough (21 Phil 95) assets to one of its members was made by the unanimous consent of all
the directors in the corporation at that time.
Facts:
There were only five stockholders in this corporation at any time, four
of whom were the directors who made the sale, and the other the
Mead and the "Philippine Engineering and Construction Company,"
plaintiff, who was absent in China when the said sale took place. The
the incorporators being the only stockholders and also the directors of
sale was, therefore, made by the unanimous consent of four-fifths of all
said company, with general ordinary powers. Each of the stockholders
the stockholders. Under the articles of incorporation, the stockholders
paid into the company $2,000 Mexican currency in cash, with the
and directors had general ordinary powers. There is nothing in said
exception of Mead, who turned over to the company personal property
articles which expressly prohibits the sale or transfer of the corporate
in lieu of cash.
property to one of the stockholders of said corporation.

Shortly after the organization, the directors held a meeting and elected
Articles 1700 to 1708 of the Civil Code deal with the manner of
the Mead as general manager. He held this position with the company
dissolving a corporation. There is nothing in these articles which
for nine months, when he resigned to accept the position of Engineer of
expressly or impliedly prohibits the sale of corporate property to one of
the Canton and Shanghai Railway Company.
its members, nor a dissolution of a corporation in this manner. Neither
is there anything in articles 151 to 174 of the Code of Commerce which
Under the organization the company began business about April 1, 102. prohibits the dissolution of a corporation by such sale or transfer.
The contract and work undertaken by the company during the
management of Mead were the wrecking contract with the Navy
Article XIII of the corporation's statutes expressly provides that "in all
Department at Cavite for the raising of the Spanish ships sunk by
the meetings of the stockholders, a majority vote of the stockholders
Admiral Dewey; the contract for the construction of certain warehouses
present shall be necessary to determine any question discussed."
for the quartermaster department; the construction of a wharf at Fort
McKinley for the Government; The supervision of the construction of
the Pacific Oriental Trading Company's warehouse; and some other The sale or transfer to one of its members was a matter which a
odd jobs not specifically set out in the record. majority of the stockholders could very properly consider. But it i said
that if the acts and resolutions of a majority of the stockholders in a
corporation are binding in every case upon the minority, the minority
Shortly after Mead left the Philippine Islands for China, the other
would be completely wiped out and their rights would be wholly at the
directors, the defendants in this case, held a meeting on December 24,
mercy of the abuses of the majority.
1903, for the purpose of discussing the condition of the company at
that time and determining what course to pursue.
Generally speaking, the voice of a majority of the stockholders is the
law of the corporation, but there are exceptions to this rule. There must
The PECC, Mccullough as the President, entered into a contract
necessarily be a limit upon the power of the majority. Without such a
reffered to in the foregoing document was known as the wrecking
limit the will of the majority would be absolute and irresistible and
contract with the naval authorities.
might easily degenerate into an arbitrary tyranny. The reason for these
limitations is that in every contract of partnership (and a corporation
On the 28th of the same month, McCullough executed and signed the can be something fundamental and unalterable which is beyond the
transfer of his right, title, and interest in the within contract, with the power of the majority of the stockholders, and which constitutes the
exception of one sixth, which he hereby retain, to R. W. Brown, H. D. C. rule controlling their actions. this rule which must be observed is to be
Jones, John T. Macleod, and T. H. Twentyman. found in the essential compacts of such partnership, which gave served
as a basis upon which the members have united, and without which it
is not probable that they would have entered not the corporation.
The assignees of the wrecking contract, including McCullough, formed Notwithstanding these limitations upon the power of the majority of
was not known as the "Manila Salvage Association." This association the stockholders, their (the majority's) resolutions, when passed in
paid to McCullough $15,000 Mexican Currency cash for the good faith and for a just cause, deserve careful consideration and are
assignment of said contract. In addition to this payment, McCullough generally binding upon the minority.
retained a one-sixth interest in the new company or association.

The resolutions of the boards passed by a majority vote are valid . . .

Issue: and authority for passing such resolutions is unlimited, provided that
the original contract is not broken by them, the partnership funds not
W/N a majority of the stockholders, who were at the same time a devoted to foreign purposes, or the partnerships transformed, or
majority of the directors of a corporation, have the power under the law changes made which are against public policy or which infringe upon
and its Articles of Agreement, to sell or transfer to one of its members the rights of third persons.
the assets of said corporation
McCullough did not represent the corporation in this transaction. It
Ruling: was represented by a quorum of the board of directors, who were at the
same time a majority of the stockholders. Ordinarily, McCullough's
duties as president were to preside at the meetings, rule on questions
When the sale or transfer heretofore mentioned took place, there were of order, vote in case of a tie, etc. He could not have voted in this
present four directors, all of whom gave their consent to that sale or transaction because there was no tie.
transfer. The plaintiff was then about and his express consent to make
this transfer or sale was not obtained. He was, before leaving, one of
the directors in this corporation, and although he had resigned as The acts of Hilbert, Green, Hartigan, and McCullough in this
manager, he had not resigned as a director. He accepted the position of transaction, in view of the relations which they bore to the corporation,
engineer of the Canton and Shanghai Railway Company, knowing that are subject to the most severe scrutiny. They are obliged to establish
his duties as such engineer would require his whole time and attention that they acted with the utmost candor and fair dealing for the interest
and prevent his returning to the Philippine Islands for at least a year or of the corporation, and without taint motives. We have subjected their
more. The new position which he accepted in China was incompatible conduct to this test, and, under the evidence, we believe it has safely
with his position as director in the Philippine Engineering and emerged from the ordeal.
Construction Company, a corporation whose sphere of operations was
limited to the Philippine Islands. These facts are sufficient to constitute Transaction which only accomplish justice, which are done in good
an abandoning or vacating of hid position as director in said faith and operate legal injury to no one, lack the characteristics of fraud
corporation. Consequently, the transfer or sale of the corporation's

84
and are not to be upset because the relations of the parties give rise to the laws of the Philippines. Thus, registrant which is allegedly qualified
suspicions which are fully cleared away. (Hancock vs. Holbrook,supra) to exercise rights under the Parity Amendment, had to do so through
the medium of a domestic corporation, which is the SAN JOSE OIL. It
refused the contention that the Corporation Law was being violated, by
We therefore conclude that the sale or transfer made by the quorum of
alleging that Section 13 thereof applies only to foreign corporations
the board of directors — a majority of the stockholders — is valid and
doing business in the Philippines, and registrant was not doing
binding upon the majority-the plaintiff. This conclusion is not in
business here. The mere fact that it was a holding company of SAN
violation of the articles of incorporation of the Philippine Engineering
JOSE OIL and that registrant undertook the financing of and giving
and Construction Company. Nor do we here announce a doctrine
technical assistance to said corporation did not constitute transaction
contrary to that announced by the supreme court of Spain in its
of business in the Philippines. Registrant also denied that the offering
decisions dated April 2, 1862, and July 8, 1903.
for sale in the Philippines of its shares of capital stock was fraudulent
or would work or tend to work fraud on the investors. On August 29,
Section 33 – 1958, and on September 9, 1958 the Securities and Exchange
Commissioner issued the orders object of the present appeal.

Contracts between corporations with interlocking

directors. - Except in cases of fraud, and provided the contract is fair Issue:
and reasonable under the circumstances, a contract between two or
more corporations having interlocking directors shall not be W/N the sale of San Jose's securities is fraudulent, or would work or
invalidated on that ground alone: Provided, That if the interest of the tend to work fraud to purchasers of such securities in the Philippines
interlocking director in one corporation is substantial and his interest
in the other corporation or corporations is merely nominal, he shall be
subject to the provisions of the preceding section insofar as the latter Ruling:
corporation or corporations are concerned.
The relationship of these corporations involved or affected in this case
Stockholdings exceeding twenty (20%) percent of the outstanding is admitted and established through the papers and documents which
capital stock shall be considered substantial for purposes of are parts of the records: SAN JOSE OIL, is a domestic mining
interlocking directors. corporation, 90% of the outstanding capital stock of which is owned by
respondent SAN JOSE PETROLEUM, a foreign (Panamanian)
corporation, the majority interest of which is owned by OIL
Palting Vs. San Jose (18 SCRA 924) INVESTMENTS, Inc., another foreign (Panamanian) company. This
latter corporation in turn is wholly (100%) owned by PANTEPEC OIL
SAN JOSE PETROLEUM filed with the Philippine Securities and COMPANY, C.A., and PANCOASTAL PETROLEUM COMPANY, C.A.,
Exchange Commission a sworn registration statement, for the both organized and existing under the laws of Venezuela. As of
registration and licensing for sale in the Philippines Voting Trust September 30, 1956, there were 9,976 stockholders of PANCOASTAL
Certificates representing 2,000,000 shares of its capital stock of a par PETROLEUM found in 49 American states and U.S. territories, holding
value of $0.35 a share, at P1.00 per share. It was alleged that the entire 3,476,988 shares of stock; whereas, as of November 30, 1956,
proceeds of the sale of said securities will be devoted or used PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by
exclusively to finance the operations of San Jose Oil Company, Inc. (a 12,373 stockholders scattered in 49 American state. In the two lists of
domestic mining corporation hereafter to be referred to as SAN JOSE stockholders, there is no indication of the citizenship of these
OIL) which has 14 petroleum exploration concessions covering an area stockholders, or of the total number of authorized stocks of each
of a little less than 1,000,000 hectares, located in the provinces of corporation, for the purpose of determining the corresponding
Pangasinan, Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and percentage of these listed stockholders in relation to the respective
Agusan. It was the express condition of the sale that every purchaser of capital stock of said corporation.
the securities shall not receive a stock certificate, but a registered or
bearer-voting-trust certificate from the voting trustees named therein Some of the provisions of the Articles of Incorporation of respondent
James L. Buckley and Austin G.E. Taylor, the first residing in SAN JOSE PETROLEUM are noteworthy; viz:
Connecticut, U.S.A., and the second in New York City.
(1) the directors of the Company need not be shareholders;
While this application for registration was pending consideration by
the Securities and Exchange Commission, SAN JOSE PETROLEUM
filed an amended Statement on June 20, 1958, for registration of the (2) that in the meetings of the board of directors, any director may be
sale in the Philippines of its shares of capital stock, which was represented and may vote through a proxy who also need not be a
increased from 2,000,000 to 5,000,000, at a reduced offering price of director or stockholder; and
from P1.00 to P0.70 per share. At this time the par value of the shares
has also been reduced from $.35 to $.01 per share. (3) that no contract or transaction between the corporation and any
other association or partnership will be affected, except in case of
Pedro R. Palting and others, allegedly prospective investors in the fraud, by the fact that any of the directors or officers of the corporation
shares of SAN JOSE PETROLEUM, filed with the Securities and is interested in, or is a director or officer of, such other association or
Exchange Commission an opposition to registration and licensing of partnership, and that no such contract or transaction of the
the securities on the grounds that (1) the tie-up between the issuer, corporation with any other person or persons, firm, association or
SAN JOSE PETROLEUM, a Panamanian corporation and SAN JOSE partnership shall be affected by the fact that any director or officer of
OIL, a domestic corporation, violates the Constitution of the the corporation is a party to or has an interest in, such contract or
Philippines, the Corporation Law and the Petroleum Act of 1949; (2) transaction, or has in anyway connected with such other person or
the issuer has not been licensed to transact business in the Philippines; persons, firm, association or partnership; and finally, that all and any
(3) the sale of the shares of the issuer is fraudulent, and works or tends of the persons who may become director or officer of the corporation
to work a fraud upon Philippine purchasers; and (4) the issuer as an shall be relieved from all responsibility for which they may otherwise
enterprise, as well as its business, is based upon unsound business be liable by reason of any contract entered into with the corporation,
principles. whether it be for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.

SAN JOSE PETROLEUM claimed that it was a "business enterprise"

enjoying parity rights under the Ordinance appended to the These provisions are in direct opposition to our corporation law and
Constitution, which parity right, with respect to mineral resources in corporate practices in this country. These provisions alone would
the Philippines, may be exercised, pursuant to the Laurel-Langley outlaw any corporation locally organized or doing business in this
Agreement, only through the medium of a corporation organized under jurisdiction. Consider the unique and unusual provision that no

85
contract or transaction between the company and any other association preliminary injunction" against the majority of the members of the
or corporation shall be affected except in case of fraud, by the fact that Board of Directors and San Miguel Corporation as an unwilling
any of the directors or officers of the company may be interested in or petitioner.
are directors or officers of such other association or corporation; and
that none of such contracts or transactions of this company with any
person or persons, firms, associations or corporations shall be affected Petitioner filed with the SEC a Manifestation stating that he intended
by the fact that any director or officer of this company is a party to or to run for the position of director of respondent corporation.
has an interest in such contract or transaction or has any connection Thereafter, respondents filed a Manifestation with respondent
with such person or persons, firms associations or corporations; and Commission, submitting a Resolution of the Board of Directors of
that any and all persons who may become directors or officers of this respondent corporation disqualifying and precluding petitioner from
company are hereby relieved of all responsibility which they would being a candidate for director unless he could submit evidence on May
otherwise incur by reason of any contract entered into which this 3, 1977 that he does not come within the disqualifications specified in
company either for their own benefit, or for the benefit of any person, the amendment to the by-laws, subject matter of SEC Case No. 1375. By
firm, association or corporation in which they may be interested. reason thereof, petitioner filed a manifestation and motion to resolve
pending incidents in the case and to issue a writ of injunction, alleging
that private respondents were seeking to nullify and render ineffectual
The impact of these provisions upon the traditional judiciary
the exercise of jurisdiction by the respondent Commission, to
relationship between the directors and the stockholders of a
petitioner's irreparable damage and prejudice. Allegedly despite a
corporation is too obvious to escape notice by those who are called
subsequent Manifestation to prod respondent Commission to act,
upon to protect the interest of investors. The directors and officers of
petitioner was not heard prior to the date of the stockholders' meeting.
the company can do anything, short of actual fraud, with the affairs of
Petitioner alleges that there appears a deliberate and concerted
the corporation even to benefit themselves directly or other persons or
inability on the part of the SEC to act, hence petitioner came to this
entities in which they are interested, and with immunity because of the
Court.
advance condonation or relief from responsibility by reason of such
acts. This and the other provision which authorizes the election of non-
Petitioner likewise alleges that, having discovered that respondent
stockholders as directors, completely disassociate the stockholders
corporation has been investing corporate funds in other corporations
from the government and management of the business in which they
and businesses outside of the primary purpose clause of the
have invested.
corporation, in violation of section 17-1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition
To assure continuity of the management and stability of SAN JOSE seeking to have private respondents Andres M. Soriano, Jr. and Jose
PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed M. Soriano, as well as the respondent corporation declared guilty of
stock of the former corporation and acting "on behalf of all future such violation, and ordered to account for such investments and to
holders of voting trust certificates," entered into a voting trust answer for damages.
agreement with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by the
outstanding trust certificates (including those that may henceforth be With respect to the afore-mentioned SEC cases, it is petitioner's
issued) in the following manner: contention before this Court that respondent Commission gravely
abused its discretion when it failed to act with deliberate dispatch on
the motions of petitioner seeking to prevent illegal and/or arbitrary
(a) At all elections of directors, the Trustees will designate a suitable impositions or limitations upon his rights as stockholder of respondent
proxy or proxies to vote for the election of directors designated by the corporation, and that respondent are acting oppressively against
Trustees in their own discretion, having in mind the best interests of petitioner, in gross derogation of petitioner's rights to property and due
the holders of the voting trust certificates, it being understood that process. He prayed that this Court direct respondent SEC to act on
any and all of the Trustees shall be eligible for election as directors ; collateral incidents pending before it.

(b) On any proposition for removal of a director , the Trustees shall On May 6, 1977, this Court issued a temporary restraining order
designate a suitable proxy or proxies to vote for or against such restraining private respondents from disqualifying or preventing
proposition as the Trustees in their own discretion may determine, petitioner from running or from being voted as director of respondent
having in mind the best interest of the holders of the voting trust corporation and from submitting for ratification or confirmation or
certificates ; from causing the ratification or confirmation of Item 6 of the Agenda of
the annual stockholders' meeting on May 10, 1977, or from making
effective the amended by-laws of respondent corporation, until further
(c) With respect to all other matters arising at any meeting of orders from this Court or until the Securities and Exchange
stockholders, the Trustees will instruct such proxy or proxies attending Commission acts on the matters complained of in the instant petition.
such meetings to vote the shares of stock held by the Trustees in
accordance with the written instructions of each holder of voting trust Issues:
certificates. (Emphasis supplied.)
W/N the provisions of the amended by-laws of respondent corporation,
It was also therein provided that the said Agreement shall be binding disqualifying a competitor from nomination or election to the Board of
upon the parties thereto, their successors, and upon all holders of Directors are valid and reasonable
voting trust certificates.
Ruling:

And these are the voting trust certificates that are offered to investors In this jurisdiction under section 21 of the Corporation Law, a
as authorized by Security and Exchange Commissioner. It can not be corporation may prescribe in its by-laws "the qualifications, duties and
doubted that the sale of respondent's securities would, to say the least, compensation of directors, officers and employees . . ." This must
work or tend to work fraud to Philippine investors. necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director
Gokongwei Vs. SEC (89 SCRA 336) must own in his right at least one share of the capital stock of the stock
corporation of which he is a director . . ."

Facts: Any person "who buys stock in a corporation does so with the
knowledge that its affairs are dominated by a majority of the
Gokongwei, as stockholder of respondent San Miguel Corporation, stockholders and that he impliedly contracts that the will of the
filed with the Securities and Exchange Commission (SEC) a petition for majority shall govern in all matters within the limits of the act of
"declaration of nullity of amended by-laws, cancellation of certificate of incorporation and lawfully enacted by-laws and not forbidden by law."
filing of amended by-laws, injunction and damages with prayer for a
86
To this extent, therefore, the stockholder may be considered to have There is another important consideration in determining whether or
"parted with his personal right or privilege to regulate the disposition not the amended by-laws are reasonable. The Constitution and the law
of his property which he has invested in the capital stock of the prohibit combinations in restraint of trade or unfair competition. Thus,
corporation, and surrendered it to the will of the majority of his fellow section 2 of Article XIV of the Constitution provides: "The State shall
incorporators. . . . It can not therefore be justly said that the contract, regulate or prohibit private monopolies when the public interest so
express or implied, between the corporation and the stockholders is requires. No combinations in restraint of trade or unfair competition
infringed . . . by any act of the former which is authorized by a shall be allowed."
majority . . ."
Article 186 of the Revised Penal Code also provides:
Pursuant to section 18 of the Corporation Law, any corporation may "Art. 186.Monopolies and combinations in restraint of trade. — The
amend its articles of incorporation by a vote or written assent of the penalty of prision correccional in its minimum period or a fine ranging
stockholders representing at least two-thirds of the subscribed capital from two hundred to six thousand pesos, or both, shall be imposed
stock of the corporation. If the amendment changes, diminishes or upon.
restricts the rights of the existing shareholders, then the dissenting
minority has only one right, viz.: "to object thereto in writing and
demand payment for his share." Under section 22 of the same law, the Obviously, if a competitor has access to the pricing policy and cost
owners of the majority of the subscribed capital stock may amend or conditions of the products of San Miguel Corporation, the essence of
repeal any by-law or adopt new by-laws. It cannot be said, therefore, competition in a free market for the purpose of serving the lowest
that petitioner has a vested right to be elected director, in the face of priced goods to the consuming public would be frustrated. The
the fact that the law at the time such right as stockholder was acquired competitor could so manipulate the prices of his products or vary its
contained the prescription that the corporate charter and the by-law marketing strategies by region or by brand in order to get the most out
shall be subject to amendment, alteration and modification. of the consumers. Where the two competing firms control a substantial
segment of the market this could lead to collusion and combination in
It being settled that the corporation has the power to provide for the restraint of trade. Reason and experience point to the inevitable
qualifications of its directors, the next question that must be conclusion that the inherent tendency of interlocking directorates
considered is whether the disqualification of a competitor from being between companies that are related to each other as competitors is to
elected to the Board of Directors is a reasonable exercise of corporate blunt the edge of rivalry between the corporations, to seek out ways of
authority. compromising opposing interests, and thus eliminate competition. As
respondent SMC aptly observes, knowledge by CFC-Robina of SMC's
Although in the strict and technical sense, directors of a private costs in various industries and regions in the country will enable the
corporation are not regarded as trustees, there cannot be any doubt former to practice price discrimination. CFC-Robina can segment the
that their character is that of a fiduciary insofar as the corporation and entire consuming population by geographical areas or income groups
the stockholders as a body are concerned. As agents entrusted with the and change varying prices in order to maximize profits from every
management of the corporation for the collective benefit of the market segment. CFC-Robina could determine the most profitable
stockholders, "they occupy a fiduciary relation, and in this sense the volume at which it could produce for every product line in which it
relation is one of trust." " competes with SMC. Access to SMC pricing policy by CFC-Robina
would in effect destroy free competition and deprive the consuming
It is not denied that a member of the Board of Directors of the San public of opportunity to buy goods of the highest possible quality at the
Miguel Corporation has access to sensitive and highly confidential lowest prices.
information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and Finally, considering that both Robina and SMC are, to a certain extent,
development; and (d) sources of funding, availability of personnel, engaged in agriculture, then the election of petitioner to the Board of
proposals of mergers or tie-ups with other firms. SMC may constitute a violation of the prohibition contained in section
13(5) of the Corporation Law. Said section provides in part that "any
It is obviously to prevent the creation of an opportunity for an officer or stockholder of more than one corporation organized for the purpose of
director of San Miguel Corporation, who is also the officer or owner of engaging in agriculture may hold his stock in such corporations solely
a competing corporation, from taking advantage of the information for investment and not for the purpose of bringing about or attempting
which he acquires as director to promote his individual or corporate to bring about a combination to exercise control of such
interests to the prejudice of San Miguel Corporation and its corporation…)."
stockholders, that the questioned amendment of the by-laws was
made. Certainly, where two corporations are competitive in a Neither are We persuaded by the claim that the by-law was intended to
substantial sense, it would seem improbable, if not impossible, for the prevent the candidacy of petitioner for election to the Board. If the by-
director, if he were to discharge effectively his duty, to satisfy his law were to be applied in the case of one stockholder but waived in the
loyalty to both corporations and place the performance of his case of another, then it could be reasonably claimed that the by-law
corporation duties above his personal concerns. was being applied in a discriminatory manner. However, the by-law, by
its terms, applies to all stockholders. The equal protection clause of the
The offer and assurance of petitioner that to avoid any possibility of his Constitution requires only that the by-law operate equally upon all
taking unfair advantage of his position as director of San Miguel persons of a class. Besides, before petitioner can be declared ineligible
Corporation, he would absent himself from meetings at which to run for director, there must be hearing and evidence must be
confidential matters would be discussed, would not detract from the submitted to bring his case within the ambit of the disqualification.
validity and reasonableness of the by-laws here involved. Apart from Sound principles of public policy and management, therefore, support
the impractical results that would ensue from such arrangement, it the view that a by-law which disqualifies a competition from election to
would be inconsistent with petitioner's primary motive in running for the Board of Directors of another corporation is valid and reasonable.
board membership which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would In the absence of any legal prohibition or overriding public policy, wide
be against all accepted principles underlying a director's duty of fidelity latitude may be accorded to the corporation in adopting measures to
to the corporation, for the policy of the law is to encourage and enforce protect legitimate corporate interests. Thus, "where the reasonableness
responsible corporate management. of a by-law is a mere matter of judgment, and upon which reasonable
minds must necessarily differ, a court would not be warranted in
Indeed, access by a competitor to confidential information regarding substituting its judgment instead of the judgment of those who are
marketing strategies and pricing policies of San Miguel Corporation authorized to make by-laws and who have expressed their authority."
would subject the latter to a competitive disadvantage and unjustly
enrich the competitor, for advance knowledge by the competitor of the Section 34 –
strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to
his advantage. Disloyalty of a director. - Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the

87
corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the Ruling:
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable, The governing body of a corporation is its board of directors. Section
notwithstanding the fact that the director risked his own funds in the 23 of the Corporation Code explicitly provides that unless otherwise
venture. provided therein, the corporate powers of all corporations formed
under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board of
directors. Thus, with the exception only of some powers expressly
Section 35 –
granted by law to stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in case of non-stock
Executive committee. - The by-laws of a corporation may create an
corporations) has the sole authority to determine policies, enter into
executive committee, composed of not less than three members of the
contracts, and conduct the ordinary business of the corporation within
board, to be appointed by the board. Said committee may act, by
the scope of its charter, i.e., its articles of incorporation, by-laws and
majority vote of all its members, on such specific matters within the
relevant provisions of law. Verily, the authority of the board of
competence of the board, as may be delegated to it in the by-laws or on
directors is restricted to the management of the regular business affairs
a majority vote of the board, except with respect to: (1) approval of any
of the corporation, unless more extensive power is expressly conferred.
action for which shareholders' approval is also required; (2) the filing
of vacancies in the board; (3) the amendment or repeal of by-laws or
the adoption of new by-laws; (4) the amendment or repeal of any The raison d’etre behind the conferment of corporate powers on the
resolution of the board which by its express terms is not so amendable board of directors is not lost on the Court. Indeed, the concentration in
or repealable; and (5) a distribution of cash dividends to the the board of the powers of control of corporate business and of
shareholders. appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to conduct
Filipinas Port Services Vs. Go (518 SCRA 453) its business directly. And so the plan of corporate organization is for
the stockholders to choose the directors who shall control and
Facts: supervise the conduct of corporate business.

In the present case, the board’s creation of the positions of Assistant

On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president Vice Presidents for Corporate Planning, Operations, Finance and
from 1968 until he lost his bid for reelection as Filport’s president Administration, and those of the Special Assistants to the President
during the general stockholders’ meeting in 1991, wrote a letter to the and the Board Chairman, was in accordance with the regular business
corporation’s Board of Directors questioning the board’s creation of the operations of Filport as it is authorized to do so by the corporation’s
following positions with a monthly remuneration of P13,050.00 each, by-laws, pursuant to the Corporation Code.
and the election thereto of certain members of the board.
The election of officers of a corporation is provided for under Section
In his aforesaid letter, Cruz requested the board to take necessary 25 of the Code. Also, the amended Bylaws of Filport provides that
action/actions to recover from those elected to the aforementioned Officers of the corporation, as provided for by the by-laws,
positions the salaries they have received. shall be elected by the board of directors at their first meeting
after the election of Directors.
On 14 June 1993, Cruz, purportedly in representation of Filport and its Likewise, the fixing of the corresponding remuneration for the
stockholders, among which is herein co-petitioner Mindanao Terminal positions in question is provided for in the same by-laws of the
and Brokerage Services, Inc. (Minterbro), filed with the SEC a petition corporation, that xxx The Board of Directors shall fix the
which he describes as a derivative suit against the herein respondents compensation of the officers and agents of the corporation.
who were then the incumbent members of Filport’s Board of Directors,
for alleged acts of mismanagement detrimental to the interest of the
corporation and its shareholders at large, namely, amomg others the Unfortunately, the bylaws of the corporation are silent as to the
creation of an executive committee in 1991 composed of seven (7) creation by its board of directors of an executive committee. Under
members of the board with compensation of P500.00 for each member Section 35 of the Corporation Code, the creation of an executive
per meeting, an office which, to Cruz, is not provided for in the by-laws committee must be provided for in the bylaws of the corporation.
of the corporation and whose function merely duplicates those of the
President and General Manager; Notwithstanding the silence of Filport’s bylaws on the matter, we
cannot rule that the creation of the executive committee by the board of
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz directors is illegal or unlawful. One reason is the absence of a showing
alleged that despite demands made upon the respondent members of as to the true nature and functions of said executive committee
the board of directors to desist from creating the positions in question considering that the “executive committee,” referred to in Section 35 of
and to account for the amounts incurred in creating the same, the the Corporation Code which is as powerful as the board of directors
demands were unheeded. Cruz thus prayed that the respondent and in effect acting for the board itself, should be distinguished from
members of the board of directors be made to pay Filport, jointly and other committees which are within the competency of the board to
severally, the sums of money variedly representing the damages create at anytime and whose actions require ratification and
incurred as a result of the creation of the offices/positions complained confirmation by the board. Another reason is that, ratiocinated by
of and the aggregate amount of the questioned increased salaries. both the two (2) courts below, the Board of Directors has the power to
create positions not provided for in Filport’s bylaws since the board is
the corporation’s governing body, clearly upholding the power of its
Issue: board to exercise its prerogatives in managing the business affairs of
the corporation.
W/N CA erred in holding that Filport’s Board of Directors acted within
its powers in creating the executive committee and the positions of As well, it may not be amiss to point out that, as testified to and
AVPs for Corporate Planning, Operations, Finance and Administration, admitted by petitioner Cruz himself, it was during his incumbency as
and those of the Special Assistants to the President and the Board Filport president that the executive committee in question was
Chairman, each with corresponding remuneration, and in increasing created, and that he was even the one who moved for the creation of
the salaries of the positions of Board Chairman, Vice-President, the positions of the AVPs for Operations, Finance and Administration.
Treasurer and Assistant General Manager By his acquiescence and/or ratification of the creation of the aforesaid
offices, Cruz is virtually precluded from suing to declare such acts of
the board as invalid or illegal. And it makes no difference that he sues
88
in behalf of himself and of the other stockholders. Indeed, as his voice The Members of Tramo Wakas Neighborhood Association, represented
was not heard in protest when he was still Filport’s president, raising a by Dominga Magno, lodged before the Presidential Action Center a
hue and cry only now leads to the inevitable conclusion that he did so petition praying that ownership over three (3) parcels of land situated
out of spite and resentment for his non-reelection as president of the in Barangay San Dionisio, Parañaque, Metro Manila with an aggregate
corporation. area of 35,195 square meters be awarded to them. In their petition,
respondents alleged that petitioner claims ownership of the subject lots
With regard to the increased emoluments of the Board Chairman, Vice- which they have openly, peacefully and continuously occupied since
President, Treasurer and Assistant General Manager which are 1957.
supposedly disproportionate to the volume and nature of their work,
the Court, after a judicious scrutiny of the increase vis-à-vis the value
The petition was referred to the Land Management Bureau (LMB) for
of the services rendered to the corporation by the officers concerned,
investigation and hearing. Director Abelardo G. Palad, Jr. of the LMB
agrees with the findings of both the trial and appellate courts as to the
found for respondents declaring that the claim of Pascual and Santos,
reasonableness and fairness thereof.
Inc., over the three lots is, dismissed and the individual members of
TRAMO WAKAS NEIGHBORHOOD ASSOCIATION, now represented
by Dominga Magno, if qualified may file appropriate public land
TITLE IV
applications over the land they actually possessed and occupied. An
POWERS OF CORPORATION
individual survey shall be conducted on the land at their own expense
and after approval of the said survey the same shall be given due
Section 36 – course.

Corporate powers and capacity. - Every corporation

incorporated under this Code has the power and capacity: Issue:

1. To sue and be sued in its corporate name; W/N the persons who executed the verification and certification of
non-forum shopping attached to PSI’s manifestation/petition for
review filed with the court of appeals were authorized to do so
2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
Ruling:
3. To adopt and use a corporate seal;
The requirement that the petitioner should sign the certificate of non-
forum shopping applies even to corporations, considering that the
4. To amend its articles of incorporation in accordance with the mandatory directives of the Rules of Court make no distinction
provisions of this Code; between natural and juridical persons.

5. To adopt by-laws, not contrary to law, morals, or public policy, and In the case at bar, the CA dismissed the petition before it on the ground
to amend or repeal the same in accordance with this Code; that Lombos and Pascual, the signatories to the verification and
certification on non-forum shopping, failed to show proof that they
6. In case of stock corporations, to issue or sell stocks to subscribers were authorized by petitioner’s board of directors to file such a
and to sell stocks to subscribers and to sell treasury stocks in petition.
accordance with the provisions of this Code; and to admit members to
the corporation if it be a non-stock corporation; Except for the powers which are expressly conferred on it by the
Corporation Code and those that are implied by or are incidental to its
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, existence, a corporation has no powers. It exercises its powers through
mortgage and otherwise deal with such real and personal property, its board of directors and/or its duly authorized officers and agents.
including securities and bonds of other corporations, as the transaction Thus, its power to sue and be sued in any court is lodged with the
of the lawful business of the corporation may reasonably and board of directors that exercises its corporate powers. Physical acts,
necessarily require, subject to the limitations prescribed by law and the like the signing of documents, can be performed only by natural
Constitution; persons duly authorized for the purpose by corporate by-laws or by a
specific act of the board of directors.

8. To enter into merger or consolidation with other corporations as

provided in this Code; It is undisputed that when the petition for certiorari was filed with the
CA, there was no proof attached thereto that Lombos and Pascual were
authorized to sign the verification and non-forum shopping
9. To make reasonable donations, including those for the public welfare certification. Subsequent to the CA’s dismissal of the petition,
or for hospital, charitable, cultural, scientific, civic, or similar purposes: however, petitioner filed a motion for reconsideration to which it
Provided, That no corporation, domestic or foreign, shall give attached a certificate issued by its board secretary stating that on
donations in aid of any political party or candidate or for purposes of February 11, 2000 or prior to the filing of the petition, Lombos and
partisan political activity; Pascual had been authorized by petitioner’s board of directors to file
the petition before the CA.
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and This Court has ruled that the subsequent submission of proof of
authority to act on behalf of a petitioner corporation justifies the
11. To exercise such other powers as may be essential or necessary to relaxation of the Rules for the purpose of allowing its petition to be
carry out its purpose or purposes as stated in the articles of given due course.
incorporation.
It must also be kept in mind that while the requirement of the
certificate of non-forum shopping is mandatory, nonetheless the
Pascual & Santos Vs. Members of Tramo (442 SCRA 438) requirements must not be interpreted too literally and thus defeat the
objective of preventing the undesirable practice of forum shopping.

Facts:
LIDECO Vs. CA (272 SCRA 256)

89
 presumed to know by which name it is registered, and the legal
provisions on the use of its corporate name.
Facts:
Section 1, Rule 3 of the Rules of Court provides that only natural or
Spouses Reynaldo Laureano and Florence Laureano are majority juridical persons or entities authorized by law may be parties to a civil
stockholders of petitioner Corporation who entered into a series of loan action. Under the Civil Code, a corporation has a legal personality of its
and credit transactions with Philippine National Cooperative Bank own (Article 44), and may sue or be sued in its name, in conformity
(PNCB for short). To secure payment of the loans, they executed Deeds with the laws and regulations of its organization (Article 46).
of Real Estate Mortgage. In view of their failure to pay their
indebtedness, PNCB applied for extrajudicial foreclosure of the real
Additionally, Article 36 of the Corporation Code similarly provides:
estate mortgages. The bank was the purchaser of the properties in
question in the foreclosure sale and titles thereof were consolidated in
PNCB's name. PNCB did not secure a writ of possession nor did it file Art. 36. Corporate powers and capacity . — Every corporation
ejectment proceedings against the Laureano spouses, because there incorporated under this Code has the power and capacity:
were then pending cases, such as . . . involving the titles of ownership
of subject two lots, which are situated at Bel-Air Subdivision, Makati,
Metro Manila. 1. To sue and be sued in its corporate name ;

Bormaheco, Inc. became the successor of the obligations and liabilities "Lideco Corporation" had no personality to intervene since it had not
of PNCB over subject lots by virtue of a Deed of Sale/Assignment been duly registered as a corporation. If petitioner legally and truly
wherein Bormaheco bought from PNCB under a bulk sale titled and wanted to intervene, it should have used its corporate name as the law
untitled properties including the two parcels of land in question, requires and not another name which it had not registered. Indeed,
formerly registered in the name of the Laureano spouses. Transfer nowhere in the motion for intervention and complaint in intervention
Certificate of Title over the lots in question was issued in the name of does it appear that "Lideco Corporation" stands for Laureano
Bormaheco. Investment and Development Corporation. Bormaheco, Inc., thus, was
not estopped from questioning the juridical personality of "Lideco
Corporation," even after the trial court had allowed it to intervene in
Five (5) days after securing titles over the said properties, Bormaheco the case.
filed an "Ex-Parte Petition for the Issuance of Writ of Possession of the
2 lots situated at Bel-Air Village, Makati, Metro Manila. Petitioner
Corporation filed its Motion for Intervention and to Admit Attached Granting arguendo that the name "Lideco Corporation" could be used
Complaint in Intervention in said case. by petitioner corporation in its motion, there is an even more cogent
reason for denying the petition. The trial court concluded, and we have
no reason to disagree, that the intervention of Lideco or petitioner
Bormaheco filed its Motion to Strike out the Complaint in Intervention corporation was not proper because neither had any legal interest in
and all related pleadings filed by LIDECO Corporation. the subject of litigation. The evidence (tax declarations) attached to the
petition for intervention and the complaint for intervention pertained
to properties not being litigated in the instant case. Lideco and
Petitioner contends that private respondent is estopped from, and is in
Petitioner Corporation both claimed to have an interest in two houses
bad faith for, denying its knowledge that "Lideco Corporation" and
constructed in Lot 3, Block 4 in Bel Air Village, Makati. The subject
Laureano Investment and Development Corporation are one and the
matter of the instant petition, on the other hand, are Lots 4 and 5,
same entity since it has previously used LIDECO as an acronym for the
Block 4, of Bel Air Village.
latter corporation.

Petitioner contends that it was private respondent which first made use Special Services Vs. Centro la Paz (272 SCRA 256)
of LIDECO as a shorter term for Laureano Investment and
Development Corporation when it filed its first motion to strike dated Facts:
January 9, 1989, prior to the filing by "Lideco Corporation" of its
motion for intervention and complaint in intervention on January 18,
Judgment was rendered in favor of petitioner Special Services
1989. Hence, private respondent should be considered estopped from
Corporation by the Court of First Instance, Branch IV, Manila, against
denying that petitioner and "Lideco Corporation" are one and the same
one Alejandro Estudillo in the amount of P94,727.52, more or less, in
corporation.
an action for Replevin with Sum of Money. A writ of execution was
thereafter issued but which has remained unsatisfied.
Issue:
By virtue of an alias writ of execution, the Sheriff of Manila caused the
Whether Respondent Bormaheco, Inc. is estopped from contesting the annotation of a notice of levy on Transfer Certificate of Title No. 51837,
legal personality to sue of "Lideco Corporation" in respect of the rights, interest and participation of said Alejandro
Estudillo, one of the registered owners indicated in said title. The title
covers two parcels of land situated in Sampaloc, Manila, consisting of
three hundred forty eight (348) square meters and registered in the
names of Alejandro Estudillo, married to Primitiva Victoria; Joaquina
Ruling:
de la Rosa, widow; Pedro Paguio, married to Amor Jose and Maximo
Victoria, married to Juliana Roberto, all Chapter members.
Examining the records of the case, we observe that the motion adverted
to indeed made use of LIDECO as an acronym for Laureano
The public auction sale of Estudillo's rights and interests in said
Investment and Development Corporation. But said motion distinctly
properties was then scheduled on July 23, 1973.
specified that LIDECO was the shorter term for “Laureano Investment
and Development Corporation”. It is obvious that no false
representation or concealment can be attributed to private respondent. Alejandro Estudillo filed a “Motion to Dissolve and/or Cancel the
Neither can it be charged with conveying the impression that the facts Notice of Levy” alleging that he and the other registered owners
are other than, or inconsistent with, those which it now asserts since indicated on the title merely held in trust the properties and
LIDECO, as an acronym, is clearly different from "Lideco Corporation" improvements thereon in favor of respondent Centro La Paz
which represented itself as a corporation duly registered and organized (Samahang Espiritista Sa Lunduyang La Paz) a Chapter of Union
in accordance with law. Nor can it be logically inferred that petitioner Espiritista Cristiana de Filipinas, Inc.
relied or acted upon such representation of private respondent in
thereafter referring to itself as "Lideco Corporation;" for petitioner is
90
On July 21, 1973, CENTRO submitted a third party claim to the Sheriff diminution of the capital stock or the incurring or increasing of any
of Manila likewise averring exclusive ownership of the properties in bonded indebtedness is to be considered, must be addressed to each
question. stockholder at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
Issue: postage prepaid, or served personally.

W/N Centro La Paz which is merely a Chapter of Union Espiritista de A certificate in duplicate must be signed by a majority of the directors
Filipinas, Inc. has a juridical personality of its own in accordance with of the corporation and countersigned by the chairman and the
the provisions of our laws secretary of the stockholders' meeting, setting forth:

Ruling:
(1) That the requirements of this section have been complied with;

Although it was CENTRO that was actively prosecuting the case, in

substance, it was representing the mother organization, the Union (2) The amount of the increase or diminution of the capital stock;
Espiritista Cristiana de Filipinas, Inc., which is the real party in interest
and is itself named in the Complaint. It is an organization that is duly (3) If an increase of the capital stock, the amount of capital stock or
registered with the Securities and Exchange Commission, and thus number of shares of no-par stock thereof actually subscribed, the
possessed of a juridical personality to sue and be sued. names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
The evidence sufficiently establishes that the registered owners of the and the amount paid by each on his subscription in cash or property, or
parcels of land, all of whom are members of CENTRO, hold the the amount of capital stock or number of shares of no-par stock
properties in trust for CENTRO by virtue of the indubitable documents allotted to each stock-holder if such increase is for the purpose of
executed even before the institution of suit. The fact of registration in making effective stock dividend therefor authorized;
the name of Alejandro Estudillo and others does not bar evidence to
show that the registered owners hold the properties in trust for (4) Any bonded indebtedness to be incurred, created or increased;
CENTRO.

(5) The actual indebtedness of the corporation on the day of the

Admittedly, the trust was not registered in accordance with section 65 meeting;
of Act 496 (the former Land Registration Law). The absence of said
registration, however, cannot be taken against CENTRO inasmuch as,
if the public auction sale had actually been held, with petitioner as the (6) The amount of stock represented at the meeting; and
successful buyer, petitioner could not have been considered a
purchaser for value and in good faith at said sale since it had (7) The vote authorizing the increase or diminution of the capital stock,
knowledge of CENTRO's claim, particularly when the latter had filed a or the incurring, creating or increasing of any bonded indebtedness.
third-party-claim with the Sheriff of Manila before the scheduled
auction sale, which knowledge was equivalent to registration of the
several "Acknowledgments" in the Registry of Deeds. Any increase or decrease in the capital stock or the incurring, creating
or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.
The conclusion follows that inasmuch as Estudillo has no interest in
the properties in question, there is nothing that petitioner can levy
upon. The power of a Court in the execution of its judgment extends One of the duplicate certificates shall be kept on file in the office of the
only over properties unquestionably belonging to the judgment debtor. corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Section 37 – Commission and the issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or decreased and the
Power to extend or shorten corporate term. - A private incurring, creating or increasing of any bonded indebtedness
corporation may extend or shorten its term as stated in the articles of authorized, as the certificate of filing may declare: Provided, That the
incorporation when approved by a majority vote of the board of Securities and Exchange Commission shall not accept for filing any
directors or trustees and ratified at a meeting by the stockholders certificate of increase of capital stock unless accompanied by the sworn
representing at least two-thirds (2/3) of the outstanding capital stock statement of the treasurer of the corporation lawfully holding office at
or by at least two-thirds (2/3) of the members in case of non-stock the time of the filing of the certificate, showing that at least twenty-five
corporations. Written notice of the proposed action and of the time and (25%) percent of such increased capital stock has been subscribed and
place of the meeting shall be addressed to each stockholder or member that at least twenty-five (25%) percent of the amount subscribed has
at his place of residence as shown on the books of the corporation and been paid either in actual cash to the corporation or that there has been
deposited to the addressee in the post office with postage prepaid, or transferred to the corporation property the valuation of which is equal
served personally: Provided, That in case of extension of corporate to twenty-five (25%) percent of the subscription: Provided, further,
term, any dissenting stockholder may exercise his appraisal right under That no decrease of the capital stock shall be approved by the
the conditions provided in this code. Commission if its effect shall prejudice the rights of corporate
creditors.

Section 38 –
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of
Power to increase or decrease capital stock; incur, create or trustees and of at least two-thirds (2/3) of the members in a meeting
increase bonded indebtedness. - No corporation shall increase or duly called for the purpose.
decrease its capital stock or incur, create or increase any bonded
indebtedness unless approved by a majority vote of the board of
directors and, at a stockholder's meeting duly called for the purpose, Bonds issued by a corporation shall be registered with the Securities
two-thirds (2/3) of the outstanding capital stock shall favor the and Exchange Commission, which shall have the authority to
increase or diminution of the capital stock, or the incurring, creating or determine the sufficiency of the terms thereof.
increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, Ong Yong Vs. Tiu (401 SCRA 1)
or increasing of any bonded indebtedness and of the time and place of
the stockholder's meeting at which the proposed increase or Facts:
91
The construction of the Masagana Citimall in Pasay City was A subscription contract necessarily involves the corporation as one of
threatened with stoppage and incompletion when its owner, the First the contracting parties since the subject matter of the transaction is
Landlink Asia Development Corporation (FLADC), which was owned property owned by the corporation – its shares of stock. Thus, the
by the Tius, encountered dire financial difficulties. It was heavily subscription contract (denominated by the parties as a Pre-
indebted to the Philippine National Bank (PNB) for P190 million. Subscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one
between the Ongs and FLADC, not between the Ongs and the Tius.
To stave off foreclosure of the mortgage on the two lots where the mall
Otherwise stated, the Tius did not contract in their personal capacities
was being built, the Tius invited the Ongs, to invest in FLADC. Under
with the Ongs since they were not selling any of their own shares to
the Pre-Subscription Agreement they entered into, the Ongs and the
them. It was FLADC that did.
Tius agreed to maintain equal shareholdings in FLADC: the Ongs were
to subscribe to 1,000,000 shares at a par value of P100.00 each while
the Tius were to subscribe to an additional 549,800 shares at P100.00 Considering therefore that the real contracting parties to the
each in addition to their already existing subscription of 450,200 subscription agreement were FLADC and the Ongs alone, a civil case
shares. Furthermore, they agreed that the Tius were entitled to for rescission on the ground of breach of contract filed by the Tius in
nominate the Vice-President and the Treasurer plus five directors while their personal capacities will not prosper. Only FLADC had the legal
the Ongs were entitled to nominate the President, the Secretary and six personality to file suit rescinding the subscription agreement with the
directors (including the chairman) to the board of directors of FLADC. Ongs inasmuch as it was the real party in interest therein.
Moreover, the Ongs were given the right to manage and operate the
mall.
However, although the Tius were adversely affected by the Ongs'
unwillingness to let them assume their positions, rescission due to
Accordingly, the Ongs paid P100 million in cash for their subscription breach of contract is definitely the wrong remedy for their personal
to 1,000,000 shares of stock while the Tius committed to contribute to grievances. The Corporation Code, SEC rules and even the
FLADC a four-storey building and two parcels of land respectively Rules of Court provide for appropriate and adequate intra-
valued at P20 million (for 200,000 shares), P30 million (for 300,000 corporate remedies, other than rescission, in situations like
shares) and P49.8 million (for 49,800 shares) to cover their additional this. Rescission is certainly not one of them, especially if the party
549,800 stock subscription therein. The Ongs paid in another P70 asking for it has no legal personality to do so and the requirements of
million to FLADC and P20 million to the Tius over and above their the law therefor have not been met. A contrary doctrine will tread on
P100 million investment, the total sum of which (P190 million) was extremely dangerous ground because it will allow just any stockholder,
used to settle the P190 million mortgage indebtedness of FLADC to for just about any real or imagined offense, to demand rescission of his
PNB. subscription and call for the distribution of some part of the corporate
assets to him without complying with the requirements of the
Corporation Code.
The business harmony between the Ongs and the Tius in FLADC,
however, was shortlived because the Tius rescinded the Pre-
Subscription Agreement. The Tius accused the Ongs of (1) refusing to Hence, the Tius, in their personal capacities, cannot seek the ultimate
credit to them the FLADC shares covering their real property and extraordinary remedy of rescission of the subject agreement based
contributions; (2) preventing David S. Tiu and Cely Y. Tiu from on a less than substantial breach of subscription contract. Not only are
assuming the positions of and performing their duties as Vice- they not parties to the subscription contract between the Ongs and
President and Treasurer, respectively, and (3) refusing to give them the FLADC; they also have other available and effective remedies under the
office spaces agreed upon. law.

The Tius went to Securities and Exchange Commission (SEC) seeking Rescission will still not prosper since it will violate the Trust Fund
confirmation of their rescission of the Pre-Subscription Agreement. Doctrine and the procedures for the valid distribution of assets and
After hearing, the SEC, through then Hearing Officer Rolando G. property under the Corporation Code.
Andaya, Jr., issued a decision on May 19, 1997 confirming the
rescission sought by the Tius.
The Trust Fund Doctrine, first enunciated by this Court in the 1923
case of Philippine Trust Co. vs. Rivera, provides that subscriptions to
Issue:
the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. This
W/N the Tius could legally rescind the Pre-Subscription Agreement
doctrine is the underlying principle in the procedure for the
distribution of capital assets, embodied in the Corporation Code, which
Ruling:
allows the distribution of corporate capital only in three instances: (1)
amendment of the Articles of Incorporation to reduce the authorized
No, they could not.
capital stock, (2) purchase of redeemable shares by the corporation,
regardless of the existence of unrestricted retained earnings, and (3)
FLADC was originally incorporated with an authorized capital stock of dissolution and eventual liquidation of the corporation. Furthermore,
500,000 shares with the Tius owning 450,200 shares representing the the doctrine is articulated in Section 41 on the power of a corporation
paid-up capital. When the Tius invited the Ongs to invest in FLADC as to acquire its own shares and in Section 122 on the prohibition against
stockholders, an increase of the authorized capital stock became the distribution of corporate assets and property unless the stringent
necessary to give each group equal (50-50) shareholdings as agreed requirements therefor are complied with.
upon in the Pre-Subscription Agreement. The authorized capital stock
was thus increased from 500,000 shares to 2,000,000 shares with a
In the instant case, the rescission of the Pre-Subscription Agreement
par value of P100 each, with the Ongs subscribing to 1,000,000 shares
will effectively result in the unauthorized distribution of the capital
and the Tius to 549,800 more shares in addition to their 450,200
assets and property of the corporation, thereby violating the Trust
shares to complete 1,000,000 shares. Thus, the subject matter of the
Fund Doctrine and the Corporation Code, since rescission of a
contract was the 1,000,000 unissued shares of FLADC stock allocated
subscription agreement is not one of the instances when distribution of
to the Ongs. Since these were unissued shares, the parties' Pre-
capital assets and property of the corporation is allowed.
Subscription Agreement was in fact a subscription contract as defined
under Section 60, Title VII of the Corporation Code:
Contrary to the Tius' allegation, rescission will, in the final analysis,
result in the premature liquidation of the corporation without the
Any contract for the acquisition of unissued stock in an
benefit of prior dissolution in accordance with Sections 117, 118, 119
existing corporation or a corporation still to be formed shall
and 120 of the Corporation Code.
be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract

92
The Tius' case for rescission cannot validly be deemed a petition to Commission for unfair labor practice against petitioner. In due time,
decrease capital stock because such action never complied with the the petitioner filed its position paper, alleging operational losses.
formal requirements for decrease of capital stock under Section 38 of
the Corporation Code. No majority vote of the board of directors was
Issue:
ever taken. Neither was there any stockholders’ meeting at which the
approval of stockholders owning at least two-thirds (2/3) of the
outstanding capital stock was secured. There was no revised treasurer's W/N the reduction of the company’s capital stock was proper
affidavit and no proof that said decrease will not prejudice the
creditors' rights.
Ruling:

Furthermore, it is an improper judicial intrusion into the internal

affairs of the corporation to compel FLADC to file at the SEC a petition While the reduction in capital stock created an apparent need for
for the issuance of a certificate of decrease of stock. Decreasing a retrenchment, it was, by all indications, just a mask for the purge of
corporation's authorized capital stock is an amendment of the Articles union members, who, by then, had agitated for wage increases. In the
of Incorporation. It is a decision that only the stockholders and the face of the petitioner company's piling profits, the unionists had the
directors can make, considering that they are the contracting parties right to demand for such salary adjustments.
thereto. In this case, the Tius are actually not just asking for a review
of the legality and fairness of a corporate decision. They want this That the petitioner made quite handsome profits is clear from the
Court to make a corporate decision for FLADC. We decline to records. A clear scrutiny of the financial reports of the petitioner
intervene and order corporate structural changes not voluntarily reveals that it had been making substantial profits in the operation.
agreed upon by its stockholders and directors.
In 1972, when it still had 765,000 common shares, of which 305,000
A judicial order to decrease capital stock without the assent of FLADC's were unissued and 459,000 outstanding capitalized at
directors and stockholders is a violation of the "business judgment P16,830,000.00, the respondent made a net profit of P2,403,211.58.
rule" which states that: Its total assets were P70,821,317.81.

xxx xxx xxx (C)ontracts intra vires entered into by the board of In 1973, based on the same capitalization, its profit increased to
directors are binding upon the corporation and courts will not interfere P2,724,465.33. Its total assets increased to P83,240,473.73.
unless such contracts are so unconscionable and oppressive as to
amount to wanton destruction to the rights of the minority, as when
plaintiffs aver that the defendants (members of the board), have In 1974, although its capitalization was reduced from P16,830,000.00
concluded a transaction among themselves as will result in serious to P11,230,459.36, its profits were further increased to P2,922,349.70.
injury to the plaintiffs stockholders. Its assets were P78,842,175.75.

Apparently, the Tius do not realize the illegal consequences of seeking The reduction in its assets by P4,398,297.98 was due to the fact that its
rescission and control of the corporation to the exclusion of the Ongs. capital stock was reduced by the amount of P5,599,540.54.
Such an act infringes on the law on reduction of capital stock. Ordering
the return and distribution of the Ongs' capital contribution without In 1975, for the period of only six months, the respondent reported a
dissolving the corporation or decreasing its authorized capital stock is net profit of P547,414.72, which when added to the surplus of
not only against the law but is also prejudicial to corporate creditors P5,591.214.19, makes a total surplus of P6,138,628.91 as of June 30,
who enjoy absolute priority of payment over and above any individual 1975.
stockholder thereof.

The petitioner would, however, have us believe that it in fact sustained

The unilateral rescission by the Tius of the subject Pre-Subscription losses. Whatever profits it earned, so it claims were in the nature of
Agreement, dated August 15, 1994, is hereby declared as null and void. dividends "declared on its shareholdings in other companies in the
earning of which the employees had no participation whatsoever."
Madrigal & Co. Vs. Zamora (151 SCRA 355) "Cash dividends," according to it, "are the absolute property of the
stockholders and cannot be made available for disposition if only to
Facts: meet the employees' economic demands."

The petitioner was engaged, among several other corporate objectives, There is no merit in this contention. We agree with the National Labor
in the management of Rizal Cement Co., Inc. Admittedly, the petitioner Relations Commission that "[t]he dividends received by the company
and Rizal Cement Co., Inc. are sister companies. Both are owned by the are corporate earnings arising from corporate investment." Indeed, as
same or practically the same stockholders. The Madrigal Central Office found by the Commission, the petitioner had entered such earnings in
Employees Union, sought for the renewal of its collective bargaining its financial statements as profits, which it would not have done if they
agreement with the petitioner, which was due to expire on February were not in fact profits.
28, 1974. Specifically, it proposed a wage increase of P200.00 a month,
an allowance of P100.00 a month, and other economic benefits. The
petitioner, however, requested for a deferment in the negotiations. Moreover, it is incorrect to say that such profits — in the form of
dividends — are beyond the reach of the petitioner's creditors since the
petitioner had received them as compensation for its management
On July 29, 1974, by an alleged resolution of its stockholders, the services in favor of the companies it managed as a shareholder thereof.
petitioner reduced its capital stock from 765,000 shares to 267,366 As such shareholder, the dividends paid to it were its own money,
shares. This was effected through the distribution of the marketable which may then be available for wage increments. It is not a case of a
securities owned by the petitioner to its stockholders in exchange for corporation distributing dividends in favor of its stockholders, in which
their shares in an equivalent amount in the corporation. case, such dividends would be the absolute property of the
stockholders and hence, out of reach by creditors of the corporation.
On August 22, 1975, by yet another alleged stockholders' action, the Here, the petitioner was acting as stockholder itself, and in that case,
petitioner reduced its authorized capitalization from 267,366 shares to the right to a share in such dividends, by way of salary increases, may
110,085 shares, again, through the same scheme. not be denied its employees.

After the petitioner's failure to sit down with the respondent union, the Accordingly, this court is convinced that the petitioner's capital
latter, commenced a complaint with the National Labor Relations reduction efforts were, to begin with, a subterfuge, a deception as it
were, to camouflage the fact that it had been making profits, and
93
consequently, to justify the mass layoff in its employee ranks, especially During the tenure of the Maggay Board, from June 22, 1979 to March
of union members. They were nothing but a premature and plain 10, 1980, it did not reform the contract of April 12, 1977, and entered
distribution of corporate assets to obviate a just sharing to labor of the into another contract with CSI for the supply and installation of
vast profits obtained by its joint efforts with capital through the years. additional equipment but also issued to CSI 113,800 shares of common
Surely, we can neither countenance nor condone this. It is an unfair stock.
labor practice.
Issue:
Section 39 –
W/N Natelco stockholders have a right of preemption to the 113,800
Power to deny pre-emptive right. - All stockholders of a stock shares in question
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective Ruling:
shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance with While the group of Luciano Maggay was in control of Natelco, the
laws requiring stock offerings or minimum stock ownership by the Maggay Board issued 113,800 shares of stock to CSI. Petitioner said
public; or to shares to be issued in good faith with the approval of the that the Maggay Board, in issuing said shares without notifying Natelco
stockholders representing two-thirds (2/3) of the outstanding capital stockholders, violated their right of pre-emption to the unissued
stock, in exchange for property needed for corporate purposes or in shares.
payment of a previously contracted debt.
This Court in Benito vs SEC, et al .(123 SCRA 722), has ruled that:
Dee Vs. SEC (199 SCRA 238)
Petitioner bewails the fact that in view of the lack of notice to him of
Facts: such subsequent issuance, he was not able to exercise his right of pre-
emption over the unissued shares. However, the general rule is that
pre-emptive right is recognized only with respect to new issues of
Naga Telephone Company, Inc. was organized in 1954, the authorized shares, and not with respect to additional issues of originally
capital was P100,000.00. In 1974 Natelco decided to increase its authorized shares. This is on the theory that when a corporation at its
authorized capital to P3,000,000.00. As required by the Public Service inception offers its first shares, it is presumed to have offered all of
Act, Natelco filed an application for the approval of the increased those which it is authorized to issue. An original subscriber is deemed
authorized capital with the then Board of Communications. A decision to have taken his shares knowing that they form a definite
was rendered in said case, approving the said application subject to proportionate part of the whole number of authorized shares. When
certain conditions, among which was: the shares left unsubscribed are later re-offered, he cannot therefore
claim a dilution of interest.
3. That the issuance of the shares of stocks will be for a
period of one year from the date hereof, "after which no The questioned issuance of the 113,800 stocks is not invalid even
further issues will be made without previous authority from assuming that it was made without notice to the stockholders as
this Board." claimed by the petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders
Pursuant to the approval given by the then Board of Communications, meeting is required to consider it because additional issuance of shares
Natelco filed its Amended Articles of Incorporation with the SEC. of stocks does not need approval of the stockholders. Consequently, no
When the amended articles were filed with the SEC, the original pre-emptive right of Natelco stockholders was violated by the issuance
authorized capital of P100,000.00 was already paid. Of the increased of the 113,800 shares to CSI.
capital of P2,900,000.00 the subscribers subscribed to P580,000.00
of which P145,000 was fully paid. Section 40 –

Natelco entered into a contract with Communication Services, Inc. for Sale or other disposition of assets. - Subject to the provisions of
the "manufacture, supply, delivery and installation" of telephone existing laws on illegal combinations and monopolies, a corporation
equipment. In accordance with this contract, Natelco issued 24,000 may, by a majority vote of its board of directors or trustees, sell, lease,
shares of common stocks to CSI on the same date as part of the exchange, mortgage, pledge or otherwise dispose of all or substantially
downpayment. Another 12,000 shares of common stocks were issued all of its property and assets, including its goodwill, upon such terms
to CSI. In both instances, no prior authorization from the Board of and conditions and for such consideration, which may be money,
Communications, now the National Telecommunications Commission, stocks, bonds or other instruments for the payment of money or other
was secured pursuant to the conditions imposed by the decision of the property or consideration, as its board of directors or trustees may
BOC. deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
Later, the stockholders of the Natelco held their annual stockholders' or in case of non-stock corporation, by the vote of at least to two-thirds
meeting to elect their seven directors to their Board of Directors, for (2/3) of the members, in a stockholder's or member's meeting duly
the year 1979-1980. In this election Pedro Lopez Dee was unseated as called for the purpose. Written notice of the proposed action and of the
Chairman of the Board and President of the Corporation, but was time and place of the meeting shall be addressed to each stockholder or
elected as one of the directors, together with his wife, Amelia Lopez member at his place of residence as shown on the books of the
Dee. corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting
stockholder may exercise his appraisal right under the conditions
In the election CSI was able to gain control of Natelco when the latter's provided in this Code.
legal counsel, Atty. Luciano Maggay won a seat in the Board with the
help of CSI. In the reorganization Atty. Maggay became president.
A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
The last three named directors including the Dee spouses never rendered incapable of continuing the business or accomplishing the
attended the meetings of the Maggay Board. The members of the purpose for which it was incorporated.
Maggay Board who attended its meetings were Maggay. Federis,
Ramos and Javalera. The last two were and are CSI representatives.

94
After such authorization or approval by the stockholders or members, Petitioner contends that VECCI violated the condition in the
the board of directors or trustees may, nevertheless, in its discretion, compromise agreement requiring that the sale be made "under the
abandon such sale, lease, exchange, mortgage, pledge or other terms and conditions recited in the enabling resolutions of its Board of
disposition of property and assets, subject to the rights of third parties Directors and stockholders. She rues that no shareholders' or directors'
under any contract relating thereto, without further action or approval meeting, wherein these resolutions were passed, was actually held. She
by the stockholders or members. thus bewails this sale as improper for not having complied with the
requirements mandated by Section 40 of the Corporation Code.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or Petitioner's contention is plainly unmeritorious.
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in the The compromise agreement clearly showed that the "enabling
usual and regular course of business of said corporation or if the resolutions of its (VECCI's) board of directors and stockholders"
proceeds of the sale or other disposition of such property and assets be referred to were those then already existing; to wit: (1) "the resolution
appropriated for the conduct of its remaining business. of the stockholders of VECCI dated November 9, 1989 , (where) the
stockholders authorized VECCI to sell and/or disposed all or
In non-stock corporations where there are no members with voting substantially all its property and assets upon such terms and
rights, the vote of at least a majority of the trustees in office will be conditions and for such consideration as the board of directors may
sufficient authorization for the corporation to enter into any deem expedient ." (2) the "resolution dated 9 November 1989 , (where)
transaction authorized by this section. (28 1/2a) the board of directors of VECCI authorized VECCI to sell and/or
dispose all or substantially all the property and assets of the
corporation, at the highest available price/s they could be sold or
disposed of in cash, and in such manner as may be held convenient
under the circumstances, and authorized the President Vicente B.
Esguerra. Jr. to negotiate. contract, execute and sign such sale for and
Esguerra Vs. CA (267 SCRA 380) in behalf of the corporation."

Facts: VECCI's sale of all the properties mentioned in the judicially-approved

compromise agreement was done on the basis of its Corporate
Julieta Esguerra filed a complaint for administration of conjugal Secretary's Certification of these two resolutions. The partial decision
partnership or separation of property against her husband Vicente did not require any further board or stockholder resolutions to make
Esguerra, Jr. before the trial court. The said complaint was later VECCI's sale of these properties valid. Being regular on its face, the
amended impleading V. Esguerra Construction Co., Inc. (VECCI) and Secretary's Certification was sufficient for Sureste Properties, Inc. to
other family corporations as defendants. rely on. It did not have to investigate the truth of the facts contained in
such certification. Otherwise, business transactions of corporations
would become tortuously slow and unnecessarily hampered.
The parties entered into a compromise agreement which was Ineluctably, VECCI's sale of Esguerra Building II to Sureste was not
submitted to the court. On the basis of the said agreement, the court ultra vires but a valid execution of the trial court's partial decision.
rendered two partial judgments: one between Vicente and Julieta and Based on the foregoing, the sale is also deemed to have satisfied the
the other as between the latter and VECCI. requirements of Section 40 of the Corporation Code.

VECCI shall sell/alienate/transfer or dispose of in any lawful and Furthermore, petitioner Julieta Esguerra is estopped from contesting
convenient manner, and under the terms and conditions recited in the the validity of VECCI's corporate action in selling Esguerra Building II
enabling resolutions of its Board of Directors and stockholders VECCI on the basis of said resolutions and certification because she never
properties. raised this issue in VECCI's prior sales of the other properties sold
including the Esguerra Building I. The same identical resolutions and
certification were used in such prior sales.
After the properties shall have been sold/alienated/transferred or
disposed of and funds are realized therefrom, and after all the financial
obligations of defendant VECCI are completely paid and/or settled, Nell & Co. Vs. Pacific Farms (15 SCRA 415)
defendant VECCI shall cause to be paid and/or remitted to the plaintiff
such amount/sum equivalent to fifty percent (50%) of the (net)
resulting balance of such funds. Facts:

The controversy arose with respect to Esguerra Building II. Julietta Nell Co. secured against Insular Farms, Inc. a judgment for the sum of
started claiming one-half of the rentals of the said building which P1,853.80 representing the unpaid balance of the price of a pump sold
VECCI refused. Thus, Julietta filed a motion praying that VECCI be by Nell to Insular Farms with interest on said sum, plus P125.00 as
ordered to remit one-half of the rentals to her effective January 1990 attorney's fees and P84.00 as costs. A writ of execution was returned
until the same be sold. VECCI opposed said motion. unsatisfied, stating that Insular Farms had no leviable property.

Meanwhile, Esguerra Bldg. II was sold to Sureste Properties. Inc. for Soon thereafter Nell filed with the present action against Pacific Farms,
P150,000,000.00. Julieta V. Esguerra filed a motion seeking the Inc. for the collection of the judgment aforementioned, upon the theory
nullification of the sale on the ground that VECCI is not the lawful and that it is the alter ego of Insular Farms. In due course, the Municipal
absolute owner thereof and that she has not been notified nor Court rendered judgment dismissing Nell's complaint. Upon appeal to
consulted as to the terms and conditions of the sale. CA, the same was denied.

Issue: Hence this appeal by certiorari , upon the ground that the Court of
Appeals had erred: (1) in not holding the Pacific liable for said unpaid
obligation of the Insular Farms.
W/N VECCI's sale of Esguerra BuildingII a valid exercise of corporate
power
Issue:

Ruling:
W/N Pacific Farms is liable to Nell Co.

95
Ruling: Gregorio Velasco, President, Felix del Castillo, Vice-president, Andres
L. Navallo, Secretary-Treasurer, and Rufino Manuel, Director of the
Trading Company, at a meeting of the board of directors approved and
Generally where one corporation sells or otherwise transfers all of its
authorized various lawful purchases already made of a large portion of
assets to another corporation, the latter is not liable for the debts and
the capital stock of the company from its various stockholders.
liabilities of the transferor, except: (1) where the purchaser expressly or
Pursuant to such resolution, the corporation purchased from S. R.
impliedly agrees to assume such debts; (2) where the transaction
Ganzon 100 shares of its capital stock of the par value of P10, from
amounts to a consolidation or merger of the corporations; (3) where
Felix D. Mendaros 100 shares of the par value of P10, and 100 shares of
the purchasing corporation is merely a continuation of the selling
the par value of P10, each, more, from Dionisio Saavedra 10 shares of
corporation; and (4) where the transaction is entered into fraudulently
the same par value, and from Valentin Matias 20 shares of like value.
in order to escape liability for such debts.
The total amount of the capital stock purchased was P3,300. At the
time of such purchase, the corporation had accounts payable
In the case at bar, there is neither proof nor allegation that Pacific had amounting to P13,807.50, most of which were unpaid at the time
expressly or impliedly agreed to assume the debt of Insular Farms in petition for the dissolution of the corporation was filed due to financial
favor of appellant herein, or that the it is a continuation of Insular condition, in contemplation of an insolvency and dissolution.
Farms, or that the sale of either the shares of stock or the assets of
Insular Farms to the Pacific has been entered into fraudulently, in
Steinberg prays judgment for the sum of P3,300 from the Gregorio
order to escape liability for the debt of the Insular Farms in favor of
Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel,
appellant herein. In fact, these sales took place (March, 1958) not only
personally as members of the Board of Directors, or for the recovery
over six (6) months before the rendition of the judgment (October 9,
from S. R. Ganzon, of the sum of P1,000, from Felix D. Mendaros,
1958) sought to be collected in the present action, but, also, over a
P2,000, and from Dionisio Saavedra, P100.
month before the filing of the case (May 29, 1958) in which said
judgment was rendered. Moreover, Pacific purchased the shares of
stock of Insular Farms as the highest bidder at an auction sale held at Issue:
the instance of a bank to which said shares had been pledged as
security for an obligation of Insular Farms in favor of said bank. It has,
W/N Sibuguey Trading Company, Incorporated, could legally purchase
also, been established that the it had paid P285,126.99 for said shares
its own stock
of stock, apart from the sum of P10,000.00 it, likewise, paid for the
other assets of Insular Farms.
Ruling:
Neither is it claimed that these transactions have resulted in the
consolidation or merger of the Insular Farms and appellee herein. On No.
the contrary, appellant's theory to the effect that appellee is an alter
ego of the Insular Farms negates such consolidation or merger, for a
corporation cannot be its own alter ego. It appears that the board of directors of the corporation authorized the
purchase of 330 shares of the capital stock of the corporation at the
agreed price of P3,300 and at the time the purchase was made, the
It is urged, however, that said P10,000.00 paid by Pacific for other corporation was indebted in the sum of P13,807.50. According to its
assets of Insular Farms is a grossly inadequate price, because, Nell now books, it had accounts receivable in the sum of P19,126.02. When the
claims, said assets were worth around P285,126.99, and that, petition was filed for its dissolution upon the ground that it was
consequently, the sale must be considered fraudulent. However, the insolvent, its accounts payable amounted to P9,241.19, and its accounts
sale was submitted to and approved by the Securities and Exchange receivable P12,512.47, or an apparent asset of P3,271.28 over and above
Commission. It must be presumed, therefore, that the price paid was its liabilities.
fair and reasonable. Moreover, the only issue raised in the court of
origin was whether or not appellee is an alter ego of Insular Farms.
The question of whether the aforementioned sale of assets for But it will be noted that there is no stipulation or finding of facts as to
P10,000.00 was fraudulent or not, had not been put in issue in said what was the actual cash value of its accounts receivable. Neither is
court. Hence, it may, not be raised on appeal. there any stipulation that those accounts or any part of them ever have
been or will be collected, and it does appear that after his appointment
Steinberg made a diligent effort to collect them, and that he was unable
Section 41 – to do so.

Power to acquire own shares. - A stock corporation shall have the If in truth and in fact the corporation had an actual bona fide surplus
power to purchase or acquire its own shares for a legitimate corporate of P3,000 over and above all of its debt and liabilities, the payment of
purpose or purposes, including but not limited to the following cases: the P3,000 in dividends would not in the least impair the financial
Provided, That the corporation has unrestricted retained earnings in its condition of the corporation or prejudice the interests of its creditors.
books to cover the shares to be purchased or acquired:
In the purchase of its own stock to the amount of P3,300 and in
1. To eliminate fractional shares arising out of stock dividends; declaring the dividends to the amount of P3,000, the real assets of the
corporation were diminished P6,300. It also appears from paragraph 4
of the stipulation that the corporation had a "surplus profit" of
2. To collect or compromise an indebtedness to the corporation, arising P3,314.72 only. It is further stipulated that the dividends should "be
out of unpaid subscription, in a delinquency sale, and to purchase made in installments so as not to effect financial condition of the
delinquent shares sold during said sale; and corporation." In other words, that the corporation did not then have an
actual bona fide surplus from which the dividends could be paid, and
3. To pay dissenting or withdrawing stockholders entitled to payment that the payment of them in full at the time would "affect the financial
for their shares under the provisions of this Code. condition of the corporation."

Steinberg Vs. Velasco (52 Phil 953) It is, indeed, peculiar that the action of the board in purchasing the
stock from the corporation and in declaring the dividends on the stock
was all done at the same meeting of the board of directors, and it
Facts: appears in those minutes that the both Ganzon and Mendaros were
formerly directors and resigned before the board approved the
Steinberg is the receiver of the Sibuguey Trading Company, a domestic purchase and declared the dividends, and that out of the whole 330
corporation. The defendants are residents of the Philippine Islands. shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of
300 shares out of the 330, which were purchased by the corporation,
96
and for which it paid P3,300. In other words, the directors were Ruling:
permitted to resign so that they could sell their stock to the
corporation. As stated, the authorized capital stock was P20,000
As to the Philippine Fiber, Ma-ao admits having invested P655,000.00
divided into 2,000 shares of the par value of P10 each, which only
in shares of stock of this company but that this was ratified by the
P10,030 was subscribed and paid. Deducting the P3,300 paid for the
Board of Directors, more than that, Ma-ao contends that since said
purchase of the stock, there would be left P7,000 of paid up stock, from
company was engaged in the manufacture of sugar bags it was perfectly
which deduct P3,000 paid in dividends, there would be left P4,000
legitimate for Ma-ao Sugar either to manufacture sugar bags or invest
only. In this situation and upon this state of facts, it is very apparent
in another corporation engaged in said manufacture, and they quote
that the directors did not act in good faith or that they were grossly
authorities for the purpose.
ignorant of their duties.

The Court is persuaded to believe that Ma-ao on this point is correct,

Section 42 – because while Sec. 17-1/2 of the Corporation Law provides that:

Power to invest corporate funds in another corporation or No corporation organized under this act shall invest its funds
business or for any other purpose. - Subject to the provisions of in any other corporation or business or for any purpose other
this Code, a private corporation may invest its funds in any other than the main purpose for which it was organized unless its
corporation or business or for any purpose other than the primary board of directors has been so authorized in a resolution by
purpose for which it was organized when approved by a majority of the the affirmative vote of stockholders holding shares in the
board of directors or trustees and ratified by the stockholders corporation entitling them to exercise at least two-thirds of
representing at least two-thirds (2/3) of the outstanding capital stock, the voting power on such proposal at the stockholders'
or by at least two thirds (2/3) of the members in the case of non-stock meeting called for the purpose.
corporations, at a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed investment and the time
and place of the meeting shall be addressed to each stockholder or The Court is convinced that that law should be understood to mean as
member at his place of residence as shown on the books of the the authorities state, that it is prohibited to the Corporation to invest in
corporation and deposited to the addressee in the post office with shares of another corporation unless such an investment is authorized
postage prepaid, or served personally: Provided, That any dissenting by two-thirds of the voting power of the stockholders, if the purpose of
stockholder shall have appraisal right as provided in this Code: the corporation in which investment is made is foreign to the purpose
Provided, however, That where the investment by the corporation is of the investing corporation because surely there is more logic in the
reasonably necessary to accomplish its primary purpose as stated in stand that if the investment is made in a corporation whose business is
the articles of incorporation, the approval of the stockholders or important to the investing corporation and would aid it in its purpose,
members shall not be necessary. to require authority of the stockholders would be to unduly curtail the
Power of the Board of Directors.

De la Rama Vs. Ma-ao Sugar Central (27 SCRA 247)

The only trouble here is that the investment was made without any
previous authority of the Board of Directors but was only ratified
Facts: afterwards; this of course would have the effect of legalizing the
unauthorized act but it is an indication of the manner in which
This was a representative or derivative suit commenced on October 20, corporate business is transacted by the Ma-ao Sugar administration,
1953, in the Court of First Instance of Manila by four minority the fact that off and on, there would be passed by the Board of
stockholders against the Ma-ao Sugar Central Co., Inc. and J. Amado Directors, resolutions ratifying all acts previously done by the
Araneta and three other directors of the corporation. management.

The complaint comprising the period November, 1946 to October, Section 43 –

1952, stated five causes of action, to wit: (1) for alleged illegal and ultra-
vires acts consisting of self-dealing irregular loans, and unauthorized Power to declare dividends. - The board of directors of a stock
investments; (2) for alleged gross mismanagement; (3) for alleged corporation may declare dividends out of the unrestricted retained
forfeiture of corporate rights warranting dissolution; (4) for alleged earnings which shall be payable in cash, in property, or in stock to all
damages and attorney's fees; and (5) for receivership. stockholders on the basis of outstanding stock held by them: Provided,
That any cash dividends due on delinquent stock shall first be applied
Sums were taken out of the funds of the Ma-ao Sugar Central Co., Inc. to the unpaid balance on the subscription plus costs and expenses,
and delivered to these affiliated companies, and vice versa, without the while stock dividends shall be withheld from the delinquent
approval of the Ma-ao Board of Directors, in violation of Sec. III, Art. stockholder until his unpaid subscription is fully paid: Provided,
6-A of the by-laws. further, That no stock dividend shall be issued without the approval of
stockholders representing not less than two-thirds (2/3) of the
outstanding capital stock at a regular or special meeting duly called for
The Lower Court dismisses the petition for dissolution but condemns J. the purpose.
Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount
of P46,270.00 with 8% interest from the date of the filing of this
complaint, plus the costs; the Court reiterates the preliminary Stock corporations are prohibited from retaining surplus profits in
injunction restraining the Ma-ao Sugar Central Co., Inc. management excess of one hundred (100%) percent of their paid-in capital stock,
to give any loans or advances to its officers and orders that this except: (1) when justified by definite corporate expansion projects or
injunction be as it is hereby made, permanent; and orders it to refrain programs approved by the board of directors; or (2) when the
from making investments in Acoje Mining, Mabuhay Printing, and any corporation is prohibited under any loan agreement with any financial
other company whose purpose is not connected with the Sugar Central institution or creditor, whether local or foreign, from declaring
business; costs of plaintiffs to be borne by the Corporation and J. dividends without its/his consent, and such consent has not yet been
Amado Araneta. secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
Issue: contingencies.

W/N the investment of corporate funds of the Ma-ao Sugar Central

PLDT Vs. NTC (539 SCRA 365)
Co., Inc., in the Philippine Fiber Processing Co., Inc. was not a
violation of section 17-1/2 of the Corporation Law

97
Facts: same amount that can be loosely termed as the “trust fund” of the
corporation. The “Trust Fund” doctrine considers this subscribed
capital as a trust fund for the payment of the debts of the corporation,
This case pertains to Section 40 (e) of the Public Service Act (PSA), as
to which the creditors may look for satisfaction. Until the liquidation
amended on March 15, 1984, pursuant to Batas Pambansa Blg. 325,
of the corporation, no part of the subscribed capital may be returned or
which authorized the NTC to collect from public telecommunications
released to the stockholder (except in the redemption of redeemable
companies Supervision and Regulation Fees (SRF) of PhP 0.50 for
shares) without violating this principle. Thus, dividends must never
every PhP 100 or a fraction of the capital and stock subscribed or paid
impair the subscribed capital; subscription commitments cannot be
for of a stock corporation, partnership or single proprietorship of the
condoned or remitted; nor can the corporation buy its own shares
capital invested, or of the property and equipment, whichever is higher.
using the subscribed capital as the considerations therefor.

Under Section 40 (e) of the PSA, the NTC sent SRF assessments to
Two concepts can be gleaned from the above. First, what constitutes
Philippine Long Distance Telephone Company (PLDT) starting
capital stock that is subject to the SRF. Second, such capital stock is
sometime in 1988. The SRF assessments were based on the market
equated to the “trust fund” of a corporation held in trust as security for
value of the outstanding capital stock, including stock dividends, of
satisfaction to creditors in case of corporate liquidation.
PLDT. PLDT protested the assessments contending that the SRF ought
to be based on the par value of its outstanding capital stock. Its protest
was denied by the NTC and likewise, its motion for reconsideration. PLDT’s contention, that stock dividends are not similarly situated as
the subscribed capital stock because the subscribers or shareholders do
not pay for their issuances as no amount was received by the
PLDT appealed before the CA. The CA modified the disposition of the
corporation in consideration of such issuances since these are effected
NTC by holding that the SRF should be assessed at par value of the
as a mere book entry, is erroneous.
outstanding capital stock of PLDT, excluding stock dividends.

Dividends, regardless of the form these are declared, that is, cash,
With the denial of the NTC’s partial reconsideration of the CA
property or stocks, are valued at the amount of the declared dividend
Decision, the issue of the basis for the assessment of the SRF was
taken from the unrestricted retained earnings of a corporation. Thus,
brought before this Court wherein we ruled that the SRF should be
the value of the declaration in the case of a stock dividend is the actual
based neither on the par value nor the market value of the outstanding
value of the original issuance of said stocks. “In the case of stock
capital stock but on the value of the stocks subscribed or paid including
dividends, it is the amount that the corporation transfers from its
the premiums paid therefor, that is, the amount that the corporation
surplus profit account to its capital account” or “it is the amount that
receives, inclusive of the premiums if any, in consideration of the
the corporation receives in consideration of the original issuance of the
original issuance of the shares. We added that in the case of stock
shares.” It is “the distribution of current or accumulated earnings to
dividends, it is the amount that the corporation transfers from its
the shareholders of a corporation pro rata based on the number of
surplus profit account to its capital account, that is, the amount the
shares owned.” Such distribution in whatever form is valued at the
stock dividends represent is equivalent to the value paid for its original
declared amount or monetary equivalent.
issuance.

Thus, it cannot be said that no consideration is involved in the issuance

PLDT argues that in our Decision in G.R. No. 127937 we have excluded
of stock dividends. In fact, the declaration of stock dividends is akin to
from the coverage of the SRF the capital stocks issued as stock
a forced purchase of stocks. By declaring stock dividends, a
dividends. Petitioner argues that G.R. No. 127937 clearly delineates
corporation ploughs back a portion or its entire unrestricted retained
between capital subscribed and stock dividends to the effect that the
earnings either to its working capital or for capital asset acquisition or
latter are not included in the concept of capital stock subscribed
investments. It is simplistic to say that the corporation did not receive
because subscribers or shareholders do not pay for their subscriptions
any actual payment for these. When the dividend is distributed, it
as no amount is received by the corporation in consideration of such
ceases to be a property of the corporation as the entire or portion of its
issuances since these are effected as mere book entries, that is, the
unrestricted retained earnings is distributed pro rata to corporate
transfer from the retained earnings account to the capital or stock
shareholders.
account. To bolster its position, PLDT repeatedly used the phrase
“actual payments” received by a corporation as a consideration for
issuances of shares which do not apply to stock dividends. When stock dividends are distributed, the amount declared ceases to
belong to the corporation but is distributed among the shareholders.
Consequently, the unrestricted retained earnings of the corporation are
Issue:
diminished by the amount of the declared dividend while the
stockholders’ equity is increased. Furthermore, the actual payment is
W/N stock dividends are part of the outstanding capital stocks of a the cash value from the unrestricted retained earnings that each
corporation insofar as it is subject to the SRF so that all the stock shareholder foregoes for additional stocks/shares which he would
dividends that are part of the outstanding capital stock of PLDT are otherwise receive as required by the Corporation Code to be given to
subject to the SRF the stockholders subject to the availability and conditioned on a certain
level of retained earnings. Elsewise put, where the unrestricted
retained earnings of a corporation are more than 100% of the paid-in
Ruling: capital stock, the corporate Board of Directors is mandated to declare
dividends which the shareholders will receive in cash unless otherwise
In National Telecommunications Commission v. Honorable Court of declared as property or stock dividends, which in the latter case the
Appeals, which we quote: stockholders are forced to forego cash in lieu of property or stocks.

The term “capital” and other terms used to describe the capital In essence, therefore, the stockholders by receiving stock dividends are
structure of a corporation are of universal acceptance and their usages forced to exchange the monetary value of their dividend for capital
have long been established in jurisprudence. Briefly, capital refers to stock, and the monetary value they forego is considered the actual
the value of the property or assets of a corporation. The capital payment for the original issuance of the stocks given as dividends.
subscribed is the total amount of the capital that persons Therefore, stock dividends acquired by shareholders for the monetary
(subscribers or shareholders) have agreed to take and pay value they forego are under the coverage of the SRF and the basis for
for, which need not necessarily by, and can be more than, the par the latter is such monetary value as declared by the board of directors.
value of the shares. In fine, it is the amount that the corporation
receives, inclusive of the premiums if any, in consideration Anent stock dividends, the value transferred from the unrestricted
of the original issuance of the shares. In the case of stock retained earnings of PLDT to the capital stock account pursuant to the
dividends, it is the amount that the corporation transfers
from its surplus profit account to its capital account. It is the
98
issuance of stock dividends is the proper basis for the assessment of the escape income tax. As realized income, the proceeds of the redeemed
SRF, which the NTC correctly assessed. stock dividends can be reached by income taxation regardless of the
existence of any business purpose for the redemption. Otherwise, to
rule that the said proceeds are exempt from income tax when the
CIR Vs. CA (301 SCRA 154)
redemption is supported by legitimate business reasons would defeat
the very purpose of imposing tax on income. Such argument would
Facts: open the door for income earners not to pay tax so long as the person
from whom the income was derived has legitimate business reasons. In
other words, the payment of tax under the exempting clause of Section
Don Andres Soriano, a citizen and resident of the United States, 83(b) would be made to depend not on the income of the taxpayer, but
formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, on the business purposes of a third party (the corporation herein) from
with a P1,000,000.00 capitalization divided into 10,000 common whom the income was earned.
shares at a par value of P100/share. ANSCOR is wholly owned and
controlled by the family of Don Andres, who are all non-resident aliens.
Don Andres subscribed to 4,963 shares of the 5,000 shares originally After considering the manner and the circumstances by which the
issued. issuance and redemption of stock dividends were made, there is no
other conclusion but that the proceeds thereof are essentially
considered equivalent to a distribution of taxable dividends. As
By 1947, ANSCOR declared stock dividends. Then, Don Andres died. "taxable dividend" under Section 83(b), it is part of the "entire income"
As of that date, the records revealed that he has a total shareholdings of subject to tax under Section 22 in relation to Section 21 of the 1939
185,154 shares — 50,495 of which are original issues and the balance of Code. Moreover, under Section 29(a) of said Code, dividends are
134,659 shares as stock dividend declarations. Correspondingly, one- included in "gross income". As income, it is subject to income tax
half of that shareholdings or 92,577 shares were transferred to his wife, which is required to be withheld at source. The 1997 Tax Code may
Doña Carmen Soriano, as her conjugal share. The other half formed have altered the situation but it does not change this disposition.
part of his estate.

ANSCOR's redemption of 82,752.5 stock dividends is herein

Pursuant to a Board Resolution, ANSCOR redeemed 28,000 common considered as essentially equivalent to a distribution of taxable
shares from the Don Andres' estate. The Board further increased dividends for which it is LIABLE for the withholding tax-at-source.
ANSCOR's capital stock to P75M divided into 150,000 preferred shares
and 600,000 common shares. About a year later, ANSCOR again
redeemed 80,000 common shares from the Don Andres' estate, further On the other hand, the exchange of common stocks with preferred
reducing the latter's common shareholdings to 19,727. As stated in the stocks, or preferred for common or a combination of either for both,
Board Resolutions, ANSCOR's business purpose for both redemptions may not produce a recognized gain or loss, so long as the provisions of
of stocks is to partially retire said stocks as treasury shares in order to Section 83(b) is not applicable. This is true in a trade between two (2)
reduce the company's foreign exchange remittances in case cash persons as well as a trade between a stockholder and a corporation. In
dividends are declared. general, this trade must be parts of merger, transfer to controlled
corporation, corporate acquisitions or corporate reorganizations. No
taxable gain or loss may be recognized on exchange of property, stock
Subsequently, the Revenue examiners issued a report proposing that or securities related to reorganizations.
ANSCOR be assessed for deficiency withholding tax-at-source pursuant
to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and
the second quarter of 1969 based on the transactions of exchange and Both shares are part of the corporation's capital stock. Both
redemption of stocks. The Bureau of Internal Revenue (BIR) made the stockholders are no different from ordinary investors who take on the
corresponding assessments despite the claim of ANSCOR that it same investment risks. Preferred and common shareholders
availed of the tax amnesty under Presidential Decree (P.D.) 23 which participate in the same venture, willing to share in the profits and
were amended by P.D.'s 67 and 157. However, petitioner ruled that the losses of the enterprise. Moreover, under the doctrine of equality of
invoked decrees do not cover Sections 53 and 54 in relation to Article shares — all stocks issued by the corporation are presumed equal with
83(b) of the 1939 Revenue Act under which ANSCOR was assessed. the same privileges and liabilities, provided that the Articles of
ANSCOR's subsequent protest on the assessments was denied in 1983 Incorporation is silent on such differences.
by petitioner.
In this case, the exchange of shares, without more, produces no
Subsequently, ANSCOR filed a petition for review with the CTA realized income to the subscriber. There is only a modification of the
assailing the tax assessments on the redemptions and exchange of subscriber's rights and privileges — which is not a flow of wealth for tax
stocks. In its decision, the Tax Court reversed petitioner's ruling, after purposes. The issue of taxable dividend may arise only once a
finding sufficient evidence to overcome the prima facie correctness of subscriber disposes of his entire interest and not when there is still
the questioned assessments. In a petition for review the CA as maintenance of proprietary interest.
mentioned, affirmed the ruling of the CTA. Hence, this petition.
Section 44 –
Issue:
Power to enter into management contract. - No corporation
W/N ANSCOR's redemption of stocks from its stockholder as well as shall conclude a management contract with another corporation unless
the exchange of common with preferred shares can be considered as such contract shall have been approved by the board of directors and
"essentially equivalent to the distribution of taxable dividend" making by stockholders owning at least the majority of the outstanding capital
the proceeds thereof taxable stock, or by at least a majority of the members in the case of a non-
stock corporation, of both the managing and the managed corporation,
at a meeting duly called for the purpose: Provided, That (1) where a
stockholder or stockholders representing the same interest of both the
managing and the managed corporations own or control more than
one-third (1/3) of the total outstanding capital stock entitled to vote of
the managing corporation; or (2) where a majority of the members of
the board of directors of the managing corporation also constitute a
Ruling:
majority of the members of the board of directors of the managed
corporation, then the management contract must be approved by the
The redemption converts into money the stock dividends which stockholders of the managed corporation owning at least two-thirds
become a realized profit or gain and consequently, the stockholder's (2/3) of the total outstanding capital stock entitled to vote, or by at
separate property. Profits derived from the capital invested cannot least two-thirds (2/3) of the members in the case of a non-stock

99
corporation. No management contract shall be entered into for a Issue:
period longer than five years for any one term.
W/N the loan of P500,000.00 procured byVitaliado Arrieta and Lilia
The provisions of the next preceding paragraph shall apply to any Perez is a corporate liability of Intertrade and that Aguenza is liable
contract whereby a corporation undertakes to manage or operate all or thereon under the "Continuing Suretyship Agreement"
substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or Ruling:
otherwise: Provided, however, That such service contracts or operating
agreements which relate to the exploration, development, exploitation
or utilization of natural resources may be entered into for such periods The only document to evidence the subject transaction was the
as may be provided by the pertinent laws or regulations. (n) promissory note signed by Arrieta and Lilia Perez. There is no
indication in said document as to what capacity the two signatories had
in affixing their signatures thereon.
Section 45 –

The subject transaction is a loan contract for P500,000.00 under terms

Ultra vires acts of corporations. - No corporation under this and conditions which are stringent, if not onerous. The power to
Code shall possess or exercise any corporate powers except those borrow money is one of those cases where even a special power of
conferred by this Code or by its articles of incorporation and except attorney is required. In the instant case, there is invariably a need of an
such as are necessary or incidental to the exercise of the powers so enabling act of the corporation to be approved by its Board of
conferred. Directors. The records of this case is bereft of any evidence that
Intertrade through its Board of Directors, conferred upon Arrieta and
Aguenza Vs. Metrobank (271 SCRA 1) Lilia Perez the authority to contract a loan with Metrobank and execute
the promissory note as a security therefor. Neither a board resolution
nor a stockholder's resolution was presented by Metrobank to show
Facts: that Arrieta and Lilia Perez were empowered by Intertrade to execute
the promissory note.
The Board of Directors of Intertrade, through a Board Resolution,
authorized and empowered Aguenza, Intertrade's President and The bank may argue that the actuation of Arrieta and Lilia Perez was in
Arrieta, Executive Vice-President, respectively, to jointly apply for and accordance with the ordinary course of business usages and practices
open credit lines with private respondent Metrobank. Pursuant to such of Intertrade. However, this contention is devoid of merit because the
authority, Aguenza and Arrieta executed several trust receipts from prevailing practice in Intertrade was to explicitly authorize an officer to
May to June, 1977, the aggregate value of which amounted to contract loans in behalf of the corporation. This is evidenced by the fact
P562,443.46, with Intertrade as the entrustee and Metrobank as the that previous to the controversy, the Intertrade Board of Directors,
entruster. through a board resolution, jointly empowered and authorized
Aguenza and Arrieta to negotiate, apply for, and open credit lines with
Aguenza and Arrieta executed a Continuing Suretyship Agreement Metrobank's. The participation of these two was mandated to be joint
whereby both bound themselves jointly and severally with Intertrade to and not separate and individual.
pay Metrobank whatever obligation Intertrade incurs, but not
exceeding the amount P750,000.00. In the case at bench, only respondent Arrieta, together with a
bookkeeper of the corporation, signed the promissory notes, without
In this connection, Metrobank's Debit Memo to Intertrade showed full the participation and approval of Aguenza. Moreover, the enabling
settlement of the letters of credit covered by said trust receipts in the corporate act on this particular transaction has not been obtained.
total amount P562,443.46. Neither has it been shown that any provision of the charter or any
other act of the Board of Directors exists to confer power on the
Executive Vice President acting alone and without the concurrence of
Arrieta and Lilia P. Perez, bookkeeper in the employ of Intertrade, its President, to execute the disputed document.
obtained P500,000.00 loan from private respondent Metrobank. Both
executed Promissory Note in favor or said bank in the amount of
P500,000,00. Under said note, private respondents Arrieta and Perez Thus, preceding from the premise that the subject loan was not the
promised to pay said amount, jointly and severally, in twenty five (25) responsibility of Intertrade, it follows that the undertaking of Arrieta
equal installments of P20,000.00 each starting on April 20, 1979 with and the bookkeeper was not an undertaking covered by the Continuing
interest of 18.704% per annum , and in case of default, a further 8 % Suretyship Agreement. The rule is that a contract of surety is never
per annum presumed; it must be express and cannot extend to more than what is
stipulated, It is strictly construed against the creditor, every doubt
being resolved against enlarging the liability of the surety.
Arrieta and Perez defaulted in the payment of several installments thus
resulting in the entire obligation becoming due and demandable. Thus,
Metrobank instituted suit against Intertrade, Vitaliado Arrieta, Lilia The present obligation incurred in subject contract of loan, as secured
Perez and her husband, Patricio Perez, to collect not only the unpaid by the Arrieta and Perez promissory note, is not the obligation of the
principal obligation, but also interests, fees and penalties, exemplary corporation and petitioner Aguenza, but the individual and personal
damages, as well as attorney's fees and costs of suit. obligation of private respondents Arrieta and Lilia Perez.

More than a year after Metrobank filed its original complaint, it filed
an Amended Complaint for the sole purpose of impleading petitioner
as liable for the loan made by Arrieta and Perez, notwithstanding the Lopez Realty Vs. Fontecha (246 SCRA 183)
fact that such liability is being claimed on account of a Continuing
Suretyship Agreement executed by Aguenza and Arrieta especifically to
guarantee the credit line applied for by and granted to, Intertrade, Facts:
through petitioner and Arrieta who were specially given authority by
Intertrade to open credit lines with Metrobank. The obligations Lopez Realty, Inc., is a corporation engaged in real estate business,
incurred by Intertrade under such credit lines were completely paid as while Asuncion Lopez Gonzales is one of its majority shareholders.
evidenced by private respondent Metrobank's debit memo in the full
amount of P562,443.46.
Except for Arturo F. Lopez, the rest of the shareholders also sit as
members of the Board of Directors.

100
On August 17, 1981, except for Asuncion Lopez Gonzales who was then Despite the alleged lack of notice to petitioner Asuncion Lopez
abroad, the remaining members of the Board of Directors, namely: Gonzales at that time the assailed resolutions were passed, we can
Rosendo de Leon, Benjamin Bernardino, and Leo Rivera, convened a glean from the records that she was aware of the corporation's
special meeting and passed a resolution which reads: obligation under the said resolutions. More importantly, she
acquiesced thereto. As pointed out by private respondents, petitioner
Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos.
Resolved, as it is hereby resolved that the gratuity (pay) of the
81-10-510 and 81-10-506, both dated October 15, 1981, evidencing the
employees be given as follows:
2nd installment of the gratuity pay of private respondents Mila
Refuerzo and Florentina Fontecha.
(a) Those who will be laid off be given the full amount of gratuity; (b)
Those who will be retained will receive 25% of their gratuity (pay) due
The conduct of petitioners after the passage of resolutions dated
on September 1 , 1981, and another 25% on January 1, 1982, and 50%
August, 17, 1951 and September 1, 1981, had estopped them from
to be retained by the office in the meantime .
assailing the validity of said board resolutions.

Private respondents were the retained employees of the corporation.

Assuming, arguendo , that there was no notice given to Asuncion
The private respondents requested for the full payment of their gratuity
Lopez Gonzalez during the special meetings held on August 17, 1981
pay. Their request was granted in a special meeting held on September
and September 1, 1981, it is erroneous to state that the resolutions
1, 1981.
passed by the board during the said meetings were ultra vires . In legal
parlance, "ultra vires "act refers to one which is not within the
At that, time, however, Asuncion Lopez Gonzales was still abroad. corporate powers conferred by the Corporation Code or Articles of
Allegedly, while she was still out of the country, she sent a cablegram to Incorporation or not necessary or incidental in the exercise of the
the corporation, objecting to certain matters taken up by the board in powers so conferred.
her absence, such as the sale of some of the assets of the corporation.
Upon her return, she flied a derivative suit with the Securities and
The assailed resolutions before us cover a subject which concerns the
Exchange Commission (SEC) against majority shareholder Arturo F.
benefit and welfare of the company's employees. To stress, providing
Lopez.
gratuity pay for its employees is one of the express powers of the
corporation under the Corporation Code, hence, petitioners cannot
Notwithstanding the "corporate squabble" between petitioner invoke the doctrine of ultra vires to avoid any liability arising from the
Asuncion Lopez Gonzales and Arturo Lopez, the first two (2) issuance the subject resolutions.
installments of the gratuity pay of private respondents Florentina
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista were
TITLE V
paid by petitioner corporation.
BY LAWS
The vouchers for the third installments of gratuity pay of said private
respondents (Florentina Fontecha, Mila Refuerzo, Marcial Mamaril
and Perfecto Bautista) were cancelled by petitioner Asuncion Lopez Section 46 –
Gonzales. Likewise, the first, second and third installments of gratuity
pay of the rest of private respondents, particularly, Edward Mamaril, Adoption of by-laws. - Every corporation formed under this Code
Marissa Pascual and Allan Pimentel, were prepared but cancelled by must, within one (1) month after receipt of official notice of the
petitioner Asuncion Lopez Gonzales. Despite private respondents' issuance of its certificate of incorporation by the Securities and
repeated demands for their gratuity pay, corporation refused to pay the Exchange Commission, adopt a code of by-laws for its government not
same. inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at
Issue: least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members
W/N the board resolutions granting gratuity pay to their retained voting for them and shall be kept in the principal office of the
employees, are ultra vires on the ground that Asuncion Lopez Gonzales corporation, subject to the inspection of the stockholders or members
was not duly notified of the said special meetings during office hours. A copy thereof, duly certified to by a majority of
the directors or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and Exchange
Ruling:
Commission which shall be attached to the original articles of
incorporation.
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed
Notwithstanding the provisions of the preceding paragraph, by-laws
by its charter or by the general law. Thus, directors must act as a body
may be adopted and filed prior to incorporation; in such case, such by-
in a meeting called pursuant to the law or the corporation's by-laws,
laws shall be approved and signed by all the incorporators and
otherwise, any action taken therein may be questioned by any objecting
submitted to the Securities and Exchange Commission, together with
director or shareholder.
the articles of incorporation.

Be that as it may, jurisprudence tells us that an action of the board of

In all cases, by-laws shall be effective only upon the issuance by the
directors during a meeting, which was illegal for lack of notice, may be
Securities and Exchange Commission of a certification that the by-laws
ratified either expressly, by the action of the directors in subsequent
are not inconsistent with this Code.
legal meeting, or impliedly, by the corporation's subsequent course of
conduct.
The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
In the case at bench, it was established that petitioner corporation did
building and loan association, trust company, insurance company,
not issue any resolution revoking nor nullifying the board resolutions
public utility, educational institution or other special corporations
granting gratuity pay to private respondents. Instead, they paid the
governed by special laws, unless accompanied by a certificate of the
gratuity pay, particularly, the first two (2) installments thereof, of
appropriate government agency to the effect that such by-laws or
private respondents Florentina Fontecha, Mila Refuerzo, Marcial
amendments are in accordance with law.
Mamaril and Perfecto Bautista.

101
 Organization and commencement of transaction of corporate business
are but conditions subsequent and not prerequisites for acquisition of
corporate personality. The adoption and filing of by-laws is also a
Loyola Grand Villas Vs. CA (276 SCRA 681)
condition subsequent. Under Section 19 of the Corporation Code, a
Corporation commences its corporate existence and juridical
Facts: personality and is deemed incorporated from the date the Securities
and Exchange Commission issues certificate of incorporation under its
official seal. This may be done even before the filing of the by-laws,
LGVHAI was organized on February 8, 1983 as the association of which under Section 46 of the Corporation Code, must be adopted
homeowners and residents of the Loyola Grand Villas. It was registered "within one month after receipt of official notice of the issuance of its
with the Home Financing Corporation, the predecessor of herein certificate of incorporation."
respondent HIGC, as the sole homeowners' organization in the said
subdivision under Certificate of Registration No. 04-197. It was
organized by the developer of the subdivision and its first president Sawadjaan Vs. CA (459 SCRA 516)
was Victorio V. Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file its corporate by-laws.
Facts:
When Soliven inquired about the status of LGVHAI, Atty. Joaquin A.
Bautista, the head of the legal department of the HIGC, informed him Sappari K. Sawadjaan was among the first employees of the Philippine
that LGVHAI had been automatically dissolved for two reasons. First, Amanah Bank (PAB) when it was created by virtue of Presidential
it did not submit its by-laws within the period required by the Decree No. 264 on 02 August 1973. He rose through the ranks,
Corporation Code and, second, there was non-user of corporate charter working his way up from his initial designation as security guard, to
because HIGC had not received any report on the association's settling clerk, bookkeeper, credit investigator, project analyst,
activities. Apparently, this information resulted in the registration of appraiser/ inspector, and eventually, loans analyst.
the South Association with the HIGC. It filed its by-laws on July 26,
1989. While still designated as appraiser/investigator, Sawadjaan was
assigned to inspect the properties offered as collaterals by Compressed
These developments prompted the officers of the LGVHAI to lodge a Air Machineries and Equipment Corporation (CAMEC) for a credit line
complaint with the HIGC. They questioned the revocation of LGVHAI's of Five Million Pesos (P5,000,000.00). The properties consisted of
certificate of registration without due notice and hearing and two parcels of land. On the basis of his Inspection and Appraisal
concomitantly prayed for the cancellation of the certificates of Report, the PAB granted the loan application.
registration of the North and South Associations by reason of the
earlier issuance of a certificate of registration in favor of LGVHAI. In the meantime, Sawadjaan was promoted to Loans Analyst I on 01
July 1989.
Issue:
Subsequently, Congress passed Republic Act 6848 creating the Al-
W/N LGVHAI's failure to file its by-laws within the period prescribed Amanah Islamic Investment Bank (AIIBP) and repealing P.D. No. 264
by Section 46 of the Corporation Code resulted in the automatic (which created the PAB). All assets, liabilities and capital accounts of
dissolution of LGVHAI the PAB were transferred to the AIIBP, and the existing personnel of
the PAB were to continue to discharge their functions unless
discharged. In the ensuing reorganization, Sawadjaan was among the
Ruling: personnel retained by the AIIBP.

Section 46 aforequoted reveals the legislative intent to attach a When CAMEC failed to pay despite the given extension, the Islamic
directory, and not mandatory, meaning for the word "must" in the first Bank, discovered that the title to one of the property was spurious, the
sentence thereof. Note should be taken of the second paragraph of the property described therein non-existent, and that the other property
law which allows the filing of the by-laws even prior to incorporation. had a prior existing mortgage in favor of one Divina Pablico.
This provision in the same section of the Code, rules out mandatory
compliance with the requirement of filing the by-laws "within one (1)
month after receipt of official notice of the issuance of its certificate of The Board of Directors of the AIIBP created an Investigating
incorporation by the Securities and Exchange Commission." It Committee to look into the CAMEC transaction, which had cost the
necessarily follows that failure to file the by-laws within that period bank Six Million Pesos (P6,000,000.00) in losses. Sawadjaan received
does not imply the "demise" of the corporation. By-laws may be a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De
necessary for the "government" of the corporation but these are Ocampo charging him with Dishonesty in the Performance of Official
subordinate to the articles of incorporation as well as to the Duties. Upon recommendation of the Investigating Committee, the
Corporation Code and related statutes. There are in fact cases where Board of Directors of the Islamic Bank finds Sawadjaan guilty of
by-laws are unnecessary to corporate existence or to the valid exercise Dishonesty in the Performance of Official Duties and/or Conduct
of corporate powers. Prejudicial to the Best Interest of the Service and imposing the penalty
of Dismissal from the Service. On reconsideration, the Board of
Directors reduced the penalty imposed on petitioner from dismissal to
Non-filing of the by-laws will not result in automatic dissolution of the suspension for a period of six (6) months and one (1) day.
corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to
"suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation" on the ground inter alia of Sawadjaan, by himself, filed a Motion for New Trial in the Court of
"failure to file by-laws within the required period." It is clear from this Appeals based on the following grounds: fraud, accident, mistake or
provision that there must first of all be a hearing to determine the excusable negligence and newly discovered evidence. He claimed that
existence of the ground, and secondly, assuming such finding, the he had recently discovered that at the time his employment was
penalty is not necessarily revocation but may be only suspension of the terminated, the AIIBP had not yet adopted its corporate by-laws. He
charter. In fact, under the rules and regulations of the SEC, failure to attached a Certification by the Securities and Exchange Commission
file the by-laws on time may be penalized merely with the imposition of (SEC) that it was only on 27 May 1992 that the AIIBP submitted its
an administrative fine without affecting the corporate existence of the draft by-laws to the SEC, and that its registration was being held in
erring firm. abeyance pending certain corrections being made thereon. Sawadjaan
argued that since the AIIBP failed to file its by-laws within 60 days
from the passage of Rep. Act No. 6848, as required by Sec. 51 of the
It should be stressed in this connection that substantial compliance said law, the bank and its stockholders had “already forfeited its
with conditions subsequent will suffice to perfect corporate personality. franchise or charter, including its license to exist and operate as a

102
corporation,” and thus no longer have “the legal standing and CBC informed VGCCI of the above-mentioned foreclosure proceedings
personality to initiate an administrative case.” and requested that the pledged stock be transferred to its CBC's name
and the same be recorded in the corporate books. However, VGCCI
wrote petitioner expressing its inability to accede to petitioner's request
Issue:
in view of Calapatia's unsettled accounts with the club.

W/N the failure of the Islamic Bank to file its by-laws within 60 days
Despite the foregoing, Notary Public de Vera held a public auction and
from the passage of Rep. Act No. 6848, as required by Sec. 51 of the
CBC emerged as the highest bidder at P20,000.00 for the pledged
said law, the bank and its stockholders had “already forfeited its
stock. Consequently, petitioner was issued the corresponding
franchise or charter, including its license to exist and operate as a
certificate of sale.
corporation,” and thus no longer have “the legal standing and
personality to initiate an administrative case.”
VGCCI sent Calapatia a notice demanding full payment of his overdue
account in the amount of P18,783.24. Subsequently, VGCCI caused to
Ruling:
be published in the newspaper Daily Express a notice of auction sale of
a number of its stock certificates included therein was Calapatia's own
The AIIBP was created by Rep. Act No. 6848. It has a main office share of stock.
where it conducts business, has shareholders, corporate officers, a
board of directors, assets, and personnel. It is, in fact, here
CBC protested the sale by VGCCI of the subject share of stock and
represented by the Office of the Government Corporate Counsel, “the
thereafter filed a case with for the nullification of the auction and for
principal law office of government-owned corporations, one of which is
the issuance of a new stock certificate in its name.
respondent bank.” At the very least, by its failure to submit its by-laws
on time, the AIIBP may be considered a de facto corporation whose
right to exercise corporate powers may not be inquired into collaterally Issue:
in any private suit to which such corporations may be a party.
W/N VGCCI had the right to sell the share in question in accordance
Moreover, a corporation which has failed to file its by-laws within the with the express provision found in its by-laws
prescribed period does not ipso facto lose its powers as such. The SEC
Rules on Suspension/Revocation of the Certificate of Registration of
Ruling:
Corporations, details the procedures and remedies that may be availed
of before an order of revocation can be issued. There is no showing
that such a procedure has been initiated in this case. The purpose of a by-law is to regulate the conduct and define the duties
of the members towards the corporation and among themselves. They
are self-imposed and, although adopted pursuant to statutory
In any case, petitioner’s argument is irrelevant because this case is not
authority, have no status as public law.
a corporate controversy, but a labor dispute; and it is an employer’s
basic right to freely select or discharge its employees, if only as a
measure of self-protection against acts inimical to its interest. Therefore, it is the generally accepted rule that third persons are not
Regardless of whether AIIBP is a corporation, a partnership, a sole bound by by-laws, except when they have knowledge of the provisions
proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP either actually or constructively. In the case of Fleisher v . Botica
is the petitioner’s employer. AIIBP chose to retain his services during Nolasco , 47 Phil. 584, the Supreme Court held that the by-law
its reorganization, controlled the means and methods by which his restricting the transfer of shares cannot have any effect on the
work was to be performed, paid his wages, and, eventually, terminated transferee of the shares in question as he "had no knowledge of such
his services. by-law when the shares were assigned to him. He obtained them in
good faith and for a valuable consideration. He was not a privy to the
contract created by the by-law between the shareholder . . and the
And though he has had ample opportunity to do so, the petitioner has
Botica Nolasco, Inc . Said by-law cannot operate to defeat his right as a
not alleged that he is anything other than an employee of AIIBP. He
purchaser.
has neither claimed, nor shown, that he is a stockholder or an officer of
the corporation. Having accepted employment from AIIBP, and
rendered his services to the said bank, received his salary, and accepted In order to be bound, the third party must have acquired knowledge of
the promotion given him, it is now too late in the day for petitioner to the pertinent by-laws at the time the transaction or agreement between
question its existence and its power to terminate his services. One, said third party and the shareholder was entered into, in this case, at
who assumes an obligation to an ostensible corporation as such, cannot the time the pledge agreement was executed. VGCCI could have easily
resist performance thereof on the ground that there was in fact no informed petitioner of its by-laws when it sent notice formally
corporation. recognizing petitioner as pledgee of one of its shares registered in
Calapatia's name. Petitioner's belated notice of said by-laws at the time
of foreclosure will not suffice.
China Banking Vs. CA (270 SCRA 503)

Finally, Sec. 63 of the Corporation Code which provides that "no shares
Facts:
of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation" cannot be utilized by
Galicano Calapatia, Jr., a stockholder of private Valley Golf & Country VGCCI. The term "unpaid claim" refers to "any unpaid claim arising
Club, Inc., pledged his Stock Certificate No. 1219 to China Banking from unpaid subscription, and not to any indebtedness which a
Corporation. subscriber or stockholder may owe the corporation arising from any
other transaction." In the case at bar, the subscription for the share in
question has been fully paid as evidenced by the issuance of
CBC wrote VGCCI requesting that the aforementioned pledge
Membership Certificate No. 1219. What Calapatia owed the corporation
agreement be recorded in its books which VGCCI replied that the deed
were merely the monthly dues. Hence, the aforequoted provision does
of pledge executed by Calapatia in CBC's favor was duly noted in its
not apply.
corporate books.

Calapatia obtained a loan of P20,000.00 from CBC, payment of which Section 47 –

was secured by the aforestated pledge agreement still existing between
Calapatia and CBC. Due to Calapatia's failure to pay his obligation,
CBC, filed a petition for extrajudicial foreclosurere questing the latter
to conduct a public auction sale of the pledged stock.
103
Contents of by-laws. - Subject to the provisions of the Constitution, Enrique Salafranca started working with Philamlife Village
this Code, other special laws, and the articles of incorporation, a Homeowners Association as administrative officer for a period of six
private corporation may provide in its by-laws for: months. He was then reappointed to his position three more times. As
administrative officer, he was generally responsible for the
management of the village's day to day activities. After his term of
1. The time, place and manner of calling and conducting regular or employment expired, he still continued to work in the same capacity,
special meetings of the directors or trustees; albeit, without the benefit of a renewed contract.

2. The time and manner of calling and conducting regular or special Thereafter, Philamlife decided to amend its by-laws. Included therein
meetings of the stockholders or members; was a provision regarding officers, specifically, the position of
administrative officer under which said officer shall hold office at the
3. The required quorum in meetings of stockholders or members and pleasure of the Board of Directors. In view of this development, the
the manner of voting therein; association, informed Salafranca that his term of office shall be
coterminus with the Board of Directors which appointed him to his
position. Furthermore, until he submits a medical certificate showing
4. The form for proxies of stockholders and members and the manner his state of health, his employment shall be on a month-to-month
of voting them; basis. Notwithstanding the failure of herein petitioner to submit his
medical certificate, he continued working until his termination in
5. The qualifications, duties and compensation of directors or trustees, December 1992.
officers and employees;
Claiming that his services had been unlawfully and unceremoniously
6. The time for holding the annual election of directors of trustees and dispensed with, petitioner filed a complaint for illegal dismissal with
the mode or manner of giving notice thereof; money claims and for damages.

7. The manner of election or appointment and the term of office of all Issue:
officers other than directors or trustees;
W/N the dismissal of Salafranca is valid on the theory that the latter's
8. The penalties for violation of the by-laws; position is coterminus with that of the Village's Board of Directors, as
provided for in its amended by-laws

9. In the case of stock corporations, the manner of issuing stock

certificates; and Ruling:

10. Such other matters as may be necessary for the proper or Admittedly, the right to amend the by-laws lies solely in the discretion
convenient transaction of its corporate business and affairs. (21a) of the employer, this being in the exercise of management prerogative
or business judgment. However this right, extensive as it may be,
cannot impair the obligation of existing contracts or rights.
Section 48 –

Amendments to by-laws. - The board of directors or trustees, by a Prescinding from these premises, Philam's insistence that it can legally
majority vote thereof, and the owners of at least a majority of the dismiss petitioner on the ground that his tenure has expired is
outstanding capital stock, or at least a majority of the members of a untenable. To reiterate, petitioner, being a regular employee, is entitled
non-stock corporation, at a regular or special meeting duly called for to security of tenure, hence, his services may only be terminated for
the purpose, may amend or repeal any by-laws or adopt new by-laws. causes provided by law. A contrary interpretation would not find
The owners of two-thirds (2/3) of the outstanding capital stock or two- justification in the laws or the Constitution. If we were to rule
thirds (2/3) of the members in a non-stock corporation may delegate to otherwise, it would enable an employer to remove any employee from
the board of directors or trustees the power to amend or repeal any by- his employment by the simple expediency of amending its by-laws and
laws or adopt new by-laws: Provided, That any power delegated to the providing that his/her position shall cease to exist upon the occurrence
board of directors or trustees to amend or repeal any by-laws or adopt of a specified event.
new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a If private respondent wanted to make the petitioner's position co-
majority of the members in non-stock corporations, shall so vote at a terminus with that of the Board of Directors, then the amendment
regular or special meeting. must be effective after petitioner's stay with the private respondent, not
during his term. Obviously, the measure taken by the private
Whenever any amendment or new by-laws are adopted, such respondent in amending its by-laws is nothing but a devious, but
amendment or new by-laws shall be attached to the original by-laws in crude, attempt to circumvent petitioner's right to security of tenure as a
the office of the corporation, and a copy thereof, duly certified under regular employee guaranteed under the Labor Code.
oath by the corporate secretary and a majority of the directors or
trustees, shall be filed with the Securities and Exchange Commission TITLE VI
the same to be attached to the original articles of incorporation and MEETINGS
original by-laws.

Section 49 –
The amended or new by-laws shall only be effective upon the issuance
by the Securities and Exchange Commission of a certification that the
same are not inconsistent with this Code. Kinds of meetings. - Meetings of directors, trustees, stockholders, or
members may be regular or special. (n)

Section 50 –

Salafranca Vs. Philamlife (300 SCRA 469)

Regular and special meetings of stockholders or members. -
Regular meetings of stockholders or members shall be held annually on
Facts: a date fixed in the by-laws, or if not so fixed, on any date in April of
every year as determined by the board of directors or trustees:

104
Provided, That written notice of regular meetings shall be sent to all Ruling:
stockholders or members of record at least two (2) weeks prior to the
meeting, unless a different period is required by the by-laws. Section 3, Article III, of the Constitution and By-laws of the association
provides:
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however, Notice of the time and place of holding of any annual
That at least one (1) week written notice shall be sent to all meeting, or any special meeting, the members, shall be given
stockholders or members, unless otherwise provided in the by-laws. either by posting the same in a postage prepaid envelope,
addressed to each member on the record at the address left
Notice of any meeting may be waived, expressly or impliedly, by any by such member with the Secretary of the Association, or at
stockholder or member. his known post-office address or by delivering the same
person at least (5) days before the date set for such meeting. .
. . In lieu of addressing or serving personal notices to the
Whenever, for any cause, there is no person authorized to call a members, notice of the members, notice of a regular annual
meeting, the Secretaries and Exchange Commission, upon petition of a meeting or of a special meeting of the members may be given
stockholder or member on a showing of good cause therefor, may issue by posting copies of said notice at the different departments
an order to the petitioning stockholder or member directing him to call and plants of the San Miguel Brewery Inc., not less than five
a meeting of the corporation by giving proper notice required by this (5) days prior to the date of the meeting.
Code or by the by-laws. The petitioning stockholder or member shall
preside thereat until at least a majority of the stockholders or members
present have been chosen one of their number as presiding officer. Notice of a special meeting of the members should be given at leasts
five days before the date of the meeting. Therefore, the five days
previous notice required would not be complied with.
BOD Vs. Tan (105 Phil 426)
As regards the creation of a committee of three vested with the
Facts: authority to call, conduct and supervise the election, and the
appointment thereto of Candido C. Viernes as chairman and the
John Castillo et al., commenced a suit in the court of First Instance of representative of the court and one representative each from the
Manila to declare null and void election of the members of the board of parties, the Court in the exercise of its equity jurisdiction may
directors of the SMB Workers Savings and Loan Association, Inc. and appointment such committee, it having been shown that the Election
of the members of the board of directors of the association to call for Committee provided for in section 7 of the By-laws of the association
and hold another election in accordance with its constitution and by- that conducted the election annulled by the respondent court if allowed
laws and the Corporation Law; to restain the defendants who had been to act as such may jeopardise the rights of the respondents.
illegally elected as members of the board of directors from exercising
the functions of their office; to order the defendants to pay the In a proper proceeding a court for equity may direct the holding of a
plaintiffs attorney's fees and costs of the suit; and to grant them other stockholders' meeting under the control of a special master, and the
just and equitable relief. action taken at such a meeting will not be set aside because of a
wrongful use of the court' interlocutory decree, where not brought to
The Court rendered judgment declaring the election held null and void, the attention of the court prior to the meeting.
ordering the BOD to call for and hold another election in accordance
with the constitution and by-laws of the association and the A court of equity may, on showing of good reason, appoint a master to
Corporation Law, and sentencing the defendants to pay the plaintiffs conduct and supervise an election of directors when it appears that a
the sum of P1,500 as attorney's fees, and to pay the cost of the suit fair election cannot make directions contrary to statute and public
policy with respect to the conduct of such election.
In compliance with the judgment rendered by the Court, the election
committee composed of Quintin Tesalona, Manuel Dumaup and Jose' Section 51 –
Capinio Santos set the meeting of the members of the association for
28 March at 5:30 o'clock in the afternoon to elect the new members of
the board of directors. Place and time of meetings of stockholders or members. -
Stockholders' or members' meetings, whether regular or special, shall
be held in the city or municipality where the principal office of the
The plaintiff filed an ex-parte motion alleging that the election corporation is located, and if practicable in the principal office of the
committee that had called the meeting of members of the association is corporation: Provided, That Metro Manila shall, for purposes of this
composed of the same members that had conducted and supervised the section, be considered a city or municipality.
election of the members of the board of directors that was declared null
and void by the Court. In view thereof it would be inequitable to allow
them to conduct and supervise again the forthcoming election. The Notice of meetings shall be in writing, and the time and place thereof
election to be conducted and supervised by the said committee would stated therein.
not be held in accordance with the constitution and by laws of the
association providing for five days notice to the members before the All proceedings had and any business transacted at any meeting of the
election, since the notice was posted and sent out only on 26 March, stockholders or members, if within the powers or authority of the
and the election would be held on 28 March, or two days after notice. corporation, shall be valid even if the meeting be improperly held or
The notice that beginning 26 March any member could secure his called, provided all the stockholders or members of the corporation are
ballot and proxy from the office of the association is in violation of present or duly represented at the meeting.
section 5, Article III of the Constitution and By-laws, which prohibits
voting by proxy in the election of members of the board of directors,
and that the defendant did not show that arrangement is being made Section 52 –
"to guarantee that the election will be held in accordance with the
constitution and by laws."
Quorum in meetings. - Unless otherwise provided for in this Code
or in the by-laws, a quorum shall consist of the stockholders
They prayed that the Court appoint its representative or representing a majority of the outstanding capital stock or a majority of
representatives, whose compensation shall be paid out of the funds of the members in the case of non-stock corporations.
the association, to supervise and conduct the election ordered by it.
Lanuza Vs. CA (454 SCRA 54)
105
Facts: interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The
stock and transfer book of PMMSI cannot be used as the sole basis for
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
determining the quorum as it does not reflect the totality of shares
incorporated, with seven hundred (700) founders’ shares and seventy-
which have been subscribed, more so when the articles of
six (76) common shares as its initial capital stock subscription reflected
incorporation show a significantly larger amount of shares issued and
in the articles of incorporation. However, Onrubia et. al. and their
outstanding as compared to that listed in the stock and transfer book.
predecessors who were in control of PMMSI registered the company’s
stock and transfer book for the first time in 1978, recording thirty-three
(33) common shares as the only issued and outstanding shares of At the time the corporation was set-up, there were already seven
PMMSI. In 1979, a special stockholders’ meeting was called and held hundred seventy-six (776) issued and outstanding shares as reflected in
on the basis of what was considered as a quorum of twenty-seven (27) the articles of incorporation. No proof was adduced as to any
common shares, representing more than two-thirds (2/3) of the transaction effected on these shares from the time PMMSI was
common shares issued and outstanding. incorporated up to the time the instant petition was filed, except for the
thirty-three (33) shares which were recorded in the stock and transfer
book in 1978, and the additional one hundred thirty-two (132) in 1982.
In 1982, the heirs of one of the original incorporators, Juan Acayan,
But obviously, the shares so ordered recorded in the stock and transfer
filed a petition with the Securities and Exchange Commission (SEC) for
book are among the shares reflected in the articles of incorporation as
the registration of their property rights over one hundred (120)
the shares subscribed to by the incorporators named therein.
founders’ shares and twelve (12) common shares owned by their
father. The SEC hearing officer held that the heirs of Acayan were
entitled to the claimed shares and called for a special stockholders’ One who is actually a stockholder cannot be denied his right to vote by
meeting to elect a new set of officers. The SEC En Banc affirmed the the corporation merely because the corporate officers failed to keep its
decision. As a result, the shares of Acayan were recorded in the stock records accurately. A corporation’s records are not the only evidence of
and transfer book. the ownership of stock in a corporation. In an American case, persons
claiming shareholders status in a professional corporation were listed
as stockholders in the amendment to the articles of incorporation. On
On 06 May 1992, a special stockholders’ meeting was held to elect a
that basis, they were in all respects treated as shareholders. In fact, the
new set of directors. Private respondents thereafter filed a petition with
acts and conduct of the parties may even constitute sufficient evidence
the SEC questioning the validity of the 06 May 1992 stockholders’
of one’s status as a shareholder or member. In the instant case, no less
meeting, alleging that the quorum for the said meeting should not be
than the articles of incorporation declare the incorporators to have in
based on the 165 issued and outstanding shares as per the stock and
their name the founders and several common shares. Thus, to
transfer book, but on the initial subscribed capital stock of seven
disregard the contents of the articles of incorporation would be to
hundred seventy-six (776) shares, as reflected in the 1952 Articles of
pretend that the basic document which legally triggered the creation of
Incorporation. The petition was dismissed. Appeal was made to the
the corporation does not exist and accordingly to allow great injustice
SEC En Banc, which granted said appeal, holding that the shares of the
to be caused to the incorporators and their heirs.
deceased incorporators should be duly represented by their respective
administrators or heirs concerned. The SEC directed the parties to call
for a stockholders meeting on the basis of the stockholdings reflected Section 53 –
in the articles of incorporation for the purpose of electing a new set of
officers for the corporation.
Regular and special meetings of directors or trustees. -
Regular meetings of the board of directors or trustees of every
Issue: corporation shall be held monthly, unless the by-laws provide
otherwise.
W/N the basis the outstanding capital stock and accordingly also for
determining the quorum at stockholders’ meetings it should be the Special meetings of the board of directors or trustees may be held at
1978 stock and transfer book or it should be the 1952 articles of any time upon the call of the president or as provided in the by-laws.
incorporation
Meetings of directors or trustees of corporations may be held anywhere
Ruling: in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this the meeting must be sent to every director or trustee at least one (1)
Code or in the by-laws, a quorum shall consist of the stockholders day prior to the scheduled meeting, unless otherwise provided by the
representing a majority of the outstanding capital stock or majority of by-laws. A director or trustee may waive this requirement, either
the members in the case of non-stock corporation. expressly or impliedly.

Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined.— The term “outstanding

capital stock” as used in this code, means the total shares of stock
issued to subscribers or stockholders whether or not fully or partially
paid (as long as there is binding subscription agreement) except
treasury shares.
Expertravel Vs. CA (459 SCRA 147)
Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders’ shares or common Facts:
shares. In the instant case, two figures are being pitted against each
other— those contained in the articles of incorporation, and those Korean Airlines is a corporation established and registered in the
listed in the stock and transfer book. Republic of South Korea and licensed to do business in the
Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
To base the computation of quorum solely on the obviously deficient, if while its appointed counsel was Atty. Mario Aguinaldo and his law
not inaccurate stock and transfer book, and completely disregarding firm.
the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors in

106
In 1999, KAL, through Atty. Aguinaldo, filed a Complaint against ETI file the complaint and execute the required certification against forum
for the collection of the principal amount of P260,150.00, plus shopping.
attorney’s fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo,
It is settled that the requirement to file a certificate of non-forum
who indicated therein that he was the resident agent and legal counsel
shopping is mandatory and that the failure to comply with this
of KAL and had caused the preparation of the complaint.
requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court or
ETI filed a motion to dismiss the complaint on the ground that Atty. other tribunal that there are no other pending cases involving basically
Aguinaldo was not authorized to execute the verification and certificate the same parties, issues and causes of action. Hence, the certification
of non-forum shopping as required by Section 5, Rule 7 of the Rules of must be accomplished by the party himself because he has actual
Court. KAL opposed the motion, contending that Atty. Aguinaldo was knowledge of whether or not he has initiated similar actions or
its resident agent and was registered as such with the Securities and proceedings in different courts or tribunals. Even his counsel may be
Exchange Commission (SEC) as required by the Corporation Code of unaware of such facts. Hence, the requisite certification executed by
the Philippines. It was further alleged that Atty. Aguinaldo was also the the plaintiff’s counsel will not suffice.
corporate secretary of KAL. Appended to the said opposition was the
identification card of Atty. Aguinaldo, showing that he was the lawyer
In a case where the plaintiff is a private corporation, the certification
of KAL.
may be signed, for and on behalf of the said corporation, by a
specifically authorized person, including its retained counsel, who has
Atty. Aguinaldo claimed that he had been authorized to file the personal knowledge of the facts required to be established by the
complaint through a resolution of the KAL Board of Directors approved documents.
during a special meeting. KAL was given a period of 10 days within
which to submit a copy of the said resolution.
The records show that the petitioner filed a motion to dismiss the
complaint on the ground that the respondent failed to comply with
Finally, KAL submitted on March 6, 2000 an Affidavit of even date, Section 5, Rule 7 of the Rules of Court. The respondent opposed the
executed by its general manager Suk Kyoo Kim, alleging that the board motion on December 1, 1999, on its contention that Atty. Aguinaldo, its
of directors conducted a special teleconference on June 25, 1999, which resident agent, was duly authorized to sue in its behalf. The
he and Atty. Aguinaldo attended. It was also averred that in that same respondent, however, failed to establish its claim that Atty. Aguinaldo
teleconference, the board of directors approved a resolution was its resident agent in the Philippines. Even the identification card
authorizing Atty. Aguinaldo to execute the certificate of non-forum of Atty. Aguinaldo which the respondent appended to its pleading
shopping and to file the complaint. Suk Kyoo Kim also alleged, merely showed that he is the company lawyer of the respondent’s
however, that the corporation had no written copy of the aforesaid Manila Regional Office.
resolution.
The respondent, through Atty. Aguinaldo, announced the holding of
Issue: the teleconference only during the hearing of January 28, 2000; Atty.
Aguinaldo then prayed for ten days, or until February 8, 2000, within
which to submit the board resolution purportedly authorizing him to
W/N KAL’s holding of a special meeting through teleconferencing
file the complaint and execute the required certification against forum
authorizing Atty. Aguinaldo to execute and sign the verification and
shopping. The respondent, however, failed to comply to submit the
certificate of non-forum shopping is valid
said board resolution authorizing him to verify and sign the certificate
of NFS.
Ruling:
Section 54 –
A teleconference represents a unique alternative to face-to-face (FTF)
meetings. It was first introduced in the 1960’s with American
Telephone and Telegraph’s Picturephone. At that time, however, no Who shall preside at meetings. - The president shall preside at all
demand existed for the new technology. Travel costs were reasonable meetings of the directors or trustee as well as of the stockholders or
and consumers were unwilling to pay the monthly service charge for members, unless the by-laws provide otherwise.
using the picturephone, which was regarded as more of a novelty than
as an actual means for everyday communication. In time, people found Section 55 –
it advantageous to hold teleconferencing in the course of business and
corporate governance, because of the money saved, among other
advantages Right to vote of pledgors, mortgagors, and administrators. -
In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at
Indeed, teleconferencing can only facilitate the linking of people; it meetings of stockholders, unless the pledgee or mortgagee is expressly
does not alter the complexity of group communication. Although it given by the pledgor or mortgagor such right in writing which is
may be easier to communicate via teleconferencing, it may also be recorded on the appropriate corporate books.
easier to miscommunicate. Teleconferencing cannot satisfy the
individual needs of every type of meeting.
Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the
In the Philippines, teleconferencing and videoconferencing of members stockholders or members without need of any written proxy.
of board of directors of private corporations is a reality, in light of
Republic Act No. 8792. The Securities and Exchange Commission
issued SEC Memorandum Circular No. 15, on November 30, 2001, Republic Vs. Sandiganbayan (402 SCRA 84)
providing the guidelines to be complied with related to such
conferences. Thus, the Court agrees with the RTC that persons in the Facts:
Philippines may have a teleconference with a group of persons in South
Korea relating to business transactions or corporate governance.
The Presidential Commission on Good Government conducted an ETPI
(Eastern Telecommunications, Phil. Inc.) stockholders’ meeting during
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim which a PCGG controlled board of directors was elected. A special
participated in a teleconference along with the respondent’s Board of stockholders meeting was later convened by the registered ETPI
Directors, the Court is not convinced that one was conducted; even if stockholders wherein another set of board of directors was elected, as a
there had been one, the Court is not inclined to believe that a board result of which two sets of such board and officers were elected.
resolution was duly passed specifically authorizing Atty. Aguinaldo to
107
Africa, a stockholder of ETPI, alleging that the PCGG had since proxy shall be valid and effective for a period longer than five (5) years
January 29, 1988 been "illegally 'exercising' the rights of stockholders at any one time.
of ETPI," especially in the election of the members of the board of
directors, filed the above-said motion before the Sandiganbayan.
Section 59 –

Ruling:
Voting trusts. - One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or
(1) The PCGG cannot vote sequestered shares to elect the ETPI Board trustees the right to vote and other rights pertaining to the shares for a
of Directors or to amend the Articles of Incorporation for the purpose period not exceeding five (5) years at any time: Provided, That in the
of increasing the authorized capital stock unless there is a prima facie case of a voting trust specifically required as a condition in a loan
evidence showing that said shares are ill-gotten and there is an agreement, said voting trust may be for a period exceeding five (5)
imminent danger of dissipation. years but shall automatically expire upon full payment of the loan. A
voting trust agreement must be in writing and notarized, and shall
(2) The ETPI Stock and Transfer Book should be the basis for specify the terms and conditions thereof. A certified copy of such
determining which persons have the right to vote in the stockholders agreement shall be filed with the corporation and with the Securities
meeting for the election of the ETPI Board of Directors. and Exchange Commission; otherwise, said agreement is ineffective
and unenforceable. The certificate or certificates of stock covered by
the voting trust agreement shall be canceled and new ones shall be
(3) The PCGG is entitled to vote the shares ceded to it by Roberto S. issued in the name of the trustee or trustees stating that they are issued
Benedicto and his controlled corporations under the Compromise pursuant to said agreement. In the books of the corporation, it shall be
Agreement, provided that the shares are first registered in the name of noted that the transfer in the name of the trustee or trustees is made
the PCGG. The PCGG may not register the transfer of the Malacañang pursuant to said voting trust agreement.
and the Nieto shares in the ETPI Stock and Transfer Book; however, it
may vote the same as conservator provided that the PCGG satisfies the
two-tiered test devised by the Court in Cojuangco v. Calpo , whether The trustee or trustees shall execute and deliver to the transferors
PCGG may vote the sequestered shares in SMC necessitates a voting trust certificates, which shall be transferable in the same
determination of at least two factual matters: 1. whether there is prima manner and with the same effect as certificates of stock.
facie evidence showing that the said shares are ill-gotten and thus
belong to the state; and 2. whether there is an immediate danger of The voting trust agreement filed with the corporation shall be subject
dissipation thus necessitating their continued sequestration and voting to examination by any stockholder of the corporation in the same
by the PCGG while the main issue pends with the Sandiganbayan. manner as any other corporate book or record: Provided, That both the
transferor and the trustee or trustees may exercise the right of
(4) The safeguards laid down in the case of Cojuangco v. Roxas shall be inspection of all corporate books and records in accordance with the
incorporated in the ETPI Articles of Incorporation substantially provisions of this Code.
contemporaneous to, but not before, the election of the ETPI Board of
Directors. Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust
(5) Members of the Sandiganbayan shall not participate in the agreement, and thereupon shall be bound by all the provisions of said
stockholders meeting for the election of the ETPI Board of Directors. agreement.
Neither shall a Clerk of Court be appointed to call such meeting and
issue notices thereof. The Sandiganbayan shall appoint, or the parties No voting trust agreement shall be entered into for the purpose of
may agree to constitute, a committee of competent and impartial circumventing the law against monopolies and illegal combinations in
persons to call, send notices and preside at the meeting for the election restraint of trade or used for purposes of fraud.
of the ETPI Board of Directors; and (6) This Court has no jurisdiction
over the motion to cite the PCGG and "its accomplices" in contempt
and to nullify the stockholders meeting of March 17, 1997. Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificates as well as the certificates of stock in the
Section 56 – name of the trustee or trustees shall thereby be deemed canceled and
new certificates of stock shall be reissued in the name of the
transferors.
Voting in case of joint ownership of stock. - In case of shares of
stock owned jointly by two or more persons, in order to vote the same,
the consent of all the co-owners shall be necessary, unless there is a The voting trustee or trustees may vote by proxy unless the agreement
written proxy, signed by all the co-owners, authorizing one or some of provides otherwise.
them or any other person to vote such share or shares: Provided, That
when the shares are owned in an "and/or" capacity by the holders
thereof, any one of the joint owners can vote said shares or appoint a National Investment Vs. Aquino (163 SCRA 153)
proxy therefor.
Facts:
Section 57 –
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan)
Voting right for treasury shares. - Treasury shares shall have no is a Filipino-American corporation organized under the laws of the
voting right as long as such shares remain in the Treasury. Philippines, primarily engaged in the manufacture of coconut oil and
copra cake for export. In 1965, Batjak's financial condition deteriorated
to the point of bankruptcy. As of that year, Batjak's indebtedness to
Section 58 – some private banks and to the Philippine National Bank (PNB)
amounted to P11,915,000.00,
Proxies. - Stockholders and members may vote in person or by proxy
in all meetings of stockholders or members. Proxies shall in writing, As security for the payment of its obligations and advances against
signed by the stockholder or member and filed before the scheduled shipments, Batjak mortgaged its three (3) coco-processing oil mills in
meeting with the corporate secretary. Unless otherwise provided in the Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte to
proxy, it shall be valid only for the meeting for which it is intended. No Manila Banking Corporation (Manila Bank), Republic Bank (RB), and
Philippine Commercial and Industrial Bank (PCIB), respectively. In

108
need for additional operating capital to place the three (3) coco- Batjak nor its stockholders have instituted any legal proceedings to
processing mills at their optimum capacity and maximum efficiency annul the mortgage foreclosure aforementioned.
and to settle, pay or otherwise liquidate pending financial obligations
with the different private banks, Batjak applied to PNB for additional
Under the aforecited provision, what was to be returned by NIDC as
financial assistance. On 5 October 1965, a Financial Agreement was
trustee to Batjak's stockholders, upon the termination of the
submitted by PNB to Batjak for acceptance.
agreement, are the certificates of shares of stock belonging to Batjak's
stockholders, not the properties or assets of Batjak itself which were
The terms and conditions of the Financial Agreement were duly never delivered, in the first place to NIDC, under the terms of said
accepted by Batjak. Under said Agreement, NIDC would, as it actually Voting Trust Agreement.
did, invest P6,722,500.00 in Batjak in the form of preferred shares of
stock convertible within five (5) years at par into common stock, to
In any event, a voting trust transfers only voting or other rights
liquidate Batjak's obligations to Republic Bank (RB), Manufacturers
pertaining to the shares subject of the agreement or control over the
Bank and Trust Company (MBTC) and Philippine Commercial &
stock. The law on the matter is Section 59, Paragraph 1 of the
Industrial Bank (PCIB), and the balance of the investment was to be
Corporation Code (BP 68) which provides:
applied to Batjak's past due account of P 5 million with the PNB.

Sec. 59. Voting Trusts — One or more stockholders of a stock

Upon receiving payment, RB, PCIB, and MBTC released in favor of
corporation may create a voting trust for the purpose of confering upon
PNB the first and any mortgages they held on the properties of Batjak.
a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: ...
Next, a Voting Trust Agreement was executed on 26 October 1965 in
favor of NIDC by the stockholders representing 60% of the outstanding
The acquisition by PNB-NIDC of the properties in question was not
paid-up and subscribed shares of Batjak. This agreement was for a
made or effected under the capacity of a trustee but as a foreclosing
period of five (5) years and, upon its expiration, was to be subject to
creditor for the purpose of recovering on a just and valid obligation of
negotiation between the parties.
Batjak.

In July 1967, forced by the insolvency of Batjak, PNB instituted

Moreover, the prevention of imminent danger to property is the
extrajudicial foreclosure proceedings against the oil mills of Batjak
guiding principle that governs courts in the matter of appointing
located in Tanauan, Leyte and Jimenez, Misamis Occidental. The
receivers. Under Sec. 1 (b), Rule 59 of the Rules of Court, it is necessary
properties were sold to PNB as the highest bidder. One year thereafter,
in granting the relief of receivership that the property or fired be in
or in September 1968, final Certificates of Sale were issued by the
danger of loss, removal or material injury.
provincial sheriffs of Leyte 6 and Misamis Occidental 7 for the two (2)
oil mills in Tanauan and Jimenez in favor of PNB, after Batjak failed to
exercise its right to redeem the foreclosed properties within the In the case at bar, Batjak in its petition for receivership, or in its
allowable one year period of redemption. Subsequently, PNB amended petition therefor, failed to present any evidence, to establish
transferred the ownership of the two (2) oil mills to NIDC which, as the requisite condition that the property is in danger of being lost,
aforestated, was a wholly-owned PNB subsidiary. removed or materially injured unless a receiver is appointed to guard
and preserve it.
As regards the oil mill located at Sasa, Davao City, the same was
similarly foreclosed extrajudicial by NIDC. It was sold to NIDC as the
highest bidder. After Batjak failed to redeem the property, NIDC
consolidated its ownership of the oil mill. TITLE VII
STOCKS AND STOCKHOLDERS
Three (3) years thereafter, Batjak represented by majority
stockholders, through Atty. Amado Duran, legal counsel of private Section 60 –
respondent Batjak, wrote a letter to NIDC inquiring if the latter was
still interested in negotiating the renewal of the Voting Trust
Agreement. Batjak wrote another letter to NIDC informing the latter Subscription contract. - Any contract for the acquisition of
that Batjak would now safely assume that NIDC was no longer unissued stock in an existing corporation or a corporation still to be
interested in the renewal of said Voting Trust Agreement and, in view formed shall be deemed a subscription within the meaning of this Title,
thereof, requested for the turn-over and transfer of all Batjak assets, notwithstanding the fact that the parties refer to it as a purchase or
properties, management and operations. some other contract.

Issue: Section 61 –

W/N the NIDC constituted as trustee of the assets, management and Pre-incorporation subscription. - A subscription for shares of
operations of Batjak, that due to the expiration of the Voting Trust stock of a corporation still to be formed shall be irrevocable for a period
Agreement, NIDC should turn over the assets of the three (3) oil mills of at least six (6) months from the date of subscription, unless all of the
to Batjak other subscribers consent to the revocation, or unless the incorporation
of said corporation fails to materialize within said period or within a
longer period as may be stipulated in the contract of subscription:
Ruling: Provided, That no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the Securities and
PNB acquired ownership of two (2) of the three (3) oil mills by virtue of Exchange Commission.
mortgage foreclosure sales. NIDC acquired ownership of the third oil
mill also under a mortgage foreclosure sale. Certificates of title were Section 62 –
issued to PNB and NIDC after the lapse of the one (1) year redemption
period. Subsequently, PNB transferred the ownership of the two (2) oil
mills to NIDC. There can be no doubt, therefore, that NIDC not only Consideration for stocks. - Stocks shall not be issued for a
has possession of, but also title to the three (3) oil mills formerly owned consideration less than the par or issued price thereof. Consideration
by Batjak. The interest of Batjak over the three (3) oil mills ceased for the issuance of stock may be any or a combination of any two or
upon the issuance of the certificates of title to PNB and NIDC more of the following:
confirming their ownership over the said properties. More so, Batjak
does not impugn the validity of the foreclosure proceedings. Neither
109
1. Actual cash paid to the corporation; Ruling:

2. Property, tangible or intangible, actually received by the corporation The stipulation is invalid.
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued; In the absence of restrictions in its charter, a corporation, under its
general power to contract, has the power to accept subscriptions upon
3. Labor performed for or services actually rendered to the corporation; any special terms not prohibited by positive law or contrary to public
policy, provided they are not such as to require the performance of acts
which are beyond the powers conferred upon the corporation by its
4. Previously incurred indebtedness of the corporation; character, and provided they do not constitute a fraud upon other
subscribers or stockholders, or upon persons who are or may become
5. Amounts transferred from unrestricted retained earnings to stated creditors of the corporation.
capital; and
The Philippine Commission inserted in the Corporation Law, enacted
6. Outstanding shares exchanged for stocks in the event of March 1, 1906, the following provision: ". . . no corporation shall issue
reclassification or conversion. stock or bonds except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair valuation
equal to the par value of the stock or bonds so issued." (Act No. 1459,
Where the consideration is other than actual cash, or consists of sec. 16 as amended by Act No. 2792, sec. 2.)
intangible property such as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or the board of
directors, subject to approval by the Securities and Exchange The prohibition against the issuance of shares by corporations except
Commission. for actual cash to the par value of the stock to its full equivalent in
property is thus enshrined in both the organic and statutory law of the
Philippine; Islands; and it would seem that our lawmakers could
Shares of stock shall not be issued in exchange for promissory notes or scarcely have chosen language more directly suited to secure absolute
future service. equality stockholders with respect to their liability upon stock
subscriptions. Now, if it is unlawful to issue stock otherwise than as
The same considerations provided for in this section, insofar as they stated it is self-evident that a stipulation such as that now under
may be applicable, may be used for the issuance of bonds by the consideration, in a stock subscription, is illegal, for this stipulation
corporation. obligates the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency that
dividends are not paid, there is no liability at all. This is discrimination
The issued price of no-par value shares may be fixed in the articles of in favor of the particular subscriber, and hence the stipulation is
incorporation or by the board of directors pursuant to authority unlawful.
conferred upon it by the articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly called for The general doctrine of corporation law is in conformity with this
the purpose. conclusion, as may be seen from the following proposition taken from
the standard encyclopedia treatise, Corpus Juris:

National Exchange Vs. Dexter (51 Phil 601)

Nor has a corporation the power to receive a subscription upon such
terms as will operate as a fraud upon the other subscribers or
Facts: stockholders by subjecting the particular subscriber to lighter burdens,
or by giving him greater rights and privileges, or as a fraud upon
creditors of the corporation by withdrawing or decreasing the capital.
I. B. Dexter, signed a written subscription to the corporate stock of C. It is well settled therefore, as a general rule, that an agreement between
S. Salmon & Co. in the following form: a corporation and a particular subscriber, by which the subscription is
not to be payable, or is to be payable in part only, whether it is for the
I hereby subscribe for three hundred (300) shares of the purpose of pretending that the stock is really greater than it is, or for
capital stock of C. S. Salmon and Company, payable from the the purpose of preventing the predominance of certain stockholders, or
first dividends declared on any and all shares of said for any other purpose, is illegal and void as in fraud of other
company owned by me at the time dividends are declared, stockholders or creditors, or both, and cannot be either enforced by the
until the full amount of this subscription has been paid. subscriber or interposed as a defense in an action on the subscription.

Upon this subscription the sum of P15,000 was paid in January, 1920, Section 63 –
from a dividend declared at about that time by the company,
supplemented by money supplied personally by the subscriber. Beyond
this nothing has been paid on the shares and no further dividend has Certificate of stock and transfer of shares. - The capital stock of
been declared by the corporation. There is therefore a balance of stock corporations shall be divided into shares for which certificates
P15,000 still paid upon the subscription. signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
The National Exchange Co., Inc., as assignee (through the Philippine stock so issued are personal property and may be transferred by
National Bank) of C. S. Salmon & Co., instituted an action for the delivery of the certificate or certificates endorsed by the owner or his
purpose of recovering from I. B. Dexter a balance of P15,000, the par attorney-in-fact or other person legally authorized to make the
value of one hundred fifty shares of the capital stock of C. S. Salmon & transfer. No transfer, however, shall be valid, except as between the
co., with interest and costs. parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of
Issue:
shares transferred.

W/N the stipulation contained in the subscription to the effect that the
No shares of stock against which the corporation holds any unpaid
subscription is payable from the first dividends declared on the shares
claim shall be transferable in the books of the corporation.
has the effect of relieving the subscriber from personal liability in an
action to recover the value of the shares
110
Pacific Basin Vs. Oriental Petroleum (531 SCRA 667) however, shall be valid except as between the
parties, until the transfer is recorded in the books
of the corporation x x x.
Facts:

Clearly, the right of a transferee/ assignee to have stocks transferred to

Pacific Basin Securities, Inc. (Pacific Basin), through the stock
his name is an inherent right flowing from his ownership of the stocks.
brokerage firm First Resources Management and Securities
The Court had ruled in Rural Bank of Salinas, Inc. v. Court of Appeals
Corporation (FRMSC), purchased 308,300,000 Class “A” shares of
that the corporation’s obligation to register is ministerial, citing
Oriental Petroleum and Minerals Corporation (OPMC). Pacific Basin
Fletcher, to wit:
fully paid for the OPMC shares in the total amount of P17,727,000.00
or P.05750 per share. The shares were listed and traded in the Makati
Stock Exchange. In transferring stock, the secretary of a
corporation acts in purely ministerial capacity, and
does not try to decide the question of ownership.
The OPMC shares turned out to be owned by Piedras Petroleum
Mining Corporation (Piedras Petroleum), a sequestered company
The duty of the corporation to transfer is a
controlled by the nominees of the Presidential Commission on Good
ministerial one and if it refuses to make such
Government (PCGG). PCGG sent a letter to Equitable Banking
transaction without good cause, it may be
Corporation (EBC), OPMC’s stock and transfer agent, confirming
compelled to do so by mandamus.
Piedras Petroleum’s sale of the OPMC shares in favor of Pacific Basin
through FRMSC. In the same letter, PCGG requested EBC to record
the acquisition of said shares and to issue the corresponding The Court further held in Rural Bank of Salinas that the only
certificates of stock in favor of Pacific Basin. limitation imposed by Section 63 of the Corporation Code is when the
corporation holds any unpaid claim against the shares intended to be
transferred.
The requests were left unheeded. EBC informed FRMSC that it cannot
effect the transfer of the OPMC s hares to Pacific Basin on the following
grounds: first, that the endorser of the stock certificate, a certain Mr. Pacific Basin satisfied the condition of full payment of the OPMC
Clemente Madarang, was not among the authorized signatories of shares as evidenced by the FRMC Buy Invoice No. 14200 dated May 31,
Piedras Petroleum; and second, there was no board resolution from 1991. This fact was never denied by both OPMC and EBC. Therefore,
Piedras Petroleum which authorized the sale of the OPMC shares. upon Pacific Basin’s full payment of the OPMC shares, it became a
ministerial duty on the part of OPMC to record the transfer in the stock
and transfer book of OPMC and issue new stock certificates in favor of
OPMC and EBC argue that the OPMC shares are government-owned
Pacific Basin. Thus, OPMC’s and EBC’s refusal to record the transfer is
and, as government property, these can be disposed of only through
violative of Section 63 of the Corporation Code and OPMC’s own
public bidding. Hence, the sale by Piedras Petroleum of the OPMC
amended by-laws which states that Certificate of stock shall be
shares to Pacific Basin through the stock market is not valid, since it
issued to each holder of fully paid stock in numerical order from
does not comply with the public bidding requirement.
the stock certificate book, and shall be signed by the President and
countersigned by the Secretary and sealed with the corporate seal. A
Issue: record of each certificate issued shall be kept on the stub thereof and
upon the stock register of the company.
W/N the sale between Pacific and OPMC is valid
Republic Vs. Estate of Hans Menzi (476 SCRA 20)
Ruling:
Facts:
The sale of the subject shares through the stock exchange is valid and
binding, as there is no law which mandates that listed shares which are In 1957, Menzi purchased the entire interest in Bulletin from its
owned by the government be sold only through public bidding. founder and owner, Mr. Carson Taylor. In 1961, Yap, owner of US
Automotive, purchased Bulletin shares from Menzi and became one of
the corporation’s major stockholders.
As conceded by both Pacific Basin and OPMC, the subject OPMC
shares are listed and traded in the stock exchange. OPMC is a listed
corporation in the Philippine Stock Exchange (PSE). As a listed On April 2, 1968, a stock option was executed by and between Menzi
corporation, it shall be bound by the provisions of the Revised Listing and Menzi and Co. on the one hand, and Yap and US Automotive on
Rules of the PSE the objective of which is “to provide a fair, orderly, the other, whereby the parties gave the each other preferential right to
efficient, and transparent market for the trading of securities. buy the other’s Bulletin shares.

Moreover, even if the law indeed requires that the sale of the subject On April 22, 1968, the stockholders of Bulletin approved certain
shares undergo public bidding, the Court finds that sale through the amendments to Bulletin’s Articles of Incorporation, consisting of some
stock exchange is already a substantial compliance with the public restrictions on the transfer of Bulletin shares to non-stockholders. The
bidding requirement. amendments were approved by the Board of Directors of Bulletin and
by the Securities and Exchange Commission (SEC).
It is beyond dispute that OPMC holds no unpaid claim against Pacific
Basin for the value of the shares acquired by the latter. The Court sees Several years later, Atty. Amorsolo V. Mendoza, Vice President of US
no reason why OPMC and EBC consistently and continuously refused Automotive, executed a promissory note with his personal guarantee in
to record the transfer in the stock and transfer books of OPMC and favor of Menzi, promising to pay the latter the sum of P21,304,921.16
issue new certificates in favor of Pacific Basin. with interest at 18% per annum as consideration for Menzi’s sale of his
154 block on or before December 31, 1984.
Section 63 of the Corporation Code provides:
One day after Menzi’s death, a petition for the probate of his last will
and testament was filed by the named executor, Atty. Montecillo.
Sec. 63. x x x Shares of stock so issued are personal
property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or Atty. Montecillo received from US Automotive two (2) checks in the
his attorney-in-fact or other person legally amounts of P21,304,778.24 and P3,664,421.85 in full payment of the
authorized to make the transfer. No transfer, agreed purchase price and interest for the sale of the 154 block. On the
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same day, Atty. Montecillo signed a company voucher acknowledging The Corporation Code acknowledges that the delivery of a duly
receipt of the payment for the shares, indicating on the dorsal portion indorsed stock certificate is sufficient to transfer ownership of shares of
thereof the certificate numbers of the 12 stock certificates covering the stock in stock corporations. Such mode of transfer is valid between the
154 block, the number of shares covered by each certificate and the parties. In order to bind third persons, however, the transfer must be
date of issuance thereof. recorded in the books of the corporation.

Atty. Montecillo also wrote on the lower portion of the promissory note Clearly then, the absence of a deed of assignment is not a fatal flaw
executed by Atty. Mendoza the words “Paid May 15, 1985 (signed) M.G. which renders the transfer invalid as the Republic posits.
Montecillo, Executor of the Estate of Hans M. Menzi.”
There appears to be no dispute in this case that the stock certificates
The Sandiganbayan ruled that the sale of the 154 block to US covering the 154 block were duly indorsed and delivered to the buyer,
Automotive is valid and legal. According to the Sandiganbayan, the US Automotive. The parties to the sale, in fact, do not question the
sale was made pursuant to the stock option executed in 1968 between validity and legality of the transfer.
the parties to the sale. Negotiations took place and were concluded
before Menzi’s death, and full payment was made only after the
At any rate, the Sandiganbayan’s factual findings that the 154 block was
probate court had judicially confirmed the sale.
sold to US Automotive while Menzi was still alive, and that Atty.
Montecillo merely accepted payment by virtue of the authority
Now, the Republic questioned the validity of such sale. They claim that conferred upon him by Menzi himself are conclusive upon this Court,
the requirements for a valid transfer of stocks, namely: (1) there must supported, as they are, by the evidence on record.
be delivery of the stock certificate; (2) the certificate must be indorsed
by the owner or his attorney-in-fact or other persons legally authorized
Therefore, the sale of the 154 block to US Automotive was valid and
to make the transfer; and (3) the transfer must be recorded in the
legal.
books of the corporation in order to be valid against third parties, have
all been met.
Ponce Vs. Alsons Cement (393 SCRA 602)
Issue:
Facts:
W/N the sale between Menzi and US Automotive was valid
The late Fausto G. Gaid was an incorporator of Victory Cement
Corporation (VCC), having subscribed to and fully paid 239,500 shares
Ruling:
of said corporation.

The absence of a deed of sale evidencing the sale is allegedly not

Ponce and Fausto Gaid executed a "Deed of Undertaking" and
irregular because the law itself does not require any deed for the
"Indorsement" whereby the latter acknowledges that the former is the
validity of the transfer of shares of stock, it being sufficient that such
owner of said shares and he was therefore assigning/endorsing the
transfer be effected by delivery of the stock certificates duly indorsed.
same to the plaintiff. Later, VCC was renamed Floro Cement
At any rate, a duly notarized Receipt covering the sale was executed.
Corporation. Thereafter, FCC was renamed Alsons Cement Corporation
as shown by the Amended Articles of Incorporation of ACC.
Moreover, the BIR certified that the Estate of Menzi paid the final tax
on capital gains derived from the sale of the 154 block and authorized
From the time of incorporation of VCC up to the present, no certificates
the Corporate Secretary to register the transfer of the said shares in the
of stock corresponding to the 239,500 subscribed and fully paid shares
name of US Automotive. Further, a stock certificate covering the 154
of Gaid were issued in the name of Fausto G. Gaid and/or of Ponce.
block was issued to US Automotive by Quimson himself as Corporate
Secretary.
Despite repeated demands, ACC refused and continued to refuse
without any justifiable reason to issue to Ponce the certificates of
Sec. 63 of the Corporation Code provides the requisites for a valid
stocks corresponding to the 239,500 shares of Gaid, in violation of
transfer of shares:
plaintiff’s right to secure the corresponding certificate of stock in his
name.
Sec. 63. Certificate of stock and transfer of
shares.—The capital stock of stock corporations
Ponce filed a petition for mandamus against ACC. Attached to the
shall be divided into shares for which certificates
complaint was the Deed of Undertaking and Indorsement. Petitioner
signed by the president or vice-president,
prayed that judgment be rendered ordering respondents (a) to issue in
countersigned by the secretary or assistant
his name certificates of stocks covering the 239,500 shares of stocks
secretary, and sealed with the seal of the
and its legal increments and (b) to pay him damages.
corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are
Issue:
personal property and may be transferred
by delivery of the certificate or certificates
indorsed by the owner or his attorney-in- W/N the indorsement by Gaid to Ponce of the shares of stock in
fact or other person legally authorized to question—assuming that the indorsement was in fact a transfer of
make the transfer. No transfer, however, stocks—was valid against third persons such as ALSONS under Section
shall be valid, except as between the 63 of the Corporation Code
parties, until the transfer is recorded in the
books of the corporation showing the
names of the parties to the transaction, the Ruling:
date of the transfer, the number of the
certificate or certificates and the number of There is no question that Fausto Gaid was an original subscriber of
shares transferred. respondent corporation’s 239,500 shares. This is clear from the
numerous pleadings filed by either party. It is also clear from the
No shares of stock against which the corporation Amended Articles of Incorporation approved on August 9, 1995 that
holds any unpaid claim shall be transferable in the each share had a par value of P 1.00 per share. And, it is undisputed
books of the corporation. that petitioner had not made a previous request upon the corporate

112
secretary of ALSONS, respondent Francisco M. Giron Jr., to record the stock certificates. With more reason, in our view, a corporate secretary
alleged transfer of stocks. may not be compelled to issue stock certificates without such
registration.
The Corporation Code states that:
Absent an allegation that the transfer of shares is recorded in the stock
and transfer book of respondent ALSONS, there appears no basis for a
SEC. 63. Certificate of stock and transfer of shares.–The
clear and indisputable duty or clear legal obligation that can be
capital stock of stock corporations shall be divided into shares for
imposed upon the respondent corporate secretary, so as to justify the
which certificates signed by the president or vice-president,
issuance of the writ of mandamus to compel him to perform the
countersigned by the secretary or assistant secretary, and sealed with
transfer of the shares to petitioner. Where the corporate secretary is
the seal of the corporation shall be issued in accordance with the by-
under no clear legal duty to issue stock certificates because of the
laws. Shares of stock so issued are personal property and may be
petitioner’s failure to record earlier the transfer of shares, one of the
transferred by delivery of the certificate or certificates indorsed by the
elements of the cause of action for mandamus is clearly missing.
owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the Bitong Vs. CA (292 SCRA 503)
corporation so as to show the names of the parties to the transaction,
the date of the transfer, the number of the certificate or certificates and
Facts:
the number of shares transferred.

These twin cases originated from a derivative suit filed by Nora A.

No shares of stock against which the corporation holds any unpaid
Bitong before the SEC allegedly for the benefit of Mr. & Ms. Publishing
claim shall be transferable in the books of the corporation.
Co., Inc., among others, to hold spouses Eugenia D. Apostol and Jose
A. Apostol liable for fraud, misrepresentation, disloyalty, evident bad
Pursuant to the foregoing provision, a transfer of shares of stock not faith, conflict of interest and mismanagement in directing the affairs of
recorded in the stock and transfer book of the corporation is non- Mr. & Ms. to the damage and prejudice of Mr. & Ms. and its
existent as far as the corporation is concerned. As between the stockholders, including petitioner.
corporation on the one hand, and its shareholders and third persons on
the other, the corporation looks only to its books for the purpose of
Alleging before the SEC that she had been the Treasurer and a Member
determining who its shareholders are. It is only when the transfer has
of the Board of Directors of Mr. & Ms. from the time it was
been recorded in the stock and transfer book that a corporation may
incorporated on 29 October 1976 to 11 April 1989, and was the
rightfully regard the transferee as one of its stockholders. From this
registered owner of 1,000 shares of stock out of the 4,088 total
time, the consequent obligation on the part of the corporation to
outstanding shares, Bitong complained of irregularities committed
recognize such rights as it is mandated by law to recognize arises.
from 1983 to 1987 by Eugenia D. Apostol, President and Chairperson of
the Board of Directors. Petitioner claimed that except for the sale of the
Hence, without such recording, the transferee may not be regarded by name Philippine Inquirer to Philippine Daily Inquirer all other
the corporation as one among its stockholders and the corporation may transactions and agreements entered into by Mr.& Ms. with PDI were
legally refuse the issuance of stock certificates in the name of the not supported by any bond and/or stockholders' resolution. And, upon
transferee even when there has been compliance with the requirements instructions of Eugenia D. Apostol, Mr. & Ms. made several cash
of Section 64 of the Corporation Code. This is the import of Section 63 advances to PDI on various occasions amounting to P3.276 million. On
which states that "No transfer, however, shall be valid, except between some of these borrowings PDI paid no interest whatsoever. Despite the
the parties, until the transfer is recorded in the books of the fact that the advances made by Mr. & Ms. to PDI were booked as
corporation showing the names of the parties to the transaction, the advances to an affiliate, there existed no board or stockholders'
date of the transfer, the number of the certificate or certificates and the resolution, contract nor any other document which could legally
number of shares transferred." The situation would be different if the authorize the creation of and support to an affiliate.
petitioner was himself the registered owner of the stock which he
sought to transfer to a third party, for then he would be entitled to the
Petitioner further alleged that Eugenia and Jose Apostol were
remedy of mandamus.
stockholders, directors and officers in both Mr. & Ms. and PDI. In fact
on 2 May 1986 Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion
From the corporation’s point of view, the transfer is not effective until G. Nuyda subscribed to PDI shares of stock at P50,000.00 each or a
it is recorded. Unless and until such recording is made the demand for total of P150,000.00. The stock subscriptions were paid for by Mr. &
the issuance of stock certificates to the alleged transferee has no legal Ms. and initially treated, as receivables from officers and employees.
basis. As between the corporation on the one hand, and its But, no payments were ever received from respondents, Magsanoc and
shareholders and third persons on the other, the corporation looks only
to its books for the purpose of determining who its shareholders are. In
Petitioner then contends that she was a holder of the proper certificates
other words, the stock and transfer book is the basis for ascertaining
of shares of stock and that the transfer was recorded in the Stock and
the persons entitled to the rights and subject to the liabilities of a
Transfer Book of Mr. & Ms. She invokes Sec. 63 of The Corporation
stockholder. Where a transferee is not yet recognized as a stockholder,
Code which provides that no transfer shall be valid except as between
the corporation is under no specific legal duty to issue stock certificates
the parties until the transfer is recorded in the books of the
in the transferee’s name.
corporation, and upon its recording the corporation is bound by it and
is estopped to deny the fact of transfer of said shares. Petitioner alleges
The deed of undertaking with indorsement presented by petitioner that even in the absence of a stock certificate, a stockholder solely on
does not establish, on its face, his right to demand for the registration the strength of the recording in the stock and transfer book can
of the transfer and the issuance of certificates of stocks. In Hager vs. exercise all the rights as stockholder, including the right to file a
Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus derivative suit in the name of the corporation. And, she need not
fails to state a cause of action where it appears that the petitioner is not present a separate deed of sale or transfer in her favor to prove
the registered stockholder and there is no allegation that he holds any ownership of stock.
power of attorney from the registered stockholder, from whom he
obtained the stocks, to make the transfer.
Ruling:

It has been made clear, thus far, that before a transferee may ask for
Sec. 63 of The Corporation Code envisions a formal certificate of stock
the issuance of stock certificates, he must first cause the registration of
which can be issued only upon compliance with the following
the transfer and thereby enjoy the status of a stockholder insofar as the
requisites:
corporation is concerned. A corporate secretary may not be compelled
to register transfers of shares on the basis merely of an indorsement of
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 a. First , the certificates must be signed by the president or the transfer shall be sufficient to effect the transfer of shares only if the
vice-president, countersigned by the secretary or assistant same is coupled with delivery. The delivery of the stock certificate duly
secretary, and sealed with the seal of the corporation. A mere endorsed by the owner is the operative act of transfer of shares from
typewritten statement advising a stockholder of the extent of the lawful owner to the new transferee.
his ownership in a corporation without qualification and/or
authentication cannot be considered as a formal certificate of
Thus, for a valid transfer of stocks, the requirements are as follows: (a)
stock.
There must be delivery of the stock certificate; (b) The certificate must
b. Second, delivery of the certificate is an essential element of
be endorsed by the owner or his attorney-in-fact or other persons
its issuance. Hence, there is no issuance of a stock certificate
legally authorized to make the transfer; and, (c) to be valid against
where it is never detached from the stock books although
third parties, the transfer must be recorded in the books of the
blanks therein are properly filled up if the person whose
corporation. At most, in the instant case, petitioner has satisfied only
name is inserted therein has no control over the books of the
the third requirement. Compliance with the first two requisites has not
company.
been clearly and sufficiently shown.
c. Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully
paid. Considering that the requirements provided under Sec. 63 of The
d. Fourth , the original certificate must be surrendered where Corporation Code should be mandatorily complied with, the rule on
the person requesting the issuance of a certificate is a presumption of regularity cannot apply. The regularity and validity of
transferee from a stockholder. the transfer must be proved. As it is, even the credibility of the stock
and transfer book and the entries thereon relied upon by petitioner to
show compliance with the third requisite to prove that she was a
The certificate of stock itself once issued is a continuing affirmation or
stockholder since 1983 is highly doubtful.
representation that the stock described therein is valid and genuine
and is at least prima facie evidence that it was legally issued in the
absence of evidence to the contrary. However, this presumption may be Lim Tay Vs. CA (293 SCRA 634)
rebutted. Similarly, books and records of a corporation which include
even the stock and transfer book are generally admissible in evidence
in favor of or against the corporation and its members to prove the Facts:
corporate acts, its financial status and other matters including one's
status as a stockholder. They are ordinarily the best evidence of Sy Guiok and Sy Lim secured a loan from the Lim Tay in the amount of
corporate acts and proceedings. P40,000 payable within six (6) months. To secure the payment of the
aforesaid loan and interest thereon, each of them executed a Contract
However, the books and records of a corporation are not conclusive of Pledge in favor of the petitioner whereby they respectively pledged
even against the corporation but are prima facie evidence only. Parol three hundred (300) shares of stock in the Go Fay & Company Inc.,
evidence may be admitted to supply omissions in the records, explain each. Guiok and Lim obliged themselves to pay interest on said loan at
ambiguities, or show what transpired where no records were kept, or in the rate of 10% per annum from the date of said contract of pledge.
some cases where such records were contradicted. The effect of entries
in the books of the corporation which purport to be regular records of Under said "Contracts of Pledge," Guiok and Sy Lim covenanted, inter
the proceedings of its board of directors or stockholders can be alia , that:
destroyed by testimony of a more conclusive character than mere
suspicion that there was an irregularity in the manner in which the
books were kept. 3. In the event of the failure of the PLEDGOR to pay the amount within
a period of six (6) months from the date hereof, the PLEDGEE is
hereby authorized to foreclose the pledge upon the said shares of stock
The foregoing considerations are founded on the basic principle that hereby created by selling the same at public or private sale with or
stock issued without authority and in violation of law is void and without notice to the PLEDGOR, at which sale the PLEDGEE may be
confers no rights on the person to whom it is issued and subjects him the purchaser at his option; and the PLEDGEE is hereby authorized
to no liabilities. Where there is an inherent lack of power in the and empowered at his option to transfer the said shares of stock on the
corporation to issue the stock, neither the corporation nor the person books of the corporation to his own name and to hold the certificate
to whom the stock is issued is estopped to question its validity since an issued in lieu thereof under the terms of this pledge, and to sell the said
estopped cannot operate to create stock which under the law cannot shares to issue to him and to apply the proceeds of the sale to the
have existence. payment of the said sum and interest, in the manner hereinabove
provided;
In the case at bar, there is overwhelming evidence that despite what
appears on the certificate of stock and stock and transfer book, 4. In the event of the foreclosure of this pledge and the sale of the
petitioner was not a bona fide stockholder of Mr. & Ms. before March pledged certificate, any surplus remaining in the hands of the
1989 or at the time the complained acts were committed to qualify her PLEDGEE after the payment of the said sum and interest, and the
to institute a stockholder's derivative suit against private respondents. expenses, if any, connected with the foreclosure sale, shall be paid by
Aside from petitioner's own admissions, several corporate documents the PLEDGEE to the PLEDGOR;
disclose that the true party-in-interest is not petitioner but JAKA.
5. Upon payment of the said amount and interest in full, the PLEDGEE
In fine, the records are unclear on how petitioner allegedly acquired will, on demand of the PLEDGOR, redeliver to him the said shares of
the shares of stock of JAKA. Petitioner being the chief executive officer stock by surrendering the certificate delivered to him by the PLEDGOR
of JAKA and the sole person in charge of all business and financial or by retransferring each share to the PLEDGOR, in the event that the
transactions and affairs of JAKA was supposed to be in the best PLEDGEE, under the option hereby granted, shall have caused such
position to show convincing evidence on the alleged transfer of shares shares to be transferred to him upon the books of the issuing
to her, if indeed there was a transfer. Considering that petitioner's company."
status is being questioned and several factual circumstances have been
presented by private respondents disproving petitioner's claim, it was
incumbent upon her to submit rebuttal evidence on the manner by Guiok and Sy Lim endorsed their respective shares of stock in blank
which she allegedly became a stockholder. Her failure to do so taken in and delivered the same to the [p]etitioner.
the light of several substantial inconsistencies in her evidence is fatal to
her case. However, Guiok and Sy Lim failed to pay their respective loans and the
accrued interests thereon to the petitioner. In October, 1990, the
The rule is that the endorsement of the certificate of stock by the owner petitioner filed a "Petition for Mandamus" against Respondent
or his attorney-in-fact or any other person legally authorized to make Corporation, praying that an order be issued directing the corporate

114
secretary of Respondent Go Fay & Co., Inc. to register the stock NEUGENE. Prior thereto, the private respondents had divested
transfers and issue new certificates in favor of Lim Tay. It is likewise themselves of their stockholdings when they endorsed their stock
prayed that Respondent Go Fay & Co., Inc. be ordered to pay all certificates in blank and delivered the same to the Uy Family, the
dividends due and unclaimed on the said certificates to Lim Tay. beneficial owners of NEUGENE. In view of the said transfers of shares
of stock, Arsenio Yang, Jr., and Charles O. Sy (each the holder of only
700 shares or 10% each of the outstanding capital stock of NEUGENE)
Issue:
and Lok Chun Suen (who had ceased to be a stockholder as July 1,
1987) could no longer validly vote for the dissolution of EUGENE,
W/N pursuant to the contracts of pledge, Lim Tay became the owner of under Section 118 of the Corporation Code, and all the proceedings of
the shares when the term for the loans expired the meetings held which were improperly called and held without a
quorum, are null void.
Ruling:
On the other hand, the private respondents, Charles O. Sy, Arsenio
Yang, Jr. and Lok Chun Suen, theorized that the alleged assignments of
The contractual stipulation shows that plaintiff was merely authorized shares of stock in favor of petitioners were simulated and fraudulently
to foreclose the pledge upon maturity of the loans, not to own them. effected, as there never was any agreement entered into by the Uy
Such foreclosure is not automatic, for it must be done in a public or family to award NEUGENE'S stock certificates to Johnny K. H. Uy,
private sale. Nowhere did the Complaint mention that petitioner had in because subject stock certificates of the private respondents covering
fact foreclosed the pledge and purchased the shares after such their shares of stock were endorsed in blank by them and delivered to
foreclosure. His status as a mere pledgee does not, under civil law, the Uy family, who were the beneficial owners of NEUGENE, for safe
entitles him to ownership of the subject shares. It is also noteworthy keeping. The private respondents never sold their shares of stock in
that petitioner's Complaint did not aver that said shares were acquired NEUGENE to any of the petitioners or other stockholders of record,
through extraordinary prescription, novation or laches. Moreover, prior to the dissolution of the corporation, so that they (private
petitioner's claim, subsequent to the filing of the Complaint, that he respondents) represented at least two-thirds (2/3) of the outstanding
acquired ownership of the said shares through these three modes is not capital stock of NEUGENE when they voted to dissolve NEUGENE.
indubitable and still has to be resolved. Manifestly, the Complaint by
itself did not contain any prima facie showing that petitioner was the
owner of the shares of stocks. Quite the contrary, it demonstrated that Issue:
he was merely a pledgee, not an owner.
W/N the transfers of stock in question to Uy Family is valid and
Petitioner's ownership over the shares in this case was not yet effective
perfected when the Complaint was filed. The contract of pledge
certainly does not make him the owner of the shares pledged. Further,
Ruling:
whether prescription effectively transferred ownership of the shares,
whether there was a novation of the contracts of pledge, and whether
laches had set in were difficult legal issues, which were unpleaded and The transfers of stock in question could not be valid and effective for
unresolved when herein petitioner asked the corporate secretary of Go the simple reason that there is a complete absence of proof that the
Fay to effect the transfer, in his favor, of the shares pledged to him. alleged transfers were recorded in the books of the corporation. It
relied on Section 63 of the Corporation Code of the Philippines which
provides that no transfer shall be valid except as between the parties,
Neugene Vs. CA (303 SCRA 295)
until the transfer is recorded in the books of the corporation.

Facts:
At the time of dissolution of NEUGENE, Lok Chun Suen, Charles O. Sy
and Arsenio Yang, Jr., owned at least two-thirds (2/3) of NEUGENE's
NEUGENE was duly registered with SEC to engage in trading business outstanding capital stock, in sufficient compliance with the germane
for a term of fifty (50) years with 5 incorporators/directors. provision of Section 118 of the Corporation Code of the Philippines.

The authorized capital stock of NEUGENE is P3,000.000.00 divided As shown in the Stock and Transfer Book of NEUGENE, Lok Chun
into P30,000 shares with a par value of ONE HUNDRED PESOS Suen is the holder of a total of 1,400 shares of stock, Charles O. Sy is
P100.00 each. Out of this authorized capital stock, P600.000.00 had the holder of a total of 2,800 shares of stock and Arsenio Yang, Jr. is
been subscribed. the holder of 1,050 shares.

The outstanding capital stock of NEUGENE was increased to Therefore, the entries on the NEUGENE'S Stock and Transfer Book,
P700,000.00 represented by 7,000 shares through a declaration of record the private respondents as the holders of 5,250 shares,
dividends made by the board of directors. constituting at least two-thirds (2/3) of NEUGENE's outstanding
capital stock of 7,000 shares.
Eugenio Flores, Jr. assigned transferred and conveyed his entire
shareholdings of 2,450 shares in NEUGENE to Sonny Moreno 1,050 Thus, the certificates of stock of the private respondents were stolen
shares, Arsenio Yang, Jr., 700 share and Charles O. Sy 700 shares. and therefore not validly transferred, and the transfers of stock relied
upon by petitioners were fraudulently recorded in the Stock and
Transfer Book of NEUGENE .
Thus, immediately after the assignment of the entire shareholdings of
Eugenio Flores, Jr, the same was recorded in the stockholders of record
of NEUGENE. The true nature of the relationship between the stockholders of
NEUGENE and the Uy family, who had the understanding that the
beneficial ownership of NEUGENE would remain with the Uy family,
Later, a board resolution approving the dissolution of NEUGENE was such that subject shares of stock were, immediately upon issuance,
passed. And acting upon the Petition for Dissolution, SEC issued a endorsed in blank by the shareholders and entrusted to the Uy family,
Certificate of Dissolution of NEUGENE. through Ban Ha Chua, for safekeeping.

Thus, the petitioners brought an action to annul or set aside the said Both the Johnson Lee and Sony Moreno, the corporate secretary, were
SEC Certification on the Dissolution of Neugene. They contended that aware of the real import or significance of the indorsements in blank
they are the majority stockholders of NEUGENE, owning eighty on the stock certificates of the private respondent. Obviously, then,
percent (80%) of its outstanding capital stock, at the time of the they acted in bad faith in assigning subject certificates of stock to the
adoption and approval of the Resolution for the Dissolution of
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petitioners, Nicanor Martin and Leoncio Tan, and in recording the said absolutely void; not because they are without notice or fraudulent in
transfers in dispute in the Stock and Transfer book of NEUGENE. law or fact, but because they are made so void by statute.

Then, too, as nominees of the Uy family, the approval by the private Thus, the transfer of the subject certificate made by Dico to Garcia was
respondents, Charles O. Sy, Lok Chun Suen and Arsenio Yang, Jr., Jr., not valid as to the spouses Atinon, the judgment creditors, as the same
was necessary for the validity and effectivity of the transfer of the stock still stood in the name of Dico, the judgment debtor, at the time of the
certificates registered under their names. In the case under levy on execution. In addition, the entry in the minutes of the meeting
consideration, not only did the transfers of stock in question lack the of the Club's board of directors noting the resignation of Dico as
requisite approval, the private respondents categorically declared proprietary member thereof does not constitute compliance with
under oath that subject certificates of stock of theirs were stolen from Section 63 of the Corporation Code. Said provision of law strictly
the confidential vault of the Uy family and illegally transferred to the requires the recording of the transfer in the books of the corporation,
names of petitioners in the Stock and Transfer Book of NEUGENE. and not elsewhere, to be valid as against third parties.

Therefore, the private respondents herein are the legitimate holders BLT Bus Co. Vs. Bitanga (362 SCRA 635)
and owners of at least-two-thirds (2/3) of the outstanding capital stock
of NEUGENE, with the corresponding right to vote for its dissolution,
Facts:
in accordance with Section 118 of the Corporation Code of the
Philippines.
These cases involve the Batangas Laguna Tayabas Bus Company, Inc.,
which has been owned by four generations of the Potenciano family.
Garcia Vs. Jomouad (323 SCRA 424)
Immediately prior to the events leading to this controversy, the
Potencianos owned 87.5% of the outstanding capital stock of BLTB.
Facts:
Dolores A. Potenciano, Max Joseph A. Potenciano, Mercedelin A.
Dico, was employed as manager of his Young Auto Supply. In order to Potenciano, Delfin C. Yorro, and Maya Industries, Inc., entered into a
assist him in entertaining clients, Garcia "lent" his Proprietary Sale and Purchase Agreement, whereby they sold to BMB Property
Ownership Certificate (POC), in the Cebu Country Club to Dico so the Holdings, Inc., represented by its President, Benjamin Bitanga, their
latter could enjoy the "signing" privileges of its members. The Club 21,071,114 shares of stock in BLTB. The said shares represented
then issued POC in the name of Dico. Thereafter, Dico resigned as 47.98% of the total outstanding capital stock of BLTB.
manager of Garcia's business. Upon demand Dico returned their POC.
Dico then executed a Deed of Transfer covering the subject certificate
The purchase price for the shares of stock was P72,076,425.00, the
in favor of petitioner. The Club was furnished with a copy of said deed
downpayment of which, in the sum of P44,354,723.00, was made
but the transfer was not recorded in the books of the Club because
payable upon signing of Agreement, while the balance of
Garcia failed to present proof of payment of the requisite capital gains
P27,721,702.00 was payable on November 26, 1997.
tax.

Furthermore, the buyer guaranteed that it shall take over the

In the meantime, the spouses Atinon filed a case for collection of sum
management and operations of BLTB but shall immediately surrender
of money against Jaime Dico. The trial court rendered judgment
the same to the sellers in case it fails to pay the balance of the purchase
ordering Dico to pay the spouses Atinon the sum of P900,000.00 plus
price on November 26, 1997.
interests. After said judgment became final and executory, Sheriff
Jomouad proceeded with its execution. In the course thereof, the
Proprietary Ownership Certificate in the Cebu Country Club, which was Barely a month after the Agreement was executed, at a meeting of the
in the name of Dico, was levied on and scheduled for public auction. stockholders of BLTB, Benjamin Bitanga and Monina Grace Lim were
Claiming ownership over the subject certificate, Garcia filed the elected as directors of the corporation, replacing Dolores and Max
aforesaid action for injunction with prayer for preliminary injunction Joseph Potenciano. Subsequently, another stockholders' meeting was
to enjoin respondents from proceeding with the auction. held, wherein Laureano A. Siy and Renato L. Leveriza were elected as
directors, replacing Candido Potenciano and Delfin Yorro who had
both resigned as such.
The trial court dismissed petitioner's complaint for injunction for lack
of merit. On appeal, the CA affirmed in toto the decision of the RTC
upon finding that it committed no reversible error in rendering the The annual stockholders' meeting was scheduled on May 19, 1998.
same. Before the scheduled meeting, on May 16, 1998, Michael Potenciano
wrote Benjamin Bitanga, requesting for a postponement of the
stockholders' meeting due to the absence of a thirty-day advance
Hence, this petition.
notice. However, there was no response from Bitanga on whether or
not the request for postponement was favorably acted upon.
Issue:
On the scheduled date of the meeting, May 19, 1998, a notice of
W/N whether a bona fide transfer of the shares of a corporation, not postponement of the stockholders' meeting was published in the
registered or noted in the books of the corporation, is valid as against a Manila Bulletin. Inasmuch as there was no notice of postponement
subsequent lawful attachment of said shares, regardless of whether the prior to that, a total of two hundred eighty six stockholders,
attaching creditor had actual notice of said transfer or not. representing 87% of the shares of stock of BLTB, arrived and attended
the meeting. The majority of the stockholders present rejected the
postponement and voted to proceed with the meeting. The Potenciano
Ruling:
group was re-elected to the Board of Directors, and a new set of officers
was thereafter elected.
The attachment prevails over the unrecorded transfer.
However, the Bitanga group refused to relinquish their positions and
All transfers of shares not so entered in the book of corporation are continued to act as directors and officers of BLTB. The conflict between
invalid as to attaching or execution creditors of the assignors, as well as the Potencianos and the Bitanga group escalated to levels of unrest and
to the corporation and to subsequent purchasers in good faith, and, even violence among laborers and employees of the bus company.
indeed, as to all persons interested, except the parties to such transfers.
All transfers not so entered on the books of the corporation are
The Bitanga group filed with the Securities and Exchange Commission
a Complaint for Damages and Injunction, which was denied. Then, the
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Bitanga group filed another complaint with application for a writ of December 31 of that same year; otherwise, the Bank would be entitled
preliminary injunction and prayer for temporary restraining order, to liquidate their shareholdings, including those under their control. In
seeking to annul the May 19, 1998 stockholders' meeting. such an event, should the proceeds of the sale of said shares fail to
satisfy in full the obligation, the unpaid balance shall be secured by
other collateral sufficient therefor.
The SEC Hearing Panel granted the Bitanga group's application for a
writ of preliminary injunction upon the posting of a bond in the
amount of P20,000,000.00. It declared that the May 19, 1998 When the Villanueva spouses failed to settle their obligation to the
stockholders' meeting was void on the grounds that, first, Michael Bank on the due date, the Board sent them a letter demanding: (1) the
Potenciano had himself asked for its postponement due to improper surrender of all the stock certificates issued to them; and (2) the
notice; and, second, there was no quorum, since BMB Holdings, Inc., delivery of sufficient collateral to secure the balance of their debt
represented by the Bitanga group, which then owned 50.26% of BLTB's amounting to P3,346,898.54. The Villanuevas ignored the bank's
shares having purchased the same from the Potenciano group, was not demands, whereupon their shares of stock were converted into
present at the said meeting. The Hearing Panel further held that the Treasury Stocks. Later, the Villanuevas, through their counsel,
Bitanga Board remains the legitimate Board in a hold-over capacity. questioned the legality of the conversion of their shares.

Issue: Thereafter, the stockholders of the Bank met to elect the new directors
and set of officers for the year 1994. The Villanuevas were not notified
of said meeting. Atty. Amado Ignacio, counsel for the Villanueva
W/N there was a valid transfer of the shares of the group of Dolores
spouses, questioned the legality of the said stockholders' meeting and
Potenciano to the Bitanga group
the validity of all the proceedings therein. In reply, the new set of
officers of the Bank informed Atty. Ignacio that the Villanuevas were
Ruling: no longer entitled to notice of the said meeting since they had
relinquished their rights as stockholders in favor of the Bank.
The transfer of the shares of the group of Dolores Potenciano to the
Bitanga group has not yet been recorded in the books of the Consequently, the Villanueva spouses filed with the Securities and
corporation. Hence, the group of Dolores Potenciano, in whose names Exchange Commission (SEC), a petition for annulment of the
those shares still stand, was the ones entitled to attend and vote at the stockholders' meeting and election of directors and officers on January
stockholders' meeting of the BLTB on 19 May 1998. This being the 15, 1994, with damages and prayer for preliminary injunction
case, the Hearing Panel committed grave abuse of discretion in holding
otherwise and in concluding that there was no quorum in said meeting.
The Villanuevas' main contention was that the stockholders' meeting
and election of officers and directors held on January 15, 1994 were
Indeed, until registration is accomplished, the transfer, though valid invalid because: (1) they were conducted in violation of the by-laws of
between the parties, cannot be effective as against the corporation. the Rural Bank; (2) they were not given due notice of said meeting and
Thus, the unrecorded transferee, the Bitanga group in this case, cannot election notwithstanding the fact that they had not waived their right to
vote nor be voted for. The purpose of registration, therefore, is notice; (3) they were deprived of their right to vote despite their being
two-fold: to enable the transferee to exercise all the rights of a holders of common stock with corresponding voting rights; (4) their
stockholder, including the right to vote and to be voted for, and to names were irregularly excluded from the list of stockholders; and (5)
inform the corporation of any change in share ownership so that it can the candidacy of petitioner Avelina Villanueva for directorship was
ascertain the persons entitled to the rights and subject to the liabilities arbitrarily disregarded by respondent Bernardo Bautista and company
of a stockholder. during the said meeting.

Until challenged in a proper proceeding, a stockholder of record has a Issue:

right to participate in any meeting; his vote can be properly counted to
determine whether a stockholders' resolution was approved, despite
W/N by virtue of the Deed of Assignment, the Villanueva spouses had
the claim of the alleged transferee. On the other hand, a person who
relinquished to the Bank any and all rights they may have had as
has purchased stock, and who desires to be recognized as a stockholder
stockholders of the Bank
for the purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider. Ruling:

Rural Bank of Lipa City Vs. CA (366 SCRA 188) While it may be true that there was an assignment of private
respondents' shares to the petitioners, said assignment was not
sufficient to effect the transfer of shares since there was no
Facts:
endorsement of the certificates of stock by the owners, their attorneys-
in-fact or any other person legally authorized to make the transfer.
The instant controversy arose from a dispute between the Rural Bank Moreover, petitioners admit that the assignment of shares was not
of Lipa City, Incorporated (hereinafter referred to as the Bank), coupled with delivery, the absence of which is a fatal defect. The rule is
represented by its officers and members of its Board of Directors, and that the delivery of the stock certificate duly endorsed by the owner is
certain stockholders of the said bank. the operative act of transfer of shares from the lawful owner to the
transferee. Thus, title may be vested in the transferee only by delivery
of the duly indorsed certificate of stock.
Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City,
executed a Deed of Assignment, wherein he assigned his shares, as well
as those of eight (8) other shareholders under his control with a total of We have uniformly held that for a valid transfer of stocks, there must
10,467 shares, in favor of the stockholders of the Bank represented by be strict compliance with the mode of transfer prescribed by law. The
its directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. requirements are: (a) There must be delivery of the stock certificate:
Sometime thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, (b) The certificate must be endorsed by the owner or his attorney-in-
executed an Agreement wherein they acknowledged their indebtedness fact or other persons legally authorized to make the transfer; and (c) To
to the Bank in the amount of P4,000,000.00, and stipulated that said be valid against third parties, the transfer must be recorded in the
debt will be paid out of the proceeds of the sale of their real property books of the corporation. As it is, compliance with any of these
described in the Agreement. requisites has not been clearly and sufficiently shown.

At a meeting of the Board of Directors of the Bank the Villanueva It may be argued that despite non-compliance with the requisite
spouses assured the Board that their debt would be paid on or before endorsement and delivery, the assignment was valid between the
117
parties, meaning the private respondents as assignors and the Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the Corporation
petitioners as assignees. While the assignment may be valid and Code]) contemplates no restriction as to whom the stocks may be
binding on the petitioners and private respondents, it does not transferred. It does not suggest that any discrimination may be created
necessarily make the transfer effective. Consequently, the petitioners, by the corporation in favor of, or against a certain purchaser. The
as mere assignees, cannot enjoy the status of a stockholder, cannot vote owner of shares, as owner of personal property, is at liberty, under said
nor be voted for, and will not be entitled to dividends, insofar as the section to dispose them in favor of whomever he pleases, without
assigned shares are concerned Parenthetically, the private respondents limitation in this respect, than the general provisions of law. . .
cannot, as yet, be deprived of their rights as stockholders, until and
unless the issue of ownership and transfer of the shares in question is
The only limitation imposed by Section 63 of the Corporation Code is
resolved with finality.
when the corporation holds any unpaid claim against the shares
intended to be transferred, which is absent here.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet
and elect their directors, private respondents shall be notified of the
A corporation, either by its board, its by-laws, or the act of its officers,
meeting and be allowed to exercise their rights as stockholders thereat.
cannot create restrictions in stock transfers, because:

Rural Bank of Salinas Vs. CA (210 SCRA 510)

. . . Restrictions in the traffic of stock must have their source in
legislative enactment, as the corporation itself cannot create such
Facts: impediment. By-laws are intended merely for the protection of the
corporation, and prescribe regulation, not restriction; they are always
subject to the charter of the corporation. The corporation, in the
Clemente G. Guerrero, President of the Rural Bank of Salinas, Inc.,
absence of such power, cannot ordinarily inquire into or pass upon the
executed a Special Power of Attorney in favor of his wife, Melania
legality of the transactions by which its stock passes from one person to
Guerrero, giving and granting the latter full power and authority to sell
another, nor can it question the consideration upon which a sale is
or otherwise dispose of and/or mortgage 473 shares of stock of the
based. . . .
Bank registered in his name to execute the proper documents therefor,
and to receive and sign receipts for the dispositions.
The right of a transferee/assignee to have stocks transferred to his
name is an inherent right flowing from his ownership of the stocks.
Pursuant to said Special Power of Attorney, Melania Guerrero, as
Thus:
Attorney-in-Fact, executed a Deed of Assignment for 472 shares out of
the 473 shares, in favor of private respondents Luz Andico (457
shares), Wilhelmina Rosales (10 shares), the remaining one (1) share of Whenever a corporation refuses to transfer and register stock in cases
stock in favor of Francisco Guerrero, Sr. like the present, mandamus will lie to compel the officers of the
corporation to transfer said stock in the books of the corporation"
Subsequently, Melania Guerrero presented to Rural Bank of Salinas the
two (2) Deeds of Assignment for registration with a request for the The corporation's obligation to register is ministerial.
transfer in the Bank's stock and transfer book of the 473 shares of stock
so assigned, the cancellation of stock certificates in the name of
In transferring stock, the secretary of a corporation acts in purely
Clemente G. Guerrero, and the issuance of new stock certificates
ministerial capacity, and does not try to decide the question of
covering the transferred shares of stocks in the name of the new
ownership. The duty of the corporation to transfer is a ministerial one
owners thereof. However, petitioner Bank denied the request of
and if it refuses to make such transaction without good cause, it may be
Melania Guerrero.
compelled to do so by mandamus.

Thus, Melania Guerrero filed with the Securities and Exchange

For the petitioner Rural Bank of Salinas to refuse registration of the
Commission an action for mandamus against Rural Bank of Salinas, its
transferred shares in its stock and transfer book, which duty is
President and Corporate Secretary.
ministerial on its part, is to render nugatory and ineffectual the spirit
and intent of Section 63 of the Corporation Code. Thus, the registration
Petitioners filed their Answer with counterclaim alleging that upon the of the 473 shares in the stock and transfer book in the names of private
death of Clemente G. Guerrero, his 473 shares of stock became the respondents is proper. At all events, the registration is without
property of his estate, and his property and that of his widow should prejudice to the proceedings in court to determine the validity of the
first be settled and liquidated in accordance with law before any Deeds of Assignment of the shares of stock in question.
distribution can be effected so that petitioners may not be a party to
any scheme to evade payment of estate or inheritance tax and in order
to avoid liability to any third persons or creditors of the late Clemente Section 64 –
G. Guerrero.
Issuance of stock certificates. - No certificate of stock shall be
Issue: issued to a subscriber until the full amount of his subscription together
with interest and expenses (in case of delinquent shares), if any is due,
has been paid.
W/N an action for mandamus against the bank to record the transfer of
stock is proper
Section 65 –

Ruling:
Liability of directors for watered stocks. - Any director or
officer of a corporation consenting to the issuance of stocks for a
Sec. 63 of the Corporation Code provides that “. . . Shares of stock so consideration less than its par or issued value or for a consideration in
issued are personal property and may be transferred by delivery of the any form other than cash, valued in excess of its fair value, or who,
certificate or certificates indorsed by the owner or his attorney-in-fact having knowledge thereof, does not forthwith express his objection in
or other person legally authorized to make the transfer. No transfer, writing and file the same with the corporate secretary, shall be
however, shall be valid, except as between the parties, until the transfer solidarily, liable with the stockholder concerned to the corporation and
is recorded in the books of the corporation . . .” its creditors for the difference between the fair value received at the
time of issuance of the stock and the par or issued value of the same.
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise: Section 66 –

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Interest on unpaid subscriptions. - Subscribers for stock shall should not collect any more from the defendants the balance of their
pay to the corporation interest on all unpaid subscriptions from the subscriptions to the capital stock of the Philippine Lumber Distributing
date of subscription, if so required by, and at the rate of interest fixed Agency, Inc.
in the by-laws. If no rate of interest is fixed in the by-laws, such rate
shall be deemed to be the legal rate. Issue:

Section 67 – W/N non-compliance with a plain statutory command, considering the

persuasiveness of the plea that defendants-appellees would "not have
Payment of balance of subscription. - Subject to the provisions subscribed to the capital stock" of the Philippine Lumber Distributing
of the contract of subscription, the board of directors of any stock Agency "were it not for the assurance of the then President of the
corporation may at any time declare due and payable to the Republic of the Philippines that the Government would back it up by
corporation unpaid subscriptions to the capital stock and may collect investing P9.00 for every peso" subscribed, a condition which was not
the same or such percentage thereof, in either case with accrued fulfilled, such commitment not having been complied with, be justified
interest, if any, as it may deem necessary.
Ruling:
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the date In Philippine Trust Co. v. Rivera , 9 citing the leading case of Velasco v.
specified in the contract of subscription or on the date stated in the call Poizat , 10 this Court held: "It is established doctrine that subscriptions
made by the board. Failure to pay on such date shall render the entire to the capital of a corporation constitute a fund to which creditors have
balance due and payable and shall make the stockholder liable for a right to look for satisfaction of their claims and that the assignee in
interest at the legal rate on such balance, unless a different rate of insolvency can maintain an action upon any unpaid stock subscription
interest is provided in the by-laws, computed from such date until full in order to realize assets for the payment of its debt.... A corporation
payment. If within thirty (30) days from the said date no payment is has no power to release an original subscriber to its capital stock from
made, all stocks covered by said subscription shall thereupon become the obligation of paying for his shares, without a valuable consideration
delinquent and shall be subject to sale as hereinafter provided, unless for such release; and as against creditors a reduction of the capital
the board of directors orders otherwise. stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of incorporation.
PNB Vs. Bitulok Sawmill (23 SCRA 1366) Moreover, strict compliance with the statutory regulations is
necessary...."

Facts:
It would be unwarranted to ascribe to the late President Roxas the view
that the payment of the stock subscriptions, as thus required by law,
The Philippine Lumber Distributing Agency, Inc., was organized could be condoned in the event that the counterpart fund to be
sometime in the early part of 1947 upon the initiative and insistence of invested by the Government would not be available. Even if such were
the late President Manuel Roxas who had called several conferences the case, however, and such a promise were in fact made, to further the
between him and the subscribers and organizers of the Philippine laudable purpose to which the proposed corporation would be devoted
Lumber Distributing Agency, Inc. to insure a steady supply of lumber, and the possibility that the lumber producers would lose money in the
which could be sold at reasonable prices to enable the war sufferers to process, still the plain and specific wording of the applicable legal
rehabilitate their devastated homes. He convinced the lumber provision as interpreted by this Court must be controlling. It is a well-
producers to form a lumber cooperative and to pool their sources settled principle that with all the vast powers lodged in the Executive,
together in order to wrest, particularly, the retail trade from aliens who he is still devoid of the prerogative of suspending the operation of any
were acting as middlemen in the distribution of lumber. As an statute or any of its terms.
inducement he promised and agreed to finance the agency by making
the Government invest P9.00 by way of counterpart for every peso that
the members would invest therein. The emphatic and categorical language of an American decision cited
by the late Justice Laurel, in People v. Vera , comes to mind: "By the
twentieth article of the declaration of rights in the constitution of this
The amount thus contributed by such lumber producers was not commonwealth, it is declared that the power of suspending the laws, or
enough for the operation of its business especially having in mind the the execution of the laws, ought never to be exercised but by the
primary purpose of putting an end to alien domination in the retail legislature, or by authority derived from it, to be exercised in such
trade of lumber products. Nor was there any appropriation by the particular cases only as the legislature shall expressly provide for...."
legislature of the counterpart fund to be put up by the Government, Nor could it be otherwise considering that the Constitution specifically
namely, P9.00 for every peso invested by defendant lumber producers. enjoins the President to see to it that all laws be faithfully executed.
There may be a discretion as to what a particular legal provision
Accordingly, the late President Roxas instructed the Hon. Emilio requires; there can be none whatsoever as to the enforcement and
Abello, then Executive Secretary and Chairman of the Board of application thereof once its meaning has been ascertained. What it
Directors of the Philippine National Bank, for the latter to grant said decrees must be followed; what it commands must be obeyed. It must
agency an overdraft in the original sum of P250,000.00 which was be respected, the wishes of the President, to the contrary
later increased to P350,000.00, which was approved by said Board of notwithstanding, even if impelled by the most worthy of motives and
Directors of the Philippine National Bank with interest at the rate of the most persuasive equitable considerations. To repeat, such is not the
6% per annum, and secured by the chattel mortgages on the stock of case here. For at no time did President Roxas ever give defendant
lumber of said agency." The Philippine Government did not invest the lumber producers to understand that the failure of the Government for
P9.00 for every peso coming from defendant lumber producers. any reason to put up the counterpart fund could terminate their
statutory liability.

The loan extended to the Philippine Lumber Distributing Agency by the

Philippine National Bank was not paid. Such is not the law. Unfortunately, the lower court was of a different
mind. That is not to pay homage to the rule of law. Its decision then,
one it is to be repeated influenced by what it considered to be the
The lower court with full recognition that the case for the plaintiff "equity of the case", is not legally impeccable.
creditor, Philippine National Bank, "is meritorious strictly from the
legal standpoint" but apparently unable to "close its eyes to the equity
of the case" dismissed nine (9) cases filed by it, seeking "to recover
from the defendant lumber producers. Consequently, viewing from all
considerations of equity in the case, the Court finds that plaintiff bank Section 68 –

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Delinquency sale. - The board of directors may, by resolution, order As security for COB Group Marketing's credit purchases up to the
the sale of delinquent stock and shall specifically state the amount due amount of P35,000, one Asuncion Manahan mortgaged her land to
on each subscription plus all accrued interest, and the date, time and Keller. Manahan assumed solidarily with COB Group Marketing, the
place of the sale which shall not be less than thirty (30) days nor more faithful performance of all the terms and conditions of the sales
than sixty (60) days from the date the stocks become delinquent. agreement (Exh. D).

Notice of said sale, with a copy of the resolution, shall be sent to every The parties executed a second sales agreement whereby COB Group
delinquent stockholder either personally or by registered mail. The Marketing's territory was extended to Northern and Southern Luzon.
same shall furthermore be published once a week for two (2) As security for the credit purchases up to P25,000 of COB Group
consecutive weeks in a newspaper of general circulation in the province Marketing for that area, Tomas C. Lorenzo, Jr. and his father Tomas,
or city where the principal office of the corporation is located. Sr. executed a mortgage on their land in Nueva Ecija. Like Manahan,
the Lorenzos were solidarily liable with COB Group Marketing for its
obligations under the sales agreement.
Unless the delinquent stockholder pays to the corporation, on or before
the date specified for the sale of the delinquent stock, the balance due
on his subscription, plus accrued interest, costs of advertisement and The board of directors of COB Group Marketing were apprised by Jose
expenses of sale, or unless the board of directors otherwise orders, said E. Bax the firm's president and general manager, that the firm owed
delinquent stock shall be sold at public auction to such bidder who Keller about P179,000. Bax was authorized to negotiate with Keller for
shall offer to pay the full amount of the balance on the subscription the settlement of his firm's liability. Bax and R. Oefeli of Keller signed
together with accrued interest, costs of advertisement and expenses of the conditions for the settlement of COB Group Marketing's liability.
sale, for the smallest number of shares or fraction of a share. The stock
so purchased shall be transferred to such purchaser in the books of the Later, Keller sued on September 16, 1971 COB Group Marketing, its
corporation and a certificate for such stock shall be issued in his favor. stockholders and the mortgagors, Manahan and Lorenzo.
The remaining shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be entitled to the issuance of
a certificate of stock covering such shares. The lower court (1) dismissed the complaint; (2) ordered Keller to pay
COB Group Marketing the sum of P100,596.72 with 6% interest a year
from August 1, 1971 until the amount is fully paid: (3) ordered Keller to
Should there be no bidder at the public auction who offers to pay the pay P100,000 as moral damages to be allocated among the
full amount of the balance on the subscription together with accrued stockholders of COB Group Marketing in proportion to their unpaid
interest, costs of advertisement and expenses of sale, for the smallest capital subscriptions; (4) ordered the petitioner to pay Manahan
number of shares or fraction of a share, the corporation may, subject to P20,000 as moral damages; (5) ordered the petitioner to pay P20,000
the provisions of this Code, bid for the same, and the total amount due as attomey's fees to be divided among the lawyers of all the answering
shall be credited as paid in full in the books of the corporation. Title to defendants and to pay the costs of the suit; (6) declared void the
all the shares of stock covered by the subscription shall be vested in the mortgages executed by Manahan and Lorenzo and the cancellation of
corporation as treasury shares and may be disposed of by said the annotation of said mortgages on the Torrens titles thereof, and (7)
corporation in accordance with the provisions of this Code. dismissed Manahan's cross-claim for lack of merit.

Section 69 – The Appellate Court affirmed said judgment except the award of
P20,000 as moral damages which it eliminated. Thus, petitioner
When sale may be questioned. - No action to recover delinquent appealed to this Court.
stock sold can be sustained upon the ground of irregularity or defect in
the notice of sale, or in the sale itself of the delinquent stock, unless the Issue:
party seeking to maintain such action first pays or tenders to the party
holding the stock the sum for which the same was sold, with interest
from the date of sale at the legal rate; and no such action shall be W/N COB Group Marketing is liable to Edward Keller
maintained unless it is commenced by the filing of a complaint within
six (6) months from the date of sale.
Ruling:

Section 70 –
The lower courts erred in nullifying the admissions of liability made in
1971 by Bax as president and general manager of COB Group
Court action to recover unpaid subscription. - Nothing in this Marketing and in giving credence to the alleged overpayment
Code shall prevent the corporation from collecting by action in a court computed by Bax. It did not only allow Bax to nullify his admissions as
of proper jurisdiction the amount due on any unpaid subscription, with to the liability of COB Group Marketing but they also erroneously
accrued interest, costs and expenses. rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72, in spite of the fact that COB
Group Marketing was declared in default and did not file any
Edward Keller Vs. COB Group Marketing (141 SCRA 86) counterclaim for the supposed overpayment.

Facts: There was a conference on the COB Group Marketing's liability. Bax in
that discussion did not present his reconciliation statements to show
This case is about the liability of a marketing distributor under its sales overpayment. Bax admitted that Keller sent his company monthly
agreements with the owner of the products. The petitioner presented statements of accounts but he could not produce any formal protest
its evidence before Judges Castro Bartolome and Benipayo. against the supposed inaccuracy of the said statements. He lamely
Respondents presented their evidence before Judge Tamayo who explained that he would have to dig up his company's records for the
decided the case. formal protest. He did not make any written demand for reconciliation
of accounts.

Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as
exclusive distributor of its household products, Brite and Nuvan in As to the liability of the stockholders, it is settled that a stockholder is
Panay and Negros. Under that agreement Keller sold on credit its personally liable for the financial obligations of a corporation to the
products to COB Group Marketing. extent of his unpaid subscription.

Thus, COB Group marketing, Inc. is ordered to pay Edward A. Keller &
Co., Ltd. the sum of P182,994.60 with 12% interest per annum from
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August 1, 1971 up to the date of payment plus P20,000 as attorney's a contest has been presented to said corporation or if an action is
fees. pending in court regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the issuance of the new
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay certificate of stock in lieu thereof shall be suspended until the final
solidarity with COB Group Marketing the sums of P35,000 and decision by the court regarding the ownership of said certificate of
P25,000, respectively. stock which has been lost, stolen or destroyed.

The following respondents are solidarity liable with COB Group Except in case of fraud, bad faith, or negligence on the part of the
Marketing up to the amounts of their unpaid subscription to be applied corporation and its officers, no action may be brought against any
to the company's liability herein: Jose E. Bax P36,000; Francisco C. de corporation which shall have issued certificate of stock in lieu of those
Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez, lost, stolen or destroyed pursuant to the procedure above-described.
P12,000; Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000;
Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz
M. Aguilar-Adao, P6,000.

If after ninety (90) days from notice of the finality of the judgment in
this case the judgment against COB Group Marketing has not been TITLE VIII
satisfied fully, then the mortgages executed by Manahan and Lorenzo
should be foreclosed and the proceeds of the sales applied to the CORPORATE BOOKS AND RECORDS
obligation of COB Group Marketing. Said mortgage obligations should
bear six percent legal interest per annum after the expiration of the
said 90-day period. Section 74 –

Section 71 – Books to be kept; stock transfer agent. - Every corporation shall

keep and carefully preserve at its principal office a record of all
business transactions and minutes of all meetings of stockholders or
Effect of delinquency. - No delinquent stock shall be voted for be members, or of the board of directors or trustees, in which shall be set
entitled to vote or to representation at any stockholder's meeting, nor forth in detail the time and place of holding the meeting, how
shall the holder thereof be entitled to any of the rights of a stockholder authorized, the notice given, whether the meeting was regular or
except the right to dividends in accordance with the provisions of this special, if special its object, those present and absent, and every act
Code, until and unless he pays the amount due on his subscription with done or ordered done at the meeting. Upon the demand of any
accrued interest, and the costs and expenses of advertisement, if any. director, trustee, stockholder or member, the time when any director,
trustee, stockholder or member entered or left the meeting must be
Section 72 – noted in the minutes; and on a similar demand, the yeas and nays must
be taken on any motion or proposition, and a record thereof carefully
made. The protest of any director, trustee, stockholder or member on
Rights of unpaid shares. - Holders of subscribed shares not fully any action or proposed action must be recorded in full on his demand.
paid which are not delinquent shall have all the rights of a stockholder.
The records of all business transactions of the corporation and the
Section 73 – minutes of any meetings shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours
Lost or destroyed certificates. - The following procedure shall be on business days and he may demand, writing, for a copy of excerpts
followed for the issuance by a corporation of new certificates of stock in from said records or minutes, at his expense.
lieu of those which have been lost, stolen or destroyed:
Any officer or agent of the corporation who shall refuse to allow any
1. The registered owner of a certificate of stock in a corporation or his director, trustees, stockholder or member of the corporation to
legal representative shall file with the corporation an affidavit in examine and copy excerpts from its records or minutes, in accordance
triplicate setting forth, if possible, the circumstances as to how the with the provisions of this Code, shall be liable to such director, trustee,
certificate was lost, stolen or destroyed, the number of shares stockholder or member for damages, and in addition, shall be guilty of
represented by such certificate, the serial number of the certificate and an offense which shall be punishable under Section 144 of this Code:
the name of the corporation which issued the same. He shall also Provided, That if such refusal is made pursuant to a resolution or order
submit such other information and evidence which he may deem of the board of directors or trustees, the liability under this section for
necessary; such action shall be imposed upon the directors or trustees who voted
for such refusal: and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
2. After verifying the affidavit and other information and evidence with copy excerpts from the corporation's records and minutes has
the books of the corporation, said corporation shall publish a notice in improperly used any information secured through any prior
a newspaper of general circulation published in the place where the examination of the records or minutes of such corporation or of any
corporation has its principal office, once a week for three (3) other corporation, or was not acting in good faith or for a legitimate
consecutive weeks at the expense of the registered owner of the purpose in making his demand.
certificate of stock which has been lost, stolen or destroyed. The notice
shall state the name of said corporation, the name of the registered
owner and the serial number of said certificate, and the number of Stock corporations must also keep a book to be known as the "stock
shares represented by such certificate, and that after the expiration of and transfer book", in which must be kept a record of all stocks in the
one (1) year from the date of the last publication, if no contest has been names of the stockholders alphabetically arranged; the installments
presented to said corporation regarding said certificate of stock, the paid and unpaid on all stock for which subscription has been made,
right to make such contest shall be barred and said corporation shall and the date of payment of any installment; a statement of every
cancel in its books the certificate of stock which has been lost, stolen or alienation, sale or transfer of stock made, the date thereof, and by and
destroyed and issue in lieu thereof new certificate of stock, unless the to whom made; and such other entries as the by-laws may prescribe.
registered owner files a bond or other security in lieu thereof as may be The stock and transfer book shall be kept in the principal office of the
required, effective for a period of one (1) year, for such amount and in corporation or in the office of its stock transfer agent and shall be open
such form and with such sureties as may be satisfactory to the board of for inspection by any director or stockholder of the corporation at
directors, in which case a new certificate may be issued even before the reasonable hours on business days.
expiration of the one (1) year period provided herein: Provided, That if

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No stock transfer agent or one engaged principally in the business of It is precisely the brewing family discord between Judge Torres and
registering transfers of stocks in behalf of a stock corporation shall be private respondents — his nephew and nieces that should have placed
allowed to operate in the Philippines unless he secures a license from Judge Torres on his guard. He should have been more careful in
the Securities and Exchange Commission and pays a fee as may be ensuring that his actions (particularly the assignment of qualifying
fixed by the Commission, which shall be renewable annually: Provided, shares to his nominees) comply with the requirements of the law.
That a stock corporation is not precluded from performing or making Petitioners cannot use the flimsy excuse that it would have been a vain
transfer of its own stocks, in which case all the rules and regulations attempt to force the incumbent corporate secretary to register the
imposed on stock transfer agents, except the payment of a license fee aforestated assignments in the stock and transfer book because the
herein provided, shall be applicable. latter belonged to the opposite faction. It is the corporate secretary's
duty and obligation to register valid transfers of stocks and if said
corporate officer refuses to comply, the transferor-stockholder may
Torres Jr. Vs. CA (278 SCRA 793) rightfully bring suit to compel performance. In other words, there are
remedies within the law that petitioners could have availed of, instead
Facts: of taking the law in their own hands, as the cliche goes.

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the In interpreting Section 74 of the Corporation Code, as follows:
majority stockholder of Tormil Realty & Development Corporation
while private respondents who are the children of Judge Torres' In the absence of any provision to the contrary, the corporate secretary
deceased brother Antonio A. Torres, constituted the minority is the custodian of corporate records. Corollarily, he keeps the stock
stockholders. and transfer book and makes proper and necessary entries therein.

In 1984, Judge Torres, in order to make substantial savings in taxes, Contrary to the generally accepted corporate practice, the stock and
adopted an "estate planning" scheme under which he assigned to transfer book of TORMIL was not kept by Ms. Maria Cristina T. Carlos,
Tormil Realty & Development Corporation (Tormil for brevity) various the corporate secretary but by respondent Torres, the President and
real properties he owned and his shares of stock in other corporations Chairman of the Board of Directors of TORMIL. In contravention to
in exchange for 225,972 Tormil Realty shares. Hence, on various dates the above cited provision, the stock and transfer book was not kept at
in July and August of 1984, ten (10) deeds of assignment were executed the principal office of the corporation either but at the place of
by the late Judge Torres. respondent Torres.

Consequently, the said properties were duly recorded in the inventory These being the obtaining circumstances, any entries made in the stock
of assets of Tormil Realty and the revenues generated by the said and transfer book on March 8, 1987 by respondent Torres of an alleged
properties were correspondingly entered in the corporation's books of transfer of nominal shares to Pabalan and Co. cannot therefore be
account and financial records. Likewise, all the assigned parcels of land given any valid effect. Where the entries made are not valid, Pabalan
were duly registered with the respective Register of Deeds in the name and Co. cannot therefore be considered stockholders of record of
of Tormil Realty, except for the ones located in Makati and Pasay City. TORMIL. Because they are not stockholders, they cannot therefore be
elected as directors of TORMIL. To rule otherwise would not only
At the time of the assignments and exchange, however, only 225,000 encourage violation of clear mandate of Sec. 74 of the Corporation
Tormil Realty shares remained unsubscribed, all of which were duly Code that stock and transfer book shall be kept in the principal office of
issued to and received by Judge Torres the corporation but would likewise open the flood gates of confusion in
the corporation as to who has the proper custody of the stock and
transfer book and who are the real stockholders of records of a certain
Due to the insufficient number of shares of stock issued to Judge corporation as any holder of the stock and transfer book, though not
Torres and the alleged refusal of private respondents to approve the the corporate secretary, at pleasure would make entries therein.
needed increase in the corporation's authorized capital stock (to cover
the shortage of 972 shares due to Judge Torres under the "estate
planning" scheme), on 11 September 1986, Judge Torres revoked the The fact that respondent Torres holds 81.28% of the outstanding
two (2) deeds of assignment covering the properties in Makati and capital stock of TORMIL is of no moment and is not a license for him to
Pasay City. arrogate unto himself a duty lodged to ( sic ) the corporate secretary.

Noting the disappearance of the Makati and Pasay City properties from All corporations, big or small, must abide by the provisions of the
the corporation's inventory of assets and financial records, private Corporation Code. Being a simple family corporation is not an
respondents were constrained to file a complaint with the Securities exemption. Such corporations cannot have rules and practices other
and Exchange Commission (SEC) to compel Judge Torres to deliver to than those established by law.
Tormil corporation the two (2) deeds of assignment covering the
aforementioned Makati and Pasay City properties which he had Capitol College of Iligan Vs. CA (302 SCRA 349)
unilaterally revoked and to cause the registration of the corresponding
titles in the name of Tormil. Private respondents alleged that following
the disappearance of the properties from the corporation's inventory of Facts:
assets, they found that Judge Torres, together with Edgardo Pabalan
and Graciano Tobias, then General Manager and legal counsel, On August 7, 1975, the Court of First Instance (now Regional Trial
respectively, of Tormil, formed and organized a corporation named Court) of Iligan City rendered judgment in a Civil Case, entitled
"Torres-Pabalan Realty and Development Corporation" and that as "Aranas vs. Iligan Capitol College, et . al .," ordering CCI to deliver to
part of Judge Torres' contribution to the new corporation, he executed Spouses Aranas their share of the profits and/or dividends by virtue of
in its favor a Deed of Assignment conveying the same Makati and Pasay their investment in the corporation, and to pay them P5,000.00 as
City properties he had earlier transferred to Tormil. moral damages and P1,000.00 as attorney's fees. This judgment was
affirmed in toto by the Court of Appeals but was later modified by
Issue: eliminating the award of P5,000.00 as moral damages. Appeal to this
Court from the modified judgment proved unavailing and the case was
remanded for execution.
W/N it is proper for the late judge to have personal custody of
corporate records, as president, chairman and majority stockholder
In the course of the execution of the judgment the RTC issued an Order
directing the examination of the property and income of CCI. This
Ruling: order of the RTC was challenged by the petitioner before the Court of
Appeals. The Court of Appeals affirmed the RTC order but with a
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qualification that the examination of petitioner's books of account be In article 10 of the By-laws of the corporation it is declared that "Every
"limited only to the determination if the corporation had declared shareholder may examine the books of the company and other
dividends from 1964 and private respondent's share thereof, for, unless documents pertaining to the same upon the days which the board of
dividends are declared, the stockholders of a corporation are not directors shall annually fix." At the directors' meeting of the
entitled to any share in the profits of the corporation." corporation held on February 16, 1924, the board passed a resolution to
the following effect that the books of the company are at their
disposition from the 15th to 25th of the same month for examination,
The RTC issued another order requiring the physical inventory of the
in appropriate hours.
assets of the petitioner. The validity of this order was questioned by the
petitioner before the Court of Appeals. The Court of Appeals, thru then
Associate Justice Justo P. Torres, nullified and set aside the challenged The contention for the respondent is that this resolution of the board
order and reiterated the appellate court's earlier ruling. It ratiocinated constitutes a lawful restriction on the right conferred by statute; and it
that the determination of corporate profits and the declaration of is insisted that as the petitioner has not availed himself of the
dividends are corporate powers vested in the board of directors which permission to inspect the books and transactions of the company
cannot be exercised by the court. In addition, the appellate court ruled within the ten days thus defined, his right to inspection and
that the execution of the final judgment of the RTC should be placed examination is lost, at least for this year.
under the supervision of the Securities and Exchange Commission
(SEC) in view of the enactment of P.D. 902-A.
Issue;

Issue:
W/N the refusal of the company to Pardo to inspect the books and
transactions of the company is valid
W/N the court erred in ordering CCI to submit to the SEC for
inspection all its records/books of account dating back in 1964 to the
Ruling:
present, for the purpose of determining whether profits have been
earned by petitioner and whether private respondents have been
unjustly deprived of their share therein. No.

Ruling: The general right given by the statute may not be lawfully abridged to
the extent attempted in this resolution. It may be admitted that the
officials in charge of a corporation may deny inspection when sought at
The court’s order was proper.
unusual hours or under other improper conditions; but neither the
executive officers nor the board of directors have the power to deprive
The respondent court, in requiring petitioner to pay private a stockholder of the right altogether. A by-law unduly restricting the
respondent's their unrealized profits and/or dividends, merely right of inspection is undoubtedly invalid. Authorities to this effect are
complied with the decision of this Court in Aranas vs. Court of too numerous and direct to require extended comment.
Appeals , which ruled:
It will be noted that our statute declares that the right of inspection can
The Securities and Exchange Commission is ordered to cause the be exercised "at reasonable hours." This means at reasonable hours on
execution of the final judgment, This will include, among others, the business days throughout the year, and not merely during some
issuance of certificate of stock in favor of petitioners, inspection of the arbitrary period of a few days chosen by the directors.
books of accounts of respondent corporation (now petitioner) for the
purpose of determining whether profits have indeed been earned by
Philpotts Vs. Phil. Mfg. Co. (40 Phil 471)
the corporation and whether herein petitioners (now private
respondents) have been unjustly deprived of their share therein.
Facts:
Based on the above-quoted ruling of this Court, it is clear that the
purpose of the inspection of petitioner's books of account is not only to W. G. Philpotts, a stockholder in the Philippine Manufacturing
determine whether dividends have been declared by the petitioner but Company, one of the respondents herein, seeks by this proceeding to
also to ascertain whether profits have been earned by the latter and obtain a writ of mandamus to compel the respondents to permit the
whether private respondents have been unjustly deprived of their share plaintiff, in person or by some authorized agent or attorney, to inspect
therein. Such determination is possible only after factual examination and examine the records of the business transacted by said company
by the board of directors of petitioner of the existence of such profits since January 1, 1918. The petition is filed originally in this court under
and their declaration of dividends. the authority of section 515 of the Code of Civil Procedure, which gives
to this tribunal concurrent jurisdiction with the Court of First Instance
in cases, among others, where any corporation or person unlawfully
After the determination of the existence of any such profits, private
excludes the plaintiff from the use and enjoyment of some right to
respondents may then avail themselves of the proper legal remedies
which he is entitled.
authorized by the governing laws and pertinent rules for the
declaration of dividends and demand their appropriate participation
therein. Issue:

Pardo Vs. Hercules Lumber (47 Phil 964) W/N the right which the law concedes to a stockholder to inspect the
records can be exercised by a proper agent or attorney of the
stockholder as well as by the stockholder in person
Facts:

Ruling:
Pardo is a stockholder in the Hercules Lumber Company, Inc., and
Ignacio Ferrer, as acting secretary of the said company, has refused to
permit the petitioner or his agent to inspect the records and business There is no pretense that the respondent corporation or any of its
transactions of the said Hercules Lumber Company, Inc., at times officials has refused to allow the petitioner himself to examine anything
desired by the petitioner. relating to the affairs of the company, and the petition prays for a
peremptory order commanding the respondents to place the records of
all business transactions of the company, during a specified period, at
The main ground upon of the company’s refusal has reference to the
the disposal of the plaintiff or his duly authorized agent or attorney, it
time, or times, within which the right of inspection may be exercised.
being evident that the petitioner desires to exercise said right through
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an agent or attorney. In the argument in support of the demurrer it is
conceded by counsel for the respondents that there is a right of
examination in the stockholder granted under section 51 of the
Corporation Law, but it is insisted that this right must be exercised in
person. Section 76 –

The pertinent provision of our law is found in the second paragraph of Plan or merger of consolidation. - Two or more corporations may
section 51 of Act No. 1459, which reads as follows: "The record of all merge into a single corporation which shall be one of the constituent
business transactions of the corporation and the minutes of any corporations or may consolidate into a new single corporation which
meeting shall be open to the inspection of any director, member or shall be the consolidated corporation.
stockholder of the corporation at reasonable hours."
The board of directors or trustees of each corporation, party to the
This provision is to be read of course in connecting with the related merger or consolidation, shall approve a plan of merger or
provisions of sections 51 and 52, defining the duty of the corporation in consolidation setting forth the following:
respect to the keeping of its records.
1. The names of the corporations proposing to merge or consolidate,
Thus, the right of inspection given to a stockholder in the provision hereinafter referred to as the constituent corporations;
above quoted can be exercised either by himself or by any proper
representative or attorney in fact, and either with or without the 2. The terms of the merger or consolidation and the mode of carrying
attendance of the stockholder. This is in conformity with the general the same into effect;
rule that what a man may do in person he may do through another; and
we find nothing in the statute that would justify us in qualifying the
right in the manner suggested by the respondents. 3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
"That stockholders have the right to inspect the books of the required to be set forth in the articles of incorporation for corporations
corporation, taking minutes from the same, at all reasonable times, and organized under this Code; and
may be aided in this by experts and counsel, so as to make the
inspection valuable to them, is a principle too well settled to need
discussion." 4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.

There are some things which a corporation may undoubtedly keep

secret, notwithstanding the right of inspection given by law to the Section 77 –
stockholder; as for instance, where a corporation, engaged in the
business of manufacture, has acquired a formula or process, not Stockholder's or member's approval. - Upon approval by
generally known, which has proved of utility to it in the manufacture of majority vote of each of the board of directors or trustees of the
its products. It is not our intention to declare that the authorities of the constituent corporations of the plan of merger or consolidation, the
corporation, and more particularly the Board of Directors, might not same shall be submitted for approval by the stockholders or members
adopt measures for the protection of such process form publicity. of each of such corporations at separate corporate meetings duly called
There is, however, nothing in the petition which would indicate that for the purpose. Notice of such meetings shall be given to all
the petitioner in this case is seeking to discover anything which the stockholders or members of the respective corporations, at least two
corporation is entitled to keep secret; and if anything of the sort is (2) weeks prior to the date of the meeting, either personally or by
involved in the case it may be brought out at a more advanced stage of registered mail. Said notice shall state the purpose of the meeting and
the proceedings. shall include a copy or a summary of the plan of merger or
consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each
Section 75 – corporation in the case of stock corporations or at least two-thirds
(2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting stockholder in
Right to financial statements. - Within ten (10) days from receipt
stock corporations may exercise his appraisal right in accordance with
of a written request of any stockholder or member, the corporation
the Code: Provided, That if after the approval by the stockholders of
shall furnish to him its most recent financial statement, which shall
such plan, the board of directors decides to abandon the plan, the
include a balance sheet as of the end of the last taxable year and a
appraisal right shall be extinguished.
profit or loss statement for said taxable year, showing in reasonable
detail its assets and liabilities and the result of its operations.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the
At the regular meeting of stockholders or members, the board of
respective boards of directors or trustees of all the constituent
directors or trustees shall present to such stockholders or members a
corporations and ratified by the affirmative vote of stockholders
financial report of the operations of the corporation for the preceding
representing at least two-thirds (2/3) of the outstanding capital stock
year, which shall include financial statements, duly signed and certified
or of two-thirds (2/3) of the members of each of the constituent
by an independent certified public accountant.
corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
However, if the paid-up capital of the corporation is less than
P50,000.00, the financial statements may be certified under oath by
Section 78 –
the treasurer or any responsible officer of the corporation.

Articles of merger or consolidation. - After the approval by the

stockholders or members as required by the preceding section, articles
of merger or articles of consolidation shall be executed by each of the
TITLE IX constituent corporations, to be signed by the president or vice-
president and certified by the secretary or assistant secretary of each
corporation setting forth:
MERGER AND CONSOLIDATION
1. The plan of the merger or the plan of consolidation;

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2. As to stock corporations, the number of shares outstanding, or in the Asian Hardwood assigned its rights over the outstanding obligation of
case of non-stock corporations, the number of members; and GALLEON of US$2,315,747.32 to World Universal Trading and
Investment Company, S.A. (World Universal), embodied in a Deed of
Assignment which in turn, assigned the credit to petitioner POLIAND.
3. As to each corporation, the number of shares or members voting for
and against such plan, respectively.
POLIAND made written demands on GALLEON, NDC, and DBP for
the satisfaction of the outstanding balance in the amount of
Section 79 – US$2,315,747.32. For failure to heed the demands POLIAND instituted
a collection suit against NDC, DBP and GALLEON. POLIAND claimed
Effectivity of merger or consolidation. - The articles of merger that under LOI No. 1155 and the Memorandum of Agreement between
or of consolidation, signed and certified as herein above required, shall GALLEON and NDC, defendants GALLEON, NDC, and DBP were
be submitted to the Securities and Exchange Commission in solidarily liable to POLIAND as assignee of the rights of the credit
quadruplicate for its approval: Provided, That in the case of merger or advances/loan accommodations to GALLEON.
consolidation of banks or banking institutions, building and loan
associations, trust companies, insurance companies, public utilities,
educational institutions and other special corporations governed by Issue:
special laws, the favorable recommendation of the appropriate
government agency shall first be obtained. If the Commission is W/N upon the effectivity of LOI No. 1155, NDC ipso facto acquired the
satisfied that the merger or consolidation of the corporations interests in GALLEON
concerned is not inconsistent with the provisions of this Code and
existing laws, it shall issue a certificate of merger or of consolidation, at
which time the merger or consolidation shall be effective. Ruling:

If, upon investigation, the Securities and Exchange Commission has Ordinarily, in the merger of two or more existing corporations, one of
reason to believe that the proposed merger or consolidation is contrary the combining corporations survives and continues the combined
to or inconsistent with the provisions of this Code or existing laws, it business, while the rest are dissolved and all their rights, properties
shall set a hearing to give the corporations concerned the opportunity and liabilities are acquired by the surviving corporation. The merger,
to be heard. Written notice of the date, time and place of hearing shall however, does not become effective upon the mere agreement of the
be given to each constituent corporation at least two (2) weeks before constituent corporations.
said hearing. The Commission shall thereafter proceed as provided in
this Code.
As specifically provided under Section 79 of said Code, the merger shall
only be effective upon the issuance of a certificate of merger by the
Securities and Exchange Commission (SEC), subject to its prior
determination that the merger is not inconsistent with the Code or
existing laws. Where a party to the merger is a special corporation
Poliand Vs. Nat’l Dev’t Co. (467 SCRA 500) governed by its own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government agency
Facts: should first be obtained. The issuance of the certificate of merger is
crucial because not only does it bear out SEC’s approval but also marks
the moment whereupon the consequences of a merger take place. By
Asian Hardwood Limited, a Hong Kong corporation, extended credit operation of law, upon the effectivity of the merger, the absorbed
accommodations in favor of GALLEON totaling US$3,317,747.32. At corporation ceases to exist but its rights, and properties as well as
that time, GALLEON, a domestic corporation organized in 1977 and liabilities shall be taken and deemed transferred to and vested in the
headed by its president, Roberto Cuenca, was engaged in the maritime surviving corporation.
transport of goods. The advances were utilized to augment GALLEON’s
working capital depleted as a result of the purchase of five new vessels
and two second-hand vessels in 1979 and competitiveness of the The records do not show SEC approval of the merger. POLIAND
shipping industry. GALLEON had incurred an obligation in the total cannot assert that no conditions were required prior to the assumption
amount of US$3,391,084.91 in favor of Asian Hardwood. by NDC of ownership of GALLEON and its subsisting loans.
Compliance with the statutory requirements is a condition precedent to
the effective transfer of the shareholdings in GALLEON to NDC. In
To finance the acquisition of the vessels, GALLEON obtained loans directing NDC to acquire the shareholdings in GALLEON, the
from Japanese lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank President could not have intended that the parties disregard the
Ltd. and Marubeni Benelux. GALLEON, through Cuenca, and DBP requirements of law. In the absence of SEC approval, there was no
executed a Deed of Undertaking whereby DBP guaranteed the prompt effective transfer of the shareholdings in GALLEON to NDC. Hence,
and punctual payment of GALLEON’s borrowings from the Japanese NDC did not acquire the rights or interests of GALLEON, including its
lenders. To secure DBP’s guarantee under the Deed of Undertaking, liabilities.
GALLEON promised, among others, to secure a first mortgage on the
five new vessels and on the second-hand vessels. Thus, GALLEON
executed a mortgage contract over five of its vessels. PNB Vs. Andrada Electric (381 SCRA 244)

Meanwhile, President Ferdinand Marcos issued Letter of Instruction Facts:

(LOI) No. 1155, directing NDC to acquire the entire shareholdings of
GALLEON for the amount originally contributed by its shareholders National Sugar Development Corporation is a semi-government
payable in five (5) years without interest cost to the government. In the corporation and the sugar arm of the PNB, while Pampanga Sugar
same LOI, DBP was to advance to GALLEON within three years from Mills is a corporation organized, existing and operating under the 1975
its effectivity the principal amount and the interest thereon of laws of the Philippines. Andrada Electric is engaged in the business of
GALLEON’s maturing obligations. general construction for the repairs and/or construction of different
kinds of machineries and buildings. PNB acquired the assets of
LOI No. 1195 was issued directing the foreclosure of the mortgage on PASUMIL that were earlier foreclosed by the Development Bank of the
the five vessels. For failure of GALLEON to pay its debt despite Philippines (DBP) under LOI No. 311. PNB organized NASUDECO to
repeated demands from DBP, the vessels were extrajudicially take ownership and possession of the assets and ultimately to
foreclosed on various dates and acquired by DBP for the total amount nationalize and consolidate its interest in other PNB controlled sugar
of P539,000,000.00. DBP subsequently sold the vessels to NDC for the mills.
same amount.

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Prior to the acquisition of PNB, engaged the services of Andrada for known as Associated Citizens Bank, the surviving bank. And on March
electrical rewinding and repair, most of which were partially paid by 10, 1981, the Associated Citizens Bank changed its corporate name to
the PASUMIL, leaving several unpaid accounts with the plaintiff. Associated Bank by virtue of the Amended Articles of Incorporation.
Andrada and PASUMIL entered into a contract for the Andrada to
perform some works construction and mechanical works to PASUMIL.
On September 7, 1977, Sarmiento executed in favor of Associated Bank
a promissory note whereby the former undertook to pay the latter the
Out of the total obligation of P777,263.80, PASUMIL had paid only sum of P2,500,000.00 payable on or before March 6, 1978. As per said
P250,000.00, leaving an unpaid balance amounting to P527,263.80. promissory note, the he agreed to pay interest at 14% per annum, 3%
PASUMIL made a partial payment of P14,000.00, in broken amounts per annum in the form of liquidated damages, compounded interests,
leaving an unpaid balance of P513,263.80. and attorney's fees, in case of litigation equivalent to 10% of the
amount due. The defendant, to date, still owes plaintiff bank the
amount of P2,250,000.00 exclusive of interest and other charges.
Andrada contended that since PNB and NASUDECO now owned and
Despite repeated demands the defendant failed to pay the amount due.
possessed the assets of the defendant PASUMIL, they all benefited
from the works, and the electrical, as well as the engineering and
repairs, performed by the plaintiff. However, PASUMIL, PNB, and The defendant contended that Associated Bank is not the proper party
NASUDECO, failed and refused to pay the plaintiff their just, valid and in interest because the promissory note was executed in favor of
demandable obligation. Citizens Bank and Trust Company.

Issue: Issue:

W/N PNB should be held liable for the unpaid obligations of PASUMIL W/N Associated Bank, the surviving corporation, may enforce the
by virtue of LOI Nos. 189-A and 311, which expressly authorized promissory note made by Sarmiento in favor of CBTC, the absorbed
PASUMIL and PNB to merge or consolidate company, after the merger agreement had been signed

Ruling: Ruling:

As a rule, a corporation that purchases the assets of another will not be Ordinarily, in the merger of two or more existing corporations, one of
liable for the debts of the selling corporation, provided the former the combining corporations survives and continues the combined
acted in good faith and paid adequate consideration for such assets, business, while the rest are dissolved and all their rights, properties
except when any of the following circumstances is present: (1) where and liabilities are acquired by the surviving corporation. Although
the purchaser expressly or impliedly agrees to assume the debts, (2) there is dissolution of the absorbed corporations, there is no winding
where the transaction amounts to a consolidation or merger of the up of their affairs or liquidation of their assets, because the surviving
corporations, (3) where the purchasing corporation is merely a corporation automatically acquires all their rights, privileges and
continuation of the selling corporation, and (4) where the transaction powers, as well as their liabilities.
is fraudulently entered into in order to escape liability for those debts.
The merger, however, does not become effective upon the mere
A consolidation is the union of two or more existing entities to form a agreement of the constituent corporations. The procedure to be
new entity called the consolidated corporation. A merger, on the other followed is prescribed under the Corporation Code. Section 79 of said
hand, is a union whereby one or more existing corporations are Code requires the approval by the Securities and Exchange
absorbed by another corporation that survives and continues the Commission (SEC) of the articles of merger which, in turn, must have
combined business. been duly approved by a majority of the respective stockholders of the
constituent corporations. The same provision further states, that the
merger shall be effective only upon the issuance by the SEC of a
The merger, however, does not become effective upon the mere
certificate of merger. The effectivity date of the merger is crucial for
agreement of the constituent corporations. Since a merger or
determining when the merged or absorbed corporation ceases to exist;
consolidation involves fundamental changes in the corporation, as well
and when its rights, privileges, properties as well as liabilities pass on
as in the rights of stockholders and creditors, there must be an express
to the surviving corporation.
provision of law authorizing them. For a valid merger or consolidation,
the approval by the Securities and Exchange Commission (SEC) of the
articles of merger or consolidation is required. These articles must Consistent with the aforementioned Section 79, the September 16, 1975
likewise be duly approved by a majority of the respective stockholders Agreement of Merger, which Associated Banking Corporation (ABC)
of the constituent corporations. and Citizens Bank and Trust Company (CBTC) entered into, provided
that its effectivity "shall, for all intents and purposes, be the date when
the necessary papers to carry out this [m]erger shall have been
In the case at bar, we hold that there is no merger or consolidation with
approved by the Securities and Exchange Commission."
respect to PASUMIL and PNB. The procedure prescribed under Title
IX of the Corporation Code was not followed.
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of
In fact, PASUMIL’s corporate existence had not been legally
the agreement itself, which was September 16, 1975. Private
extinguished or terminated. Neither did petitioner expressly or
respondent contends that, since he issued the promissory note to CBTC
impliedly agree to assume the debt of PASUMIL to respondent. LOI
on September 7, 1977 — two years after the merger agreement had
No. 11 explicitly provides that PNB shall study and submit
been executed — CBTC could not have conveyed or transferred to
recommendations on the claims of PASUMIL’s creditors. Clearly, the
petitioner its interest in the said note, which was not yet in existence at
corporate separateness between PASUMIL and PNB remains, despite
the time of the merger. Therefore, petitioner, the surviving bank, has
respondent’s insistence to the contrary.
no right to enforce the promissory note on private respondent; such
right properly pertains only to CBTC.
Associated Bank Vs. CA (291 SCRA 511)
Assuming that the effectivity date of the merger was the date of its
Facts: execution, we still cannot agree that petitioner no longer has any
interest in the promissory note. A closer perusal of the merger
agreement leads to a different conclusion. The provision quoted earlier
On September 16, 1975 Associated Banking Corporation and Citizens has this other clause:
Bank and Trust Company merged to form just one banking corporation

126
Upon the effective date of the [m]erger, all references to [CBTC] in any The letters of credit, on the other hand, were opened for ELISCON by
deed, documents, or other papers of whatever kind or nature and CBTC using the credit facilities of Pacific Multi-Commercial
wherever found shall be deemed for all intents and purposes, Corporation (MULTI) with the said bank, pursuant to the Resolution of
references to [ABC], the SURVIVING BANK, as if such references the Board of Directors of MULTI adopted that since at least 90% of the
were direct references to [ABC] . . . . Company's gross sales is generated by the sale of tin-plates
manufactured by Elizalde Steel Consolidated, Inc. it is to the best
interests of the Company to continue handling said tin-plate line and
Thus, the fact that the promissory note was executed after the
because Elizalde Steel Consolidated, Inc. has requested the assistance
effectivity date of the merger does not militate against petitioner. The
of the Company in obtaining credit facilities to enable it to maintain the
agreement itself clearly provides that all contracts — irrespective of the
present level of its tin-plate manufacturing output and the Company is
date of execution — entered into in the name of CBTC shall be
willing to extend said requested assistance, MULTI allow and authorize
understood as pertaining to the surviving bank, herein petitioner.
ELICON to avail and make use of the Credit Line of MULTI with CBCT.
Since, in contrast to the earlier aforequoted provision, the latter clause
MULTI likewise guarantee, solidarily, the payment of the
no longer specifically refers only to contracts existing at the time of the
corresponding Letters of Credit upon maturity of the same.
merger, no distinction should be made. The clause must have been
deliberately included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the merger Subsequently, Antonio Roxas Chua and Chester G. Babst executed a
agreement a farcical interpretation aimed at evading fulfillment of a Continuing Suretyship, whereby they bound themselves jointly and
due obligation. severally liable to pay any existing indebtedness of MULTI to CBTC to
the extent of P8,000,000.00 each.
Thus, although the subject promissory note names CBTC as the payee,
the reference to CBTC in the note shall be construed, under the very CBTC opened for ELISCON in favor of National Steel Corporation
provisions of the merger agreement, as a reference to petitioner bank, three (3) domestic letters of credit which ELISCON used to purchase
"as if such reference was a direct reference to" the latter "for all intents tin black plates from National Steel Corporation. ELISCON defaulted
and purposes." in its obligation to pay the amounts of the letters of credit, leaving an
outstanding account in the total amount of P3,963,372.08.
Section 80 –
On December 22, 1980, the Bank of the Philippine Islands (BPI) and
CBTC entered into a merger, wherein BPI, as the surviving corporation,
Effects or merger or consolidation. - The merger or acquired all the assets and assumed all the liabilities of CBTC.
consolidation shall have the following effects:

Meanwhile, ELISCON encountered financial difficulties and became

1. The constituent corporations shall become a single corporation
heavily indebted to the Development Bank of the Philippines (DBP). In
which, in case of merger, shall be the surviving corporation designated
order to settle its obligations, ELISCON proposed to convey to DBP by
in the plan of merger; and, in case of consolidation, shall be the
way of dacion en pago all its fixed assets mortgaged with DBP, as
consolidated corporation designated in the plan of consolidation;
payment for its total indebtedness in the amount of P201,181,833.16.
On December 28, 1978, ELISCON and DBP executed a Deed of Cession
2. The separate existence of the constituent corporations shall cease, of Property in Payment of Debt.
except that of the surviving or the consolidated corporation;
DBP formally took over the assets of ELISCON, including its
3. The surviving or the consolidated corporation shall possess all the indebtedness to BPI. Thereafter, DBP proposed formulas for the
rights, privileges, immunities and powers and shall be subject to all the settlement of all of ELISCON's obligations to its creditors, but BPI
duties and liabilities of a corporation organized under this Code; expressly rejected the formula submitted to it for not being acceptable.

4. The surviving or the consolidated corporation shall thereupon and Consequently, BPI, as successor-in-interest of CBTC, instituted a
thereafter possess all the rights, privileges, immunities and franchises complaint for sum of money against ELISCON, MULTI and Babst.
of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including
ELISCON argued that the complaint was premature since DBP had
subscriptions to shares and other choses in action, and all and every
made serious efforts to settle its obligations with BPI.
other interest of, or belonging to, or due to each constituent
corporation, shall be deemed transferred to and vested in such
surviving or consolidated corporation without further act or deed; and Babst also alleged that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred
solely for its benefit and not for any third party liability, and he had no
5. The surviving or consolidated corporation shall be responsible and
knowledge or information of any transaction between MULTI and
liable for all the liabilities and obligations of each of the constituent
ELISCON.
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such MULTI, for its part, denied knowledge of the merger between BPI and
constituent corporations may be prosecuted by or against the surviving CBTC, and averred that the guaranty under its board resolution did not
or consolidated corporation. The rights of creditors or liens upon the cover purchases made by ELISCON in the form of trust receipts. It set
property of any of such constituent corporations shall not be impaired up a cross-claim against ELISCON alleging that the latter should be
by such merger or consolidation. held liable for any judgment which the court may render against it in
favor of BPI.
Babst Vs. CA (350 SCRA 341)
Issue:
Facts:
W/N BPI has legal capacity to recover the obligations of ELISCON,
MULTI and Babst to CBTC
Elizalde Steel Consolidated, Inc. (ELISCON) obtained from
Commercial Bank and Trust Company (CBTC) a loan in the amount of
P8,015,900.84, with interest at the rate of 14% per annum, evidenced Ruling:
by a promissory note. ELISCON defaulted in its payments, leaving an
outstanding indebtedness in the amount of P2,795,240.67.

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There is no question that there was a valid merger between BPI and
CBTC. It is settled that in the merger of two existing corporations, one He alleged that he is an expert in textile manufacturing process. As
of the corporations survives and continues the business, while the early as 1956 he was hired as the Assistant Spinning Manager of
other is dissolved and all its rights, properties and liabilities are Universal Textiles, Inc. (UTEX). Then he was promoted to Senior
acquired by the surviving corporation. Hence, BPI has a right to Manager and worked for UTEX till 1980 under its President, Patricio
institute the case a quo. Lim. In 1978 Patricio Lim formed Peggy Mills, Inc. with Filsyn having
controlling interest. He was absorbed by Peggy Mills as its Vice
President and Plant Manager. At the time of his retirement he was
Notwithstanding such right, BPI cannot recover from the petitioner.
receiving P60,000.00 monthly with vacation and sick leave benefits,
13th month pay, holiday pay and two round trip business class tickets
Article 1293 of the Civil Code provides: on a Manila-London-Manila itinerary every three years which is
convertible to cash if unused.
Novation which consists in substituting a new debtor in the place of the In 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as
original one, may be made even without the knowledge or against the per agreement and this was renamed as Sta. Rosa Textile with Patricio
will of the latter, but not without the consent of the creditor. Payment Lim as Chairman and President. He worked for Sta. Rosa until
by the new debtor gives him the rights mentioned in articles 1236 and November 30 and that from time to time the owners of Far Eastern
1237. consulted with him on technical aspects of reoperation of the plant as
per correspondence.
BPI contends that in order to have a valid novation, there must be an
express consent of the creditor. However, there exist clear indications Issue:
that BPI was aware of the assumption by DBP of the obligations of
ELISCON. Due to the failure of BPI to register its objection to the take- W/N Peggy Mills Inc. (PMI) and Sta. Rosa Textile Inc. (SRTI) are the
over by DBP of ELISCON's assets, at the creditors' meeting held in same entity, so that the latter will be liable to McLeod
June 1981 and thereafter, it is deemed to have consented to the
substitution of DBP for ELISCON as debtor. Ruling:

BPI gives no cogent reason in withholding its consent to the As a rule, a corporation that purchases the assets of another will not be
substitution, other than its desire to preserve its causes of action and liable for the debts of the selling corporation, provided the former
legal recourse against the sureties of ELISCON. It must be acted in good faith and paid adequate consideration for such assets,
remembered, however, that while a surety is solidarily liable with the except when any of the following circumstances is present: (1) where
principal debtor, his obligation to pay only arises upon the principal the purchaser expressly or impliedly agrees to assume the debts, (2)
debtor's failure or refusal to pay. A contract of surety is an accessory where the transaction amounts to a consolidation or merger of the
promise by which a person binds himself for another already bound, corporations, (3) where the purchasing corporation is merely a
and agrees with the creditor to satisfy the obligation if the debtor does continuation of the selling corporation, and (4) where the selling
not. A surety is an insurer of the debt; he promises to pay the corporation fraudulently enters into the transaction to escape liability
principal's debt if the principal will not pay. for those debts.

In the case at bar, there was no indication that the principal debtor will None of the foregoing exceptions is present in this case.
default in payment. In fact, DBP, which had stepped into the shoes of
ELISCON, was capable of payment. Its authorized capital stock was Here, PMI transferred its assets to SRTI to settle its obligation to SRTI
increased by the government. More importantly, the National in the sum of P210,000,000. We are not convinced that PMI
Development Company took over the business of ELISCON and fraudulently transferred these assets to escape its liability for any of its
undertook to pay ELISCON's creditors, and earmarked for that debts. PMI had already paid its employees, except McLeod, their
purpose the amount of P4,015,534.54 for payment to BPI. money claims.

BPI's conduct evinced a clear and unmistakable consent to the There was also no merger or consolidation of PMI and SRTI.
substitution of DBP for ELISCON as debtor. Hence, there was a valid
novation which resulted in the release of ELISCON from its obligation
to BPI, whose cause of action should be directed against DBP as the Consolidation is the union of two or more existing corporations to form
new debtor. a new corporation called the consolidated corporation. It is a
combination by agreement between two or more corporations by which
their rights, franchises, and property are united and become those of a
Moreover, novation, would have dual functions — one to extinguish an single, new corporation, composed generally, although not necessarily,
existing obligation, the other to substitute a new one in its place — of the stockholders of the original corporations.
requiring a conflux of four essential requisites, (1) a previous valid
obligation; (2) an agreement of all parties concerned to a new contract;
(3) the extinguishment of the old obligation; and (4) the birth of a valid Merger, on the other hand, is a union whereby one corporation
new obligation. absorbs one or more existing corporations, and the absorbing
corporation survives and continues the combined business.
Thus, the original obligation having been extinguished, the contracts of
suretyship executed separately by Babst and MULTI, being accessory The parties to a merger or consolidation are called constituent
obligations, are likewise extinguished. corporations. In consolidation, all the constituents are dissolved and
absorbed by the new consolidated enterprise. In merger, all
constituents, except the surviving corporation, are dissolved. In both
McLeod Vs. NLRC (512 SCRA 222) cases, however, there is no liquidation of the assets of the dissolved
corporations, and the surviving or consolidated corporation acquires
Facts: all their properties, rights and franchises and their stockholders usually
become its stockholders.
John F. McLeod filed a complaint for retirement benefits, vacation and
sick leave benefits, non-payment of unused airline tickets, holiday pay, The surviving or consolidated corporation assumes automatically the
underpayment of salary and 13 th month pay, moral and exemplary liabilities of the dissolved corporations, regardless of whether the
damages, attorney’s fees plus interest against Filipinas Synthetic creditors have consented or not to such merger or consolidation.
Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles,
Inc., Patricio Lim and Eric Hu.
128
 In the present case, there is no showing that the subject dation in Effect of demand and termination of right. - From the time of
payment involved any corporate merger or consolidation. Neither is demand for payment of the fair value of a stockholder's shares until
there any showing of those indicative factors that SRTI is a mere either the abandonment of the corporate action involved or the
instrumentality of PMI. purchase of the said shares by the corporation, all rights accruing to
such shares, including voting and dividend rights, shall be suspended
Moreover, SRTI did not expressly or impliedly agree to assume any of in accordance with the provisions of this Code, except the right of such
PMI’s debts. stockholder to receive payment of the fair value thereof: Provided, That
if the dissenting stockholder is not paid the value of his shares within
30 days after the award, his voting and dividend rights shall
Also, McLeod did not present any evidence to show the alleged immediately be restored.
renaming of “Peggy Mills, Inc.” to “Sta. Rosa Textiles, Inc.”
Section 84 –
Hence, it is not correct for McLeod to treat PMI and SRTI as the same
entity.
When right to payment ceases. - No demand for payment under
this Title may be withdrawn unless the corporation consents thereto.
If, however, such demand for payment is withdrawn with the consent
TITLE X of the corporation, or if the proposed corporate action is abandoned or
rescinded by the corporation or disapproved by the Securities and
Exchange Commission where such approval is necessary, or if the
APPRAISAL RIGHT Securities and Exchange Commission determines that such stockholder
is not entitled to the appraisal right, then the right of said stockholder
to be paid the fair value of his shares shall cease, his status as a
Section 81 – stockholder shall thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to him.
Instances of appraisal right. - Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of Section 85 –
his shares in the following instances:

Who bears costs of appraisal. - The costs and expenses of

1. In case any amendment to the articles of incorporation has the effect appraisal shall be borne by the corporation, unless the fair value
of changing or restricting the rights of any stockholder or class of ascertained by the appraisers is approximately the same as the price
shares, or of authorizing preferences in any respect superior to those of which the corporation may have offered to pay the stockholder, in
outstanding shares of any class, or of extending or shortening the term which case they shall be borne by the latter. In the case of an action to
of corporate existence; recover such fair value, all costs and expenses shall be assessed against
the corporation, unless the refusal of the stockholder to receive
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other payment was unjustified.
disposition of all or substantially all of the corporate property and
assets as provided in the Code; and Section 86 –

3. In case of merger or consolidation. (n) Notation on certificates; rights of transferee. - Within ten (10)
days after demanding payment for his shares, a dissenting stockholder
Section 82 – shall submit the certificates of stock representing his shares to the
corporation for notation thereon that such shares are dissenting
How right is exercised. - The appraisal right may be exercised by shares. His failure to do so shall, at the option of the corporation,
any stockholder who shall have voted against the proposed corporate terminate his rights under this Title. If shares represented by the
action, by making a written demand on the corporation within thirty certificates bearing such notation are transferred, and the certificates
(30) days after the date on which the vote was taken for payment of the consequently canceled, the rights of the transferor as a dissenting
fair value of his shares: Provided, That failure to make the demand stockholder under this Title shall cease and the transferee shall have all
within such period shall be deemed a waiver of the appraisal right. If the rights of a regular stockholder; and all dividend distributions which
the proposed corporate action is implemented or affected, the would have accrued on such shares shall be paid to the transferee.
corporation shall pay to such stockholder, upon surrender of the
certificate or certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken,
excluding any appreciation or depreciation in anticipation of such
TITLE XI
corporate action.

If within a period of sixty (60) days from the date the corporate action NON-STOCK CORPORATIONS
was approved by the stockholders, the withdrawing stockholder and
the corporation cannot agree on the fair value of the shares, it shall be
determined and appraised by three (3) disinterested persons, one of Section 87 –
whom shall be named by the stockholder, another by the corporation,
and the third by the two thus chosen. The findings of the majority of Definition. - For the purposes of this Code, a non-stock corporation is
the appraisers shall be final, and their award shall be paid by the one where no part of its income is distributable as dividends to its
corporation within thirty (30) days after such award is made: Provided, members, trustees, or officers, subject to the provisions of this Code on
That no payment shall be made to any dissenting stockholder unless dissolution: Provided, That any profit which a non-stock corporation
the corporation has unrestricted retained earnings in its books to cover may obtain as an incident to its operations shall, whenever necessary
such payment: and Provided, further, That upon payment by the or proper, be used for the furtherance of the purpose or purposes for
corporation of the agreed or awarded price, the stockholder shall which the corporation was organized, subject to the provisions of this
forthwith transfer his shares to the corporation. Title.

Section 83 – The provisions governing stock corporation, when pertinent, shall be

applicable to non-stock corporations, except as may be covered by
specific provisions of this Title.

129
Section 88 – First, it is managed by its members. Both the CA and the CTA found
that the management and affairs of Sunlife were conducted by its
member-policyholders.
Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic service, or similar purposes, like trade, A stock insurance company doing business in the Philippines may
industry, agricultural and like chambers, or any combination thereof, “alter its organization and transform itself into a mutual insurance
subject to the special provisions of this Title governing particular company.” Sunlife has been mutualized or converted from a stock life
classes of non-stock corporations. insurance company to a nonstock mutual life insurance corporation
pursuant to Section 266 of the Insurance Code of 1978. On the basis of
its bylaws, its ownership has been vested in its member-policyholders
Republic Vs. Sunlife (473 SCRA 129) who are each entitled to one vote; and who, in turn, elect from among
themselves the members of its board of trustees. Being the governing
Facts: body of a nonstock corporation, the board exercises corporate powers,
lays down all corporate business policies, and assumes responsibility
for the efficiency of management.
Sun Life is a mutual life insurance company organized and existing
under the laws of Canada. It is registered and authorized by the
Securities and Exchange Commission and the Insurance Commission Second, it is operated with money collected from its members. Since
to engage in business in the Philippines as a mutual life insurance respondent is composed entirely of members who are also its
company. policyholders, all premiums collected obviously come only from them.

Sun Life filed with the Commissioner of Internal Revenue (CIR) its The member-policyholders constitute “both insurer and insured” who
insurance premium tax return for the third quarter of 1997 and paid “contribute, by a system of premiums or assessments, to the creation of
the premium tax in the amount of P31,485,834.51. For the period a fund from which all losses and liabilities are paid.” The premiums
covering August 21 to December 18, 1997, it filed with the CIR its pooled into this fund are earmarked for the payment of their indemnity
documentary stamp tax (DST) declaration returns and paid the total and benefit claims.
amount of P30,000,000.00.
Third, it is licensed for the mutual protection of its members, not for
Meanwhile, the Court of Tax Appeals (CTA) rendered its decision in the profit of anyone.
Insular Life Assurance Co. Ltd. v. CIR, which held that mutual life
insurance companies are purely cooperative companies and are exempt
from the payment of premium tax and DST. This pronouncement was As early as October 30, 1947, the director of commerce had already
later affirmed by this court in CIR v. Insular Life Assurance Company, issued a license to Sunlife -- a corporation organized and existing
Ltd. under the laws of Canada -- to engage in business in the Philippines.
Pursuant to Section 225 of Canada’s Insurance Companies Act, the
Sun Life surmised that being a mutual life insurance company, it was Canadian Minister of State (for finance and privatization) also declared
likewise exempt from the payment of premium tax and DST. Hence, in its Amending Letters Patent that Sunlife would be a mutual
Sun Life filed with the CIR an administrative claim for tax credit of its company effective June 1, 1992. In the Philippines, the Insurance
alleged erroneously paid premium tax and DST for the aforestated tax Commissioner also granted it annual Certificates of Authority to
periods. transact life insurance business, the most relevant of which were dated
July 1, 1997 and July 1, 1998.
For failure of the CIR to act upon the administrative claim for tax credit
and with the 2-year period to file a claim for tax credit or refund A mutual life insurance company is conducted for the benefit of its
dwindling away and about to expire, Sun Life filed with the CTA a member-policyholders, who pay into its capital by way of premiums.
petition for review. In its petition, it prayed for the issuance of a tax To that extent, they are responsible for the payment of all its losses.
credit certificate in the amount of P61,485,834.51 representing “The cash paid in for premiums and the premium notes constitute their
P31,485,834.51 of erroneously paid premium tax for the third quarter assets x x x.” In the event that the company itself fails before the terms
of 1997 and P30,000,000.00 of DST on policies of insurance from of the policies expire, the member-policyholders do not acquire the
August 21 to December 18, 1997. Sun Life stood firm on its contention status of creditors. Rather, they simply become debtors for whatever
that it is a mutual life insurance company vested with all the premiums that they have originally agreed to pay the company, if they
characteristic features and elements of a cooperative company or have not yet paid those amounts in full, for “mutual companies x x x
association as defined in Section 121 of the Tax Code. Primarily, the depend solely upon x x x premiums.” Only when the premiums will
management and affairs of Sun Life were conducted by its members; have accumulated to a sum larger than that required to pay for
secondly, it is operated with money collected from its members; and, company losses will the member-policyholders be entitled to a “pro
lastly, it has for its purpose the mutual protection of its members and rata division thereof as profits.”
not for profit or gain.
Contributing to its capital, the member-policyholders of a mutual
Issue: company are obviously also its owners. Sustaining a dual relationship
inter se, they not only contribute to the payment of its losses, but are
W/N Sunlife is a purely cooperative company or association under also entitled to a proportionate share and participate alike in its profits
Section 121 of the National Internal Revenue Code and a fraternal or and surplus.
beneficiary society, order or cooperative company on the lodge system
or local cooperation plan and organized and conducted solely by the Sharing in the common fund, any member-policyholder may choose to
members thereof for the exclusive benefit of each member and not for withdraw dividends in cash or to apply them in order to reduce a
profit under Section 199 of the National Internal Revenue Code. subsequent premium, purchase additional insurance, or accelerate the
payment period. Although the premium made at the beginning of a
Ruling: year is more than necessary to provide for the cost of carrying the
insurance, the member-policyholder will nevertheless receive the
benefit of the overcharge by way of dividends, at the end of the year
The Tax Code defines a cooperative as an association “conducted by the when the cost is actually ascertained. “The declaration of a dividend
members thereof with the money collected from among themselves and upon a policy reduces pro tanto the cost of insurance to the holder of
solely for their own protection and not for profit.” Without a doubt, the policy. That is its purpose and effect.”
Sunlife is a cooperative engaged in a mutual life insurance business.

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The so-called “dividend” that is received by member-policyholders is Sec. 91. Termination of membership. - Membership shall be
not a portion of profits set aside for distribution to the stockholders in terminated in the manner and for the causes provided in the articles of
proportion to their subscription to the capital stock of a corporation. incorporation or the by-laws. Termination of membership shall have
One, a mutual company has no capital stock to which subscription is the effect of extinguishing all rights of a member in the corporation or
necessary; there are no stockholders to speak of, but only members. in its property, unless otherwise provided in the articles of
And, two, the amount they receive does not partake of the nature of a incorporation or the by-laws. (n)
profit or income. The quasi-appearance of profit will not change its
character. It remains an overpayment, a benefit to which the member-
policyholder is equitably entitled. Chinese YMCA Vs. Ching (71 S 460)

Verily, a mutual life insurance corporation is a cooperative that Facts:

promotes the welfare of its own members. It does not operate for
profit, but for the mutual benefit of its member-policyholders. They Victor Ching filed an action for mandamus with preliminary injunction
receive their insurance at cost, while reasonably and properly guarding against Chinese Young Men's Christian Association of the Philippine
and maintaining the stability and solvency of the company. “The Islands (Chinese YMCA for short), William Golangco, in his capacity as
economic benefits filter to the cooperative members. Either equally or Director and President of the Chinese YMCA, and Juanito K. Tan, in
proportionally, they are distributed among members in correlation his capacity as Recording Secretary of the Chinese YMCA.
with the resources of the association utilized.”

Ching anchored his action in the Court of First Instance of Manila upon
It does not follow that because respondent is registered as a nonstock the claim that the Membership Campaign of the Chinese YMCA for
corporation and thus exists for a purpose other than profit, the 1966 held from September 27, 1965, up to November 26, 1965, only 175
company can no longer make any profits. Earning profits is merely its applications for membership were submitted, canvassed and accepted
secondary, not primary, purpose. In fact, it may not lawfully engage in on the last day of the membership campaign, which was November 26,
any business activity for profit, for to do so would change or contradict 1965 at 5:00 p.m.
its nature as a non-profit entity. It may, however, invest its corporate
funds in order to earn additional income for paying its operating
expenses and meeting benefit claims. Any excess profit it obtains as an The herein petitioners, on the other hand, alleged that 249
incident to its operations can only be used, whenever necessary or membership applications, including the 106 submitted through
proper, for the furtherance of the purpose for which it was organized. respondent Ching, were filed during the campaign period. Further, the
petitioners denied that there was any counting and/or approval of
membership applications that took place on November 26, 1965, as
The Tax Code is clear. On the one hand, Section 121 of the Code under the Constitution and By-Laws of the Chinese YMCA membership
exempts cooperative companies from the 5 percent percentage tax on applications had to be screened by its Membership Committee,
insurance premiums. On the other hand, Section 199 also exempts endorsed favorably to its Board of Directors and approved by the latter
from the DST, policies of insurance or annuities made or granted by body by two-thirds majority vote.
cooperative companies. Being a cooperative, respondent is thus
exempt from both types of taxes. It is claimed by the petitioners that of the 249 applications submitted,
174 were favorably endorsed by the Membership Committee to the
It is worthy to note that while RA 8424 amending the Tax Code has Board of Directors and subsequently approved by the latter. Seventy-
deleted the income tax of 10 percent imposed upon the gross five applications, which were among those submitted by respondent
investment income of mutual life insurance companies -- domestic and Ching were not approved for the reason that said respondent had given
foreign -- the provisions of Section 121 and 199 remain unchanged. "stop-payment" orders on the checks submitted by him and some
others to cover payment of the fees corresponding to these 75
applications. Accordingly, petitioners contend that the 1966
Having been seasonably filed and amply substantiated, the claim for membership of the Chinese YMCA should be constituted as they are
exemption in the amount of P61,485,834.51, representing percentage constituted, only by those 174 applicants whose applications were
taxes on insurance premiums and documentary stamp taxes on policies approved by the Chinese YMCA Board of Directors.
of insurance or annuities that were paid by respondent in 1997, is in
order. Thus, the grant of a tax credit certificate to respondent as The Court of First Instance of Manila rendered its decision annulling
ordered by the appellate court was correct. the 1966 annual membership campaign of the respondent Chinese
YMCA of the Philippine Islands, without prejudice to the holding of
Chapter I - MEMBERS another one in lieu thereof; declaring as without legal effect the results
of the same, including the approval of 174 applications to constitute the
present active membership of the association; making permanent the
Sec. 89. Right to vote. - The right of the members of any class or preliminary injunction issued in this case enjoining the respondents
classes to vote may be limited, broadened or denied to the extent from holding the annual election of the respondent association, until
specified in the articles of incorporation or the by-laws. Unless so such time that a new list of members shall have been finalized; and
limited, broadened or denied, each member, regardless of class, shall dismissing the counterclaim of the respondents.
be entitled to one vote.
Issue:
Unless otherwise provided in the articles of incorporation or the by-
W/N respondent Court of Appeals erred in annulling the 1966 annual
laws, a member may vote by proxy in accordance with the provisions of
membership campaign of YMCA and in declaring invalid the approval
this Code. (n)
by YMCA of 174 applications for membership

Voting by mail or other similar means by members of non-stock Ruling:

corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions which
The position adopted by both the trial court and the Court of Appeals
may be prescribed by, the Securities and Exchange Commission.
on the basis of the trial court's conjecture and speculation is not
justified.
Sec. 90. Non-transferability of membership. - Membership in a
non-stock corporation and all rights arising therefrom are personal and
The documentary evidence itself as cited by the trial court, consisting
non-transferable, unless the articles of incorporation or the by-laws
of the applications and the receipts for payment of the membership
otherwise provide. (n)
fees show that they were filed and paid not later than the November 26,
1965 deadline, and this was further supported by the bank statement of

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the petitioner YMCA deposit account with the China Banking Facts:
Corporation and the checks paid by certain members to the YMCA
which show that the application fees corresponding to the questioned
The principal adversaries in this controversy are respondent Vicente
74 applications (that raised the total to 249 from 175) were already paid
Josefa of the Manila Traders Lions Club and petitioner James L. So of
to petitioner YMCA as the time of the said deadline. No evidence could
the Manila Centrum Lions Club, which Lions clubs are duly organized,
be cited by the trial court to rebut this well nigh conclusive
chartered, and affiliated with Lions Clubs International having its
documentary evidence other than respondent's unsupported suspicion
International offices at 300 22nd Street, Oakbrook, Illinois 60570,
which the trial court adopted in a negative manner with its statement
U.S.A. The Manila Traders Lions Club and the Manila Centrum Lions
that it is "not improbable" that" some of those applications filed after
Club, together with other Lions clubs, are embraced and constituted
said deadline". If there were indeed any applications filed after the
into the newly organized District 301-Al. The Lions districts in the
deadline, they certainly should have been positively pin-pointed and
country form the so-called Multiple District 301,Philippines. All clubs
specifically annulled.
so organized and chartered under the Constitution of Lions Clubs
International are under the exclusive supervision of the International
What is worse, 175 membership applications were undisputedly filed Board of Directors.
within the deadline (including the 75 withdrawn by respondent) and
yet the 100 remaining unquestioned memberships were nullified by the
Josefa and So were properly nominated candidates for the office of
questioned decision without the individuals concerned ever having
District Governor, District 301-Al, for the fiscal year 1982-83. One hour
been impleaded or heard (except the individual petitioners president
after the designated convening time, District Governor Huang
and secretary).
transferred the election meeting from the designated site to the
Admiral Royal Hotel. After the announcement of District Governor
The appealed decision thus contravened the established principle that Huang transferring the election meeting, a majority of the delegates of
the courts cannot strip a member of a non-stock non-profit corporation the newly authorized District 301-Al remained at the designated site
of his membership therein without cause. Otherwise, that would be an and convened an election for District Governor between the two
unwarranted and undue interference with the well established right of candidates, Lion So and Lion Josefa. So that there were two elections
a corporation to determine its membership, as announced by Fletcher, held on June 6, 1982 for the office of District Governor of District 301-
as follows: Al.

Compliance with provisions of charter, constitution or by- One election was held as a part of the official District Convention at the
laws. —In order that membership may be acquired in a non- designated election meeting site, the Little Theater Olongapo National
stock corporation and valid by-laws must be complied with, High School, at which Lion So received 147 votes and Lion Josefa
except in so far as they may be and are waived. *** But received 3 votes. And the other election was held at the Admiral Royale
provisions in the by-laws as to formal steps to be taken to Hotel at which Lion Josefa received 115 votes.
acquire membership may be waived by the corporation, or it
may be estopped to assert that they have not been taken.
The action of District Governor Huang in transferring the election
meeting away from the convention site was without approval of a
Finally, the appealed decision did not give due importance to the majority of the delegates and was without any clear authority and
undisputed fact therein stated that "at the board meeting of the justification. The said election meeting held at the Little Theatre
association held on December 7, 1965, a list of 174 applications for Olongapo National High School was properly conducted and resulted
membership, old and new, was submitted to the board and approved in the election of Lion So. Said election of Lion So was duly certified by
by the latter, over the objection of the petitioner [therein private the official Election Committee Chairman Lion Ernesto Castañeda,
respondent] who was present at said meeting." Such action of the appointed by District Governor Huang and District Governor Beleno of
petitioner association's board of directors approving the 174 District 301-E, the official Multiple District Council representative.
membership applications of old and new members constituting its
active membership as duly processed and screened by the authorized
Vicente Josefa filed a complaint for Quo Warranto, Injunction,
committee just be deemed a waiver on its part of any technicality or
Damages with writ of preliminary injunction and prayer for temporary
requirement of form, since otherwise the association would be
restraining order in the Court of First Instance of Manila against Lions
practically paralyzed and deprived of the substantial revenues from the
Clubs International and James L. So.
membership dues of P17,400.00 (at P100.00 per application).

Finding the foregoing allegations of the complaint to be sufficient in

Chapter II - TRUSTEES AND OFFICERS form and substance, the Court of First Instance on the same date, July
1, 1982, issued a temporary restraining order enjoining So from
assuming the powers and prerogatives of the office of Governor of
Sec. 92. Election and term of trustees. - Unless otherwise District 301-Al, and Lions Clubs International, represented by Antonio
provided in the articles of incorporation or the by-laws, the board of Ramos, from recognizing and proclaiming So as the Governor of
trustees of non-stock corporations, which may be more than fifteen District 301-Al for the fiscal year 1982- 1983.
(15) in number as may be fixed in their articles of incorporation or by-
laws, shall, as soon as organized, so classify themselves that the term of
office of one-third (1/3) of their number shall expire every year; and On July 8, 1982, defendants So and Lions Club International filed a
subsequent elections of trustees comprising one-third (1/3) of the Motion to Dismiss and to Lift Restraining Order.
board of trustees shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter elected to fill
The Court of First Instance issued an Order denying defendants'
vacancies occurring before the expiration of a particular term shall
motion to dismiss. Finding the Motion to lift restraining order to be
hold office only for the unexpired period.
meritorious, the Court set aside said restraining order.

No person shall be elected as trustee unless he is a member of the

Herein petitioners Lions Clubs International and James L. So now
corporation.
come to this Court attributing grave abuse of discretion to the Court of
First Instance of Manila for the denial of their Motion to Dismiss dated
Unless otherwise provided in the articles of incorporation or the by- July 6, 1982, and contending that the Court of Appeals acted in excess
laws, officers of a non-stock corporation may be directly elected by the of its jurisdiction in issuing its temporary restraining order of July 29,
members. (n) 1982. As prayed for by said petitioners, We issued on August 4, 1982 a
temporary restraining order enjoining the enforcement of the assailed
Lions Club Vs. Amores (121 S 621) temporary restraining order of the Court of Appeals.

132
It is petitioners' submission that the subject matter of the instant case to the International Board of Directors through the Constitution and
is purely an internal affair of the Lions organization and, therefore, is By-Laws Committee of Lions Clubs International, 300 22nd Street,
beyond judicial review. On the other hand, private respondent Oakbrook, Illinois 60570, U.S.A.
maintains that court intervention is warranted when, as he alleges in
this case, there is fraud, oppression. bad faith, when the proceedings in
At the meeting of the International Board of Directors held on June 27,
question are violative of the laws of the association, or where the
1982, the election of petitioner James L. So to serve as District
proceedings are illegal.
Governor of District 301-Al for the fiscal year 1982-83 was approved
and said petitioner was duly informed thereof by Richard G. Rice,
Issue: Manager, District Operations Department, Lions Clubs International in
his letter dated July 8, 1982. Petitioner attended and completed the
District Governors' Executive Seminar as District Governor of 301-Al.
W/N there is the justiciability of the election dispute between herein
On June 29, 1982, petitioner So was proclaimed, sworn to and installed
petitioner James L. So and private respondent Vicente Josefa for the
to office as District Governor of District 301-Al by the President of
position of District Governor of District 301-Al Philippines
Lions International at the close of the 65th Lions Clubs International
Convention held in Atlanta, Georgia, U.S.A.
Ruling:
The Report of the Constitution and By-laws Committee duly approved
The general rule is that "... the courts will not interfere with the and adopted by the International Board of Directors clearly belies the
internal affairs of an unincorporated association so as to settle disputes claim of injustice alleged by respondent Josefa in his complaint in Civil
between the members, or questions of policy, discipline, or internal Case No. 82-10588 that petitioner So was illegally and arbitrarily
government, so long as the government of the society is fairly and nominated; that the latter's election was illegal and that he (Josefa)
honestly administered in conformity with its laws and the law of the was legally elected in a valid election held at the new venue and was
land, and no property or civil rights are invaded. Under such duly proclaimed by the State Council of Governors and that Lions
circumstances, the decision of the governing body or established International unlawfully recognized So as the winner on the basis of his
private tribunal of the association is binding and conclusive and not illegal election. These findings upon the evidence submitted and
subject to review or collateral attack in the courts. " examined at the hearing of the election protest before the Committee
personally attended by both So and Josefa may not be disturbed by the
courts. The decision of the Association's tribunal, the International
The general rule of non-interference in the internal affairs of Board of Directors, is controlling since respondent Josefa alleges no
associations is, however, subject to exceptions, but the power of review invasion of this property or civil rights and neither is it claimed that the
is extremely limited. Accordingly, the courts have and will exercise government of the Association is not fairly and honestly administered
power to interfere in the internal affairs of an association where law in conformity with its laws and the law of the land.
and justice so require, and the proceedings of the association are
subject to judicial review where there is fraud, oppression, or bad faith,
or where the action complained of is capricious, arbitrary, or unjustly And since the disputed election to the position of District Governor is
discriminatory. Also, the courts will usually entertain jurisdiction to within the peculiar province and function of Lions International
grant relief in case property or civil rights are invaded, although it has through its established tribunal to decide and determine in accordance
also been held that the involvement of property rights does not with its governing laws, its resolution may not be questioned
necessarily authorize judicial intervention, in the absence of elsewhere, much less in the courts.
arbitrariness, fraud or collusion. Moreover, the courts will intervene
where the proceedings in question are violative of the laws of the
In essence, the courts, considering the nature of the action or suit at
society, or the law of the land, as by depriving a person of due process
bar, are without jurisdiction and authority to review and reverse the
of law. Similarly, judicial intervention is warranted where there is a
decision of the International Board of Directors, Lions Clubs
lack of jurisdiction on the part of the tribunal conducting the
International, approving and recognizing the petitioner as duly elected
proceedings, where the organization exceeds its powers, or where the
District Governor of District 301-A1 for the fiscal year 1982-1983.
proceedings are otherwise illegal.

In accordance with the general rules as to judicial interference cited Sec. 93. Place of meetings. - The by-laws may provide that the
above, the decision of an unincorporated association on the question of members of a non-stock corporation may hold their regular or special
an election to office is a matter peculiarly and exclusively to be meetings at any place even outside the place where the principal office
determined by the association, and, in the absence of fraud, is final and of the corporation is located: Provided, That proper notice is sent to all
binding on the courts. (7 C.J.S., p. 44). members indicating the date, time and place of the meeting: and
Provided, further, That the place of meeting shall be within the
Philippines.
The instant controversy between petitioner So and respondent Josefa
falls squarely within the ambit of the rule of judicial non-intervention
or non- interference. The elections in dispute, the manner by which it
was conducted and the results thereof, is strictly the internal affair that Chapter III - DISTRIBUTION OF ASSETS IN
concerns only the Lions association and/or its members, and We find
from the records that the same was resolved within the organization of NON-STOCK CORPORATIONS
Lions Clubs International in accordance with the Constitution and By-
Laws which are not immoral, unreasonable, contrary to public policy,
or in contravention of the laws of the land. Sec. 94. Rules of distribution. - In case dissolution of a non-stock
corporation in accordance with the provisions of this Code, its assets
shall be applied and distributed as follows:
It is of judicial notice that a Lions club is a voluntary association of
civic-minded men whose general purpose and aim is to serve the
people and the community. It appears from the records that duly 1. All liabilities and obligations of the corporation shall be paid,
organized and chartered Lions clubs all over the world are under the satisfied and discharged, or adequate provision shall be made
supervision of the mother club known as The International Association therefore;
of Lions Clubs for Lions Clubs International) which holds international
offices in Illinois, U.S.A., and is governed by its constitution and by- 2. Assets held by the corporation upon a condition requiring return,
laws. transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
The records disclose that the election dispute between petitioner James with such requirements;
L. So and respondent Vicente Josefa was brought before and elevated

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3. Assets received and held by the corporation subject to limitations San Juan Structural and Steel Fabricators, Inc.'s entered into an
permitting their use only for charitable, religious, benevolent, agreement with Motorich Sales Corporation for the transfer to it of a
educational or similar purposes, but not held upon a condition parcel of land identified as Lot 30, Block 1 of the Acropolis Greens
requiring return, transfer or conveyance by reason of the dissolution, Subdivision located in the District of Murphy, Quezon City, Metro
shall be transferred or conveyed to one or more corporations, societies Manila, containing an area of Four Hundred Fourteen (414) square
or organizations engaged in activities in the Philippines substantially meters. As stipulated in the Agreement of 14 February 1989, San Juan
similar to those of the dissolving corporation according to a plan of paid the downpayment in the sum of One Hundred Thousand
distribution adopted pursuant to this Chapter; (P100,000.00) Pesos, the balance to be paid on or before March 2,
1989.
4. Assets other than those mentioned in the preceding paragraphs, if
any, shall be distributed in accordance with the provisions of the San Juan Structural and Steel Fabricators, Inc. alleges that on
articles of incorporation or the by-laws, to the extent that the articles of February 14, 1989, it entered through its president, Andres Co, into the
incorporation or the by-laws, determine the distributive rights of disputed Agreement with Motorich Sales Corporation, which was in
members, or any class or classes of members, or provide for turn allegedly represented by its treasurer, Nenita Lee Gruenberg.
distribution; and
Petitioner also argues that the veil of corporate fiction of Motorich
5. In any other case, assets may be distributed to such persons, should be pierced, because the latter is a close corporation. Since
societies, organizations or corporations, whether or not organized for "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all
profit, as may be specified in a plan of distribution adopted pursuant to or almost all or 99.866% to be accurate, of the subscribed capital stock"
this Chapter. (n) of Motorich, petitioner argues that Gruenberg needed no authorization
from the board to enter into the subject contract. It adds that, being
solely owned by the Spouses Gruenberg, the company can treated as a
Sec. 95. Plan of distribution of assets. - A plan providing for the close corporation which can be bound by the acts of its principal
distribution of assets, not inconsistent with the provisions of this Title, stockholder who needs no specific authority.
may be adopted by a non-stock corporation in the process of
dissolution in the following manner:
Issue:
The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission W/N Motorich is a close corporation
thereof to a vote at a regular or special meeting of members having
voting rights. Written notice setting forth the proposed plan of
distribution or a summary thereof and the date, time and place of such Ruling:
meeting shall be given to each member entitled to vote, within the time
and in the manner provided in this Code for the giving of notice of
It is not. Section 96 of the Corporation Code defines a close corporation
meetings to members. Such plan of distribution shall be adopted upon
as follows:
approval of at least two-thirds (2/3) of the members having voting
rights present or represented by proxy at such meeting. (n)
Sec. 96. Definition and Applicability of Title . — A close corporation,
within the meaning of this Code, is one whose articles of incorporation
TITLE XII provide that:
CLOSE CORPORATIONS
(1) All of the corporation's issued stock of all classes,
Sec. 96. Definition and applicability of Title. - A close exclusive of treasury shares, shall be held of record by not
corporation, within the meaning of this Code, is one whose articles of more than a specified number of persons, not exceeding
incorporation provide that: (1) All the corporation's issued stock of all twenty (20);
classes, exclusive of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding twenty (20); (2) all
(2) All of the issued stock of all classes shall be subject to one
the issued stock of all classes shall be subject to one or more specified
or more specified restrictions on transfer permitted by this
restrictions on transfer permitted by this Title; and (3) The corporation
Title; and
shall not list in any stock exchange or make any public offering of any
of its stock of any class. Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at least two-thirds (2/3) (3) The corporation shall not list in any stock exchange or
of its voting stock or voting rights is owned or controlled by another make any public offering of any of its stock of any class.
corporation which is not a close corporation within the meaning of this
Code.
Notwithstanding the foregoing, a corporation shall be deemed not a
close corporation when at least two-thirds (2/3) of its voting stock or
Any corporation may be incorporated as a close corporation, except voting rights is owned or controlled by another corporation which is
mining or oil companies, stock exchanges, banks, insurance not a close corporation within the meaning of this Code. . . .
companies, public utilities, educational institutions and corporations
declared to be vested with public interest in accordance with the
provisions of this Code. The articles of incorporation of Motorich Sales Corporation does not
contain any provision stating that (1) the number of stockholders shall
not exceed 20, or (2) a preemption of shares is restricted in favor of any
The provisions of this Title shall primarily govern close corporations: stockholder or of the corporation, or (3) listing its stocks in any stock
Provided, That the provisions of other Titles of this Code shall apply exchange or making a public offering of such stocks is prohibited. From
suppletorily except insofar as this Title otherwise provides. its articles, it is clear that Motorich is not a close corporation. Motorich
does not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The "mere
ownership by a single stockholder or by another corporation of all or
capital stock of a corporation is not of itself sufficient ground for
San Juan Structural Vs. CA (296 S 631) disregarding the separate corporate personalities." So, too, a narrow
distribution of ownership does not, by itself, make a close corporation.
Facts:
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals
wherein the Court ruled that ". . . petitioner corporation is classified as

134
a close corporation and, consequently, a board resolution authorizing The articles of incorporation may likewise provide that all officers or
the sale or mortgage of the subject property is not necessary to bind the employees or that specified officers or employees shall be elected or
corporation for the action of its president." But the factual milieu in appointed by the stockholders, instead of by the board of directors.
Dulay is not on all fours with the present case. In Dulay, the sale of
real property was contracted by the president of a close corporation
with the knowledge and acquiescence of its board of directors. In the Sec. 98. Validity of restrictions on transfer of shares. -
present case, Motorich is not a close corporation, as previously Restrictions on the right to transfer shares must appear in the articles
discussed, and the agreement was entered into by the corporate of incorporation and in the by-laws as well as in the certificate of stock;
treasurer without the knowledge of the board of directors. otherwise, the same shall not be binding on any purchaser thereof in
good faith. Said restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option to purchase the
The Court is not unaware that there are exceptional cases where "an shares of the transferring stockholder with such reasonable terms,
action by a director, who singly is the controlling stockholder, may be conditions or period stated therein. If upon the expiration of said
considered as a binding corporate act and a board action as nothing period, the existing stockholders or the corporation fails to exercise the
more than a mere formality." The present case, however, is not one of option to purchase, the transferring stockholder may sell his shares to
them. any third person.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own Sec. 99. Effects of issuance or transfer of stock in breach of
"almost 99.866%" of Respondent Motorich. Since Nenita is not the sole qualifying conditions. -
controlling stockholder of Motorich, the aforementioned exception
does not apply. Granting arguendo that the corporate veil of Motorich
is to be disregarded, the subject parcel of land would then be treated as 1. If stock of a close corporation is issued or transferred to any person
conjugal property of Spouses Gruenberg, because the same was who is not entitled under any provision of the articles of incorporation
acquired during their marriage. There being no indication that said to be a holder of record of its stock, and if the certificate for such stock
spouses, who appear to have been married before the effectivity of the conspicuously shows the qualifications of the persons entitled to be
Family Code, have agreed to a different property regime, their property holders of record thereof, such person is conclusively presumed to have
relations would be governed by conjugal partnership of gains. As a notice of the fact of his ineligibility to be a stockholder.
consequence, Nenita Gruenberg could not have effected a sale of the
subject lot because "there is no co-ownership between the spouses in 2. If the articles of incorporation of a close corporation states the
the properties of the conjugal partnership of gains. Hence, neither number of persons, not exceeding twenty (20), who are entitled to be
spouse can alienate in favor of another his/her interest in the holders of record of its stock, and if the certificate for such stock
partnership nor in any property belonging to it; neither spouse can ask conspicuously states such number, and if the issuance or transfer of
for a partition of the properties before the partnership has been legally stock to any person would cause the stock to be held by more than such
dissolved." number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
Assuming further, for the sake of argument, that the spouses' property
regime is the absolute community of property, the sale would still be 3. If a stock certificate of any close corporation conspicuously shows a
invalid. Under this regime, "alienation of community property must restriction on transfer of stock of the corporation, the transferee of the
have the written consent of the other spouse or he authority of the stock is conclusively presumed to have notice of the fact that he has
court without which the disposition or encumbrance is void." Both acquired stock in violation of the restriction, if such acquisition violates
requirements are manifestly absent in the instant case. the restriction.

Sec. 97. Articles of incorporation. - The articles of incorporation 4. Whenever any person to whom stock of a close corporation has been
of a close corporation may provide: issued or transferred has, or is conclusively presumed under this
section to have, notice either (a) that he is a person not eligible to be a
holder of stock of the corporation, or (b) that transfer of stock to him
1. For a classification of shares or rights and the qualifications for
would cause the stock of the corporation to be held by more than the
owning or holding the same and restrictions on their transfers as may
number of persons permitted by its articles of incorporation to hold
be stated therein, subject to the provisions of the following section;
stock of the corporation, or (c) that the transfer of stock is in violation
of a restriction on transfer of stock, the corporation may, at its option,
2. For a classification of directors into one or more classes, each of refuse to register the transfer of stock in the name of the transferee.
whom may be voted for and elected solely by a particular class of stock;
and
5. The provisions of subsection (4) shall not applicable if the transfer of
stock, though contrary to subsections (1), (2) of (3), has been consented
3. For a greater quorum or voting requirements in meetings of to by all the stockholders of the close corporation, or if the close
stockholders or directors than those provided in this Code. corporation has amended its articles of incorporation in accordance
with this Title.
The articles of incorporation of a close corporation may provide that
the business of the corporation shall be managed by the stockholders of 6. The term "transfer", as used in this section, is not limited to a
the corporation rather than by a board of directors. So long as this transfer for value.
provision continues in effect:
7. The provisions of this section shall not impair any right which the
1. No meeting of stockholders need be called to elect directors; transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying Sec. 100. Agreements by stockholders. –
the provisions of this Code; and
1. Agreements by and among stockholders executed before the
3. The stockholders of the corporation shall be subject to all liabilities formation and organization of a close corporation, signed by all
of directors. stockholders, shall survive the incorporation of such corporation and
shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such agreements
are not inconsistent with the articles of incorporation, irrespective of

135
where the provisions of such agreements are contained, except those a close corporation, if the directors or stockholders are so divided
required by this Title to be embodied in said articles of incorporation. respecting the management of the corporation's business and affairs
that the votes required for any corporate action cannot be obtained,
with the consequence that the business and affairs of the corporation
2. An agreement between two or more stockholders, if in writing and
can no longer be conducted to the advantage of the stockholders
signed by the parties thereto, may provide that in exercising any voting
generally, the Securities and Exchange Commission, upon written
rights, the shares held by them shall be voted as therein provided, or as
petition by any stockholder, shall have the power to arbitrate the
they may agree, or as determined in accordance with a procedure
dispute. In the exercise of such power, the Commission shall have
agreed upon by them.
authority to make such order as it deems appropriate, including an
order: (1) canceling or altering any provision contained in the articles
3. No provision in any written agreement signed by the stockholders, of incorporation, by-laws, or any stockholder's agreement; (2)
relating to any phase of the corporate affairs, shall be invalidated as canceling, altering or enjoining any resolution or act of the corporation
between the parties on the ground that its effect is to make them or its board of directors, stockholders, or officers; (3) directing or
partners among themselves. prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action; (4)
requiring the purchase at their fair value of shares of any stockholder,
4. A written agreement among some or all of the stockholders in a close either by the corporation regardless of the availability of unrestricted
corporation shall not be invalidated on the ground that it so relates to retained earnings in its books, or by the other stockholders; (5)
the conduct of the business and affairs of the corporation as to restrict appointing a provisional director; (6) dissolving the corporation; or (7)
or interfere with the discretion or powers of the board of directors: granting such other relief as the circumstances may warrant.
Provided, That such agreement shall impose on the stockholders who
are parties thereto the liabilities for managerial acts imposed by this
Code on directors. A provisional director shall be an impartial person who is neither a
stockholder nor a creditor of the corporation or of any subsidiary or
affiliate of the corporation, and whose further qualifications, if any,
5. To the extent that the stockholders are actively engaged in the may be determined by the Commission. A provisional director is not a
management or operation of the business and affairs of a close receiver of the corporation and does not have the title and powers of a
corporation, the stockholders shall be held to strict fiduciary duties to custodian or receiver. A provisional director shall have all the rights
each other and among themselves. Said stockholders shall be and powers of a duly elected director of the corporation, including the
personally liable for corporate torts unless the corporation has right to notice of and to vote at meetings of directors, until such time as
obtained reasonably adequate liability insurance. he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement
Sec. 101. When board meeting is unnecessary or improperly between him and the corporation subject to approval of the
held. - Unless the by-laws provide otherwise, any action by the Commission, which may fix his compensation in the absence of
directors of a close corporation without a meeting shall nevertheless be agreement or in the event of disagreement between the provisional
deemed valid if: director and the corporation.
1. Before or after such action is taken, written consent thereto is signed
by all the directors; or Sec. 105. Withdrawal of stockholder or dissolution of
corporation. - In addition and without prejudice to other rights and
2. All the stockholders have actual or implied knowledge of the action remedies available to a stockholder under this Title, any stockholder of
and make no prompt objection thereto in writing; or a close corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their
par or issued value, when the corporation has sufficient assets in its
3. The directors are accustomed to take informal action with the books to cover its debts and liabilities exclusive of capital stock:
express or implied acquiescence of all the stockholders; or Provided, That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel the
4. All the directors have express or implied knowledge of the action in dissolution of such corporation whenever any of acts of the directors,
question and none of them makes prompt objection thereto in writing. officers or those in control of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are being misapplied or
If a director's meeting is held without proper call or notice, an action wasted.
taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written
TITLE XIII
objection with the secretary of the corporation after having knowledge
SPECIAL CORPORATIONS
thereof.
Chapter I - Educational Corporations

Sec. 102. Pre-emptive right in close corporations. - The pre-

Sec. 106. Incorporation. - Educational corporations shall be
emptive right of stockholders in close corporations shall extend to all
governed by special laws and by the general provisions of this Code. (n)
stock to be issued, including reissuance of treasury shares, whether for
money, property or personal services, or in payment of corporate debts,
unless the articles of incorporation provide otherwise. Sec. 107. Pre-requisites to incorporation. - Except upon
favorable recommendation of the Ministry of Education and Culture,
the Securities and Exchange Commission shall not accept or approve
Sec. 103. Amendment of articles of incorporation. - Any
the articles of incorporation and by-laws of any educational institution.
amendment to the articles of incorporation which seeks to delete or
(168a)
remove any provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall not be valid or effective Sec. 108. Board of trustees. - Trustees of educational institutions
unless approved by the affirmative vote of at least two-thirds (2/3) of organized as non-stock corporations shall not be less than five (5) nor
the outstanding capital stock, whether with or without voting rights, or more than fifteen (15): Provided, however, That the number of trustees
of such greater proportion of shares as may be specifically provided in shall be in multiples of five (5).
the articles of incorporation for amending, deleting or removing any of
the aforesaid provisions, at a meeting duly called for the purpose.
Unless otherwise provided in the articles of incorporation on the by-
laws, the board of trustees of incorporated schools, colleges, or other
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in institutions of learning shall, as soon as organized, so classify
the articles of incorporation or by-laws or agreement of stockholders of themselves that the term of office of one-fifth (1/5) of their number

136
shall expire every year. Trustees thereafter elected to fill vacancies, 65686; and more than 39 years with respect to the fourth parcel
occurring before the expiration of a particular term, shall hold office described in plan PSU-112592 (at least from the date of the survey in
only for the unexpired period. Trustees elected thereafter to fill 1940) have been open, public, continuous, peaceful, adverse against the
vacancies caused by expiration of term shall hold office for five (5) whole world, and in the concept of owner.
years. A majority of the trustees shall constitute a quorum for the
transaction of business. The powers and authority of trustees shall be Accordingly, the court ordered the registration of the four parcels
defined in the by-laws. together with the improvements thereon "in the name of the ROMAN
CATHOLIC BISHOP OF LUCENA, INC., a religious corporation sole
For institutions organized as stock corporations, the number and term duly registered and existing under the laws of the Republic of the
of directors shall be governed by the provisions on stock corporations. Philippines."
(169a)
Issue:

Chapter II - RELIGIOUS CORPORATIONS W/N the Roman Catholic Bishop of Lucena, as a corporation sole is
qualified to apply for confirmation of its title to the four (4) parcels of
Sec. 109. Classes of religious corporations. - Religious land subject of this case
corporations may be incorporated by one or more persons. Such
corporations may be classified into corporations sole and religious Ruling:
societies.

Petitioner argues that considering such constitutional prohibition,

Religious corporations shall be governed by this Chapter and by the private respondent is disqualified to own and register its title to the lots
general provisions on non-stock corporations insofar as they may be in question. Further, it argues that since the application for registration
applicable. (n) was filed only on February 2, 1979, long after the 1973 Constitution
took effect on January 17, 1973, the application for registration and
Sec. 110. Corporation sole. - For the purpose of administering and confirmation of title is ineffectual because at the time it was filed,
managing, as trustee, the affairs, property and temporalities of any private corporation had been declared ineligible to acquire alienable
religious denomination, sect or church, a corporation sole may be lands of the public domain pursuant to Art. XIV, Sec. 11 of the said
formed by the chief archbishop, bishop, priest, minister, rabbi or other constitution.
presiding elder of such religious denomination, sect or church. (154a)
The questioned posed before this Court has been settled in the case of
Republic Vs. IAC (168 S 165) DIRECTOR OF LANDS vs. Intermediate Appellate Court (146 SCRA
509 [1986]) which reversed the ruling first enunciated in the 1982 case
of Manila Electric Co. vs. CASTRO BARTOLOME , (114 SCRA 789
Facts: [1982]) imposing the constitutional ban on public land acquisition by
private corporations which ruling was declared emphatically as res
On February 2, 1979, the ROMAN CATHOLIC BISHOP of Lucena, judicata on January 7, 1986 in Director of Lands vs. Hermanos y
represented by Msgr. Jose T. Sanchez, filed an application for Hermanas de Sta. Cruz de Mayo, Inc ., (141 SCRA 21 [1986]). In said
confirmation of title to four (4) parcels of land. Three of said parcels, case, (Director of Lands v. IAC, supra), this Court stated that a
denominated as Lots 1, 2 and 3, respectively, are situated in Barrio determination of the character of the lands at the time of institution of
Masin, Municipality of Candelaria, Quezon Province. The fourth parcel the registration proceedings must be made. If they were then still part
is located in Barrio Bucal (Taguan), same municipality and province. of the public domain, it must be answered in the negative.
As basis for the application, the applicant claimed title to the various
properties through either purchase or donation dating as far back as If, on the other hand, they were already private lands, the
1928. constitutional prohibition against their acquisition by private
corporation or association obviously does not apply. In affirming the
The legal requirements of publication and posting were duly complied Decision of the Intermediate Appellate Court in said case, this Court
with, as was the service of copies of notice of initial hearing on the adopted the vigorous dissent of the then Justice, later Chief Justice
proper government officials. Claudio Teehankee, tracing the line of cases beginning with CARINO,
in 1909, thru SUSI, in 1925, down to HERICO, in 1980, which
developed, affirmed and reaffirmed the doctrine that open, exclusive
In behalf of the Director of Lands and the Director of the Bureau of and undisputed possession of alienable public land for the period
Forest Development, the Solicitor General filed an Opposition on April prescribed by law creates the legal fiction whereby the land, upon
20, 1979, alleging therein among others, that the applicant did not have completion of the requisite period ipso jure and without the need of
an imperfect title or title in fee simple to the parcel of land being judicial or other sanction, ceases to be public land and becomes' private
applied for. property. (DIRECTOR OF LANDS vs. IAC, supra , p. 518).

At the initial hearing held on November 13, 1979, only the Provincial It must be emphasized that the Court is not here saying that a
Fiscal in representation of the Solicitor General appeared to interpose corporation sole should be treated like an ordinary private corporation.
personal objection to the application. Hence, an Order of General
Default against the whole world was issued by the Court a quo except
for the Director of Lands and the Director of the Bureau of Forest A corporation sole consists of one person only, and his successors (who
Development. will always be one at a time), in some particular station, who are
incorporated by law in order to give them some legal capacities and
advantages, particularly that of perpetuity, which in their natural
Evaluating the applicant's submitted proofs, the court a quo concluded, persons they could not have had. In this sense, the King is a sole
on the basis of acquisitive prescription at the very least, that the former corporation; so is a bishop, or deans distinct from their several
had adequately shown title to the parcels of land being claimed. chapters.

Since the acquisition of these four (4) lots by the applicant, it has been Pertinent to this case is the provision of Sec. 113 Batas Pambansa Blg.
in continuous possession and enjoyment thereof, and such possession, 68 which reads as follows:
together with its predecessors-in interest, covering a period of more
than 52 years (at least from the date of the survey in 1928) with respect
to lots 1 and 2, about 62 years with respect to lot 3, all of plan PSU-
137
Sec. 113. Acquisition and alienation of property . — Any corporation Ruling:
sole may purchase and hold real estate and personal property for its
church, charitable, benevolent or educational purposes, and may
The Iglesia Ni Cristo, as a corporation sole or a juridical person, is
receive bequests or gifts for such purposes. Such corporation may
disqualified to acquire or hold alienable lands of the public domain,
mortgage or sell real property held by it upon obtaining an order for
like the two lots in question, because of the constitutional prohibition
that purpose from the Court of First Instance of the province where the
already mentioned and because the said church is not entitled to avail
property is situated; but before the order is issued, proof must be made
itself of the benefits of section 48(b) which applies only to Filipino
to the satisfaction of the Court that notice of the application for leave to
citizens or natural persons. A corporation sole has no nationality
mortgage or sell has been given by publication or otherwise in such
(Roman Catholic Apostolic Adm. of Davao, Inc. vs. Land Registration
manner and for such time as said court may have directed, and that it
Commission, 102 Phil. 596. See Register of Deeds vs. Ung Siu Si
is to the interest of the corporation that leave to mortgage or sell
Temple, 97 Phil. 58 and sec. 49 of the Public Land Law).
should be granted. The application for leave to mortgage or sell must
be made by petition, duly verified by the chief archbishop, bishop,
priest, minister, rabbi or presiding elder acting as corporation sole, and The contention in the comments of the Iglesia Ni Cristo that the two
may be opposed by any member of the religious denomination, sect or lots are private lands, following the rule laid down in Susi vs. Razon
church represented by the corporation sole: Provided, That in cases and Director of Lands, 48 Phil. 424, is not correct. What was
where the rules, regulations and discipline of the religious considered private land in the Susi case was a parcel of land possessed
denomination, sect or church religious society or order concerned by a Filipino citizen since time immemorial, as in Cariño vs. Insular
represented by such corporation sole regulate the method of acquiring, Government, 212 U.S. 449, 53 L. ed. 594, 41 Phil. 935 and 7 Phil. 132.
holding, selling and mortgaging real estate and personal property, such The lots sought to be registered in this case do not fall within that
rules, regulations and discipline shall control and the intervention of category. They are still public lands. A land registration proceeding,
the courts shall not be necessary. under section 48(b), "presupposes that the land is public" (Mindanao
vs. Director of Lands, L-19535, July 10, 1967, 20 SCRA 641, 644).
There is no doubt that a corporation sole by the nature of its
Incorporation is vested with the right to purchase and hold real estate As held in Oh Cho vs. Director of Lands , 75 Phil. 890, "all lands that
and personal property. It need not therefore be treated as an ordinary were not acquired from the Government, either by purchase or by
private corporation because whether or not it be so treated as such, the grant, belong to the public domain. An exception to the rule would be
Constitutional provision involved will, nevertheless, be not applicable. any land that should have been in the possession of an occupant and of
his predecessors-in-interest since time immemorial, for such
possession would justify the presumption that the land had never been
In the light of the facts obtaining in this case and the ruling of this
part of the public domain or that it had been a private property even
Court in Director of Lands vs. IAC , ( supra , 513), the lands subject of
before the Spanish conquest. "
this petition were already private property at the time the application
for confirmation of title was filed in 1979. There is therefore no cogent
reason to disturb the findings of the appellate court. In Uy Un vs. Perez , 71 Phil. 508, it was noted that the right of an
occupant of public agricultural land to obtain a confirmation of his title
under section 48(b) of the Public Land Law is a "derecho dominical
Republic Vs. Villanueva (114 S 875)
incoativo" and that before the issuance of the certificate of title the
occupant is not in the juridical sense the true owner of the land since it
Facts: still pertains to the State.

Lots Nos. 568 and 569, located at Barrio Dampol, Plaridel, Bulacan, Roman Catholic Vs. LRC (102 Phil 595)
with an area of 313 square meters and an assessed value of P1,350 were
acquired by the Iglesia Ni Cristo on January 9, 1953 from Andres Perez
Facts:
in exchange for a lot with an area of 247 square meters owned by the
said church.
On October 4, 1954, Mateo L. Rodis, a Filipino citizen and resident of
the City of Davao, executed a deed of sale of a parcel of land located in
The said lots were already possessed by Perez in 1933. They are not
the same city, in favor of the Roman Catholic Apostolic Administrator
included in any military reservation. They are inside an area which was
of Davao Inc., a corporation sole organized and existing in accordance
certified as alienable or disposable by the Bureau of Forestry in 1927.
with Philippine Laws, with Msgr. Clovis Thibault, a Canadian citizen,
The lots are planted to santol and mango trees and banana plants. A
as actual incumbent. When the deed of sale was presented to Register
chapel exists on the said land. The land had been declared for realty tax
of Deeds of Davao for registration, the latter, having in mind a previous
purposes. Realty taxes had been paid therefor.
resolution of the Fourth Branch of the Court of First Instance of Manila
wherein the Carmelite Nuns of Davao were made to prepare an
On September 13, 1977, the Iglesia Ni Cristo, a corporation sole, duly affidavit to the effect that 60 per cent of the members of their
existing under Philippine laws, filed with the Court of First Instance of corporation were Filipino citizens when they sought to register in favor
Bulacan an application for the registration of the two lots. It alleged of their congregation of deed of donation of a parcel of land— required
that it and its predecessors-in-interest had possessed the land for more said corporation sole to submit a similar affidavit declaring that 60 per
than thirty years. It invoked section 48(b) of the Public Land Law. cent of the members thereof were Filipino citizens.

The Republic of the Philippines, through the Director of Lands, The vendee in the letter dated June 28, 1954, expressed willingness to
opposed the application on the grounds that applicant, as a private submit an affidavit, both not in the same tenor as that made the
corporation, is disqualified to hold alienable lands of the public Progress of the Carmelite Nuns because the two cases were not similar,
domain, that the land applied for is public land not susceptible of for whereas the congregation of the Carmelite Nuns had five
private appropriation and that the applicant and its predecessors-in- incorporators, the corporation sole has only one; that according to
interest have not been in the open, continuous, exclusive and notorious their articles of incorporation, the organization of the Carmelite Nuns
possession of the land since June 12, 1945. became the owner of properties donated to it, whereas the case at bar,
the totality of the Catholic population of Davao would become the
owner of the property bought to be registered.
Issue:

As the Register of Deeds entertained some doubts as to the

W/N the INC as a private corporation is disqualified to hols alienable
registerability if the document, the matter was referred to the Land
lands of the public domain
Registration Commissioner en consulta for resolution. A resolution
was rendered on September 21, 1954, holding that in view of the

138
provisions of Section 1 and 5 of Article XIII of the Philippine methods of acquiring, holding, selling and mortgaging real estate and
Constitution, the vendee was not qualified to acquire private lands in personal property, such rules, regulations, and discipline shall control
the Philippines in the absence of proof that at least 60 per centum of and the intervention of the Courts shall not be necessary.
the capital, property, or assets of the Roman Catholic Apostolic
Administrator of Davao, Inc., was actually owned or controlled by
It can, therefore, be noticed that the power of a corporation sole to
Filipino citizens, there being no question that the present incumbent of
purchase real property, like the power exercised in the case at bar, it is
the corporation sole was a Canadian citizen. It was also the opinion of
not restricted although the power to sell or mortgage sometimes is,
the Land Registration Commissioner that section 159 of the
depending upon the rules, regulations, and discipline of the church
corporation Law relied upon by the vendee was rendered operative by
concerned represented by said corporation sole. If corporations sole
the aforementioned provisions of the Constitution with respect to real
can purchase and sell real estate for its church, charitable, benevolent,
estate, unless the precise condition set therein — that at least 60 per
or educational purposes, can they register said real properties? As
cent of its capital is owned by Filipino citizens — be present, and,
provided by law, lands held in trust for specific purposes me be subject
therefore, ordered the Registered Deeds of Davao to deny registration
of registration (section 69, Act 496), and the capacity of a corporation
of the deed of sale in the absence of proof of compliance with such
sole, like petitioner herein, to register lands belonging to it is
condition.
acknowledged, and title thereto may be issued in its name (Bishop of
Nueva Segovia vs. Insular Government, 26 Phil. 300-1913). Indeed it is
Issue: absurd that while the corporations sole that might be in need of
acquiring lands for the erection of temples where the faithful can pray,
or schools and cemeteries which they are expressly authorized by law
W/N the Universal Roman Catholic Apostolic Church in the
to acquire in connection with the propagation of the Roman Catholic
Philippines, or better still, the corporation sole named the Roman
Apostolic faith or in furtherance of their freedom of religion they could
Catholic Apostolic Administrator of Davao, Inc., is qualified to acquire
not register said properties in their name.
private agricultural lands in the Philippines pursuant to the provisions
of Article XIII of the Constitution
Even before the establishment of the Philippine Commonwealth and of
the Republic of the Philippines every corporation sole then organized
Ruling:
and registered had by express provision of law the necessary power
and qualification to purchase in its name private lands located in the
The Roman Catholic Bishop of Zamboanga was incorporated (as a territory in which it exercised its functions or ministry and for which it
corporation sole) in September, 1912, principally to administer its was created, independently of the nationality of its incumbent unique
temporalities and manage its properties. Probably due to the ravages and single member and head, the bishop of the dioceses. It can be also
of the last war, its articles of incorporation were reconstructed in the maintained without fear of being gainsaid that the Roman Catholic
Securities and Exchange Commission on April 8, 1948. At first, this Apostolic Church in the Philippines has no nationality and that the
corporation sole administered all the temporalities of the church framers of the Constitution, as will be hereunder explained, did not
existing or located in the island of Mindanao. Later on, however, new have in mind the religious corporations sole when they provided that
dioceses were formed and new corporations sole were created to 60 per centum of the capital thereof be owned by Filipino citizens.
correspond with the territorial jurisdiction of the new dioceses, one of
them being petitioner herein, the Roman Catholic Apostolic
There could be no controversy as to the fact that a duly registered
Administrator of Davao, Inc., which was registered with the Securities
corporation sole is an artificial being having the right of succession and
and Exchange Commission on September 12, 1950, and succeeded in
the power, attributes, and properties expressly authorized by law or
the administrative for all the "temporalities" of the Roman Catholic
incident to its existence (section 1, Corporation Law).
Church existing in Davao.

Even assuming that petitioner had at the time of the enactment of the
According to our Corporation Law, Public Act No. 1549, approved April
Constitution the right to purchase real property or right could not be
1, 1906, a corporation sole is organized and composed of a single
exercised after the effectivity of our Constitution, because said power
individual, the head of any religious society or church, for the
or right of corporations sole, like the herein petitioner, conferred in
ADMINISTRATION of the temporalities of such society or church. By
virtue of the aforequoted provisions of the Corporation Law, could no
"temporalities" is meant estate and properties not used exclusively for
longer be exercised in view of the requisite therein prescribed that at
religious worship. The successor in office of such religious head or chief
least 60 per centum of the capital of the corporation had to be Filipino.
priest incorporated as a corporation sole shall become the corporation
It has been shown before that: (1) the corporation sole, unlike the
sole on ascension to office, and shall be permitted to transact business
ordinary corporations which are formed by no less than 5
as such on filing with the Securities and Exchange Commission a copy
incorporators, is composed of only one persons, usually the head or
of his commission, certificate of election or letter of appointment duly
bishop of the diocese, a unit which is not subject to expansion for the
certified by any notary public or clerk of court of record (Guevara's The
purpose of determining any percentage whatsoever; (2) the corporation
Philippine Corporation Law, p. 223).
sole is only the administrator and not the owner of the temporalities
located in the territory comprised by said corporation sole; (3) such
The Corporation Law also contains the following provisions: temporalities are administered for and on behalf of the faithful residing
in the diocese or territory of the corporation sole; and (4) the latter, as
such, has no nationality and the citizenship of the incumbent Ordinary
SECTION 159. Any corporation sole may purchase and hold real estate has nothing to do with the operation, management or administration of
and personal; property for its church, charitable, benevolent, or the corporation sole, nor effects the citizenship of the faithful
educational purposes, and may receive bequests or gifts of such connected with their respective dioceses or corporation sole.
purposes. Such corporation may mortgage or sell real property held by
it upon obtaining an order for that purpose from the Court of First
Instance of the province in which the property is situated; but before In view of these peculiarities of the corporation sole, it would seem
making the order proof must be made to the satisfaction of the Court obvious that when the specific provision of the Constitution invoked by
that notice of the application for leave to mortgage or sell has been respondent Commissioner (section 1, Art. XIII), was under
given by publication or otherwise in such manner and for such time as consideration, the framers of the same did not have in mind or
said Court or the Judge thereof may have directed, and that it is to the overlooked this particular form of corporation. If this were so, as the
interest of the corporation that leave to mortgage or sell must be made facts and circumstances already indicated tend to prove it to be so, then
by petition, duly verified by the bishop, chief priest, or presiding elder the inescapable conclusion would be that this requirement of at least
acting as corporation sole, and may be opposed by any member of the 60 per cent of Filipino capital was never intended to apply to
religious denomination, society or church represented by the corporations sole, and the existence or not a vested right becomes
corporation sole: Provided, however, That in cases where the rules, unquestionably immaterial.
regulations, and discipline of the religious denomination, society or
church concerned represented by such corporation sole regulate the

139
In Ung Siu Si Temple case, the fact that the appellant religious estate and properties of the religious denomination, sect or church
organization has no capital stock does not suffice to escape the theretofore administered or managed by him as such chief archbishop,
Constitutional inhibition, since it is admitted that its members are of bishop, priest, minister, rabbi or presiding elder shall be held in trust
foreign nationality. The purpose of the sixty per centum requirement is by him as a corporation sole, for the use, purpose, behalf and sole
obviously to ensure that corporation or associations allowed to acquire benefit of his religious denomination, sect or church, including
agricultural land or to exploit natural resources shall be controlled by hospitals, schools, colleges, orphan asylums, parsonages and
Filipinos; and the spirit of the Constitution demands that in the cemeteries thereof. (n)
absence of capital stock, the controlling membership should be
composed of Filipino citizens
Sec. 113. Acquisition and alienation of property. - Any
corporation sole may purchase and hold real estate and personal
In that case respondent-appellant Ung Siu Si Temple was not a property for its church, charitable, benevolent or educational purposes,
corporation sole but a corporation aggregate, i.e., an unregistered and may receive bequests or gifts for such purposes. Such corporation
organization operating through 3 trustees, all of Chinese nationality, may sell or mortgage real property held by it by obtaining an order for
and that is why this Court laid down the doctrine just quoted. With that purpose from the Court of First Instance of the province where the
regard to petitioner, which likewise is a non-stock corporation, the case property is situated upon proof made to the satisfaction of the court
is different, because it is a registered corporation sole, evidently of no that notice of the application for leave to sell or mortgage has been
nationality and registered mainly to administer the temporalities and given by publication or otherwise in such manner and for such time as
manage the properties belonging to the faithful of said church residing said court may have directed, and that it is to the interest of the
in Davao. But even if we were to go over the record to inquire into the corporation that leave to sell or mortgage should be granted. The
composing membership to determine whether the citizenship application for leave to sell or mortgage must be made by petition, duly
requirement is satisfied or not, we would find undeniable proof that the verified, by the chief archbishop, bishop, priest, minister, rabbi or
members of the Roman Catholic Apostolic faith within the territory of presiding elder acting as corporation sole, and may be opposed by any
Davao are predominantly Filipino citizens. As indicated before, member of the religious denomination, sect or church represented by
petitioner has presented evidence to establish that the clergy and lay the corporation sole: Provided, That in cases where the rules,
members of this religion fully cover the percentage of Filipino citizens regulations and discipline of the religious denomination, sect or
required by the Constitution. These facts are not controverted by church, religious society or order concerned represented by such
respondents and our conclusion in this point is sensibly obvious. corporation sole regulate the method of acquiring, holding, selling and
mortgaging real estate and personal property, such rules, regulations
and discipline shall control, and the intervention of the courts shall not
Sec. 111. Articles of incorporation. - In order to become a
be necessary. (159a)
corporation sole, the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or church must file
with the Securities and Exchange Commission articles of incorporation Sec. 114. Filling of vacancies. - The successors in office of any
setting forth the following: chief archbishop, bishop, priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on their accession
to office and shall be permitted to transact business as such on the
1. That he is the chief archbishop, bishop, priest, minister, rabbi or
filing with the Securities and Exchange Commission of a copy of their
presiding elder of his religious denomination, sect or church and that
commission, certificate of election, or letters of appointment, duly
he desires to become a corporation sole;
certified by any notary public.
2. That the rules, regulations and discipline of his religious
denomination, sect or church are not inconsistent with his becoming a During any vacancy in the office of chief archbishop, bishop, priest,
corporation sole and do not forbid it; minister, rabbi or presiding elder of any religious denomination, sect
or church incorporated as a corporation sole, the person or persons
authorized and empowered by the rules, regulations or discipline of the
3. That as such chief archbishop, bishop, priest, minister, rabbi or
religious denomination, sect or church represented by the corporation
presiding elder, he is charged with the administration of the
sole to administer the temporalities and manage the affairs, estate and
temporalities and the management of the affairs, estate and properties
properties of the corporation sole during the vacancy shall exercise all
of his religious denomination, sect or church within his territorial
the powers and authority of the corporation sole during such vacancy.
jurisdiction, describing such territorial jurisdiction;
(158a)

4. The manner in which any vacancy occurring in the office of chief

Sec. 115. Dissolution. - A corporation sole may be dissolved and its
archbishop, bishop, priest, minister, rabbi of presiding elder is
affairs settled voluntarily by submitting to the Securities and Exchange
required to be filled, according to the rules, regulations or discipline of
Commission a verified declaration of dissolution.
the religious denomination, sect or church to which he belongs; and

The declaration of dissolution shall set forth:

5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
1. The name of the corporation;
The articles of incorporation may include any other provision not
contrary to law for the regulation of the affairs of the corporation. (n) 2. The reason for dissolution and winding up;

Sec. 112. Submission of the articles of incorporation. - The 3. The authorization for the dissolution of the corporation by the
articles of incorporation must be verified, before filing, by affidavit or particular religious denomination, sect or church;
affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by a copy of the
4. The names and addresses of the persons who are to supervise the
commission, certificate of election or letter of appointment of such
winding up of the affairs of the corporation.
chief archbishop, bishop, priest, minister, rabbi or presiding elder, duly
certified to be correct by any notary public.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its
From and after the filing with the Securities and Exchange Commission
operations except for the purpose of winding up its affairs. (n)
of the said articles of incorporation, verified by affidavit or affirmation,
and accompanied by the documents mentioned in the preceding
paragraph, such chief archbishop, bishop, priest, minister, rabbi or Sec. 116. Religious societies. - Any religious society or religious
presiding elder shall become a corporation sole and all temporalities, order, or any diocese, synod, or district organization of any religious

140
denomination, sect or church, unless forbidden by the constitution, Uy Siu Si Temple has appealed to this Court, claiming: (1) that the
rules, regulations, or discipline of the religious denomination, sect or acquisition of the land in question, for religious purposes, is authorized
church of which it is a part, or by competent authority, may, upon and permitted by Act No. 271 of the old Philippine Commission,
written consent and/or by an affirmative vote at a meeting called for providing as follows:
the purpose of at least two-thirds (2/3) of its membership, incorporate
for the administration of its temporalities or for the management of its SECTION 1. It shall be lawful for all religious associations, of whatever
affairs, properties and estate by filing with the Securities and Exchange sort or denomination, whether incorporated in the Philippine Islands
Commission, articles of incorporation verified by the affidavit of the or in the name of other country, or not incorporated at all, to hold land
presiding elder, secretary, or clerk or other member of such religious in the Philippine Islands upon which to build churches, parsonages, or
society or religious order, or diocese, synod, or district organization of educational or charitable institutions.
the religious denomination, sect or church, setting forth the following:

SEC. 2. Such religious institutions, if not incorporated, shall hold the

1. That the religious society or religious order, or diocese, synod, or land in the name of three Trustees for the use of such associations; . . ..
district organization is a religious organization of a religious (Printed Rec. App. p. 5.) and (2) that the refusal of the Register of
denomination, sect or church; Deeds violates the freedom of religion clause of our Constitution [Art.
III, Sec. 1(7)].
2. That at least two-thirds (2/3) of its membership have given their
written consent or have voted to incorporate, at a duly convened Issue:
meeting of the body;
W/N a deed of donation of a parcel of land executed in favor of a
religious organization whose founder, trustees and administrator are
3. That the incorporation of the religious society or religious order, or Chinese citizens should be registered or not
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules, Ruling:
regulations or discipline of the religious denomination, sect, or church
of which it forms a part;
In view of the absolute terms of section 5, Title XIII, of the
Constitution, the provisions of Act No. 271 of the old Philippine
4. That the religious society or religious order, or diocese, synod, or Commission must be deemed repealed since the Constitution was
district organization desires to incorporate for the administration of its enacted, in so far as incompatible therewith. In providing that, —
affairs, properties and estate;

Save in cases of hereditary succession, no private agricultural land shall

5. The place where the principal office of the corporation is to be be transferred or assigned except to individuals, corporations or
established and located, which place must be within the Philippines; associations qualified to acquire or hold lands of the public domain in
and the Philippines, the Constitution makes no exception in favor of
religious associations. Neither is there any such saving found in
6. The names, nationalities, and residences of the trustees elected by sections 1 and 2 of Article XIII, restricting the acquisition of public
the religious society or religious order, or the diocese, synod, or district agricultural lands and other natural resources to "corporations or
organization to serve for the first year or such other period as may be associations at least sixty per centum of the capital of which is owned
prescribed by the laws of the religious society or religious order, or of by such citizens" (of the Philippines).
the diocese, synod, or district organization, the board of trustees to be
not less than five (5) nor more than fifteen (15). (160a) The fact that the appellant religious organization has no capital stock
does not suffice to escape the Constitutional inhibition, since it is
Register of Deeds Vs. Ung Siu Si Temple (97 Phil 261) admitted that its members are of foreign nationality. The purpose of
the sixty per centum requirement is obviously to ensure that
corporations or associations allowed to acquire agricultural land or to
Facts: exploit natural resources shall be controlled by Filipinos; and the spirit
of the Constitution demands that in the absence of capital stock, the
controlling membership should be composed of Filipino citizens.
The Register of Deeds for the province of Rizal refused to accept for
record a deed of donation executed in due form on January 22, 1953,
by Jesus Dy, a Filipino citizen, conveying a parcel of residential land, in To permit religious associations controlled by non-Filipinos to acquire
Caloocan, Rizal, known as lot No. 2, block 48-D, PSD-4212, G.L.R.O. agricultural lands would be to drive the opening wedge to revive alien
Record No. 11267, in favor of the unregistered religious organization religious land holdings in this country. We can not ignore the historical
"Ung Siu Si Temple", operating through three trustees all of Chinese fact that complaints against land holdings of that kind were among the
nationality. The donation was duly accepted by Yu Juan, of Chinese factors that sparked the revolution of 1896.
nationality, founder and deaconess of the Temple, acting in
representation and in behalf of the latter and its trustees.
As to the complaint that the disqualification under article XIII is
violative of the freedom of religion guaranteed by Article III of the
The refusal of the Registrar was elevated en Consultato the IVth Constitution, we are by no means convinced (nor has it been shown)
Branch of the Court of First Instance of Manila. On March 14, 1953, the that land tenure is indispensable to the free exercise and enjoyment of
Court upheld the action of the Rizal Register of Deeds that UNG SIU SI religious profession or worship; or that one may not worship the Deity
TEMPLE is a religious organization whose deaconess, founder, trustees according to the dictates of his own conscience unless upon land held
and administrator are all Chinese citizens, this Court is of the opinion in fee simple.
and so hold that in view of the provisions of the sections 1 and 5 of
Article XIII of the Constitution of the Philippines limiting the
acquisition of land in the Philippines to its citizens, or to corporations TITLE XIV
or associations at least sixty per centum of the capital stock of which is DISSOLUTION
owned by such citizens adopted after the enactment of said Act No. 271,
and the decision of the Supreme Court in the case of Krivenko vs. the Sec. 117. Methods of dissolution. - A corporation formed or
Register of Deeds of Manila, the deed of donation in question should organized under the provisions of this Code may be dissolved
not be admitted for registration. voluntarily or involuntarily. (n)

141
Sec. 118. Voluntary dissolution where no creditors are Ruling:
affected. - If dissolution of a corporation does not prejudice the rights
of any creditor having a claim against it, the dissolution may be A mere resolution by the stockholders or by the Board of Directors of a
effected by majority vote of the board of directors or trustees, and by a corporation to dissolve the same does not effect the dissolution but that
resolution duly adopted by the affirmative vote of the stockholders some other step, administrative or judicial, is necessary. Furthermore,
owning at least two-thirds (2/3) of the outstanding capital stock or of under section 77 of the Corporation Law, a corporation dissolved will
at least two-thirds (2/3) of the members of a meeting to be held upon continue in existence as a judicial entity for a period of three years after
call of the directors or trustees after publication of the notice of time, the declaration of its dissolution, to windup its affairs and protect its
place and object of the meeting for three (3) consecutive weeks in a interests during the period of liquidation.
newspaper published in the place where the principal office of said
corporation is located; and if no newspaper is published in such place,
then in a newspaper of general circulation in the Philippines, after Vesagas Vs. CA (371 S 508)
sending such notice to each stockholder or member either by registered
mail or by personal delivery at least thirty (30) days prior to said
Facts:
meeting. A copy of the resolution authorizing the dissolution shall be
certified by a majority of the board of directors or trustees and
countersigned by the secretary of the corporation. The Securities and The respondent spouses Delfino and Helenda Raniel are members in
Exchange Commission shall thereupon issue the certificate of good standing of the Luz Villaga Tennis Clud, Inc. (club). They alleged
dissolution. (62a) that petitioner Teodoro B. Vesagas, who claims to be the club's duly
elected president, in conspiracy with petitioner Wilfred D. Asis, who, in
turn, claims to be its duly elected vice-president and legal counsel,
Daguhoy Enterprise Vs. Ponce (96 Phil 15) summarily stripped them of their lawful membership, without due
process of law. Thereafter, respondent spouses filed a Complaint with
Facts: the Securities and Exchange Commission (SEC) on March 26, 1997
against the petitioners. In this case, respondents asked the
In the year 1950, Domingo Ponce was Chairman and Manager and his Commission to declare as illegal their expulsion from the club as it was
son Buhay M. Ponce was Secretary-Treasurer, of Daguhoy Enterprises, allegedly done in utter disregard of the provisions of its by-laws as well
Inc. On June 24th of said year Rita L. Ponce, wife of Domingo, as the requirements of due process. They likewise sought the
executed in favor of corporation a deed of mortgage over a parcel of annulment of the amendments to the by-laws made on December 8,
land including the improvements thereon, situated in Manila, to secure 1996, changing the annual meeting of the club from the last Sunday of
the payment of a loan of P5,000 granted to her by said corporation, January to November and increasing the number of trustees from nine
payable within six years with interest at 12 per cent per annum. On to fifteen. Finally, they prayed for the issuance of a Temporary
March 10, 1951, Rita L. Ponce with the consent of her husband Restraining Order and Writ of Preliminary Injunction. The application
Domingo executed another mortgage deed amending the first one, for TRO was denied by SEC Hearing Officer Soller in an Order dated
whereby the loan was increased from P5,000 to P6,190, the terms and April 29, 1997.
conditions of the mortgage remaining the same. Rita and Domingo
presented the two mortgage deeds for registration in the office of the The petioners claim in gratia argumenti that while the club may have
register of deeds, but the said register after going over the papers noted been considered a corporation during a brief spell, still, at the time of
defects and deficiencies and advised Rita and Domingo to cure the the institution of this case with the SEC, the club was already dissolved
defects and furnish the necessary data. Instead of complying with the by virtue of a Board resolution.
suggestion and requirements, the two withdrew the two mortgage
deeds and then mortgaged the same parcel of land in favor of the
Rehabilitation Finance Corporation (RFC) to secure a loan. Issue:

Potenciano Gapol was the majority stockholder in the Daguhoy W/N the club was already dissolved by virtue of a Board resolution
Enterprises, Inc., and naturally was interested in the security of the
payment of the loan aforesaid. Upon learning that the deeds of Ruling:
mortgage were not registered and what is more, that they were
withdrawn from the office of the register of deeds and the land covered
by the two deeds was again mortgaged to the RFC, he filed a case The Corporation Code establishes the procedure and other formal
entitled "Potenciano Gapol, for and on behalf of Daguhoy Enterprises, requirements a corporation needs to follow in case it elects to dissolve
Inc. vs. Domingo Ponce and Buhay M. Ponce " for accounting, not only and terminate its structure voluntarily and where no rights of creditors
for the amount of the loan of P6,190 but apparently for other sums, may possibly be prejudiced, thus:
possibly on the theory that the loan in question was granted by
Domingo and Buhay acting as Chairman-Manager and Secretary- Sec. 118. Voluntary dissolution where no creditors are affected. - If
Treasurer, respectively of the corporation. dissolution of a corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution may be effected by
Thereafter, the Daguhoy Enterprises, Inc. filed the present action majority vote of the board of directors or trustees and by a resolution
against Rita and her husband Domingo to collect the amount of the duly adopted by the affirmative vote of the stockholders owning at least
loan, including interests. two-thirds (2/3) of the outstanding capital stock or at least two-thirds
(2/3) of the members at a meeting to be held upon call of the directors
or trustees after publication of the notice of time, place and object of
The defendants alleged that the plaintiff corporation had no legal the meeting for three (3) consecutive weeks in a newspaper published
capacity to sue for the reason that as a corporation it no longer was in in the place where the principal office of said corporation is located;
existence because on April 16, 1951, at a meeting held by the and if no newspaper is published in such place, then in a newspaper of
stockholders and attended by Potenciano Gapol, the majority general circulation in the Philippines, after sending such notice to each
stockholder, a resolution was adopted dissolving the said corporation, stockholder or member either by registered mail or by personal
and that as a matter of fact, Gapol was designated Assignee. delivery at least 30 days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board
Issue: of directors or trustees and countersigned by the secretary of the
corporation. The Securities and Exchange Commission shall thereupon
issue the certificate of dissolution.
W/N the corporation has no capacity to sue by reason of the
dissolution
We note that to substantiate their claim of dissolution, petitioners
submitted only two relevant documents: the Minutes of the First Board

142
Meeting held on January 5, 1997, and the board resolution issued on affairs of the corporation which, according to the petition had a balance
April 14, 1997 which declared "to continue to consider the club as a of P57,601.24 over and above its just debts and liabilities.
non-registered or a non-corporate entity and just a social association of
respectable and respecting individual members who have associated
The appellee, M. Michelin & Cie., filed its claim against the corporation
themselves, since the 1970's, for the purpose of playing the sports of
for the aforesaid balance of P21,968.83 with a prayer that the claim be
tennis x x x." Obviously, these two documents will not suffice. The
allowed as a preferred one against the corporation on the ground that
requirements mandated by the Corporation Code should have been
the said amount represented the proceeds from the sale of a number of
strictly complied with by the members of the club. The records reveal
rubber tires which were on deposit with and sold by the corporation.
that no proof was offered by the petitioners with regard to the notice
The court rendered a judgment allowing the claim as a preferred claim
and publication requirements. Similarly wanting is the proof of the
against the corporation and directing the receiver to pay the amount
board members' certification. Lastly, and most important of all, the
thereof out of any funds in his possession.
SEC Order of Dissolution was never submitted as evidence.

On September 30, 1931, China Banking Corporation, filed a motion

Sec. 119. Voluntary dissolution where creditors are affected. praying that the orders of November 8, and November 26, 1930, be set
- Where the dissolution of a corporation may prejudice the rights of aside as null and void, that appellee's claim be allowed as an ordinary
any creditor, the petition for dissolution shall be filed with the claim and that the sum P5,000 paid by the receiver to the appellee on
Securities and Exchange Commission. The petition shall be signed by a account of the latter's claim be refunded to the funds of the corporation
majority of its board of directors or trustees or other officers having the in the liquidation for the benefit of the rest of the creditors. In support
management of its affairs, verified by its president or secretary or one of said motion and with the permission of the court of the appellant,
of its directors or trustees, and shall set forth all claims and demands Leopoldo Kahn, submitted a memorandum, arguing on the nullity of
against it, and that its dissolution was resolved upon by the affirmative the said orders on the ground of want of the notice and on the
vote of the stockholders representing at least two-thirds (2/3) of the proposition that under the provisions of the Insolvency Law appellee's
outstanding capital stock or by at least two-thirds (2/3) of the members claim could not and should not have been allowed as a preferred claim
at a meeting of its stockholders or members called for that purpose. under the allegations contained therein.

If the petition is sufficient in form and substance, the Commission Issue:

shall, by an order reciting the purpose of the petition, fix a date on or
before which objections thereto may be filed by any person, which date
shall not be less than thirty (30) days nor more than sixty (60) days W/N Michelin’s claim can legally be allowed on its face as a preferred
after the entry of the order. Before such date, a copy of the order shall claim
be published at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city
Ruling:
where the principal office of the corporation is situated, or if there be
no such newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three (3) consecutive A close examination of the record in this case fails to disclose the
weeks in three (3) public places in such municipality or city. reasons which led the corporation to resort to the court for a decree of
voluntary dissolution. If the corporation was under such a financial
condition as alleged in its petition for dissolution and did not desire to
Upon five (5) day's notice, given after the date on which the right to file
continue doing business because of failing conditions or of any other
objections as fixed in the order has expired, the Commission shall
reason, we are unable to understand the necessity of its seeking judicial
proceed to hear the petition and try any issue made by the objections
intervention in the winding up of its affairs coupled with the
filed; and if no such objection is sufficient, and the material allegations
appointment for a receiver to deal with its creditors as though they
of the petition are true, it shall render judgment dissolving the
were the creditors of an insolvent corporation.
corporation and directing such disposition of its assets as justice
requires, and may appoint a receiver to collect such assets and pay the
debts of the corporation. (Rule 104, RCa) Statutes authorizing voluntary dissolutions are generally held to apply
only to a dissolution brought about by the stockholders themselves,
and while the appointment of a receiver rests within the sound judicial
China Banking Vs. Michelin (58 Phil 261) discretion of the court, such discretion must however, always be
exercised with caution and governed by legal and equitable principles,
Facts: the violation of which will amount to its abuse, and in making such
appointment the court should take into consideration all the facts and
weigh the relative advantages and disadvantages of appointing a
George O' Farrell & Cie., Inc., is a domestic corporation organized in receiver to wind up the corporate business. The court should only act
1925 and registered in the same year in the mercantile register of the on facts which have been proved by competent legal evidence.
Bureau of Commerce and Industry, one of its purposes being that of
acting as the agent and representative of foreign firms for the sale and
distribution of their products in the Philippines. And for a number of The appointment of a receiver by the court to wind up the affairs of the
years prior to its dissolution, acting as agent of the appellee M. corporation upon petition of voluntary dissolution does not empower
Michelin & Cie., in the Philippine Islands for the sale and distribution the court to hear and pass on the claims of the creditors of the
of the rubber tires for motor cars produced by the appellee and broadly corporation at first hand. In such cases the receiver does not act as a
known as "Michelin tires". receiver of an insolvent corporation. Since "liquidation" as applied to
the settlement of the affairs of a corporation consists of adjusting the
debts and claims, that is, of collecting all that is due the corporation,
These business relations between the appellee and the corporation the settlement and adjustment of claims against it and the payment of
lasted until the month of May, 1930, when the appellee decided to its just debts, all claims must be presented for allowance to the receiver
discontinue them, and upon settlement of accounts between both or trustee or other proper or persons during the winding up proceeding
concerns it was found that the corporation failed to account for the which in this jurisdiction would be within the three years provided by
sum of P23,268.83, the sale price of a number of rubber tires sold by sections 77 and 78 of the Corporation Law as the term of the corporate
the corporation. Prior to the filing of the petition for dissolution to the existence of the corporation, and if a claim is disputed or unliquidated
corporation made a partial payment of P1,300 leaving an unpaid so that the receiver cannot safely allow the same, it should be
balance of P21,968.83. transferred to the proper court for trial and allowance, and the amount
so allowed then presented to the receiver or trustee for payment. The
On July 9, 1930, the board of directors filed the petition for its rulings of the receiver on the validity of claims submitted are subject to
dissolution and for the appointment of its president and general review by the court appointing such receiver though no appeal is taken
manager, Gaston, O' Farrell as receiver and liquidator to wind up the to the latter's ruling, and during the winding up proceedings after
dissolution, no creditor will be permitted by legal process or otherwise
143
to acquire priority, or to enforce his claim against the property held for Sec. 121. Involuntary dissolution. - A corporation may be
distribution as against the rights of other creditors. dissolved by the Securities and Exchange Commission upon filing of a
verified complaint and after proper notice and hearing on the grounds
The decree of dissolution in the case at bar having been entered on provided by existing laws, rules and regulations. (n)
August 22, 1930, and the motion of the appellant, China Banking
Corporation , appearing to have been filed on September 30, 1931, or Republic Vs. Security Credit (19 S 58)
about thirteen months later, it follows that the motion was filed on
time to have the appellee's claim reviewed by the court under the
provisions of the said section of the Corporation Law, and the trial Facts:
court, therefore, erred in finding that the order of November 8, 1930
allowing appellee's claim was final and unappealable under the The Articles of Incorporation of Security Credit were registered with
provisions of section 133 of the Code of Civil Procedure. the Securities and Exchange Commission on March 27, 1961. The next
day, the Board of Directors of the corporation adopted a set of by-laws,
The record in this case shows that Gaston O' Farrell, the receiver which were filed with said Commission on April 5, 1961. The Central
herein, besides being the principal promoter of the corporation and the Bank of the Philippines opined that said corporation is a banking
holder of the largest number of shares was elected president and institution. Thus, the corporation through its president, Rosendo T.
general manager and that he held the said offices ever since the Resuello, sought a reconsideration of the aforementioned opinion,
organization of the corporation and his conduct in executing a which reconsideration was denied on March 16, 1962. The Commission
mortgage on his own house and giving a pledge on his shares of stock advised the corporation on December 5, 1961, to comply with the
and on those of Rosario Sanchez represented by him as attorney in fact, requirements of the General Banking Act.
in favor of the appellee to guarantee the latter's claim, lends itself to a
serious suspicion. The facts appearing of record leave no room for In the meantime, the Municipal Court of Manila issued Search Warrant
doubt that his administration of the business of the corporation left No. A-1019 and pursuant thereto, members of the intelligence division
much to be desired and that he alone ought to be blamed for the of the Central Bank and of the Manila Police Department searched the
shortage claimed by the appellee, but to save himself from personal premises of the corporation and seized documents and records thereof
liability he made the corporation shoulder the burden of the obligation relative to its business operations.Upon the return of said warrant, the
in exchange for a simulated conveyance of his house to the corporation. seized documents and records were, with the authority of the court,
No sooner had the corporation become delinquent in the payment of placed under the custody of the Central Bank of the Philippines. Upon
the obligation under the terms of the written agreement than he examination and evaluation of said documents and records, the
resorted to a judicial proceeding of voluntary dissolution in an attempt intelligence division of the Central Bank submitted, to the Acting
to settle appellee's claim and to free himself from all harm, but fearing Deputy Governor thereof, a memorandum finding that the corporation
that the alleged preference of appellee's claim might be defeated, in is performing banking functions, without requisite certificate of
collusion with the appellee they had the claim allowed summarily as a authority from the Monetary Board of the Central Bank.
preferred claim ignoring the rest of the world.

Issue:
Appellants' contention that appellee's claim cannot be lowed as a
preferred claim is well taken for even admitting for the sake of
argument that the merchandise which sale price is the subject of W/N the dissolution of the Security and Acceptance Corporation for
appellee's claim was shipped to the corporation under a commission allegedly engaging in banking operations without the authority
agreement or any other agreement carrying the obligation to return required therefor by the General Banking Act is proper
either the goods on its price, the fact is that the merchandise in the case
at bar was no longer in the corporation's possession nor could the
Ruling:
appellee trace the proceeds from its sale, and this is made manifest by
the very fact of the written agreement entered into between the
appellee and the corporation whereby the appellee accepted payment Yes.
of the obligation by installments duly secured with a mortgaged of
property to guarantee its payment. But such is not the case, however,
Although, admittedly, Security has not secured the requisite authority
for the very agreement of May 31, 1930 mentioned in paragraph 5 of
to engage in banking, defendants deny that its transactions partake of
the appellee's claim, shows that the rubber tires consigned to the
the nature of banking operations. It is conceded, however, that, in
corporation were to be sold by the latter "por orden, cuenta y riesgo de
consequence of a propaganda campaign therefor, a total of 59,463
los Sres. M. Michelin & Cie." and that the customers' accounts were
savings account deposits have been made by the public with the
opened "por orden, cuenta y riesgo de M. Michelin & Cie." , and so
corporation and its 74 branches, with an aggregate deposit of
much is this true that the uncollected accounts were turned over to and
P1,689,136.74, which has been lent out to such persons as the
received by the appellee, M. Michelin & Cie. Under such circumstances
corporation deemed suitable therefor. It is clear that these transactions
the amount of the appellee's claim appears to be in the nature of a
partake of the nature of banking, as the term is used in Section 2 of the
balance of a current account between the two firms more than anything
General Banking Act.
else.

Accordingly, defendant corporation has violated the law by engaging in

The order appealed from is reversed, and the appellee's claim is hereby
banking without securing the administrative authority required in
declared to be an ordinary claim. The appellee is ordered to refund to
Republic Act No. 337.
the corporation the sum of P5,000 erroneously paid by the receiver,
with costs against the appellee.
That the illegal transactions thus undertaken by defendant corporation
warrant its dissolution is apparent from the fact that the foregoing
misuser of the corporate funds and franchise affects the essence of its
business, that it is willful and has been repeated 59,463 times, and that
Sec. 120. Dissolution by shortening corporate term. - A its continuance inflicts injury upon the public, owing to the number of
voluntary dissolution may be effected by amending the articles of persons affected thereby.
incorporation to shorten the corporate term pursuant to the provisions
of this Code. A copy of the amended articles of incorporation shall be It is urged, however, that this case should be remanded to the Court of
submitted to the Securities and Exchange Commission in accordance First Instance of Manila upon the authority of Veraguth vs. Isabela
with this Code. Upon approval of the amended articles of incorporation Sugar Co . (57 Phil. 266). In this connection, it should be noted that
of the expiration of the shortened term, as the case may be, the this Court is vested with original jurisdiction, concurrently with courts
corporation shall be deemed dissolved without any further of first instance, to hear and decide quo warranto cases and, that,
proceedings, subject to the provisions of this Code on liquidation. (n)
144
consequently, it is discretionary for us to entertain the present case or P55,000.00 with interest at the legal rate from January 1982 with costs
to require that the issues therein be taken up in said Civil Case No. against defendants-appellees.
52342. The Veraguth case cited by herein defendants, in support of the
second alternative, is not in point, because in said case there were
It appears that prior to the promulgation of the decision of the trial
issues of fact which required the presentation of evidence, and courts
court, Pepsi Cola has amended its articles of incorporation to shorten
of first instance are, in general, better equipped than appellate courts
its term of existence to July 8, 1983. The amended articles of
for the taking of testimony and the determination of questions of fact.
incorporation was approved by the Securities and Exchange
In the case at bar, there is, however, no dispute as to the principal facts
Commission on March 2, 1984. The trial court was not notified of this
or acts performed by the corporation in the conduct of its business. The
fact.
main issue here is one of law, namely, the legal nature of said facts or
of the aforementioned acts of the corporation. For this reason, and
because public interest demands an early disposition of the case, we Petitioners moved to quash the writ of execution alleging that when the
have deemed it best to determine the merits thereof. decision was rendered by this Honorable Court, when the said decision
was appealed to the Court of Appeals, and when the Court of Appeals
rendered its decision, Pepsi Cola was no longer in existence and had no
Therefore, the defendant corporation is, accordingly, ordered
more juridical personality and so, as such, it no longer had the capacity
dissolved. The appointment of receiver herein issued pendente lite is
to sue and be sued.
hereby made permanent, and the receiver is, accordingly, directed to
administer the properties, deposits, and other assets of defendant
corporation and wind up the affairs thereof conformably to Rules 59 Pepssi Cola argued that the jurisdiction of the court as well as the
and 66 of the Rules of Court. respective parties capacity to sue had already been established during
the initial stages of the case; and that when the complaint was filed in
1982, private respondent was still an existing corporation so that the
Sec. 122. Corporate liquidation. - Every corporation whose mere fact that it was dissolved at the time the case was yet to be
charter expires by its own limitation or is annulled by forfeiture or resolved did not warrant the dismissal of the case or oust the trial court
otherwise, or whose corporate existence for other purposes is of its jurisdiction. Private respondent further claimed that its
terminated in any other manner, shall nevertheless be continued as a dissolution was effected in order to transfer its assets to a new firm of
body corporate for three (3) years after the time when it would have almost the same name and was thus only for convenience.
been so dissolved, for the purpose of prosecuting and defending suits
by or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets, but not for the Issue:
purpose of continuing the business for which it was established.
W/N a dissolved and non-existing corporation could no longer be
At any time during said three (3) years, the corporation is authorized represented by a lawyer and concomitantly a lawyer could not appear
and empowered to convey all of its property to trustees for the benefit as counsel for a non-existing judicial person
of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property
Ruling:
in trust for the benefit of its stockholders, members, creditors and
others in interest, all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and the beneficial Sec. 122 of the Corporation Code provides in part:
interest in the stockholders, members, creditors or other persons in
interest.
§122. Corporate Liquidation. — Every Corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise,
Upon the winding up of the corporate affairs, any asset distributable to or whose corporate existence for other purposes is terminated in any
any creditor or stockholder or member who is unknown or cannot be other manner, shall nevertheless be continued as a body corporate for
found shall be escheated to the city or municipality where such assets three (3) years after the time when it would have been so dissolved, for
are located. the purpose of prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the purpose of
Except by decrease of capital stock and as otherwise allowed by this
continuing the business for which it was established.
Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities. (77a, 89a, 16a) At any time during said three (3) years, said corporation is authorized
the empowered to convey all of its property to trustees for the benefit
of stockholders, members, creditors, and other persons in interest.
Reburiano Vs.CA (301 S 342) From and after any such conveyance by the corporation of its property
in trust for the benefit of its stockholders, members, creditors and
Facts: others in interests, all interests which the corporation had in the
property in terminates, the legal interest vests in the trustees, and the
beneficial interest in the stockholders, members, creditors or other
In a Civil Case entitled "Pepsi Cola Bottling Company of the Philippines persons in interest.
Inc. v. Urbano (Ben) Reburiano and James Reburiano," the Regional
Trial Court, rendered on June 1, 1987 a decision, in favor of plaintiff
Pepsi Cola Bottling Co. of the Philippines Inc. ordering Urbano (Ben) Petitioners argue that while private respondent Pepsi Cola Bottling
Reburiano and James Reburiano to pay jointly and severally the Company of the Philippines, Inc. undertook a voluntary dissolution on
plaintiff the sum of P55,000.00 less whatever empties (cases and July 3, 1983 and the process of liquidation for three (3) years
bottles) may be returned by said defendants valued at the rate of thereafter, there is no showing that a trustee or receiver was ever
P55.00 per empty case with bottles and costs against the defendants in appointed. They contend that §122 of the Corporation Code does not
case of execution. authorize a corporation, after the three-year liquidation period, to
continue actions instituted by it within said period of three years.

Pepsi Cola Bottling Company of the Philippines Inc. appealed to the

Court of Appeals seeking the modification of the portion of the It is to be noted that the time during which the corporation, through its
decision, which stated the value of the cases with empty bottles as own officers, may conduct the liquidation of its assets and sue and be
P55.00 per case and obtained a favorable decision. On June 26, 1990, sued as a corporation is limited to three years from the time the period
judgment was rendered where the decision appealed from is SET of dissolution commences: but there is no time limit within which the
ASIDE and another one is rendered, ordering the defendant appellees trustees must complete a liquidation placed in their hands. It is
to pay jointly and severally the plaintiff-appellant the sum of provided only that the conveyance to the trustees must be made within

145
the three-year period. It may be found impossible to complete the work corporation on July 24, 1989 and that it has winded up its corporate
of liquidation within the three-year period or to reduce disputed claims affairs in accordance with law. It also averred that it was now owned by
to judgment. The authorities are to the effect that suits by or against a PCPPI.
corporation abate when it ceased to be an entity capable of suing or
being sued but trustees to whom the corporate assets have been
On February 11, 1992, the NLRC issued a Resolution dismissing the
conveyed pursuant to the authority of Sec. 78 [now Sec. 122] may sue
complaint of the PCEWU for the reason that, with the cessation and
and be sued as such in all matters connected with the liquidation. . . .
dissolution of the corporate existence of the PCDP, rendering any
judgment against it is incapable of execution and satisfaction.
Furthermore, the Corporation Law provides:
Issue:
§145. Amendment or repeal. — No right or remedy in favor of or
against any corporation, its stockholders, members, directors, trustees,
W/N with the cessation and dissolution of the corporate existence of
or officers, nor any liability incurred by any such corporation,
PCDP, any judgment against it is incapable of execution and
stockholders, members, directors, trustees, or officers, shall be
satisfaction
removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or
of any part thereof. Ruling:

This provision safeguards the rights of a corporation which is dissolved The NLRC committed a grave abuse of its discretion amounting to lack
pending litigation. of jurisdiction in dismissing the case. The NLRC clearly erred in
perceiving that, upon the petitioner’s acquisition of the PCDP, the
latter lost its corporate personality.
There is, therefore, no reason why the suit filed by private respondent
should not be allowed to proceed to execution. It is conceded by
petitioners that the judgment against them and in favor of private Under Section 122 of the Corporation Code, a corporation whose
respondent in C.A. G.R. No. 16070 had become final and executory. corporate existence is terminated in any manner continues to be a body
The only reason for their refusal to execute the same is that there is no corporate for three (3) years after its dissolution for purposes of
existing corporation to which they are indebted. Such argument is prosecuting and defending suits by and against it and to enable it to
fallacious. As previously mentioned, the law specifically allows a settle and close its affairs, culminating in the disposition and
trustee to manage the affairs of the corporation in liquidation. distribution of its remaining assets. It may, during the three-year term,
Consequently, any supervening fact, such as the dissolution of the appoint a trustee or a receiver who may act beyond that period.
corporation, repeal of a law, or any other fact of similar nature would
not serve as an effective bar to the enforcement of such right.
At any time during the said three (3) years, the corporation is
authorized and empowered to convey all of its properties to trustees for
Pepsi Cola Vs. CA (443 S 580) the benefit of stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the corporation of its
properties in trust for the benefit of its stockholders, members,
Facts:
creditors and others in interest, all interest which the corporation had
in the properties terminates the legal interest vests in the trustees, and
Pepsi-Cola Products Philippines, Inc. Employees and Workers Union the beneficial interest in the stockholders, members, creditors or other
(PCEWU) is a duly- registered labor union of the employees of the persons in interest.
Pepsi-Cola Distributors of the Philippines (PCDP). On July 14, 1986,
PCEWU, through its local union president, Arisedes T. Bombeo, filed a
Upon the winding up of the corporate affairs, any asset distributable to
Complaint against PCDP for payment of overtime services rendered by
any creditor or stockholder or member, who is unknown or cannot be
fifty-three (53) of its members, who were employed as salesmen,
found, shall be escheated to the city or municipality where such assets
warehousemen, truck helpers, route salesmen, route sales workers,
are located.
distributors, conductors and forklift operators, on the eight (8) days
duly- designated as Muslim holidays for calendar year 1985, in their
respective places of assignment, namely: Iligan City, Tubod, Lanao del Except by decrease of capital stock and as otherwise allowed by this
Norte and Dipolog City. Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities.
The PCEWU alleged, inter alia, that in previous years, they had been
paid overtime pay for services rendered during the eight (8) Muslim
holidays in their places of assignment, including Dipolog City. The termination of the life of a corporate entity does not by itself cause
the extinction or diminution of the rights and liabilities of such entity.
If the three-year extended life has expired without a trustee or receiver
The PCDP maintained that there were only five (5) legal Muslim
having been expressly designated by the corporation, within that
holidays under the Muslim Code. It asserted that under the law, the
period, the board of directors (or trustees) itself, may be permitted to
cities of Cagayan de Oro and Dipolog were not included in the areas
so continue as "trustees" by legal implication to complete the corporate
that officially observed the Muslim holidays, and that the said holidays
liquidation.
were only applicable to Muslims. It also argued that even assuming
that the employees were entitled to such overtime pay, only the rank-
and-file employees and not the managerial employees should be given Gelano Vs. CA (103 S 90)
such benefit.
Facts:
On May 26, 1987, the Executive Labor Arbiter (ELA) rendered a
Decision in favor of PCEWU, ordering PCDP to pay the claims of its
workers. Insular Sawmill, Inc. is a corporation organized on September 17, 1945
with a corporate life of fifty (50) years, or up to September 17, 1995,
with the primary purpose of carrying on a general lumber and sawmill
Pending resolution of the case, ownership of various Pepsi-Cola business. To carry on this business, it leased the paraphernal property
bottling plants was transferred to petitioner Pepsi-Cola Products of petitioner-wife Guillermina M. Gelano at the corner of Canonigo and
Philippines, Inc. (PCPPI). The NLRC directed the parties to file their Otis, Paco, Manila for P1,200.00 a month. It was while it was leasing
respective pleadings concerning the respondent’s existence as a the aforesaid property that its officers and directors had come to know
corporate entity. The PCDP alleged that it had ceased to exist as a petitioner-husband Carlos Gelano who received from the corporation

146
cash advances on account of rentals to be paid by the corporation on and defending suits By or against it ...," so that, thereafter, it shall no
the land. longer enjoy corporate existence for such purpose. For this reason,
Section 78 of the same law authorizes the corporation, "at any time
during said three years ... to convey all of its property to trustees for the
Between November 19, 1947 to December 26, 1950 Gelano obtained
benefit of members, Stockholders, creditors and other interested,"
from private respondent cash advances of P25,950.00. The said sum
evidently for the purpose, among others, of enabling said trustees to
was taken and received by Carlos Gelano on the agreement that Insular
prosecute and defend suits by or against the corporation begun before
could deduct the same from the monthly rentals of the leased premises
the expiration of said period.
until said cash advances are fully paid. Carlos Gelano was able to pay
only P5,950.00 thereby leaving an unpaid balance of P20,000.00
which he refused to pay despite repeated demands by Insular. When Insular Sawmill, Inc. was dissolved on December 31, 1960,
under Section 77 of the Corporation Law, it still has the right until
December 31, 1963 to prosecute in its name the present case. After the
On various occasions from May 4, 1948 to September 11, 1949
expiration of said period, the corporation ceased to exist for all
petitioners husband and wife also made credit purchases of lumber
purposes and it can no longer sue or be sued.
materials from private respondent with a total price of P1,120.46 in
connection with the repair and improvement of petitioners' residence.
The amount due private respondent on account of credit purchases of However, a corporation that has a pending action and which cannot be
lumber materials is P946.46 which petitioners failed to pay. terminated within the three-year period after its dissolution is
authorized under Section 78 to convey all its property to trustees to
enable it to prosecute and defend suits by or against the corporation
On July 14, 1952, in order to accommodate and help petitioners renew
beyond the Three-year period.
previous loans obtained by them from the China Banking Corporation,
Insular, through Joseph Tan Yoc Su, executed a joint and several
promissory note with Carlos Gelano in favor of said bank in the In the case at bar, although Insular did not appoint any trustee, yet the
amount of P8,000.00 payable in sixty (60) days. For failure of Carlos counsel who prosecuted and defended the interest of the corporation in
Gelano to pay the promissory note upon maturity, the bank collected the instant case and who in fact appeared in behalf of the corporation
from the respondent corporation the amount of P9,106.00 including may be considered a trustee of the corporation at least with respect to
interests, by debiting it from the corporation's current account with the the matter in litigation only. Said counsel had been handling the case
bank. Petitioner Carlos Gelano was able to pay private respondent the when the same was pending before the trial court until it was appealed
amount of P5,000.00 but the balance of P4,106.00 remained before the Court of Appeals and finally to this Court. We therefore hold
unsettled. that there was a substantial compliance with Section 78 of the
Corporation Law and as such, Insular Sawmill, Inc. could still continue
prosecuting the present case even beyond the period of three (3) years
Thus, the corporation, filed a complaint for collection against herein
from the time of its dissolution.
petitioners.

From the above quoted commentary of Justice Fisher, the trustee may
In the meantime, Insular amended its Articles of Incorporation to
commence a suit which can proceed to final judgment even beyond the
shorten its term of existence up to December 31, 1960 only. The
three-year period. No reason can be conceived why a suit already
amended Articles of Incorporation was filed with, and approved by the
commenced By the corporation itself during its existence, not by a
Securities and Exchange Commission, but the trial court was not
mere trustee who, by fiction, merely continues the legal personality of
notified of the amendment shortening the corporate existence and no
the dissolved corporation should not be accorded similar treatment
substitution of party was ever made. On November 20, 1964 and
allowed — to proceed to final judgment and execution thereof.
almost four (4) years after the dissolution of the corporation, the trial
court rendered a decision in favor of Insular.
The word "trustee" as sued in the corporation statute must be
understood in its general concept which could include the counsel to
After petitioners received a copy of the decision on August 24, 1973,
whom was entrusted in the instant case, the prosecution of the suit
they came to know that the Insular Sawmill Inc. was dissolved way
filed by the corporation. The purpose in the transfer of the assets of the
back on December 31, 1960. Hence, petitioners filed a motion to
corporation to a trustee upon its dissolution is more for the protection
dismiss the case and/or reconsideration of the decision of the Court of
of its creditor and stockholders. Debtors like the petitioners herein may
Appeals on grounds that the case was prosecuted even after dissolution
not take advantage of the failure of the corporation to transfer its assets
of private respondent as a corporation and that a defunct corporation
to a trustee, assuming it has any to transfer which petitioner has failed
cannot maintain any suit for or against it without first complying with
to show, in the first place. To sustain petitioners' contention would be
the requirements of the winding up of the affairs of the corporation and
to allow them to enrich themselves at the expense of another, which all
the assignment of its property rights within the required period.
enlightened legal systems condemn.

Issue:
Clemente Vs. CA (242 S 717)

W/N a corporation, whose corporate life had ceased by the expiration

Facts:
of its term of existence, could still continue prosecuting and defending
suits after its dissolution and beyond the period of three years provided
for under Act No. 1459, otherwise known as the Corporation law, to In an action entitled "Declaration of Ownership with Receivership,"
wind up its affairs, without having undertaken any step to transfer its instituted, the petitioners sought to be declared the owners of a piece of
assets to a trustee or assignee land so described as Lot No. 148-New of the subdivision plan Pls-502-
D being a portion of Lot No. 148 of the cadastral survey of Calamba
G.L.RO, Records No. 8418, situated in the Barrio of Lecheria,
Ruling:
Municipality of Calamba, Province of Laguna, island of Luzon.

In American corporate law, upon which our Corporation Law was

The private respondents likewise claimed ownership of the property by
patterned, it is well settled that, unless the statutes otherwise provide,
virtue of acquisitive prescription.
all pending suits and actions by and against a corporation are abated
by a dissolution of the corporation.
The trial court dismissed the complaint not merely on what it
apparently perceived to be an insufficiency of the evidence that firmly
Section 77 of the Corporation Law provides that the corporation shall
could establish plaintiffs' claim of ownership over the property in
"be continued as a body corporate for three (3) years after the time
dispute but also on its thesis that, absent a corporate liquidation, it is
when it would have been ... dissolved, for the purpose of prosecuting
the corporation, not the stockholders, which can assert, if at all, any
147
title to the corporate assets. The court, even then, expressed some condition of its license, subject to the provisions of this Code and other
reservations on the corporation's being able to still validly pursue such special laws. (n)
a claim.
Sec. 125. Application for a license. - A foreign corporation
Issue: applying for a license to transact business in the Philippines shall
submit to the Securities and Exchange Commission a copy of its
W/N the petitioners can be held to have succeeded in establishing for articles of incorporation and by-laws, certified in accordance with law,
themselves a firm title to the property in question and their translation to an official language of the Philippines, if
necessary. The application shall be under oath and, unless already
stated in its articles of incorporation, shall specifically set forth the
Ruling: following:

Petitioners' evidence is direly wanting; all that appear to be certain are 1. The date and term of incorporation;
that the "Sociedad Popular Calambeña," believed to be a "sociedad
anonima" and for a while engaged in the operation and management of
a cockpit, has existed some time in the past; that it has acquired the 2. The address, including the street number, of the principal office of
parcel of land here involved; and that the plaintiffs' predecessors, the corporation in the country or state of incorporation;
Mariano Elepaño and Pablo Clemente, had been original stockholders
of the sociedad . Except in showing that they are the successors-in- 3. The name and address of its resident agent authorized to accept
interest of Elepaño and Clemente, petitioners have been unable to summons and process in all legal proceedings and, pending the
come up with any evidence to substantiate their claim of ownership of establishment of a local office, all notices affecting the corporation;
the corporate asset.
4. The place in the Philippines where the corporation intends to
If, indeed, the sociedad has long become defunct, it should behoove operate;
petitioners, or anyone else who may have any interest in the
corporation, to take appropriate measures before a proper forum for a
peremptory settlement of its affairs. We might invite attention to the 5. The specific purpose or purposes which the corporation intends to
various modes provided by the Corporation Code (see Sees. 117-122) pursue in the transaction of its business in the Philippines: Provided,
for dissolving, liquidating or winding up, and terminating the life of the That said purpose or purposes are those specifically stated in the
corporation. Among the causes for such dissolution are when the certificate of authority issued by the appropriate government agency;
corporate term has expired or when, upon a verified complaint and
after notice and hearing, the Securities and Exchange Commission 6. The names and addresses of the present directors and officers of the
orders the dissolution of a corporation for its continuous inactivity for corporation;
at least five (5) years. The corporation continues to be a body corporate
for three (3) years after its dissolution for purposes of prosecuting and
defending suits by and against it and for enabling it to settle and close 7. A statement of its authorized capital stock and the aggregate number
its affairs, culminating in the disposition and distribution of its of shares which the corporation has authority to issue, itemized by
remaining assets. It may, during the three-year term, appoint a trustee classes, par value of shares, shares without par value, and series, if any;
or a receiver who may act beyond that period. The termination of the
life of a juridical entity does not by itself cause the extinction or 8. A statement of its outstanding capital stock and the aggregate
diminution of the rights and liabilities of such entity (see Gonzales vs. number of shares which the corporation has issued, itemized by
Sugar Regulatory Administration, 174 SCRA 377) nor those of its classes, par value of shares, shares without par value, and series, if any;
owners and creditors. If the three-year extended life has expired
without a trustee or receiver having been expressly designated by the
corporation within that period, the board of directors (or trustees) 9. A statement of the amount actually paid in; and
itself, following the rationale of the Supreme Court's decision in
Gelano vs. Court of Appeals (103 SCRA 90) may be permitted to so 10. Such additional information as may be necessary or appropriate in
continue as "trustees" by legal implication to complete the corporate order to enable the Securities and Exchange Commission to determine
liquidation. Still in the absence of a board of directors or trustees, those whether such corporation is entitled to a license to transact business in
having any pecuniary interest in the assets, including not only the the Philippines, and to determine and assess the fees payable.
shareholders but likewise the creditors of the corporation, acting for
and in its behalf, might make proper representations with the
Securities and Exchange commission, which has primary and Attached to the application for license shall be a duly executed
sufficiently broad jurisdiction in matters of this nature, for working out certificate under oath by the authorized official or officials of the
a final settlement of the corporate concerns. jurisdiction of its incorporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino citizens and
corporations to do business therein, and that the applicant is an
TITLE XV existing corporation in good standing. If such certificate is in a foreign
FOREIGN CORPORATIONS language, a translation thereof in English under oath of the translator
shall be attached thereto.
Sec. 123. Definition and rights of foreign corporations. - For
the purposes of this Code, a foreign corporation is one formed, The application for a license to transact business in the Philippines
organized or existing under any laws other than those of the shall likewise be accompanied by a statement under oath of the
Philippines and whose laws allow Filipino citizens and corporations to president or any other person authorized by the corporation, showing
do business in its own country or state. It shall have the right to to the satisfaction of the Securities and Exchange Commission and
transact business in the Philippines after it shall have obtained a other governmental agency in the proper cases that the applicant is
license to transact business in this country in accordance with this solvent and in sound financial condition, and setting forth the assets
Code and a certificate of authority from the appropriate government and liabilities of the corporation as of the date not exceeding one (1)
agency. (n) year immediately prior to the filing of the application.

Sec. 124. Application to existing foreign corporations. - Every Foreign banking, financial and insurance corporations shall, in
foreign corporation which on the date of the effectivity of this Code is addition to the above requirements, comply with the provisions of
authorized to do business in the Philippines under a license therefore existing laws applicable to them. In the case of all other foreign
issued to it shall continue to have such authority under the terms and corporations, no application for license to transact business in the

148
Philippines shall be accepted by the Securities and Exchange "The (name of foreign corporation) does hereby stipulate and agree, in
Commission without previous authority from the appropriate consideration of its being granted by the Securities and Exchange
government agency, whenever required by law. (68a) Commission a license to transact business in the Philippines, that if at
any time said corporation shall cease to transact business in the
Philippines, or shall be without any resident agent in the Philippines on
Sec. 126. Issuance of a license. - If the Securities and Exchange
whom any summons or other legal processes may be served, then in
Commission is satisfied that the applicant has complied with all the
any action or proceeding arising out of any business or transaction
requirements of this Code and other special laws, rules and regulations,
which occurred in the Philippines, service of any summons or other
the Commission shall issue a license to the applicant to transact
legal process may be made upon the Securities and Exchange
business in the Philippines for the purpose or purposes specified in
Commission and that such service shall have the same force and effect
such license. Upon issuance of the license, such foreign corporation
as if made upon the duly-authorized officers of the corporation at its
may commence to transact business in the Philippines and continue to
home office."
do so for as long as it retains its authority to act as a corporation under
the laws of the country or state of its incorporation, unless such license
is sooner surrendered, revoked, suspended or annulled in accordance Whenever such service of summons or other process shall be made
with this Code or other special laws. upon the Securities and Exchange Commission, the Commission shall,
within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or
Within sixty (60) days after the issuance of the license to transact
principal office. The sending of such copy by the Commission shall be
business in the Philippines, the license, except foreign banking or
necessary part of and shall complete such service. All expenses
insurance corporation, shall deposit with the Securities and Exchange
incurred by the Commission for such service shall be paid in advance
Commission for the benefit of present and future creditors of the
by the party at whose instance the service is made.
licensee in the Philippines, securities satisfactory to the Securities and
Exchange Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its political In case of a change of address of the resident agent, it shall be his or its
subdivisions and instrumentalities, or of government-owned or duty to immediately notify in writing the Securities and Exchange
controlled corporations and entities, shares of stock in "registered Commission of the new address. (72a; and n)
enterprises" as this term is defined in Republic Act No. 5186, shares of
stock in domestic corporations registered in the stock exchange, or
Sec. 129. Law applicable. - Any foreign corporation lawfully doing
shares of stock in domestic insurance companies and banks, or any
business in the Philippines shall be bound by all laws, rules and
combination of these kinds of securities, with an actual market value of
regulations applicable to domestic corporations of the same class,
at least one hundred thousand (P100,000.) pesos; Provided, however,
except such only as provide for the creation, formation, organization or
That within six (6) months after each fiscal year of the licensee, the
dissolution of corporations or those which fix the relations, liabilities,
Securities and Exchange Commission shall require the licensee to
responsibilities, or duties of stockholders, members, or officers of
deposit additional securities equivalent in actual market value to two
corporations to each other or to the corporation. (73a)
(2%) percent of the amount by which the licensee's gross income for
that fiscal year exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also require deposit of Sec. 130. Amendments to articles of incorporation or by-
additional securities if the actual market value of the securities on laws of foreign corporations. - Whenever the articles of
deposit has decreased by at least ten (10%) percent of their actual incorporation or by-laws of a foreign corporation authorized to
market value at the time they were deposited. The Securities and transact business in the Philippines are amended, such foreign
Exchange Commission may at its discretion release part of the corporation shall, within sixty (60) days after the amendment becomes
additional securities deposited with it if the gross income of the effective, file with the Securities and Exchange Commission, and in the
licensee has decreased, or if the actual market value of the total proper cases with the appropriate government agency, a duly
securities on deposit has increased, by more than ten (10%) percent of authenticated copy of the articles of incorporation or by-laws, as
the actual market value of the securities at the time they were amended, indicating clearly in capital letters or by underscoring the
deposited. The Securities and Exchange Commission may, from time to change or changes made, duly certified by the authorized official or
time, allow the licensee to substitute other securities for those already officials of the country or state of incorporation. The filing thereof shall
on deposit as long as the licensee is solvent. Such licensee shall be not of itself enlarge or alter the purpose or purposes for which such
entitled to collect the interest or dividends on the securities deposited. corporation is authorized to transact business in the Philippines. (n)
In the event the licensee ceases to do business in the Philippines, the
securities deposited as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction of the Securities Sec. 131. Amended license. - A foreign corporation authorized to
and Exchange Commission that the licensee has no liability to transact business in the Philippines shall obtain an amended license in
Philippine residents, including the Government of the Republic of the the event it changes its corporate name, or desires to pursue in the
Philippines. (n) Philippines other or additional purposes, by submitting an application
therefor to the Securities and Exchange Commission, favorably
endorsed by the appropriate government agency in the proper cases.
Sec. 127. Who may be a resident agent. - A resident agent may (n)
be either an individual residing in the Philippines or a domestic
corporation lawfully transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good moral character Sec. 132. Merger or consolidation involving a foreign
and of sound financial standing. (n) corporation licensed in the Philippines. - One or more foreign
corporations authorized to transact business in the Philippines may
merge or consolidate with any domestic corporation or corporations if
Sec. 128. Resident agent; service of process. - The Securities such is permitted under Philippine laws and by the law of its
and Exchange Commission shall require as a condition precedent to incorporation: Provided, That the requirements on merger or
the issuance of the license to transact business in the Philippines by consolidation as provided in this Code are followed.
any foreign corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney designating
some person who must be a resident of the Philippines, on whom any Whenever a foreign corporation authorized to transact business in the
summons and other legal processes may be served in all actions or Philippines shall be a party to a merger or consolidation in its home
other legal proceedings against such corporation, and consenting that country or state as permitted by the law of its incorporation, such
service upon such resident agent shall be admitted and held as valid as foreign corporation shall, within sixty (60) days after such merger or
if served upon the duly authorized officers of the foreign corporation at consolidation becomes effective, file with the Securities and Exchange
its home office. Any such foreign corporation shall likewise execute and Commission, and in proper cases with the appropriate government
file with the Securities and Exchange Commission an agreement or agency, a copy of the articles of merger or consolidation duly
stipulation, executed by the proper authorities of said corporation, in authenticated by the proper official or officials of the country or state
form and substance as follows: under the laws of which merger or consolidation was effected:

149
Provided, however, That if the absorbed corporation is the foreign In the present controversy, petitioner is a foreign corporation which
corporation doing business in the Philippines, the latter shall at the claims that it is not doing business in the Philippines. As such, it needs
same time file a petition for withdrawal of it license in accordance with no license to institute a collection suit against respondent before
this Title. (n) Philippine courts.

Sec. 133. Doing business without a license. - No foreign Under Section 3(d) of Republic Act No. 7042 (RA 7042) or “The
corporation transacting business in the Philippines without a license, Foreign Investments Act of 1991,” the phrase “doing business”
or its successors or assigns, shall be permitted to maintain or intervene includes:
in any action, suit or proceeding in any court or administrative agency
of the Philippines; but such corporation may be sued or proceeded x x x soliciting orders, service contracts, opening offices, whether
against before Philippine courts or administrative tribunals on any called “liaison” offices or branches; appointing representatives or
valid cause of action recognized under Philippine laws. (69a) distributors domiciled in the Philippines or who in any calendar year
stay in the country for a period or periods totalling one hundred eighty
B. Van Zuiden Vs. GTVL Mfg. (523 S 233) (180) days or more; participating in the management, supervision or
control of any domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a continuity of
Facts: commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the
ZUIDEN, is a corporation, incorporated under the laws of Hong Kong. functions normally incident to, and in progressive prosecution of,
ZUIDEN is not engaged in business in the Philippines, but is suing commercial gain or of the purpose and object of the business
before the Philippine Courts, for the reasons hereinafter stated. organization: Provided, however, That the phrase “doing business”
shall not be deemed to include mere investment as a shareholder by a
ZUIDEN is engaged in the importation and exportation of several foreign entity in domestic corporations duly registered to do business,
products, including lace products. On several occasions, GTVL and/or the exercise of rights as such investor; nor having a nominee
purchased lace products from ZUIDEN. The procedure for these director or officer to represent its interests in such corporation; nor
purchases, as per the instructions of GTVL, was that ZUIDEN delivers appointing a representative or distributor domiciled in the Philippines
the products purchased by GTVL, to a certain Hong Kong corporation, which transacts business in its own name and for its own account.
known as Kenzar Ltd. (KENZAR), and the products are then
considered as sold, upon receipt by KENZAR of the goods purchased by The series of transactions between petitioner and respondent cannot be
GTVL. KENZAR had the obligation to deliver the products to the classified as “doing business” in the Philippines under Section 3(d) of
Philippines and/or to follow whatever instructions GTVL had on the RA 7042. An essential condition to be considered as “doing business”
matter. in the Philippines is the actual performance of specific commercial acts
within the territory of the Philippines for the plain reason that the
Insofar as ZUIDEN is concerned, upon delivery of the goods to Philippines has no jurisdiction over commercial acts performed in
KENZAR in Hong Kong, the transaction is concluded; and GTVL foreign territories. Here, there is no showing that petitioner performed
became obligated to pay the agreed purchase price. However, within the Philippine territory the specific acts of doing business
commencing October 31, 1994 up to the present, GTVL has failed and mentioned in Section 3(d) of RA 7042. Petitioner did not also open an
refused to pay the agreed purchase price for several deliveries ordered office here in the Philippines, appoint a representative or distributor,
by it and delivered by ZUIDEN, as above-mentioned. In spite of said or manage, supervise or control a local business. While petitioner and
demands and in spite of promises to pay and/or admissions of liability, respondent entered into a series of transactions implying a continuity
GTVL has failed and refused, and continues to fail and refuse, to pay of commercial dealings, the perfection and consummation of these
the overdue amount of U.S.$32,088.02 inclusive of interest. transactions were done outside the Philippines.

Thus, on 13 July 1999, petitioner filed a complaint for sum of money As earlier stated, the series of transactions between petitioner and
against respondent. Instead of filing an answer, respondent filed a respondent transpired and were consummated in Hong Kong. We also
Motion to Dismiss on the ground that petitioner has no legal capacity find no single activity which petitioner performed here in the
to sue. Respondent alleged that petitioner is doing business in the Philippines pursuant to its purpose and object as a business
Philippines without securing the required license. Accordingly, organization. Moreover, petitioner’s desire to do business within the
petitioner cannot sue before Philippine courts. Philippines is not discernible from the allegations of the complaint or
from its attachments. Therefore, there is no basis for ruling that
Issue: petitioner is doing business in the Philippines.

W/N petitioner, an unlicensed foreign corporation, has legal capacity An exporter in one country may export its products to many foreign
to sue before Philippine courts importing countries without performing in the importing countries
specific commercial acts that would constitute doing business in the
importing countries. The mere act of exporting from one’s own
Ruling: country, without doing any specific commercial act within the territory
of the importing country, cannot be deemed as doing business in the
importing country. The importing country does not acquire
Section 133 of the Corporation Code provides:
jurisdiction over the foreign exporter who has not performed any
specific commercial act within the territory of the importing country.
Doing business without license. — No foreign corporation transacting Without jurisdiction over the foreign exporter, the importing country
business in the Philippines without a license, or its successors or cannot compel the foreign exporter to secure a license to do business in
assigns, shall be permitted to maintain or intervene in any action, suit the importing country.
or proceeding in any court or administrative agency of the Philippines;
but such corporation may be sued or proceeded against before
Otherwise, Philippine exporters, by the mere act alone of exporting
Philippine courts or administrative tribunals on any valid cause of
their products, could be considered by the importing countries to be
action recognized under Philippine laws.
doing business in those countries. This will require Philippine
exporters to secure a business license in every foreign country where
The law is clear. An unlicensed foreign corporation doing business in they usually export their products, even if they do not perform any
the Philippines cannot sue before Philippine courts. On the other specific commercial act within the territory of such importing
hand, an unlicensed foreign corporation not doing business in the countries. Such a legal concept will have a deleterious effect not only
Philippines can sue before Philippine courts. on Philippine exports, but also on global trade.

150
To be doing or “transacting business in the Philippines” for purposes of Eriks Pte. Ltd. Vs. CA (2676 S 567)
Section 133 of the Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is, perform specific
Facts:
business transactions within the Philippine territory on a continuing
basis in its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the Petitioner Eriks Pte. Ltd. is a non-resident foreign corporation engaged
Philippines to acquire jurisdiction over a foreign corporation and thus in the manufacture and sale of elements used in sealing pumps, valves
require the foreign corporation to secure a Philippine business license. and pipes for industrial purposes, valves and control equipment used
If a foreign corporation does not transact such kind of business in the for industrial fluid control and PVC pipes and fittings for industrial
Philippines, even if it exports its products to the Philippines, the uses. It is a corporation duly organized and existing under the laws of
Philippines has no jurisdiction to require such foreign corporation to the Republic of Singapore. It is not licensed to do business in the
secure a Philippine business license. Philippines and is not so engaged.

Considering that petitioner is not doing business in the Philippines, it Delfin Enriquez, Jr., doing business under the name and style of
does not need a license in order to initiate and maintain a collection Delrene EB Controls Center and/or EB Karmine Commercial, ordered
suit against respondent for the unpaid balance of respondent’s and received from petitioner various elements used in sealing pumps,
purchases. valves, pipes and control equipment, PVC pipes and fittings. The
ordered materials were delivered via airfreight.
Mavest Vs. Sampaguita (470 S 440)
The transfers of goods were perfected in Singapore, for Enriquez's
account, F.O.B. Singapore, with a 90-day credit term. Subsequently,
Facts:
demands were made by petitioner upon private respondent to settle his
account, but the latter failed/refused to do so.
MAVEST (U.S.A.), Inc. (MAVEST, U.S.A., for short) is a corporation
duly organized and existing under the laws of the United States of
Thus, the corporation filed with a complaint for the recovery of
America but registered with the Philippine Board of Investments, while
S$41,939.63 or its equivalent in Philippine currency, plus interest
co-petitioner MAVEST Manila Liaison Office is MAVEST U.S.A.’s
thereon and damages. Enriquez responded with a Motion to Dismiss,
representative in the Philippines. On the other hand, Sampaguita
contending that petitioner corporation had no legal capacity to sue. In
Garment Corporation is a domestic corporation engaged in the
an Order, the trial court dismissed the action on the ground that
business of manufacturing and exporting garments.
petitioner is a foreign corporation doing business in the Philippines
without a license.
Mavest U.S.A. and Mavest Manila Liaison Office entered into a series
of transactions with Sampaguita Garment Corporation, whereby the
Issue:
former would furnish from abroad raw materials to be manufactured
by the latter into finished products, for shipment to petitioners’ foreign
buyers, Sears Roebuck and JC Penney. W/N Eriks may maintain an action in Philippine courts considering
that it has no license to do business in the country
Each transaction was embodied in a purchase order the style and
description as well as the quantity, mode and date of delivery. The Ruling:
orders of Sears Roebuck were duly paid in full by way of letter of credit.
The JC Penney orders consisting of 8,000 pcs Cotton Woven Pants
with total amount of $29,200.00 were not covered by a letter of credit. The resolution of this issue depends on whether petitioner's business
with private respondent may be treated as isolated transactions.

Despite shipment and receipt by JC Penney of said orders, no payment

was made, thus prompting Sampaguita to send demand letters which The sale by petitioner of the items covered by the receipts, which are
remained unheeded. part and parcel of its main product line, was actually carried out in the
progressive prosecution of commercial gain and the pursuit of the
purpose and object of its business, pure and simple. Further, its grant
On April 27, 1990, Sampaguita filed a complaint for collection of a sum and extension of 90-day credit terms to private respondent for every
of money amounting to US$29,200.00 with damages against MAVEST purchase made, unarguably shows an intention to continue transacting
International Co., LTD and Patrick Wang, former General Manager of with private respondent, since in the usual course of commercial
MLO. transactions, credit is extended only to customers in good standing or
to those on whom there is an intention to maintain long-term
relationship. This being so, the existence of a distributorship
The trial court rendered judgment in favor of Sampaguita and against
agreement between the parties, as alleged but not proven by private
the petitioners and their co-defendants.
respondent, would, if duly established by competent evidence, be
merely corroborative, and failure to sufficiently prove said allegation
Issue: will not significantly affect the finding of the courts below. It is
precisely upon the set of facts above detailed that we concur with
respondent Court that petitioner corporation was doing business in the
W/N Mavest Manila Liaison Office (MLO), being merely an agent of
country.
Mavest U.S.A, should not be held solidarily liable with the principal
Ruling: Equally important is the absence of any fact or circumstance which
MLO is solidarily liable with Mavest U.S.A., since MLO is the liaison might tend even remotely to negate such intention to continue the
office of Mavest U.S.A and the extension office of both Mavest U.S.A. progressive prosecution of petitioner's business activities in this
and MILC. country. Had private respondent not turned out to be a bad risk, in all
likelihood petitioner would have indefinitely continued its commercial
Mavest U.S.A. appears to have constituted MLO as its representative transactions with him, and not surprisingly, in ever increasing
and its fully subsidized extension office in the Philippines. As such, volumes.
MLO can be charged for the liabilities incurred by Mavest U.S.A. in the
country. And if MLO can be so charged, there is no rhyme or reason
Thus, we hold that the series of transactions in question could not have
why it cannot be adjudged, as solidarily liable with head office, Mavest
been isolated or casual transactions. What is determinative of "doing
U.S.A.
business" is not really the number or the quantity of the transactions,
but more importantly, the intention of an entity to continue the body of
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its business in the country. The number and quantity are merely body or substance of the business or enterprise for which it was
evidence of such intention. The phrase "isolated transaction" has a organized.
definite and fixed meaning, i.e. a transaction or series of transactions
set apart from the common business of a foreign enterprise in the sense
Article 44 of the Omnibus Investments Code of 1987 defines the phrase
that there is no intention to engage in a progressive pursuit of the
to include:
purpose and object of the business organization. Whether a foreign
corporation is "doing business" does not necessarily depend upon the
frequency of its transactions, but more upon the nature and character soliciting orders, purchases, service contracts, opening offices, whether
of the transactions. called "liaison" offices or branches; appointing representatives or
distributors who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or periods totaling
Given the facts of this case, we cannot see how petitioner's business
one hundred eighty (180) days or more; participating in the
dealings will fit the category of "isolated transactions" considering that
management, supervision or control of any domestic business firm,
its intention to continue and pursue the corpus of its business in the
entity or corporation in the Philippines, and any other act or acts that
country had been clearly established. It has not presented any
imply a continuity or commercial dealings or arrangements and
convincing argument with equally convincing evidence for us to rule
contemplate to that extent the performance of acts or works, or the
otherwise.
exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and
Accordingly and ineluctably, petitioner must be held to be object of the business organization.
incapacitated to maintain the action a quo against private respondent.
The term ordinarily implies a continuity of commercial dealings and
It was never the intent of the legislature to bar court access to a foreign arrangements, and contemplates, to that extent, the performance of
corporation or entity which happens to obtain an isolated order for acts or works or the exercise of the functions normally incident to and
business in the Philippines. Neither, did it intend to shield debtors in progressive prosecution of the purpose and object of its
from their legitimate liabilities or obligations. But it cannot allow organization.
foreign corporations or entities which conduct regular business any
access to courts without the fulfillment by such corporations of the
A single act or transaction made in the Philippines, however, could
necessary requisites to be subjected to our government's regulation and
qualify a foreign corporation to be doing business in the Philippines, if
authority. By securing a license, the foreign entity would be giving
such singular act is not merely incidental or casual, but indicates the
assurance that it will abide by the decisions of our courts, even if
foreign corporation's intention to do business in the Philippines.
adverse to it.

There is no sufficient basis in the records which would merit the

Avon Insurance Vs. CA (278 S 312)
institution of this collection suit in the Philippines. More specifically,
there is nothing to substantiate the private respondent's submission
Facts: that the petitioners had engaged in business activities in this country.
This is not an instance where the erroneous service of summons upon
the defendant can be cured by the issuance and service of alias
Yupangco Cotton Mills engaged to secure with Worldwide Security and
summons, as in the absence of showing that petitioners had been doing
Insurance Co. Inc., several of its properties for the periods July 6, 1979
business in the country, they cannot be summoned to answer for the
to July 6, 1980 for a coverage of P100,000,000.00 and from October 1,
charges leveled against them.
1980 to October 1, 1981, also for P100,000,000.00. Both contracts
were covered by reinsurance treaties between Worldwide Surety and
Insurance and several foreign reinsurance companies, including Avon As it is, private respondent has made no allegation or demonstration of
Insurance. The reinsurance arrangements had been made through the existence of petitioners' domestic agent, but avers simply that they
international broker C.J. Boatwright and Co. Ltd., acting as agent of are doing business not only abroad but in the Philippines as well. It
Worldwide Surety and Insurance. does not appear at all that the petitioners had performed any act which
would give the general public the impression that it had been engaging,
or intends to engage in its ordinary and usual business undertakings in
On December 16, 1979 and May 2, 1981, within the respective
the country. The reinsurance treaties between the petitioners and
effectivity periods of the two policies, the properties therein insured
Worldwide Surety and Insurance were made through an international
were razed by fire, thereby giving rise to the obligation of the insurer to
insurance broker, and not through any entity or means remotely
indemnify the Yupangco Cotton Mills. Partial payments were made by
connected with the Philippines. Moreover, there is authority to the
Worldwide Surety and Insurance and some of the reinsurance
effect that a reinsurance company is not doing business in a certain
companies.
state merely because the property or lives which are insured by the
original insurer company are located in that state. The reason for this is
On May 2, 1983, Worldwide Surety and Insurance, in a Deed of that a contract of reinsurance is generally a separate and distinct
Assignment, acknowledged a remaining balance of P19,444,447.75 still arrangement from the original contract of insurance, whose contracted
due Yupangco Cotton Mills, and assigned to the latter all reinsurance risk is insured in the reinsurance agreement. Hence, the original
proceeds still collectible from all the foreign reinsurance companies. insured has generally no interest in the contract of reinsurance.
Thus, in its interest as assignee and original insured, Yupangco Cotton
Mills instituted this collection suit against the petitioners.
Hutchison Parts Vs. SBMA (339 S 434)

Issue:
Facts:

W/N the petitioners were determined to be "doing business in the

The Subic Bay Metropolitan Authority (or SBMA) advertised in leading
Philippines" or not
national daily newspapers and in one international publication, an
invitation offering to the private sector the opportunity to develop and
Ruling: operate a modern marine container terminal within the Subic Bay
Freeport Zone. Three were declared by the SBMA as qualified bidders
after passing the pre-qualification evaluation conducted by the SBMA’s
There is no exact rule or governing principle as to what constitutes Technical Evaluation Committee (or SBMA-TEC). These are: (1)
doing or engaging in or transacting business. Indeed, such case must International Container Terminal Services, Inc. (or ICTSI); (2) a
be judged in the light of its peculiar circumstances, upon its peculiar consortium consisting of Royal Port Services, Inc. and HPC Hamburg
facts and upon the language of the statute applicable. The true test, Port Consulting GMBH (or RPSI); and (3) Hutchison Ports Philippines
however, seems to be whether the foreign corporation is continuing the
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Limited (or HPPL), representing a consortium composed of HPPL, While the case before the trial court was pending litigation, on August
Guoco Holdings (Phils.), Inc. and Unicol Management Services, Inc. 4, 1997, the SBMA sent notices to plaintiff HPPL, ICTSI and RPSI
requesting them to declare their interest in participating in a rebidding
of the proposed project. On October 20, 1997, plaintiff HPPL received a
Thereafter, the services of three (3) international consultants
copy of the minutes of the pre-bid conference which stated that the
recommended by the World Bank for their expertise were hired by
winning bidder would be announced on December 5, 1997. Then on
SBMA to evaluate the business plans submitted by each of the bidders,
November 4, 1997, plaintiff HPPL learned that the SBMA had accepted
and to ensure that there would be a transparent and comprehensive
the bids of ICTSI and RPSI who were the only bidders who qualified.
review of the submitted bids. The consultants, after such review and
evaluation unanimously concluded that HPPL’s Business Plan was “far
superior to that of the two other bidders.” Hence, this petition filed by petitioner (plaintiff below) HPPL against
respondents SBMA, ICTSI, RPSI and the Executive Secretary seeking
to obtain a prohibitory injunction.
However, even before the sealed envelopes containing the bidders’
proposed royalty fees could be opened at the appointed time and place,
RPSI formally protested that ICTSI is legally barred from operating a Issue:
second port in the Philippines based on Executive Order No. 212 and
Department of Transportation and Communication (DOTC) Order 95-
W/N HPPL has the legal capacity to even seek redress from this Court
863. Nevertheless, the opening of the sealed financial bids proceeded
“under advisement” relative to the protest signified by RPSI.
Ruling:
The SBMA-PBAC decided to suspend the announcement of the
winning bid, however, and instead gave ICTSI seven (7) days within Admittedly, petitioner HPPL is a foreign corporation, organized and
which to respond to the letter-protest lodged by RPSI. The HPPL existing under the laws of the British Virgin Islands. While the actual
joined in RPSI’s protest, stating that ICTSI should be disqualified bidder was a consortium composed of petitioner, and two other
because it was already operating the Manila International Container corporations, namely, Guoco Holdings (Phils.) Inc. and Unicol
Port (or MICP), which would give rise to inevitable conflict of interest Management Servises, Inc., it is only petitioner HPPL that has brought
between the MICP and the Subic Bay Container Terminal facility. the controversy before the Court, arguing that it is suing only on an
isolated transaction to evade the legal requirement that foreign
corporations must be licensed to do business in the Philippines to be
On August 15, 1996, the SBMA-PBAC issued a resolution rejecting the
able to file and prosecute an action before Philippines courts.
bid of ICTSI because “said bid does not comply with the requirements
of the tender documents and the laws of the Philippines.” The said
resolution also declared that the winning bid be awarded to The maelstrom of this issue is whether participating in the bidding is a
HUTCHISON PORTS PHILIPPINES LIMITED (HPPL) and that mere isolated transaction, or did it constitute “engaging in” or
negotiations commence immediately with HPPL (HUTCHISON) with a “transacting” business in the Philippines such that petitioner HPPL
view to concluding an acceptable agreement within 45 days of this date needed a license to do business in the Philippines before it could come
failing which negotiations with RPSI (ROYAL) will commence with a to court.
view to concluding an acceptable agreement within 45 days thereafter
failing which there will be declared a failure of bids.
Participating in the bidding process constitutes “doing business”
because it shows the foreign corporation’s intention to engage in
The following day, ICTSI filed a letter-appeal with SBMA’s Board of business here. The bidding for the concession contract is but an
Directors requesting the nullification and reversal of the above-quoted exercise of the corporation’s reason for creation or existence. Thus, it
resolution rejecting ICTSI’s bid while awarding the same to HPPL. But has been held that “a foreign company invited to bid for IBRD and ADB
even before the SBMA Board could act on the appeal, ICTSI filed a international projects in the Philippines will be considered as doing
similar appeal before the Office of the President. On August 30, 1996, business in the Philippines for which a license is required.” In this
then Chief Presidential Legal Counsel (CPLC) Renato L. Cayetano regard, it is the performance by a foreign corporation of the acts for
submitted a memorandum to then President Fidel V. Ramos, which it was created, regardless of volume of business, that determines
containing the following recommendations that the President direct whether a foreign corporation needs a license or not.
SBMA Chairman Gordon to consider option number 4 – that is to re-
evaluate the financial bids submitted by the parties, taking into
consideration all the following factors which includes reinstatement of If a foreign corporation operates a business in the Philippines without
ICTSI’s bid. a license, and thus does not submit itself to Philippine laws, it is only
just that said foreign corporation be not allowed to invoke them in our
courts when the need arises. “While foreign investors are always
SBMA, through the unanimous vote of all the Board Members, welcome in this land to collaborate with us for our mutual benefit, they
excluding the Chairman of the Board who voluntarily inhibited himself must be prepared as an indispensable condition to respect and be
from participating in the re-evaluation, selected the HPPL bid as the bound by Philippine law in proper cases, as in the one at bar.” The
winning bid, being: the conforming bid with a realistic Business Plan requirement of a license is not intended to put foreign corporations at a
offering the greatest financial return to the SBMA; the best possible disadvantage, for the doctrine of lack of capacity to sue is based on
offer in the market, and the most advantageous to the government in considerations of sound public policy. Accordingly, petitioner HPPL
accordance with the Tender Document. must be held to be incapacitated to bring this petition for injunction
before this Court for it is a foreign corporation doing business in the
Philippines without the requisite license.
Notwithstanding the SBMA Board’s recommendations and action
awarding the project to HPPL, then Executive Secretary Ruben Torres
submitted a memorandum to the Office of the President SBMA Vs. UIG of Taiwan (340 S 359)
recommending that another rebidding be conducted. Consequently,
the Office of the President issued a Memorandum directing the SBMA
Board of Directors to refrain from signing the Concession Contract Facts:
with HPPL and to conduct a rebidding of the project.
On 25 May 1995, a ‘Lease and Development Agreement’ was executed
July 7, 1997, the HPPL, feeling aggrieved by the SBMA’s failure and by UIG and SBMA under which UIG shall lease from SBMA the
refusal to commence negotiations and to execute the Concession Binictican Golf Course and appurtenant facilities thereto to be
Agreement despite its earlier pronouncements that HPPL was the transformed into a world class 18-hole golf course, golf club/resort,
winning bidder, filed a complaint against SBMA for specific commercial tourism and residential center. The contract in pertinent
performance, mandatory injunction and damages. part contains pre-termination clauses.

153
On 4 February 1997, SBMA sent a letter to UIG calling its attention to In this case, SBMA is estopped from questioning the capacity to sue of
its alleged several contractual violations in view of UIG’s failure to UIG. In entering into the LDA with UIG, SBMA effectively recognized
deliver its various contractual obligations, primarily its failure to its personality and capacity to institute the suit before the trial court.
complete the rehabilitation of the Golf Course in time for the APEC
Leader’s Summit, and to pay accumulated lease rentals and utilities,
Agilent Vs. Integrated Silicon (427 S 593)
and to post the required performance bond. UIG interposed as an
excuse the alleged default of its main contractor FF Cruz, resulting in
their filing of suit against the latter, and committed itself to comply Facts:
with its obligations within a few days. UIG, however, failed to comply
with its undertakings. On 7 March 1997, SBMA sent a letter to UIG
declaring the latter in default of its contractual obligations to SBMA Agilent Technologies Singapore (Pte.), Ltd. is a foreign corporation,
under Section 22.1 of the Lease and Development Agreement and which, by its own admission, is not licensed to do business in the
required it to show cause why petitioner SBMA should not pre- Philippines. Integrated Silicon Technology Philippines Corporation is a
terminate the agreement. UIG paid the rental arrearages but the other private domestic corporation, 100% foreign owned, which is engaged in
obligations remained unsatisfied. the business of manufacturing and assembling electronics components.
Teoh Kiang Hong, Teoh Kiang Seng and Anthony Choo, Malaysian
nationals, are current members of Integrated Silicon’s board of
Thus, on 8 September 1997, a letter of pre-termination was served by directors, while Joanne Kate M. dela Cruz, Jean Kay M. dela Cruz, and
SBMA requiring UIG to vacate the premises. On 12 September 1997, Rolando T. Nacilla are its former members.
SBMA served the formal notice of closure of Subic Bay Golf Course and
took over possession of the subject premises. On even date, UIG filed a
complaint against petitioner SBMA for ‘Injunction and Damages’ with A 5-year Value Added Assembly Services Agreement (“VAASA”) was
prayer for a writ of temporary restraining order and writ of preliminary entered into between Integrated Silicon and the Hewlett-Packard
injunction. Singapore (Pte.) Ltd., Singapore Components Operation. Under the
terms of the VAASA, Integrated Silicon was to locally manufacture and
assemble fiber optics for export to HP-Singapore. HP-Singapore, for
Issue: its part, was to consign raw materials to Integrated Silicon; transport
machinery to the plant of Integrated Silicon; and pay Integrated Silicon
the purchase price of the finished products. The VAASA had a five-year
W/N UIG has the capacity to sue
term, beginning on April 2, 1996, with a provision for annual renewal
by mutual written consent. On September 19, 1999, with the consent of
Ruling: Integrated Silicon, HP-Singapore assigned all its rights and obligations
in the VAASA to Agilent.
As a general rule, unlicensed foreign non-resident corporations cannot
file suits in the Philippines. Section 133 of the Corporation Code On May 25, 2001, Integrated Silicon filed a complaint for “Specific
specifically provides: Performance and Damages” against Agilent and its officers Tan Bian
Ee, Lim Chin Hong, Tey Boon Teck and Francis Khor. It alleged that
Agilent breached the parties’ oral agreement to extend the VAASA.
“Sec. 133. No foreign corporation transacting business in the
Integrated Silicon thus prayed that defendant be ordered to execute a
Philippines without a license, or its successors or assigns, shall be
written extension of the VAASA for a period of five years as earlier
permitted to maintain or intervene in any action, suit or proceeding in
assured and promised; to comply with the extended VAASA; and to pay
any court or administrative agency of the Philippines, but such
actual, moral, exemplary damages and attorney’s fees.
corporation may be sued or proceeded against before Philippine courts
or administrative tribunals on any valid cause of action recognized
under Philippine laws.” On July 2, 2001, Agilent filed a separate complaint against Integrated
Silicon, Teoh Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne
Kate M. dela Cruz, Jean Kay M. dela Cruz and Rolando T. Nacilla, for
A corporation has legal status only within the state or territory in which
Specific Performance, Recovery of Possession, and Sum of Money with
it was organized. For this reason, a corporation organized in another
Replevin, Preliminary Mandatory Injunction, and Damages. Agilent
country has no personality to file suits in the Philippines. In order to
prayed that a writ of replevin or, in the alternative, a writ of
subject a foreign corporation doing business in the country to the
preliminary mandatory injunction, be issued ordering defendants to
jurisdiction of our courts, it must acquire a license from the SEC and
immediately return and deliver to plaintiff its equipment, machineries
appoint an agent for service of process. Without such license, it cannot
and the materials to be used for fiber-optic components which were left
institute a suit in the Philippines.
in the plant of Integrated Silicon. It further prayed that defendants be
ordered to pay actual and exemplary damages and attorney’s fees.
It should be stressed, however, that the licensing requirement was
“never intended to favor domestic corporations who enter into solitary
Silicon filed a Motion to Dismiss on the grounds of lack of Agilent’s
transactions with unwary foreign firms and then repudiate their
legal capacity to sue; litis pendentia; forum shopping; and failure to
obligations simply because the latter are not licensed to do business in
state a cause of action.
this country.” After contracting with a foreign corporation, a domestic
firm is estopped from denying the former’s capacity to sue.
Issue:
Hence, in Merril Lynch Futures v. CA, the Court ruled:
W/N Agilent has a legal capacity to sue
“The rule is that a party is estopped to challenge the personality of a
corporation after having acknowledged the same by entering into a Ruling:
contract with it. And the ‘doctrine of estoppel to deny corporate
existence applies to foreign as well as to domestic corporations;’ “one
In a number of cases, however, we have held that an unlicensed foreign
who has dealt with a corporation of foreign origin as a corporate entity
corporation doing business in the Philippines may bring suit in
is estopped to deny its existence and capacity.’ The principle ‘will be
Philippine courts against a Philippine citizen or entity who had
applied to prevent a person contracting with a foreign corporation from
contracted with and benefited from said corporation. Such a suit is
later taking advantage of its noncompliance with the statutes, chiefly in
premised on the doctrine of estoppel. A party is estopped from
cases where such person has received the benefits of the contract x x
challenging the personality of a corporation after having acknowledged
x.’”
the same by entering into a contract with it. This doctrine of estoppel
to deny corporate existence and capacity applies to foreign as well as
domestic corporations. The application of this principle prevents a

154
person contracting with a foreign corporation from later taking involved, such that, as stated in Communication Materials, the
advantage of its noncompliance with the statutes chiefly in cases where Philippine entity is reduced to a mere extension or instrument of the
such person has received the benefits of the contract. foreign corporation. For example, in Communication Materials, the
Court deemed the “No Competing Product” provision of the
Representative Agreement therein restrictive.
The principles regarding the right of a foreign corporation to bring suit
in Philippine courts may thus be condensed in four statements: (1) if a
foreign corporation does business in the Philippines without a license, By the clear terms of the VAASA, Agilent’s activities in the Philippines
it cannot sue before the Philippine courts; (2) if a foreign corporation is were confined to (1) maintaining a stock of goods in the Philippines
not doing business in the Philippines, it needs no license to sue before solely for the purpose of having the same processed by Integrated
Philippine courts on an isolated transaction or on a cause of action Silicon; and (2) consignment of equipment with Integrated Silicon to
entirely independent of any business transaction; (3) if a foreign be used in the processing of products for export. As such, we hold that,
corporation does business in the Philippines without a license, a based on the evidence presented thus far, Agilent cannot be deemed to
Philippine citizen or entity which has contracted with said corporation be “doing business” in the Philippines. Silicon’s contention that
may be estopped from challenging the foreign corporation’s corporate Agilent lacks the legal capacity to file suit is therefore devoid of merit.
personality in a suit brought before Philippine courts; and (4) if a As a foreign corporation not doing business in the Philippines, it
foreign corporation does business in the Philippines with the required needed no license before it can sue before our courts.
license, it can sue before Philippine courts on any transaction.
Lorenzo Shipping Vs. Chubb & Sons (431 S 266)
The challenge to Agilent’s legal capacity to file suit hinges on whether
or not it is doing business in the Philippines. However, there is no
Facts:
definitive rule on what constitutes “doing”, “engaging in”, or
“transacting” business in the Philippines, as this Court observed in the
case of Mentholatum v. Mangaliman. The Court discoursed on the two Lorenzo Shipping Corporation, a domestic corporation engaged in
general tests to determine whether or not a foreign corporation can be coastwise shipping, was the carrier of 581 bundles of black steel pipes,
considered as “doing business” in the Philippines. The first of these is the subject shipment, from Manila to Davao City. From Davao City,
the substance test, thus: Gearbulk, Ltd., a foreign corporation licensed as a common carrier
under the laws of Norway and doing business in the Philippines
through its agent, Philippine Transmarine Carriers, Inc., a domestic
The true test for doing business, however, seems to be whether the
corporation, carried the goods on board its vessel M/V San Mateo
foreign corporation is continuing the body of the business or enterprise
Victory to the United States, for the account of Sumitomo Corporation.
for which it was organized or whether it has substantially retired from
The latter, the consignee, is a foreign corporation organized under the
it and turned it over to another.
laws of the United States of America. It insured the shipment with
Chubb and Sons, Inc., a foreign corporation organized and licensed to
The second test is the continuity test, expressed thus: engage in insurance business under the laws of the United States of
America.
The term doing business implies a continuity of commercial dealings
and arrangements, and contemplates, to that extent, the performance Due to its heavily rusted condition, the consignee Sumitomo rejected
of acts or works or the exercise of some of the functions normally the damaged steel pipes and declared them unfit for the purpose they
incident to, and in the progressive prosecution of, the purpose and were intended. It then filed a marine insurance claim with respondent
object of its organization. Chubb and Sons, Inc. which the latter settled in the amount of
US$104,151.00.
Although each case must be judged in light of its attendant
circumstances, jurisprudence has evolved several guiding principles for On December 2, 1988, Chubb and Sons, Inc. filed a complaint for
the application of these tests. For instance, considering that it collection of a sum of money against Lorenzo Shipping, Gearbulk, and
transacted with its Philippine counterpart for seven years, engaging in Transmarine. Chubb and Sons, Inc. alleged that it is not doing
futures contracts, this Court concluded that the foreign corporation in business in the Philippines, and that it is suing under an isolated
Merrill Lynch Futures, Inc. v. Court of Appeals and Spouses Lara, was transaction.
doing business in the Philippines. In Commissioner of Internal
Revenue v. Japan Airlines (“JAL”), the Court held that JAL was doing
Issue:
business in the Philippines, i.e., its commercial dealings in the country
were continuous – despite the fact that no JAL aircraft landed in the
country – as it sold tickets in the Philippines through a general sales W/N Chubb and Sons has capacity to sue before the Philippine courts
agent, and opened a promotions office here as well.
Ruling:
In General Corp. of the Phils. v. Union Insurance Society of Canton
and Fireman’s Fund Insurance, a foreign insurance corporation was
held to be doing business in the Philippines, as it appointed a settling In the first place, petitioner failed to raise the defense that Sumitomo is
agent here, and issued 12 marine insurance policies. We held that a foreign corporation doing business in the Philippines without a
these transactions were not isolated or casual, but manifested the license. It is therefore estopped from litigating the issue on appeal
continuity of the foreign corporation’s conduct and its intent to especially because it involves a question of fact which this Court cannot
establish a continuous business in the country. In Eriks PTE Ltd. v. resolve. Secondly, assuming arguendo that Sumitomo cannot sue in
Court of Appeals and Enriquez, the foreign corporation sold its the Philippines, it does not follow that respondent, as subrogee, has
products to a Filipino buyer who ordered the goods 16 times within an also no capacity to sue in our jurisdiction.
eight-month period. Accordingly, this Court ruled that the corporation
was doing business in the Philippines, as there was a clear intention on In the instant case, the rights inherited by the insurer, Chubb and Sons,
its part to continue the body of its business here, despite the relatively pertain only to the payment it made to the insured Sumitomo as
short span of time involved. Communication Materials and Design, stipulated in the insurance contract between them, and which amount
Inc., et al. v. Court of Appeals, ITEC, et al. and Top-Weld it now seeks to recover from petitioner Lorenzo Shipping which caused
Manufacturing v. ECED, IRTI, et al. both involved the License and the loss sustained by the insured Sumitomo. The capacity to sue of
Technical Agreement and Distributor Agreement of foreign Chubb and Sons could not perchance belong to the group of rights,
corporations with their respective local counterparts that were the remedies or securities pertaining to the payment insurer made for the
primary bases for the Court’s ruling that the foreign corporations were loss which was sustained by the insured Sumitomo and covered by the
doing business in the Philippines. In particular, the Court cited the contract of insurance. Capacity to sue is a right personal to its holder.
highly restrictive nature of certain provisions in the agreements It is conferred by law and not by the parties.

155
Lack of legal capacity to sue means that the plaintiff is not in the German Consortium, stating that the German Consortium’s contract
exercise of his civil rights, or does not have the necessary qualification with DMWAI, LBV&A and ERTI has been terminated or extinguished
to appear in the case, or does not have the character or representation on the following grounds: (a) the CDC did not give its approval to the
he claims. It refers to a plaintiff’s general disability to sue, such as on Consortium’s request for the approval of the assignment or transfer by
account of minority, insanity, incompetence, lack of juridical the German Consortium in favor of ERTI of its rights and interests
personality, or any other disqualifications of a party. Respondent under the Contract for Services; (b) the parties failed to prepare and
Chubb and Sons who was plaintiff in the trial court does not possess finalize the Shareholders’ Agreement pursuant to the provision of the
any of these disabilities. On the contrary, respondent Chubb and Sons MOU; (c) there is no more factual or legal basis for the joint venture to
has satisfactorily proven its capacity to sue, after having shown that it continue; and (d) with the termination of the MOU, the MOA is also
is not doing business in the Philippines, but is suing only under an deemed terminated or extinguished.
isolated transaction, i.e., under the one (1) marine insurance policy
issued in favor of the consignee Sumitomo covering the damaged steel
Attached to the letter was a copy of the letter of the CDC, stating that
pipes.
the German Consortium’s assignment of an eighty-five percent (85%)
majority interest to another party violated its representation to
The law on corporations is clear in depriving foreign corporations undertake both the financial and technical aspects of the project. The
which are doing business in the Philippines without a license from dilution of the Consortium’s interest in ERTI is a substantial
bringing or maintaining actions before, or intervening in Philippine modification of the Consortium’s representations which were used as
courts. bases for the award of the project to it.

The law does not prohibit foreign corporations from performing single On February 20, 2001, petitioner ERTI, through counsel, sent a letter
acts of business. A foreign corporation needs no license to sue before to CDC requesting for the reconsideration of its disapproval of the
Philippine courts on an isolated transaction. agreement between ERTI and the German Consortium.

We reject the claim of petitioner Lorenzo Shipping that respondent Before CDC could act upon petitioner ERTI’s letter, the German
Chubb and Sons is not suing under an isolated transaction because the Consortium filed a complaint for injunction against herein petitioners.
steel pipes, subject of this case, are covered by two (2) bills of lading; The German Consortium claimed that ERTI’s continued
hence, two transactions. The stubborn fact remains that these two (2) misrepresentation as to their right to accept solid wastes from third
bills of lading spawned from the single marine insurance policy that parties for processing at the waste management center will cause
Chubb and Sons issued in favor of the consignee Sumitomo, covering irreparable damage to the Consortium and its exclusive right to operate
the damaged steel pipes. The execution of the policy is a single act, an the waste management center at the CSEZ. Moreover, petitioner
isolated transaction. This Court has not construed the term “isolated ERTI’s acts destroy the Consortium’s credibility and undermine
transaction” to literally mean “one” or a mere single act. customer confidence in it. Hence, the German Consortium prayed that
a writ of temporary restraining order be issued against petitioner ERTI
and, after hearing, a writ of preliminary injunction be likewise issued
European Resources Vs. Ingenieuburo (435 S 246)
ordering petitioner ERTI to cease and desist from misrepresenting to
third parties or the public that it has any right or interest in the waste
Facts: management center at CSEZ.

European Resources and Technologies Inc., a corporation organized At the hearings on the application for injunction, petitioners objected
and existing under the laws of the Republic of the Philippines, is joined to the presentation of evidence on the ground that the trial court had
by Delfin J. Wenceslao as petitioner in this case. Ingenieuburo no jurisdiction over the case since the German Consortium was
Birkhan + Nolte Ingiurgesellschaft mbh and Heers & Brockstedt Gmbh composed of foreign corporations doing business in the country
& Co. are German corporations who are respondents in this case and without a license. Moreover, the MOA between the parties provides
shall be collectively referred to as the “German Consortium”. that the dispute should be referred to arbitration.

The German Consortium tendered and submitted its bid to the Clark Issue:
Development Corporation to construct, operate and manage the
Integrated Waste Management Center at the Clark Special Economic
W/N ERTI are estopped from assailing the capacity of the German to
Zone (“CSEZ”). CDC accepted the German Consortium’s bid and
institute the suit for injunction
awarded the contract to it. On October 6, 1999, CDC and the German
Consortium executed the Contract for Services which embodies the
terms and conditions of their agreement. Ruling:

The Contract for Services provides that the German Consortium shall We have held that the act of participating in a bidding process
be empowered to enter into a contract or agreement for the use of the constitutes “doing business” because it shows the foreign corporation’s
integrated waste management center by corporations, local intention to engage in business in the Philippines. In this regard, it is
government units, entities, and persons not only within the CSEZ but the performance by a foreign corporation of the acts for which it was
also outside. created, regardless of volume of business, that determines whether a
foreign corporation needs a license or not.
Article VIII, Section 7 of the Contract for Services provides that the
German Consortium shall undertake to organize a local corporation as Consequently, the German Consortium is doing business in the
its representative for this project. Pursuant to this, petitioner Philippines without the appropriate license as required by our laws. By
European Resources and Technologies, Inc. was incorporated. The participating in the bidding conducted by the CDC for the operation of
parties likewise agreed to prepare and finalize a Shareholders’ the waste management center, the German Consortium exhibited its
Agreement within one (1) month from the execution of the MOU, intent to transact business in the Philippines. Although the Contract
which shall provide that the German Consortium shall own fifteen for Services provided for the establishment of a local corporation to
percent (15%) of the equity in the joint venture corporation, DMWAI serve as respondents’ representative, it is clear from the other
shall own seventy percent (70%) and LBV&A shall own fifteen percent provisions of the Contract for Services as well as the letter by the CDC
(15%). In the event that the parties fail to execute the Shareholders’ containing the disapproval that it will be the German Consortium
Agreement, the MOU shall be considered null and void. which shall manage and conduct the operations of the waste
management center for at least twenty-five years. Moreover, the
German Consortium was allowed to transact with other entities outside
On December 11, 2000, ERTI received a letter from BN Consultants
the CSEZ for solid waste collection. Thus, it is clear that the local
Philippines, Inc., signed by Mr. Holger Holst for and on behalf of the
156
corporation to be established will merely act as a conduit or extension 6. Failure to pay any and all taxes, imposts, assessments or penalties, if
of the German Consortium. any, lawfully due to the Philippine Government or any of its agencies or
political subdivisions;
As a general rule, unlicensed foreign non-resident corporations cannot
file suits in the Philippines. Section 133 of the Corporation Code 7. Transacting business in the Philippines outside of the purpose or
specifically provides. However, there are exceptions to this rule. In a purposes for which such corporation is authorized under its license;
number of cases, we have declared a party estopped from challenging
or questioning the capacity of an unlicensed foreign corporation from
initiating a suit in our courts. In the case of Communication Materials 8. Transacting business in the Philippines as agent of or acting for and
and Design, Inc. v. Court of Appeals, a foreign corporation instituted in behalf of any foreign corporation or entity not duly licensed to do
an action before our courts seeking to enjoin a local corporation, with business in the Philippines; or
whom it had a “Representative Agreement”, from using its corporate
name, letter heads, envelopes, sign boards and business dealings as 9. Any other ground as would render it unfit to transact business in the
well as the foreign corporation’s trademark. The case arose when the Philippines. (n)
foreign corporation discovered that the local corporation has violated
certain contractual commitments as stipulated in their agreement. In
said case, we held that a foreign corporation doing business in the Sec. 135. Issuance of certificate of revocation. - Upon the
Philippines without license may sue in Philippine Courts a Philippine revocation of any such license to transact business in the Philippines,
citizen or entity that had contracted with and benefited from it. the Securities and Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to the appropriate
government agency in the proper cases.
Hence, the party is estopped from questioning the capacity of a foreign
corporation to institute an action in our courts where it had obtained
benefits from its dealings with such foreign corporation and thereafter The Securities and Exchange Commission shall also mail to the
committed a breach of or sought to renege on its obligations. The rule corporation at its registered office in the Philippines a notice of such
relating to estoppel is deeply rooted in the axiom of commodum ex revocation accompanied by a copy of the certificate of revocation. (n)
injuria sua non habere debet—no person ought to derive any
advantage from his own wrong. Sec. 136. Withdrawal of foreign corporations. - Subject to
existing laws and regulations, a foreign corporation licensed to transact
In the case at bar, petitioners have clearly not received any benefit from business in the Philippines may be allowed to withdraw from the
its transactions with the German Consortium. In fact, there is no Philippines by filing a petition for withdrawal of license. No certificate
question that petitioners were the ones who have expended a of withdrawal shall be issued by the Securities and Exchange
considerable amount of money and effort preparatory to the Commission unless all the following requirements are met;
implementation of the MOA. Neither do petitioners seek to back out
from their obligations under both the MOU and the MOA by 1. All claims which have accrued in the Philippines have been paid,
challenging respondents’ capacity to sue. The reverse could not be any compromised or settled;
more accurate. Petitioners are insisting on the full validity and
implementation of their agreements with the German Consortium.
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political
To rule that the German Consortium has the capacity to institute an subdivisions have been paid; and
action against petitioners even when the latter have not committed any
breach of its obligation would be tantamount to an unlicensed foreign
corporation gaining access to our courts for protection and redress. 3. The petition for withdrawal of license has been published once a
We cannot allow this without violating the very rationale for the law week for three (3) consecutive weeks in a newspaper of general
prohibiting a foreign corporation not licensed to do business in the circulation in the Philippines.
Philippines from suing or maintaining an action in Philippine courts.
TITLE XVI
MISCELLANEOUS PROVISIONS
Sec. 134. Revocation of license. - Without prejudice to other
grounds provided by special laws, the license of a foreign corporation
to transact business in the Philippines may be revoked or suspended by Sec. 137. Outstanding capital stock defined. - The term
the Securities and Exchange Commission upon any of the following "outstanding capital stock", as used in this Code, means the total
grounds: shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares. (n)
1. Failure to file its annual report or pay any fees as required by this
Code;
Sec. 138. Designation of governing boards. - The provisions of
specific provisions of this Code to the contrary notwithstanding, non-
2. Failure to appoint and maintain a resident agent in the Philippines stock or special corporations may, through their articles of
as required by this Title; incorporation or their by-laws, designate their governing boards by any
name other than as board of trustees. (n)
3. Failure, after change of its resident agent or of his address, to submit
to the Securities and Exchange Commission a statement of such change Sec. 139. Incorporation and other fees. - The Securities and
as required by this Title; Exchange Commission is hereby authorized to collect and receive fees
as authorized by law or by rules and regulations promulgated by the
4. Failure to submit to the Securities and Exchange Commission an Commission. (n)
authenticated copy of any amendment to its articles of incorporation or
by-laws or of any articles of merger or consolidation within the time Sec. 140. Stock ownership in certain corporations. - Pursuant
prescribed by this Title; to the duties specified by Article XIV of the Constitution, the National
Economic and Development Authority shall, from time to time, make a
5. A misrepresentation of any material matter in any application, determination of whether the corporate vehicle has been used by any
report, affidavit or other document submitted by such corporation corporation or by business or industry to frustrate the provisions
pursuant to this Title; thereof or of applicable laws, and shall submit to the Batasang
Pambansa, whenever deemed necessary, a report of its findings,
including recommendations for their prevention or correction.

157
Maximum limits may be set by the Batasang Pambansa for Facts:
stockholdings in corporations declared by it to be vested with a public
interest pursuant to the provisions of this section, belonging to Rose Packing Company, Inc., a domestic corporation, owns three (3)
individuals or groups of individuals related to each other by parcels of land with a total area of 31, 842 square meters situated in
consanguinity or affinity or by close business interests, or whenever it Sto. Domingo, Cainta, Rizal. The largest among these parcels w/ an
is necessary to achieve national objectives, prevent illegal monopolies area of 31,447 square meters is mortgaged with the Philippine
or combinations in restraint or trade, or to implement national Commercial and Industrial Bank (PCIB). The other two remaining
economic policies declared in laws, rules and regulations designed to parcels are unregistered.
promote the general welfare and foster economic development.
On October 26, 1965, Rose Packing, through its President Rene Knecht,
In recommending to the Batasang Pambansa corporations, business or sold to the United Cigarette Corporation (UCC), a domestic
industries to be declared vested with a public interest and in corporation, the said parcels of land, with all the buildings and
formulating proposals for limitations on stock ownership, the National improvements thereon, for P800,000.00. Rose Packing made a
Economic and Development Authority shall consider the type and warranty that the lots are free from all liens and encumbrances, except
nature of the industry, the size of the enterprise, the economies of the real estate mortgage constituted over one area covered by TCT No.
scale, the geographic location, the extent of Filipino ownership, the 73620. For its part, UCC promised to pay the purchase price under the
labor intensity of the activity, the export potential, as well as other following terms and conditions: (a) a P250,000.00 down payment
factors which are germane to the realization and promotion of business must be made upon signing of the deed of sale with mortgage; (b) it
and industry. will assume Rose Packing’s P250,000.00 overdraft line obligation with
the PCIB, subject to the latter’s approval; and (c) the balance of
P300,000.00 shall be paid in two annual installments at P150,000.00
Sec. 141. Annual report or corporations. - Every corporation, each (within 12 and 14 months) from the date of sale, with 10% annual
domestic or foreign, lawfully doing business in the Philippines shall interest. To secure the deal, UCC initially paid Rose Packing
submit to the Securities and Exchange Commission an annual report of P80,000.00 as earnest money.
its operations, together with a financial statement of its assets and
liabilities, certified by any independent certified public accountant in Before the deed of sale could be executed, the parties found that Rose
appropriate cases, covering the preceding fiscal year and such other Packing’s actual obligation with the PCIB far exceeded the
requirements as the Securities and Exchange Commission may require. P250,000.00 which UCC assumed to pay under their agreement. So
Such report shall be submitted within such period as may be prescribed the PCIB demanded additional collateral from UCC as a condition
by the Securities and Exchange Commission. (n) precedent for the approval of the sale of the mortgaged property.
However, UCC did not comply.
Sec. 142. Confidential nature of examination results. - All Meanwhile, Rose Packing again offered to sell the same lots to other
interrogatories propounded by the Securities and Exchange prospective buyers without the knowledge of UCC and without
Commission and the answers thereto, as well as the results of any returning to the latter the earnest money it earlier paid.
examination made by the Commission or by any other official
authorized by law to make an examination of the operations, books and Aggrieved, UCC, filed a complaint against Rose Packing and Rene
records of any corporation, shall be kept strictly confidential, except Knecht for specific performance and recovery of damages.
insofar as the law may require the same to be made public or where
such interrogatories, answers or results are necessary to be presented Eventually, on July 19, 1990, UCC, through its liquidator Alberto
as evidence before any court. (n) Wong, filed with the CFI, Branch 2 a motion for leave to intervene and
to admit its complaint-in-intervention. Rose Packing, through its
liquidator/trustee, Knecht, Inc., opposed the motion claiming that the
Sec. 143. Rule-making power of the Securities and Exchange Decision in Civil Case No. 9165 which became final on March 23, 1977
Commission. - The Securities and Exchange Commission shall have can no longer be enforced since more than ten (10) years had elapsed
the power and authority to implement the provisions of this Code, and from its finality.
to promulgate rules and regulations reasonably necessary to enable it
to perform its duties hereunder, particularly in the prevention of fraud While it nullified the Orders dated December 10, 1990 and October 10,
and abuses on the part of the controlling stockholders, members, 1991, the CA nonetheless stressed that “UCC’s right to execute the
directors, trustees or officers. (n) judgment in Civil Case No. 9165 has not yet prescribed
insofar as the parcel of land covered by TCT No. 73620 is
concerned” because this land was involved in Civil Case No. 11015.
Sec. 144. Violations of the Code. - Violations of any of the Its execution can be availed of in Branch 151, not in Branch 152, of the
provisions of this Code or its amendments not otherwise specifically RTC, Pasig City. As regards the two other unregistered parcels of
penalized therein shall be punished by a fine of not less than one land, the judgment has already prescribed because these
thousand (P1,000.00) pesos but not more than ten thousand properties were not involved in Civil Case No. 11015, hence,
(P10,000.00) pesos or by imprisonment for not less than thirty (30) UCC should have then sought the execution of the judgment
days but not more than five (5) years, or both, in the discretion of the with respect to said properties.
court. If the violation is committed by a corporation, the same may,
after notice and hearing, be dissolved in appropriate proceedings Issue:
before the Securities and Exchange Commission: Provided, That such
dissolution shall not preclude the institution of appropriate action W/N UCC’s right to enforce that judgment had already prescribed
against the director, trustee or officer of the corporation responsible for
said violation: Provided, further, That nothing in this section shall be Ruling:
construed to repeal the other causes for dissolution of a corporation
provided in this Code. (190 1/2 a) There is no doubt that the judgment in Civil Case No. 9165 became
final and executory on March 23, 1977. That this judgment is still
enforceable was decided with finality by this Court in G.R. No. 109385.
Sec. 145. Amendment or repeal. - No right or remedy in favor of
or against any corporation, its stockholders, members, directors, In Reburiano vs. Court of Appeals, a case with similar facts, this Court
trustees, or officers, nor any liability incurred by any such corporation, held:
stockholders, members, directors, trustees, or officers, shall be
removed or impaired either by the subsequent dissolution of said “the trustee (of a dissolved corporation) may commence a
corporation or by any subsequent amendment or repeal of this Code or suit which can proceed to final judgment even beyond
of any part thereof. (n) the three-year period (of liquidation) x x x, no
reason can be conceived why a suit already
commenced by the corporation itself during its
Knecht Vs. United Cigarette (384 S 45) existence, not by a mere trustee who, by fiction, merely
continues the legal personality of the dissolved

158
 corporation, should not be accorded similar Thereafter, the properties of Skyline were levied upon motion of
treatment – to proceed to final judgment and Rufina. Skyline appealed to CA, but the Court ruled that Skyline
execution thereof.” (Emphasis ours) International, Inc. was a conjugal enterprise before its incorporation in
December 1970 when it was still a proprietorship. The Court found
Indeed, the rights of a corporation (dissolved pending litigation) are that the only assets of the corporation are the conjugal properties.
accorded protection by law. This is clear from Section 145 of the Thus, “it is safe to assume that Skyline International Corporation is
Corporation Code, thus: another name for Mr. and Mrs. Pastor Y. Lim in person.” Skyline, then,
filed a petition for review before this Court, but the petition was
“Section 145. Amendment or repeal. No right or remedy dismissed.
in favor of or against any corporation, its
stockholders, members, directors, trustees, or officers, nor
any liability incurred by any such corporation, Sometimes later, the Speed Distributing Corporation was registered
stockholders, members, directors, trustees, or officers, with the Securities and Exchange Commission, with Pastor Lim as one
shall be removed or impaired either by the of the incorporators. He owned ten shares, valued at P100.00 per
subsequent dissolution of said corporation or by share. Lita Lim-Marcelo was elected treasurer of the corporation.
any subsequent amendment or repeal of this Code or of
any part thereof.” (Emphasis ours)
Also, another corporation, Leslim Corporation, was registered with the
The dissolution of UCC itself, or the expiration of its three-year Securities and Exchange Commission with a capital stock of
liquidation period, should not be a bar to the enforcement of its rights P12,000,000.00, divided into 120,000 shares at par value of P100.00
as a corporation. One of these rights, to be sure, includes the UCC’s per share. Pastor Lim subscribed to 95,700 shares valued at
right to seek from the court the execution of a valid and final judgment P9,570,000.00. Under the articles of incorporation, Pastor Lim was the
in Civil Case No. 9165 – through its trustee/liquidator Encarnacion treasurer-in-trust of the corporation. The Vice-President and Treasurer
Gonzales Wong – for the benefit of its stockholders, creditors and any of the corporation was Lita Lim-Marcelo, now married to Ireneo
other person who may have legal claims against it. To hold otherwise Marcelo.
would be to allow petitioners to unjustly enrich themselves at the
expense of UCC. This, in effect, renders nugatory all the efforts and Sometimes in1994, Leslim Corporation executed a deed of absolute
expenses of UCC in its quest to secure justice, not to mention the sale in favor of the Speed, represented by its Vice-President, Ireneo
undue delay in disposing of this case prejudicial to the administration Marcelo, over the parcel of lot located at Diliman Quezon City, for the
of justice. price of P3,900,000.00. Lita Lim-Marcelo, the Vice-President of
Leslim signed in the deed for and in behalf of the corporation. Lita
Lim-Marcelo was authorized by the Board of Directors in a Resolution
Sec. 146. Repealing clause. - Except as expressly provided by this
August 19, 1994 to sign the said deed and to receive the purchase price
Code, all laws or parts thereof inconsistent with any provision of this
for and in behalf of Leslim. The said Resolution was certified by
Code shall be deemed repealed. (n)
corporate secretary Pedro Aquino on August 22, 1994. Consequently,
TCT No. 36617 which was in the name of Leslim, was cancelled and a
Sec. 147. Separability of provisions. - Should any provision of new one, TCT No. T-116716, was issued to and in the name of Speed.
this Code or any part thereof be declared invalid or unconstitutional,
the other provisions, so far as they are separable, shall remain in force.
Prior to that sale, Pastor Lim died intestate and was survived by his
(n)
wife, Rufina Lim.

Sec. 148. Applicability to existing corporations. - All

Rufina filed a complaint against Speed, and the petitioners with the
corporations lawfully existing and doing business in the Philippines on
RTC of Quezon City, for the nullification of the Deed of Absolute Sale
the date of the effectivity of this Code and heretofore authorized,
executed by Leslim in favor of Speed over the property covered by TCT
licensed or registered by the Securities and Exchange Commission,
No. T-36617, and the cancellation of TCT No. T-11676 with damages
shall be deemed to have been authorized, licensed or registered under
before the RTC of Quezon City.
the provisions of this Code, subject to the terms and conditions of its
license, and shall be governed by the provisions hereof: Provided, That
if any such corporation is affected by the new requirements of this On November 25, 1995, the RTC issued an order dismissing the
Code, said corporation shall, unless otherwise herein provided, be complaint, real party-in-interest. According to the court, she had no
given a period of not more than two (2) years from the effectivity of this cause of action against the petitioners as she was not privy to the
Code within which to comply with the same. (n) contract of sale between Leslim and Speed. Neither was she a
stockholder of the defendant corporation; as such, she could not sue
for the corporation. According to the court, Rufina could not file the
Sec. 149. Effectivity. - This Code shall take effect immediately upon
complaint in behalf of her deceased husband Pastor as she was unable
its approval.
to show that she was the authorized representative of his estate; even if
she was so authorized, her claim was limited to the shares owned by
Pastor, which could not extend to the properties of Leslim. The court
also ruled that the action involved intra-corporate controversies over
which the SEC had original and exclusive jurisdiction.

INTRA-CORPORATE DISPUTE Issue:

W/N the CA is correct in remanding the case to the RTC and directing
Speed Distributing Vs. CA (425 S 691) it to decide and hear the complaint on its merits, in view of Rep. Act
No. 8799 which took effect on August 8, 2000, during the pendency of
the case before it, effectively transferring jurisdiction over cases
Facts:
involving intra-corporate controversies from the SEC to the RTC

Pastor Y. Lim married Rufina Luy Lim. During the early part of their
Ruling:
marriage Pastor organized some family corporations using their
conjugal funds. Among these corporations was Skyline International
Corporation which was engaged in the importation and sale of The CA is correct in remanding the case to the RTC.
Hankook Brand Korean Tires and the acquisition of real estate. The
spouses were incorporators and major stockholders of the corporation
and were also employed therein.
159
Jurisdiction over the subject matter is conferred by law. The nature of In the present recourse, it is clear that Rufina Lim’s complaint in the
an action, as well as which court or body has jurisdiction over it, is RTC is not an intra-corporate case. For one thing, she has never been a
determined based on the allegations contained in the complaint of the stockholder of Leslim, or of Speed for that matter. The complaint is
plaintiff, irrespective of whether or not plaintiff is entitled to recover one for the nullification of the deed of absolute sale executed by Leslim
upon all or some of the claims asserted therein. It cannot depend on in favor of Speed over the property covered by TCT No. T-36617 in the
the defenses set forth in the answer, in a motion to dismiss, or in a name of Leslim, the cancellation of TCT No. T-116716 in the name of
motion for reconsideration by the defendant. Speed, as well as the Secretary’s Certificate dated August 22, 1994. She
alleged that since her deceased husband, Pastor Lim, acquired the
property during their marriage, the said property is a conjugal in
Section 5 of P.D. No. 902-A provides that the SEC shall have original
nature, although registered under the name of Leslim under TCT No.
and exclusive jurisdiction over complaints, to hear and decide cases
T-36617. She asserted that the petitioners connived to deprive the
involving the following:
estate of Pastor Lim and his heirs of their possession and ownership
over the said property using a falsified Secretary’s Certificate stating
(a) Devices or schemes employed by or any acts of the board of that the Board of Directors of Leslim had a meeting on August 19, 1994,
directors, business associates, its officers or partners, amounting to when, in fact, no such meeting was held. Lita Lim was never a
fraud and misrepresentation which may be detrimental to the interest stockholder of Leslim or a member of its Board of Directors; her
of the public and/or stockholders, partners, members of associations husband, Ireneo Marcelo was the Vice-President of Speed; and, Pedro
registered with the Commission; Aquino was Leslim’s corporate secretary. She further averred that the
amount of P3,900,000.00, the purchase price of the property under
the deed of absolute sale, was not paid to Leslim, and that the Spouses
(b) Controversies arising out of intra-corporate or partnership Marcelo and petitioner Pedro Aquino contrived the said deed to
relations, between and among stockholders, members, or associates; consummate their devious scheme and chicanery. The private
between any or all of them and the corporation, partnership or respondent concluded that the Deed of Absolute Sale was simulated;
association and the State insofar as it concerns their individual hence, null and void.
franchise or right as such entity;

Thus, on the basis of the material allegations of the complaint, the

(c) Controversies in the election or appointment of directors, trustees, court a quo had jurisdiction over the case.
officers or managers of such corporations, partnership or associations;

Sy Chim Vs. Sy Siy Ho (480 S 465)

(d) Petitioners of corporations, partnerships or associations to be
declared in the state of suspension of payment in cases where the
corporation, partnership or association possesses sufficient property to Facts:
cover all its debts but foresees the impossibility of meeting them when
they fall due or in cases where the corporation, partnership or
The Sy Siy Ho & Sons, Inc. is a domestic corporation which was
association has no sufficient assets to cover its liabilities but is under
organized in the 1940s, engaged primarily in importing, buying and
the management of a rehabilitation receiver or management committee
selling hardware, machineries, spare parts, supplies and other allied
created pursuant to this Decree.
products and merchandise to be sold exclusively on wholesale basis. It
was doing business under the name and style Guan Yiac Hardware.
However, Section 5.2 of Rep. Act No. 8799 transferred the erstwhile
exclusive and original jurisdiction of the SEC over actions involving
The corporation was owned and controlled by Sy Chim and his
intra-corporate controversies to the courts of general jurisdiction, or
children. Sometime in 1990, a controversy ensued between Sy Chim’s
the appropriate RTC. All intra-corporate cases pending in the SEC
two sons, Sy Tiong Shiou and Sy Tiong Bio who was then the Vice
were to be transferred to the appropriate RTC. Congress thereby
President for Finance. Sy Chim sided with Sy Tiong Shiou. The intra-
recognized the expertise and competence of the RTC to take cognizance
corporate dispute reached the Securities and Exchange Commission
of and resolve cases involving intra-corporate controversies. In
(SEC). Later, the parties agreed to divide and distribute the assets and
compliance with the law, the Court issued, on November 21, 2000 a
liabilities of the corporation.
Resolution designating certain branches of the RTC in the National
Capital Region to try and decide cases enumerated in Section 5 of P.D.
No. 902-A. For Quezon City cases, the Court designated Branches 46 Some of the shares of stocks were assigned to Felicidad Chan Sy, wife
and 93 of the RTC. Branch 222 of the Quezon City RTC, which of Sy Chim. The spouses Sy Chim and Felicidad Chan Sy, and spouses
dismissed the complaint of the Rufina Lim was not so designated by Sy Tiong Shiou and Juanita Tan Sy, and their children, Charlie, Romer
the Court. On March 13, 2001, the Court approved the Interim Rules of and Jesse James Tan, then became stockholders and members of the
Procedure for Intra-Corporate Controversies, which took effect on Board of Directors of the corporation.
April 1, 2001.
After almost a decade later, another intra-corporate dispute ensued,
To determine whether a case involves an intra-corporate controversy, this time between Sy Chim and his wife, on the one hand, and their son
and is to be heard and decided by the Branches of the RTC specifically Sy Tiong Shiou, on the other.
designated by the Court to try and decide such cases, two elements
must concur: (a) the status or relationship of the parties; and (2) the
The complaint for accounting and damages against the spouses Sy
nature of the question that is the subject of their controversy.
Chim was filed on May 6, 2003. The complaint alleged that Felicidad
Chan Sy, as custodian of all cash collections, had been depositing
The first element requires that the controversy must arise out of intra- amounts less than those appearing in the financial statements which
corporate or partnership relations between any or all of the parties and are in the defendants’ custody and that no deposits were made in the
the corporation, partnership or association of which they are corporation’s account from November 1, 2002 to January 31, 2003.
stockholders, members or associates; between any or all of them and Based on the accountant’s report, Felicidad Chan Sy failed to account
the corporation, partnership or association of which they are for P67,117,230.30.
stockholders, members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it
Now, petitioners aver that the CA erred in strictly applying the
concerns their individual franchises. The second element requires that
requisites under Section 1, Rule 9 of the Interim Rules regarding the
the dispute among the parties be intrinsically connected with the
creation of a management committee. The petitioners posit that the
regulation of the corporation. If the nature of the controversy involves
word “and” in Section 1(1), Rule 9 should be interpreted as “or,” since a
matters that are purely civil in character, necessarily, the case does not
literal interpretation of the provision would frustrate the plain
involve an intra-corporate controversy. The determination of whether a
intention of the Rule. They point out that the appellate court’s strict
contract is simulated or not, is an issue that could be resolved by
interpretation of the rule is contrary to the spirit of Presidential Decree
applying pertinent provisions of the Civil Code.
160
No. 902-A. They further assert that the RTC is empowered to act and Rules are shown. It is a drastic course for the benefit of the minority
put a stop to misappropriation of a corporation’s funds and thus stockholders, the parties-litigants or the general public are allowed
prevent business operations from being paralyzed. According to the only under pressing circumstances and, when there is inadequacy,
petitioners, for the Court to idly wait and watch as assets of the ineffectual or exhaustion of legal or other remedies. The power to
corporation are plundered until the business is paralyzed, would intervene before the legal remedy is exhausted and misused when it is
render inutile Section 1, Rule 9 of the Interim Rules. exercised in aid of such a purpose. The power of the court to continue a
business of a corporation, partnership or association must be exercised
with the greatest care and caution. There should be a full consideration
Issue:
of all the attendant facts, including the interest of all the parties
concerned.
W/N the RTC committed grave abuse of its discretion amounting to
excess or lack of jurisdiction in creating a management committee
Neither Presidential Decree No. 902-A and Republic Act No. 8799 nor
the Interim Rules of Procedure define “imminent danger.” “Danger” is
Ruling: a general term, including peril, jeopardy, hazard and risk; as used in
the Rule, it refers to exposure or liability to injury. “Imminent” refers
to something which is threatening to happen at once, something close
Section 1, Rule 9 of the Interim Rules provides: at hand, something to happen upon the instant, close although not yet
happening, and on the verge of happening.

SECTION 1. Creation of a management committee. – As an In the present case, petitioners failed to make a strong showing that
incident to any of the cases filed under these Rules or the there was an imminent danger of dissipation, loss, wastage or
Interim Rules on Corporate Rehabilitation, a party may destruction of assets or other properties of respondent corporation
apply for the appointment of a management committee for and paralysis of its business operations which may be prejudicial to
the corporation, partnership or association, when there is the interest of the parties-litigants, petitioners, or the general public.
imminent danger of: The RTC thus committed grave abuse of its discretion amounting to
excess of jurisdiction in creating a management committee and the
(1) Dissipation, loss, wastage or destruction of assets or other subsequent appointment of a comptroller.
properties; and

(2) Paralyzation of its business operations which may be prejudicial The bone of contention between the parties is whether there was a
to the interest of the minority stockholders, parties-litigants or shortage or unaccounted funds of the corporation, including
the general public. P67,117,230.30 allegedly incurred from 1993 (when petitioner Sy Chim
assumed office as President, Felicidad Chan Sy as Assistant Treasurer,
Sy Tiong Shiou as General Manager, and Juanita Tan Sy as Corporate
We do not agree with petitioners’ contention that the word “and” in Treasurer); and who should be held accountable therefor. Petitioners
Section 1, Rule 9 of the Interim Rules should be interpreted to mean blame Sy Tiong Shiou and Juanita Tan Sy, while the latter pin liability
“or”. While it is true that in Section 6(d) of Presidential Decree No. on petitioners based on the financial report of the Banaria Banaria and
902-A an applicant for the appointment of a management committee is Company and the claim of Juanita Tan Sy. However, these issues of
mandated to prove only one of the two requisites provided therein, the fact have yet to be determined by the trial court after due proceedings.
Court, in Jacinto v. First Women’s Credit Corporation ruled that the
two requisites should be present before a management committee may
be created and a receiver appointed by the RTC: Petitioners failed to adduce a shred of evidence during the hearing of
their motion to prove their claim that there was imminent danger of
dissipation, loss, wastage or destruction of the assets or other
A reading of the aforecited legal provision reveals that for a properties of respondent ever since Sy Tiong Shiou became president
minority stockholder to obtain the appointment of an and Juanita Tan Sy continued discharging her duties as corporate
interim management committee, he must do more than treasurer; nor is there proof that there was imminent danger of
merely make a prima facie showing of a denial of his right to paralyzing the business operations of the corporation.
share in the concerns of the corporation; he must show that
the corporate property is in danger of being wasted and
destroyed; that the business of the corporation is being We have reviewed the records and find that, contrary to the findings of
diverted from the purpose for which it has been organized; the RTC, there is no imminent danger of dissipation or total loss of the
and that there is serious paralyzation of operations all to his assets, funds, properties and records of respondent corporation, or
detriment. … paralysis of business operations. In fact, records show that there has
been no slack in the business operations of respondent corporation.
The rationale for the need to establish the confluence of the two (2)
requisites under Section 1, Rule 9 by an applicant for the appointment Petitioners were divested of their corporate positions, and thus
of a management committee is primarily based upon the fact that such stockholdings in the corporation were reduced. Petitioners claim that
committee and receiver appointed by the court will immediately take Sy Tiong Shiou and Juanita Tan Sy (third-party defendants below) and
over the management of the corporation, partnership or association, their children unlawfully ousted them from their positions and reduced
including such power as it may deem appropriate, and any of the their shareholdings in the corporation. They posit that the former’s
powers specified in Section 5 of the Rule. claim that they (petitioners) misappropriated the funds and assets of
respondent was designed to justify the unlawful ouster of petitioners
from the management of respondent corporation. Such claims,
Indeed, upon the appointment of a receiver, the duly elected/appointed however, have yet to be proven.
officers of the corporation are divested of the management of such
corporation in favor of the management committee/receiver. Such
transference of the corporation’s management will certainly have a While the allegation that Sy Tiong Shiou and Juanita Tan Sy abused
negative, if not crippling effect, on the operations/affairs of the their positions and mismanaged the affairs of respondent corporation
corporation not only with banks and other business institutions is a distinct possibility, petitioners failed to adduce proof thereon.
including those abroad which it deals business with. A wall of Mere possibility without proof of abusing corporate positions and
uncertainty is erected; the short and long-term plans of the dissipation of assets and properties of the corporation is not a valid
management of the corporation are disrupted, if not derailed. ground for the appointment of a management committee/receiver.

Thus, the creation and appointment of a management committee and a We agree that past conduct and condition of the corporation may be
receiver is an extraordinary and drastic remedy to be exercised with considered in determining the present situation and what the future
care and caution; and only when the requirements under the Interim will be. However, a management committee or receiver will not be
161
appointed merely because of things done or attempted at a past time An intra-corporate controversy is one which “pertains to any of the
when the present situation and the prospects for the future following relationships: (1) between the corporation, partnership or
are not such as to warrant taking the control of the property association and the public; (2) between the corporation, partnership or
out of the hands of its owners. The circumstances to justify the association and the State in so far as its franchise, permit or license to
appointment of a management committee/ receiver must be operate is concerned; (3) between the corporation, partnership or
extraordinary and something more must be shown than past association and its stockholders, partners, members or officers; and (4)
misconduct and a mere apprehension based thereon of future among the stockholders, partners or associates themselves.”
wrongdoing. To repeat, in the absence of a strong showing of an There is thus no dispute that respondents’ complaint involves an intra-
imminent danger of dissipation, loss, wastage or destruction of assets corporate controversy, the contending parties being stockholders
or other properties of a corporation and paralysis of its business and officers of a corporation.
operations, the mere apprehension of future misconduct based upon
prior mismanagement will not authorize the appointment of a
Upon the enactment of R.A. No. 8799, otherwise known as “The
management committee/receiver.
Securities Regulation Code” which took effect on August 8, 2000, the
jurisdiction of the SEC over intra-corporate controversies and other
Yujuico Vs. Quiambao (513 S 243) cases enumerated in Section 5 of P.D. No. 902-A has been
transferred to the courts of general jurisdiction, or the appropriate
RTC.
Facts:

Pursuant to R.A. No. 8799, the Court issued a Resolution dated

Strategic Alliance Development Corporation (STRADEC) is a domestic
November 21, 2000 in A.M. No. 00-11-03-SC designating certain
corporation engaged in the business of providing financial and
branches of the RTC to try and decide cases enumerated in Section 5 of
investment advisory services and investing in projects through
P.D. No. 902-A. Branch 48 of RTC, Urdaneta City, the court a quo, is
consortium or joint venture information. On July 27, 1998, the
among those designated as a Special Commercial Court. On March 13,
Securities and Exchange Commission (SEC) approved the amendment
2001, the Court approved the Interim Rules of Procedure Governing
of STRADEC’s Articles of Incorporation authorizing the change of
Intra-Corporate Controversies under R.A. No. 8799 which took effect
its principal office from Pasig City to Bayambang, Pangasinan.
on April 1, 2001.

On March 1, 2004, STRADEC held its annual stockholders’ meeting in

Clearly, the RTC has the power to hear and decide the intra-corporate
its Pasig City office as indicated in the notices sent to the stockholders.
controversy of the parties herein. Concomitant to said power is
At the said meeting, the following were elected members of the Board
the authority to issue orders necessary or incidental to the
of Directors: Alderito Z. Yujuico, Bonifacio C. Sumbilla, Dolney S.
carrying out of the powers expressly granted to it. Thus, the
Sumbilla (petitioners herein), Cesar T. Quiambao, Jose M. Magno
RTC may, in appropriate cases, order the holding of a special
III and Ma. Christina Ferreros (respondents herein). Petitioners
meeting of stockholders or members of a corporation involving an
Alderito Yujuico was elected Chairman and President, while Bonifacio
intra-corporate dispute under its supervision.
Sumbilla was elected Treasurer. All of them then discharged the
duties of their office. After five (5) months, or on August 16, 2004,
respondents filed a Complaint against STRADEC (represented by One of the reliefs sought by respondents in the complaint is the
herein petitioners as members of its Board of Directors). The nullification of the election of the Board of Directors and corporate
complaint prays that: (1) the March 1, 2004 election be nullified on the officers held during the March 1, 2004 annual stockholders’ meeting on
ground of improper venue, pursuant to Section 51 of the the ground of improper venue, in violation of the Corporation Code.
Corporation Code; (2) all ensuing transactions conducted by the Hence, the action involves an election contest, falling squarely under
elected directors be likewise nullified; and (3) a special stockholders’ the Interim Rules of Procedure Governing Intra-Corporate
meeting be held anew. Controversies under R.A. No. 8799. Sections 1 and 2, Rule 6 of the
Interim Rules provide:
As the controversy involves an intra-corporate dispute, the trial court,
issued an Order transferring said Civil Case to RTC, Branch 48, SEC. 1. Cases covered. – The provisions of this
Urdaneta City, being a designated Special Commercial Court. rule shall apply to election contests in stock and
non-stock corporations.
On November 2, 2004, petitioners filed their Answer with
Counterclaim in Civil (SEC) Case No. U-14. They prayed for the SEC. 2. Definition. – An election contest refers
dismissal of the complaint on the following grounds, among others: (a) to any controversy or dispute involving title
the complaint does not state a cause of action; (b) the action is or claim to any elective office in a stock or non-
barred by prescription for it was filed beyond the 15-day stock corporation, the validation of proxies, the
prescriptive period provided by Section 2, Rule 6 of the Interim Rules manner and validity of elections, and the
and Procedure Governing Intra-Corporate Controversies under qualifications of candidates, including the
Republic Act (R.A.) No. 8799; (c) respondents’ prayer that a special proclamation of winners, to the office of director,
stockholders’ meeting be held in Bayambang, Pangasinan “is trustee or other officer directly elected by the
premature pending the establishment of a principal office of stockholders in a close corporation or by members
STRADEC in said municipality;” and (d) respondents waived their of a non-stock corporation where the articles of
right to object to the venue as they attended and participated in incorporation or by-laws so provide.
the said March 1, 2004 meeting and election without any protest.” (Underscoring supplied)
Petitioners likewise opposed the application for a writ of preliminary
injunction as respondents have no right that was violated, hence, are
As pointed out by petitioners in their answer with counterclaim, under
not entitled to be protected by law. They further prayed for damages
Section 3, Rule 6 of the Interim Rules of Procedure Governing Intra-
by way of counterclaim.
Corporate Controversies under R.A. No. 8799, an election contest must
be “filed within 15 days from the date of the election.” It was only on
Issue: August 16, 2004 that respondents instituted an action questioning the
validity of the March 1, 2004 stockholders’ election, clearly beyond the
15-day prescriptive period.
W/N only the SEC, not the RTC, has jurisdiction to order the holding of
a special stockholders’ meeting involving an intra-corporate
controversy and W/N the action has prescribed Vesagas Vs. CA (371 S 508)

Ruling: Facts:

162
The respondent spouses Delfino and Helenda Raniel are members in x x x b) Controversies arising out of intra-corporate or
good standing of the Luz Villaga Tennis Clud, Inc. (club). They alleged partnership relations, between and among stockholders, members
that petitioner Teodoro B. Vesagas, who claims to be the club's duly or associates; between any or all of them and the corporation,
elected president, in conspiracy with petitioner Wilfred D. Asis, who, in partnership or association of which they are the stockholders, members
turn, claims to be its duly elected vice-president and legal counsel, or associates, respectively; and between such corporation, partnership
summarily stripped them of their lawful membership, without due or association and the state insofar as it concerns their individual
process of law. Thereafter, respondent spouses filed a Complaint with franchise or right to exist as such entity;
the Securities and Exchange Commission (SEC) on March 26, 1997
against the petitioners. In this case, respondents asked the
The enactment of R.A. 8799, otherwise known as the Securities
Commission to declare as illegal their expulsion from the club as it was
Regulation Code, however, transferred the jurisdiction to resolve intra-
allegedly done in utter disregard of the provisions of its by-laws as well
corporate controversies to courts of general jurisdiction or the
as the requirements of due process. They likewise sought the
appropriate Regional Trial Courts, thus:
annulment of the amendments to the by-laws made on December 8,
1996, changing the annual meeting of the club from the last Sunday of
January to November and increasing the number of trustees from nine "5.2. The Commission's jurisdiction over all cases
to fifteen. Finally, they prayed for the issuance of a Temporary enumerated under Section 5 of Presidential Decree No. 902-
Restraining Order and Writ of Preliminary Injunction. The application A is hereby transferred to the Court of general jurisdiction or
for TRO was denied by SEC Hearing Officer Soller in an Order dated the appropriate Regional Trial Court: Provided, that the
April 29, 1997. Supreme Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over these
cases. The Commission shall retain jurisdiction over pending cases
The petioners claim in gratia argumenti that while the club may have
involving intra-corporate disputes submitted for final resolution which
been considered a corporation during a brief spell, still, at the time of
should be resolved within one (1) year from the enactment of this Code.
the institution of this case with the SEC, the club was already dissolved
The Commission shall retain jurisdiction over pending suspension of
by virtue of a Board resolution.
payments/ rehabilitation cases filed as of 30 June 2000 until finally
disposed."
Issue:
On August 22, 2000, we issued a resolution, in A.M. No. 00-8-10-SC,
W/N the dispute between the respondents and petitioners is a wherein we "DIRECT(ed) the Court Administrator and the Securities
corporate matter within the exclusive competence of the SEC to decide and Exchange Commission to cause the actual transfer of the records of
such cases and all other SEC cases affected by R.A. No. 8799 to the
appropriate Regional trial Courts x x x." We also issued another
Ruling:
resolution designating certain branches of the Regional Trial Court to
try and decide cases formerly cognizable by the SEC. Consequently, the
In order that the commission can take cognizance of a case, the case at bar should now be referred to the appropriate Regional Trial
controversy must pertain to any of the following relationship: a) Court.
between the corporation, partnership or association and its
stockholders, partners, members, or officers; c) between the
corporation, partnership, or association and the state as far as its
franchise, permit or license to operate is concerned; and d) among the
stockholders, partners or associates themselves. The fact that the CORPORATE REHABILITATION
parties involved in the controversy are all stockholders or that the
parties involved are the stockholders and the corporation, does not
necessarily place the dispute within the loop of jurisdiction of the SEC.
Jurisdiction should be determined by considering not only the status or
relationship of the parties but also the nature of the question that is the Banco De Oro Vs. JAPRL (551 S 342)
subject of their controversy.

Facts:
We rule that the present dispute is intra-corporate in character. In the
first place, the parties here involved are officers and members of the
club. Respondents claim to be members of good standing of the club After evaluating the financial statements of respondent JAPRL
until they were purportedly stripped of their membership in illegal Development Corporation (JAPRL) for fiscal years 1998, 1999 and
fashion. Petitioners, on the other hand, are its President and Vice- 2000, petitioner Banco de Oro-EPCI, Inc. extended credit facilities to it
President, respectively. More significantly, the present conflict relates amounting to P230,000,000 on March 28, 2003. Respondents Rapid
to, and in fact arose from, this relation between the parties. The subject Forming Corporation (RFC) and Jose U. Arollado acted as JAPRL’s
of the complaint, namely, the legality of the expulsion from sureties.
membership of the respondents and the validity of the amendments in
the club's by-laws are, furthermore, within the Commission's
Despite its seemingly strong financial position, JAPRL defaulted in the
jurisdiction.
payment of four trust receipts soon after the approval of its loan.
Petitioner later learned from MRM Management, JAPRL’s financial
Well to underscore is the date when the original complaint was filed at adviser, that JAPRL had altered and falsified its financial statements. It
the SEC, which was March 26, 1997. On that date, the SEC still allegedly bloated its sales revenues to post a big income from
exercised quasi-judicial functions over this type of suits. It is axiomatic operations for the concerned fiscal years to project itself as a viable
that jurisdiction is conferred by the Constitution and by the laws in investment. The information alarmed petitioner. Citing relevant
force at the time of the commencement of the action. In particular, the provisions of the Trust Receipt Agreement, it demanded immediate
Commission was thereupon empowered, under Sec. 5 of P.D. 902-A, to payment of JAPRL’s outstanding obligations amounting to
hear and decide cases involving intra-corporate disputes, thus: P194,493,388.98.

"SEC. 5. In addition to the regulatory and adjudicative functions of the On August 30, 2003, JAPRL (and its subsidiary, RFC) filed a petition
Securities and Exchange Commission over corporations, partnerships for rehabilitation in the Regional Trial Court (RTC) of Quezon City,
and other forms of association registered with it as expressly granted Branch 90 (Quezon City RTC). It disclosed that it had been
under existing laws and decrees, it shall have original and experiencing a decline in sales for the three preceding years and a
exclusive jurisdiction to hear and decide cases involving: staggering loss in 2002.

163
Because the petition was sufficient in form and substance, a stay order The protective remedy of rehabilitation was never intended to be a
was issued on September 28, 2003. However, the proposed refuge of a debtor guilty of fraud.
rehabilitation plan for JAPRL and RFC was eventually rejected by the
Quezon City RTC in an order dated May 9, 2005. Meanwhile, the Makati RTC should proceed to hear Civil Case No. 03-
991 against the three respondents guided by Section 40 of the General
Banking Law.
Because JAPRL ignored its demand for payment, petitioner filed a
complaint for sum of money with an application for the issuance of a
writ of preliminary attachment against respondents in the RTC of Under this provision, banks have the right to annul any credit
Makati City, Branch 145 (Makati RTC) on August 21, 2003. Petitioner accommodation or loan, and demand the immediate payment thereof,
essentially asserted that JAPRL was guilty of fraud because it (JAPRL) from borrowers proven to be guilty of fraud. Petitioner would then be
altered and falsified its financial statements. entitled to the immediate payment of P194,493,388.98 and other
appropriate damages.

On February 20, 2006, JAPRL (and its subsidiary, RFC) filed a petition
for rehabilitation in the RTC of Calamba, Laguna, Branch 34 (Calamba Finally, considering that respondents failed to pay the four trust
RTC). Finding JAPRL’s petition sufficient in form and in substance, the receipts, the Makati City Prosecutor should investigate whether or not
Calamba RTC issued a stay order on March 13, 2006. there is probable cause to indict respondents for violation of Section 13
of the Trust Receipts Law.

In view of the said order, respondents hastily moved to suspend the

proceedings in Civil Case No. 03-991 pending in the Makati RTC. Pryce Corp Vs. CA (543 S 657)

On July 7, 2006, the Makati RTC granted the motion with regard to Facts:
JAPRL and RFC but ordered Arollado to file an answer. It ruled that,
because he was jointly and solidarily liable with JAPRL and RFC, the Pryce Corporation, petitioner, was incorporated under Meippine laws
proceedings against him should continue. Respondents moved for on September 7, 1989. Its primary purpose was to develop real estate
reconsideration but it was denied. in Mindanao. It engaged in the development of memorial parks,
operated a major hotel in Cagayan de Oro City, and produced
Issue: industrial gases.

W/N JAPRL’s petition for corporate rehabilitation may prosper The 1997 Asian financial crisis, however, badly affected petitioner’s
operations, resulting in heavy losses. It could not meet its obligations
as they became due. It incurred losses of P943.09 million in 2001,
Ruling: P479.05 million in 2002, and P125.86 million in 2003.

We withhold judgment for the moment on the July 7, 2006 order of the Thus, on July 12, 2004, petitioner filed a petition for rehabilitation.
Makati RTC suspending the proceedings in Civil Case No. 03-991 Petitioner prayed for the appointment of a Rehabilitation Receiver
insofar as JAPRL and RFC are concerned. from among the nominees named therein and the staying of the
enforcement of all claims, monetary or otherwise against it. Petitioner
Under the Interim Rules of Procedure on Corporate Rehabilitation, a also prayed that after due hearing, its proposed Rehabilitation Plan be
stay order defers all actions or claims against the corporation seeking approved.
rehabilitation from the date of its issuance until the dismissal of the
petition or termination of the rehabilitation proceedings. On July 13, 2004, the RTC issued a “Stay Order” directing that: all
claims against petitioner be deferred; the initial hearing of the petition
The Makati RTC may proceed to hear Civil Case No. 03-991 only for rehabilitation be set on September 1, 2004; and all creditors and
against Arollado if there is no ground to go after JAPRL and RFC (as interested parties should file their respective comments/oppositions to
will later be discussed). A creditor can demand payment from the the petition. In the same Order, the RTC then appointed Gener T.
surety solidarily liable with the corporation seeking rehabilitation. Mendoza as Rehabilitation Receiver.

Respondents abused procedural technicalities (albeit unsuccessfully) The petition was opposed by petitioner’s bank-creditors. The Bank of
for the sole purpose of preventing, or at least delaying, the collection of the Philippine Islands claimed that the petition and the proposed
their legitimate obligations. Their reprehensible scheme impeded the Rehabilitation Plan are coercive and violative of the contract. The
speedy dispensation of justice. More importantly, however, considering Land Bank of the Philippines contended, among others, that the
the amount involved, respondents utterly disregarded the significance petition is unacceptable because of the unrealistic valuation of the
of a stable and efficient banking system to the national economy. properties subject of the dacion en pago.

Protecting the integrity of the banking system has become, by large, the The China Banking Corporation, respondent herein, alleged in its
responsibility of banks. The role of the public, particularly individual opposition that petitioner is solvent and that it filed the petition to
borrowers has not been emphasized. Nevertheless, we are not unaware force its creditors to accept dacion payments. In effect, petitioner
of the rampant and unscrupulous practice of obtaining loans without passed on to the creditors the burden of marketing and financing
intending to pay the same. unwanted memorial lots, while exempting it (petitioner) from paying
interests and penalties.

In this case, petitioner alleged that JAPRL fraudulently altered and

falsified its financial statements in order to obtain its credit facilities. On September 13, 2004, the RTC give due course to the petition.
Considering the amount of petitioner’s exposure in JAPRL, justice and
fairness dictate that the Makati RTC to hear whether or not Upon petition for review, the Court of Appeals rendered its Decision
respondents indeed committed fraud in securing the credit granting respondent’s petition and reversing the assailed Orders of the
accommodation. RTC.

A finding of fraud will change the whole picture. In this event, Issue:
petitioner can use the finding of fraud to move for the dismissal of the
rehabilitation case in the Calamba RTC.

164
W/N the Court of Appeals erred in denying the petition for Hence, a remand of the records of this case to the RTC is imperative.
rehabilitation of petitioner Pryce Corporation
Uniwide Holdings Vs. Jandecs Transpo (541 S 158)
Ruling:
Facts:
Section 6 of the Interim Rules of Procedure on Corporate
Rehabilitation provides:
In January 1997, petitioner and respondent Jandecs Transportation
Co., Inc. entered into a contract of “Assignment of Leasehold Rights”
SEC. 6. Stay Order.— If the court finds the petition to be under which the latter was to operate food and snack stalls at
sufficient in form and substance, it shall, not later than five (5) petitioner's Uniwide Coastal Mall in Parañaque City. The contract was
days from the filing of the petition, issue an Order (a) appointing a for a period of 18 years, commencing October 1, 1997 up to September
Rehabilitation Receiver and fixing his bond; (b) staying enforcement of 30, 2015, for a consideration of P2,460,630.15. The parties also agreed
all claims, whether for money or otherwise and whether such that respondent's stalls would be located near the movie houses and
enforcement is by court action or otherwise, against the debtor, its would be the only stalls to sell food and beverages in that area.
guarantors and sureties not solidarily liable with the debtor; (c)
prohibiting the debtor from selling, encumbering, transferring, or
On February 7, 1997, respondent paid the contract price in full.
disposing in any manner any of its properties except in the ordinary
Petitioner, however, failed to turn over the stall units on October 1,
course of business; (d) prohibiting the debtor from making any
1997 as agreed upon. Respondent sought the rescission of the
payment of its liabilities outstanding as of the date of filing of the
contract and the refund of its payment. Petitioner refused both.
petition; (e) prohibiting the debtor’s suppliers of goods or services from
withholding supply of goods and services in the ordinary course of
business for as long as the debtor makes payments for the services and On July 23, 1999, respondent filed a complaint in the Regional Trial
goods supplied after the issuance of the stay order; (f) directing the Court (RTC), Branch 257 of Parañaque City, for breach of contract,
payment in full of all administrative expenses incurred after the rescission of contract, damages and issuance of a writ of preliminary
issuance of the stay order; (g) fixing the initial hearing on the attachment. In the complaint, respondent claimed that, despite full
petition not earlier than forty five (45) days but not later payment, petitioner (1) failed to deliver the stall units on the stipulated
than sixty (60) days from the filing thereof; (h) directing the date; (2) opened its own food and snack stalls near the cinema area and
petitioner to publish the Order in a newspaper of general circulation in (3) refused to accommodate its request for the rescission of the
the Philippines once a week for two (2) consecutive weeks; (i) directing contract and the refund of payment.
all creditors and all interested parties (including the Securities and
Exchange Commission) to file and serve on the debtor a verified
comment on or opposition to the petition, with supporting In its answer, petitioner admitted respondent's full payment of the
affidavits and documents, not later than ten (10) days before the date contract price but denied that it was bound to deliver the stalls on
of the initial hearing and putting them on notice that their failure to do October 1, 1997. According to petitioner, the contract was clear that it
so will bar them from participating in the proceedings; and (j) was to turn over the units only upon completion of the mall. It likewise
directing the creditors and interested parties to secure from claimed that, under the contract, it had the option to offer substitute
the court copies of the petition and its annexes within such time stalls to respondent which the latter, however, rejected.
as to enable themselves to file their comment on or opposition to the
petition and to prepare for the initial hearing of the petition. After trial, the RTC ruled in favor of respondent.

Section 6 provides that the petition must be “sufficient in form and Aggrieved, petitioner appealed the decision to the CA. Except for the
substance.” In Rizal Commercial Banking Corporation v. award of attorney's fees which it found to be bereft of any basis the CA
Intermediate Appellate Court, this Court held that under Section 6(c) upheld the RTC decision.
of P.D. No. 902-A, receivers may be appointed whenever: (1)
necessary in order to preserve the rights of the parties-
litigants; and/or (2) protect the interest of the investing public and Petitioner filed a partial motion for reconsideration (MR) of the CA
creditors. The situations contemplated in these instances are decision but it was denied as well. Hence, it filed the petition for review
serious in nature. There must exist a clear and imminent on certiorari which we denied on August 17, 2005. Thereafter,
danger of losing the corporate assets if a receiver is not petitioner filed the “Motion to Suspend Proceedings with Motion for
appointed. Absent such danger, such as where there are sufficient Reconsideration.”
assets to sustain the rehabilitation plan and both investors and
creditors are amply protected, the need for appointing a receiver does In its motion to suspend the proceedings, petitioner prays that the
not exist. Simply put, the purpose of the law in directing the action in this Court be held in abeyance in view of the SEC's order of
appointment of receivers is to protect the interests of the suspension of payments and approval of its rehabilitation plan. In its
corporate investors and creditors. MR, on the other hand, it insists that we should find (1) the rescission
decreed by the lower courts erroneous and (2) the order for refund of
We agree with the Court of Appeals that the petition for rehabilitation the P2,460,630.15 (with legal interest) to respondent unwarranted.
does not allege that there is a clear and imminent danger that
petitioner will lose its corporate assets if a receiver is not appointed. Issue:
In other words, the “serious situation test” laid down by Rizal
Commercial Banking Corporation has not been met or at least
substantially complied with. Significantly, the Stay Order dated July W/N the motion to suspend the proceedings is warranted in the case at
13, 2004 issued by the RTC does not state any serious situation bar
affecting petitioner’s corporate assets. We observe that in appointing
Mr. Gener T. Mendoza as Rehabilitation Receiver, the only basis of Ruling:
the lower court was its finding that “the petition is sufficient
in form and substance.” However, it did not specify any reason or
ground to sustain such finding. Clearly, the petition failed to The relevant law dealing with the suspension of payments for money
comply with the “serious situation test.” claims against corporations under rehabilitation is Presidential Decree
(PD) No. 902-A, as amended. The term “claim” under said law refers
to debts or demands of pecuniary nature. It is the assertion of rights for
In determining whether petitioner’s financial situation is serious and the payment of money. The raison d' être behind the suspension of
whether there is a clear and imminent danger that it will lose its claims pending rehabilitation was explained in the case of BF Homes,
corporate assets, the RTC, acting as commercial court, should conduct Inc. v. CA:
a hearing wherein both parties can present their respective evidence.

165
 ...the reason for suspending actions for claims against the On appeal to the NLRC, the assailed decision of the Labor Arbiter was
corporation should not be difficult to discover. It is not really to enable reversed.
the management committee or the rehabilitation receiver to substitute
the [corporation] in any pending action against it before any court,
On 30 April 1999, the Court of Appeals promulgated its Decision
tribunal, board or body. Obviously, the real justification is to enable the
dismissing the petition filed by PAL. It affirmed the 28 January 1998
management committee or the rehabilitation receiver to effectively
NLRC Resolution.
exercise its/his powers free from any judicial or extra-judicial
interference that might unduly hinder or prevent the “rescue” of the
debtor [corporation]. To allow such other action to continue would Hence, this Petition for Review on Certiorari filed under Rule 45 of the
only add to the burden of the management committee or rehabilitation Rules of Court, as amended.
receiver, whose time, effort and resources would be wasted in
defending claims against the corporation instead of being directed
toward its restructuring and rehabilitation. Te Securities and Exchange Commission (SEC) had mandated the
rehabilitation of PAL. On 17 May 1999, the SEC approved the
“Amended and Restated Rehabilitation Plan” of PAL and appointed a
In Philippine Air Lines [(PAL)], Incorporated v. Zamora, we said that “permanent rehabilitation receiver for the latter.” To date, PAL is still
“all actions for claims against a corporation pending before any court, undergoing rehabilitation.
tribunal or board shall ipso jure be suspended in whatever stage such
actions may be found upon the appointment by the SEC of a
management committee or a rehabilitation receiver.” Issue:

However, we would still find no cogent reason to reverse our August W/N the suspension of claims pending rehabilitation proceedings is
17, 2005 resolution denying petitioner's appeal even if the proceedings proper
here were to be suspended in the meantime. And such suspension
would not at all affect our position that the MR should be denied as Ruling:
well.
The pertinent law concerning the suspension of actions for claims
PAL Vs. PALEA (525 S 29) against corporations is Presidential Decree No. 902-A, as amended.
Particularly, Section 5(d) provides:
Facts:
SECTION 5. In addition to the regulatory
This case arose from a labor Complaint, filed by herein PALEA against adjudicative functions of the Securities and Exchange Commission over
herein PAL and one Mary Anne del Rosario, Director of Personnel, corporations, partnerships and other forms of associations registered
PAL, on 1 March 1989, charging them with unfair labor practice for the with it as expressly granted under existing laws and decrees, it shall
non-payment of 13th month pay of employees who had not been have original and exclusive jurisdiction to hear and decide cases
regularized as of the 30 th of April 1988, as allegedly stipulated in the involving:
Collective Bargaining Agreement (CBA) entered into by herein parties.
xxx
On 6 February 1987, herein parties, PAL and PALEA, the collective
bargaining agent of the rank and file employees of PAL, entered into a d) Petitions of corporations, partnerships or
CBA that was to cover the period of 1986 – 1989. Part of said associations to be declared in the state of suspension of
agreement required PAL to pay its rank and file employees the 13th payments in cases where the corporation, partnership or
Month Pay (Mid-year Bonus) and Christmas Bonus. association possesses property to cover all its debts but
foresees the impossibility of meeting them when they
PALEA assailed the implementation of the foregoing guideline. It is of respectively fall due or in cases where the corporation,
the view that all employees of PAL, whether regular or non-regular, partnership or association has no sufficient assets to cover its
should be paid their 13th month pay. In response to the above, PAL liabilities, but is under the [management of a rehabilitation
informed PALEA that rank and file employees who were regularized receiver or] management committee created pursuant to this
after 30 April 1988 were not entitled to the 13 th month pay as they were Decree.
already given the Christmas bonus in December of 1988, per the
Implementing Rules of Presidential Decree No. 851. Likewise, Section 6(c), to wit:

PALEA, disagreeing with PAL, filed a Complaint for unfair labor SECTION 6. In order to effectively exercise such jurisdiction,
practice before the NLRC on 1 March 1989. The union argued that “the the Commission shall possess the following:
cut-off period for regularization should not be used as the parameter
for granting [the] 13th month pay considering that the law does not
distinguish the status of employment but (sic) the law covers all xxxx
employees.”
c) To appoint one or more receivers of the property,
In its Position Paper submitted before the labor arbiter, PAL countered real or personal, which is the subject of the action pending
that those rank and file employees who were not regularized by 30 before the Commission in accordance with the pertinent
April of a particular year are, in principle, not denied their 13 th month provisions of the Rules of Court in such other cases
pay, considering they receive said mandatory bonus in the form of the whenever necessary in order to preserve the rights of the
Christmas Bonus; that the Christmas Bonus given to all its employees parties-litigants and/or protect the interest of the investing
is deemed a compliance with Presidential Decree No. 851 and the public and creditors: x x x Provided, finally, That upon
latter’s implementing rules; and that the foregoing has been the appointment of a management committee, the rehabilitation
practice and has been formally adopted in the previous CBA’s as early receiver, board or body, pursuant to this Decree, all actions
as 1970. for claims against corporations, partnerships or
associations under management or receivership pending
before any court, tribunal, board or body shall be suspended
On 12 March 1990, the Labor Arbiter rendered his decision dismissing accordingly. (Emphasis supplied.)
the complaint for lack of merit.

166
The term “claim,” as contemplated in Sec. 6(c) of Presidential Decree Cordova Vs. Reyes Daway Law Offices (526 S 300)
No. 902-A, refers “to debts or demands of a pecuniary nature. It
means ‘the assertion of a right to have money paid.’” In the case at bar,
Facts:
in the event that the present petition is found to be without merit, PAL
will be obliged to satisfy the pecuniary claims of PALEA – the payment
of the 13th Month Pay for the particular year to all rank and file Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from
employees whether or not regularized by 30 April 1988. Philippine Underwriters Finance Corporation (Philfinance) certificates
of stock of Celebrity Sports Plaza Incorporated (CSPI) and shares of
stock of various other corporations. He was issued a confirmation of
In Philippine Airlines, Inc. v. National Labor Relations Commission,
sale. The CSPI shares were physically delivered by Philfinance to the
the Court ruled that:
former Filmanbank and Philtrust Bank, as custodian banks, to hold
these shares in behalf of and for the benefit of petitioner.
In Rubberworld (Phils.), Inc. v. NLRC, we held that worker’s
claims before the NLRC and labor arbiters are included
On June 18, 1981, Philfinance was placed under receivership by public
among the actions suspended upon the placing under
respondent Securities and Exchange Commission (SEC). Thereafter,
receivership of the employer-corporations. Although strictly
private respondents Reyes Daway Lim Bernardo Lindo Rosales Law
speaking, the ruling in Rubberworld dealt with actions for
Offices and Atty. Wendell Coronel (private respondents) were
claims pending before the NLRC and labor arbiters, we find
appointed as liquidators. Sometime in 1991, without the knowledge
that the rationale for the automatic suspension therein set
and consent of petitioner and without authority from the SEC, private
out would apply to the instant case where the employee’s
respondents withdrew the CSPI shares from the custodian banks. On
claim was elevated on certiorari before this Court, x x x.
May 27, 1996, they sold the shares to Northeast Corporation and
included the proceeds thereof in the funds of Philfinance. Petitioner
xxxx learned about the unauthorized sale of his shares only on September
10, 1996. He lodged a complaint with private respondents but the
latter ignored it prompting him to file, on May 6, 1997, a formal
The Court holds that rendition of judgment while petitioner
complaint against private respondents in the receivership proceedings
is under a state of receivership could render violence to the
with the SEC, for the return of the shares.
rationale for suspension of payments in Section 6 (c) of P.D.
902-A, if the judgment would result in the granting of
private respondent’s claim to separation pay, thus defeating Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery
the basic purpose behind Section 6 (c) of P.D. 902-A which is for Philfinance’s creditors and investors. On May 13, 1997, the
to prevent dissipation of the distressed company’s resources. liquidators began the process of settling the claims against Philfinance,
(Emphasis supplied.) from its assets.

In another PAL case, specifically, Philippine Airlines, Inc. v. Court of On April 14, 1998, the SEC rendered judgment dismissing the petition.
Appeals, this Court again resolved to grant PAL’s Motion for However, it reconsidered this decision in a resolution dated September
Suspension of Proceedings by reason of the SEC Orders dated 23 June 24, 1999 and granted the claims of petitioner. It held that petitioner
1998 and 1 July 1998, appointing an Interim Rehabilitation Receiver was the owner of the CSPI shares by virtue of a confirmation of sale
and enjoining the suspension of all claims for payment against PAL, (which was considered as a deed of assignment) issued to him by
respectively. Therein it was declared that this Court is “not prepared to Philfinance. But since the shares had already been sold and the
depart from the well-established doctrines” essentially maintaining proceeds commingled with the other assets of Philfinance, petitioner’s
that all actions for claims against a corporation pending before any status was converted into that of an ordinary creditor for the value of
court, tribunal or board shall ipso jure be suspended in whatever stage such shares. Thus, it ordered private respondents to pay petitioner the
such actions may be found upon the appointment by the SEC of a amount of P5,062,500 representing 15% of the monetary value of his
management committee or a rehabilitation receiver. CSPI shares plus interest at the legal rate from the time of their
unauthorized sale.
And, most recently, is the case of Philippine Airlines v. Zamora, we
held in simple terms that: On October 27, 1999, the SEC issued an order clarifying its September
24, 1999 resolution. While it reiterated its earlier order to pay
petitioner the amount of P5,062,500, it deleted the award of legal
Otherwise stated, no other action may be taken in, including
interest. It clarified that it never meant to award interest since this
the rendition of judgment during the state of suspension –
would be unfair to the other claimants.
what are automatically stayed or suspended are the
proceedings of an action or suit and not just the payment of
claims during the execution stage after the case had become On appeal, the CA affirmed the SEC. It agreed that petitioner was
final and executory.(Citation omitted) indeed the owner of the CSPI shares but the recovery of such shares
had become impossible. It also declared that the clarificatory order
merely harmonized the dispositive portion with the body of the
The suspension of action for claims against a corporation
resolution. Petitioner’s motion for reconsideration was denied.
under rehabilitation receiver or management committee
embraces all phases of the suit, be it before the trial court or
any tribunal or before this Court. Furthermore, actions that Hence this petition.
are suspended cover all claims against a distressed
corporation whether for damages founded on a breach of
Issue:
contract of carriage, labor cases, collection suits or any other
claims of a pecuniary nature.
W/N Cordova becomes an ordinary creditor of Philfinance
In actual fact, allowing such actions to proceed would only
increase the work-load of the management committee or the Ruling:
rehabilitation receiver, whose precious time and effort would
be dissipated and wasted in defending suits against the
corporation, instead of being channeled toward restructuring There is no dispute that petitioner was the owner of the CSPI shares.
and rehabilitation. However, private respondents, as liquidators of Philfinance, illegally
withdrew said certificates of stock without the knowledge and consent
of petitioner and authority of the SEC. After selling the CSPI shares,
All told, this Court is constrained to suspend the progress, private respondents added the proceeds of the sale to the assets of
development and other proceedings in the present petition.
167
Philfinance. Under these circumstances, did the petitioner become a Bank, PNB, DBP, GSIS, AFP-RSBS and the Republic of the Philippines,
creditor of Philfinance? We rule in the affirmative. praying that they be released from the obligation to buy the PAL shares
of petitioner and other defendants therein at P5.00 per share, as earlier
agreed upon under the Stockholders' Agreement, on ground of alleged
However, Petitioner is seeking the return of his CSPI shares which, for
radical change in the conditions prevailing at the time the said
the present, is no longer possible, considering that the same had
agreement was entered and the present.
already been sold by the respondents, the proceeds of which are
ADMITTEDLY commingled with the assets of PHILFINANCE. This
being the case, [petitioner] is now but a claimant for the value of those Land Bank and the other defendants in Civil Case No. 02-843
shares. As a claimant, he shall be treated as an ordinary creditor in so contended that the events or circumstances cited by the respondents
far as the value of those certificates is concerned. were not valid grounds for the latter to be released from their
obligation under the doctrine of rebus sic stantibus.
The return of petitioner’s CSPI shares is well-nigh impossible, if not
already an utter impossibility, inasmuch as the certificates of stocks The trial court rendered judgment in favor of the plaintiffs and against
have already been alienated or transferred in favor of Northeast the defendants, declaring plaintiffs released from the obligation to
Corporation, as early as May 27, 1996, in consequence whereof the comply with defendants' option to sell their shares in Philippine
proceeds of the sale have been transmuted into corporate assets of Airlines, Inc.
Philfinance, under custodia legis, ready for distribution to its creditors
and/or investors. Case law holds that the assets of an institution under
On July 4, 2006, the trial court denied Land Bank's motion for
receivership or liquidation shall be deemed in custodia legis in the
reconsideration. Therefrom, Land Bank decided to go to the CA on a
hands of the receiver or liquidator, and shall from the moment of such
petition for review. For the purpose, it filed with the CA, on July 25,
receivership or liquidation, be exempt from any order, garnishment,
2006, a motion for extension of time to file the intended petition
levy, attachment, or execution.
for review.

Concomitantly, petitioner’s filing of his claim over the subject CSPI

Unfortunately, the motion was denied by the CA.
shares before the SEC in the liquidation proceedings bound him to the
terms and conditions thereof. He cannot demand any special treatment
[from] the liquidator, for this flies in the face of, and will contravene, On August 16, 2006, petitioner Land Bank filed a motion for
the Supreme Court dictum that when a corporation threatened by reconsideration of the above resolution urging that even though a
bankruptcy is taken over by a receiver, all the creditors shall stand on motion for reconsideration of the March 15, 2006 “Judgment” of the
equal footing. Not one of them should be given preference by paying trial court is not allowed under the Interim Rules of Procedure
one or some [of] them ahead of the others. This is precisely the Governing Intra-Corporate Controversies under R.A. No. 8799,
philosophy underlying the suspension of all pending claims against the nonetheless it implored the appellate court to consider the filing
corporation under receivership. The rule of thumb is equality in thereof as sufficient, “in the interest of substantial justice,” to suspend
equity. the running of the reglementary period to appeal. Petitioner hastens to
add that the March 15, 2006 “Judgment” and the July 4, 2006 Order of
the trial court had created a dangerous precedent when said court
Thus, petitioner had become an ordinary creditor of Philfinance.
upheld respondents' contention that the occurrence of the “fleet
expansion and re-equiptment of PAL, pilot strike, Asian economic
Petitioner’s right of action against Philfinance was a “claim” properly to downturn, the devaluation of the peso and the purported reduced
be litigated in the liquidation proceedings. demand for air travel” have absolved them from their obligation to
comply with the Stockholders’ Agreement.
We note that there is an undisputed finding by the SEC and CA that
private respondents sold the subject shares without authority from the With its motion for reconsideration having been denied by the CA in its
SEC. Petitioner evidently has a cause of action against private equally challenged resolution of September 11, 2006, petitioner is now
respondents for their bad faith and unauthorized acts, and the with this Court via the present recourse, urging the Court to compel the
resulting damage caused to him. CA to approve its motion for extension of time to file petition for
review, and, ultimately, to give due course to its intended petition for
review.
Landbank Vs. Ascot Holdings (537 S 396)

Ruling:
Facts:

It is beyond quibbling that the assailed “Judgment” in Civil Case No.

Sometime in March 1992, after the Philippine Airlines (PAL) was
02-843 was issued by the RTC in the exercise of its special jurisdiction
privatized, Land Bank purchased from the National Government some
over intra-corporate controversies under R.A. No. 8799. Civil Case No.
75,000,000 PAL shares at P14.3925 per share or for a total
02-843 was, therefore, governed by the Interim Rules of Corporate
consideration of P1,079,437,485.01.
Rehabilitation and the Interim Rules of Procedure Governing Intra-
Corporate Controversies under R.A. No. 8799, as well as A.M. No. 04-
Meanwhile, respondents, together with the Philippine National Bank 9-07-SC of this Court prescribing the mode of appeal from decisions of
(PNB), the Development Bank of the Philippines (DBP), the AFP the RTC in intra-corporate controversies.
Retirement and Separation Benefits System (AFP-RSBS), all
stockholders of PAL, and several other parties, formed a consortium in
Under Section 8(3), Rule 1 of the Interim Rules of Procedure Governing
order to purchase 67% of PAL’s capital stocks which were then being
Intra-Corporate Controversies Under R.A. No. 8799, motion for new
sold by public bidding. For this purpose, the aforesaid consortium
trial, or for reconsideration of judgment or order, or for re-opening of
organized a holding company – the PR Holdings Inc. (PR Holdings) -
trial are prohibited pleadings in said cases. Hence, the filing by
to hold the PAL shares of stock.
petitioner of a motion for reconsideration before the trial court did not
toll the reglementary period to appeal the judgment via a petition for
As it were, Land Bank, with the Government Service Insurance System review under Rule 43 of the 1997 Rules of Civil Procedure, as amended.
(GSIS) and the National Government, owned 33% of the issued and As a consequence, the CA has no more jurisdiction to entertain the
outstanding shares of stock of PAL, while respondents and other petition for review which Land Bank intended to file before it, much
stockholders of PR Holdings owned the other 67%. less to grant the motion for extension of time for the filing thereof.

On July 23, 2002, instead of honoring the Stockholders' Agreement, The prohibited motion for reconsideration filed by the petitioner with
respondents filed with the RTC of Makati a complaint against Land the trial court did not suspend the period to appeal the RTC’s
168
“Judgment” of March 15, 2006. Consequently, that “Judgment” became Zamora was a cargo representative assigned at the International Cargo
final and executory 15-days thereafter. When petitioner filed a motion Operations - Import Operations Division (ICO-IOD) of petitioner
for extension to file a petition for review in the CA on July 25, 2006, or Philippine Airlines, Inc.
one hundred twenty four (124) days after it received the RTC
“Judgment,” there was no more period to extend. Given these
On March 12, 1996, Zamora filed an action for illegal dismissal, unfair
undeniable facts, the CA cannot be faulted for denying petitioner’s
labor practice, non-payment of wages, and damages.
motion for extension. There is no abuse, much less grave abuse, of
discretion, to speak of.
On September 28, 1998, the Labor Arbiter dismissed the complaint for
lack of merit.
Petitioner insists, however, that the CA committed grave abuse of
discretion in denying its motion for extension because the prohibited
pleading it filed in the trial court was still sufficient to suspend the On July 26, 1999, the NLRC reversed the Labor Arbiter’s decision and
running of the reglementary period to appeal “in the interest of declared Zamora’s transfer illegal. It ruled that there was no valid and
substantial justice.” Unfortunately, there is a scarcity of law or legal reason for the transfer other than Zamora’s report of the
jurisprudence to support petitioner’s novel theory. It is obvious that a smuggling and pilferage activities.
prohibited pleading cannot toll the running of the period to appeal
since such pleading cannot be given any legal effect precisely because of
its being prohibited. On appeal, the Court of Appeals affirmed the decision of the NLRC.

Procedural rules setting the period for perfecting an appeal or filing an Hence, this instant petition.
appellate petition are generally inviolable. It is doctrinally entrenched
that appeal is not a constitutional right but a mere statutory privilege. Issue:
Hence, parties who seek to avail of the privilege must comply with the
statutes or rules allowing it. The requirements for perfecting an appeal
within the reglamentary period specified in the law must, as a rule, be W/N the Court of Appeals erred in ordering respondent to present his
strictly followed. Such requirements are considered indispensable monetary claim to petitioner’s rehabilitation receiver
interdictions against needless delays, and are necessary for the orderly
discharge of the judicial business. For sure, the perfection of an appeal Ruling:
in the manner and within the period set by law is not only mandatory,
but jurisdictional as well. Failure to perfect an appeal renders the
judgment appealed from final and executory. In resolving the petition, the Court noted that petitioner had been
placed by the Securities and Exchange Commission (SEC) under a
Permanent Rehabilitation Receiver. Such being the case, a suspension
We must stress that the bare invocation of “the interest of substantial of all actions for claims against petitioner pending before any court,
justice” is not a magic wand that will automatically compel this Court tribunal or board was, ipso jure, in order. The Court likewise took note of
to suspend procedural rules. Procedural rules are not to be belittled or the fact that such suspension of actions was observed in some other cases
dismissed simply because their non-observance may have resulted in against petitioner.
prejudice to a party's substantive rights. Like all rules, they are
required to be followed except only for the most persuasive of reasons
when they may be relaxed to relieve a litigant of an injustice not We shall defer to these determinations. To reiterate, the suspension of
commensurate with the degree of his thoughtlessness in not complying all actions for claims against a corporation embraces all phases of the
with the procedure prescribed. The Court reiterates that rules of suit, be it before the trial court or any tribunal or before this Court. No
procedure, especially those prescribing the time within which certain other action may be taken, including the rendition of judgment during
acts must be done, have oft been held as absolutely indispensable to the state of suspension. It must be stressed that what are automatically
the prevention of needless delays and to the orderly and speedy stayed or suspended are the proceedings of a suit and not just the
discharge of business. Indeed, in no uncertain terms, the Court held payment of claims during the execution stage after the case had
that the said rules may be relaxed only in “exceptionally meritorious become final and executory. Once the process of rehabilitation,
cases.” This case is not one of those. however, is completed, this Court will proceed to complete the
proceedings on the suspended actions.

Petitioner’s claim that it supposedly stands to lose its substantial

investment in shares of stock amounting to P1,079,437,485.61 just Furthermore, the actions which were suspended cover all claims
because it filed a motion for reconsideration, is unfounded. As we see against the corporation whether for damages founded on a breach of
it, the so-called loss of substantial investment that petitioner contract of carriage, labor cases, collection suits or any other claims of
complains about is more imaginary than real. As it is, petitioner’s a pecuniary nature. No exception in favor of labor claims is mentioned
shares in PAL have not been taken away from it; neither has petitioner in the law.
been deprived of any of its proprietary rights vis-à-vis the said shares
of stock. Petitioner continues to hold and own the shares in its name. More importantly, as the instant case involves essentially the same
Respondents, who own the majority of the shares in PAL, have all the facts, parties, and issues as G.R. No. 166996 entitled Philippine
more reason to keep the company afloat and thriving since they have Airlines, Inc., et al. v. Bernardin J. Zamora, we find it unnecessary to
more to lose. Any benefit that respondents may derive from the make further pronouncements which might otherwise conflict with the
continued profitable operations of PAL will likewise benefit petitioner. disposition made by the Court’s Third Division therein.

The Court may deign to veer away from the general rule only if, in its Garcia Vs. PAL (531 S 574)
assessment, the appeal on its face appears absolutely meritorious.
Indeed, the Court has, in a number of instances, relaxed procedural
rules in order to serve and achieve substantial justice. In the Facts:
circumstances obtaining in this case, however, the occasion does not
warrant the desired relaxation.
Since petitioners’ claim against PAL is a money claim for their wages
PAL Vs. Heirs of Zamora (538 S 456) during the pendency of PAL’s appeal to the NLRC, the same should
have been suspended pending the rehabilitation proceedings. The
Labor Arbiter, the NLRC, as well as the Court of Appeals should have
Facts: abstained from resolving petitioners’ case for illegal dismissal and
should instead have directed them to lodge their claim before PAL’s
receiver.

169
However, to still require petitioners at this time to re-file their labor Reconsideration; d) Petition for Relief; e) Motion for Extension; f)
claim against PAL under the peculiar circumstances of the case – that Memorandum; g) Motion for Postponement; h) Reply or Rejoinder; i)
their dismissal was eventually held valid with only the matter of Third Party Complaint; j) Intervention;
reinstatement pending appeal being the issue – this Court deems it
legally expedient to suspend the proceedings in this case.
xxx xxx xxx

Leca Realty Vs. Manuela (534 S 97)

The prohibited pleadings enumerated above are those filed in the
rehabilitation proceedings. Once the trial court decides the case and
the aggrieved party appeals, the procedure to be followed is that
Facts:
prescribed by the Rules of Court as mandated by Section 5, Rule 3, of
the same Interim Rules, thus:
On January 31, 2002, Manuela filed a Petition for Rehabilitation. The
petition alleges inter alia that respondent is a corporation primarily
The review of any order or decision of the court or on appeal
engaged in the business of leasing to retailers commercial spaces in
therefrom shall be in accordance with the Rules of Court.
shopping malls.

In this connection, Section 11, Rule 11, of the Rules of Court (now the
Respondent is the owner and operator of the following malls
1997 Rules of Civil Procedure, as amended), states:
strategically located in Metro Manila. Respondent has assets valued at
P12.43 billion and total liabilities of P4.87 billion as of December 31,
2001. Extension of time to plead. – Upon motion and on such
terms as may be just, the court may extend the time to plead
provided in these Rules.
In order to finance the costs of building the Metropolis Star and the
Pacific Mall, respondent obtained several loans from two syndicates of
lenders. Respondent’s total outstanding loan from the syndicates (e.g., The court may also, upon like terms, allow an answer or
principal plus interest) is P2.174 billion as of December 31, 2001. These other pleading to be filed after the time fixed by these Rules.
loans are secured by a mortgage over M Star One and M Star, both
located in Las Piñas City.
Verily, the trial court erred in denying petitioner’s motion for extension
of time to file record on appeal.
Respondent also has liabilities to the Hero Holdings, Inc. and its trade
suppliers and other parties in the sum of P1.476 billion as of December
31, 2001. 2.

On February 5, 2002, the trial court issued a Stay Order. In the same Petitioner contends that the approved Rehabilitation Plan drastically
Stay Order, the trial court appointed Marilou Adea, also a respondent, altered the terms of its lease contract with respondent Manuela, hence,
as Rehabilitation Receiver. should be declared void.

On July 28, 2003, the trial court issued an Order approving the There is a gross discrepancy between the amounts of rent agreed upon
Rehabilitation Plan. by the parties and those provided in the Rehabilitation Plan.

The trial court issued an Order denying the Motion for Extension of In The Insular Life Assurance Company, Ltd., v. Court of Appeals, et
Time to File Record on Appeal filed by Leca Realty on the ground that al., we held:
under Rule 3, Section 1 of the Interim Rules of Procedure on
Corporate Rehabilitation, a motion for extension is a prohibited When the language of the contract is explicit leaving no
pleading. doubt as to the intention of the drafters thereof, the courts
may not read into it any other intention that would
Issue: contradict its plain import. The Court would be rewriting the
contract of lease between Insular and Sun Brothers under
the guise of construction were we to interpret the ‘option to
1. W/N the trial court erred in ruling that a motion for extension of renew’ clause as Sun Brothers propounds it, despite the
time to file record on appeal is a prohibited pleading under Section 1 of express provision in the original contract of lease and the
the Interim Rules of Procedure on Corporate Rehabilitation contracting parties’ subsequent acts. As the Court has held in
Riviera Filipina, Inc. vs. Court of Appeals, ‘a court, even the
Supreme Court, has no right to make new contracts for the
2. W/N Manuela’s Rehabilitation Plan violates petitioner’s
parties or ignore those already made by them, simply to
constitutional right to non-impairment of contract and the Interim
avoid seeming hardships. Neither abstract justice nor the
Rules of Procedure on Corporate Rehabilitation
rule of liberal construction justifies the creation of a contract
for the parties, which they did not make themselves nor the
Ruling: imposition upon one party to a contract of an obligation not
assumed.’
1.
The amount of rental is an essential condition of any lease contract.
Needless to state, the change of its rate in the Rehabilitation Plan is not
Section 1. Nature of Proceedings. – Any proceeding initiated under justified as it impairs the stipulation between the parties. We thus rule
these Rules shall be considered in rem. Jurisdiction over all those that the Rehabilitation Plan is void insofar as it amends the rental rates
affected by the proceedings shall be considered as acquired upon agreed upon by the parties.
publication of the notice of the commencement of the proceedings in
any newspaper of general circulation in the Philippines in the manner
prescribed by these Rules. It must be emphasized that there is nothing in Section 5 (c) of P.D. No.
902-A authorizing the change or modification of contracts entered into
by the distressed corporation and its creditors.
The proceedings shall also be summary and non-adversarial in nature.
The following pleadings are prohibited: a) Motion to Dismiss; b)
Motion for Bill of Particulars; c) Motion for New Trial or For

170
Moreover, the Stay Order issued by the trial court directed respondent Meanwhile, on account of Rubberworld’s failure to upgrade or
Manuela to pay in full, after the issuance of such Order, all complete its appeal bond as indicated in the NLRC’s January 22, 1996
administrative expenses incurred. Administrative expenses are costs Order, the Commission, in a decision dated June 28, 1996, did dismiss
associated with the general administration of an organization and Rubberworld’s appeal.
include such items as utilities, rents, salaries, postages, furniture, and
housekeeping charges.
Eventually, in the herein assailed Decision dated January 18, 2002, the
CA granted Rubberworld’s petition in CA–G.R. SP. No. 53356 on the
Inasmuch as rents are considered administrative expenses and finding that the Labor Arbiter had indeed committed grave abuse of
considering that the Stay Order directed respondent Manuela to pay discretion when it proceeded with the ULP case despite the SEC’s
the rents in full, then it must comply at the rates agreed upon. suspension order of December 28, 1994, and accordingly declared the
proceedings before it, including the subsequent orders by the NLRC
dismissing Rubberworld’s appeal and the writ of execution, null and
Respondent Manuela, therefore, must update its payment of rental
void.
arrears and continue to pay current rentals at the rate stipulated in the
lease contract.
Issue:
Lingkod ng Manggagawa Vs. Rubberworld (513 S 208)
W/N the CA is correct in annulling the decision of the NLRC

Facts:
Ruling:

Petitioner Lingkod Manggagawa sa Rubberworld, Adidas-Anglo is a While posting an appeal bond is indeed a requirement for the
legitimate labor union whose members were employees of the principal perfection of an appeal from the decision of the Labor Arbiter to the
respondent, Rubberworld Philippines, Inc.(Rubberworld, for short), a NLRC, Rubberworld’s failure to upgrade its appeal bond cannot bar, in
domestic corporation engaged in the manufacture of footwear, bags this particular instance, the review by the CA of the lower court
and garments. proceedings.

On August 26, 1994, Rubberworld filed with the Department of Labor Given the factual milieu obtaining in this case, it cannot be said
and Employment (DOLE) a Notice of Temporary Partial Shutdown that the decision of the Labor Arbiter, or the decision/dismissal
due to severe financial crisis, therein announcing the formal actual order and writ of execution issued by the NLRC, could ever attain final
company shutdown to take effect on September 26, 1994. A copy of and executory status. The Labor Arbiter completely disregarded and
said notice was served on the recognized labor union of violated Section 6(c) of Presidential Decree 902-A, as amended,
Rubberworld, the Bisig Pagkakaisa-NAFLU, the union with which the which categorically mandates the suspension of all actions for claims
corporation had a collective bargaining agreement. against a corporation placed under a management committee by the
SEC. Thus, the proceedings before the Labor Arbiter and the order and
writ subsequently issued by the NLRC are all null and void for having
On September 1, 1994, Bisig Pagkakaisa-NAFLU staged a strike. It
been undertaken or issued in violation of the SEC suspension Order
set up a picket line in front of the premises of Rubberworld and even
dated December 28, 1994. As such, the Labor Arbiter’s decision,
welded its gate. As a result, Rubberworld's premises closed
including the dismissal by the NLRC of Rubberworl’s appeal, could not
prematurely even before the date set for the start of its temporary
have achieved a final and executory status.
partial shutdown.

Acts executed against the provisions of mandatory or prohibitory laws

On September 9, 1994, herein petitioner union, the Lingkod
shall be void, except when the law itself authorizes their validity. The
Manggagawa Sa Rubberworld, Adidas-Anglo (Lingkod, for brevity),
Labor Arbiter's decision in this case is void ab initio, and therefore,
represented by its President, Sonia Esperanza, filed a complaint
non-existent. A void judgment is in effect no judgment at all. No rights
against Rubberworld and its Vice Chairperson, Mr. Antonio Yang, for
are divested by it nor obtained from it. Being worthless in itself, all
unfair labor practice (ULP), illegal shutdown, and non-payment of
proceedings upon which the judgment is founded are equally
salaries and separation pay.
worthless. It neither binds nor bars anyone. All acts performed under
it and all claims flowing out of it are void. In other words, a void
On November 22, 1994, while the aforementioned complaint was judgment is regarded as a nullity, and the situation is the same as it
pending with Labor Arbiter Dinopol, Rubberworld filed with the SEC a would be if there were no judgment. It accordingly leaves the party-
Petition for Declaration of a State of Suspension of Payments with litigants in the same position they were in before the trial.
Proposed Rehabilitation Plan which was granted by the SEC.
In fact, it is immaterial whether an appeal from the Labor Arbiter's
Notwithstanding the SEC's aforementioned suspension order and decision was perfected or not, since a judgment void ab initio is non-
despite Rubberworld's submission on January 10, 1995 of a Motion to existent and cannot acquire finality. The judgment is vulnerable to
Suspend Proceedings, Labor Arbiter Dinopol went ahead with the ULP attack even when no appeal has been taken. Hence, such judgment
case and rendered his decision. does not become final in the sense of depriving a party of his right to
question its validity. Hence, no grave abuse of discretion attended the
CA's taking cognizance of the petition in CA-G.R. SP No. 53356.
On September 21, 1995, Rubberworld went on appeal to the NLRC,
posting therefor a temporary appeal bond in the amount of
P500,000.00 as tentatively fixed by the Labor Arbiter. Besides, the Labor Arbiter, by simultaneously ruling in his decision of
August 16, 1995 on both the merits of the ULP case and the motion of
Rubberworld to suspend the proceedings thereon, effectively required
Its motion for reconsideration of the same Order having been denied the respondent corporation to post a surety bond before the same
by the NLRC in its Resolution of March 29, 1996, Rubberworld directly respondent could have questioned the arbiter’s action in not
went to this Court on a Petition for Certiorari, interposing the sole suspending the proceedings before him.
issue of whether or not the NLRC acted without or in excess of
jurisdiction or with grave abuse of discretion amounting to lack or
excess of jurisdiction in requiring the corporation to post the upgraded New Frontier Vs. RTC (513 S 601)
appeal bond of P27,506,255.70 based on the computation of Mr.
Atienza.
Facts:

171
New Frontier Sugar Corporation (petitioner) is a domestic corporation what would prevent an alert creditor, upon learning of the
engaged in the business of raw sugar milling. Foreseeing that it cannot receivership, from rushing posthaste to the courts to secure
meet its obligations with its creditors as they fell due, petitioner filed a judgments for the satisfaction of its claims to the prejudice of
Petition for the Declaration of State of Suspension of Payments with the less alert creditors.
Approval of Proposed Rehabilitation Plan under the Interim Rules of
Procedure on Corporate Rehabilitation (2000) some time in August
As between creditors, the key phrase is "equality is equity."
2002. Finding the petition to be sufficient in form and substance, the
When a corporation threatened by bankruptcy is taken over by a
RTC issued a Stay Order dated August 20, 2002, appointing Manuel B.
receiver, all the creditors should stand on an equal footing. Not anyone
Clemente as rehabilitation receiver, ordering the latter to put up a
of them should be given any preference by paying one or some of them
bond, and setting the initial hearing on the petition.
ahead of the others. This is precisely the reason for the suspension of
all pending claims against the corporation under receivership. Instead
One of petitioner’s creditors, the Equitable PCI Bank (respondent of creditors vexing the courts with suits against the distressed firm,
bank), filed a Comment/Opposition with Motion to Exclude Property, they are directed to file their claims with the receiver who is a duly
alleging that petitioner is not qualified for corporate rehabilitation, as appointed officer of the SEC. (Emphasis supplied)
it can no longer operate because it has no assets left. Respondent bank
also alleged that the financial statements, schedule of debts and
Nevertheless, the suspension of the enforcement of all claims against
liabilities, inventory of assets, affidavit of general financial condition,
the corporation is subject to the rule that it shall commence only
and rehabilitation plan submitted by petitioner are misleading and
from the time the Rehabilitation Receiver is appointed. Thus,
inaccurate since its properties have already been foreclosed and
in Rizal Commercial Banking Corporation v. Intermediate Appellate
transferred to respondent bank before the petition for rehabilitation
Court, the Court upheld the right of RCBC to extrajudicially foreclose
was filed, and petitioner, in fact, still owes respondent bank deficiency
the mortgage on some of BF Homes’ properties, and reinstated the trial
liability.
court’s judgment ordering the sheriff to execute and deliver to RCBC
the certificate of auction sale involving the properties. The Court
On January 13, 2003, the RTC issued an Omnibus Order terminating vacated its previous Decision rendered on September 14, 1992 in the
the proceedings and dismissing the case. Petitioner filed an Omnibus same case, finding that RCBC can rightfully move for the extrajudicial
Motion but this was denied by the RTC in its Order dated April 14, foreclosure of the mortgage since it was done on October 16, 1984,
2003. while the management committee was appointed only on March 18,
1985. The Court also took note of the SEC’s denial of the petitioner’s
consolidated motion to cite the sheriff and RCBC for contempt and to
Petitioner then filed with the CA a special civil action for certiorari,
annul the auction proceedings and sale.
which was denied by the CA.

In this case, respondent bank instituted the foreclosure proceedings

In dismissing the petition, the CA sustained the findings of the RTC
against petitioner’s properties on March 13, 2002 and a Certificate of
that since petitioner no longer has sufficient assets and properties to
Sale at Public Auction was issued on May 6, 2002, with respondent
continue with its operations and answer its corresponding liabilities it
bank as the highest bidder. The mortgage on petitioner’s chattels was
is no longer eligible for rehabilitation.
likewise foreclosed and the Certificate of Sale was issued on May 14,
2002. It also appears that titles over the properties have already been
Issue: transferred to respondent bank.

W/N Petitioner has no substantial property left to make corporate On the other hand, the petition for corporate rehabilitation was filed
rehabilitation feasible only on August 14, 2002 and the Rehabilitation Receiver appointed on
August 20, 2002. Respondent bank, therefore, acted within its
prerogatives when it foreclosed and bought the property, and had title
Ruling: transferred to it since it was made prior to the appointment of a
rehabilitation receiver.
Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its The fact that there is a pending case for the annulment of the
former position of successful operation and solvency. Presently, the foreclosure proceedings and auction sales is of no moment. Until a
applicable law on rehabilitation petitions filed by corporations, court of competent jurisdiction, annuls the foreclosure sale of the
partnerships or associations, including rehabilitation cases transferred properties involved, petitioner is bereft of a valid title over the
from the Securities and Exchange Commission to the RTCs pursuant to properties. In fact, it is the trial court’s ministerial duty to grant a
Republic Act No. 8799 or the Securities Regulation Code, is the Interim possessory writ over the properties.
Rules of Procedure on Corporate Rehabilitation (2000).

Consequently, the CA was correct in upholding the RTC’s dismissal of

Under the Interim Rules, the RTC, within five (5) days from the filing the petition for rehabilitation in view of the fact that the titles to
of the petition for rehabilitation and after finding that the petition is petitioner’s properties have already passed on to respondent bank and
sufficient in form and substance, shall issue a Stay Order appointing a petitioner has no more assets to speak of, specially since petitioner
Rehabilitation Receiver, suspending enforcement of all claims, does not dispute the fact that the properties which were foreclosed by
prohibiting transfers or encumbrances of the debtor’s properties, respondent bank comprise the bulk, if not the entirety, of its assets.
prohibiting payment of outstanding liabilities, and prohibiting the
withholding of supply of goods and services from the debtor. Any
transfer of property or any other conveyance, sale, payment, or It should be stressed that the Interim Rules was enacted to provide for
agreement made in violation of the Stay Order or in violation of the a summary and non-adversarial rehabilitation proceedings. This is in
Rules may be declared void by the court upon motion or motu proprio. consonance with the commercial nature of a rehabilitation case, which
is aimed to be resolved expeditiously for the benefit of all the parties
concerned and the economy in general.
Further, the Stay Order is effective both against secure and unsecured
creditors. This is in harmony with the principle of "equality is equity"
first enunciated in Alemar’s Sibal & Sons, Inc. v. Elbinias, thus: As provided in the Interim Rules, the basic procedure is as follows:

During rehabilitation receivership, the assets are held in (1) The petition is filed with the appropriate Regional Trial Court;
trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by (2) If the petition is found to be sufficient in form and substance, the
the expediency of an attachment, execution or otherwise. For trial court shall issue a Stay Order, which shall provide, among others,

172
for the appointment of a Rehabilitation Receiver; the fixing of the from their pilgrimage to the Holy City of Mecca, Saudi Arabia, on
initial hearing on the petition; a directive to the petitioner to publish board a Philippines Airlines (PAL) flight. Respondents claimed that
the Order in a newspaper of general circulation in the Philippines once they were unable to retrieve their checked-in luggages.
a week for two (2) consecutive weeks; and a directive to all creditors
and all interested parties (including the Securities and Exchange On 05 January 1998, respondents filed a complaint with the Regional
Commission) to file and serve on the debtor a verified comment on or Trial Court (RTC) of Marawi City against PAL for breach of contract
opposition to the petition, with supporting affidavits and documents. resulting in damages due to negligence in the custody of the missing
luggages.
3) Publication of the Stay Order;
On 02 March 1998, PAL filed its answer invoking, among its defenses,
4) Initial hearing on any matter relating to the petition or on any the limitations under the Warsaw Convention. On 19 June 1998, before
comment and/or opposition filed in connection therewith. If the trial the case could be heard on pre-trial, PAL, claiming to have suffered
court is satisfied that there is merit in the petition, it shall serious business losses due to the Asian economic crisis, followed by a
give due course to the petition; massive strike by its employees, filed a petition for the approval of a
rehabilitation plan and the appointment of a rehabilitation receiver
5) Referral for evaluation of the rehabilitation plan to the rehabilitation before the Securities and Exchange Commission (SEC).
receiver who shall submit his recommendations to the court; On 23 June 1998, the SEC issued an order granting the prayer for an
appointment of a rehabilitation receiver, and it constituted a three-
6) Modifications or revisions of the rehabilitation plan as necessary; man panel to oversee PAL’s rehabilitation. On 25 September 1998, the
SEC created a management committee conformably with Section 6(d)
7) Submission of final rehabilitation plan to the trial court for approval; of Presidential Decree (“P.D.”) 902, as amended, declaring the
suspension of all actions for money claims against PAL pending before
8) Approval/disapproval of rehabilitation plan by the trial court; any court, tribunal, board or body. Thereupon, PAL moved for the
suspension of the proceedings before the Marawi City RTC. On 11
In the present case, the petition for rehabilitation did not run its full January 1999, the trial court issued an order denying the motion for
course but was dismissed by the RTC after due consideration of the suspension of the proceedings on the ground that the claim of
pleadings filed before it. On this score, the RTC cannot be faulted for respondents was only yet to be established. PAL’s motion for
its summary dismissal, as it is tantamount to a finding that there is no reconsideration was denied by the trial court.
merit to the petition. This is in accord with the trial court’s authority
to give due course to the petition or not under Rule 4, Section 9 of the PAL went to the Court of Appeals via a petition for certiorari. On 16
Interim Rules. Letting the petition go through the process only to be April 1999, the appellate court dismissed the petition for the failure of
dismissed later on because there are no assets to be conserved will not PAL to serve a copy of the petition on respondents. PAL moved for a
only defeat the reason for the rules but will also be a waste of the trial reconsideration. In its resolution, dated 08 October 1999, the appellate
court’s time and resources. court denied the motion.

The CA also correctly ruled that petitioner availed of the wrong remedy Thus, PAL went to this Court via a petition for review on certiorari
when it filed a special civil action for certiorari with the CA under Rule under Rule 45 of the Rules of Court.
65 of the Rules of Court.

Issue:
The Omnibus Order dated January 13, 2003 issued by the RTC is a
final order since it terminated the proceedings and dismissed the case
before the trial court; it leaves nothing more to be done. As such, W/N the proceedings before the trial court should have been
petitioner’s recourse is to file an appeal from the Omnibus Order. suspended after the court was informed that a rehabilitation receiver
was appointed over the petitioner by the Securities and Exchange
Commission under Section 6(c) of Presidential Decree No. 902-A
In this regard, A.M. No. 00-8-10-SC promulgated by the Court on
September 4, 2001 provides that a petition for rehabilitation is
considered a special proceeding given that it seeks to establish the Ruling:
status of a party or a particular fact. Accordingly, the period of appeal
provided in paragraph 19 (b) of the Interim Rules Relative to the
On 15 December 2000, the Supreme Court, in A.M. No. 00-8-10-SC,
Implementation of Batas Pambansa Blg. 129 for special proceedings
adopted the Interim Rules of Procedure on Corporate Rehabilitation
shall apply. Under said paragraph 19 (b), the period of appeal shall be
and directed to be transferred from the SEC to Regional Trial Courts,
thirty (30) days, a record of appeal being required.
all petitions for rehabilitation filed by corporations, partnerships, and
associations under P.D. 902-A in accordance with the amendatory
However, it should be noted that the Court issued A.M. No. 04-9-07-SC provisions of Republic Act No. 8799. The rules require trial courts to
on September 14, 2004, clarifying the proper mode of appeal in cases issue, among other things, a stay order in the “enforcement of all
involving corporate rehabilitation and intra-corporate controversies. It claims, whether for money or otherwise, and whether such
is provided therein that all decisions and final orders in cases falling enforcement is by court action or otherwise,” against the corporation
under the Interim Rules of Corporate Rehabilitation and the Interim under rehabilitation, its guarantors and sureties not solidarily liable
Rules of Procedure Governing Intra-Corporate Controversies under with it. Specifically, Section 6, Rule 4, of the Interim Rules of
Republic Act No. 8799 shall be appealed to the CA through a petition Procedure on Corporate Rehabilitation.
for review under Rule 43 of the Rules of Court to be filed within fifteen
(15) days from notice of the decision or final order of the RTC.
The stay order is effective from the date of its issuance until the
dismissal of the petition or the termination of the rehabilitation
In any event, as previously stated, since what petitioner filed was a proceedings.
petition for certiorari under Rule 65 of the Rules, the CA rightly
dismissed the petition and affirmed the assailed Orders.
The interim rules must likewise be read and applied along with Section
6(c) of P.D. 902-A, as so amended, directing that upon the
PAL Vs. Kurangking (389 S 588) appointment of a management committee, rehabilitation receiver,
board or body pursuant to the decree, “all actions” for claims against
the distressed corporation “pending before any court, tribunal, board
Facts: or body shall be suspended accordingly.”

In April 1997, respondents, all Muslim Filipinos, returned to Manila A “claim” is said to be “a right to payment, whether or not It is

173
reduced to judgment, liquidated or unliquidated, fixed or contingent, Issue:
matured or unmatured, disputed or undisputed, legal or equitable, and
secured or unsecured.” In Finasia Investments and Finance
W/N petition for rehabilitation and the proposed rehabilitation plan do
Corporation this Court has defined the word “claim,” contemplated in
not require extraordinary corporate actions
Section 6(c) of P.D. 902-A, as referring to debts or demands of a
pecuniary nature and the assertion of a right to have money paid as
well. Ruling:

Verily, the claim of private respondents against petitioner PAL is a Rule 4, Section 2(k), of the Interim Rules on Corporate Rehabilitation
money claim for the missing luggages, a financial demand that the law provides:
requires to be suspended pending the rehabilitation proceedings.
“Sec. 2. Contents of the Petition. – The petition filed
by the debtor must be verified and must set forth with
Chas Realty Vs. Talavera (397 S 84) sufficient particularity all the following material facts: (a)
the name and business of the debtor; (b) the nature of the
Facts: business of the debtor; (c) the history of the debtor; (d) the
cause of its inability to pay its debts; (e) all the pending
actions or proceedings known to the debtor and the courts
Petitioner Chas Realty and Development Corporation (CRDC) is a or tribunals where they are pending; (f) threats or
domestic corporation engaged in property development and demands to enforce claims or liens against the debtor; and
management. It is the owner and developer of a three-hectare (g) the manner by which the debtor may be rehabilitated
shopping complex, also known as the Megacenter Mall (Megacenter), and how such rehabilitation may benefit the general body
in Cabanatuan City. of creditors, employees, and stockholders.
The construction of Megacenter commenced in January 1996, but by “The petitioner shall be accompanied by the
the time of its so-called “soft opening” in July 1998, it was only partly following documents:
completed due to lack of funds, said to have been brought about by
construction overages due to the massive devaluation of the peso “x x x xxx x x x.
during the economic crisis in 1997, low occupancy, and rental
arrearages of tenants. The opening of the upper ground floor and the “k. A Certificate attesting, under oath, that (a)
second floor of the building followed, respectively, in August 1998 and the filing of the petition has been duly authorized; and (b)
towards the end of 1998. Eventually, Megacenter opened its third floor the directors and stockholders have irrevocably approved
in 1999. and/or consented to, in accordance with existing laws, all
actions or matters necessary and desirable to rehabilitate
Purportedly on account of factors beyond the control of CRDC, such as the debtor including, but not limited to, amendments to
high interest rates on its loans, unpaid rentals of tenants, low the articles of incorporation and by-laws or articles of
occupancy rate, sluggishness of the economy and the freezing of its partnership; increase or decrease in the authorized capital
bank account by its main creditor, the Land Bank of the Philippines, stock; issuance of bonded indebtedness; alienation,
CRDC encountered difficulty in paying its obligations as and when they transfer, or encumbrance of assets of the debtor; and
fell due and had to contend with collection suits and related cases. modification of shareholders’ rights.”
On 04 June 2001, CRDC filed a petition for rehabilitation attaching Observe that Rule 4, Section 2(k), prescribes the need for a
thereto a proposed rehabilitation plan, accompanied by a secretary’s certification; one, to state that the filing of the petition has been duly
certificate, consonantly with paragraph 2(k), Section 2, Rule 4, of the authorized, and two, to confirm that the directors and stockholders
Interim Rules of Procedure on Corporate Rehabilitation. CRDC have irrevocably approved and/or consented to, in accordance with
claimed that it had sufficient assets and a workable rehabilitation plan existing laws, all actions or matters necessary and desirable to
both of which showed that the continuance of its business was still rehabilitate the corporate debtor, including, as and when called for,
feasible. It alleged that, prior to the filing of the petition for such extraordinary corporate actions as may be marked out. The
rehabilitation, a special meeting of its stockholders was held on 18 phrase, “in accordance with existing laws,” obviously would refer to
April 2001 during which the majority of the outstanding capital stock that which is, or to those that are, intended to be done by the
of CRDC approved the resolution authorizing the filing of a petition for corporation in the pursuit of its plan for rehabilitation. Thus, if any
rehabilitation. extraordinary corporate action (mentioned in Rule 4, Section 2(k), of
the Interim Rules on Corporate Rehabilitation) are to be done under
On 08 June 2001, the Regional Trial Court, Branch 28, of Cabanatuan the proposed rehabilitation plan, the petitioner would be bound to
City, to which the petition was assigned, issued an order staying all make it known that it has received the approval of a majority of the
claims against CRDC and prohibited it from making any payment on directors and the affirmative votes of stockholders representing at least
its outstanding obligations and selling, or otherwise disposing or two-thirds (2/3) of the outstanding capital stock of the corporation.
encumbering, its property. Forthwith, the court appointed a Where no such extraordinary corporate acts (or one that under the law
rehabilitation receiver. would call for a two-thirds (2/3) vote) are contemplated to be done in
carrying out the proposed rehabilitation plan, then the approval of
On 20 July 2001, Angel D. Concepcion, Sr., herein private respondent,
stockholders would only be by a majority, not necessarily a two-thirds
filed a complaint in intervention opposing the appointment of CRDC’s
(2/3), vote, as long as, of course, there is a quorum a fact which is not
nominee for the post of rehabilitation receiver. He belied CRDC’s
here being disputed.
factual allegations and claimed that the predicament of the corporation
was due to serious “mismanagement, fraud, embezzlement, Nowhere in the aforequoted paragraph can it be inferred that an
misappropriation and gross/evident violation of the fiduciary duties of affirmative vote of stockholders representing at least two-thirds (2/3)
CHAS officers.” Concepcion moved to dismiss and/or to deny the of the outstanding stock is invariably necessary for the filing of a
petition for rehabilitation on the ground that there was no approval by petition for rehabilitation regardless of the corporate action that the
the stockholders representing at least two-thirds (2/3) of the plan envisions. Just to the contrary, it only requires in the filing of the
outstanding capital stock which, according to him, would be essential petition that the corporate actions therein proposed have been duly
under paragraph 2(k), Section 2, Rule 4, of the Interim Rules on approved or consented to by the directors and stockholders “in
Corporate Rehabilitation. Concepcion further asserted that the consonance with existing laws.” The requirement is designed to avoid
supposed approval of the directors of the filing of the petition for a situation where a rehabilitation plan, after being developed and
rehabilitation was inaccurate considering that the membership of judicially sanctioned, cannot ultimately be seen through because of the
petitioner CRDC’s board of directors was still then being contested and refusal of directors or stockholders to cooperate in the full
pending final resolution. implementation of the plan. In fine, a certification on the approval of
stockholders is required but the question, whether such approval
should be by a majority or by a two-thirds (2/3) vote of the outstanding
174
capital stock, would depend on the existing law vis-à-vis the corporate in its audited financial statements. The banks do not hold any assets of
act or acts proposed to be done in the rehabilitation of the distressed Maynilad that would be material to the rehabilitation proceedings nor
corporation. is Maynilad liable to the banks at this point.

The rehabilitation plan submitted by petitioner merely consists of a

repayment or re-structuring scheme of CRDC’s bank loans to Land Respondent Maynilad’s Financial Statement as of December 31, 2001
Bank of the Philippines and Equitable-PCI Bank and of leasing out and 2002 do not show the Irrevocable Standby Letter of Credit as part
most of the available spaces in the Megacenter, including the of its assets or liabilities, and by respondent Maynilad’s own admission
completion of the construction of the fourth floor, to increase rental it is not. In issuing the clarificatory order of November 27, 2003,
revenues. None of the proposed corporate actions would require a vote enjoining petitioner from claiming from an asset that did not belong to
of approval by the stockholders representing at least two-thirds (2/3) the debtor and over which it did not acquire jurisdiction, the
of the outstanding capital stock. rehabilitation court acted in excess of its jurisdiction.

MWSS Vs. Daway (432 S 559) Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of
the Interim Rules that supports its claim that the commencement of
the process to draw on the Standby Letter of Credit is an enforcement
Facts: of claim prohibited by and under the Interim Rules and the order of
public respondent.
MWSS granted Maynilad under a Concession Agreement a twenty-year
period to manage, operate, repair, decommission and refurbish the We disagree.
existing MWSS water delivery and sewerage services in the West Zone
Service Area, for which Maynilad undertook to pay the corresponding
concession fees on the dates agreed upon in said agreement which, First, the claim is not one against the debtor but against an entity that
among other things, consisted of payments of petitioner’s mostly respondent Maynilad has procured to answer for its non-performance
foreign loans. of certain terms and conditions of the Concession Agreement,
particularly the payment of concession fees.

To secure the concessionaire’s performance of its obligations under the

Concession Agreement, Maynilad was required under Section 6.9 of Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the
said contract to put up a bond, bank guarantee or other security enforcement of all claims against guarantors and sureties, but only
acceptable to MWSS. those claims against guarantors and sureties who are not
solidarily liable with the debtor. Respondent Maynilad’s claim
that the banks are not solidarily liable with the debtor does not find
However, on November 5, 2002, Maynilad served upon MWSS a support in jurisprudence.
Notice of Event of Termination, claiming that MWSS failed to comply
with its obligations under the Concession Agreement and Amendment
No. 1 regarding the adjustment mechanism that would cover The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not
Maynilad’s foreign exchange losses. On December 9, 2002, Maynilad apply to herein petitioner as the prohibition is on the enforcement of
filed a Notice of Early Termination of the concession, which was claims against guarantors or sureties of the debtors whose obligations
challenged by MWSS. This matter was eventually brought before the are not solidary with the debtor. The participating banks’ obligation are
Appeals Panel on January 7, 2003 by MWSS. solidary with respondent Maynilad in that it is a primary, direct,
definite and an absolute undertaking to pay and is not conditioned on
the prior exhaustion of the debtor’s assets. These are the same
MWSS, thereafter, submitted a written notice on November 24, 2003, characteristics of a surety or solidary obligor.
to Citicorp International Limited, as agent for the participating banks,
that by virtue of Maynilad’s failure to perform its obligations under the
Concession Agreement, it was drawing on the Irrevocable Standby Being solidary, the claims against them can be pursued separately from
Letter of Credit and thereby demanded payment in the amount of and independently of the rehabilitation case, as held in Traders Royal
US$98,923,640.15. Bank v. Court of Appeals and reiterated in Philippine Blooming Mills,
Inc. v. Court of Appeals, where we said that property of the surety
cannot be taken into custody by the rehabilitation receiver (SEC) and
Prior to this, however, Maynilad had filed on November 13, 2003, a said surety can be sued separately to enforce his liability as surety for
petition for rehabilitation before the court a quo which resulted in the the debts or obligations of the debtor. The debts or obligations for
issuance of the Stay Order of November 17, 2003 and the disputed which a surety may be liable include future debts, an amount which
Order of November 27, 2003. may not be known at the time the surety is given.

Issue: The public respondent, therefore, exceeded his jurisdiction, in holding

that he was competent to act on the obligation of the banks under the
W/N the rehabilitation court sitting as such, act in excess of its Letter of Credit under the argument that this was not a solidary
authority or jurisdiction when it enjoined herein petitioner from obligation with that of the debtor. Being a solidary obligation, the
seeking the payment of the concession fees from the banks that issued letter of credit is excluded from the jurisdiction of the rehabilitation
the Irrevocable Standby Letter of Credit in its favor and for the account court and therefore in enjoining petitioner from proceeding against the
of respondent Maynilad Standby Letters of Credit to which it had a clear right under the law
and the terms of said Standby Letter of Credit, public respondent acted
in excess of his jurisdiction.
Ruling:
Union Bank Vs. CA (290 S 198)
The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on
Corporate Rehabilitation to support its jurisdiction over the
Irrevocable Standby Letter of Credit and the banks that issued it. The Facts:
section reads in part “that jurisdiction over those affected by the
proceedings is considered acquired upon the publication of the notice On September 16, 1997, EYCO Group of Companies, Eulogio O.
of commencement of proceedings in a newspaper of general Yutingco, Caroline Yutingco-Yao, and Theresa T. Lao (the "Yutingcos"),
circulation” and goes further to define rehabilitation as an in rem all of whom are controlling stockholders of the aforementioned
proceeding. The reference to “all those affected by the proceedings corporations, jointly filed with the SEC a Petition for the Declaration of
“covers creditors or such other persons or entities holding assets Suspension of Payment[s], Formation and Appointment of
belonging to the debtor under rehabilitation which should be reflected Rehabilitation Receiver/Committee, Approval of Rehabilitation Plan

175
with Alternative Prayer for Liquidation and Dissolution of that the petition with respect to EYCO shall subsist and may be validly
Corporations. acted upon by the SEC. The Yutingcos, on the other hand, shall be
dropped from the petition and be required to pursue their remedies in
the regular courts of competent jurisdiction.
Upon finding the above petition to be sufficient in form and substance,
the SEC Hearing Panel issued an order setting its hearing on October
22, 1997. At the same time, said panel also directed the suspension of Petitioner's allegations of fraudulent dispositions of private
all actions, claims and proceedings against private respondents respondents' assets and the supposed insolvency of the latter are
pending before any court, tribunal, office, board and/or commission. hardly of any consequence to the assumption of jurisdiction by the SEC
over the nature or subject matter of the petition for suspension of
payments. Aside from the fact that these allegations are evidentiary in
Meanwhile, some of private respondents' creditors, composed mainly
nature and still remains to be proved, we have likewise consistently
of twenty-two (22) domestic banks (the "consortium") including herein
ruled that what determines the nature of an action, as well as which
petitioner Union Bank of the Philippines, also convened on September
court or body has jurisdiction over it, are the allegations of the
19, 1997 for the purpose of deciding their options in the event that
complaint, or a petition as in this case, and the character of the relief
private respondents invoke the provisions of Presidential Decree No.
sought. That the merits of the case after due proceedings are later
902-A, as amended. The minutes embodying the terms agreed upon by
found to veer away from the claims asserted by EYCO in its petition, as
the consortium in said meeting provided.
when it is shown later that it is actually insolvent and may not be
entitled to suspension of payments, does not divest the SEC at all of its
Without notifying the members of the consortium, petitioner, however, jurisdiction already acquired at its inception through the allegations
decided to break away from the group by suing private respondents in made in the petition.
the regular courts.
Neither are we convinced by petitioner's reasoning that the Yutingcos
In the meantime, the SEC issued an order on appointing interim and the corporate entities making up the EYCO Group, on the basis of
receivers of the distressed corporations. the footnote that the former were filing the petition because they
bound themselves as surety to the corporate obligations, should be
considered as mere individuals who should file their petition for
Aside from commencing suits in the regular courts, petitioner also suspension of payments with the regular courts pursuant to Section 2
vehemently opposed private respondents' petition for suspension of of the Insolvency Law. We do not see any legal ground which should
payments in the SEC by filing a Motion to Dismiss on October 22, 1997. lead one to such conclusion. The doctrine of piercing the veil of
It contended that the SEC was bereft of jurisdiction over such petition corporate fiction heavily relied upon by petitioner is entirely misplaced,
on the ground that the inclusion of the Yutingcos in the petition as said doctrine only applies when such corporate fiction is used to
"cannot be allowed since the authority and power of the Commission defeat public convenience, justify wrong, protect fraud or defend crime.
under the virtue of the law applies only to corporations, partnership[s]
and other forms of associations , and not to individual petitioners who
are not clearly covered by P.D. 902-A as amended." According to
petitioner, what should have been applied instead was the provision on
suspension of payments under Act No. 1956, otherwise known as the
"Insolvency Law," which mandated the filing of the petition in the
Regional Trial Court and not in the SEC. Finally, petitioner disputed
private respondents' recourse to suspension of payments alleging that
the latter prejudiced their creditors by fraudulently disposing of
corporate properties within the 30-day period prior to the filing of such
petition.

Subsequently, a creditors' meeting was again convened pursuant to

SEC's earlier order dated September 19, 1997, wherein the matter of
creating a management committee (the "Mancom") was submitted for
resolution. Apparently, only petitioner opposed the creation of said
Mancom as it filed earlier with the SEC its Motion to Dismiss.

Issue:
SECURITIES REGULATION CODE

W/N the SEC can validly acquire jurisdiction over a petition for
suspension of payments filed pursuant to Section 5 (d) of P.D. No. 902
— A, as amended, when such petition joins as co-petitioners the
petitioning corporate entities AND individual stockholders thereof
Orendain Vs. BF Homes (506 S 254)

Ruling:
Facts:

Section 5 (d) of P.D. No. 902-A, as amended] clearly does not allow a
BF Homes, Inc. is a domestic corporation operating under Philippine
mere individual to file the petition which is limited to "corporations,
laws and organized primarily to develop and sell residential lots and
partnerships or associations." Administrative agencies like the SEC
houses and other related realty business.
are tribunals of limited jurisdiction and, as such, can exercise only
those powers which are specifically granted to them by their enabling
statutes. Consequently, where no authority is granted to hear petitions Records show that respondent BF Homes had to avail itself of financial
of individuals for suspension of payments, such petitions are beyond assistance from various sources to enable it to buy properties and
the competence of the SEC. convert them into residential subdivisions. This resulted in its
incurring liabilities amounting to PhP 1,542,805,068.23 as of July 31,
1984. On the other hand, during its business operations, it was able to
In a case of misjoinder of parties — which in this case is the co-filing of
acquire properties and assets worth PhP 2,482,843,358.81 as of July
the petition for suspension of payments by both the Yutingcos and the
31, 1984, which, if liquidated, were more than enough to pay all its
EYCO group — the remedy has never been to dismiss the petition in its
creditors.
entirety but to dismiss it only as against the party upon whom the
tribunal or body cannot acquire jurisdiction. The result, therefore, is

176
Despite its solvent status, respondent filed a Petition for Rehabilitation body has jurisdiction over a case would be to consider not only [1] the
and for Declaration in a State of Suspension of Payments under Section status or relationship of the parties but also [2] the nature of the
4 of PD No. 1758 before the Securities and Exchange Commission. question that is the subject of their controversy.”

The SEC subsequently issued an order creating Management However, Section 5 of PD No. 902-A does not apply in the instant case.
Committee Chaired by Atty. Florencio Orendain as Chairman The LSFSIPI is neither an officer nor a stockholder of BF Homes, and
this case does not involve intra-corporate proceedings. In addition, the
seller, petitioner Orendain, is being sued in his individual capacity for
Thereafter, on February 2, 1988, the SEC ordered the appointment of a
the unauthorized sale of the property in controversy. Hence, we find
rehabilitation receiver, FBO Management Networks, Inc., with
no cogent reason to sustain petitioner’s manifestation that the
petitioner Orendain as Chairman to prevent paralyzation of BF Homes’
resolution of the instant controversy depends on the ratification by the
business operations.
SEC of the acts of its agent or the receiver because the act of Orendain
was allegedly not within the scope of his authority as receiver.
On October 8, 1993, a Deed of Absolute Sale was executed by and Furthermore, the determination of the validity of the sale to LSFSIPI
between BF Homes—represented by petitioner Orendain—as absolute will necessitate the application of the provisions of the Civil Code on
and registered owner, and the Local Superior of the Franciscan Sisters obligations and contracts, agency, and other pertinent provisions.
of the Immaculate Phils., Inc. (LSFSIPI) over a parcel of land situated
at Barangay Pasong Papaya, BF International, Municipality of Las
In addition, jurisdiction over the case for reconveyance is clearly vested
Piñas, Metro Manila.
in the RTC.

Meanwhile, on November 7, 1994, the SEC hearing panel released an

The passage of RA 8799 has put to rest petitioner Orendain’s claim that
Omnibus Order which admitted and confirmed the Closing Report
it is the SEC and not the RTC that has jurisdiction over Civil Case No.
submitted by the receiver, petitioner Orendain. It further appointed a
LP-96-0022. At present, the instant petition has nothing to stand on
new Committee of Receivers composed of the eleven (11) members of
and perforce must fail.
the Board of Directors of BF Homes with Albert C. Aguirre as the
Chairman of the Committee. Consequently, receiver Orendain was
relieved of his duties and responsibilities. 1. TIME SHARES

On January 23, 1996, BF Homes filed a Complaint before the Las Piñas Timeshare Realty Vs. Lao (544 S 254)
RTC against LSFSIPI and petitioner Orendain, in Civil Case No. LP-96-
0022, for reconveyance of the property covered by TCT No. T-36482—
Facts:
alleging, inter alia, that the LSFSIPI transacted with Orendain in his
individual capacity and therefore, neither FBO Management, Inc. nor
Orendain had title to the property transferred. On October 6, 1996, Timeshare Realty sold to Ceasar M. Lao and
Cynthia V. Cortez, one timeshare of Laguna de Boracay for
US$7,500.00 payable in eight months and fully paid by the
On June 14, 1996, Florencio B. Orendain filed a Motion to Dismiss
respondents.
stating that (1) the RTC had no jurisdiction over the reconveyance suit;
(2) the Complaint was barred by the finality of the November 7, 1994
Sometime in February 1998, the SEC issued a resolution to the effect
Omnibus Order of the SEC hearing panel; and (3) BF Homes, acting
that petitioner was without authority to sell securities, like timeshares,
through its Committee of Receivers, had neither the interest nor the
prior to February 11, 1998. It further stated in the resolution/order that
personality to prosecute the said action, in the absence of SEC’s clear
the Registration Statement of petitioner became effective only on
and actual authorization for the institution of the said suit.
February 11, 1998. It also held that the 30 days within which a
purchaser may exercise the option to unilaterally rescind the purchase
Issue: agreement and receive the refund of money paid applies to all purchase
agreements entered into by petitioner prior to the effectivity of the
Registration Statement.
W/N the RTC or SEC has jurisdiction over the action for reconveyance

Petitioner sought a reconsideration of the aforesaid order but the SEC

Ruling:
denied the same in a letter dated March 9, 1998.

In the case at bench, the BF Homes’ Complaint for reconveyance was On March 30, 1998, respondents wrote petitioner demanding their
filed on January 23, 1996 against LSFSIPI and Florencio B. Orendain, right and option to cancel their Contract, as it appears that Laguna de
in Civil Case No. LP-96-002. Boracay is selling said shares without license or authority from the
SEC. But despite repeated demands, petitioner failed and refused to
refund or pay respondents.
In 1996, Section 5 of PD No. 902-A, which was approved on March 11,
1976, was still the law in force—whereby the SEC still had original and
exclusive jurisdiction to hear and decide cases involving: Respondents directly filed with SEC En Banc a Complaint against
petitioner and the Members of its Board of Directors - Julius S.
Strachan, Angel G. Vivar, Jr. and Cecilia R. Palma - for violation of
b) controversies arising out of intra-corporate or Section 4 of Batas Pambansa Bilang (B.P. Blg.) 178.
partnership relations, between and among
stockholders, members, or associates; between any
and/or all of them and the corporation, On March 25, 2002, the SEC En Banc rendered a Decision in favor of
partnership, or association of which they are respondents, ordering petitioner, together with Julius S. Strachan,
stockholders, members or associates, respectively; Angel G. Vivar, Jr., and Cecilia R. Palma, to pay respondents the
and between such corporation, partnership or amount of US$7,500.00.
association and the state insofar as it concerns
their individual franchise or right to exist as such
Petitioner filed a Motion for Reconsideration which the SEC En Banc
entity.
denied in an Order dated June 24, 2002.

Clearly, the controversy involves matters purely civil in character and is

Petitioner received a copy of the June 24, 2002 SEC En Banc Order on
beyond the ambit of the limited jurisdiction of the SEC. As held in
July 4, 2002 and had 15 days or until July 19, 2002 within which to
Viray v. Court of Appeals, “[t]he better policy in determining which
appeal. However, on July 10, 2002, petitioner sought from the CA an
177
extension of 30 days, counted from July 19, 2002, or until August 19, petitioner’s original period to appeal. While such computation of the
2002, within which to appeal. The CA partly granted the motion in an CA appears to be erroneous, petitioner did not question it in the
Order dated July 24, 2002, to wit: present petition. But even if we do reckon the 15-day extension period
from July 19, 1999, the same would have ended on August 3, 1999,
making petitioner’s appeal still inexcusably tardy by 16 days. Either
As prayed for, but conditioned on the timeliness of its filing, the
way we reckon it, therefore, petitioner’s appeal was not perfected
Motion for Extension to File Petition for Review dated 09 July 2002
within the period prescribed under Rule 43.Nevertheless, the Court
and filed before this Court on 10 July 2002 is GRANTED and
opts to resolve the substantive issues raised by petitioner in its appeal
petitioners are given a non-extendible period of fifteen (15) days from
so as to determine the lawful rights of the parties and put an end to the
10 July 2002 or until 25 July 2002 within which to file the desired
litigation.
petition, otherwise, the above-entitled case will be dismissed.
Petitioner claims that at the time it entered into a timeshare purchase
Petitioner purportedly received the July 24, 2002 CA Order on July 29, agreement with respondents on October 6, 1996, it already possessed
2002, but filed a Petition for Review with the CA on August 19, 2002. the requisite license and marketing agreement to engage in such
transactions, as evidenced by its registration with the SEC as a
In the assailed October 30, 2002 Resolution, the CA dismissed the corporation. Petitioner argues that when it was registered and
Petition for Review and denied petitioner's Motion for Reconsideration authorized by the SEC as broker of securities - such as the Laguna de
in the assailed Resolution dated July 4, 2003. Boracay timeshares - this had the effect of ratifying its October 6, 1996
purchase agreement with respondents, and removing any cause for the
latter to rescind it.
Petitioner filed the present petition.

The Court is not persuaded.

Issue:

As cited by the SEC En Banc in its March 25, 2002 Decision, as early as
Whether or not the eventual approval or issuance of license has February 13, 1998, the SEC, through Director Linda A. Daoang, already
retroactive effect and therefore ratifies all earlier transactions rendered a ruling on the effectivity of the registration statement of
petitioner, viz:
Ruling:
This has reference to your registration statement which was rendered
Section 70 of Republic Act No. 8799, which was enacted on July 19, effective 11 February 1998. The 30 days within which a purchaser may
2000, is the law which governs petitioner’s appeal from the orders of exercise the option to unilaterally rescind the purchase agreement and
the SEC En Banc. It prescribes that such appeal be taken to the CA by receive the refund of money paid, applies to all purchase agreements
petition for review in accordance with the pertinent provisions of the entered into by the registrant prior to the effectivity of the registration
Rules of Court, specifically Rule 43. statement. The 30-day rescission period for contracts signed before
the Registration Statement was rendered effective shall commence on
11 February 1998. The rescission period for contracts after 11
Section 4 of Rule 43 is restrictive in its treatment of the period within February 1998 shall commence on the date of purchase agreement.
which a petition may be filed:

Petitioner sought a reconsideration of said ruling but the same was

Section 4. Period of appeal. - The appeal shall be taken within fifteen denied by Director Daoang in an Order dated March 9, 1998. However,
(15) days from notice of the award, judgment, final order or resolution, petitioner did not resort to any other administrative remedy against
or from the date of its last publication, if publication is required by law said ruling, such as by questioning the same before the SEC En Banc.
for its effectivity, or of the denial of petitioner’s motion for new trial or Having failed to exhaust the administrative remedies available to it,
reconsideration duly filed in accordance with the governing law of the petitioner is already bound by said ruling and can no longer question
court or agency a quo. Only one (1) motion for reconsideration shall be the same through a direct and belated recourse to us.
allowed. Upon proper motion and the payment of the full amount of
the docket fee before the expiration of the reglementary period, the
Court of Appeals may grant an additional period of fifteen (15) days Finally, the provisions of B.P. Blg. 178 do not support the contention of
only within which to file the petition for review. No further extension petitioner that its mere registration as a corporation already authorizes
shall be granted except for the most compelling reason and in no case it to deal with unregistered timeshares. Corporate registration is just
to exceed fifteen (15) days. one of several requirements before it may deal with timeshares:

Petitioner’s Motion for Extension of Time to File Petition for Review Section 8. Procedure for registration. - (a) All securities required to be
flouted the foregoing restriction: it sought, not a 15-day, but a 30-day registered under subsection (a) of Section four of this Act shall be
extension of the appeal period; and it did not even bother to cite a registered through the filing by the issuer or by any dealer or
compelling reason for such extension, other than its counsel’s caseload underwriter interested in the sale thereof, in the office of the
which, as we have repeatedly ruled, hardly qualifies as an imperative Commission, of a sworn registration statement with respect to such
cause for moderation of the rules. securities, containing or having attached thereto, the following:

x x x x
Its motion for extension being inherently flawed, petitioner should not
have presumed that the CA would fully grant the same. Instead, it (36) Unless previously filed and registered with the Commission and
should have exercised due diligence by filing the proper petition within brought up to date:
the allowable period, or at the very least, ascertaining from the CA
whether its motion for extension had been acted upon. As it were,
petitioner’s counsel left the country, unmindful of the possibility that (a)A copy of its articles of incorporation with all amendments thereof
his client’s period to appeal was about to lapse - as it indeed lapsed on and its existing by-laws or instruments corresponding thereto,
July 25, 1999, after the CA allowed them a 15-day extension only, in whatever the name, if the issuer be a corporation.
view of the restriction under Section 4, Rule 43. Thus, petitioner has
only itself to blame that the Petition for Review it filed on August 19, Prior to fulfillment of all the other requirements of Section 8, petitioner
1999 was late by 25 days. The CA cannot be faulted for dismissing it. is absolutely proscribed under Section 4 from dealing with
unregistered timeshares, thus:
The Court notes that the CA reckoned the 15-day extension it granted
to petitioner from July 10, 1999, the date petitioner filed its Motion for
Extension, rather than from July 19, 1999, the date of expiration of

178
Section 4. Requirement of registration of securities. - (a) No securities, definition of the law. When the investor is relatively uninformed and
except of a class exempt under any of the provisions of Section five turns over his money to others, essentially depending upon their
hereof or unless sold in any transaction exempt under any of the representations and their honesty and skill in managing it, the
provisions of Section six hereof, shall be sold or offered for sale or transaction generally is considered to be an investment contract. The
distribution to the public within the Philippines unless such securities touchtone is the presence of an investment in a common venture
shall have been registered and permitted to be sold as hereinafter premised on a reasonable expectation of profits to be derived from the
provided. entrepreneurial or managerial efforts of others.

2. INVESTMENT CONTRACT Dr. Bailey testified on this matter but no contract was submitted by the
prosecution. The prosecution failed to prove by sufficient evidence that
indeed, the amount delivered by Dr. Bailey to Lansdale, through
People Vs. Petralba (439 S 158)
appellant, is an investment contemplated by the Revised Securities Act
and not a mere act of buying and selling foreign exchange.
Facts:
Moreover, the receipt merely shows that Dr. Bailey remitted the
Elvira Petralba was convicted for violating Sections 4, 19 and 29 of amount of US$6,000.00 to Lansdale through appellant, as account
Batas Pambansa Bilang (B.P. Blg.) 178, otherwise known as The executive. It contained a request for appellant to follow-up proper
Revised Securities Act. remittance and credit of her trading account as well as the issuance of
the receipt of said amount which is confirmed by appellant as shown by
her signature. The receipt did not prove that appellant committed any
Under the three Informations, appellant is charged with conniving and of the offenses charged against her. The receipt merely established
confederating together with her three co-accused, and mutually that appellant received the amount from Dr. Bailey for the purpose of
helping one another, with deliberate intent to gain and defraud remitting the same to Lansdale and to follow-up the crediting thereof
complainant by: (1) offering for sale, together with her co-accused, to her trading account. The brochure, given by appellant to Dr. Bailey,
securities which were not registered in violation of Section 4 of the law; does not prove appellant’s guilt beyond reasonable doubt in the
(2) representing and acting as broker or dealer to induce complainant absence of direct and specific proof on the (1) actual participation of
as in fact she delivered the subject amount, not having been registered appellant in the alleged offer and sale of securities to the public within
with the Securities and Exchange Commission, in violation of Section the Philippines which were not registered in violation of Section 4 of
19 of the same law; and (3) assuring the complainant that Lansdale is B.P. Blg. 178; (2) manner by which appellant misrepresented to Dr.
duly licensed to engage in foreign exchange trading when in fact said Bailey that Lansdale is duly licensed to engage in foreign exchange
company is not duly-licensed, as a consequence of which complainant trading in violation of Section 29 of said law; and (3) manner by
invested the amount of $6,000.00, thereby engaging in fraudulent which appellant misrepresented to Dr. Bailey that she was a licensed
transactions in foreign exchange trading, in violation of Section 29 of broker, dealer or salesperson of securities when in fact she was not,
the law. thereby inducing Dr. Bailey to invest and deliver the amount of
US$6,000.00, in violation of Section 19 of said law.
Issue:
Furthermore, while it is established by the prosecution that Lansdale
W/N the prosecution has established the guilt of appellant beyond was not duly registered and appellant was not licensed as a broker, the
reasonable doubt for violating Sections 4, 19 and 29 of B.P. Blg. 178 manner by which appellant connived with her co-accused and induced
her to invest her $6,000.00, not $9,000.00 as erroneously stated in
the Information are too sketchy, devoid of any certainty as to the actual
Ruling: participation of appellant in the commission of the offenses charged
against her.
After a careful examination of the prosecution evidence, we find that
the findings of both lower courts were grounded on mere surmises or The testimony of complainant read in its entirety does not sufficiently
conjectures; the inferences they made were manifestly mistaken, establish that appellant herself had uttered any words of assurance or
bordering on absurdity; and the judgment of the appellate court was committed a particular act as specified under the aforequoted
based on misapprehension of facts or mere conclusions without provision of law. Neither did complainant’s testimony show her specific
citation of specific, competent evidence. participation in the alleged conspiracy to defraud complainant. Dr.
Bailey’s testimony did not prove the guilt of appellant beyond
The Court of Appeals erred in affirming the RTC’s decision. The reasonable doubt.
prosecution failed to establish the guilt of appellant beyond reasonable
doubt. Moreover, the RTC made mention of a brochure, marked as Exhibit “B”
but the same is not offered as evidence by the prosecution as shown by
Appellant claims that the transaction that transpired between its Written Offer of Evidence.
complainant and her employer Lansdale was a mere foreign exchange
trading which is not covered by the term “securities” of B.P. Blg. 178, In fine, there is no proof beyond reasonable doubt to hold appellant
the prevailing law at the time of the commission of the alleged crimes. guilty of all the offenses charged against her under the three
Informations.
Section 2 of B.P. Blg. 178 provides:
PowerHomes Vs. SEC (546 S 567)
Section 2. Definitions. – For purposes of this Act:
Facts:
“Securities” shall include bonds, debentures, notes, evidences of
indebtedness, shares in a company, pre -organization certificates or Petitioner is a domestic corporation duly registered with public
subscription, investment contracts, certificates of interest or respondent SEC.
participation in a profit sharing agreement, xxxxxxx
Its primary purpose is to engage in the transaction of promoting,
Clearly therefrom, as pointed out by the Office of the Solicitor General, acquiring, managing, leasing, obtaining options on, development, and
the foreign exchange trading transaction that transpired between improvement of real estate properties for subdivision and allied
complainant and Lansdale appears to be an investment contract or purposes, and in the purchase, sale and/or exchange of said
participation in a profit sharing agreement that falls within the subdivision and properties through network marketing.

179
 An investment contract is defined in the Amended Implementing Rules
Later, the Commission ordered POWER HOMES UNLIMITED, CORP., and Regulations of R.A. No. 8799 as a contract, transaction or scheme
its officers, directors, agents, representatives and any and all persons (collectively contract) whereby a person invests his money in a
claiming and acting under their authority to immediately CEASE AND common enterprise and is led to expect profits primarily from the
DESIST from further engaging in the sale, offer or distribution of the efforts of others.
securities upon the receipt of this order.
We therefore rule that the business operation or the scheme of
In accordance with the provisions of Section 64.3 of Republic Act No. petitioner constitutes an investment contract that is a security under
8799, otherwise known as the Securities Regulation Code, the parties R.A. No. 8799. Thus, it must be registered with public respondent SEC
subject of this Cease and Desist Order may file a request for the lifting before its sale or offer for sale or distribution to the public. As
thereof within five (5) days from receipt. petitioner failed to register the same, its offering to the public was
rightfully enjoined by public respondent SEC. The CDO was proper
On February 5, 2001, petitioner moved for the lifting of the CDO, even without a finding of fraud. As an investment contract that is
which public respondent SEC denied for lack of merit on February 22, security under R.A. No. 8799, it must be registered with public
2001. respondent SEC, otherwise the SEC cannot protect the investing public
from fraudulent securities. The strict regulation of securities is founded
Aggrieved, petitioner went to the Court of Appeals imputing grave on the premise that the capital markets depend on the investing
abuse of discretion amounting to lack or excess of jurisdiction on public’s level of confidence in the system.
public respondent SEC for issuing the order. It also applied for a
temporary restraining order, which the appellate court granted.

On June 18, 2004, the Court of Appeals denied petitioner’s motion for 3. PONZI SCHEME
reconsideration; hence, this petition for review.
People Vs. Balasa (295 S 49)

Facts:
Issue:
The Panata Foundation of the Philippines, Inc., a non-stock, non-profit
W/N petition’s business constitutes an investment contract which
corporation with principal address at San Miguel, Puerto Princesa,
should be registered with public respondent SEC before its sale or offer
Palawan, was registered with the securities and Exchange Commission,
for sale or distribution to the public
under S.E.C. Reg. No. 165565. Its ten incoporators were Priscilla
Balasa, Normita Visaya, Analina Francisco, Lolita Gelilang, Cynthia
Ruling:
Ang, Norma Francisco, Purabel Espidol, Melinda Mercado, Rodolfo
Ang, Jr. and Teresa G. Carandang. Five incorporators, namely, Priscilla
Section 8. Requirement of Registration of Securities. “ 8.1. Securities
Balasa, Normita Visaya, Analina Francisco, Lolita Gelilang and Cynthia
shall not be sold or offered for sale or distribution within the
Ang were named first trustees.
Philippines, without a registration statement duly filed with and
approved by the Commission. Prior to such sale, information on the
securities, in such form and with such substance as the Commission In addition, the management of the foundation was entrusted to
may prescribe, shall be made available to each prospective purchaser. Priscilla Balasa, as president and general manager; Normita Visaya as
corporate secretary and head comptroller; Norma Francisco as cashier;
Public respondent SEC found the petitioner as a marketing company Guillermo Francisco as the disbursing officer; and Analina Francisco as
that promotes and facilitates sales of real properties and other related treasurer. The latter also doubled as a typist of the Foundation.
products of real estate developers through effective leverage marketing.

It also described the conduct of petitioner’s business as follows: On the other hand, the employees of the foundation were the tellers
Rosemarie Balasa, Sylvia Magnaye, Judith Ponciano, Jessica Buaya,
The scheme of the [petitioner] corporation requires an investor to Rosario Arciaga, Paul Francisco, Enriquita Gabayan and Anita
become a Business Center Owner (BCO) who must fill-up and sign its Macmac. The comptrollers, Ruth Jalover, Amarino Agayo, and Avelina
application form. The Terms and Conditions printed at the back of the Yan were under the supervision of Normita Visaya. Nelia Daco, one of
application form indicate that the BCO shall mean an independent the clerks assigned outside, was the one in direct contact with the
representative of Power Homes, who is enrolled in the company’s depositors.
referral program and who will ultimately purchase real property from
any accredited real estate developers and as such he is entitled to a The Foundation's purposes, as stated in its by-laws, were as follows:
referral bonus/commission. Paragraph 5 of the same indicates that
there exists no employer/employee relationship between the BCO and
the Power Homes Unlimited, Corp. 1. Uplift members' economic condition by way of financial or
consultative basis ( sic );
The BCO is required to pay US$234 as his enrollment fee. His
enrollment entitles him to recruit two investors who should pay 2. To encourage members in a self-help program;
US$234 each and out of which amount he shall receive US$92. In case
the two referrals/enrollees would recruit a minimum of four (4)
persons each recruiting two (2) persons who become his/her own down 3. To grant educational assistance;
lines, the BCO will receive a total amount of US$1f7.20 after deducting
the amount of US$36.80 as property fund from the gross amount of 4. To implement the program on the Anti-Drug campaign;
US$184. After recruiting 128 persons in a period of eight (8) months
for each Left and Right business groups or a total of 256 enrollees
whether directly referred by the BCO or through his down lines, the 5. To acquire facilities either by or through purchase, lease, bequest of
BCO who receives a total amount of US$11,412.80 after deducting the donations, equipments ( sic ), machineries ( sic ) and supplies for
amount of US$363.20 as property fund from the gross amount of purposes of carrying out its business operation or hold such real or
US$11,776, has now an accumulated amount of US$2,700 constituting personal properties as may be convenient and proper in order to
as his Property Fund placed in a Property Fund account with the achieve the purpose of this corporation;
Chinabank. This accumulated amount of US$2,700 is used as
partial/full down payment for the real property chosen by the BCO 6. To cooperate with other organizations, institutions with similar
from any of petitioner’s accredited real estate developers. activities for purposes of carrying out its business; and 7. To organize
seminars or conferences specially in the rural areas and other selected
cities. 2
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After obtaining its SEC registration, the foundation immediately swung to invest more than P5,000.00, provided that the excess was deposited
into operation. It sent out brochures soliciting deposits from the public, under the name of others. She assured the depositors that this was safe
assuring would-be depositors that their money would either be doubled because as long as the depositor was holding the slots, he was the
after 21 days or trebled after 30 days. Priscilla Balasa also went around "owner" of the amount deposited. Most investors then deposited
convincing people to make deposits with the foundation at their office amounts in the names of their relatives.
at the Diaz Apartment, Puerto Princesa.
At the outset, the foundation's operations proceeded smoothly, as
The modus operandi for investing with the foundation was as follows: satisfied investors collected their investments upon maturity. On
November 29, 1989, however, the foundation did not open. Depositors
whose investments were to mature on said date demanded payments
When a person would deposit an amount, the amount would be taken
but none was forthcoming. On December 2, 1989, Priscilla Balasa
by a clerk to be given to the teller. The teller would then fill up a
announced that since the foundation's money had been invested in the
printed form called a "slot." These "slots" were part of a booklet, with
stock market, it would resume operations on December 4, 1989. On
one booklet containing one hundred "slots."
that date, the foundation remained closed. Depositors began to
demand reimbursement of their deposits, but the foundation was
unable to deliver.
The control number indicated the number of the "slot" in a booklet,
while the space after "date" would contain the date when the slot was
Consequently, sixty-four informations, all charging the offense of
acquired, as well as the date of its maturity. The amount deposited
estafa, as defined in Presidential Decree No. 1689, were filed against
determined the number of shares, one share being equivalent to one
Priscilla Balasa, Normita Visaya, Norma Francisco, Guillermo
hundred pesos. The depositor had the discretion when to affix his
Francisco, Analina Francisco and eight other persons, mostly
signature on the space provided therefor. Some would sign their slot
incorporators and employees of the Panata Foundation, before the
only after payment on maturity, while others would sign as soon as
Regional Trial Court of Palawan. Fourteen cases, including Criminal
they were given the slot. However, without the control number and the
Case Nos. 8429 and 8751, were raffled off to Branch 52. Two more
stamp of the teller, duly signed or initialed, no depositor could claim
cases, Criminal Case Nos. 8704 and 8749, were similarly assigned to it.
the proceeds of his deposit upon maturity. 4
Of the sixteen casts assigned to Branch 52, eight were, with the consent
of the accused, provisionally dismissed for lack of evidence.
After the slot had been filled up by the teller, he would give it to the
clerk assigned outside. The clerk would then give the slot to the
Ruling:
depositor. Hence, while it was the teller who prepared and issued the
slot, he had no direct contact with the depositor. The slots handed to a
depositor were signed beforehand by the president of the foundation. It has been held that where one states that the future profits or income
of an enterprise shall be a certain sum, but he actually knows that there
will be none, or that they will be substantially less than he represents,
Every afternoon, the comptrollers would take the list of depositors
the statement constitutes actionable fraud where the hearer believes
made by the tellers with the amounts deposited by each, and have these
him and relies on the statement to his injury. That there was no profit
typed. Norma Francisco would then receive from the tellers the
forthcoming can be clearly deduced from the fact that the foundation
amounts deposited by the public. It was also her job to pay the salaries
was not engaged nor authorized to engage in any lucrative business to
of the foundation's employees. For his part, Guillermo Francisco would
finance its operation. It was not shown that it was the recipient of
release money whenever a deposit would mature as indicated in the
donations or bequest with which to finance its "double or triple your
slots.
money" scheme, nor did it have any operating capital to speak of when
it started operations.
According to the foundations rules, an investor could deposit up to
P5,000.00 only, getting a slot corresponding thereto. Anyone who
Parenthetically, what appellants offered the public was a "Ponzi
deposited more than that amount would, however, be given a slot but
scheme," an investment program that offers impossibly high returns
the slot had to be in he name of another person or several other
and pays these returns to early investors out of the capital contributed
persons, depending upon the amount invested. According to Sylvia
by later investors. Named after Charles Ponzi who promoted the
Magnaye, a foundation teller, all deposits maturing in August 1989
scheme in the 1920s, the original scheme involved the issuance of
were to be tripled. For such deposits, the slots issued were colored
bonds which offered 50% interest in 45 days or a 100% profit if held for
yellow to signify that the depositor would have his deposit tripled.
90 days. Basically, Ponzi used the money he received from later
Deposits that would mature subsequent to August were only given
investors to pay extravagant rates of return to early investors, thereby
double the amount deposited. However, there were times when it was
inducing more investors to place their money with him in the false
the depositor who would choose that his deposit be tripled, in which
hope of realizing this same extravagant rate of return themselves. This
case, the deposit would mature later.
was the very same scheme practiced by the Panata Foundation.

The amounts received by the foundation were deposited in banks.

However, the Ponzi scheme works only as long as there is an ever-
Thus, a foundation teller would, from time to time, go to PNB, PCI
increasing number of new investors joining the scheme. To pay off the
Bank, DBP and the Rural Bank of Coron to deposit the collections in a
50% bonds Ponzi had to come up with a one-and-a-half times increase
joint account in the names of Priscilla Balasa and Norma Francisco.
with each round. To pay 100% profit he had to double the number of
investors at each stage, and this is the reason why a Ponzi scheme is a
Initially, the operation started with a few depositors, with most scheme and not an investment strategy. The progression it depends
depositors investing small amounts to see whether the foundation upon is unsustainable. The pattern of increase in the number of
would make good on its promise. When the foundation paid double or participants in the system explains how it is able to succeed in the short
triple the amounts of their investment at maturity, most not only run and, at the same time, why it must fail in the long run. This game is
reinvested their earnings but even added to their initial investments. difficult to sustain over a long period of time because to continue
As word got around that deposits could be doubled within 21 days, or paying the promised profits to early investors, the operator needs an
tripled if the period lasted for more than 30 days, more depositors were ever larger pool of later investors. The idea behind this type of swindle
attracted. Blinded by the prospect of gaining substantial profits for is that the "con-man" collects his money from his second or third
nothing more than a minuscule investment, these investors, like round of investors and then absconds before anyone else shows up to
previous ones, were lured to reinvest their earnings, if not to invest collect. Necessarily, these schemes only last weeks, or months at most.
more.
Note should also be taken of the fact that appellants used "slots" in
Most would invest more than P5,000.00, the investment limit set by their operation. These slots are actually securities, the issuance of
the foundation. Priscilla Balasa would, however, encourage depositors which needs the approval of the Securities and Exchange Commission.

181
Knowing fully well that the S.E.C. would not approve the issuance of On July 15, 2003, petitioner filed with the Department of Justice
securities by a non-stock, non-profit organization, the operators of the (DOJ), a complaint charging the above-named officers and members of
Ponzi scheme, nevertheless, applied for registration as a foundation, an the SCB Board of Directors and other SCB officials, with syndicated
entity not allowed to engage in securities. estafa.

Finally, if the foundation were indeed legitimate, the incorporators, On February 7, 2004, petitioner filed with the DOJ a complaint for
outside of the members of the Francisco family, would not have violation of Section 8.1 of the Securities Regulation Code against
escaped from the clutches of the law. If the foundation and its private respondents, docketed as I.S. No. 2004-229.
investment scheme were legal, then it behooved them to come out and
testify for their own exoneration. The wicked flee when no man
Issue:
pursueth: but the righteous are bold as a lion.
W/N the petitioner’s complaint for violation of Securities Regulation
4. VIOLATION OF SRC Code with the DOJ is proper

Ruling:
Baviera Vs. Paglinawan (515 S 170)

Facts: Section 53.1 of the Securities Regulation Code provides:

Manuel Baviera, petitioner in these cases, was the former head of the
SEC. 53. Investigations, Injunctions and Prosecution of Offenses.–
HR Service Delivery and Industrial Relations of Standard Chartered
53. 1. The Commission may, in its discretion, make such investigation
Bank-Philippines (SCB), one of herein respondents. SCB is a foreign
as it deems necessary to determine whether any person has violated or
banking corporation duly licensed to engage in banking, trust, and
is about to violate any provision of this Code, any rule, regulation or
other fiduciary business in the Philippines.
order thereunder, or any rule of an Exchange, registered securities
association, clearing agency, other self-regulatory organization, and
As early as 1996, it acted as a stock broker, soliciting from local may require or permit any person to file with it a statement in writing,
residents foreign securities called “GLOBAL THIRD PARTY MUTUAL under oath or otherwise, as the Commission shall determine, as to all
FUNDS” (GTPMF), denominated in US dollars. These securities were facts and circumstances concerning the matter to be investigated. The
not registered with the Securities and Exchange Commission (SEC). Commission may publish information concerning any such violations
These were then remitted outwardly to SCB-Hong Kong and SCB- and to investigate any fact, condition, practice or matter which it may
Singapore. deem necessary or proper to aid in the enforcement of the provisions of
this Code, in the prescribing of rules and regulations thereunder, or in
securing information to serve as a basis for recommending further
SCB was able to sell GTPMF securities worth around P6 billion to some
legislation concerning the matters to which this Code relates:
645 investors.
Provided, however, That any person requested or subpoenaed to
produce documents or testify in any investigation shall simultaneously
However, SCB’s operations did not remain unchallenged. On July 18, be notified in writing of the purpose of such investigation: Provided,
1997, the Investment Capital Association of the Philippines (ICAP) filed further, That all criminal complaints for violations of this
with the SEC a complaint alleging that SCB violated the Revised Code and the implementing rules and regulations enforced
Securities Act, particularly the provision prohibiting the selling of or administered by the Commission shall be referred to the
securities without prior registration with the SEC; and that its actions Department of Justice for preliminary investigation and
are potentially damaging to the local mutual fund industry. prosecution before the proper court: Provided, furthermore,
That in instances where the law allows independent civil or criminal
proceedings of violations arising from the act, the Commission shall
In its answer, SCB denied offering and selling securities, contending take appropriate action to implement the same: Provided, finally; That
that it has been performing a “purely informational function” without the investigation, prosecution, and trial of such cases shall be given
solicitations for any of its investment outlets abroad; that it has a trust priority.
license and the services it renders under the “Custodianship
Agreement” for offshore investments are authorized by Section 72 of
the General Banking Act; that its clients were the ones who took the The Court of Appeals held that under the above provision, a criminal
initiative to invest in securities; and it has been acting merely as an complaint for violation of any law or rule administered by the SEC
agent or “passive order taker” for them. must first be filed with the latter. If the Commission finds that there is
probable cause, then it should refer the case to the DOJ. Since
petitioner failed to comply with the foregoing procedural requirement,
On September 2, 1997, the SEC issued a Cease and Desist Order against the DOJ did not gravely abuse its discretion in dismissing his
SCB, holding that its services violated Sections 4(a) and 19 of the complaint in I.S. No. 2004-229.
Revised Securities Act.

A criminal charge for violation of the Securities Regulation Code is a

Meanwhile, the BSP directed SCB not to include investments in global specialized dispute. Hence, it must first be referred to an
mutual funds issued abroad in its trust investments portfolio without administrative agency of special competence, i.e., the SEC. Under the
prior registration with the SEC. SCB sent a letter to the BSP confirming doctrine of primary jurisdiction, courts will not determine a
that it will withdraw third-party fund products which could be directly controversy involving a question within the jurisdiction of the
purchased by investors. administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the specialized knowledge
However, notwithstanding its commitment and the BSP directive, SCB and expertise of said administrative tribunal to determine technical
continued to offer and sell GTPMF securities in this country. This and intricate matters of fact. The Securities Regulation Code is a
prompted petitioner to enter into an Investment Trust Agreement with special law. Its enforcement is particularly vested in the SEC. Hence,
SCB wherein he purchased US$8,000.00 worth of securities upon the all complaints for any violation of the Code and its implementing rules
bank’s promise of 40% return on his investment and a guarantee that and regulations should be filed with the SEC. Where the complaint is
his money is safe. After six (6) months, however, petitioner learned criminal in nature, the SEC shall indorse the complaint to the DOJ for
that the value of his investment went down to US$7,000.00. preliminary investigation and prosecution as provided in Section 53.1
earlier quoted.
Meanwhile, on November 27, 2000, the BSP found that SCB failed to
comply with its directive of August 17, 1998. Consequently, it was fined We thus agree with the Court of Appeals that petitioner committed a
in the amount of P30,000.00. fatal procedural lapse when he filed his criminal complaint directly

182
with the DOJ. Verily, no grave abuse of discretion can be ascribed to W/N the Trading Contract on "futures" is a specie of gambling and
the DOJ in dismissing petitioner’s complaint. therefore null and void

Ruling:
5. FUTURES TRADING

Onapal Vs. CA (218 S 281)

A commodity futures contract is a specie of securities included in the
Facts: broad definition of what constitutes securities under Section 2 of the
Revised Securities Act.
ONAPAL Philippines Commodities, Inc. (petitioner), a duly organized
and existing corporation, was licensed as commission merchant/broker
Sec. 2 . . .:
by the SEC, to engage in commodity futures trading in Cebu City.

(a) Securities shall include bonds, . . ., commodity futures contracts, . . .

Onapal and Chua concluded a "Trading Contract". Like all customers
of the petitioner, private respondent was furnished regularly with
"Commodities Daily Quotations" showing daily movements of prices of The Revised Rules and Regulations on Commodity Futures Trading
commodity futures traded and of market reports indicating the volume issued by the SEC and approved by the Monetary Board of the Central
of trade in different future exchanges in Hongkong, Tokyo and other bank defines such contracts as follows:
centers. Every time a customer enters into a trading transaction with
petitioner as broker, the trading order is communicated by telex to its
principal, Frankwell Enterprises of Hongkong. If the transaction, either "Commodity Futures Contract" shall refer to an agreement to buy or
buying or selling commodity futures, is consummated by the principal, sell a specified quantity and grade of a commodity at a future date at a
the petitioner issues a document known as "Confirmation of Contract price established at the floor of the exchange.
and Balance Sheet" to the customer. An order of a customer of the
petitioner is supposed to be transmitted from Cebu to petitioner's The petitioner is a duly licensed commodity futures broker as defined
office in Manila. From Manila, it should be forwarded to Hongkong under the Revised Rules and Regulations on Commodity Futures
and from there, transmitted to the Commodity Futures Exchange in Trading as follows:
Japan.
"Futures Commission Merchant/Broker" shall refer to a corporation or
There were only two parties involved as far as the transactions covered partnership, which must be registered and licensed as a Futures
by the Trading Contract are concerned — the petitioner and the private Commission Merchant/Broker and is engaged in soliciting or in
respondents. accepting orders for the purchase or sale of any commodity for future
delivery on or subject to the rules of the contract market and that, in
Sometime in April of 1983, Chua was invited by Onapal's Account connection with such solicitation or acceptance of orders, accepts any
Executive Elizabeth Diaz to invest in the commodity futures trading by money, securities or property (or extends credit in lieu thereof) to
depositing the amount of P500,000.00; She was further told that the margin, guarantee or secure any trade or contract that results or may
business is "profitable" and that she could withdraw her money result therefrom.
anytime; she was furthermore instructed to go to the Onapal Office
where she met the Manager, Mr. Ciam, and the Account Executive At the time private respondent entered into the transaction with the
Elizabeth Diaz who told her that they would take care of how to trade petitioner, she signed a document denominated as "Trading Contract"
business and her account. She was then made to sign the Trading in printed form as prepared by the petitioner represented by its Branch
Contract and other documents without making her aware/understand Manager, Albert Chiam, incorporating the Rules for Commodity
the risks involved; that at the time they let her sign "those papers" they Trading. A copy of said contract was furnished to the private
were telling her that those papers were for "formality sake"; that when respondent but the contents thereof were not explained to the former,
she was told later on that she made a profit of P20,480.00 in a span of beyond what was told her by the petitioner's Account Executive
three days in the first transaction, they told her that the business is Elizabeth Diaz. Private respondent was also told that the petitioner's
"very profitable". principal was Frankwell Enterprises with offices in Hongkong but the
private respondent's money which was supposed to have been
On June 2, 1983, Chua was informed by Miss Diaz that she had to transmitted to Hongkong, was kept by petitioner in a separate account
deposit an additional amount of P300,000.00 "to pay the difference" in a local bank.
in prices, otherwise she will lose her original deposit of P500,000.00;
Fearing the loss of her original deposit, she was constrained to deposit The evidence of Chua tend to show that in her transactions with the
an additional amount of P300,000.00; Since she was made to Onapal, the parties never intended to make or accept delivery of any
understand that she could withdraw her deposit/investment anytime, particular commodity but the parties merely made a speculation on the
she not knowing how the business is operated/managed as she was not rise or fall in the market of the contract price of the commodity, subject
made to understand what the business was all about, she wanted to of the transaction, on the pretended date of delivery so that if the
withdraw her investment; but Elizabeth Diaz, told her she could not get forecast was correct, one party would make a profit, but if the forecast
out because there are some accounts hanging on the transactions. was wrong, one party would lose money. Under this scheme, Chua was
only able to recover P470,000.00 out of her original and "additional"
Chua further testified that she understood the transaction of buying deposit of P800,000.00 with the defendant.
and selling as speculating in prices, and her paying the difference
between gains and losses without actual delivery of the goods to be Petitioner admits that in all the transactions that it had with Chua,
gambling, and she would like to withdraw from this kind of business, there was no actual deliveries and that it has made no arrangement
the risk of which she was not made aware of. She further testified that with the Central Bank for the remittance of its customer's money
she stopped trading in commodity futures in September, 1983 when abroad but contends in its defense that the mere fact that there were no
she realized she was engaged in gambling. She was able to get only actual deliveries made in the transactions which Chua had with
P470,000.00 out of her total deposit of P800,000.00. In order to petitioner, did not mean that no such actual deliveries were intended
recover the loss of P330,000.00, she filed this case and engaged the by the parties since paragraph 10 of the rules for commodity trading,
services of counsel for P40,000.00 and expects to incur expenses of attached to the trading contract which Chua signed before she traded
litigation in the sum of P20,000.00." with the petitioner amply provides for actual delivery of the commodity
subject of the transaction.
Issue:

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The trading contract signed by private respondent and Albert Chiam, respondent had been transmitted. But petitioner failed to prove this
representing petitioner, is a contract for the sale of products for future point.
delivery, in which either seller or buyer may elect to make or demand
delivery of goods agreed to be bought and sold, but where no such
Queensland-Tokyo Vs. Matsuda (512 S 276)
delivery is actually made. By delivery is meant the act by which the res
or subject is placed in the actual or constructive possession or control
of another. It may be actual as when physical possession is given to the Facts:
vendee or his representative; or constructive which takes place without
actual transfer of goods, but includes symbolic delivery or substituted
delivery as when the evidence of title to the goods, the key to the This is a case for recovery of investments with damages filed by the
warehouse or bill of lading/warehouse receipt is delivered. As a Margie Matsuda against Queensland-Tokyo Commodities, Inc., a
contract in printed form, prepared by petitioner and served on private corporation then engaged as a commodity futures broker, and its
respondent, for the latter's signature, the trading contract bears all the officers and directors, citing as grounds therefor the alleged nullity of
indicia of a valid trading contract because it complies with the Rules complainant’s spot/futures contracts for having been allegedly traded
and Regulations on Commodity Futures Trading as prescribed by the and supervised by unlicensed employees of QTCI, in violation of
SEC. But when the transaction which was carried out to implement the Section 20 and 33-A of the Revised Rules and Regulations on
written contract deviates from the true import of the agreement as Commodity Futures Trading.
when no such delivery, actual or constructive, of the commodity or
goods is made, and final settlement is made by payment and receipt of On July 13, 1995, Matsuda agreed to invest with QTCI on the basis of
only the difference in prices at the time of delivery from that prevailing its officers’ representations that investments in currency contracts are
at the time the sale is made, the dealings in futures become mere very profitable, and that her account would be handled by licensed
speculative contracts in which the parties merely gamble on the rise or investment consultants. Charlie Collado induced her to immediately
fall in prices. A contract for the sale or purchase of goods/commodity sign the Customer’s Agreement and Risk Disclosure Statement without
to be delivered at future time, if entered into without the intention of explaining the contents thereof; that she made investments in QTCI on
having any goods/commodity pass from one party to another, but with July 13, 1995 in the amount of P150,000.00 and an additional amount
an understanding that at the appointed time, the purchaser is merely to of P2,000,000.00 on July 24, 1995; that she was required to execute a
receive or pay the difference between the contract and the market Special Power of Attorney authorizing Felix Sampaga and that within
prices, is a transaction which the law will not sanction, for being illegal. the same period complainant’s account incurred substantial losses; and
that sometime in April 1996, upon verification with the Securities and
Exchange Commission (SEC), complainant learned for the first time
The facts clearly establish that the petitioner is a direct participant in that Felix Sampaga and Charlie Collado were not licensed by the SEC;
the transaction, acting through its authorized agents. It received the that she demanded the return of her investments but the petitioners
customer's orders and private respondent's money. As per terms of the refused to comply, and that since her currency contracts are null and
trading contract, customer's orders shall be directly transmitted by the void for having been traded and supervised by unlicensed employees,
petitioner as broker to its principal, Frankwell Enterprises Ltd. of she is entitled to the return of her investments in the total amount of
Hongkong, being a registered member of the International Commodity P2,150,000.00.
Clearing House, which in turn must place the customer's orders with
the Tokyo Exchange. There is no evidence that the orders and money Petitioners denied having made misrepresentations and false pretenses
were transmitted to its principal Frankwell Enterprises Ltd. in to the complainant, alleging, among others, that it was the complainant
Hongkong nor were the orders forwarded to the Tokyo Exchange. We together with her Japanese husband who came to the office of QTCI on
draw the conclusion that no actual delivery of goods and commodity July 13, 1995 to pen an account with an initial deposit of P150,000.00.
was intended and ever made by the parties. In the realities of the The petitioners further alleged that Charlie Collado did not induce the
transaction, the parties merely speculated on the rise and fall in the complainant to sign the Customer’s Agreement and Risk Disclosure
price of the goods/commodity subject matter of the transaction. If Statement; that Collado is not involved in the marketing of investments
private respondent's speculation was correct, she would be the winner because he is only in charge of operations; that Collado did not
and the petitioner, the loser, so petitioner would have to pay private misrepresent himself as a licensed consultant and that he signed in
respondent the "margin". But if private respondent was wrong in her behalf of QTCI on the Customer’s Agreement as part of his official
speculation then she would emerge as the loser and the petitioner, the function which does not however require a license; that complainant
winner. The petitioner would keep the money or collect the difference deposited P2,000,000.00 on July 24, 1995 to open a second account
from the private respondent. This is clearly a form of gambling after she made a profit in the amount of P67,978.61 under her first
provided for with unmistakeable certainty under Article 2018 account; and that the attorney-in-fact of the complainant is Jose “Joel”
abovestated. It would thus be governed by the New Civil Code and not Colmenar and not Felix Sampaga; that Jose “Joel” Colmenar was duly
by the Revised Securities Act nor the Rules and Regulations on licensed by the SEC as Commodity Futures salesman.
Commodity Futures Trading laid down by the SEC.
Issue:
After considering all the evidence in this case, it appears that petitioner
W/N the Commission en banc erred in dismissing petitioner’s appeal
and private respondent did not intend, in the deals of purchasing and
selling for future delivery, the actual or constructive delivery of the
Ruling:
goods/commodity, despite the payment of the full price therefor. The
contract between them falls under the definition of what is called
The commission en banc did not err in dismissing the petitioners’
"futures". The payments made under said contract were payments of
appeal.
difference in prices arising out of the rise or fall in the market price
above or below the contract price thus making it purely gambling and
Petitioners’ argument is that pursuant to the August 31, 1999 New
declared null and void by law.
Rules of Procedure, particularly Sec. 1 of Rule XV it had fifteen (15)
days from December 6, 1999 the date they received the denial of their
Under Article 2018, the private respondent is entitled to refund from Motion for Reconsideration or up to December 21, 1999. And since
the petitioner what she paid. There is no evidence that the orders of they filed their appeal on December 20, 1999, [so] then it was filed on
private respondent were actually transmitted to the petitioner's time.
principal in Hongkong and Tokyo. There was no arrangement made by
petitioner with the Central Bank for the purpose of remitting the Such argument is misplaced. Petitioners would invoke the new rules if
money of its customers abroad. The money which was supposed to be favorable to them but would disregard a clear one if adverse to their
remitted to Frankwell Enterprises of Hongkong was kept by petitioner stand. Petitioners should be consistent. If they want to have the July
in a separate account in a local bank. Having received the money and 15, 1999 rule apply to them, then they should not be selective in its
orders of private respondent under the trading contract, petitioner has application. Under Sec. 8, Rule XV of the same rule a Motion for
the burden of proving that said orders and money of private Reconsideration is a prohibited pleading. Such being the case, the

184
judgment of the Hearing Officer has become final and executory provided that the “result of the bidding is subject to the right of BDO
pursuant to Sec. 1 of Rule XVI of said Rule. Capital … to match the highest bid.” October 20, 2004 was the date set
for determining the winning bid.
More so under the old rule, Under Sec. 3, Rule XVI of the old rules, the
time during which [the] Motion for Reconsideration is pending shall be
The records do not show whether or not any interested group/s
deducted from the period for perfecting an appeal. Pursuant to said
submitted bids. The bottom line, however, is that even before the bid
Rule petitioners were twelve (12) days late in filing the appeal. Either
envelopes, if any, could be opened, the herein petitioners commenced
way, therefore, under the old or the new Rule, the dismissal of the
the instant special civil action for certiorari, setting their sights
appeal by the respondent Commission is proper and valid.
primarily on the legality of the Swiss Challenge angle and a provision
in the Instruction to Bidders under which the SSS undertakes to offer
The other grounds relied upon questions of the finding of facts and
the Shares to BDO should no bidder or prospective bidder qualifies.
conclusions of the Hearing Officer. Petitioners ought to be minded
And as earlier mentioned, the Court, via a status quo order, effectively
that in reviewing administrative decisions, the findings of fact made
suspended the proceedings on the proposed sale.
therein must be respected as long as they are supported by substantial
evidence. (Lo v. CA, 321 SCRA 190). We have carefully read the
decision sought to be [reviewed] and We are convinced that the same is Under the Swiss Challenge format, one of the bidders is given the
supported by substantial evidence. In fact the issues raised herein are option or preferential “right to match” the winning bid.
the same issues raised by Petitioners in its Motion for Reconsideration
filed with the Hearing Officer.
Petitioners assert, in gist, that a public bidding with a Swiss Challenge
In sum, it was sufficiently proven that only respondent Charlie Collado component is contrary to COA Circular No. 89-296 and public policy
and Felix Sampaga had in fact, assented to the unlawful acts of which requires adherence to competitive public bidding in a
respondent corporation, [and they] should jointly and severally [be] government-contract award to assure the best price possible for
liable for the payment of all damages sustained and which are government assets. Accordingly, the petitioners urge that the planned
sufficiently proven by the complainant. disposition of the Shares through a Swiss Challenge method be
scrapped. As argued, the Swiss Challenge feature tends to discourage
would-be-bidders from undertaking the expense and effort of bidding
6. TENDER OFFER if the chance of winning is diminished by the preferential “right to
match” clause. Pushing the point, petitioners aver that the Shares are
Osmena III Vs. SSS (533 S 313) in the nature of long-term or non-current assets not regularly traded or
held for sale in the regular course of business. As such, their
disposition must be governed by the aforementioned COA circular
Facts: which, subject to several exceptions, prescribes “public auction” as a
primary mode of disposal of GFIs’ assets. And obviously finding the
proposed purchase price to be inadequate, the petitioners expressed
Sometime in 2003, SSS, a government financial institution (GFI)
the belief that “if properly bidded out in accordance with [the] COA
created pursuant to Republic Act (RA) No. 1161 and placed under the
Circular …, the Shares could be sold at a price of at least Sixty Pesos
direction and control of SSC, took steps to liquefy its long-term
(P60.00) per share.” Other supporting arguments for allowing
investments and diversify them into higher-yielding and less volatile
certiorari are set forth in some detail in the basic petition.
investment products. Among its assets determined as needing to be
liquefied were its shareholdings in EPCIB. The principal reason behind
the intended disposition, as explained by respondent Dela Paz during Pending consideration of the petition, supervening events and
the February 4, 2004 hearing conducted by the Senate Committee on corporate movements transpired that radically altered the factual
Banks, Financial Institutions and Currencies, is that the shares in complexion of the case. Some of these undisputed events are: BDO
question have substantially declined in value and the SSS could no made public its intent to merge with EPCIB, the GSIS publicly
longer afford to continue holding on to them at the present level of announced receiving from an undisclosed entity an offer to buy its
EPCIB’s income. stake in EPCIB – 12% of the bank’s outstanding capital stock – at
P92.00 per share, and SM Investments Corporation, an affiliate of
BDO and BDO Capital, a mandatory tender offer (Tender Offer)
Albeit there were other interested parties, only Banco de Oro Universal
covering the purchase of the entire outstanding capital stock of
Bank (BDO) and its investment subsidiary, respondent BDO Capital,
EPCIB at P92.00 per share.
appeared in earnest to acquire the shares in question. Following talks
between them, BDO and SSS signed, on December 30, 2003, a Letter-
Agreement, for the sale and purchase of some 187.8 million EPCIB Owing to the foregoing developments, the Court, on October 3, 2006,
common shares (the Shares, hereinafter), at P43.50 per share, which issued a Resolution requiring the ‘parties to CONFIRM news reports
represents a premium of 30% of the then market value of the EPCIB that price of subject shares has been agreed upon at P92; and if so, to
shares. At about this time, the Shares were trading at an average of MANIFEST whether this case has become moot.”
P34.50 @ share.
First to comply with the above were public respondents SSS et al., by
On April 19, 2004, the Commission on Audit (COA), in response to filing their Compliance and Manifestation, therein essentially stating
respondent Dela Paz’s letter-query on the applicability of the public that the case is now moot in view of the SM-BDO Group’s Tender Offer
bidding requirement under COA Circular No. 89-296 on the at P92.00 @ unit share, for the subject EPCIB common shares,
divestment by the SSS of its entire EPICB equity holdings, stated that inclusive of the SSS shares subject of the petition. They also stated the
the “circular covers all assets of government agencies except those observation that the petitioners’ Manifestation and Motion to Take
merchandize or inventory held for sale in the regular course of Judicial Notice, never questioned the Tender Offer, thus confirming
business.” And while it expressed the opinion that the sale of the the dispensability of a competitive public bidding in the disposition of
subject Shares are “subject to guidelines in the Circular,” the COA subject Shares.
qualified its determination with a statement that such negotiated sale
would partake of a stock exchange transaction and, therefore, would be
adhering to the general policy of public auction. Ruling:

On July 14, 2004, SSC passed Res. No. 428 approving, as earlier stated, The case, with the view we take of it, has indeed become moot and
the sale of the EPCIB shares through the Swiss Challenge method. A academic for interrelated reasons.
month later, the equally assailed Res. No. 485 was also passed.
We start off with the core subject of this case. As may be noted, the
On August 23, 24, and 25, 2004, SSS advertised an Invitation to Bid Letter-Agreement, the SPA, the SSC resolutions assailed in this
for the block purchase of the Shares. The Invitation to Bid expressly recourse, and the Invitation to Bid sent out to implement said

185
resolutions, all have a common subject: the Shares – the 187.84 SEC Vs. CA (246 S 738)
Million EPCIB common shares. It cannot be overemphasized,
however, that the Shares, as a necessary consequence of the BDO-
Facts:
EPCIB merger which saw EPCIB being absorbed by the surviving BDO,
have been transferred to BDO and converted into BDO common
shares under the exchange ratio set forth in the BDO-EPCIB Plan of Cualoping Securities Corporation is a stockbroker, Fidelity Stock
Merger. As thus converted, the subject Shares are no longer equity Transfer, Inc., on the other hand, is the stock transfer agent of Philex
security issuances of the now defunct EPCIB, but those of BDO-EPCI, Mining Corporation.
which, needless to stress, is a totally separate and distinct entity from
what used to be EPCIB. In net effect, therefore, the 187.84 Million
EPCIB common shares are now lost or inexistent. And in this regard, On or about the first half of 1988, certificates of stock of PHILEX
the Court takes judicial notice of the disappearance of EPCIB stocks representing one million four hundred [thousand] (1,400,000) shares
from the local bourse listing. Instead, BDO-EPCI Stocks are presently were stolen from the premises of FIDELITY. These stock certificates
listed and being traded in the PSE. consisting of stock dividends of certain PHILEX shareholders had been
returned to FIDELITY for lack of forwarding addresses of the
shareholders concerned.
With the above consideration, respondent SSS or SSC cannot, under
any circumstance, cause the implementation of the assailed
resolutions, let alone proceed with the planned disposition of the Later, the stolen stock certificates ended in the hands of a certain
Shares, be it via the traditional competitive bidding or the challenged Agustin Lopez, a messenger of New World Security Inc ., an entirely
public bidding with a Swiss Challenge feature. different stock brokerage firm. In the first half of 1989, Agustin Lopez
brought the stolen stock certificates to CUALOPING for trading and
sale with the stock exchange. When the said stocks were brought to
At any rate, the moot-and-academic angle would still hold sway even if CUALOPING, all of the said stock certificates bore the "apparent"
it were to be assumed hypothetically that the subject Shares are still indorsement ( signature ) in blank of the owners (the stockholders to
existing. This is so, for the supervening BDO-EPCIB merger has so whom the stocks were issued by PHILEX) thereof. At the side of these
effected changes in the circumstances of SSS and BDO/BDO Capital as indorsements (signatures), the words "Signature Verified" apparently
to render the fulfillment of any of the obligations that each may have of FIDELITY were stamped on each and every certificate. Further, on
agreed to undertake under either the Letter-Agreement, the SPA or the the words "Signature Verified" showed the usual initials of the officers
Swiss Challenge package legally impossible. When the service has of FIDELITY.
become so difficult as to be manifestly beyond the contemplation of the
parties, total or partial release from a prestation and from the counter-
prestation is allowed. Upon receipt of the said certificates from Agustin Lopez, CUALOPING
stamped each and every certificate with the words "Indorsement
Guaranteed," and thereafter traded the same with the stock exchange.
Under the theory of rebus sic stantibus, the parties stipulate in the
light of certain prevailing conditions, and once these conditions cease
to exist, the contract also ceases to exist. Upon the facts obtaining in After the stock exchange awarded and confirmed the sale of the stocks
this case, it is abundantly clear that the conditions in which SSS and represented by said certificates to different buyers, the same were
BDO Capital and/or BDO executed the Letter-Agreement upon which delivered to FIDELITY for the cancellation of the stocks certificates
the pricing component – at P43.50 per share – of the Invitation to Bid and for issuance of new certificates in the name of the new buyers.
was predicated, have ceased to exist. Accordingly, the implementation Agustin Lopez on the other hand was paid by CUALOPING with several
of the Letter- Agreement or of the challenged Res. Nos. 428 and 485 checks for Four Hundred Thousand (P400,000.00) Pesos for the value
cannot plausibly push through, even if the central figures in this case of the stocks.
are so minded.
After acquiring knowledge of the pilferage, FIDELITY conducted an
Lest it be overlooked, BDO-EPCI, in a manner of speaking, stands now investigation with assistance of the National Bureau of Investigation
as the issuer of what were once the subject Shares. Consequently, (NBI) and found that two of its employees were involved and signed
should SSS opt to exit from BDO and BDO Capital, or BDO Capital, in the certificates.
turn, opt to pursue SSS’s shareholdings in EPCIB, as thus converted
into BDO shares, the sale-purchase ought to be via an Issuer Tender After two (2) months from receipt of said stock certificates, FIDELITY
Offer -- a phrase which means a publicly announced intention by an rejected the issuance of new certificates in favor of the buyers for
issuer to acquire any of its own class of equity securities or by an reasons that the signatures of the owners of the certificates were
affiliate of such issuer to acquire such securities . In that eventuality, allegedly forged and thus the cancellation and new issuance thereof
BDO or BDO Capital cannot possibly exercise the “right to match” cannot be effected.
under the Swiss Challenge procedure, a tender offer being wholly
inconsistent with public bidding. The offeror or buyer in an issue
tender offer transaction proposes to buy or acquire, at the stated price On 11 August 1988, FIDELITY sought an opinion on the matter from
and given terms, its own shares of stocks held by its own stockholder SEC, which, on 06 October 1988, summoned FIDELITY and
who in turn simply have to accept the tender to effect the sale. No CUALOPING to a conference.
bidding is involved in the process.
The Brokers and Exchange Department ("BED") of the SEC ordered
For perspective, a “tender offer” is a publicly announced intention by a Fidelity Stock Transfers, Inc., to replace all the subject shares and to
person acting alone or in concert with other persons to acquire equity cause the transfer thereof in the names of the buyers within ten days
securities of a public company, i.e., one listed on an exchange, among from actual receipt hereof. Cualoping Securities, INC., for having
others. The term is also defined as “an offer by the acquiring person to violated Section 29 a(3) of the Revised Securities Act is hereby ordered
stockholders of a public company for them to tender their shares to pay a fine of P50,000.00 within five (5) days from actual receipt
therein on the terms specified in the offer” Tender offer is in place to hereof. Henceforth, all brokers are required to make out checks in
protect the interests of minority stockholders of a target company payment of shares transacted only in the name of the registered owners
against any scheme that dilutes the share value of their investments. It thereof.
affords such minority shareholders the opportunity to withdraw or exit
from the company under reasonable terms, a chance to sell their shares From the above resolution, as well as that which denied a motion for
at the same price as those of the majority stockholders. reconsideration, both CUALOPING and FIDELITY appealed to the
Commission En Banc.
7. IMPOSITION OF FINES
The Commission rendered its decision finding both Cualoping
Securities Corporation and Fidelity Stock Transfers, Inc. equally
186
negligent in the performance of their duties hereby orders them to (1) private respondents would not at all be actionable; upon the other
jointly replace the subject shares and for Fidelity to cause the transfer hand, as we have earlier intimated, such an action belongs not to the
thereof in the names of the buyers and (2) to pay a fine of P50,000,00 SEC but to those whose rights have been injured.
each for hav[ing] violated Section 29 (a) of the Revised Securities Act.
Our attention is called by the Solicitor General on the violation by
The decision was appealed to the Court of Appeals. In a consolidated FIDELITY of SEC-BED Memorandum Circular No. 9, series of 1987,
decision, dated 22 July 1992, the appellate court reversed the SEC and which reads:
set aside SEC's order "without prejudice to the right of persons injured
to file the proper action for damages."
To expedite the release of Certificates of Securities to the buyers, the
Commission reiterates the following rules in delivery of stock
The Commission has brought the case to this Court in the instant certificates:
petition for review on certiorari, contending that the appellate court
erred in setting aside the decision of the SEC which had (a) ordered the
1. Deadlines for Delivery of Documents — All requirements must be
replacement of the certificates of stock of Philex and (b) imposed fines
complied with the certificates of stock, as well as necessary documents
on both FIDELITY and CUALOPING.
required for the transfer of shares shall be delivered within the
following periods:
Issue:
xxx xxx xxx d. From transfer agent back to clearing house and/or
W/N SEC’s imposition of fines on Fidelity and Cualoping is proper broker — not longer than ten (10) days from receipt of documents
provided there is a "good delivery," where there is no " good delivery ,"
the certificate and the accompanying documents shall be returned to
Ruling:
the clearing house or broker not later than two (2) days after receipt
thereof, except when defects can be readily remedied, in which case the
The Revised Securities Act (Batas Pambansa Blg. 178) is designed, in clearing house or the broker shall instead be notified of the
main, to protect public investors from fraudulent schemes by requirements within the same period. The notice to the clearing house
regulating the sale and disposition of securities, creating, for this or broker shall indicate that the Securities and Exchange Commission
purpose, a Securities and Exchange Commission to ensure proper has been notified of such defective delivery.
compliance with the law. Here, the SEC has aptly invoked the
provisions of Section 29, in relation to Section 46, of the Revised
FIDELITY is candid enough to admit that it has truly failed to promptly
Securities Act. This law provides:
notify CUALOPING and the clearing house of the pilferage of the
certificates of stock. FIDELITY strongly asserts, however, that it has
Sec. 29. Fraudulent transactions. — (a) It shall be unlawful for any been fined by the SEC not by virtue of Memorandum Circular No. 9 but
person, directly or indirectly, in connection with the purchase or sale of for a violation of Section 29(a)(3) of the Revised Securities Act, and
any securities — that the memorandum circular is only now being raised for the first
time in the instant petition.
xxx xxx xxx (3) To engage in any act, transaction practice, or course
of business which operates or would operate as a fraud or deceit upon In Insular Life Assurance Co., Ltd. , Employees Association-NATU vs.
any person Insular Life Assurance Co. , Ltd. , this Court has ruled that when issues
are not specifically raised but they bear relevance and close relation to
those properly raised, a court has the authority to include all such
Sec. 46. Administrative sanctions. — If, after proper notice and issues in passing upon and resolving the controversy. In Bank of
hearing, the Commission finds that there is a violation of this Act, its America , NT & SA vs. Court of Appeals , 228 SCRA 357, we have said
rules, or its orders or that any registrant has, in a registration that "the rule that only issues or theories raised in the initial
statement and its supporting papers and other reports required by law proceedings may be taken up by a party thereto on appeal should only
or rules to be filed with the Commission, made any untrue statement of refer to independent, not concomitant matters, to support or oppose
a material fact, or omitted to state any material fact required to be the cause of action or defense." In this case at bench, particularly, it is
stated therein or necessary to make the statements therein not not a new issue that is being raised but a memorandum-circular having
misleading, or refused to permit any unlawful examination into its the force and effect of law that has been cited to support a position that
affairs, it shall, in its discretion, impose any or all of the following relates to the very subject matter of the controversy. On this point,
sanctions : accordingly, we must rule in favor of petitioner SEC.

(a) Suspension, or revocation of its certificate of registration and

permit to offer securities;

8. ANTI-MONEY LAUNDERING ACT

(b) A fine of no less than two hundred (P200.00) pesos nor more than
fifty thousand (P50,000.00) pesos plus not more than five hundred
(P500.00) pesos for each day of continuing violation. Republic of the Philippines Vs. Glasgow Credit (542 S 95)

There is, to our mind, no question that both FIDELITY and Facts:
CUALOPING have been guilty of negligence in the conduct of their
affairs involving the questioned certificates of stock. To constitute,
On July 18, 2003, the Republic filed a complaint in the RTC Manila for
however, a violation of the Revised Securities Act that can warrant an
civil forfeiture of assets with urgent plea for issuance of temporary
imposition of a fine under Section 29(3), in relation to Section 46 of the
restraining order TRO and/or writ of preliminary injunction against
Act, fraud or deceit, not mere negligence, on the part of the offender
the bank deposits in account number maintained by Glasgow in CSBI.
must be established. Fraud here is akin to bad faith which implies a
The case, filed pursuant to RA 9160 the Anti-Money Laundering Act of
conscious and intentional design to do a wrongful act for a dishonest
2001.
purpose or moral obliquity; it is unlike that of the negative idea of
negligence in that fraud or bad faith contemplates a state of mind
affirmatively operating with furtive objectives. Given the factual Acting on the Republic’s urgent plea for the issuance of a TRO, the
circumstances found by the appellate court, neither FIDELITY nor executive judge of RTC Manila issued a 72-hour TRO dated July 21,
CUALOPING, albeit indeed remiss in the observance of due diligence, 2003. The case was thereafter raffled to Branch 47 and the hearing on
can be held liable under the above provisions of the Revised Securities the application for issuance of a writ of preliminary injunction was set
Act. We do not imply, however, that the negligence committed by on August 4, 2003.
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After hearing, the trial court (through then Presiding Judge Marivic T. (b) A description with reasonable particularity of the monetary
Balisi-Umali) issued an order granting the issuance of a writ of instrument, property, or proceeds, and their location; and
preliminary injunction. The injunctive writ was issued on August 8,
2003.
(c) The acts or omissions prohibited by and the specific provisions of
the Anti-Money Laundering Act, as amended, which are alleged to be
Meanwhile, summons and alias summons to Glasgow was returned the grounds relied upon for the forfeiture of the monetary instrument,
"unserved" as it could no longer be found at its last known address. property, or proceeds; and

On August 12, 2005, the OSG received a copy of Glasgo’s "Motion to [(d)] The reliefs prayed for.
Dismiss (By Way of Special Appearance)" dated August 11, 2005. It
alleged that (1) the court had no jurisdiction over its person as
Here, the verified complaint of the Republic contained the following
summons had not yet been served on it; (2) the complaint was
allegations:
premature and stated no cause of action as there was still no conviction
for estafa or other criminal violations implicating Glasgow and (3)
there was failure to prosecute on the part of the Republic. (a) the name and address of the primary defendant therein, Glasgow;

The Republic opposed Glasgow’s motion to dismiss. It contended that (b) a description of the proceeds of Glasgow’s unlawful activities with
its suit was an action quasi in rem where jurisdiction over the person of particularity, as well as the location thereof, account no. CA-005-10-
the defendant was not a prerequisite to confer jurisdiction on the court. 000121-5 in the amount of P21,301,430.28 maintained with CSBI;
It asserted that prior conviction for unlawful activity was not a
precondition to the filing of a civil forfeiture case and that its complaint
alleged ultimate facts sufficient to establish a cause of action. It denied (c) the acts prohibited by and the specific provisions of RA 9160, as
that it failed to prosecute the case. amended, constituting the grounds for the forfeiture of the said
proceeds. In particular, suspicious transaction reports showed that
Glasgow engaged in unlawful activities of estafa and violation of the
On October 27, 2005, the trial court issued the assailed order. It Securities Regulation Code (under Section 3(i)(9) and (13), RA 9160, as
dismissed the case on the following grounds: (1) improper venue as it amended); the proceeds of the unlawful activities were transacted and
should have been filed in the RTC of Pasig where CSBI, the depository deposited with CSBI in account no. CA-005-10-000121-5 thereby
bank of the account sought to be forfeited, was located; (2) making them appear to have originated from legitimate sources; as
insufficiency of the complaint in form and substance and (3) failure to such, Glasgow engaged in money laundering (under Section 4, RA
prosecute. It lifted the writ of preliminary injunction and directed CSBI 9160, as amended); and the AMLC subjected the account to freeze
to release to Glasgow or its authorized representative the funds in CA- order and
005-10-000121-5.
(d) the reliefs prayed for, namely, the issuance of a TRO or writ of
Issue: preliminary injunction and the forfeiture of the account in favor of the
government as well as other reliefs just and equitable under the
premises.
W/N the complaint for civil forfeiture was correctly dismissed on
grounds of improper venue, insufficiency in form and substance and
failure to prosecute The form and substance of the Republic’s complaint substantially
conformed with Section 4, Title II of the Rule of Procedure in Cases of
Civil Forfeiture.
Ruling:

Moreover, Section 12(a) of RA 9160, as amended, provides:

1. At any rate, the trial court was a proper venue.

SEC. 12. Forfeiture Provisions.

The order dismissing the Republic’s complaint for civil forfeiture of
Glasgow’s account in CSBI has not yet attained finality on account of
the pendency of this appeal. Thus, the Rule of Procedure in Cases of (a) Civil Forfeiture. When there is a covered transaction report made,
Civil Forfeiture applies to the Republic’s complaint. Moreover, Glasgow and the court has, in a petition filed for the purpose ordered seizure of
itself judicially admitted that the Rule of Procedure in Cases of Civil any monetary instrument or property, in whole or in part, directly or
Forfeiture is "applicable to the instant case." indirectly, related to said report, the Revised Rules of Court on civil
forfeiture shall apply.
Under Section 3, Title II of the Rule of Procedure in Cases of Civil
Forfeiture, therefore, the venue of civil forfeiture cases is any RTC of RA 9160, as amended, and its implementing rules and regulations lay
the judicial region where the monetary instrument, property or down two conditions when applying for civil forfeiture:
proceeds representing, involving, or relating to an unlawful activity or
to a money laundering offense are located. Pasig City, where the
account sought to be forfeited in this case is situated, is within the (1) when there is a suspicious transaction report or a covered
National Capital Judicial Region (NCJR). Clearly, the complaint for transaction report deemed suspicious after investigation by the AMLC
civil forfeiture of the account may be filed in any RTC of the NCJR. and
Since the RTC Manila is one of the RTCs of the NCJR, it was a proper
venue of the Republic’s complaint for civil forfeiture of Glasgow’s (2) the court has, in a petition filed for the purpose, ordered the seizure
account. of any monetary instrument or property, in whole or in part, directly or
indirectly, related to said report.
2. Section 4, Title II of the Rule of Procedure in Cases of Civil
Forfeiture provides: It is the preliminary seizure of the property in question which brings it
within the reach of the judicial process. It is actually within the court’s
Sec. 4. Contents of the petition for civil forfeiture. - The petition for possession when it is submitted to the process of the court. The
civil forfeiture shall be verified and contain the following allegations: injunctive writ issued on August 8, 2003 removed account no. CA-005-
10-000121-5 from the effective control of either Glasgow or CSBI or
their representatives or agents and subjected it to the process of the
(a) The name and address of the respondent; court.

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Since the account of Glasgow in CSBI was (1) covered by several
suspicious transaction reports and (2) placed under the control of the
trial court upon the issuance of the writ of preliminary injunction, the
conditions provided in Section 12(a) of RA 9160, as amended, were
satisfied. Hence, the Republic, represented by the AMLC, properly
instituted the complaint for civil forfeiture.

Rule 6.1 of the Revised Implementing Rules and Regulations of RA

9160, as amended, states:

Rule 6.1. Prosecution of Money Laundering

(a) Any person may be charged with and convicted of both the offense
of money laundering and the unlawful activity as defined under Rule
3(i) of the AMLA.

(b) Any proceeding relating to the unlawful activity shall be given

precedence over the prosecution of any offense or violation under the
AMLA without prejudice to the application ex-parte by the AMLC
to the Court of Appeals for a freeze order with respect to the monetary
instrument or property involved therein and resort to other
remedies provided under the AMLA, the Rules of Court and
other pertinent laws and rules.

Finally, Section 27 of the Rule of Procedure in Cases of Civil Forfeiture

provides:

Sec. 27. No prior charge, pendency or conviction necessary. No prior

criminal charge, pendency of or conviction for an unlawful
activity or money laundering offense is necessary for the
commencement or the resolution of a petition for civil forfeiture.

Thus, regardless of the absence, pendency or outcome of a criminal

prosecution for the unlawful activity or for money laundering, an
action for civil forfeiture may be separately and independently
prosecuted and resolved.

3. The Republic cannot be faulted for failure to prosecute the

complaint for civil forfeiture. While there was admittedly a delay in the
proceeding, it could not be entirely or primarily ascribed to the
Republic. That Glasgow’s whereabouts could not be ascertained was
not only beyond the Republic’s control, it was also attributable to
Glasgow which left its principal office address without informing the
Securities and Exchange Commission or any official regulatory body
(like the Bureau of Internal Revenue or the Department of Trade and
Industry) of its new address. Moreover, as early as October 8, 2003,
the Republic was already seeking leave of court to serve summons by
publication.

In Marahay v. Melicor,18 this Court ruled:

While a court can dismiss a case on the ground of non prosequitur, the
real test for the exercise of such power is whether, under the
circumstances, plaintiff is chargeable with want of due diligence in
failing to proceed with reasonable promptitude. In the absence of a
pattern or scheme to delay the disposition of the case or a
wanton failure to observe the mandatory requirement of the
rules on the part of the plaintiff, as in the case at bar, courts
should decide to dispense with rather than wield their
authority to dismiss. (emphasis supplied)

We see no pattern or scheme on the part of the Republic to delay the

disposition of the case or a wanton failure to observe the mandatory
requirement of the rules. The trial court should not have so eagerly
wielded its power to dismiss the Republic’s complaint.

189