Grace Christian High School Vs Ca

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GRACE CHRISTIAN HIGH SCHOOL VS CA

Corporation Law; Board of Directors; The board of directors of corporations must be elected from
among the stockholders or mem-bers.—These provisions of the former and present corporation law
leave no room for doubt as to their meaning: the board of directors of corporations must be elected
from among the stockholders or members. There may be corporations in which there are unelected
members in the board but it is clear that in the examples cited by petitioner the unelected members
sit as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in the
case of petitioner, there is no reason at all for its representative to be given a seat in the board. Nor
does petitioner claim a right to such seat by virtue of an office held. In fact it was not given such seat
in the beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it one.

Same; Same; By-Laws; No provision of the by-laws can be adopted if it is contrary to law.—Since the
provision in question is contrary to law, the fact that for fifteen years it has not been questioned or
challenged but, on the contrary, appears to have been implemented by the members of the
association cannot forestall a later challenge to its validity. Neither can it attain validity through
acquiescence because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity. For that matter the members of the association may have formally
adopted the provision in question, but their action would be of no avail because no provision of the
by-laws can be adopted if it is contrary to law.

Same; Same; Same; Tolerance cannot be considered a ratification.—It is probable that, in allowing
petitioner’s representative to sit on the board, the members of the association were not aware that
this was contrary to law. It should be noted that they did not actually implement the provision in
question except perhaps insofar as it increased the number of directors from 11 to 15, but certainly
not the allowance of petitioner’s representative as an unelected member of the board of directors. It
is more accurate to say that the members merely tolerated petitioner’s representative and tolerance
cannot be considered ratification.

Same; Same; Same; Practice, no matter how long continued, cannot give rise to any vested right if it is
contrary to law.—Nor can petitioner claim a vested right to sit in the board on the basis of “practice.”
Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to law.
Even less tenable is petitioner’s claim that its right is “coterminus with the existence of the
association.”

GOKONGWEI VS SEC

Supreme Court; Judgments; Securities and Exchange Commission; Corporation Law; Supreme Court
always strives to settle a legal controversy in a single proceeding.—xxx In the case at bar, there are
facts which cannot be denied, viz.: that the amended by-laws were adopted by the Board of Directors
of the San Miguel Corporation in the exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special meeting on February 10, 1977 held
specially for that purpose, the amended by-laws were ratified by more than 80% of the stockholders
of record; that the foreign investment in the Hongkong Brewery and Distillery, a beer manufacturing
company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the
stockholders’ annual meeting held in 1972 and 1977, all foreign investments and operations of San
Miguel Corporation were ratified by the stockholders.

Corporation Law; While reasonableness of a by-law is a legal question, where reasonableness of a by-
law provision is one in which reasonable minds may differ a court will not be justified in subsisting its
judgment for those authorized to make the by-laws.—The validity or reasonableness of a by-law of a
corporation is purely a question of law. Whether the by-law is in conflict with the law of the land, or
with the charter of the corporation, or is in a legal sense unreasonable and therefore unlawful is a
question of law. This rule is subject, however, to the limitation that where the reasonableness of a by-
law is a mere matter of judgment, and one upon which reasonable minds must necessarily differ, a
court would not be warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised their authority.
Same; Under the Corporation Law a corporation is authorized to prescribe the qualification of its
directors.—In this jurisdiction, under Section 21 of the Corporation Law, a corporation may prescribed
in its by-laws “the qualifications, duties and compensation of directors, officers and employees ***.”
This must necessarily refer to a qualification in addition to that specified by section 30 of the
Corporation Law, which provides that “every director must own in his right at least one share of the
capital stock of the stock corporation of which he is a director * * *.”

Same; Stockholder has no vested right to be elected as stockholder.—Any person “who buys stock in
a corporation does so with the knowledge that its affairs are dominated by a majority of the
stockholders and that he implied contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-laws and not forbidden by law.”
To this extent, therefore, the stockholder may be considered to have “parted with his personal right
or privilege to regulate the disposition of his property which he has invested in the capital stock of the
corporation and surrendered it to the will of the majority or his fellow incorporators. **** It can not
therefore be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed *** by any act of the former which is authorized by a majority, ***.”

Same; A director stands in a fiduciary relation to the competition and its stockholders. The
disqualification of a competition from being elected to the board of directors is a reasonable exercise
of corporate authority. Although in the strict and technical sense, directors of a private corporation
are not regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation for the collective benefit of the stockholders, “they occupy a fiduciary
relation, and in these sense the relation is one of trust.”

Same; Same.—It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of competing corporation, from taking advantage
of the information which he acquires as director to promote his individual or corporate interests to
the prejudice of San Miguel Corporation and its stockholders, that the questioned amendment of the
by-laws was made. Certainly, where two corporations are competitive in a substantial sense, it would
seem improbable, if not impossible, for the director, if he were to discharge effectively his duty, to
satisfy his loyalty to both corporations and place the performance of his corporate duties above his
personal concerns.

Same; Same.—Sound principles of corporate management counsel against sharing sensitive


information with a director whose fiduciary duty to loyalty may well require that he disclose this
information to a competitive rival. These dangers are enhanced considerably where the common
director such as the petitioner is a controlling stockholder of two of the competing corporations. It
would seem manifest that in such situations, the director has an economic incentive to appropriate
for the benefit of his own corporation the corporate plans and policies of the corporation where he
sits as director.

Same; Another reason for upholding a by-law provision that forbids a competitor to be elected as
corporate director are the laws prohibiting cartels.—There is another important consideration in
determining whether or not the amended by-laws are reasonable. The Constitution and the law
prohibit combinations in restraint of trade or unfair competition. Thus, Section 2 of Article XIV of the
Constitution provides: “That State shall regulate or prohibit private monopolies when the public
interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.”

Same; Same.—Basically, these anti-trust laws or laws against monopolies or combinations in restraint
of trade are aimed at raising levels of competition by improving the consumers’ effectiveness as the
final arbiter in free markets. These laws are designed to preserve free and unfettered competition as
the rule of trade. “It rests on the premise that the unrestrained interaction of competitive forces will
yield the best allocation of our economic resources, the lowest prices and the highest quality ***.”
They operate to forestall concentration of economic power. The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason of the
inherent nature of the contemplated acts, prejudice the public interest by unduly restraining
competition or unduly obstructing the course of trade.

Same; Election of petitioner as San Miguel Corporation Director may run counter to the prohibition
contained in Section 13(5) of Corporation Law on investments in corporations engaged in agriculture.
—Finally, considering that both Robina and SMC are, to a certain extent, engaged in agriculture, then
the election of petitioner to the Board of SMC may constitute a violation of the prohibition contained
in Section 13(5) of the Corporation Law. Said section provides in part that “any stockholder of more
than one corporation organized for the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of such corporations. ***.”

Same; The by-law amendment of SMC applies equally to all and does not discriminate against
petitioner only.—However, the by-law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-laws operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be hearing and
evidence must be submitted to bring his case within the ambit of the disqualification. Sound principles
of public policy and management, therefore, support the view that a by-law which disqualifies a
competitor from election to the Board of Directors of another corporation is valid and reasonable.

Same; Petitioner is not ipso facto disqualified to run on SMC director. He must be given full
opportunity by the SEC to show that he is not covered by the disqualification.—While We here sustain
the validity of the amended by-laws, it does not follow as a necessary consequence that petitioner is
ipso facto disqualified. Consonant with the requirement of due process, there must be due hearing at
which the petitioner must be given the fullest opportunity to show that he is not covered by the
disqualification. As trustees of the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders. Pursuant to this obligation and to remove any
suspicion that this power may be utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a candidate for the Board of Directors
should be reviewed by the Securities and Exchange Commission en banc and its decision shall be final
unless reversed by this Court on certiorari.

Same; Every stockholder has the right to inspect corporate books and records.—The stockholder’s
right of inspection of the corporation’s books and records is based upon their ownership of the assets
and property of the corporation. It is, therefore, an incident of ownership of the corporate property,
whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a
quasi-ownership. This right is predicated upon the necessity of selfprotection. It is generally held by
majority of the courts that where the right is granted by statute to the stockholder, it is given to him
as such and must be exercised by him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the corporation. In other words, the inspection has to
germane to the petitioner’s interest as a stockholder, and has to be proper and lawful in character
and not inimical to the interest of the corporation.

Same; The right of stockholder to inspect corporate books extends to a wholly-owned subsidiary.—In
the case at bar, considering that the foreign subsidiary is wholly owned by respondent San Miguel
Corporation and, therefore, under its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly owned subsidiary which
are in respondent corporation’s possession and control.

Same; Purely ultra vires corporate acts of corporate officers to invest corporate funds in another
business or corporation, i.e., acts not contrary to law, morals, public order as public policy, may be
ratified by the stockholders holding 2/3 of the voting power.—Assuming arguendo that the Board of
Directors of San Miguel Corporation had no authority to make the assailed investment, there is no
question that a corporation, like an individual, may ratify and thereby render binding upon it the
originally unauthorized acts of its officers or other agents. This is true because the questioned
investment is neither contrary to law, morals, public order or public policy. It is a corporate
transaction or contract which is within the corporate powers, but which is defective from a purported
failure to observe in its execution the requirement of the law that the investment must be authorized
by the affirmative vote of the stockholders holding twothirds of the voting power. This requirement is
for the benefit of the stockholders. The stockholders for whose benefit the requirement was enacted
may, therefore, ratify the investment and its ratification by said stockholders obliterates any defect
which it may have had at the outset. “Mere ultra vires acts”, said this Court in Pirovano, “or those
which are not illegal and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by the
stockholders.”

Corporation Law; Judgment; The doctrine of the law of the case.—We hold on our part that the
doctrine of the law of the case invoked by Mr. Justice Barredo has no applicability for the following
reasons: a) Our jurisprudence is quite clear that this doctrine may be invoked only where there has
been a final and conclusive determination of an issue in the first case later invoked as the law of the
case.

Same; Same; When doctrine of the law of the case not applicable.—The doctrine of the law of the
case, therefore, has no applicability whatsoever herein insofar as the question of the validity or
invalidity of the amended by-laws is concerned. The Court’s judgment of April 11, 1979 clearly shows
that the voting on this question inconclusive with six against four Justices and two other Justices (the
Chief Justice and Mr. Justice Fernando) expressly reserving their votes thereon, and Mr. Justice
Aquino while taking no part in effect likewise expressly reserved his vote thereon. No final aad
conclusive determination could be reached on the issue and pursuant to the provisions of Rule 56,
section 11, since this special civil action originally commenced in this Court, the action was simply
dismissed with the result that no law of the case was laid down insofar as the issue of the validity or
invalidity of the questioned by-laws is concerned, and the relief sought herein by petitioner that this
Court bypass the SEC which has yet to hear and determine the same issue pending before it below
and that this Court itself directly resolve the said issue stands denied.

Same; Same; Constitutional Law; Due Process; When procedural due process was not observed.—The
entire Court, therefore, recognized that petitioner had not been given procedural due process by the
SMC board on the matter of his disqualification and that he was entitled to a “new and proper
hearing”. It stands to reason that in such hearing, petitioner could raise not only questions of fact but
questions of law, particularly questions of law affecting the investing public and their right to
representation on the board as provided by law—not to mention that as borne out by the fact that no
restriction whatsoever appears in the Court’s decision, it was never contemplated that petitioner was
to be limited questions of fact and could not raise the fundamental question of law bearing on the
invalidity of the questioned amended by-laws at such hearing before the SMC board. Furthermore, it
was expressly provided unanimously in the Court’s decision that the SMC board’s decision on the
disqualification of petitioner (“assuming the board of directors of San Miguel Corporation should,
after the proper hearing, disqualify him” as qualified in Mr. Justice Barredo’s own separate opinion, at
page 2) shall be appealable to respondent Securities and Exchange Commission “deliberating and
acting en banc” and “ultimately to this Court.”

Same; Same; Reservation of the vote of the Chief Justice.—As expressly stated in the Chief Justice’s
reservation of his vote, the matter of the question of the applicability of the said section 13(5) to
petitioner would be heard by this Court at the appropriate time after the proceedings below (and
necessarily the question of the validity of the amended by-laws would be taken up anew and the
Court would at that time be able to reach a final and conclusive vote).

Same; Same; Validity of the amended by-laws.—The six votes cast by Justices Makasiar, Antonio,
Santos, Abad Santos, De Castro and this writer in favor of validity of the amended by-laws in question,
with only four members of this Court, namely, Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero opining otherwise, and with Chief Justice Castro and Justice Fernando reserving their votes
thereon and Justice Aquino and Melencio Herrera not voting, thereby resulting in the dismissal of the
petition “insofar as it assails the validity of the amended by-laws . . . . for lack of necessary votes”, has
no other legal consequence than that it is the law of the case far as the parties herein are concerned,
albeit the majority opinion of six against four Justices is not doctrinal in the sense that it cannot be
cited as necessarily a precedent for subsequent cases. This means that petitioner Gokongwei and the
respondents, including the Securities and Exchange Commission, are bound by the foregoing result,
namely, that the Court en banc has not found merit in the claim that the amended by-laws in question
are invalid. Indeed, it is one thing to say that dismissal of the case is not doctrinal and entirely another
thing to maintain that such dismissal leaves the issue unsettled.

Same; Same; Where petitioner can no longer revive the issue validity of the amended by-laws.—I
reiterate, therefore, that as between the parties herein, the issue of validity of the challenged bylaws
is already settled. From which it follows that the same are already enforceable insofar as they are
concerned. Petitioner Gokongwei may not hereafter act on the assumption that he can revive the
issue of validity whether in the Securities Exchange Commission, in this Court or in any other forum,
unless he proceeds on the basis of a factual milieu different from the setting of this case. Not even the
Securities and Exchange Commission may pass on such question anymore at the instance of herein
petitioner or anyone acting in his stead or on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.

Same; Same; Where Court has not found merit in the claim that the amended by-laws in question are
valid.—I concur in Justice Barredo’s statement that the dismissal (for lack of necessary votes) of the
petition to the extent that “it assails the validity of the amended by-laws,” is the law of the case at
bar, which means in effect that as far and only in so far as the parties and the Securities and Exchange
Commission are concerned, the Court has not found merit in the claim that the amended by-laws in
question are valid.

Same; Same; Term and meaning of “farming.”—This is my view, even as I am for a restrictive
interpretation of Section 13(5) of the Philippine Corporation Law, under which I would limit the scope
of the provision to corporations engaged in agriculture, but only as the word “agriculture” refers to its
more limited meaning as distinguished from its general and broad connotation. The term would then
mean “farming” or raising the natural products of the soil, such as by cultivation, in the acquisition of
agricultural land such as by homestead, before the patent may be issued.

Same; Same; Poultry raising or piggery is included in the term “agriculture.”—It is my opinion that
under the public land statute, the development of a certain portion of the land applied for a specified
in the law as a condition precedent before the applicant may obtain a patent, is cultivation, not let us
say, poultry raising or piggery, which may be included in the term “Agriculture” in its broad sense. For
under Section 13(5) of the Philippine Corporation Law, construed not in the strict way as I believe it
should because the provision is in derogation of property rights, the petitioner in this case would be
disqualified from becoming an officer of either the San Miguel Corporation or his own supposedly
agricultural corporations.

WESTERN INSTITUTE OF TECHNOLOGY VS SALAS

Corporation Law; Two ways by which members of the board can be granted compensation apart from
reasonable per diems.—There is no argument that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they perform nothing more than the usual and
ordinary duties of their office. This rule is founded upon a presumption that directors/trustees render
service gratuitously, and that the return upon their shares adequately furnishes the motives for
service, without compensation. Under the 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 outstanding capital stock at a regular or special stockholders’ meeting
agree to give it to them.

Same; Members of the board may receive compensation, in addition to reasonable per diems, when
they render services to the corporation in a capacity other than as directors/trustees.—This
proscription, however, against granting compensation to directors/trustees of a corporation is not a
sweeping rule. Worthy of note is the clear phraseology of Section 30 which states: “x x x [T]he
directors shall not receive any compensation, as such directors, x x x.” The phrase as such directors is
not without significance for it delimits the scope of the prohibition to compensation given to them for
services performed purely in their capacity as directors or trustees. The unambiguous implication is
that members of the board may receive compensation, in addition to reasonable per diems, when
they render services to the corporation in a capacity other than as directors/trustees. In the case at
bench, Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in their
capacity as members of the board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of Technology.

Same; Remedial Law; Action; Meaning of Derivative Suit; For a derivative suit to prosper, it is required
that the minority shareholder who is suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join.—A derivative suit is an
action brought by minority shareholders in the name of the corporation to redress wrongs committed
against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the
principal defense of the minority shareholders against abuses by the majority. Here, however, the
case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097
and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic
requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on
behalf of the corporation must allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders similarly situated
who wish to join. This is necessary to vest jurisdiction upon the tribunal in line with the rule that it is
the allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body concerned
over the subject matter and nature of the action. This was not complied with by the petitioners either
in their complaint before the court a quo nor in the instant petition which, in part, merely states that
“this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC
decision in Criminal Cases Nos. 37097 and 37098” since the trial court’s judgment of acquittal failed to
impose any 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.

NACPIL VS INTERCONTINENTAL BROADCASTING CORP

Corporation Law; Securities and Exchange Commission; Two elements to be considered in


determining whether the SEC has jurisdiction over the controversy.—The Court has consistently held
that there are two elements to be considered in determining whether the SEC has jurisdiction over
the controversy, to wit: (1) the status or relationship of the parties; and (2) the nature of the question
that is the subject of their controversy.

Same; Same; The board of directors may also be empowered under the by-laws to create additional
officers as may be necessary.—The Court has held that in most cases the “by-laws may and usually do
provide for such other officers,” and that where a corporate office is not specifically indicated in the
roster of corporate offices in the by-laws of a corporation, the board of directors may also be
empowered under the by-laws to create additional officers as may be necessary.

Same; Same; The relationship of a person to a corporation, whether as officer or agent or employee is
not determined by the nature of the services performed, but instead by the incidents of the
relationship as they actually exist.—As to petitioner’s argument that the nature of his functions is
recommendatory thereby making him a mere managerial officer, the Court has previously held that
the relationship of a person to a corporation, whether as officer or agent or employee is not
determined by the nature of the services performed, but instead by the incidents of the relationship
as they actually exist.

PEOPLE’S AIRCARGO VS CA

Corporation Law; In the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation.—The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a corporation. A corporation is a
juridical person, separate and distinct from its stockholders and members, “having x x x powers,
attributes and properties expressly authorized by law or incident to its existence.” Being a juridical
entity, a corporation may act through its board of directors, which exercises almost all corporate
powers, lays down all corporate business policies and is responsible for the efficiency of management,
as provided in Section 23 of the Corporation Code of the Philippines.

Same; The authority of certain individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business.—Under Sec. 23, Corporation Code, the power and the
responsibility to decide whether the corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles of incorporation, bylaws, or relevant
provisions of law. However, just as a natural person may authorize another to do certain acts for and
on his behalf, the board of directors may validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to bind the corporation is generally derived
from law, corporate bylaws or authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business.

Same; It is not the quantity of similar acts which establishes apparent authority, but the vesting of a
corporate officer with the power to bind the corporation.—Petitioner’s argument is not persuasive.
Apparent authority is derived not merely from practice. Its existence may be ascertained through (1)
the general manner in which the corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers. It requires presentation of evidence of
similar act(s) executed either in its favor or in favor of other parties. It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporate officer with the power to
bind the corporation.

Same; Estoppel; It is familiar doctrine that if a corporation knowingly permits one of its officers, or any
other agent, to act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts, and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agent’s authority.—Private
respondent should not be faulted for believing that Punsalan’s conformity to the contract in dispute
was also binding on petitioner. It is familiar doctrine that if a corporation knowingly permits one of its
officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; and thus, the corporation will, as against anyone who
has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

Same; Even if a certain contract is outside the usual powers of the president, the corporation’s
ratification of the same and acceptance of benefits make it binding.—Private respondent prepared an
operations manual and conducted a seminar for the employees of petitioner in accordance with their
contract. Petitioner accepted the operations manual, submitted it to the Bureau of Customs and
allowed the seminar for its employees. As a result of its aforementioned actions, petitioner was given
by the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo then that the
Second Contract was outside the usual powers of the president, petitioner’s ratification of said
contract and acceptance of benefits have made it binding, nonetheless. The enforceability of
contracts under Article 1403(2) is ratified “by the acceptance of benefits under them” under Article
1405.

Same; In the absence of a charter or bylaw provision to the contrary, the president of a corporation is
presumed to have the authority to act within the domain of the general objectives of its business and
within the scope of his or her usual duties.—Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict rule that said officer has no inherent
power to act for the corporation is slowly giving way to the realization that such officer has certain
limited powers in the transaction of the usual and ordinary business of the corporation. In the
absence of a charter or bylaw provision to the contrary, the president is presumed to have the
authority to act within the domain of the general objectives of its business and within the scope of his
or her usual duties.
PRIME WHITE CEMENT VS IAC

Corporation Law; Contracts; When contracts signed by corporate officers binding on corporation.—
Under the Corporation Law, which was then in force at the time this case arose, as well as under the
present Corporation Code, all corporate powers shall be exercised by the Board of Directors, except
as otherwise provided by law. Although it cannot completely abdicate its power and responsibility to
act for the juridical entity, the Board may expressly delegate specific powers to its President or any of
its officers. In the absence of such express delegation, a contract entered into by its President, on
behalf of the corporation, may still bind the corporation if the board should ratify the same expressly
or impliedly. Implied ratification may take various forms—like silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom. Furthermore, even in the absence of express or implied authority by ratification, the
President as such may, as a general rule, bind the corporation by a contract in the ordinary course of
business, provided the same is reasonable under the circumstances. These rules are basic, but are all
general and thus quite flexible. They apply where the President or other officer, purportedly acting for
the corporation, is dealing with a third person, i.e., a person outside the corporation.

Same; Same; A board director or other corporate officer cannot readily enter into a contract with his
own corporation; Exceptions.—A director of a corporation holds a position of trust and as such, he
owes a duty of loyalty to his corporation. In case his interests conflict with those of the corporation,
he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are
committed to seek the maximum amount of profits for the corporation. This trust relationship "is not
a matter of statutory or technical law. It springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the property interests of the stockholders."

Same; Same; Same.—On the other hand, a director's contract with his corporation is not in all
instances void or voidable. If the contract is fair and reasonable under the circumstances, it may be
ratified by the stockholders provided a full disclosure of his adverse interest is made.

Same; Same; Same.—Granting arguendo that the "dealership agreement" involved here would be
valid and enforceable if entered into with a person other than a director or officer of the corporation,
the fact that the other party to the contract was a Director and Auditor of the petitioner corporation
changes the whole situation. First of all, We believe that the contract was neither fair nor reasonable.
The "dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te
20,000 bags of white cement per month, for five years starting September, 1970, at the fixed price of
P9.70 per bag. Respondent Te is a businessman himself and must have known, or at least must be
presumed to know, that at that time, prices of commodities in general, and white cement in
particular, were not stable and were expected to rise. At the time of the contract, petitioner
corporation had not even commenced the manufacture of white cement, the reason why delivery
was not to begin until 14 months later. He must have known that within that period of six years, there
would be a considerable rise in the price of white cement. In fact, respondent Te's own Memorandum
shows that in September, 1970, the price per bag was P 14.50, and by the middle of 1975, it was
already P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow
for an increase in price mutually acceptable to the parties. Instead, the price was pegged at P9.70 per
bag for the whole five years of the contract. Fairness on his part as a director of the corporation from
whom he was to buy the cement, would require such a provision. In fact, this unfairness in the
contract is also a basis which renders a contract entered into by the President, without authority from
the Board of Directors, void or voidable, although it may have been in the ordinary course of business.
We believe that the fixed price of P9.70 per bag for a period of five years was not fair and reasonable.
Respondent Te, himself, when he subsequently entered into contracts to resell the cement to his
"new dealers" Henry Wee and Gaudencio Galang stipulated as follows: The price of white cement
shall be mutually determined by us but in no case shall the same be less than P14.00 per bag (94 Ibs)."

Same; Same; Damages; No moral damages for lost goodwill are awardable to a corporation.—As a
result of this action which has been proven to be without legal basis, petitioner corporation's
reputation and goodwill have been prejudiced. However, there can be no award for moral damages
under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of the Civil Code in
favor of a corporation.

SANTOS VS NLRC

Corporation Law; Corporate Officers; Piercing the Veil of Corporate Fiction; A corporation is a juridical
entity with legal personality separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it—obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities.—A corporation is a juridical entity with legal
personality separate and distinct from those acting for and in its behalf and, in general, from the
people comprising it. The rule is that obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. Nevertheless, being a mere fiction of law,
peculiar situations or valid grounds can exist to warrant, albeit done sparingly, the disregard of its
independent being and the lifting of the corporate veil. As a rule, this situation might arise when a
corporation is used to evade a just and due obligation or to justify a wrong, to shield or perpetrate
fraud, to carry out similar other unjustifiable aims or intentions, or as a subterfuge to commit injustice
and so circumvent the law.

Same; Same; Same; Instances when personal civil liability can also be said to lawfully attach to a
corporate director, trustee or officer.—In Tramat Mercantile, Inc. vs. Court of Appeals, the Court has
collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal
civil liability can also be said to lawfully attach to a corporate director, trustee or officer; to wit: When
—“(1) He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons; “(2) He consents to the issuance of watered stocks or
who, having knowledge thereof, does not forthwith file with the corporate secretary his written
objection thereto; “(3) He agrees to hold himself personally and solidarily liable with the corporation;
or “(4) He is made, by a specific provision of law, to

Same; Same; Same; The basic rule is still that which can be deduced from the Court’s pronouncement
in Sunio v. National Labor Relations Commission, i.e., that mere ownership by a single stock-holder or
by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.—The basic rule is still that which can be
deduced from the Court’s pronouncement in Sunio v. National Labor Relations Commission, 127 SCRA
390, thus: “It is basic that a corporation is invested by law with a personality separate and distinct
from those of the persons composing it as well as from that of any other legal entity to which it may
be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. Petitioner Sunio, therefore, should not have been made personally answerable for the
payment of private respondents’ back salaries.” The Court, to be sure, did appear to have deviated
somewhat in Gudez vs. NLRC; however, it should be clear from our recent pronouncement in Mam
Realty Development Corporation and Manuel Centeno vs. NLRC that the Sunio doctrine still prevails.

SPS. DAVID VS CONSTRUCTION INDUSTRY ARBITRATION & COMMISSION

Actions; Alternative Dispute Resolution; Arbitration; Construction Industry Arbitration Law (E.O. No.
1008); Jurisdiction; E.O. No. 1008 vests on the Construction Industry Arbitration Commission (CIAC)
original and exclusive jurisdiction over disputes arising from or connected with construction contracts
entered into by the parties who have agreed to submit their case to voluntary arbitration.—Executive
Order No. 1008 entitled, “Construction Industry Arbitration Law” provided for an arbitration
mechanism for the speedy resolution of construction disputes other than by court litigation. It
recognized the role of the construction industry in the country’s economic progress as it utilizes a
large segment of the labor force and contributes substantially to the gross national product of the
country. Thus, E.O. No. 1008 vests on the Construction Industry Arbitration Commission (CIAC)
original and exclusive jurisdiction over disputes arising from or connected with construction contracts
entered into by parties who have agreed to submit their case to voluntary arbitration. Section 19 of
E.O. No. 1008 provides that its arbitral award shall be appealable to the Supreme Court only on
questions of law.

Same; Same; Same; Same; Questions of Law and Questions of Fact; Words and Phrases; There is a
question of law when the doubt or difference in a given case arises as to what the law is on a certain
set of facts, and there is a question of fact when the doubt arises as to the truth or falsity of the
alleged facts.—There is a question of law when the doubt or difference in a given case arises as to
what the law is on a certain set of facts, and there is a question of fact when the doubt arises as to the
truth or falsity of the alleged facts. Thus, for a question to be one of law, it must not involve an
examination of the probative value of the evidence presented by the parties and there must be no
doubt as to the veracity or falsehood of the facts alleged.

Same; Same; Same; Same; Same; The law can be applied only after establishing a factual basis.—At
first glance, the issue may appear to be a question of law as it would call for application of the law on
the separate liability of a corporation. However, the law can be applied only after establishing a
factual basis, i.e., whether petitioner-spouses as corporate officers were grossly negligent in ordering
the revisions on the construction plan without the knowledge and consent of the respondent-
spouses. On this issue, the Court of Appeals again affirmed the factual findings of the arbitrator, thus:
As a general rule, the officers of a corporation are not personally liable for their official acts unless it is
shown that they have exceeded their authority. However, the personal liability of a corporate
director, trustee or officer, along with corporation, may so validly attach when he assents to a
patently unlawful act of the corporation or for bad faith or gross negligence in directing its affairs.

Same; Same; Same; Same; Same; Factual findings of construction arbitrators are final and conclusive
and not reviewable by the Supreme Court on appeal; Exceptions.—The case at bar does not raise any
genuine issue of law. We reiterate the rule that factual findings of construction arbitrators are final
and conclusive and not reviewable by this Court on appeal, except when the petitioner proves
affirmatively that: (1) the award was procured by corruption, fraud or other undue means; (2) there
was evident partiality or corruption of the arbitrators or of any of them; (3) the arbitrators were guilty
of misconduct in refusing to postpone the hearing upon sufficient cause shown, or in refusing to hear
evidence pertinent and material to the controversy; (4) one or more of the arbitrators were
disqualified to act as such under section nine of Republic Act No. 876 and willfully refrained from
disclosing such disqualifications or of any other misbehavior by which the rights of any party have
been materially prejudiced; or (5) the arbitrators exceeded their powers, or so imperfectly executed
them, that a mutual, final and definite award upon the subject matter submitted to them was not
made. Petitioners failed to show that any of these exceptions applies to the case at bar.

Same; Same; Same; Same; Same; Rationale for limiting appeal to legal questions in construction cases
resolved through arbitration.—It bears to remind petitioners of this Court’s ruling in the 1993 case of
Hi-Precision Steel Center, Inc. vs. Lim Kim Steel Builders, Inc. which emphasized the rationale for
limiting appeal to legal questions in construction cases resolved through arbitration, thus: x x x
Consideration of the animating purpose of voluntary arbitration in general, and arbitration under the
aegis of the CIAC in particular, requires us to apply rigorously the above principle embodied in Section
19 that the Arbitral Tribunal’s findings of fact shall be final and inappealable (sic). Voluntary
arbitration involves the reference of a dispute to an impartial body, the members of which are chosen
by the parties themselves, which parties freely consent in advance to abide by the arbitral award
issued after proceedings where both parties had the opportunity to be heard. The basic objective is to
provide a speedy and inexpensive method of settling disputes by allowing the parties to avoid the
formalities, delay, expense and aggravation which commonly accompany ordinary litigation,
especially litigation which goes through the entire hierarchy of courts. Executive Order No. 1008
created an arbitration facility to which the construction industry in the Philippines can have recourse.
The Executive Order was enacted to encourage the early and expeditious settlement of disputes in
the construction industry, a public policy the implementation of which is necessary and important for
the realization of the national development goals. Aware of the objective of voluntary arbitration in
the labor field, in the construction industry, and in other area for that matter, the Court will not assist
one or the other or even both parties in any effort to subvert or defeat that objective for their private
purposes. The Court will not review the factual findings of an arbitral tribunal upon the artful
allegation that such body had “misapprehended facts” and will not pass upon issues which are, at
bottom, issues of fact, no matter how cleverly disguised they might be as “legal questions.” The
parties here had recourse to arbitration and chose the arbitrators themselves; they must have had
confidence in such arbitrators. The Court will not, therefore, permit the parties to relitigate before it
the issues of facts previously presented and argued before the Arbitral Tribunal, save only where a
clear showing is made that, in reaching its factual conclusions, the Arbitral Tribunal committed an
error so egregious and hurtful to one party as to constitute a grave abuse of discretion resulting in
lack or loss of jurisdiction. Prototypical examples would be factual conclusions of the Tribunal which
resulted in deprivation of one or the other party of a fair opportunity to present its position before
the Arbitral Tribunal, and an award obtained through fraud or the corruption of arbitrators. Any other
more relaxed rule would result in setting at naught the basic objective of a voluntary arbitration and
would reduce arbitration to a largely inutile institution.

MALAYANG SAMAHAN NG MGA MANGGAGAWA VS RAMOS

Labor Law; Corporation Law; Judgments; The rule is that obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities.—Petitioners’ contention
that respondent company officials should be made personally liable for damages on account of
petitioners’ dismissal is not impressed with merit. A corporation is a juridical entity with legal
personality separate and distinct from those acting for and in its behalf and, in general from the
people comprising it. The rule is that obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. True, solidary liabilities may at times be
incurred but only when exceptional circumstances warrant.

Same; Same; Same; In labor cases, Court has held corporate directors and officers solidarily liable with
the corporation for the termination of employment of corporate employees done with malice or in
bad faith.—In labor cases, particularly, the Court has held corporate directors and officers solidarily
liable with the corporation for the termination of employment of corporate employees done with
malice or in bad faith. Bad faith or negligence is a question of fact and is evidentiary. It has been held
that bad faith does not connote bad judgement or negligence; it imports a dishonest purpose or some
moral obliquity and conscious doing of wrong; it means breach of a known duty thru some motive or
interest or ill will; it partakes of the nature of fraud.

Same; Same; Same; It is elementary that strangers to a case are not bound by the judgment rendered
by the court and such judgment is not available as an adjudication either against or in favor of such
other person.—Petitioners’ prayer for the inclusion of other employees allegedly similarly situated
but whose names were not included either in Annex “D” or in the caption of the case must be denied.
A judgment cannot bind persons who are not parties to the action. It is elementary that strangers to a
case are not bound by the judgment rendered by the court and such judgment is not available as an
adjudication either against or in favor of such other person. Petitioners failed to explain why these
employees allegedly similarly situated were not included in the submitted list filed before us. Such
inclusion would be tantamount to a substantial amendment which cannot be allowed at this late
stage of the proceedings as it will definitely work to the prejudice and disadvantage of the private
respondents.

INTER-ASIA INVESTMENTS INDUSTRIES VS CA

Corporation Law; An officer of a corporation who is authorized to purchase the stock of another
corporation has the implied power to perform all other obligations arising therefrom such as payment
of the shares of stock.—As correctly argued by private respondent, an officer of a corporation who is
authorized to purchase the stock of another corporation has the implied power to perform all other
obligations arising therefrom, such as payment of the shares of stock. By allowing its president to sign
the Agreement on its behalf, petitioner clothed him with apparent capacity to perform all acts which
are expressly, impliedly and inherently stated therein.

LAPU-LAPU FOUNDATION, INC. VS CA

Corporation Law; Corporate Officers; Powers; If a corporation knowingly permits one of its officers to
act within the scope of an apparent authority, it holds him out to the public as possessing the power
to do those acts.—It is a familiar doctrine that if a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agent’s authority.

HYDRO RESOURCES CONTRACTORS CORP VS NATIONAL IRRIGATION ADMINISTRATION

Administrative Law; Corporation Law; It would be preposterous for the National Irrigation
Administration (NIA) Administrator to have the power of granting claims without the authority to
verify the computation of such claims.—As early as April 1983, Hydro and NIA, through its
Administrator Cesar L. Tech, prepared the Joint Computation which shows that Hydro is entitled to
the foreign currency differential. As correctly found by the CIAC, this computation constitutes a
written acknowledgment of the debt by the debtor under Article 1155 of the Civil Code, which states:
ART. 1155. The prescription of actions is interrupted when they are filed before the court, when there
is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of
the debt by the debtor. Instead of upholding the CIAC’s findings on this point, the Court of Appeals
ruled that Cesar L. Tech’s act of signing the Joint Computation was an ultra vires act. This again is
patent error. It must be noted that the Administrator is the highest officer of the NIA. Furthermore,
Hydro has been dealing with NIA through its Administrator in all of its transactions with respect to the
contract and subsequently the foreign currency differential claim. The NIA Administrator is
empowered by the Contract to grant or deny foreign currency differential claims. It would be
preposterous for the NIA Administrator to have the power of granting claims without the authority to
verify the computation of such claims. Finally, the records of the case will show that NIA itself never
disputed its Administrator’s capacity to sign the Joint Computation because it knew that the
Administrator, in fact, had such capacity.

Same; Same; Estoppel; A corporation may be held in estoppel from denying as against third persons
the authority of its officers or agents who have been clothed by it with ostensible or apparent
authority.—Even assuming for the sake of argument that the Administrator had no authority to bind
NIA, the latter is already estopped after repeatedly representing to Hydro that the Administrator had
such authority. A corporation may be held in estoppel from denying as against third persons the
authority of its officers or agents who have been clothed by it with ostensible or apparent authority.
Indeed—. . . The rule is of course settled that “[a]lthough an officer or agent acts without, or in excess
of, his actual authority if he acts within the scope of an apparent authority with which the corporation
has clothed him by holding him out or permitting him to appear as having such authority, the
corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such
apparent authority, as where an officer is allowed to exercise a particular authority with respect to
the business, or a particular branch of it, continuously and publicly, for a considerable time.”. . .

MONFORT HERMANOS VS MONFORT

Corporation Law; Corporation Code; Corporations; By the express mandate of the Corporation Code
(Section 26), all corporations duly organized pursuant thereto are required to submit within the
period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities,
and residences of the directors, trustees and officers elected.— By the express mandate of the
Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to
submit within the period therein stated (30 days) to the Securities and Exchange Commission the
names, nationalities and residences of the directors, trustees and officers elected. Sec. 26 of the
Corporation Code provides, thus: “Sec. 26. Report of election of directors, trustees and officers.—
Within thirty (30) days after the election of the directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities and residences of the directors, trustees and officers elected. x
x x” Evidently, the objective sought to be achieved by Section 26 is to give the public information,
under sanction of oath of responsible officers, of the nature of business, financial condition and
operational status of 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 corporation’s financial resources and business responsibility.

MCLEOD VS NLRC

Corporation Law; As a rule, a corporation that purchases the assets of another will not be liable for
the debts of the selling corporation, provided the former acted in good faith and paid adequate
consideration for such assets; Exceptions.—As a rule, a corporation that purchases the assets of
another will not be liable for the debts of the selling corporation, provided the former acted in good
faith and paid adequate consideration for such assets, except when any of the following
circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts,
(2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling
corporation fraudulently enters into the transaction to escape liability for those debts.

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

Labor Law; Employer-Employee Relationship; Procedural Rules and Technicalities; Appointment


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

Same; Same; Doctrine of Piercing the Veil of Corporate Existence; While a corporation may exist for
any lawful purpose, the law will regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality.—A
corporation is an artificial being invested by law with a personality separate and distinct from that of
its stockholders and from that of other corporations to which it may be connected. While a
corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in
case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for
fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies
only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation
is the mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation. To disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly. It cannot be presumed.

Same; Same; Same; The existence of interlocking incorporators, directors, and officers is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy
considerations.—The existence of interlocking incorporators, directors, and officers is not enough
justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy
considerations. In Del Rosario v. NLRC, 187 SCRA 777 (1990), the Court ruled that substantial identity
of the incorporators of corporations does not necessarily imply fraud.

Same; Same; Same; In the absence of malice, bad faith, or specific provision of law, a stockholder or
an officer of a corporation cannot be made personally liable for corporate liabilities.—On Patricio’s
personal liability, it is settled that in the absence of malice, bad faith, or specific provision of law, a
stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. To
reiterate, a corporation is a juridical entity with legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations
incurred by the corporation, acting through its directors, officers, and employees, are its sole
liabilities. Personal liability of corporate directors, trustees or officers attaches only when (1) they
assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross
negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the
corporation, its stockholders or other persons; (2) they consent to the issuance of watered down
stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary
their written objection; (3) they agree to hold themselves personally and solidarily liable with the
corporation; or (4) they are made by specific provision of law personally answerable for their
corporate action.

Same; Same; Same; Bad faith does not connote bad judgment or negligence—it imports a dishonest
purpose or some moral obliquity and conscious wrongdoing.—The records are bereft of any evidence
that Patricio acted with malice or bad faith. Bad faith is a question of fact and is evidentiary. Bad faith
does not connote bad judgment or negligence. It imports a dishonest purpose or some moral
obliquity and conscious wrongdoing. It means breach of a known duty through some ill motive or
interest. It partakes of the nature of fraud. In the present case, there is nothing substantial on record
to show that Patricio acted in bad faith in terminating McLeod’s services to warrant Patricio’s
personal liability. PMI had no other choice but to stop plant operations. The work stoppage therefore
was by necessity. The company could no longer continue with its plant operations because of the
serious business losses that it had suffered. The mere fact that Patricio was president and director of
PMI is not a ground to conclude that he should be held solidarily liable with PMI for McLeod’s money
claims.

Same; Same; Same; The rule is still that the doctrine of piercing the corporate veil applies only when
the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime.—The rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable,
such corporate officer cannot be made personally liable for corporate liabilities. Neither Article 212(c)
nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable
for the debts of the corporation.

CARAG VS NLRC

Same; Corporation Law; The rule is that a director is not personally liable for the debts of the
corporation, which has a separate legal personality of its own; Section 31 of the Corporation Code
makes a director personally liable for corporate debts if he willfully and knowingly votes for or assents
to patently unlawful acts of the corporation, or if he is guilty of gross negligence or bad faith in
directing the affairs of the corporation.—This case also raises this issue: when is a director personally
liable for the debts of the corporation? The rule is that a director is not personally liable for the debts
of the 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: 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 personal or pecuniary interest in conflict with their duty as such directors
or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons. x x x x Section 31 makes a director
personally liable for corporate debts if he willfully and knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31 also makes a director personally liable if he is guilty of
gross negligence or bad faith in directing the affairs of the corporation.

Same; Same; Piercing the Veil of Corporate Fiction; To hold a director personally liable for debts of the
corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director
must be established clearly and convincingly.—To hold a director personally liable for debts of the
corporation, and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of the director
must be established clearly and convincingly. Bad faith is 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 partakes of the nature of fraud.

Same; Same; Same; Notice Requirement; 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 is a violation of procedural
due process but does not amount to an unlawful or criminal act.—Neither does bad faith arise
automatically just because a corporation fails to comply with the notice requirement of labor laws on
company closure or dismissal of 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 is a violation of procedural
due process but does not amount to an unlawful or criminal act. Such procedural defect is called
illegal dismissal because it fails to comply with mandatory procedural requirements, but it is not
illegal in the sense that it constitutes an unlawful or criminal act.

Same; Same; Same; Dismissals; Mere failure to comply with the notice requirement of labor laws on
company closure or dismissal of employees does not amount to a patently unlawful act.—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 notice requirement of labor laws on company closure or dismissal of employees does not amount
to a patently unlawful act. Patently 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.

Same; Same; Same; Article 212(e) of the Labor Code, by itself, does not make a corporate officer
personally liable for the debts of the corporation.—We have already ruled in McLeod v. NLRC, 512
SCRA 222 (2007) and Spouses Santos v. NLRC, 187 SCRA 777 (1990), that Article 212(e) of the Labor
Code, by itself, does not make a corporate officer personally liable for the debts of the corporation.
The governing law on personal liability of directors for debts of the corporation is still Section 31 of
the Corporation Code. Thus, we explained in McLeod: Personal liability of corporate directors,
trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation,
or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a
conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) they
consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not
forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves
personally and solidarily liable with the corporation; or (4) they are made by specific provision of law
personally answerable for their corporate action.

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