FIRST DIVISION

[G.R. No. 131367. August 31, 2000]

HUTCHISON PORTS PHILIPPINES LIMITED, petitioner, vs. SUBIC
BAY METROPOLITAN AUTHORITY, INTERNATIONAL CONTAINER
TERMINAL SERVICES INC., ROYAL PORT SERVICES INC. and the
EXECUTIVE SECRETARY, respondents.
DECISION
YNARES-SANTIAGO, J.:
On February 12, 1996, the Subic Bay Metropolitan Authority (or SBMA)
advertised in leading national daily newspapers and in one
international publication,[1] an invitation offering to the private sector
the opportunity to develop and operate a modern marine container
terminal within the Subic Bay Freeport Zone. Out of seven bidders
who responded to the published invitation, three were declared by the
SBMA as qualified bidders after passing the pre-qualification
evaluation conducted by the SBMAs Technical Evaluation Committee
(or SBMA-TEC). These are: (1) International Container Terminal
Services, Inc. (or ICTSI); (2) a consortium consisting of Royal Port
Services, Inc. and HPC Hamburg Port Consulting GMBH (or RPSI);
and (3) Hutchison Ports Philippines Limited (or HPPL), representing a
consortium composed of HPPL, Guoco Holdings (Phils.), Inc. and
Unicol Management Services, Inc. All three qualified bidders were
required to submit their respective formal bid package on or before
July 1, 1996 by the SBMAs Pre-qualification, Bids and Awards
Committee (or SBMA-PBAC).
Thereafter, the services of three (3) international
consultants[2] recommended by the World Bank for their expertise
were hired by SBMA to evaluate the business plans submitted by each
of the bidders, and to ensure that there would be a transparent and
comprehensive review of the submitted bids. The SBMA also hired the
firm of Davis, Langdon and Seah Philippines, Inc. to assist in the
evaluation of the bids and in the negotiation process after the winning
bidder is chosen. All the consultants, after such review and evaluation
unanimously concluded that HPPLs Business Plan was far superior to
that of the two other bidders.[3]
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 second port in the Philippines based on Executive Order
No. 212 and Department of Transportation and Communication
(DOTC) Order 95-863. RPSI thus requested that the financial bid of
ICTSI should be set aside.[4]
Nevertheless, the opening of the sealed financial bids proceeded
under advisement relative to the protest signified by RPSI. The
financial bids, more particularly the proposed royalty fee of each
bidder, was as follows:
ICTSI ------------US$57.80 TEU
HPPL ------------US$20.50 TEU
RPSI -------------US$15.08 TEU
The SBMA-PBAC decided to suspend the announcement of the
winning bid, however, and instead gave ICTSI seven (7) days within
which to respond to the letter-protest lodged by RPSI. The HPPL
joined in RPSIs protest, stating that ICTSI should be disqualified
because it was already operating the Manila International Container
Port (or MICP), which would give rise to inevitable conflict of interest
between the MICP and the Subic Bay Container Terminal facility.[5]
On August 15, 1996, the SBMA-PBAC issued a resolution rejecting the
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:
RESOLVED FURTHER, that the winning bid be awarded to
HUTCHISON PORTS PHILIPPINES LIMITED (HPPL) and
that negotiations commence immediately with HPPL (HUTCHISON)
with a view to concluding an acceptable agreement within 45 days of
this date failing which negotiations with RPSI (ROYAL) will commence
with a view to concluding an acceptable agreement within 45 days
thereafter failing which there will be declared a failure of bids.
[6] (Underscoring supplied)
The following day, ICTSI filed a letter-appeal with SBMAs Board of
Directors requesting the nullification and reversal of the above-quoted
resolution rejecting ICTSIs bid while awarding the same to HPPL. But
even before the SBMA Board could act on the appeal, ICTSI filed a
similar appeal before the Office of the President.[7] On August 30,

1996, then Chief Presidential Legal Counsel (CPLC) Renato L.

Cayetano submitted a memorandum to then President Fidel V. Ramos,
containing the following recommendations:
We therefore suggest that the President direct 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:
1.
Reinstate ICTSIs bid;
2.
Disregard all arguments relating to monopoly;
3.
The re-evaluation must be limited to the parties financial bids.
3.1
Considering that the parties business have been accepted
(passed), strictly follow the criteria for bid evaluation provided for in
pars. (c) and (d), Part B (1) of the Tender Document.
4.
In the re-evaluation, the COA should actively participate to
determine which of the financial bids is more advantageous.
5.
In addition, all the parties should be given ample opportunity to
elucidate or clarify the components/justification for their respective
financial bids in order to ensure fair play and transparency in the
proceedings.
6.
The Presidents authority to review the final award shall
remain.[8] (Underscoring supplied)
The recommendation of CPLC Cayetano was approved by President
Ramos, and a copy of President Ramos handwritten approval was
sent to the SBMA Board of Directors. Accordingly, the SBMA Board,
with the concurrence of representatives of the Commission on Audit,
agreed to focus the reevaluation of the bids in accordance with the
evaluation criteria and the detailed components contained in the
Tender Document, including all relevant information gleaned from the
bidding documents, as well as the reports of the three international
experts and the consultancy firm hired by the SBMA.
On September 19, 1996, the SBMA Board issued a Resolution,
declaring:
NOW, THEREFORE, IT IS HEREBY RESOLVED that the bid that
conforms to the Invitation to Tender, that has a realistic Business Plan
offering the greatest financial return to SBMA, the best possible offer
and the most advantageous to the government is that of HPPL
and HPPL is accordingly selected as the winning bidder and is hereby
awarded the concession for the operation and development of the
Subic Bay Container Terminal.[9] (Underscoring supplied)
In a letter dated September 24, 1996, the SBMA Board of Directors
submitted to the Office of the President the results of the re-evaluation
of the bid proposals, to wit:
SBMA, through the unanimous vote of all the Board Members,
excluding the Chairman of the Board who voluntarily inhibited himself
from participating in the re-evaluation, selected the HPPL bid as the
winning bid, being: the conforming bid with a realistic Business Plan
offering the greatest financial return to the SBMA; the best possible
offer in the market, and the most advantageous to the government in
accordance with the Tender Document.[10]
Notwithstanding the SBMA Boards recommendations and action
awarding the project to HPPL, then Executive Secretary Ruben Torres
submitted a memorandum to the Office of the President recommending
that another rebidding be conducted.[11] Consequently, the Office of
the President issued a Memorandum directing the SBMA Board of
Directors to refrain from signing the Concession Contract with HPPL
and to conduct a rebidding of the project.[12]
In the meantime, the Resident Ombudsman for the DOTC filed a
complaint against members of the SBMA-PBAC before the Office of
the Ombudsman for alleged violation of Section 3(e) of Republic Act
No. 3019 for awarding the contract to HPPL. On April 16, 1997, the
Evaluation and Preliminary Investigation Bureau of the Office of the
Ombudsman issued a Resolution absolving the members of the
SBMA-PBAC of any liability and dismissing the complaint against
them, ruling thus:
After an assiduous study of the respective contentions of both parties,
we are inclined to hold, as it is hereby held, that there is no proof on
record pinpointing respondents to have acted in excess of their
discretion when they awarded the bid to HPPL. Records revealed that
respondents, in the exercise of their discretion in determining the
financial packages offered by the applicants, were guided by the expert
report of Davis, Langdon and Seah (DLS) that fairly evaluated which of
the bidders tender the greatest financial return to the
government. There is no showing that respondents had abused their
prerogatives. As succinctly set forth in the DLS report it stated, among

others, that, in assessing the full financial return to SBMA offered by

the bidders, it is necessary to consider the following critical matters:
1.
Royalty fees
2.
Volume of TEUs as affected by:
a.
Tariff rates;
b.
Marketing strategy;
c.
Port facilities; and
d.
Efficient reliable services.
With the preceding parameters for the evaluation of bidders business
plan, the respondents were fairly guided by, as they aligned their
judgment in congruence with, the opinion of the panel of experts and
the SBMAs Technical Evaluation Committee to the effect that HPPLs
business is superior while that of ICTSIs appeared to be unrealistically
high which may eventually hinder the competitiveness of the SBMA
port with the rest of the world. Respondents averred that the panel of
World Bank experts noted that ICTSIs high tariff rates at U.S. $119.00
per TEU is already higher by 37% through HPPL, which could further
increase by 20% in the first two (2) years and by 5% hike
thereafter. In short, high tariffs would discourage potential customers
which may be translated into low cargo volume that will eventually
reduce financial return to SBMA. Respondents asserted that HPPLs
business plan offers the greatest financial return which could be
equated that over the five years, HPPL offers 1.25 billion pesos while
ICTSI offers P0.859 billion, and RPSI offers P.420 billion. Over the first
ten years HPPL gives P2.430 billion, ICTSI tenders P2.197 billion and
RPSI has P1.632 billion.
Viewed from this perspective alongside with the evidence on record,
the undersigned panel does not find respondents to have exceeded
their discretion in awarding the bid to HPPL. Consequently, it could not
be said that respondents act had placed the government at a grossly
disadvantageous plight that could have jeopardized the interest of the
Republic of the Philippines.[13]
On July 7, 1997, the HPPL, feeling aggrieved by the SBMAs failure
and refusal to commence negotiations and to execute the Concession
Agreement despite its earlier pronouncements that HPPL was the
winning bidder, filed a complaint[14] against SBMA before the Regional
Trial Court (RTC) of Olongapo City, Branch 75, for specific
performance, mandatory injunction and damages. In due time, ICTSI,
RPSI and the Office of the President filed separate Answers-inIntervention[15] to the complaint opposing the reliefs sought by
complainant HPPL.
Complainant HPPL alleged and argued therein that a binding and
legally enforceable contract had been established between HPPL and
defendant SBMA under Article 1305 of the Civil Code, considering that
SBMA had repeatedly declared and confirmed that HPPL was the
winning bidder. Having accepted HPPLs offer to operate and develop
the proposed container terminal, defendant SBMA is duty-bound to
comply with its obligation by commencing negotiations and drawing up
a Concession Agreement with plaintiff HPPL. HPPL also pointed out
that the bidding procedure followed by the SBMA faithfully complied
with existing laws and rules established by SBMA itself; thus, when
HPPL was declared the winning bidder it acquired the exclusive right to
negotiate with the SBMA. Consequently, plaintiff HPPL posited that
SBMA should be: (1) barred from conducting a re-bidding of the
proposed project and/or performing any such acts relating thereto; and
(2) prohibited from negotiating with any party other than plaintiff HPPL
until negotiations between HPPL and SBMA have been concluded or in
the event that no acceptable agreement could be arrived at. Plaintiff
HPPL also alleged that SBMAs continued refusal to negotiate the
Concession Contract is a substantial infringement of its proprietary
rights, and caused damage and prejudice to plaintiff HPPL.
Hence, HPPL prayed that:
(1) Upon the filing of this complaint, hearings be scheduled to
determine the propriety of plaintiffs mandatory injunction application
which seeks to order defendant or any of its appropriate officers or
committees to forthwith specify the date as well as to perform any and
all such acts (e.g. laying the ground rules for discussion) for the
commencement of negotiations with plaintiff with the view to signing at
the earliest possible time a Concession Agreement for the
development and operation of the Subic Bay Container Terminal.
(2) Thereafter, judgment be rendered in favor of plaintiff and against
defendant:
2.1. Making permanent the preliminary mandatory injunction it had
issued;

2.2. Ordering defendant to implement the Concession Agreement it

had executed with plaintiff in respect of the development and operation
of the proposed Subic Bay Container Terminal;
2.3. Ordering defendant to pay for the cost of plaintiffs attorneys
fees in the amount of P500,000.00, or as otherwise proven during the
trial.
Plaintiff prays for other equitable reliefs.[16]
During the pre-trial hearing, one of the issues raised and submitted for
resolution was whether or not the Office of the President can set aside
the award made by SBMA in favor of plaintiff HPPL and if so, can the
Office of the President direct the SBMA to conduct a re-bidding of the
proposed project.
While the case before the trial court was pending litigation, on August
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.[17] On October 20, 1997, plaintiff HPPL
received a copy of the minutes of the pre-bid conference which stated
that the winning bidder would be announced on December 5, 1997.
[18] Then on November 4, 1997, plaintiff HPPL learned that the SBMA
had accepted the bids of ICTSI and RPSI who were the only bidders
who qualified.
In order to enjoin the rebidding while the case was still pending,
plaintiff HPPL filed a motion for maintenance of the status quo[19] on
October 28, 1997. The said motion was denied by the court a quo in
an Order dated November 3, 1997, to wit:
Plaintiff maintains that by voluntarily participating in this proceedings,
the defendant and the intervenors have unqualifiedly agreed to submit
the issue of the propriety, legality and validity of the Office of the
Presidents directive that the SBMA effect a rebidding of its
concession contract or the operation of the Subic Bay Container
Terminal. As such, the status quo must be maintained in order not to
thwart the courts ability to resolve the issues presented. Further, the
ethics of the profession require that counsel should discontinue any act
which tends to render the issues academic.
The Opposition is anchored on lack of jurisdiction since the issuance of
a cease-and-desist order would be tantamount to the issuance of a
Temporary Restraining Order or a Writ of Injunction which this Court
cannot do in light of the provision of Section 21 of R.A. 7227 which
states:
Section 21. Injunction and Restraining Order. The implementation of
the projects for the conversion into alternative productive uses of the
military reservations are urgent and necessary and shall not be
restrained or enjoined except by an order issued by the Supreme Court
of the Philippines.
During the hearing on October 30, 1997, SBMAs counsel revealed that
there is no law or administrative rule or regulation which requires that a
bidding be accomplished within a definite time frame.
Truly, the matter of the deferment of the re-bidding on November 4,
1997 rests on the sound discretion of the SBMA. For this Court to
issue a cease-and-desist order would be tantamount to an issuance of
a Temporary Restraining Order or a Writ of Preliminary
Injunction. (Prado v. Veridiano II, G.R. No. 98118, December 6, 1991).
The Court notes that the Office of the President has not been heard
fully on the issues. Moreover, one of the intervenors is of the view that
the issue of jurisdiction must be resolved first, ahead of all the other
issues.
WHEREFORE, and viewed from the foregoing considerations,
plaintiffs motion is DENIED.
SO ORDERED.[20] (Underscoring supplied)
Hence, this petition filed by petitioner (plaintiff below) HPPL against
respondents SBMA, ICTSI, RPSI and the Executive Secretary seeking
to obtain a prohibitory injunction. The grounds relied upon by
petitioner HPPL to justify the filing of the instant petition are summed
up as follows:
29.
It is respectfully submitted that to allow or for this
Honorable Court to otherwise refrain from restraining SBMA, during the
pendency of this suit, from committing the aforementioned act(s) which
will certainly occur on 5 December 1997 such action (or inaction) will
work an injustice upon petitioner which has validly been announced as
the winning bidder for the operation of the Subic Bay Container
Terminal.
30.
To allow or for this Honorable Court to otherwise refrain
from restraining SBMA, during the pendency of this suit, from
committing the aforementioned threatened acts would be in violation of

petitioners rights in respect of the action it had filed before the RTC of
Olongapo City in Civil Case No. 243-O-97, and could render any
judgment which may be reached by said Court moot and
ineffectual. As stated, the legal issues raised by the parties in that
proceedings are of far reaching importance to the national pride and
prestige, and they impact on the integrity of government agencies
engaged in international bidding of privatization projects. Its resolution
on the merits by the trial court below and, thereafter, any further action
to be taken by the parties before the appellate courts will certainly
benefit respondents and the entire Filipino people.[21]
WHEREFORE, petitioner HPPL sought relief praying that:
a) Upon the filing of this petition, the same be given due course and a
temporary restraining order and/or writ of preliminary injunction be
issued ex parte, restraining SBMA or any of its committees, or other
persons acting under its control or direction or upon its instruction, from
declaring any winner on 5 December 1997 or at any other date
thereafter, in connection with the rebidding for the privatization of the
Subic Bay Container Terminal and/or for any, some or all of the
respondents to perform any such act(s) in pursuance thereof, until
further orders from this Honorable Court;
b) After appropriate proceedings, judgment be rendered in favor of
petitioner and against respondents -(1) Ordering SBMA to desist from conducting any rebidding or in
declaring the winner of any such rebidding in respect of the
development and operation of the Subic Bay Container Terminal until
the judgment which the RTC of Olongapo City may render in Civil
Case No. 243-O-97 is resolved with finality;
(2) Declaring null and void any award which SBMA may announce or
issue on 5 December 1997; and
(3) Ordering respondents to pay for the cost of suit.
Petitioner prays for other equitable reliefs.[22]
The instant petition seeks the issuance of an injunctive writ for the sole
purpose of holding in abeyance the conduct by respondent SBMA of a
rebidding of the proposed SBICT project until the case for specific
performance is resolved by the trial court. In other words, petitioner
HPPL prays that the status quo be preserved until the issues raised in
the main case are litigated and finally determined. Petitioner was
constrained to invoke this Courts exclusive jurisdiction and authority by
virtue of the above-quoted Republic Act 7227, Section 21.
On December 3, 1997, this Court granted petitioner HPPLs application
for a temporary restraining order enjoining the respondent SBMA or
any of its committees, or other persons acting under its control or
direction or upon its instruction, from declaring any winner on
December 5, 1997 or at any other date thereafter, in connection with
the rebidding for the privatization of the Subic Bay Container Terminal
and/or for any, some or all of the respondents to perform any such act
or acts in pursuance thereof.[23]
There is no doubt that since this controversy arose, precious time has
been lost and a vital infrastructure project has in essense been
mothballed to the detriment of all parties involved, not the least of
which is the Philippine Government, through its officials and agencies,
who serve the interest of the nation. It is, therefore, imperative that the
issues raised herein and in the court a quo be resolved without further
delay so as not to exacerbate an already untenable situation.
At the outset, the application for the injunctive writ is only a provisional
remedy, a mere adjunct to the main suit.[24] Thus, it is not uncommon
that the issues in the main action are closely intertwined, if not
identical, to the allegations and counter allegations propounded by the
opposing parties in support of their contrary positions concerning the
propriety or impropriety of the injunctive writ. While it is not our
intention to preempt the trial courts determination of the issues in the
main action for specific performance, this Court has a bounden duty to
perform; that is, to resolve the matters before this Court in a manner
that gives essence to justice, equity and good conscience.
While our pronouncements are for the purpose only of determining
whether or not the circumstances warrant the issuance of the writ of
injunction, it is inevitable that it may have some impact on the main
action pending before the trial court. Nevertheless, without delving into
the merits of the main case, our findings herein shall be confined to the
necessary issues attendant to the application for an injunctive writ.
For an injunctive writ to be issued, the following requisites must be
proven:
First.
That the petitioner/applicant must have a clear and
unmistakable right.

Second. That there is a material and substantial invasion of such right.

Third.
That there is an urgent and permanent necessity for the writ
to prevent serious damage.[25]
To our mind, petitioner HPPL has not sufficiently shown that it has a
clear and unmistakable right to be declared the winning bidder with
finality, such that the SBMA can be compelled to negotiate a
Concession Contract. Though the SBMA Board of Directors, by
resolution, may have declared HPPL as the winning bidder, said award
cannot be said to be final and unassailable. The SBMA Board of
Directors and other officers are subject to the control and supervision
of the Office of the President. All projects undertaken by SBMA require
the approval of the President of the Philippines under Letter of
Instruction No. 620, which places the SBMA under its ambit as an
instrumentality, defined in Section 10 thereof as an agency of the
national government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes
regulatory agencies, chartered institutions and government owned and
controlled corporations.[26] (Underscoring supplied)
As a chartered institution, the SBMA is always under the direct control
of the Office of the President, particularly when contracts and/or
projects undertaken by the SBMA entail substantial amounts of
money. Specifically, Letter of Instruction No. 620 dated October 27,
1997 mandates that the approval of the President is required in all
contracts of the national government offices, agencies and
instrumentalities, including government-owned or controlled
corporations involving two million pesos (P2,000,000.00) and above,
awarded through public bidding or negotiation. The President may,
within his authority, overturn or reverse any award made by the SBMA
Board of Directors for justifiable reasons. It is well-established that the
discretion to accept or reject any bid, or even recall the award thereof,
is of such wide latitude that the courts will not generally interfere with
the exercise thereof by the executive department, unless it is apparent
that such exercise of discretion is used to shield unfairness or
injustice. When the President issued the memorandum setting aside
the award previously declared by the SBMA in favor of HPPL and
directing that a rebidding be conducted, the same was, within the
authority of the President and was a valid exercise of his
prerogative. Consequently, petitioner HPPL acquired no clear and
unmistakable right as the award announced by the SBMA prior to the
Presidents revocation thereof was not final and binding.
There being no clear and unmistakable right on the part of petitioner
HPPL, the rebidding of the proposed project can no longer be enjoined
as there is no material and substantial invasion to speak of. Thus,
there is no longer any urgent or permanent necessity for the writ to
prevent any perceived serious damage. In fine, since the requisites for
the issuance of the writ of injunction are not present in the instant case,
petitioners application must be denied for lack of merit.[27]
Finally, we focus on the matter of whether or not petitioner HPPL has
the legal capacity to even seek redress from this Court. Admittedly,
petitioner HPPL is a foreign corporation, organized and existing under
the laws of the British Virgin Islands. While the actual bidder was a
consortium composed of petitioner, and two other corporations,
namely, Guoco Holdings (Phils.) Inc. and Unicol Management
Servises, Inc., it is only petitioner HPPL that has brought 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
able to file and prosecute an action before Philippines courts.
The maelstrom of this issue is whether participating in the bidding is a
mere isolated transaction, or did it constitute engaging in or
transacting business in the Philippines such that petitioner HPPL
needed a license to do business in the Philippines before it could come
to court.
There is no general rule or governing principle laid down as to what
constitutes doing or engaging in or transacting business in the
Philippines. Each case must be judged in the light of its peculiar
circumstances.[28] Thus, it has often been held that a single act or
transaction may be considered as doing business when a corporation
performs acts for which it was created or exercises some of the
functions for which it was organized. The amount or volume of the
business is of no moment, for even a singular act cannot be merely

incidental or casual if it indicates the foreign corporations intention to

do business.[29]
Participating in the bidding process constitutes doing business
because it shows the foreign corporations intention to engage in
business here. The bidding for the concession contract is but an
exercise of the corporations reason for creation or existence. Thus, it
has been held that a foreign company invited to bid for IBRD and ADB
international projects in the Philippines will be considered as doing
business in the Philippines for which a license is required. In this
regard, it is the performance by a foreign corporation of the acts for
which it was created, regardless of volume of business, that
determines whether a foreign corporation needs a license or not.[30]
The primary purpose of the license requirement is to compel a foreign
corporation desiring to do business within the Philippines to submit
itself to the jurisdiction of the courts of the state and to enable the
government to exercise jurisdiction over them for the regulation of their
activities in this country.[31] If a foreign corporation operates a
business in the Philippines without 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 welcome in this land to collaborate with us
for our mutual benefit, they must be prepared as an indispensable
condition to respect and be bound by Philippine law in proper cases,
as in the one at bar.[32] The requirement of a license is not intended
to put foreign corporations at a disadvantage, for the doctrine of lack of
capacity to sue is based on considerations of sound public policy.
[33] Accordingly, petitioner HPPL 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.
WHEREFORE, in view of all the foregoing, the instant petition is
hereby DISMISSED for lack of merit. Further, the temporary
restraining order issued on December 3, 1997 is LIFTED and SET
ASIDE. No costs.
SO ORDERED.
Puno, Kapunan, and Pardo, JJ., concur.
Davide, Jr., C.J., (Chairman), in the result.

FIRST DIVISION
[G.R. No. 159586. July 26, 2004]
EUROPEAN RESOURCES AND TECHNOLOGIES, INC. and DELFIN
J. WENCESLAO, petitioners, vs. INGENIEUBURO BIRKHAHN +
NOLTE, Ingeniurgesellschaft mbh and HEERS & BROCKSTEDT
GMBH & CO., respondents.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this Petition for Review under Rule 45 of the Rules of Court
is the Decision[1] of the Court of Appeals dated May 15, 2003, which
sustained the Order of the Regional Trial Court of Angeles City, Branch
61, dated June 28, 2001, and its subsequent Resolution dated August
3, 2003 denying petitioners motion for reconsideration.
European Resources and Technologies Inc. (hereinafter ERTI), a
corporation organized and existing under the laws of the Republic of
the Philippines, is joined by Delfin J. Wenceslao as petitioner in this
case. Ingenieuburo Birkhan + Nolte Ingiurgesellschaft mbh and Heers
& Brockstedt Gmbh & Co. are German corporations who are
respondents in this case and shall be collectively referred to as the
German Consortium.
The German Consortium tendered and submitted its bid to the Clark
Development Corporation (CDC) to construct, operate and manage
the Integrated Waste Management Center at the Clark Special
Economic Zone (CSEZ). CDC accepted the German Consortiums
bid and awarded the contract to it. On October 6, 1999, CDC and the
German Consortium executed the Contract for Services[2] which
embodies the terms and conditions of their agreement.
The Contract for Services provides that the German Consortium shall
be empowered to enter into a contract or agreement for the use of the
integrated waste management center by corporations, local
government units, entities, and persons not only within the CSEZ but
also outside. For waste collected within the CSEZ, the German
Consortium may impose a tipping fee per ton of waste collected from
locators and residents of the CSEZ, which fees shall be subject to the

schedule agreed upon by the parties and specified in the Contract for
Services. For its operations outside of the CSEZ, the German
Consortium shall pay CDC US$1.50 per ton of non-hazardous solid
waste collected.[3] The CDC shall guarantee that nineteen thousand
eighteen hundred (19,800) tons per year of solid waste volume shall be
collected from inside and outside the CSEZ.[4] The contract has a term
of twenty-five (25) years,[5] during which time the German Consortium
shall operate the waste management center on a day-to-day basis.[6]
Article VIII, Section 7 of the Contract for Services provides that the
German Consortium shall undertake to organize a local corporation as
its representative for this project. On April 18, 2000, the German
Consortium entered into a Joint Venture with D.M. Wenceslao and
Associates, Inc. (DMWAI) and Ma. Elena B. Villarama (doing
business as LBV and Associates), embodied in a Memorandum of
Understanding[7] (MOU) signed by the parties. Under the MOU, the
parties agreed to jointly form a local corporation to which the German
Consortium shall assign its rights under the Contract for
Services. Pursuant to this agreement, petitioner European Resources
and Technologies, Inc. was incorporated. The parties likewise agreed
to prepare and finalize a Shareholders Agreement within one (1)
month from the execution of the MOU, which shall provide that the
German Consortium shall own fifteen percent (15%) of the equity in the
joint venture corporation, DMWAI shall own seventy percent (70%) and
LBV&A shall own fifteen percent (15%). In the event that the parties
fail to execute the Shareholders Agreement, the MOU shall be
considered null and void.[8]
On August 1, 2000, without the Shareholders Agreement having been
executed, the German Consortium and petitioner ERTI entered into a
Memorandum of Agreement (MOA)[9]whereby the German Consortium
ceded its rights and obligations under the Contract for Services in favor
of ERTI and assigned unto ERTI, among others, its license from CDC
to engage in the business of providing environmental services needed
in the CSEZ in connection with the waste management within the
CSEZ and other areas.[10] Likewise, the parties agreed that should
there be a disagreement between or among them relative to the
interpretation or implementation of the MOA and the collateral
documents including but not limited to the Contract for Services
between the German Consortium and CDC, the dispute shall be
referred to a panel of arbitrators.[11]
On December 11, 2000, ERTI received a letter from BN Consultants
Philippines, Inc., signed by Mr. Holger Holst for and on behalf of the
German Consortium,[12] stating that the German Consortiums
contract with DMWAI, LBV&A and ERTI has been terminated or
extinguished on the following grounds: (a) the CDC did not give its
approval to the Consortiums request for the approval of the
assignment or transfer by the German Consortium in favor of ERTI of
its rights and interests under the Contract for Services; (b) the parties
failed to prepare and finalize the Shareholders Agreement pursuant to
the provision of the MOU; (c) there is no more factual or legal basis for
the joint venture to continue; and (d) with the termination of the MOU,
the MOA is also deemed terminated or extinguished.
Attached to the letter was a copy of the letter of the CDC,[13] stating
that the German Consortiums assignment of an eighty-five percent
(85%) majority interest to another party violated its representation to
undertake both the financial and technical aspects of the project. The
dilution of the Consortiums interest in ERTI is a substantial
modification of the Consortiums representations which were used as
bases for the award of the project to it.
On February 20, 2001, petitioner ERTI, through counsel, sent a letter
to CDC requesting for the reconsideration of its disapproval of the
agreement between ERTI and the German Consortium.
Before CDC could act upon petitioner ERTIs letter, the German
Consortium filed a complaint for injunction against herein petitioners
before the Regional Trial Court of Angeles City, Branch 61, docketed
as Civil Case No. 10049. The German Consortium claimed that
petitioner ERTIs continued misrepresentation as to their right to accept
solid wastes from third parties for processing at the waste
management center will cause irreparable damage to the Consortium
and its exclusive right to operate the waste management center at the
CSEZ. Moreover, petitioner ERTIs acts destroy the Consortiums
credibility and undermine 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 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 management center at CSEZ.
[14]
Petitioners filed their Opposition to the application for preliminary
injunction on February 7, 2001. The following day, February 8, 2001,
petitioners sent respondents, through Mr. Holger Holst, a letter
demanding that the parties proceed to arbitration in accordance with
Section 17 of the MOA. At the hearings on the application for
injunction, petitioners objected to the presentation of evidence on the
ground that the trial court had no jurisdiction over the case since the
German Consortium was composed of foreign corporations doing
business in the country without a license. Moreover, the MOA between
the parties provides that the dispute should be referred to arbitration.
The trial court overruled the objection and proceeded with the
hearing. On June 28, 2001, the trial court issued an Order granting the
writ of preliminary injunction.[15] Petitioners filed a motion for
reconsideration, which was denied in a Resolution dated November
21, 2001.
On January 17, 2002, petitioners filed a petition for certiorari and
prohibition under Rule 65 of the Rules of Court before the Court of
Appeals, assailing the trial courts Orders datedJune 28,
2001 and November 21, 2001.
Meanwhile, on February 11, 2002, the temporary restraining order
issued was lifted in view of respondents failure to file sufficient bond.
[16] On September 6, 2002, all proceedings in Civil Case No. 10049
were suspended until the petition for certiorari pending before the
Court of Appeals shall have been resolved.[17]
On May 15, 2003, the Court of Appeals dismissed the petition for
certiorari. Petitioners Motion for Reconsideration was denied in a
Resolution dated August 25, 2003.
Hence, this petition arguing that the Court of Appeals committed
reversible error in:
(a)
Ruling that petitioners are estopped from assailing the capacity
of the respondents to institute the suit for injunction
(b)
Ruling that respondents are entitled to an injunctive writ.
(c)
Not holding that the dispute is covered by the arbitration clause
in the memorandum of agreement.
(d)
Issuing the writ of preliminary injunction that is tantamount to a
decision of the case on the merits.[18]
The petition is partly meritorious.
There is no general rule or governing principle laid down as to what
constitutes doing or engaging in or transacting business in
the Philippines. Thus, it has often been held that a single act or
transaction may be considered as doing business when a corporation
performs acts for which it was created or exercises some of the
functions for which it was organized.[19] We have held that the act of
participating in a bidding process constitutes doing business because
it shows the foreign corporations intention to engage in business in
thePhilippines. In this regard, it is the performance by a foreign
corporation of the acts for which it was created, regardless of volume
of business, that determines whether a foreign corporation needs a
license or not.[20]
Consequently, the German Consortium is doing business in
the Philippines without the appropriate license as required by our
laws. By participating in the bidding conducted by the CDC for the
operation of the waste management center, the German Consortium
exhibited its intent to transact business in the Philippines. Although the
Contract for Services provided for the establishment of a local
corporation to serve as respondents representative, it is clear from the
other provisions of the Contract for Services as well as the letter by the
CDC containing the disapproval that it will be the German Consortium
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
the CSEZ for solid waste collection. Thus, it is clear that the local
corporation to be established will merely act as a conduit or extension
of the German Consortium.
As a general rule, unlicensed foreign non-resident corporations cannot
file suits in the Philippines. Section 133 of the Corporation Code
specifically provides:
SECTION 133.
No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding in
any court or administrative agency of the Philippines, but such

corporation may be sued or proceeded against before Philippine courts

or administrative tribunals on any valid cause of action recognized
under Philippine laws.
A corporation has legal status only within the state or territory in which
it was organized. For this reason, a corporation organized in another
country has no personality to file suits in the Philippines. In order to
subject a foreign corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license from the Securities
and Exchange Commission (SEC) and appoint an agent for service of
process. Without such license, it cannot institute a suit in
the Philippines.[21]
However, there are exceptions to this rule. In a number of cases,
[22] 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
and Design, Inc. v. Court of Appeals,[23] a foreign corporation
instituted an action before our courts seeking to enjoin a local
corporation, with whom it had a Representative Agreement, from
using its corporate name, letter heads, envelopes, sign boards and
business dealings as well as the foreign corporations trademark. The
case arose when the 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 Philippines without license may sue in Philippine
Courts a Philippine citizen or entity that had contracted with and
benefited from it.
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
committed a breach of or sought to renege on its obligations. The rule
relating to estoppel is deeply rooted in the axiom of commodum ex
injuria sua non habere debetno person ought to derive any
advantage from his own wrong.
In the case at bar, petitioners have clearly not received any benefit
from its transactions with the German Consortium. In fact, there is no
question that petitioners were the ones who have expended a
considerable amount of money and effort preparatory to the
implementation of the MOA. Neither do petitioners seek to back out
from their obligations under both the MOU and the MOA by challenging
respondents capacity to sue. The reverse could not be any more
accurate. Petitioners are insisting on the full validity and
implementation of their agreements with the German Consortium.
To rule that the German Consortium has the capacity to institute an
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. We cannot allow this without violating the very rationale for
the law prohibiting a foreign corporation not licensed to do business in
the Philippines from suing or maintaining an action in Philippine
courts. The object of requiring a license is not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring
domicile for the purpose of business without taking the steps
necessary to render it amenable to suits in the local courts.[24] In other
words, the foreign corporation is merely prevented from being in a
position where it takes the good without accepting the bad.
On the issue of whether the respondents were entitled to the injunctive
writ, the petitioners claim that respondents right is not in esse but is
rather a future right which is contingent upon a judicial declaration that
the MOA has been validly rescinded. The Court of Appeals, in its
decision, held that the MOA should be deemed subject to a suspensive
condition, that is, that CDCs prior written consent must be obtained for
the validity of the assignment.
This issue must be resolved in a separate proceeding. It must be
noted that the hearing conducted in the trial court was merely a
preliminary hearing relating to the issuance of the injunctive writ. In
order to fully appreciate the facts of this case and the surrounding
circumstances relating to the agreements and contract involved, further
proof should be presented for consideration of the court. Likewise,
corollary matters, such as whether either of the parties is liable for
damages and to what extent, cannot be resolved with absolute
certainty, thus rendering any decision we might make incomplete as to
fully dispose of this case.
More importantly, it is evident that CDC must be made a proper party
in any case which seeks to resolve the effectivity or ineffectivity of its

disapproval of the assignment made between petitioners and

respondent German Consortium. Where, as in the instant case, CDC
is not impleaded as a party, any decision of the court which will
inevitably affect or involve CDC cannot be deemed binding on it.
For the same reason, petitioners assertion that the instant case should
be referred to arbitration pursuant to the provision of the MOA is
untenable.
We have ruled in several cases that arbitration agreements are valid,
binding, enforceable and not contrary to public policy such that when
there obtains a written provision for arbitration which is not complied
with, the trial court should suspend the proceedings and order the
parties to proceed to arbitration in accordance with the terms of their
agreement.[25] In the case at bar, the MOA between petitioner ERTI
and respondent German Consortium provided:
17. Should there be a disagreement between or among the Parties
relative to the interpretation or implementation of this Agreement and
the collateral documents including but not limited to the Contract for
Services between GERMAN CONSORTIUM and CDC and the Parties
cannot resolve the same by themselves, the same shall be endorsed
to a panel of arbitrators which shall be convened in accordance with
the process ordained under the Arbitration Law of the Republic of the
Philippines.[26]
Indeed, to brush aside a contractual agreement calling for arbitration in
case of disagreement between parties would be a step backward.
[27] But there are exceptions to this rule. Even if there is an arbitration
clause, there are instances when referral to arbitration does not appear
to be the most prudent action. The object of arbitration is to allow the
expeditious determination of a dispute. Clearly, the issue before us
could not be speedily and efficiently resolved in its entirety if we allow
simultaneous arbitration proceedings and trial, or suspension of trial
pending arbitration.[28]
As discussed earlier, the dispute between respondent German
Consortium and petitioners involves the disapproval by the CDC of the
assignment by the German Consortium of its rights under the Contract
for Services to petitioner ERTI. Admittedly, the arbitration clause is
contained in the MOA to which only the German Consortium and
petitioner ERTI were parties. Even if the case is brought before an
arbitration panel, the decision will not be binding upon CDC who is a
non-party to the arbitration agreement. What is more, the arbitration
panel will not be able to completely dispose of all the issues of this
case without including CDC in its proceedings. Accordingly, the
interest of justice would only be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
Lastly, petitioners question the propriety of the issuance of writ of
preliminary injunction claiming that such is already tantamount to
granting the main prayer of respondents complaint without the benefit
of a trial. Petitioners point out that the purpose of a preliminary
injunction is to prevent threatened or continuous irremediable injury to
some of the parties before their claims can be thoroughly studied and
decided. It cannot be used to railroad the main case and seek a
judgment without a full-blown trial as in the instant case.
The Court of Appeals ruled that since petitioners did not raise this
issue during the hearing on the application for preliminary injunction
before the trial court, the same cannot be raised for the first time on
appeal and even in special civil actions for certiorari as in this case.
At the outset, it must be noted that with the finding that the German
Consortium is without any personality to file the petition with the trial
court, the propriety of the injunction writ issued is already moot and
academic. Even assuming for the sake of argument that respondents
have the capacity to file the petition, we find merit in the issue raised
by petitioners against the injunction writ issued.
Before an injunctive writ can be issued, it is essential that the following
requisites are present: (1) there must be a right in esse or the
existence of a right to be protected; and (2) the act against which
injunction to be directed is a violation of such right.[29] The onus
probandi is on movant to show that there exists a right to be protected,
which is directly threatened by the act sought to be enjoined. Further,
there must be a showing that the invasion of the right is material and
substantial and that there is an urgent and paramount necessity for the
writ to prevent a serious damage.[30]
Thus, it is clear that for the issuance of the writ of preliminary injunction
to be proper, it must be shown that the invasion of the right sought to
be protected is material and substantial, that the right of complainant is
clear and unmistakable and that there is an urgent and paramount

necessity for the writ to prevent serious damage.[31] At the time of its
application for an injunctive writ, respondents right to operate and
manage the waste management center, to the exclusion of or without
any participation by petitioner ERTI, cannot be said to be clear and
unmistakable. The MOA executed between respondents and petitioner
ERTI has not yet been judicially declared as rescinded when the
complaint was lodged in court.[32] Hence, a cloud of doubt exists over
respondent German Consortiums exclusive right relating to the waste
management center.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. SP No.
68923 dated May 15, 2003 is REVERSED and SET ASIDE. The
Orders of the trial court dated June 28, 2001and November 21,
2001 are ANNULLED and SET ASIDE and Civil Case No. 10049 is
DISMISSED for lack of legal capacity of respondents to institute the
action. Costs against respondents.
SO ORDERED.
Davide, Jr., C.J., Quisumbing, Carpio, and Azcuna, JJ., concur.
G.R. No. 152580
CONSUELO METAL CORPORATION,
Petitioner,
- versus PLANTERS DEVELOPMENT
BANK and ATTY. JESUSA PRADO- Promulgated:
MANINGAS, in her capacity as
Ex-officio Sheriff of Manila,
Respondents.
June 26, 2008
CARPIO, J.:
The Case
This is a petition for review[1] seeking to reverse the 14
December 2001 Decision[2] and the 6 March 2002 Resolution[3] of the
Court of Appeals in CA-G.R. SP No. 65069. In its 14 December 2001
Decision, the Court of Appeals dismissed petitioner Consuelo Metal
Corporations (CMC) petition for certiorari and affirmed the 25 April
2001 Order[4] of the Regional Trial Court, Branch 46, Manila (trial
court). In its 6 March 2002 Resolution, the Court of Appeals partially
granted CMCs motion for reconsideration and remanded the case to
the Securities and Exchange Commission (SEC) for further
proceedings.
The Facts
On 1 April 1996, CMC filed before the SEC a petition to be
declared in a state of suspension of payment, for rehabilitation, and for
the appointment of a rehabilitation receiver or management committee
under Section 5(d) of Presidential Decree No. 902-A.[5] On 2 April
1996, the SEC, finding the petition sufficient in form and substance,
declared that all actions for claims against CMC pending before any
court, tribunal, office, board, body and/or commission are deemed
suspended immediately until further order from the SEC.[6]
In an Order dated 13 September 1999, the SEC directed the
creation of a management committee to undertake CMCs
rehabilitation and reiterated the suspension of all actions for claims
against CMC.[7]
On 29 November 2000, upon the management committees
recommendation,[8] the SEC issued an Omnibus Order directing the
dissolution and liquidation of CMC.[9] The SEC also directed that the
proceedings on and implementation of the order of liquidation be
commenced at the Regional Trial Court to which this case shall be
transferred.[10]
Thereafter, respondent Planters Development Bank (Planters
Bank), one of CMCs creditors, commenced the extra-judicial
foreclosure of CMCs real estate mortgage. Public auctions were
scheduled on 30 January 2001 and 6 February 2001.
CMC filed a motion for the issuance of a temporary restraining
order and a writ of preliminary injunction with the SEC to enjoin the
foreclosure of the real estate mortgage. On 29 January 2001, the SEC
issued a temporary restraining order to maintain the status quo and
ordered the immediate transfer of the case records to the trial court.
[11]
The case was then transferred to the trial court. In its 25 April
2001 Order, the trial court denied CMCs motion for issuance of a
temporary restraining order. The trial court ruled that since the SEC

had already terminated and decided on the merits CMCs petition for
suspension of payment, the trial court no longer had legal basis to act
on CMCs motion.
On 28 May 2001, the trial court denied CMCs motion for
reconsideration.[12] The trial court ruled that CMCs petition for
suspension of payment could not be converted into a petition for
dissolution and liquidation because they covered different subject
matters and were governed by different rules. The trial court stated
that CMCs remedy was to file a new petition for dissolution and
liquidation either with the SEC or the trial court.
CMC filed a petition for certiorari with the Court of
Appeals. CMC alleged that the trial court acted with grave abuse of
discretion amounting to lack of jurisdiction when it required CMC to file
a new petition for dissolution and liquidation with either the SEC or the
trial court when the SEC clearly retained jurisdiction over the case.
On 13 June 2001, Planters Bank extra-judicially foreclosed the
real estate mortgage.[13]
The Ruling of the Court of Appeals
On 14 December 2001, the Court of Appeals dismissed the
petition and upheld the 25 April 2001 Order of the trial court. The
Court of Appeals held that the trial court correctly denied CMCs motion
for the issuance of a temporary restraining order because it was only
an ancillary remedy to the petition for suspension of payment which
was already terminated. The Court of Appeals added that, under
Section 121 of the Corporation Code,[14] the SEC has jurisdiction to
hear CMCs petition for dissolution and liquidation.
CMC filed a motion for reconsideration. CMC argued that it
does not have to file a new petition for dissolution and liquidation with
the SEC but that the case should just be remanded to the SEC as a
continuation of its jurisdiction over the petition for suspension of
payment. CMC also asked that Planters Banks foreclosure of the real
estate mortgage be declared void.
In its 6 March 2002 Resolution, the Court of Appeals partially
granted CMCs motion for reconsideration and ordered that the case
be remanded to the SEC under Section 121 of the Corporation
Code. The Court of Appeals also ruled that since the SEC already
ordered CMCs dissolution and liquidation, Planters Banks foreclosure
of the real estate mortgage was in order.
Planters Bank filed a motion for reconsideration questioning the
remand of the case to the SEC. In a resolution dated 19 July 2002, the
Court of Appeals denied the motion for reconsideration.
Not satisfied with the 6 March 2002 Resolution, CMC filed this
petition for review on certiorari.
The Issues
CMC raises the following issues:
1. Whether the present case falls under Section 121 of the
Corporation Code, which refers to the SECs jurisdiction over CMCs
dissolution and liquidation, or is only a continuation of the SECs
jurisdiction over CMCs petition for suspension of payment; and
2. Whether Planters Banks foreclosure of the real estate mortgage
is valid.
The Courts Ruling
The petition has no merit.
The SEC has jurisdiction to order CMCs dissolution
but the trial court has jurisdiction over CMCs liquidation.
While CMC agrees with the ruling of the Court of Appeals that
the SEC has jurisdiction over CMCs dissolution and liquidation, CMC
argues that the Court of Appeals remanded the case to the SEC on the
wrong premise that the applicable law is Section 121 of the
Corporation Code. CMC maintains that the SEC retained jurisdiction
over its dissolution and liquidation because it is only a continuation of
the SECs jurisdiction over CMCs original petition for suspension of
payment which had not been finally disposed of as of 30 June 2000.
On the other hand, Planters Bank insists that the trial court has
jurisdiction over CMCs dissolution and liquidation. Planters Bank
argues that dissolution and liquidation are entirely new proceedings for
the termination of the existence of the corporation which are
incompatible with a petition for suspension of payment which seeks to
preserve corporate existence.

Republic Act No. 8799 (RA 8799)[15] transferred to the

appropriate regional trial courts the SECs jurisdiction defined under
Section 5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:
The Commissions jurisdiction over all cases enumerated under Sec. 5
of Presidential Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided,
That the 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 involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year from the
enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30
June 2000 until finally disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for
suspension of payment and issued a suspension order on 2 April 1996
after it found CMCs petition to be sufficient in form and
substance. While CMCs petition was still pending with the SEC as
of 30 June 2000, it was finally disposed of on 29 November 2000 when
the SEC issued its Omnibus Order directing the dissolution of CMC
and the transfer of the liquidation proceedings before the appropriate
trial court. The SEC finally disposed of CMCs petition for suspension
of payment when it determined that CMC could no longer be
successfully rehabilitated.
However, the SECs jurisdiction does not extend to the
liquidation of a corporation. While the SEC has jurisdiction to order the
dissolution of a corporation,[16]jurisdiction over the liquidation of the
corporation now pertains to the appropriate regional trial courts. This
is the reason why the SEC, in its 29 November 2000 Omnibus Order,
directed that the proceedings on and implementation of the order of
liquidation be commenced at the Regional Trial Court to which this
case shall be transferred. This is the correct procedure because the
liquidation of a corporation requires the settlement of claims for and
against the corporation, which clearly falls under the jurisdiction of the
regular courts. The trial court is in the best position to convene all the
creditors of the corporation, ascertain their claims, and determine their
preferences.
Foreclosure of real estate mortgage is valid.
CMC maintains that the foreclosure is void because it was
undertaken without the knowledge and previous consent of the
liquidator and other lien holders. CMC adds that the rules on
concurrence and preference of credits should apply in foreclosure
proceedings. Assuming that Planters Bank can foreclose the
mortgage, CMC argues that the foreclosure is still void because it was
conducted in violation of Section 15, Rule 39 of the Rules of Court
which states that the sale should not be earlier than nine oclock in the
morning and not later than two oclock in the afternoon.
On the other hand, Planters Bank argues that it has the right to
foreclose the real estate mortgage because of non-payment of the loan
obligation. Planters Bank adds that the rules on concurrence and
preference of credits and the rules on insolvency are not applicable in
this case because CMC has been not been declared insolvent and
there are no insolvency proceedings against CMC.
In Rizal Commercial Banking Corporation v. Intermediate
Appellate Court,[17] we held that if rehabilitation is no longer feasible
and the assets of the corporation are finally liquidated, secured
creditors shall enjoy preference over unsecured creditors, subject only
to the provisions of the Civil Code on concurrence and preference of
credits. Creditors of secured obligations may pursue their security
interest or lien, or they may choose to abandon the preference and
prove their credits as ordinary claims.[18]
Moreover, Section 2248 of the Civil Code provides:
Those credits which enjoy preference in relation to specific real
property or real rights, exclude all others to the extent of the value of
the immovable or real right to which the preference refers.
In this case, Planters Bank, as a secured creditor, enjoys
preference over a specific mortgaged property and has a right to
foreclose the mortgage under Section 2248 of the Civil Code. The
creditor-mortgagee has the right to foreclose the mortgage over a
specific real property whether or not the debtor-mortgagor is under
insolvency or liquidation proceedings. The right to foreclose such
mortgage is merely suspended upon the appointment of a

management committee or rehabilitation receiver[19] or upon the

issuance of a stay order by the trial court.[20] However, the creditormortgagee may exercise his right to foreclose the mortgage upon the
termination of the rehabilitation proceedings or upon the lifting of the
stay order.[21]
Foreclosure proceedings have in their favor the presumption of
regularity and the burden of evidence to rebut the same is on the party
that seeks to challenge the proceedings.[22] CMCs challenge to the
foreclosure proceedings has no merit. The notice of sale clearly
specified that the auction sale will be held at 10:00 oclock in the
morning or soon thereafter, but not later than 2:00 oclock in the
afternoon.[23] The Sheriffs Minutes of the Sale stated that the
foreclosure sale was actually opened at 10:00 A.M. and commenced
at 2:30 P.M.[24] There was nothing irregular about the foreclosure
proceedings.
WHEREFORE, we DENY the petition. We REINSTATE the 29
November 2000 Omnibus Order of the Securities and Exchange
Commission directing the Regional Trial Court, Branch 46, Manila to
immediately undertake the liquidation of Consuelo Metal
Corporation. We AFFIRM the ruling of the Court of Appeals that
Planters Development Banks extra-judicial foreclosure of the real
estate mortgage is valid.
SO ORDERED.

SECOND DIVISION
[G.R. No. 143866. August 22, 2005]
POLIAND INDUSTRIAL LIMITED, petitioner, vs. NATIONAL
DEVELOPMENT COMPANY, DEVELOPMENT BANK OF THE
PHILIPPINES, and THE HONORABLE COURT OF APPEALS
(Fourteenth Division) respondents.
[G.R. No. 143877. August 22, 2005]
NATIONAL DEVELOPMENT COMPANY, petitioner, vs. POLIAND
INDUSTRIAL LIMITED, respondent.
DECISION
TINGA, J.:
Before this Court are two Rule 45 consolidated petitions for review
seeking the review of the Decision[1] of the Court of Appeals (Fourth
Division) in CA-G.R. CV No. 53257, which modified the Decision of the
Regional Trial Court, Branch 61, Makati City in Civil Case No. 91-2798.
Upon motion of the Development Bank of the Philippines (DBP), the
two petitions were consolidated since both assail the same Decision of
the Court of Appeals.
In G.R. No. 143866, petitioner Poliand Industrial Limited (POLIAND)
seeks judgment declaring the National Development Company (NDC)
and the DBP solidarily liable in the amount of US$2,315,747.32,
representing the maritime lien in favor of POLIAND and the net amount
of loans incurred by Galleon Shipping Corporation (GALLEON). It also
prays that NDC and DBP be ordered to pay the attorneys fees and
costs of the proceedings as solidary debtors. In G.R. No. 143877,
petitioner NDC seeks the reversal of the Court of
Appeals Decisionordering it to pay POLIAND the amount of One
Million Nine Hundred Twenty Thousand Two Hundred Ninety-Eight and
56/100 United States Dollars (US$1,920,298.56), corresponding to the
maritime lien in favor of POLIAND, plus interest.
ANTECEDENTS
The following factual antecedents are matters of record.
Between October 1979 and March 1981, Asian Hardwood Limited
(Asian Hardwood), a Hong Kong corporation, extended credit
accommodations in favor of GALLEON totaling US$3,317,747.32.[2] At
that time, GALLEON, a domestic corporation organized in 1977 and
headed by its president, Roberto Cuenca, was engaged in the
maritime transport of goods. The advances were utilized to augment
GALLEONs working capital depleted as a result of the purchase of five
new vessels and two second-hand vessels in 1979 and
competitiveness of the shipping industry. GALLEON had incurred an
obligation in the total amount of US$3,391,084.91 in favor of Asian
Hardwood.
To finance the acquisition of the vessels, GALLEON obtained loans
from Japanese lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank
Ltd. and Marubeni Benelux. On October 10, 1979, GALLEON, through
Cuenca, and DBP executed a Deed of Undertaking[3] whereby DBP
guaranteed the prompt and punctual payment of GALLEONs

borrowings from the Japanese lenders. To secure DBPs guarantee

under the Deed of Undertaking, GALLEON promised, among others, to
secure a first mortgage on the five new vessels and on the secondhand vessels. Thus, GALLEON executed on January 25, 1982 a
mortgage contract over five of its vessels namely, M/V Galleon Honor,
M/V Galleon Integrity, M/V Galleon Dignity, M/V Galleon Pride, and
M/V Galleon Trust in favor of DBP.[4]
Meanwhile, on January 21, 1981, President Ferdinand Marcos issued
Letter of Instruction (LOI) No. 1155, directing NDC to acquire the entire
shareholdings of GALLEON for the amount originally contributed by its
shareholders payable in five (5) years without interest cost to the
government. In the same LOI, DBP was to advance to GALLEON
within three years from its effectivity the principal amount and the
interest thereon of GALLEONs maturing obligations.
On August 10, 1981, GALLEON, represented by its president, Cuenca,
and NDC, represented by Minister of Trade Roberto Ongpin, forged
a Memorandum of Agreement,[5] whereby NDC and GALLEON agreed
to execute a share purchase agreement within sixty days for the
transfer of GALLEONs shareholdings. Thereafter, NDC assumed the
management and operations of GALLEON although Cuenca remained
president until May 9, 1982.[6] Using its own funds, NDC paid Asian
Hardwood on January 15, 1982 the amount of US$1,000,000.00 as
partial settlement of GALLEONs obligations.[7]
On February 10, 1982, LOI No. 1195 was issued directing the
foreclosure of the mortgage on the five vessels. For failure of
GALLEON to pay its debt despite repeated demands from DBP, the
vessels were extrajudicially foreclosed on various dates and acquired
by DBP for the total amount of P539,000,000.00. DBP subsequently
sold the vessels to NDC for the same amount.[8]
On April 22, 1982, the Board of Directors of GALLEON amended the
Articles of Incorporation changing the corporate name from Galleon
Shipping Corporation to National Galleon Shipping Corporation and
increasing the number of directors from seven to nine.[9]
Asian Hardwood assigned its rights over the outstanding obligation of
GALLEON of US$2,315,747.32 to World Universal Trading and
Investment Company, S.A. (World Universal), embodied in a Deed of
Assignment executed on April 29, 1989.[10] World Universal, in turn,
assigned the credit to petitioner POLIAND sometime in July 1989.[11]
On March 24, 1988, then President Aquino issued Administrative Order
No. 64, directing NDC and Philippine Export and Foreign Loan
Guarantee Corporation (now Trade and Investment Development
Corporation of the Philippines) to transfer some of their assets to the
National Government, through the Asset Privatization Trust (APT) for
disposition. Among those transferred to the APT were the five
GALLEON vessels sold at the foreclosure proceedings.
On September 24, 1991, POLIAND made written demands on
GALLEON, NDC, and DBP for the satisfaction of the outstanding
balance in the amount of US$2,315,747.32.[12] For failure to heed the
demand, POLIAND instituted a collection suit against NDC, DBP and
GALLEON filed on October 10, 1991 with the Regional Trial Court,
Branch 61, Makati City. POLIAND claimed that under LOI No. 1155
and the Memorandum of Agreement between GALLEON and NDC,
defendants GALLEON, NDC, and DBP were solidarily liable to
POLIAND as assignee of the rights of the credit advances/loan
accommodations to GALLEON. POLIAND also claimed that it had a
preferred maritime lien over the proceeds of the extrajudicial
foreclosure sale of GALLEONs vessels mortgaged by NDC to DBP.
The complaint prayed for judgment ordering NDC, DBP, and
GALLEON to pay POLIAND jointly and severally the balance of the
credit advances/loan accommodations in the amount of
US$2,315,747.32 and attorneys fees of P100,000.00 plus 20% of the
amount recovered. By way of an alternative cause of action, POLIAND
sought reimbursement from NDC and DBP for the preferred maritime
lien of US$1,193,298.56.[13]
In its Answer with Compulsory Counterclaim and Cross-claim, DBP
denied being a party to any of the alleged loan transactions.
Accordingly, DBP argued that POLIANDs complaint stated no cause of
action against DBP or was barred by the Statute of Frauds because
DBP did not sign any memorandum to act as guarantor for the alleged
credit advances/loan accommodations in favor of POLIAND. DBP also
denied any liability under LOI No. 1155, which it described as immoral
and unconstitutional, since it was rescinded by LOI No. 1195. By way
of its Affirmative Allegations and Defenses, DBP countered that it was
unaware of the maritime lien on the five vessels mortgaged in its favor

and that as far as GALLEONs foreign borrowings are concerned, DBP

agreed to act as guarantor thereof only under the conditions laid down
under the Deed of Undertaking. DBP prayed for the award of actual,
moral and exemplary damages and attorneys fees against POLIAND
as compulsory counterclaim. In the event that it be adjudged liable for
the payment of the loan accommodations and the maritime liens, DBP
prayed that its co-defendant GALLEON be ordered to indemnify DBP
for the full amount.[14]
For its part, NDC denied any participation in the execution of the loan
accommodations/credit advances and acquisition of ownership of
GALLEON, asserting that it acted only as manager of GALLEON. NDC
specifically denied having agreed to the assumption of GALLEONs
liabilities because no purchase and sale agreement was executed and
the delivery of the required shares of stock of GALLEON did not take
place.[15]
Upon motion by POLIAND, the trial court dropped GALLEON as a
defendant, despite vigorous oppositions from NDC and DBP. At the
pre-trial conference on April 29, 1993, the trial court issued
an Order limiting the issues to the following: (1) whether or not
GALLEON has an outstanding obligation in the amount of
US$2,315,747.32; (2) whether or not NDC and DBP may be held
solidarily liable therefor; and (3) whether or not there exists a preferred
maritime lien of P1,000,000.00 in favor of POLIAND.[16]
After trial on the merits, the court a quo rendered a decision on August
9, 1996 in favor of POLIAND. Finding that GALLEONs loan
advances/credit accommodations were duly established by the
evidence on record, the trial court concluded that under LOI No. 1155,
DBP and NDC are liable for those obligations. The trial court also
found NDC liable for GALLEONs obligations based on
the Memorandum of Agreement dated August 1981 executed between
GALLEON and NDC, where it was provided that NDC shall prioritize
repayments of GALLEONs valid and subsisting liabilities subject of a
meritorious lawsuit or which have been arranged and guaranteed by
Cuenca. The trial court was of the opinion that despite the subsequent
issuance of LOI No. 1195, NDC and DBPs obligation under LOI No.
1155 subsisted because vested rights of the parties have arisen
therefrom. Accordingly, the trial court interpreted LOI No. 1195s
directive to limit and protect to mean that DBP and NDC should not
assume or incur additional exposure with respect to GALLEON.[17]
The trial court dismissed NDCs argument that the Memorandum of
Agreement was merely a preliminary agreement, noting that under
paragraph nine thereof, the only condition for the payment of
GALLEONs subsisting loans by NDC was the determination by the
latter that those obligations were incurred in the ordinary course of
GALLEONs business. The trial court did not regard the non-execution
of the stock purchase agreement as fatal to POLIANDs cause since its
non-happening was solely attributable to NDC. The trial court also
ruled that POLIAND had preference to the maritime lien over the
proceeds of the extrajudicial foreclosure sale of GALLEONs vessels
since the loan advances/credit accommodations utilized for the
payment of expenses on the vessels were obtained prior to the
constitution of the mortgage in favor of DBP.
In sum, NDC and DBP were ordered to pay POLIAND as follows:
WHEREFORE, premises above considered, judgment is hereby
rendered for plaintiff as against defendants DBP and NDC, who are
hereby ORDERED as follows:
1.
To jointly and severally PAY plaintiff POLIAND the amount of
TWO MILLION THREE HUNDRED FIFTEEN THOUSAND SEVEN
HUNDRED FORTY SEVEN AND 21/100 [sic] United States Dollars
(US$2,315,747.32) computed at the official exchange rate at the time
of payment, plus interest at the rate of 12% per annum from 25
September 1991 until fully paid;
2.
To PAY the amount of ONE MILLION (P1,000,000.) Pesos,
Philippine Currency, for and as attorneys fees; and
3.
To PAY the costs of the proceedings.
SO ORDERED.[18]
Both NDC and DBP appealed the trial courts decision.
The Court of Appeals rendered a modified judgment, absolving DBP of
any liability in view of POLIANDs failure to clearly prove its action
against DBP. The appellate court also discharged NDC of any liability
arising from the credit advances/loan obligations obtained by
GALLEON on the ground that NDC did not acquire ownership of
GALLEON but merely assumed control over its management and
operations. However, NDC was held liable to POLIAND for the

payment of the preferred maritime lien based on LOI No. 1195 which
directed NDC to discharge such maritime liens as may be necessary
to allow the foreclosed vessels to engage on the international shipping
business, as well as attorneys fees and costs of suit. The dispositive
portion of the Decision reads:
WHEREFORE, the assailed decision is MODIFIED, in accordance with
the foregoing findings, as follows:
The case against defendant-appellant DBP is hereby DISMISSED.
Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee
POLIAND the amount of US$1,920,298.56 plus legal interest effective
September 12, 1984.
The award of attorneys fees and cost of suit is addressed only against
NDC.
Costs against defendant-appellant NDC.
SO ORDERED.[19]
Not satisfied with the modified judgment, both POLIAND and NDC
elevated it to this Court via two separate petitions for review
on certiorari. In G.R. No. 143866 filed on August 21, 2000, petitioner
POLIAND raises the following arguments:
RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND
REVERSIBLE ERRORS IN ITS QUESTIONED DECISION DATED 29
JUNE 2000 AND DECIDED QUESTIONS CONTRARY TO LAW AND
THE APPLICABLE DECISIONS OF THE HONORABLE COURT
WHEN IT MODIFIED THE DECISION DATED 09 AUGUST 1996
RENDERED BY THE REGIONAL TRIAL COURT (BRANCH 61)
CONSIDERING THAT:
A.
CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF
APPEALS, RESPONDENT NDC NOT ONLY TOOK OVER TOTALLY
THE MANAGEMENT AND CONTROL OF GALLEON BUT ALSO
ASSUMED OWNERSHIP OF GALLEON PURSUANT TO LOI NO.
1155 AND THE MEMORANDUM OF AGREEMENT DATED 10
AUGUST 1981; THUS, RESPONDENT NDCS ACQUISITION OF
FULL OWNERSHIP AND CONTROL OF GALLEON CARRIED WITH
IT THE ASSUMPTION OF THE LATTERS LIABILITIES TO THIRD
PARTIES SUCH AS ASIAN HARDWOOD, PETITIONER POLIANDS
PREDECESSOR-IN-INTEREST.
B.
RESPONDENT COURT OF APPEALS, IN VIOLATION OF THE
CONSTITUTION AND THE RULES OF COURT, DISMISSED THE
CASE AGAINST RESPONDENT DBP WITHOUT STATING CLEARLY
AND DISTINCTLY THE REASONS FOR SUCH A DISMISSAL.
C.
CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF
APPEALS, PETITIONER POLIAND WAS ABLE TO ESTABLISH THAT
RESPONDENT DBP IS SOLIDARILY LIABLE, TOGETHER WITH
RESPONDENT NDC, WITH RESPECT TO THE NET TOTAL
AMOUNT OWING TO PETITIONER POLIAND.
D.
RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN
NOT FINDING THAT RESPONDENT DBP IS JOINTLY AND
SOLIDARILY LIABLE WITH RESPONDENT NDC FOR THE
PAYMENT OF MARITIME LIENS PLUS INTEREST PURSUANT TO
SECTION 17 OF PRESIDENTIAL DECREEE 1521.[20]
On August 25, 2000, NDC filed its petition, docketed as G.R. No.
143877, imputing the following errors to the Court of Appeals:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER
NDC IS LIABLE TO PAY GALLEONS OUTSTANDING OBLIGATION
TO RESPONDENT POLIAND IN THE AMOUNT OF US$
1,920,298.56, TO SATISFY THE PREFERRED MARITIME LIENS
OVER THE PROCEEDS OF THE FORECLOSURE SALE OF THE
FIVE GALLEON VESSELS.
(A) PRESIDENTIAL DECREE NO. 1521 OTHERWISE KNOWN AS
THE SHIP MORTGAGE DECREE OF 1978 IS NOT APPLICABLE IN
THE CASE AT BAR.
(B) PETITIONER NDC DOES NOT HOLD THE PROCEEDS OF THE
FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS.
(C) THE FORECLOSURE SALE OF THE FIVE (5) GALLEON
VESSELS EXTINGUISHES ALL CLAIMS AGAINST THE VESSELS.
II.
THE COURT OF APPEALS ERRED IN AWARDING ATTORNEYS
FEES TO RESPONDENT POLIAND.[21]

The two petitions were consolidated considering that both petitions

assail the same Court of Appeals Decision, although on different
fronts. In G.R. No. 143866, POLIAND questions the appellate courts
finding that neither NDC nor DBP can be held liable for the loan
accommodations to GALLEON. In G.R. No. 143877, NDC asserts that
it is not liable to POLIAND for the preferred maritime lien.
ISSUES
The bone of contention revolves around two main issues, namely: (1)
Whether NDC or DBP or both are liable to POLIAND on the loan
accommodations and credit advances incurred by GALLEON, and (2)
Whether POLIAND has a maritime lien enforceable against NDC or
DBP or both.
RULING of the COURT
I. Liability on loan accommodations
and credit advances incurred by GALLEON
The Court of Appeals reversed the trial courts conclusion that NDC
and DBP are both liable to POLIAND for GALLEONs debts on the
basis of LOI No. 1155 and the Memorandum of Agreement. It
ratiocinated thus:
With respect to appellant NDC, resolution of the matters raised in its
assignment of errors hinges on whether or not it acquired the
shareholdings of GALLEON as directed by LOI 1155; and if in the
negative, whether or not it is liable to pay GALLEONs outstanding
obligation.
The Court answers the issue in the negative. The MOA executed by
GALLEON and NDC following the issuance of LOI 1155 called for the
execution of a formal share purchase agreement and the transfer of
all the shareholdings of seller to Buyer. Since no such execution and
consequent transfer of shareholdings took place, NDC did not acquire
ownership of GALLEON. It merely assumed actual control over the
management and operations of GALLEON in the exercise of which it,
on January 15, 1982, after being satisfied of the existence of
GALLEONs obligation to ASIAN HARDWOOD, partially paid the latter
One Million ($1,000,000.00) US dollars.[22]
....
With respect to defendant-appellant DBP, POLIAND failed to clearly
prove its cause of action against it. This leaves it unnecessary to dwell
on DBPs other assigned errors, including that bearing on its claim for
damages and attorneys fees which does not persuade.[23]
POLIANDs cause of action against NDC is premised on the theory
that when NDC acquired all the shareholdings of GALLEON, the
former also assumed the latters liabilities, including the loan
advances/credit accommodations obtained by GALLEON from
POLIANDs predecessors-in-interest. In G.R. No. 143866, POLIAND
argues that NDC acquired ownership of GALLEON pursuant to
paragraphs 1 and 2 of LOI No. 1155, which was implemented through
the execution of the Memorandum of Agreement. It believes that no
conditions were required prior to the assumption by NDC of
GALLEONs ownership and subsisting loans. Even assuming that
conditions were set, POLIAND opines that the conditions were deemed
fulfilled pursuant to Article 1186 of the Civil Code because of NDCs
apparent intent to prevent the execution of the share purchase
agreement.[24]
On the other hand, NDC asserts that it could not have acquired
GALLEONs equity and, consequently, its liabilities because LOI No.
1155 had been rescinded by LOI No. 1195, and therefore, became
inoperative and non-existent. Moreover, NDC, relying on the
pronouncements in Philippine Association of Service Exporters, Inc. et
al. v. Ruben D. Torres[25] andParong, et al. v. Minister Enrile,[26] is of
the opinion that LOI No. 1155 does not have the force and effect of law
and cannot be a valid source of obligation.[27] NDC denies POLIANDs
contention that it deliberately prevented the execution of the share
purchase agreement considering that Cuenca remained GALLEONs
president seven months after the signing of theMemorandum of
Agreement.[28] NDC contends that the Memorandum of
Agreement was a mere preliminary agreement between Cuenca and
Ongpin for the intended purchase of GALLEONs equity, prescribing
the manner, terms and conditions of said purchase.[29]
NDC, not liable under LOI No. 1155
As a general rule, letters of instructions are simply directives of the
President of the Philippines, issued in the exercise of his administrative
power of control, to heads of departments and/or officers under the
executive branch of the government for observance by the officials
and/or employees thereof.[30] Being administrative in nature, they do

not have the force and effect of a law and, thus, cannot be a valid
source of obligation. However, during the period when then President
Marcos exercised extraordinary legislative powers, he issued certain
decrees, orders and letters of instruction which the Court has declared
as having the force and effect of a statute. As pointed out by the Court
in Legaspi v. Minister of Finance,[31]paramount considerations
compelled the grant of extraordinary legislative power to the President
at that time when the nation was beset with threats to public order and
the purpose for which the authority was granted was specific to meet
the exigencies of that period, thus:
True, without loss of time, President Marcos made it clear that there
was no military take-over of the government, and that much less was
there being established a revolutionary government, even as he
declared that said martial law was of a double-barrelled type,
unfamiliar to traditional constitutionalists and political scientistsfor
two basic and transcendental objectives were intended by it: (1) the
quelling of nation-wide subversive activities characteristic not only of a
rebellion but of a state of war fanned by a foreign power of a different
ideology from ours, and not excluding the stopping effectively of a
brewing, if not a strong separatist movement in Mindanao, and (2) the
establishment of a New Society by the institution of disciplinary
measures designed to eradicate the deep-rooted causes of the
rebellion and elevate the standards of living, education and culture of
our people, and most of all the social amelioration of the poor and
underprivileged in the farms and in the barrios, to the end that
hopefully insurgency may not rear its head in this country again.[32]
Thus, before a letter of instruction is declared as having the force and
effect of a statute, a determination of whether or not it was issued in
response to the objectives stated in Legaspiis necessary. Parong, et al.
v. Minister Enrile[33] differentiated between LOIs in the nature of mere
administrative issuances and those forming part of the law of the land.
The following conditions must be established before a letter of
instruction may be considered a law:
To form part of the law of the land, the decree, order or LOI must be
issued by the President in the exercise of his extraordinary power of
legislation as contemplated in Section 6 of the 1976 amendments to
the Constitution, whenever in his judgment, there exists a grave
emergency or threat or imminence thereof, or whenever the interim
Batasan Pambansa or the regular National Assembly fails or is unable
to act adequately on any matter for any reason that in his judgment
requires immediate action.[34]
Only when issued under any of the two circumstances will a decree,
order, or letter be qualified as having the force and effect of law. The
decree or instruction should have been issued either when there
existed a grave emergency or threat or imminence or when the
Legislature failed or was unable to act adequately on the matter. The
qualification that there exists a grave emergency or threat or
imminence thereof must be interpreted to refer to the prevailing peace
and order conditions because the particular purpose the President was
authorized to assume legislative powers was to address the
deteriorating peace and order situation during the martial law period.
There is no doubt that LOI No. 1155 was issued on July 21, 1981 when
then President Marcos was vested with extraordinary legislative
powers. LOI No. 1155 was specifically directed to DBP, NDC and the
Maritime Industry Authority to undertake the following tasks:
LETTER OF INSTRUCTIONS NO. 1155
DEVELOPMENT BANK OF THE PHILIPPINES
NATIONAL DEVELOPMENT COMPANY
MARITIME INDUSTRY AUTHORITY
DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING
CORPORATION
....
1.
NDC shall acquire 100% of the shareholdings of Galleon
Shipping Corporation from its present owners for the amount of P46.7
million which is the amount originally contributed by the present
shareholders, payable after five years with no interest cost.
2.
NDC to immediately infuse P30 million into Galleon Shipping
Corporation in lieu of is previously approved subscription to Philippine
National Lines. In addition, NDC is to provide additional equity to
Galleon as may be required.
3.
DBP to advance for a period of three years from date hereof
both the principal and the interest on Galleon's obligations falling due
and to convert such advances into 12% preferred shares in Galleon
Shipping Corporation.

4.
DBP and NDC to negotiate a restructuring of loans extended by
foreign creditors of Galleon.
5.
MARINA to provide assistance to Galleon by mandating a
rational liner shipping schedule considering existing freight volumes
and to immediately negotiate a bilateral agreement with the United
States in accordance with UNCTAD resolutions.
....
Although LOI No. 1155 was undoubtedly issued at the time when the
President exercised legislative powers granted under Amendment No.
6 of the 1973 Constitution, the language and purpose of LOI No. 1155
precludes this Court from declaring that said LOI had the force and
effect of law in the absence of any of the conditions set out in Parong.
The subject matter of LOI No. 1155 is not connected, directly or
remotely, to a grave emergency or threat to the peace and order
situation of the nation in particular or to the public interest in general.
Nothing in the language of LOI No. 1155 suggests that it was issued to
address the security of the nation. Obviously, LOI No. 1155 was in the
nature of a mere administrative issuance directed to NDC, DBP and
MARINA to undertake a policy measure, that is, to rehabilitate a private
corporation.
NDC, not liable under the Corporation Code
The Court cannot accept POLIANDs theory that with the effectivity of
LOI No. 1155, NDC ipso facto acquired the interests in GALLEON
without disregarding applicable statutory requirements governing the
acquisition of a corporation. Ordinarily, in the merger of two or more
existing corporations, one of the combining corporations survives and
continues the combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the surviving
corporation.[35] The merger, however, does not become effective upon
the mere agreement of the constituent corporations.[36]
As specifically provided under Section 79[37] 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
governed by its own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government agency
should first be obtained. The issuance of the certificate of merger is
crucial because not only does it bear out SECs approval but also
marks the moment whereupon the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the
absorbed corporation ceases to exist but its rights, and properties as
well as liabilities shall be taken and deemed transferred to and vested
in the surviving corporation.[38]
The records do not show SEC approval of the merger. POLIAND
cannot assert that no conditions were required prior to the assumption
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
directing NDC to acquire the shareholdings in GALLEON, the
President could not have intended that the parties disregard the
requirements of law. In the absence of SEC approval, there was no
effective transfer of the shareholdings in GALLEON to NDC. Hence,
NDC did not acquire the rights or interests of GALLEON, including its
liabilities.
DBP, not liable under LOI No. 1155
POLIAND argues that paragraph 3 of LOI No. 1155 unequivocally
obliged DBP to advance the obligations of GALLEON.[39] DBP argues
that POLIAND has no cause of action against it under LOI No. 1155
which is void and unconstitutional.[40]
The Court affirms the appellate courts ruling that POLIAND does not
have any cause of action against DBP under LOI No. 1155. Being a
mere administrative issuance, LOI No. 1155 cannot be a valid source
of obligation because it did not create any privity of contract between
DBP and POLIAND or its predecessors-in-interest. At best, the
directive in LOI No. 1155 was in the nature of a grant of authority by
the President on DBP to enter into certain transactions for the
satisfaction of GALLEONs obligations. There is, however, nothing
from the records of the case to indicate that DBP had acted as surety
or guarantor, or had otherwise accommodated GALLEONs obligations
to POLIAND or its predecessors-in-interest.
II.
Liability on maritime lien

On the second issue of whether or not NDC is liable to POLIAND for

the payment of maritime lien, the appellate court ruled in the
affirmative, to wit:
Non-acquisition of ownership of GALLEON notwithstanding, NDC is
liable to pay ASIAN HARDWOODs successor-in-interest POLIAND the
equivalent of US$1,930,298.56 representing the proceeds of the loan
from Asian Hardwood which were spent by GALLEON for ship
modification and salaries of crew, to satisfy the preferred maritime liens
over the proceeds of the foreclosure sale of the 5 vessels.[41]
POLIAND contends that NDC can no longer raise the issue on the
latters liability for the payment of the maritime lien considering that
upon appeal to the Court of Appeals, NDC did not assign it as an error.
[42] Generally, an appellate court may only pass upon errors
assigned. However, this rule is not without exceptions. In the following
instances, the Court ruled that an appellate court is accorded a broad
discretionary power to waive the lack of assignment of errors and
consider errors not assigned:
(a) Grounds not assigned as errors but affecting the jurisdiction of
the court over the subject matter;
(b) Matters not assigned as errors on appeal but are evidently plain
or clerical errors within contemplation of law;
(c) Matters not assigned as errors on appeal but consideration of
which is necessary in arriving at a just decision and complete
resolution of the case or to serve the interests of a justice or to avoid
dispensing piecemeal justice;
(d) Matters not specifically assigned as errors on appeal but raised in
the trial court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or which the lower
court ignored;
(e) Matters not assigned as errors on appeal but closely related to an
error assigned;
(f) Matters not assigned as errors on appeal but upon which the
determination of a question properly assigned, is dependent.[43]
It is noteworthy that the question of NDC and DBPs liability on the
maritime lien had been raised by POLIAND as an alternative cause of
action against NDC and DBP and was passed upon by the trial court.
The Court of Appeals, however, reversed the trial courts finding that
NDC and DBP are liable to POLIAND for the payment of the credit
advances and loan accommodations and instead found NDC to be
solely liable on the preferred maritime lien although NDC did not
assign it as an error.
The records, however, reveal that the issue on the liability on the
preferred maritime lien had been properly raised and argued upon
before the Court of Appeals not by NDC but by DBP who was also
adjudged liable thereon by the trial court. DBPs appellants
brief[44] pointed out POLIANDs failure to present convincing evidence
to prove its alternative cause of action, which POLIAND disputed in its
appellees brief.[45] The issue on the maritime lien is a matter of record
having been adequately ventilated before and passed upon by the trial
court and the appellate court. Thus, by way of exception, NDC is not
precluded from again raising the issue before this Court even if it did
not specifically assign the matter as an error before the Court of
Appeals. Besides, this Court is clothed with ample authority to review
matters, even if they are not assigned as errors in the appeal if it finds
that their consideration is necessary in arriving at a just decision of the
case.[46]
Articles 578 and 580 of the Code
of Commerce, not applicable
NDC cites Articles 578[47] and 580[48] of the Code of Commerce to
bolster its argument that the foreclosure of the vessels extinguished all
claims against the vessels including POLIANDs claim.[49] Article 578
of the Code of Commerce is not relevant to the facts of the instant
case because it governs the sale of vessels in a foreign port. Said
provision outlines the formal and registration requirements in order that
a sale of a vessel on voyage or in a foreign port becomes effective as
against third persons. On the other hand, the resolution of the instant
case depends on the determination as to which creditor is entitled to
the proceeds of the foreclosure sale of the vessels. Clearly, Article 578
of the Code of Commerce is inapplicable.
Article 580, while providing for the order of payment of creditors in the
event of sale of a vessel, had been repealed by the pertinent
provisions of Presidential Decree (P.D.) No. 1521, otherwise known as
the Ship Mortgage Decree of 1978. In particular, Article 580 provides
that in case of the judicial sale of a vessel for the payment of creditors,

the debts shall be satisfied in the order specified therein. On the other
hand, Section 17 of P.D. No. 1521[50] also provides that in the judicial
or extrajudicial sale of a vessel for the enforcement of a preferred
mortgage lien constituted in accordance with Section 2 of P.D. No.
1521, such preferred mortgage lien shall have priority over all preexisting claims against the vessel, save for those claims enumerated
under Section 17, which have preference over the preferred mortgage
lien in the order stated therein. Since P.D. No. 1521 is a subsequent
legislation and since said law in Section 17 thereof confers on the
preferred mortgage lien on the vessel superiority over all other claims,
thereby engendering an irreconcilable conflict with the order of
preference provided under Article 580 of the Code of Commerce, it
follows that the Code of Commerce provision is deemed repealed by
the provision of P.D. No. 1521, as the posterior law.[51]
P.D. No. 1521 is applicable, not the
Civil Code provisions on
concurrence/preference of
credits
Whether or not the order of preference under Section 17, P.D. No.
1521 may be properly applied in the instant case depends on the
classification of the mortgage on the GALLEON vessels, that is, if it
falls within the ambit of Section 2, P.D. No. 1521, defining how a
preferred mortgage is constituted.
NDC and DBP both argue that POLIANDs claim cannot prevail over
DBPs mortgage credit over the foreclosed vessels because the
mortgage executed in favor of DBP pursuant to the October 10,
1979 Deed of Undertaking signed by GALLEON and DBP was an
ordinary ship mortgage and not a preferred one, that is, it was not
given in connection with the construction, acquisition, purchase or
initial operation of the vessels, but for the purpose of guaranteeing
GALLEONs foreign borrowings.[52]
Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage
on a vessel, to wit:
SECTION 2. Who may Constitute a Ship Mortgage. Any citizen of
the Philippines, or any association or corporation organized under the
laws of the Philippines, at least sixty per cent of the capital of which is
owned by citizens of the Philippines may, for the purpose of financing
the construction, acquisition, purchase of vessels or initial operation of
vessels, freely constitute a mortgage or any other lien or encumbrance
on his or its vessels and its equipment with any bank or other financial
institutions, domestic or foreign.
If the mortgage on the vessel is constituted for the purpose stated
under Section 2, the mortgage obtains a preferred status provided the
formal requisites enumerated under Section 4[53] are complied with.
Upon enforcement of the preferred mortgage and eventual foreclosure
of the vessel, the proceeds of the sale shall be first applied to the claim
of the mortgage creditor unless there are superior or preferential liens,
as enumerated under Section 17, namely:
SECTION 17.
Preferred Maritime Lien, Priorities, Other Liens.
(a) Upon the sale of any mortgaged vessel in any extra-judicial sale or
by order of a district court of the Philippines in any suit in rem in
admiralty for the enforcement of a preferred mortgage lien thereon, all
pre-existing claims in the vessel, including any possessory commonlaw lien of which a lienor is deprived under the provisions of Section 16
of this Decree, shall be held terminated and shall thereafter attach in
like amount and in accordance with the priorities established herein to
the proceeds of the sale. The preferred mortgage lien shall have
priority over all claims against the vessel, except the following claims in
the order stated: (1) expenses and fees allowed and costs taxed by the
court and taxes due to the Government; (2) crew's wages; (3) general
average; (4) salvage including contract salvage; (5) maritime liens
arising prior in time to the recording of the preferred mortgage; (6)
damages arising out of tort; and (7) preferred mortgage registered prior
in time.
(b)
If the proceeds of the sale should not be sufficient to pay all
creditors included in one number or grade, the residue shall be divided
among them pro rata. All credits not paid, whether fully or partially shall
subsist as ordinary credits enforceable by personal action against the
debtor. The record of judicial sale or sale by public auction shall be
recorded in the Record of Transfers and Encumbrances of Vessels in
the port of documentation. (Emphasis supplied.)
There is no question that the mortgage executed in favor of DBP is
covered by P.D. No. 1521. Contrary to NDCs assertion, the mortgage
constituted on GALLEONs vessels in favor of DBP may appropriately

be characterized as a preferred mortgage under Section 2, P.D. No.

1521 because GALLEON constituted the same for the purpose of
financing the construction, acquisition, purchase of vessels or initial
operation of vessels. While it is correct that GALLEON executed the
mortgage in consideration of DBPs guarantee of the prompt payment
of GALLEONs obligations to the Japanese lenders, DBPs undertaking
to pay the Japanese banks was a condition sine qua non to the
acquisition of funds for the purchase of the GALLEON vessels.
Without DBPs guarantee, the Japanese lenders would not have
provided the funds utilized in the purchase of the GALLEON vessels.
The mortgage in favor of DBP was therefore constituted to facilitate the
acquisition of funds necessary for the purchase of the vessels.
NDC adds that being an ordinary ship mortgage, the Civil Code
provisions on concurrence and preference of credits and not P.D. No.
1521 should govern. NDC contends that under Article 2246, in relation
to Article 2241 of the Civil Code, the credits guaranteed by a chattel
mortgage upon the thing mortgaged shall enjoy preference (with
respect to the thing mortgaged), to the exclusion of all others to the
extent of the value of the personal property to which the preference
exists.[54] Following NDCs theory, DBPs mortgage credit, which is
fourth in the order of preference under Article 2241, is superior to
POLIANDs claim, which enjoys no preference.
NDCs argument does not persuade the Court.
The provision of P.D. No. 1521 on the order of preference in the
satisfaction of the claims against the vessel is the more applicable
statute to the instant case compared to the Civil Code provisions on
the concurrence and preference of credit. General legislation must give
way to special legislation on the same subject, and generally be so
interpreted as to embrace only cases in which the special provisions
are not applicable.[55]
POLIANDs alternative cause of action for the payment of maritime
liens is based on Sections 17 and 21 of P.D. No. 1521. POLIAND also
contends that by virtue of the directive in LOI No. 1195 on NDC to
discharge maritime liens to allow the vessels to engage in international
business, NDC is liable therefor.[56]
POLIANDs maritime lien is superior
to DBPs mortgage lien
Before POLIANDs claim may be classified as superior to the mortgage
constituted on the vessel, it must be shown to be one of the
enumerated claims which Section 17, P.D. No. 1521 declares as
having preferential status in the event of the sale of the vessel. One of
such claims enumerated under Section 17, P.D. No. 1521 which is
considered to be superior to the preferred mortgage lien is a maritime
lien arising prior in time to the recording of the preferred mortgage.
Such maritime lien is described under Section 21, P.D. No. 1521,
which reads:
SECTION 21. Maritime Lien for Necessaries; persons entitled to such
lien. Any person furnishing repairs, supplies, towage, use of dry
dock or marine railway, or other necessaries to any vessel, whether
foreign or domestic, upon the order of the owner of such vessel, or of a
person authorized by the owner, shall have a maritime lien on the
vessel, which may be enforced by suit in rem, and it shall be necessary
to allege or prove that credit was given to the vessel.
Under the aforequoted provision, the expense must be incurred upon
the order of the owner of the vessel or its authorized person and prior
to the recording of the ship mortgage. Under the law, it must be
established that the credit was extended to the vessel itself.[57]
The trial court found that GALLEONs advances obtained from Asian
Hardwood were used to cover for the payment of bunker oil/fuel,
unused stores and oil, bonded stores, provisions, and repair and
docking of the GALLEON vessels.[58] These expenses clearly fall
under Section 21, P.D. No. 1521.
The trial court also found that the advances from Asian Hardwood were
spent for ship modification cost and the crews salary and wages. DBP
contends that a ship modification cost is omitted under Section 17, P.D.
No. 1521, hence, it does not have a status superior to DBPs preferred
mortgage lien.
As stated in Section 21, P.D. No. 1521, a maritime lien may consist in
other necessaries spent for the vessel. The ship modification cost
may properly be classified under this broad category because it was a
necessary expenses for the vessels navigation. As long as an
expense on the vessel is indispensable to the maintenance and
navigation of the vessel, it may properly be treated as a maritime lien
for necessaries under Section 21, P.D. No. 1521.

With respect to the claim for salary and wages of the crew, there is no
doubt that it is also one of the enumerated claims under Section 17,
P.D. No. 1521, second only to judicial costs and taxes due the
government in preference and, thus, having a status superior to DBPs
mortgage lien.
All told, the determination of the existence and the amount of
POLIANDs claim for maritime lien is a finding of fact which is within the
province of the courts below. Findings of fact of lower courts are
deemed conclusive and binding upon the Supreme Court except when
the findings are grounded on speculation, surmises or conjectures;
when the inference made is manifestly mistaken, absurd or impossible;
when there is grave abuse of discretion in the appreciation of facts;
when the factual findings of the trial and appellate courts are
conflicting; when the Court of Appeals, in making its findings, has gone
beyond the issues of the case and such findings are contrary to the
admissions of both appellant and appellee; when the judgment of the
appellate court is premised on a misapprehension of facts or when it
has failed to notice certain relevant facts which, if properly considered,
will justify a different conclusion; when the findings of fact are
conclusions without citation of specific evidence upon which they are
based; and when findings of fact of the Court of Appeals are premised
on the absence of evidence but are contradicted by the evidence on
record.[59] The Court finds no sufficient justification to reverse the
findings of the trial court and the appellate court in respect to the
existence and amount of maritime lien.
Only NDC is liable on the maritime lien
POLIAND maintains that DBP is also solidarily liable for the payment of
the preferred maritime lien over the proceeds of the foreclosure sale by
virtue of Section 17, P.D. No. 1521. It claims that since the lien was
incurred prior to the constitution of the mortgage on January 25, 1982,
the preferred maritime lien attaches to the proceeds of the sale of the
vessels and has priority over all claims against the vessels in
accordance with Section 17, P.D. No. 1521.[60]
In its defense, DBP reiterates the following arguments: (1) The salary
and crews wages cannot be claimed by POLIAND or its predecessorsin-interest because none of them is a sailor or mariner;[61] (2) Even if
conceded, POLIANDs preferred maritime lien is unenforceable
pursuant to Article 1403 of the Civil Code; and (3) POLIANDs claim is
barred by prescription and laches.[62]
The first argument is absurd. Although POLIAND or its predecessorsin-interest are not sailors entitled to wages, they can still make a claim
for the advances spent for the salary and wages of the crew under the
principle of legal subrogation. As explained in Philippine National Bank
v. Court of Appeals,[63] a third person who satisfies the obligation to an
original maritime lienor may claim from the debtor because the third
person is subrogated to the rights of the maritime lienor over the
vessel. The Court explained as follows:
From the foregoing, it is clear that the amount used for the repair of the
vessel M/V Asean Liberty was advanced by Citibank and was utilized
for the purpose of paying off the original maritime lienor, Hong Kong
United Dockyards, Ltd. As a person not interested in the fulfillment of
the obligation between PISC and Hong Kong United Dockyards, Ltd.,
Citibank was subrogated to the rights of Hong Kong United Dockyards,
Ltd. as a maritime lienor over the vessel, by virtue of Article 1302, par.
2 of the New Civil Code. By definition, subrogation is the transfer of all
the rights of the creditor to a third person, who substitutes him in all his
rights. Considering that Citibank paid off the debt of PISC to Hong
Kong United Dockyards, Ltd. it became the transferee of all the rights
of Hong Kong Dockyards, Ltd. as against PISC, including the maritime
lien over the vessel M/V Asian Liberty.[64]
DBPs reliance on the Statute of Frauds is misplaced. Article 1403 (2)
of the Civil Code, which enumerates the contracts covered by the
Statue of Frauds, is inapplicable. To begin with, there is no privity of
contract between POLIAND or its predecessors-in-interest, on one
hand, and DBP, on the other. POLIAND hinges its claim on the
maritime lien based on LOI No. 1195 and P.D. No. 1521, and not on
any contract or agreement.
Neither can DBP invoke prescription or laches against POLIAND.
Under Article 1144 of the Civil Code, an action upon an obligation
created by law must be brought within ten years from the time the right
of action accrues. The right of action arose after January 15, 1982,
when NDC partially paid off GALLEONs obligations to POLIANDs
predecessor-in-interest, Asian Hardwood. At that time, the prescriptive
period for the enforcement by action of the balance of GALLEONs

outstanding obligations had commenced. Prescription could not have

set in because the prescriptive period was tolled when POLIAND made
a written demand for the satisfaction of the obligation on September
24, 1991, or before the lapse of the ten-year prescriptive period.
Laches also do not lie because there was no unreasonable delay on
the part of POLIAND in asserting its rights. Indeed, it instituted the
instant suit seasonably.
All things considered, however, the Court finds that only NDC is liable
for the payment of the maritime lien. A maritime lien is akin to a
mortgage lien in that in spite of the transfer of ownership, the lien is not
extinguished. The maritime lien is inseparable from the vessel and until
discharged, it follows the vessel. Hence, the enforcement of a maritime
lien is in the nature and character of a proceeding quasi in rem.
[65] The expression action in rem is, in its narrow application, used
only with reference to certain proceedings in courts of admiralty
wherein the property alone is treated as responsible for the claim or
obligation upon which the proceedings are based.[66] Considering that
DBP subsequently transferred ownership of the vessels to NDC, the
Court holds the latter liable on the maritime lien. Notwithstanding the
subsequent transfer of the vessels to NDC, the maritime lien subsists.
This is a unique situation where the extrajudicial foreclosure of the
GALLEON vessels took place without the intervention of GALLEONs
other creditors including POLIANDs predecessors-in-interest who
were apparently left in the dark about the foreclosure proceedings. At
that time, GALLEON was already a failing corporation having borrowed
large sums of money from banks and financial institutions. When
GALLEON defaulted in the payment of its obligations to DBP, the latter
foreclosed on its mortgage over the GALLEON ships. The other
creditors, including POLIANDs predecessors-in-interest who
apparently had earlier or superior rights over the foreclosed vessels,
could not have participated as they were unaware and were not made
parties to the case.
On this note, the Court believes and so holds that the institution of the
extrajudicial foreclosure proceedings was tainted with bad faith. It took
place when NDC had already assumed the management and
operations of GALLEON. NDC could not have pleaded ignorance over
the existence of a prior or preferential lien on the vessels subject of
foreclosure. As aptly held by the Court of Appeals:
NDCs claim that even if maritime liens existed over the proceeds of
the foreclosure sale of the vessels which it subsequently purchased
from DBP, it is not liable as it was a purchaser in good faith fails, given
the fact that in its actual control over the management and operations
of GALLEON, it was put on notice of the various obligations of
GALLEON including those secured from ASIAN HARDWOOD as in
fact it even paid ASIAN HARDWOOD US$1,000,000.00 in partial
settlement of GALLEONs obligations, before it (NDC) mortgaged the 5
vessels to DBP on January 25, 1982.
Parenthetically, LOI 1195 directed NDC to discharge such maritime
liens as may be necessary to allow the foreclosed vessels to engage
on the international shipping business.
In fine, it is with respect to POLIANDs claim for payment of
US$1,930,298.56 representing part of the proceeds of GALLEONs
loan which was spent by GALLEON for ship modification and salaries
of crew that NDC is liable.[67]
Thus, NDC cannot claim that it was a subsequent purchaser in good
faith because it had knowledge that the vessels were subject to various
liens. At the very least, to evince good faith, NDC could have inquired
as to the existence of other claims against the vessels apart from
DBPs mortgage lien. Considering that NDC was also in a position to
know or discover the financial condition of GALLEON when it took over
its management, the lack of notice to GALLEONs creditors suggests
that the extrajudicial foreclosure was effected to prejudice the rights of
GALLEONs other creditors.
NDC also cannot rely on Administrative Order No. 64,[68] which
directed the transfer of the vessels to the APT, on its hypothesis that
such transfer extinguished the lien. APT is a mere conduit through
which the assets acquired by the National Government are
provisionally held and managed until their eventual disposal or
privatization. Administrative Order No. 64 did not divest NDC of its
ownership over the GALLEON vessels because APT merely holds the
vessels in trust for NDC until the same are disposed. Even if
ownership was transferred to APT, that would not be sufficient to
discharge the maritime lien and deprive POLIAND of its recourse

based on the lien. Such denouement would smack of denial of due

process and taking of property without just compensation.
NDCs liability for attorneys fees
The lower court awarded attorneys fees to POLIAND in the amount
of P1,000,000.00 on account of the amount involved in the case and
the protracted character of the litigation.[69]The award was affirmed by
the Court of Appeals as against NDC only.[70]
This Court finds no reversible error with the award as upheld by the
appellate court. Under Article 2208[71] of the Civil Code, attorneys
fees may be awarded inter alia when the defendants act or omission
has compelled the plaintiff to incur expenses to protect his interest or in
any other case where the court deems it just and equitable that
attorneys fees and expenses of litigation be recovered.
One final note. There is a discrepancy between the dispositive portion
of the Court of Appeals Decision and the body thereof with respect to
the amount of the maritime lien in favor of POLIAND. The dispositive
portion ordered NDC to pay POLIAND the amount of
US$1,920,298.56 plus interest[72] despite a finding that NDCs liability
to POLIAND represents the maritime lien[73] which according to the
complaint[74] is the alternative cause of action of POLIAND in the
smaller amount of US$1,193,298.56, as prayed for by POLIAND in its
complaint.
The general rule is that where there is conflict between the dispositive
portion or the fallo and the body of the decision, the fallo controls. This
rule rests on the theory that the fallo is the final order while the opinion
in the body is merely a statement ordering nothing. However, where
the inevitable conclusion from the body of the decision is so clear as to
show that there was a mistake in the dispositive portion, the body of
the decision will prevail.[75] In the instant case, it is clear from the trial
court records and the Court of Appeals Rollo that the bigger amount
awarded in the dispositive portion of the Court of
Appeals Decision was a typographical mistake. Considering that the
appellate courts Decision merely affirmed the trial courts finding with
respect to the amount of maritime lien, the bigger amount stated in the
dispositive portion of the Court of Appeals Decision must have been
awarded through indavertence.
WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No.
143877 are DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 53257 is MODIFIED to the extent that National Development
Company is liable to Poliand Industrial Limited for the amount of One
Million One Hundred Ninety Three Thousand Two Hundred Ninety
Eight US Dollars and Fifty-Six US Cents (US$ 1,193,298.56), plus
interest of 12% per annum computed from 25 September 1991 until
fully paid. In other respects, said Decision is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.

G.R. No. 157479 November 24, 2010

PHILIPand ELNORA TURNER
Petitioners,
-versus LORENZO SHIPPING
CORP, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to
demand payment of the value of their shareholdings.
In the stockholders suit to recover the value of their shareholdings
from the corporation, the Regional Trial Court (RTC) upheld the
dissenting stockholders, herein petitioners, and ordered the
corporation, herein respondent, to pay. Execution was partially carried
out against the respondent. On the respondents petition for certiorari,
however, the Court of Appeals (CA) corrected the RTC and dismissed
the petitioners suit on the ground that their cause of action for
collection had not yet accrued due to the lack of unrestricted retained
earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CAs
decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156

entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his

capacity as Presiding Judge of Branch 46 of the Regional Trial Court of
Manila, et al.[1]
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a
domestic corporation engaged primarily in cargo shipping activities. In
June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders pre-emptive rights to newly
issued shares of stock. Feeling that the corporate move would be
prejudicial to their interest as stockholders, the petitioners voted
against the amendment and demanded payment of their shares at the
rate of P2.276/share based on the book value of the shares, or a total
of P2,298,760.00.
The respondent found the fair value of the shares
demanded by the petitioners unacceptable. It insisted that the market
value on the date before the action to remove the pre-emptive right
was taken should be the value, or P0.41/share (or a total
of P414,100.00), considering that its shares were listed in the
Philippine Stock Exchange, and that the payment could be made only
if the respondent had unrestricted retained earnings in its books to
cover the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the
parties to constitute an appraisal committee pursuant to Section 82 of
the Corporation Code, each of them nominating a representative, who
together then nominated the third member who would be chairman of
the appraisal committee. Thus, the appraisal committee came to be
made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio
Acyatan, the respondents nominee; and Leo Anoche of the Asian
Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its
valuation of P2.54/share, for an aggregate value of P2,565,400.00 for
the petitioners.[2]
Subsequently, the petitioners demanded payment based on the
valuation of the appraisal committee, plus 2%/month penalty from the
date of their original demand for payment, as well as the
reimbursement of the amounts advanced as professional fees to the
appraisers.[3]
In its letter to the petitioners dated January 2, 2001,[4] the
respondent refused the petitioners demand, explaining that pursuant
to the Corporation Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the corporation had
unrestricted retained earnings to cover the fair value of the shares, but
that it had no retained earnings at the time of the petitioners demand,
as borne out by its Financial Statements for Fiscal Year 1999 showing
a deficit of P72,973,114.00 as of December 31, 1999.
Upon the respondents refusal to pay, the petitioners sued the
respondent for collection and damages in the RTC
in Makati City on January 22, 2001. The case, docketed as Civil Case
No. 01-086, was initially assigned to Branch 132.[5]
On June 26, 2002, the petitioners filed their motion for partial
summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained
earnings of ELEVEN MILLION NINE HUNDRED SEVENTY FIVE
THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the
Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the
Appraisal Committee is final, that the same cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the
plaintiffs are entitled, as a matter of right, to a summary judgment.
xxx [6]
The respondent opposed the motion for partial summary
judgment, stating that the determination of the unrestricted retained
earnings should be made at the end of the fiscal year of the
respondent, and that the petitioners did not have a cause of action
against the respondent.
During the pendency of the motion for partial
summary judgment, however, the Presiding Judge of Branch 133
transmitted the records to the Clerk of Court for re-raffling to any of the
RTCs special commercial courts in Makati City due to the case being

an intra-corporate dispute. Hence, Civil Case No. 01-086 was re-raffled

to Branch 142.
Nevertheless, because the principal office of the respondent was in
Manila, Civil Case No. 01-086 was ultimately transferred to Branch 46
of the RTC in Manila, presided by Judge Artemio Tipon,[7] pursuant to
the Interim Rules of Procedure on Intra-Corporate
Controversies (Interim Rules) requiring intra-corporate cases to be
brought in the RTC exercising jurisdiction over the place where the
principal office of the corporation was found.
After the conference in Civil Case No. 01-086 set
on October 23, 2002, which the petitioners counsel did not attend,
Judge Tipon issued an order,[8] granting the petitioners motion for
partial summary judgment, stating:
As to the motion for partial summary judgment, there is no question
that the 3-man committee mandated to appraise the shareholdings of
plaintiff submitted its recommendation onOctober 27, 2000 fixing the
fair value of the shares of stocks of the plaintiff at P2.54 per share.
Under Section 82 of the Corporation Code:
The findings of the majority of the appraisers shall be final, and the
award shall be paid by the corporation within thirty (30) days after the
award is made.
The only restriction imposed by the Corporation Code is
That no payment shall be made to any dissenting stockholder unless
the corporation has unrestricted retained earning in its books to cover
such payment.
The evidence submitted by plaintiffs shows that in its quarterly
financial statement it submitted to the Securities and Exchange
Commission, the defendant has retained earnings of P11,975,490 as
of March 21, 2002. This is not disputed by the defendant. Its only
argument against paying is that there must be unrestricted retained
earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a
stockholder. The law does not say that the unrestricted retained
earnings must exist at the time of the demand. Even if there are no
retained earnings at the time the demand is made if there are retained
earnings later, the fair value of such stocks must be paid. The only
restriction is that there must be sufficient funds to cover the creditors
after the dissenting stockholder is paid. No such allegations have been
made by the defendant.[9]
On November 12, 2002, the respondent filed a motion for
reconsideration.
On the scheduled hearing of the motion for
reconsideration on November 22, 2002, the petitioners filed a motion
for immediate execution and a motion to strike out motion for
reconsideration. In the latter motion, they pointed out that the motion
for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied
the motion for reconsideration and granted the petitioners motion for
immediate execution.[10]
Subsequently, on November 28, 2002, the RTC issued a writ of
execution.[11]
Aggrieved, the respondent commenced a
special civil action for certiorari in the CA to challenge the two
aforecited orders of Judge Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING
SUMMARY JUDGMENT TO THE SPOUSES TURNER, BECAUSE AT
THE TIME THE COMPLAINT WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND
NOT VIOLATING ANY RIGHTS OF THE SPOUSES TURNER, WHEN
IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC
SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER
THE COMPLAINT WAS FILED ARE IRRELEVANT TO THE
SPOUSES TURNERS RIGHT TO RECOVER UNDER THE
COMPLAINT, BECAUSE THE WELL-SETTLED RULE,
REPEATEDLY BROUGHT TO JUDGE TIPONS ATTENTION, IS IF
NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS
COMMENCED THE SUIT CANNOT BE MAINTAINED, ALTHOUGH
SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.
B.

JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS

GRAVELY ABUSED HIS DISCRETION, WHEN HE GRANTED AND
ISSUED THE QUESTIONED WRIT OF EXECUTION DIRECTING
THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN
FAVOR OF THE SPOUSES TURNER, BECAUSE THAT JUDGMENT
IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF
THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT
OF EXECUTION UNDER THE SUPREME COURTS CATEGORICAL
HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF
APPEALS.
Upon the respondents application, the CA issued a temporary
restraining order (TRO), enjoining the petitioners, and their agents and
representatives from enforcing thewrit of execution. By then, however,
the writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction
to prevent the execution. Thereupon, the sheriff resumed the
enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4, 2003,
[12] pertinently holding:
However, it is clear from the foregoing that the Turners appraisal right
is subject to the legal condition that no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover such payment. Thus, the Supreme
Court held that:
The requirement of unrestricted retained earnings to cover the shares
is based on the trust fund doctrine which means that the capital stock,
property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that
creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors.
Hence, any disposition of corporate funds to the prejudice of creditors
is null and void. Creditors of a corporation have the right to assume
that so long as there are outstanding debts and liabilities, the board of
directors will not use the assets of the corporation to purchase its own
stock.
In the instant case, it was established that there were no unrestricted
retained earnings when the Turners filed their Complaint. In a letter
dated 20 August 2000, petitioner informed the Turners that payment of
their shares could only be made if it had unrestricted earnings in its
books to cover the same. Petitioner reiterated this in a letter dated 2
January 2001 which further informed the Turners that its Financial
Statement for fiscal year 1999 shows that its retained earnings ending
December 31, 1999 was at a deficit in the amount of P72,973,114.00,
a matter which has not been disputed by private respondents. Hence,
in accordance with the second paragraph of sec. 82, BP 68 supra, the
Turners right to payment had not yet accrued when they filed their
Complaint on January 22, 2001, albeit their appraisal right already
existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines,
Inc., the Supreme Court declared that:
Now, before an action can properly be commenced all the essential
elements of the cause of action must be in existence, that is, the cause
of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed
by agreement of the parties or implied by law must be performed or
complied with before commencing the action, unless the conduct of the
adverse party has been such as to prevent or waive performance or
excuse non-performance of the condition.
It bears restating that a right of action is the right to presently enforce
a cause of action, while a cause of action consists of the operative
facts which give rise to such right of action. The right of action does
not arise until the performance of all conditions precedent to the
action and may be taken away by the running of the statute of
limitations, through estoppel, or by other circumstances which do not
affect the cause of action. Performance or fulfillment of all conditions
precedent upon which a right of action depends must be sufficiently
alleged, considering that the burden of proof to show that a party has a
right of action is upon the person initiating the suit.
The Turners right of action arose only when petitioner had already
retained earnings in the amount of P11,975,490.00 on March 21, 2002;

such right of action was inexistent on January 22, 2001 when they filed
the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris,
the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by
law, an action commenced before the cause of action has accrued is
prematurely brought and should be dismissed. The fact that the cause
of action accrues after the action is commenced and while it is pending
is of no moment. It is a rule of law to which there is, perhaps, no
exception, either at law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are
reasons of public policy why there should be no needless haste in
bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned
before the public tribunals to answer complaints which are groundless.
An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action
iscommenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such afteraccrued cause of action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals
and Lao vs. Court of Appeals.
The Turners apprehension that their claim for payment may prescribe
if they wait for the petitioner to have unrestricted retained earnings is
misplaced. It is the legal possibility of bringing the action that
determines the starting point for the computation of the period of
prescription. Stated otherwise, the prescriptive period is to be reckoned
from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction
when it entertained the herein Complaint and issued the assailed
Orders. Excess of jurisdiction is the state of being beyond or outside
the limits of jurisdiction, and as distinguished from the entire absence
of jurisdiction, means that the act although within the general power of
the judge, is not authorized and therefore void, with respect to the
particular case, because the conditions which authorize the exercise of
his general power in that particular case are wanting, and hence, the
judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this
petition.
WHEREFORE, upon the premises, the petition is GRANTED. The
assailed Orders and the corresponding Writs of Garnishment
are NULLIFIED. Civil Case No. 02-104692 is hereby
ordered DISMISSED without prejudice to refiling by the private
respondents of the action for enforcement of their right to payment as
withdrawing stockholders.
The petitioners now come to the Court for a review on certiorari of the
CAs decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT GRANTED THE PETITION FOR CERTIORARI WHEN
THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND
ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN
GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT
AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW WHEN IT ORDERED THE DISMISSAL OF THE CASE, WHEN
THE PETITION FOR CERTIORARI MERELY SOUGHT THE
ANNULMENT OF THE ORDER GRANTING THE MOTION FOR
PARTIAL SUMMARY JUDGMENT AND OF THE ORDER GRANTING
THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED
QUESTIONS OF SUBSTANCE NOT THEREFORE DETERMINED BY
THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN
ACCORD WITH LAW OR WITH JURISPRUDENCE.
Ruling
The petition fails.

The CA correctly concluded that the RTC had exceeded its jurisdiction
in entertaining the petitioners complaint in Civil Case No. 01-086, and
in rendering the summary judgment and issuing writ of execution.
A.
Stockholders Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the
right to demand payment of the fair value of his or her shares. This
right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a
corporation shall have the right to dissent and demand payment of the
fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those
of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken.[13] It serves the
purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation.[14]
Under the common law, there were originally conflicting views
on whether a corporation had the power to acquire or purchase its own
stocks. In England, it was held invalid for a corporation to purchase its
issued stocks because such purchase was an indirect method of
reducing capital (which was statutorily restricted), aside from being
inconsistent with the privilege of limited liability to creditors.[15] Only a
few American jurisdictions adopted by decision or statute the strict
English rule forbidding a corporation from purchasing its own shares.
In some American states where the English rule used to be adopted,
statutes granting authority to purchase out of surplus funds were
enacted, while in others, shares might be purchased even out of
capital provided the rights of creditors were not prejudiced.[16] The
reason underlying the limitation of share purchases sprang from the
necessity of imposing safeguards against the depletion by a
corporation of its assets and against the impairment of its capital
needed for the protection of creditors.[17]
Now, however, a corporation can purchase its own
shares, provided payment is made out of surplus profits and the
acquisition is for a legitimate corporate purpose.[18] In the Philippines,
this new rule is embodied in Section 41 of the Corporation Code, to
wit:
Section 41. Power to acquire own shares. - A stock corporation shall
have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or
acquired:
1.
To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised,
as well as the implications of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has
voted against the proposed corporate action by making a written
demand on the corporation within 30 days after the date on which the
vote was taken for the payment of the fair value of his shares. The
failure to make the demand within the period is deemed a waiver of the
appraisal right.[19]
2. If the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares within a period of 60 days from the date
the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of
whom shall be named by the stockholder, another by the corporation,

and the third by the two thus chosen. The findings and award of the
majority of the appraisers shall be final, and the corporation shall pay
their award within 30 days after the award is made. Upon payment by
the corporation of the agreed or awarded price, the stockholder shall
forthwith transfer his or her shares to the corporation.[20]
3. All rights accruing to the withdrawing stockholders shares,
including voting and dividend rights, shall be suspended from the time
of demand for the payment of the fair value of the shares until either
the abandonment of the corporate action involved or the purchase of
the shares by the corporation, except the right of such stockholder to
receive payment of the fair value of the shares.[21]
4. Within 10 days after demanding payment for his or her shares, a
dissenting stockholder shall submit to the corporation the certificates of
stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the
corporation, terminate his rights under this Title X of the Corporation
Code. If shares represented by the certificates bearing such notation
are transferred, and the certificates are consequently canceled, the
rights of the transferor as a dissenting stockholder under this Title shall
cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued on
such shares shall be paid to the transferee.[22]
5. If the proposed corporate action is implemented or effected, the
corporation shall pay to such stockholder, upon the surrender of the
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 corporate action.
[23]
Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover the payment. In case the corporation has
no available unrestricted retained earnings in its books, Section 83 of
the Corporation Code 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 immediately be restored.
The trust fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of the shares of
stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors, who are preferred
in the distribution of corporate assets.[24] The creditors of a
corporation have the right to assume that the board of directors will not
use the assets of the corporation to purchase its own stock for as long
as the corporation has outstanding debts and liabilities.[25] There can
be no distribution of assets among the stockholders without first paying
corporate debts. Thus, any disposition of corporate funds and assets to
the prejudice of creditors is null and void.[26]
B.
Petitioners cause of action was premature
That the respondent had indisputably no unrestricted retained
earnings in its books at the time the petitioners commenced Civil Case
No. 01-086 on January 22, 2001 proved that the respondents legal
obligation to pay the value of the petitioners shares did not yet
arise. Thus, the CA did not err in holding that the petitioners had no
cause of action, and in ruling that the RTC did not validly render the
partial summary judgment.
A cause of action is the act or omission by which a party
violates a right of another.[27] The essential elements of a cause of
action are: (a) the existence of a legal right in favor of the plaintiff; (b) a
correlative legal duty of the defendant to respect such right; and (c) an
act or omission by such defendant in violation of the right of the plaintiff
with a resulting injury or damage to the plaintiff for which the latter may
maintain an action for the recovery of relief from the defendant.
[28] Although the first two elements may exist, a cause of action arises
only upon the occurrence of the last element, giving the plaintiff the
right to maintain an action in court for recovery of damages or other
appropriate relief.[29]
Section 1, Rule 2, of the Rules of Court requires that every
ordinary civil action must be based on a cause of action.
Accordingly, Civil Case No. 01-086 was dismissible from the beginning
for being without any cause of action.
The RTC concluded that the respondents obligation to pay had
accrued by its having the unrestricted retained earnings after the

making of the demand by the petitioners. It based its conclusion on the

fact that the Corporation Code did not provide that the unrestricted
retained earnings must already exist at the time of the demand.
The RTCs construal of the Corporation Code was unsustainable,
because it did not take into account the petitioners lack of a cause of
action against the respondent. In order to give rise to any obligation to
pay on the part of the respondent, the petitioners should first make a
valid demand that the respondent refused to pay despite having
unrestricted retained earnings. Otherwise, the respondent could not be
said to be guilty of any actionable omission that could sustain their
action to collect.
Neither did the subsequent existence of unrestricted retained
earnings after the filing of the complaint cure the lack of cause of
action in Civil Case No. 01-086. The petitioners right of action could
only spring from an existing cause of action. Thus, a complaint whose
cause of action has not yet accrued cannot be cured by an amended
or supplemental pleading alleging the existence or accrual of a cause
of action during the pendency of the action.[30] For, only when there is
an invasion of primary rights, not before, does the adjective or remedial
law become operative.[31] Verily, a premature invocation of the courts
intervention renders the complaint without a cause of action and
dismissible on such ground.[32] In short, Civil Case No. 01-086, being
a groundless suit, should be dismissed.
Even the fact that the respondent already had
unrestricted retained earnings more than sufficient to cover the
petitioners claims on June 26, 2002 (when they filed their motion for
partial summary judgment) did not rectify the absence of the cause of
action at the time of the commencement of Civil Case No. 01-086.
The motion for partial summary judgment, being a mere application for
relief other than by a pleading,[33] was not the same as the
complaint in Civil Case No. 01-086. Thereby, the petitioners did not
meet the requirement of the Rules of Court that a cause of action must
exist at the commencement of an action, which is commenced by the
filing of the original complaint in court.[34]
The petitioners claim that the respondents petition
for certiorari sought only the annulment of the assailed orders of the
RTC (i.e., granting the motion for partial summary judgment and
the motion for immediate execution); hence, the CA had no right to
direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondents petition for certiorari targeted only
the RTCs orders granting the motion for partial summary
judgment and the motion for immediate execution, the CAs directive
for the dismissal of Civil Case No. 01-086 was not an abuse of
discretion, least of all grave, because such dismissal was the only
proper thing to be done under the circumstances. According to Surigao
Mine Exploration Co., Inc. v. Harris:[35]
Subject to certain qualification, and except as otherwise
provided by law, an action commenced before the cause of action has
accrued is prematurely brought and should be dismissed. The fact that
the cause of action accrues after the action is commenced and while
the case is pending is of no moment. It is a rule of law to which there
is, perhaps no exception, either in law or in equity, that to recover at all
there must be some cause of action at the commencement of the suit.
There are reasons of public policy why there should be no needless
haste in bringing up litigation, and why people who are in no default
and against whom there is as yet no cause of action should not be
summoned before the public tribunals to answer complaints which are
groundless. An action prematurely brought is a groundless suit. Unless
the plaintiff has a valid and subsisting cause of action at the time his
action is commenced, the defect cannot be cured or remedied by the
acquisition or accrual of one while the action is pending, and a
supplemental complaint or an amendment setting up such afteraccrued cause of action is not permissible.
Lastly, the petitioners argue that the respondents recourse of a
special action for certiorari was the wrong remedy, in view of the fact
that the granting of the motion for partial summary
judgment constituted only an error of law correctible by appeal, not of
jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty
of an error of jurisdiction, for it exceeded its jurisdiction by taking

cognizance of the complaint that was not based on an existing cause

of action.
WHEREFORE, the petition for review on certiorari is denied for
lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP
No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S.
Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional
Trial Court of Manila, et al.

Present:
- versus FINANCE SECRETARY
MARGARITO B. TEVES,
FINANCE UNDERSECRETARY
JOHN P. SEVILLA, AND
COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL
COMMISSION ON GOOD
GOVERNMENT (PCGG) IN
THEIR CAPACITIES AS CHAIR
AND MEMBERS,
RESPECTIVELY, OF THE
PRIVATIZATION COUNCIL,
CHAIRMAN ANTHONI SALIM OF
FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF
METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN
MANUEL V. PANGILINAN OF
PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS
MANAGING DIRECTOR OF
FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE
LONG DISTANCE TELEPHONE
COMPANY, CHAIR FE BARIN OF
THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT
FRANCIS LIM OF THE
PHILIPPINE STOCK EXCHANGE,
Respondents.
PABLITO V. SANIDAD and
ARNO V. SANIDAD,
Petitioners-in-Intervention.

CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO, JJ.

Promulgated:
June 28, 2011

DECISION
CARPIO, J.:
The Case
This is an original petition for prohibition, injunction, declaratory relief
and declaration of nullity of the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the
government of the Republic of the Philippines to Metro Pacific Assets
Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited
(First Pacific).

EN BANC
WILSON P. GAMBOA,
Petitioner,

G.R. No. 176579

The Antecedents
The facts, according to petitioner Wilson P. Gamboa, a stockholder of
Philippine Long Distance Telephone Company (PLDT), are as follows:1
On 28 November 1928, the Philippine Legislature enacted Act No.
3436 which granted PLDT a franchise and the right to engage in
telecommunications business. In 1969, General Telephone and
Electronics Corporation (GTE), an American company and a major
PLDT stockholder, sold 26 percent of the outstanding common shares
of PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated
by several persons, including Roland Gapud and Jose Campos, Jr.
Subsequently, PHI became the owner of 111,415 shares of stock of
PTIC by virtue of three Deeds of Assignment executed by PTIC
stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 shares of stock of PTIC held by PHI were sequestered by the
Presidential Commission on Good Government (PCGG). The 111,415
PTIC shares, which represent about 46.125 percent of the outstanding
capital stock of PTIC, were later declared by this Court to be owned by
the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based

investment firm, acquired the remaining 54 percent of the outstanding
capital stock of PTIC. On 20 November 2006, the Inter-Agency
Privatization Council (IPC) of the Philippine Government announced
that it would sell the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, through a public bidding to be
conducted on 4 December 2006. Subsequently, the public bidding was
reset to 8 December 2006, and only two bidders, Parallax Venture
Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their
bids. Parallax won with a bid of P25.6 billion or US$510 million.
Thereafter, First Pacific announced that it would exercise its right of
first refusal as a PTIC stockholder and buy the 111,415 PTIC shares by
matching the bid price of Parallax. However, First Pacific failed to do so
by the 1 February 2007 deadline set by IPC and instead, yielded its
right to PTIC itself which was then given by IPC until 2 March 2007 to
buy the PTIC shares. On 14 February 2007, First Pacific, through its
subsidiary, MPAH, entered into a Conditional Sale and Purchase
Agreement of the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, with the Philippine Government for
the price of P25,217,556,000 or US$510,580,189. The sale was
completed on 28 February 2007.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125 percent of PTIC shares is actually an indirect
sale of 12 million shares or about 6.3 percent of the outstanding
common shares of PLDT. With the sale, First Pacifics common
shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the common shareholdings of foreigners in PLDT to
about 81.47 percent. This violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign ownership of the capital of a
public utility to not more than 40 percent.3
On the other hand, public respondents Finance
Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and
PCGG Commissioner Ricardo Abcede allege the following relevant
facts:
On 9 November 1967, PTIC was incorporated and had since engaged
in the business of investment holdings. PTIC held 26,034,263 PLDT
common shares, or 13.847 percent of the total PLDT outstanding
common shares. PHI, on the other hand, was incorporated in 1977,
and became the owner of 111,415 PTIC shares or 46.125 percent of
the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In
1986, the 111,415 PTIC shares held by PHI were sequestered by the
PCGG, and subsequently declared by this Court as part of the illgotten wealth of former President Ferdinand Marcos. The sequestered
PTIC shares were reconveyed to the Republic of the Philippines in
accordance with this Courts decision4 which became final
and executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares,
which represent 6.4 percent of the outstanding common shares of
stock of PLDT, and designated the Inter-Agency Privatization Council
(IPC), composed of the Department of Finance and the PCGG, as the
disposing entity. An invitation to bid was published in seven different
newspapers from 13 to 24 November 2006. On 20 November 2006, a
pre-bid conference was held, and the original deadline for bidding
scheduled on 4 December 2006 was reset to 8 December 2006. The
extension was published in nine different newspapers.
During the 8 December 2006 bidding, Parallax Capital Management
LP emerged as the highest bidder with a bid of P25,217,556,000. The
government notified First Pacific, the majority owner of PTIC shares, of
the bidding results and gave First Pacific until 1 February 2007 to
exercise its right of first refusal in accordance with PTICs Articles of
Incorporation. First Pacific announced its intention to match Parallaxs
bid.
On 31 January 2007, the House of Representatives (HR) Committee
on Good Government conducted a public hearing on the particulars of
the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the
public hearing. The HR Committee Report No. 2270 concluded that:
(a) the auction of the governments 111,415 PTIC shares bore due
diligence, transparency and conformity with existing legal procedures;
and (b) First Pacifics intended acquisition of the governments 111,415
PTIC shares resulting in First Pacifics 100% ownership of PTIC will not
violate the 40 percent constitutional limit on foreign ownership of a
public utility since PTIC holds only 13.847 percent of the total

outstanding common shares of PLDT.5 On 28 February 2007, First

Pacific completed the acquisition of the 111,415 shares of stock of
PTIC.
Respondent Manuel V. Pangilinan admits the following facts: (a) the
IPC conducted a public bidding for the sale of 111,415 PTIC shares or
46 percent of the outstanding capital stock of PTIC (the remaining 54
percent of PTIC shares was already owned by First Pacific and its
affiliates); (b) Parallax offered the highest bid amounting
to P25,217,556,000; (c) pursuant to the right of first refusal in favor of
PTIC and its shareholders granted in PTICs Articles of Incorporation,
MPAH, a First Pacific affiliate, exercised its right of first refusal by
matching the highest bid offered for PTIC shares on 13 February 2007;
and (d) on 28 February 2007, the sale was consummated when MPAH
paid IPC P25,217,556,000 and the government delivered the
certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of
petitioner.
On 28 February 2007, petitioner filed the instant petition for
prohibition, injunction, declaratory relief, and declaration of nullity of
sale of the 111,415 PTIC shares. Petitioner claims, among others, that
the sale of the 111,415 PTIC shares would result in an increase in First
Pacifics common shareholdings in PLDT from 30.7 percent to 37
percent, and this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign common
shareholdings in PLDT of 51.56 percent which is over the 40 percent
constitutional limit.6 Petitioner asserts:
If and when the sale is completed, First Pacifics equity in PLDT will go
up from 30.7 percent to 37.0 percent of its common or votingstockholdings, x x x. Hence, the consummation of the sale will put the
two largest foreign investors in PLDT First Pacific and Japans
NTT DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent of PLDT common
equity. x x x With the completion of the sale, data culled from the
official website of the New York Stock Exchange (www.nyse.com)
showed that those foreign entities, which own at least five percent of
common equity, will collectively own 81.47 percent of PLDTs common
equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K
reports x x x which PLDT submitted to the New York Stock Exchange
for the period 2003-2005, revealed that First Pacific and several other
foreign entities breached the constitutional limit of 40 percent
ownership as early as 2003. x x x7
Petitioner raises the following issues: (1) whether the consummation
of the then impending sale of 111,415 PTIC shares to First Pacific
violates the constitutional limit on foreign ownership of a public utility;
(2) whether public respondents committed grave abuse of discretion in
allowing the sale of the 111,415 PTIC shares to First Pacific; and (3)
whether the sale of common shares to foreigners in excess of 40
percent of the entire subscribed common capital stock violates the
constitutional limit on foreign ownership of a public utility.8
On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a
Motion for Leave to Intervene and Admit Attached Petition-inIntervention. In the Resolution of 28 August 2007, the Court granted
the motion and noted the Petition-in-Intervention.
Petitioners-in-intervention join petitioner Wilson Gamboa x x x in
seeking, among others, to enjoin and/or nullify the sale by respondents
of the 111,415 PTIC shares to First Pacific or assignee. Petitioners-inintervention claim that, as PLDT subscribers, they have a stake in the
outcome of the controversy x x x where the Philippine Government is
completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions
of the Philippine Constitution.
The Issue
This Court is not a trier of facts. Factual questions such as those
raised by petitioner,9 which indisputably demand a thorough
examination of the evidence of the parties, are generally beyond this
Courts jurisdiction. Adhering to this well-settled principle, the Court
shall confine the resolution of the instant controversy solely on
the threshold and purely legal issueof whether the term capital in
Section 11, Article XII of the Constitution refers to the total common
shares only or to the total outstanding capital stock (combined total of
common and non-voting preferred shares) of PLDT, a public utility.
The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus
At the outset, petitioner is faced with a procedural barrier. Among the
remedies petitioner seeks, only the petition for prohibition is within the
original jurisdiction of this court, which however is not exclusive but is
concurrent with the Regional Trial Court and the Court of Appeals. The
actions for declaratory relief,10 injunction, and annulment of sale are
not embraced within the original jurisdiction of the Supreme Court. On
this ground alone, the petition could have been dismissed outright.
While direct resort to this Court may be justified in a petition for
prohibition,11 the Court shall nevertheless refrain from discussing the
grounds in support of the petition for prohibition since on 28 February
2007, the questioned sale was consummated when MPAH paid
IPC P25,217,556,000 and the government delivered the certificates for
the 111,415 PTIC shares.
However, since the threshold and purely legal issue on the definition
of the term capital in Section 11, Article XII of the Constitution has farreaching implications to the nationaleconomy, the Court treats the
petition for declaratory relief as one for mandamus.12
In Salvacion v. Central Bank of the Philippines,13 the Court treated
the petition for declaratory relief as one for mandamus considering the
grave injustice that would result in the interpretation of a banking law.
In that case, which involved the crime of rape committed by a foreign
tourist against a Filipino minor and the execution of the final judgment
in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960,
exempting foreign currency deposits from attachment, garnishment or
any other order or process of any court, inapplicable due to the
peculiar circumstances of the case. The Court held that injustice
would result especially to a citizen aggrieved by a foreign guest like
accused x x x that would negate Article 10 of the Civil Code which
provides that in case of doubt in the interpretation or application of
laws, it is presumed that the lawmaking body intended right and justice
to prevail. The Court therefore required respondents Central Bank of
the Philippines, the local bank, and the accused to comply with the writ
of execution issued in the civil case for damages and to release the
dollar deposit of the accused to satisfy the judgment.
In Alliance of Government Workers v. Minister of Labor,14 the Court
similarly brushed aside the procedural infirmity of the petition for
declaratory relief and treated the same as one for mandamus.
In Alliance, the issue was whether the government unlawfully excluded
petitioners, who were government employees, from the enjoyment of
rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and
instrumentalities of the Government, including government owned or
controlled corporations included among the four employers under
Presidential Decree No. 851 which are required to pay their employees
x x x a thirteenth (13th) month pay x x x ? The Constitutional principle
involved therein affected all government employees, clearly justifying a
relaxation of the technical rules of procedure, and certainly requiring
the interpretation of the assailed presidential decree.
In short, it is well-settled that this Court may treat a petition for
declaratory relief as one for mandamus if the issue involved has farreaching implications. As this Court held inSalvacion:
The Court has no original and exclusive jurisdiction over a petition for
declaratory relief. However, exceptions to this rule have been
recognized. Thus, where the petition has far-reaching implications and
raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)
In the present case, petitioner seeks primarily the interpretation of the
term capital in Section 11, Article XII of the Constitution. He prays that
this Court declare that the term capital refers to common shares only,
and that such shares constitute the sole basis in determining foreign
equity in a public utility. Petitioner further asks this Court to declare
any ruling inconsistent with such interpretation unconstitutional.
The interpretation of the term capital in Section 11, Article XII of the
Constitution has far-reaching implications to the national economy. In
fact, a resolution of this issue will determine whether Filipinos are
masters, or second class citizens, in their own country. What is at
stake here is whether Filipinos or foreigners will have effective
control of the national economy. Indeed, if ever there is a legal issue
that has far-reaching implications to the entire nation, and to future
generations of Filipinos, it is the threshhold legal issue presented in
this case.

The Court first encountered the issue on the definition of the term
capital in Section 11, Article XII of the Constitution in the case
of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That
case involved the same public utility (PLDT) and substantially the
same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition
involved a purely legal question, the Court declined to resolve the case
on the merits, and instead denied the same for disregarding the
hierarchy of courts.17 There, petitioner Fernandez assailed on a pure
question of law the Regional Trial Courts Decision of 21 February
2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another
opportunity to finally settle this purely legal issue which is of
transcendental importance to the national economy and a fundamental
requirement to a faithful adherence to our Constitution. The Court must
forthwith seize such opportunity, not only for the benefit of the litigants,
but more significantly for the benefit of the entire Filipino people, to
ensure, in the words of the Constitution, a self-reliant and independent
national economy effectively controlled by Filipinos.18 Besides, in the
light of vague and confusing positions taken by government agencies
on this purely legal issue, present and future foreign investors in this
country deserve, as a matter of basic fairness, a categorical ruling from
this Court on the extent of their participation in the capital of public
utilities and other nationalized businesses.
Despite its far-reaching implications to the national economy, this
purely legal issue has remained unresolved for over 75 years since the
1935 Constitution. There is no reason for this Court to evade this ever
recurring fundamental issue and delay again defining the term
capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint
venture agreements for the development of our natural resources,19 in
Section 7, Article XII on ownership of private lands,20 in Section 10,
Article XII on the reservation of certain investments to Filipino
citizens,21 in Section 4(2), Article XIV on the ownership of educational
institutions,22 and in Section 11(2), Article XVI on the ownership of
advertising companies.23
Petitioner has locus standi
There is no dispute that petitioner is a stockholder of PLDT. As such,
he has the right to question the subject sale, which he claims to violate
the nationality requirement prescribed in Section 11, Article XII of the
Constitution. If the sale indeed violates the Constitution, then there is a
possibility that PLDTs franchise could be revoked, a dire consequence
directly affecting petitioners interest as a stockholder.
More importantly, there is no question that the instant petition raises
matters of transcendental importance to the public. The fundamental
and threshold legal issue in this case, involving the national economy
and the economic welfare of the Filipino people, far outweighs any
perceived impediment in the legal personality of the petitioner to bring
this action.
In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a
suit on matters of transcendental importance to the public, thus:
In Taada v. Tuvera, the Court asserted that when the issue concerns
a public right and the object of mandamus is to obtain the enforcement
of a public duty, the people are regarded as the real parties in interest;
and because it is sufficient that petitioner is a citizen and as such is
interested in the execution of the laws, he need not show that he has
any legal or special interest in the result of the action. In the aforesaid
case, the petitioners sought to enforce their right to be informed on
matters of public concern, a right then recognized in Section 6, Article
IV of the 1973 Constitution, in connection with the rule that laws in
order to be valid and enforceable must be published in the Official
Gazette or otherwise effectively promulgated. In ruling for the
petitioners legal standing, the Court declared that the right they sought
to be enforced is a public right recognized by no less than the
fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further
declared that when a mandamus proceeding involves the assertion of
a public right, the requirement of personal interest is satisfied by the
mere fact that petitioner is a citizen and, therefore, part of the general
public which possesses the right.

Further, in Albano v. Reyes, we said that while expenditure of public

funds may not have been involved under the questioned contract for
the development, management and operation of the Manila
International Container Terminal, public interest [was] definitely
involved considering the important role [of the subject contract] . . . in
the economic development of the country and the magnitude of the
financial consideration involved. We concluded that, as a
consequence, the disclosure provision in the Constitution would
constitute sufficient authority for upholding the petitioners standing.
(Emphasis supplied)
Clearly, since the instant petition, brought by a citizen, involves
matters of transcendental public importance, the petitioner has the
requisite locus standi.
Definition of the Term Capital in
Section 11, Article XII of the 1987 Constitution
Section 11, Article XII (National Economy and Patrimony) of the 1987
Constitution mandates the Filipinization of public utilities, to wit:
Section 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except
to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per centum
of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be
citizens of the Philippines. (Emphasis supplied)
The above provision substantially reiterates Section 5, Article XIV of
the 1973 Constitution, thus:
Section 5. No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the
laws of the Philippines at least sixty per centum of the capital of which
is owned by such citizens, nor shall such franchise, certificate, or
authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or
repeal by the National Assembly when the public interest so requires.
The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their
proportionate share in the capital thereof. (Emphasis supplied)
The foregoing provision in the 1973 Constitution reproduced Section 8,
Article XIV of the 1935 Constitution, viz:
Section 8. No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or other entities organized under the
laws of the Philippines sixty per centum of the capital of which is
owned by citizens of the Philippines, nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer
period than fifty years. No franchise or right shall be granted to any
individual, firm, or corporation, except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when
the public interest so requires. (Emphasis supplied)
Father Joaquin G. Bernas, S.J., a leading member of the 1986
Constitutional Commission, reminds us that the Filipinization provision
in the 1987 Constitution is one of the products of the spirit of
nationalism which gripped the 1935 Constitutional Convention.25 The
1987 Constitution provides for the Filipinization of public utilities by
requiring that any form of authorization for the operation of public
utilities should be granted only to citizens of the Philippines or to
corporations or associations organized under the laws of the
Philippines at least sixty per centum of whose capital is owned by such
citizens. The provision is [an express] recognition of the sensitive and
vital position of public utilities both in the national economy and for
national security.26 The evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public
utilities, which may be inimical to the national interest.27 This specific
provision explicitly reserves to Filipino citizens control of public utilities,

pursuant to an overriding economic goal of the 1987 Constitution: to

conserve and develop our patrimony28 and ensure a self-reliant and
independent national economy effectively controlled by Filipinos.29
Any citizen or juridical entity desiring to operate a public utility must
therefore meet the minimum nationality requirement prescribed in
Section 11, Article XII of the Constitution. Hence, for a corporation to
be granted authority to operate a public utility, at least 60 percent of its
capital must be owned by Filipino citizens.
The crux of the controversy is the definition of the term capital. Does
the term capital in Section 11, Article XII of the Constitution refer to
common shares or to the total outstanding capital stock (combined
total of common and non-voting preferred shares)?
Petitioner submits that the 40 percent foreign equity limitation in
domestic public utilities refers only to common shares because such
shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioner posits that the term capital in
Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of
shares alone, under the corporate set-up of PLDT, can vote and elect
members of the board of directors. It is undisputed that PLDTs nonvoting preferred shares are held mostly by Filipino citizens.30 This
arose from Presidential Decree No. 217,31 issued on 16 June 1973 by
then President Ferdinand Marcos, requiring every applicant of a PLDT
telephone line to subscribe to non-voting preferred shares to pay for
the investment cost of installing the telephone line.32
Petitioners-in-intervention basically reiterate petitioners arguments and
adopt petitioners definition of the term capital.33 Petitioners-inintervention allege that the approximate foreign ownership of common
capital stock of PLDT x x x already amounts to at least 63.54% of the
total outstanding common stock, which means that foreigners exercise
significant control over PLDT, patently violating the 40 percent foreign
equity limitation in public utilities prescribed by the Constitution.
Respondents, on the other hand, do not offer any definition of the term
capital in Section 11, Article XII of the Constitution. More importantly,
private respondents Nazareno andPangilinan of PLDT do not dispute
that more than 40 percent of the common shares of PLDT are held by
foreigners.
In particular, respondent Nazarenos Memorandum, consisting of 73
pages, harps mainly on the procedural infirmities of the petition and the
supposed violation of the due process rights of the affected foreign
common shareholders. Respondent Nazareno does not deny
petitioners allegation of foreigners dominating the common
shareholdings of PLDT.Nazareno stressed mainly that the petition
seeks to divest foreign common shareholders purportedly exceeding
40% of the total common shareholdings in PLDT of their ownership
over their shares. Thus, the foreign natural and juridical PLDT
shareholders must be impleaded in this suit so that they can be
heard.34 Essentially, Nazareno invokes denial of due process on
behalf of the foreign common shareholders.
While Nazareno does not introduce any definition of the term capital,
he states that among the factual assertions that need to be
established to counter petitioners allegations is the uniform
interpretation by government agencies (such as the SEC), institutions
and corporations (such as the Philippine National Oil Company-Energy
Development Corporation or PNOC-EDC) of including both preferred
shares and common shares in controlling interest in view of testing
compliance with the 40% constitutional limitation on foreign ownership
in public utilities.35
Similarly, respondent Manuel V. Pangilinan does not define the term
capital in Section 11, Article XII of the Constitution. Neither does he
refute petitioners claim of foreigners holding more than 40 percent of
PLDTs common shares. Instead, respondent Pangilinan focuses on
the procedural flaws of the petition and the alleged violation of the due
process rights of foreigners. Respondent Pangilinan emphasizes in his
Memorandum (1) the absence of this Courts jurisdiction over the
petition; (2) petitioners lack of standing; (3) mootnessof the petition;
(4) non-availability of declaratory relief; and (5) the denial of due
process rights. Moreover, respondent Pangilinan alleges that the issue
should be whether owners of shares in PLDT as well as owners of
shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without any
law requiring them to surrender their shares and also without notice
and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of

the Constitution] imposes no nationality requirement on the
shareholders of the utility company as a condition for keeping their
shares in the utility company. According to him, Section 11 does not
authorize taking one persons property (the shareholders stock in the
utility company) on the basis of another partys alleged failure to satisfy
a requirement that is a condition only for that other partys retention of
another piece of property (the utility company being at least 60%
Filipino-owned to keep its franchise).36
The OSG, representing public respondents Secretary Margarito Teves,
Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and
Chairman Fe Barin, is likewise silent on the definition of the term
capital. In its Memorandum37 dated 24 September 2007, the OSG
also limits its discussion on the supposed procedural defects of the
petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of
interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term capital in Section
11, Article XII of the Constitution. The OSG contends that the petition
actually partakes of a collateral attack on PLDTs franchise as a public
utility, which in effect requires a full-blown trial where all the parties in
interest are given their day in court.38
Respondent Francisco Ed Lim, impleaded as President and Chief
Executive Officer of the Philippine Stock Exchange (PSE), does not
also define the term capital and seeks the dismissal of the petition on
the following grounds: (1) failure to state a cause of action against Lim;
(2) the PSE allegedly implemented its rules and required all listed
companies, including PLDT, to make proper and timely disclosures;
and (3) the reliefs prayed for in the petition would adversely impact the
stock market.
In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez
who claimed to be a stockholder of record of PLDT, contended that the
term capital in the 1987 Constitution refers to shares entitled to vote
or the common shares. Fernandez explained thus:
The forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock
entitled to vote, i.e., common shares, considering that it is through
voting that control is being exercised. x x x
Obviously, the intent of the framers of the Constitution in imposing
limitations and restrictions on fully nationalized and partially
nationalized activities is for Filipino nationals to be always in control of
the corporation undertaking said activities. Otherwise, if the Trial
Courts ruling upholding respondents arguments were to be given
credence, it would be possible for the ownership structure of a public
utility corporation to be divided into one percent (1%) common stocks
and ninety-nine percent (99%) preferred stocks. Following the Trial
Courts ruling adopting respondents arguments, the common shares
can be owned entirely by foreigners thus creating an absurd situation
wherein foreigners, who are supposed to be minority shareholders,
control the public utility corporation.
xxxx
Thus, the 40% foreign ownership limitation should be interpreted to
apply to both the beneficial ownership and the controlling interest.
xxxx
Clearly, therefore, the forty percent (40%) foreign equity limitation in
public utilities prescribed by the Constitution refers to ownership of
shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown that
the legal and beneficial ownership rests in the hands of Filipino
citizens. Consequently, in the case of petitioner PLDT, since it is
already admitted that the voting interests of foreigners which would
gain entry to petitioner PLDT by the acquisition of SMART shares
through the Questioned Transactions is equivalent to 82.99%, and the
nominee arrangements between the foreign principals and the Filipino
owners is likewise admitted, there is, therefore, a violation of Section
11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14,
1987 cited by the Trial Court to support the proposition that the
meaning of the word capital as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed
and paid-in by the shareholder and it allegedly is immaterial how the
stock is classified, whether as common or preferred, cannot stand in
the face of a clear legislative policy as stated in the FIA which took
effect in 1991 or way after said opinions were rendered, and as

clarified by the above-quoted Amendments. In this regard, suffice it to

state that as between the law and an opinion rendered by an
administrative agency, the law indubitably prevails. Moreover, said
Opinions are merely advisory and cannot prevail over the clear intent
of the framers of the Constitution.
In the same vein, the SECs construction of Section 11, Article XII of
the Constitution is at best merely advisory for it is the courts that finally
determine what a law means.39
On the other hand, respondents therein, Antonio O. Cojuangco,
Manuel V. Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B.
Elma, Mariles Cacho-Romulo, Fr. BienvenidoF. Nebres, Ray C.
Espinosa, Napoleon L. Nazareno, Albert F. Del Rosario, and Orlando
B. Vea, argued that the term capital in Section 11, Article XII of the
Constitution includes preferred shares since the Constitution does not
distinguish among classes of stock, thus:
16. The Constitution applies its foreign ownership limitation on the
corporations capital, without distinction as to classes of shares. x x x
In this connection, the Corporation Code which was already in force
at the time the present (1987) Constitution was drafted defined
outstanding capital stock as follows:
Section 137. Outstanding capital stock defined. The term
outstanding capital stock, as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.
Section 137 of the Corporation Code also does not distinguish
between common and preferred shares, nor exclude either class of
shares, in determining the outstanding capital stock (the capital) of a
corporation. Consequently, petitioners suggestion to reckon PLDTs
foreign equity only on the basis of PLDTs outstanding common shares
is without legal basis. The language of the Constitution should be
understood in the sense it has in common use.
xxxx
17. But even assuming that resort to the proceedings of the
Constitutional Commission is necessary, there is nothing in the Record
of the Constitutional Commission (Vol. III) which petitioner
misleadingly cited in the Petition x x x which supports petitioners
view that only common shares should form the basis for computing a
public utilitys foreign equity.
xxxx
18. In addition, the SEC the government agency primarily
responsible for implementing the Corporation Code, and which also
has the responsibility of ensuring compliance with the Constitutions
foreign equity restrictions as regards nationalized activities x x x has
categorically ruled that both common and preferred shares are
properly considered in determining outstanding capital stock and the
nationality composition thereof.40
We agree with petitioner and petitioners-in-intervention. The term
capital in Section 11, Article XII of the Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in
the present case only to common shares,41 and not to the total
outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as
common or preferred, thus:
Sec. 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights
except those classified and issued as preferred or redeemable
shares, unless otherwise 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 the shares or series of shares may have a
par value or have no par value as may be provided for in the articles of
incorporation: Provided, 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.

Preferred shares of stock issued by any corporation may be given

preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred
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: Provided, That such terms and conditions shall be effective
upon the filing of a certificate thereof with the Securities and Exchange
Commission.
Shares of capital stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not be
liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration
less than the value of five (P5.00) pesos per share: Provided, further,
That the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for
distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated
in the certificate of stock, each share shall be equal in all respects to
every other share.
Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate
in the control or management of the corporation.43 This is exercised
through his vote in the election of directors because it is the board of
directors that controls or manages the corporation.44 In the absence of
provisions in the articles of incorporation denying voting rights to
preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded
from any control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the
same manner as bondholders.45 In fact, under the Corporation Code
only preferred or redeemable shares can be deprived of the right to
vote.46 Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid.47
Considering that common shares have voting rights which translate to
control, as opposed to preferred shares which usually have no voting
rights, the term capital in Section 11, Article XII of the Constitution
refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term capital
shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the
right to vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares of stock
that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the
Constitution to place in the hands of Filipino citizens the control and
management of public utilities. As revealed in the deliberations of the
Constitutional Commission, capital refers to the voting stock
or controlling interest of a corporation, to wit:
MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or
Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in
Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this
question: Where do we base the equity requirement, is it on the
authorized capital stock, on the subscribed capital stock, or on the
paid-up capital stock of a corporation? Will the Committee please
enlighten me on this?
MR. VILLEGAS. We have just had a long discussion with the
members of the team from the UP Law Center who provided us a
draft. The phrase that is contained here which we adopted from the UP
draft is 60 percent of voting stock.
MR. NOLLEDO. That must be based on the subscribed capital stock,
because unless declared delinquent, unpaid capital stock shall be
entitled to vote.
MR. VILLEGAS. That is right.
MR. NOLLEDO. Thank you.
With respect to an investment by one corporation in another
corporation, say, a corporation with 60-40 percent equity invests in
another corporation which is permitted by the Corporation Code, does
the Committee adopt the grandfather rule?
MR. VILLEGAS. Yes, that is the understanding of the Committee.
MR. NOLLEDO. Therefore, we need additional Filipino capital?
MR. VILLEGAS. Yes.48
xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted
by the Committee.
MR. VILLEGAS. The portion accepted by the Committee is the
deletion of the phrase voting stock or controlling interest.
MR. AZCUNA. Hence, without the Davide amendment, the committee
report would read: corporations or associations at least sixty percent
of whose CAPITAL is owned by such citizens.
MR. VILLEGAS. Yes.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with
60 percent of the capital to be owned by citizens.
MR. VILLEGAS. That is right.
MR. AZCUNA. But the control can be with the foreigners even if they
are the minority. Let us say 40 percent of the capital is owned by them,
but it is the voting capital, whereas, the Filipinos own the nonvoting
shares. So we can have a situation where the corporation is controlled
by foreigners despite being the minority because they have the voting
capital. That is the anomaly that would result here.
MR. BENGZON. No, the reason we eliminated the word stock as
stated in the 1973 and 1935 Constitutions is that according to
Commissioner Rodrigo, there are associations that do not have stocks.
That is why we say CAPITAL.
MR. AZCUNA. We should not eliminate the phrase controlling
interest.
MR. BENGZON. In the case of stock corporations, it is
assumed.49 (Emphasis supplied)
Thus, 60 percent of the capital assumes, or should result in,
controlling interest in the corporation. Reinforcing this interpretation of
the term capital, as referring to controlling interest or shares entitled
to vote, is the definition of a Philippine national in the Foreign
Investments Act of 1991,50 to wit:
SEC. 3. Definitions. - As used in this Act:
a. The term Philippine national shall mean a citizen of the
Philippines; or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and registered as doing
business in the Philippines under the Corporation Code of which one
hundred percent (100%) of the capital stock outstanding and entitled to
vote is wholly owned by Filipinos or a trustee of funds for pension or
other employee retirement or separation benefits, where the trustee is
a Philippine national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of
each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the
Board of Directors of each of both corporations must be citizens of the
Philippines, in order that the corporation, shall be considered a
Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing

Rules and Regulations of the Foreign Investments Act of 1991 provide:
b. Philippine national shall mean a citizen of the Philippines or a
domestic partnership or association wholly owned by the citizens of the
Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital stock
outstanding and entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent [60%] of the fund will accrue to the
benefit of the Philippine nationals;Provided, that where a corporation
its non-Filipino stockholders own stocks in a Securities and Exchange
Commission [SEC] registered enterprise, at least sixty percent [60%] of
the capital stock outstanding and entitled to vote of both corporations
must be owned and held by citizens of the Philippines and at least sixty
percent [60%] of the members of the Board of Directors of each of both
corporation must be citizens of the Philippines, in order that the
corporation shall be considered a Philippine national. The control test
shall be applied for this purpose.
Compliance with the required Filipino ownership of a corporation shall
be determined on the basis of outstanding capital stock whether fully
paid or not, but only such stocks which are generally entitled to vote
are considered.
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals. (Emphasis
supplied)
Mere legal title is insufficient to meet the 60 percent Filipino-owned
capital required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is required. The legal and beneficial ownership of 60
percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is considered as non-Philippine
national[s].
Under Section 10, Article XII of the Constitution, Congress may
reserve to citizens of the Philippines or to corporations or associations
at least sixty per centum of whose capital is owned by such citizens, or
such higher percentage as Congress may prescribe, certain areas of
investments. Thus, in numerous laws Congress has reserved certain
areas of investments to Filipino citizens or to corporations at least sixty
percent of the capital of which is owned by Filipino citizens. Some of
these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No.
3850; (3) Magna Carta for Micro, Small and Medium Enterprises or
R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or
R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or
R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A.
No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence,
the term capital in Section 11, Article XII of the Constitution is also
used in the same context in numerous laws reserving certain areas of
investments to Filipino citizens.
To construe broadly the term capital as the total outstanding capital
stock, including both common and non-voting preferred shares, grossly
contravenes the intent and letter of the Constitution that the State
shall develop a self-reliant and independent national
economy effectively controlled by Filipinos. A broad definition
unjustifiably disregards who owns the all-important voting stock, which
necessarily equates to control of the public utility.
We shall illustrate the glaring anomaly in giving a broad definition to
the term capital. Let us assume that a corporation has 100 common
shares owned by foreigners and 1,000,000 non-voting preferred
shares owned by Filipinos, with both classes of share having a par
value of one peso (P1.00) per share. Under the broad definition of the
term capital, such corporation would be considered compliant with
the 40 percent constitutional limit on foreign equity of public utilities
since the overwhelming majority, or more than 99.999 percent, of the

total outstanding capital stock is Filipino owned. This is obviously

absurd.
In the example given, only the foreigners holding the common shares
have voting rights in the election of directors, even if they hold only 100
shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the
Filipinos, holding more than 99.999 percent of the equity, cannot vote
in the election of directors and hence, have no control over the public
utility. This starkly circumvents the intent of the framers of the
Constitution, as well as the clear language of the Constitution, to place
the control of public utilities in the hands of Filipinos. It also renders
illusory the State policy of an independent national economy effectively
controlled by Filipinos.
The example given is not theoretical but can be found in the real
world, and in fact exists in the present case.
Holders of PLDT preferred shares are explicitly denied of the right to
vote in the election of directors. PLDTs Articles of Incorporation
expressly state that the holders of Serial Preferred Stock shall not be
entitled to vote at any meeting of the stockholders for the election of
directors or for any other purpose or otherwise participate in any action
taken by the corporation or its stockholders, or to receive notice of any
meeting of stockholders.51
On the other hand, holders of common shares are granted the
exclusive right to vote in the election of directors. PLDTs Articles of
Incorporation52 state that each holder of Common Capital Stock shall
have one vote in respect of each share of such stock held by him on all
matters voted upon by the stockholders, and the holders of Common
Capital Stock shall have the exclusive right to vote for the election of
directors and for all other purposes.53
In short, only holders of common shares can vote in the election of
directors, meaning only common shareholders exercise control over
PLDT. Conversely, holders of preferred shares, who have no voting
rights in the election of directors, do not have any control over PLDT. In
fact, under PLDTs Articles of Incorporation, holders of common shares
have voting rights for all purposes, while holders of preferred shares
have no voting right for any purpose whatsoever.
It must be stressed, and respondents do not dispute, that foreigners
hold a majority of the common shares of PLDT. In fact, based on
PLDTs 2010 General Information Sheet (GIS),54 which is a document
required to be submitted annually to the Securities and Exchange
Commission,55 foreigners hold 120,046,690 common shares of PLDT
whereas Filipinos hold only 66,750,622 common shares.56 In other
words, foreigners hold 64.27% of the total number of PLDTs common
shares, while Filipinos hold only 35.73%. Since holding a majority of
the common shares equates to control, it is clear that foreigners
exercise control over PLDT. Such amount of control unmistakably
exceeds the allowable 40 percent limit on foreign ownership of public
utilities expressly mandated in Section 11, Article XII of the
Constitution.
Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted
to the SEC, shows that per share the SIP58 preferred shares earn a
pittance in dividends compared to the common shares. PLDT declared
dividends for the common shares at P70.00 per share, while the
declared dividends for the preferred shares amounted to a
measly P1.00 per share.59So the preferred shares not only cannot
vote in the election of directors, they also have very little and obviously
negligible dividend earning capacity compared to common shares.
As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par
value of PLDT common shares is P5.00 per share, whereas the par
value of preferred shares is P10.00 per share. In other words,
preferred shares have twice the par value of common shares but
cannot elect directors and have only 1/70 of the dividends of common
shares. Moreover, 99.44% of the preferred shares are owned by
Filipinos while foreigners own only a minuscule 0.56% of the preferred
shares.61 Worse, preferred shares constitute 77.85% of the authorized
capital stock of PLDT while common shares constitute only
22.15%.62 This undeniably shows that beneficial interest in PLDT is
not with the non-voting preferred shares but with the common shares,
blatantly violating the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public utility.
The legal and beneficial ownership of 60 percent of the outstanding
capital stock must rest in the hands of Filipinos in accordance with the
constitutional mandate. Full beneficial ownership of 60 percent of the

outstanding capital stock, coupled with 60 percent of the voting rights,

is constitutionally required for the States grant of authority to operate a
public utility. The undisputed fact that the PLDT preferred shares,
99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino
beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and
earn less than 60 percent of the dividends, of PLDT. This directly
contravenes the express command in Section 11, Article XII of the
Constitution that [n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except
to x x xcorporations x x x organized under the laws of the
Philippines, at least sixty per centum of whose capital is owned by
such citizens x x x.
To repeat, (1) foreigners own 64.27% of the common shares of PLDT,
which class of shares exercises the sole right to vote in the election of
directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the voting
stock, and thus do not exercise control over PLDT; (3) preferred
shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred
shares earn only 1/70 of the dividends that common shares earn;63 (5)
preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of
PLDT and common shares only 22.15%. This kind of ownership and
control of a public utility is a mockery of the Constitution.
Incidentally, the fact that PLDT common shares with a par value
of P5.00 have a current stock market value of P2,328.00 per
share,64 while PLDT preferred shares with a par value ofP10.00 per
share have a current stock market value ranging from only P10.92
to P11.06 per share,65 is a glaring confirmation by the market that
control and beneficial ownership of PLDT rest with the common
shares, not with the preferred shares.
Indisputably, construing the term capital in Section 11, Article XII of
the Constitution to include both voting and non-voting shares will result
in the abject surrender of our telecommunications industry to
foreigners, amounting to a clear abdication of the States constitutional
duty to limit control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional provision
reserving certain areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the ownership of land,
educational institutions and advertising businesses. The Court should
never open to foreign control what the Constitution has expressly
reserved to Filipinos for that would be a betrayal of the Constitution
and of the national interest. The Court must perform its solemn duty to
defend and uphold the intent and letter of the Constitution to ensure, in
the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.
Section 11, Article XII of the Constitution, like other provisions of the
Constitution expressly reserving to Filipinos specific areas of
investment, such as the development of natural resources and
ownership of land, educational institutions and advertising business,
is self-executing. There is no need for legislation to implement these
self-executing provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained in Manila
Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is
necessary to enforce a constitutional mandate, the presumption now is
that all provisions of the constitution are self-executing. If the
constitutional provisions are treated as requiring legislation instead of
self-executing, the legislature would have the power to ignore and
practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always been,
that
. . . in case of doubt, the Constitution should be considered selfexecuting rather than non-self-executing. . . . Unless the contrary is
clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the legislature
discretion to determine when, or whether, they shall be effective. These
provisions would be subordinated to the will of the lawmaking body,
which could make them entirely meaningless by simply refusing to
pass the needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate

Justice Reynato S. Puno, later Chief Justice, agreed that constitutional
provisions are presumed to be self-executing. Justice Puno stated:
Courts as a rule consider the provisions of the Constitution as selfexecuting, rather than as requiring future legislation for their
enforcement. The reason is not difficult to discern. For if they are not
treated as self-executing, the mandate of the fundamental law ratified
by the sovereign people can be easily ignored and nullified by
Congress. Suffused with wisdom of the ages is the unyielding rule that
legislative actions may give breath to constitutional rights but
congressional inaction should not suffocate them.
Thus, we have treated as self-executing the provisions in the Bill of
Rights on arrests, searches and seizures, the rights of a person under
custodial investigation, the rights of an accused, and the privilege
against self-incrimination. It is recognized that legislation is
unnecessary to enable courts to effectuate constitutional provisions
guaranteeing the fundamental rights of life, liberty and the protection of
property. The same treatment is accorded to constitutional provisions
forbidding the taking or damaging of property for public use without just
compensation. (Emphasis supplied)
Thus, in numerous cases,67 this Court, even in the absence of
implementing legislation, applied directly the provisions of the 1935,
1973 and 1987 Constitutions limiting land ownership to Filipinos.
In Soriano v. Ong Hoo,68 this Court ruled:
x x x As the Constitution is silent as to the effects or consequences of
a sale by a citizen of his land to an alien, and as both the citizen and
the alien have violated the law, none of them should have a recourse
against the other, and it should only be the State that should be
allowed to intervene and determine what is to be done with the
property subject of the violation. We have said that what the State
should do or could do in such matters is a matter of public policy,
entirely beyond the scope of judicial authority. (Dinglasan, et al. vs. Lee
Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.)While the
legislature has not definitely decided what policy should be followed in
cases of violations against the constitutional prohibition, courts of
justice cannot go beyond by declaring the disposition to be null and
void as violative of the Constitution. x x x (Emphasis supplied)
To treat Section 11, Article XII of the Constitution as not self-executing
would mean that since the 1935 Constitution, or over the last 75 years,
not one of the constitutional provisions expressly reserving specific
areas of investments to corporations, at least 60 percent of the
capital of which is owned by Filipinos, was enforceable. In short, the
framers of the 1935, 1973 and 1987 Constitutions miserably failed to
effectively reserve to Filipinos specific areas of investment, like the
operation by corporations of public utilities, the exploitation by
corporations of mineral resources, the ownership by corporations of
real estate, and the ownership of educational institutions. All the
legislatures that convened since 1935 also miserably failed to enact
legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or
foreigners. This Court cannot allow such an absurd interpretation of the
Constitution.
This Court has held that the SEC has both regulatory and
adjudicative functions.69 Under its regulatory functions, the SEC can
be compelled by mandamus to perform its statutory duty when it
unlawfully neglects to perform the same. Under its adjudicative or
quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it
administers or enforces when it is mandated by law to investigate such
violation.
Under Section 17(4)70 of the Corporation Code, the SEC has the
regulatory function to reject or disapprove the Articles of Incorporation
of any corporation where the required percentage of ownership of the
capital stock to be owned by citizens of the Philippines has not been
complied with as required by existing laws or the Constitution. Thus,
the SEC is the government agency tasked with the statutory duty to
enforce the nationality requirement prescribed in Section 11, Article XII
of the Constitution on the ownership of public utilities. This Court, in a
petition for declaratory relief that is treated as a petition for mandamus
as in the present case, can direct the SEC to perform its statutory duty
under the law, a duty that the SEC has apparently unlawfully neglected

to do based on the 2010 GIS that respondent PLDT submitted to the

SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is
vested with the power and function to suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds
provided by law. The SEC is mandated under Section 5(d) of the
same Code with the power and function to investigate x x x the
activities of persons to ensure compliance with the laws and
regulations that SEC administers or enforces. The GIS that all
corporations are required to submit to SEC annually should put the
SEC on guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court can compel
the SEC, in a petition for declaratory relief that is treated as a petition
for mandamus as in the present case, to hear and decide a possible
violation of Section 11, Article XII of the Constitution in view of the
ownership structure of PLDTs voting shares, as admitted by
respondents and as stated in PLDTs 2010 GIS that PLDT submitted to
SEC.
WHEREFORE, we PARTLY GRANT the petition and rule that the term
capital in Section 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in
the present case only to common shares, and not to the total
outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission
is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine
Long Distance Telephone Company, and if there is a violation of
Section 11, Article XII of the Constitution, to impose the appropriate
sanctions under the law.
SO ORDERED

Republic of the Philippines

Congress of the Philippines
Metro Manila
Eleventh Congress
Republic Act No. 8756
November 23, 1999
AN ACT PROVIDING FOR THE TERMS, CONDITIONS AND
LICENSING REQUIREMENTS OF REGIONAL OR AREA
HEADQUARTERS, REGIONAL OPERATING HEADQUARTERS, AND
REGIONAL WAREHOUSES OF MULTINATIONAL COMPANIES,
AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF
EXECUTIVE ORDER NO. 226, OTHERWISE KNOWN AS THE
OMNIBUS INVESTMENTS CODE OF 1987
Be it enacted by the Senate and House of Representatives of
the Philippines in Congress assembled::
Section 1. The title of Book III of Executive Order No. 226,
otherwise known as the Omnibus Investments Code of 1987,
is hereby amended as follows:
"BOOK III
"INCENTIVES TO MULTINATIONAL COMPANIES ESTABLISHING
REGIONAL OR AREA HEADQUARTERS AND REGIONAL
OPERATING HEADQUARTERS IN THE PHILIPPINES"
Section 2. Definition of Terms. - For purposes of this Act, the
term:
(1) Multinational Company shall mean a foreign company or a
group of foreign companies with business establishments in
two or more countries;
(2) Regional or Area Headquarters (RHQ) shall mean an office
whose purpose is to act as an administrative branch of a
multinational company engaged in international trade which
principally serves as a supervision, communications and
coordination center for its subsidiaries, branches or affiliates
in the Asia-Pacific Region and other foreign markets and which
does not earn or derive income in the Philippines; and

(3) Regional Operating Headquarters (ROHQ) shall mean a

foreign business entity which is allowed to derive income in
the Philippines by performing qualifying services to its
affiliates, subsidiaries or branches in the Philippines, in the
Asia-Pacific Region and in other foreign markets.
Section 3. The Title and Article 58 of Chapter I of the same
Code are hereby amended as follows:
"CHAPTER I
LICENSING OF REGIONAL OR AREA HEADQUARTERS
Art. 58. Qualification of Regional or Area Headquarters. - Any
foreign business entity formed, organized and existing under
any laws other than those of the Philippines whose purpose,
as expressed in its organizational documents or by resolution
of its Board of Directors or its equivalent, is to supervise,
superintend, inspect or coordinate its own affiliates,
subsidiaries or branches in the Asia-Pacific Region and other
foreign markets may establish a regional or area headquarters
in the Philippines, by securing a license therefor from the
Securities and Exchange Commission, upon the favorable
recommendation of the Board of Investments.
The Securities and Exchange Commission shall, within thirty
(30) days from the effectivity of this Code, issue the
implementing rules and regulations. The following minimum
requirements shall, however, be complied with by the said
foreign entity:
(a) A certification from the Philippine Consulate/Embassy, or a
duly authenticated certification from the Department of Trade
and Industry or its equivalent in the foreign firm's home
country that said foreign firm is an entity engaged in
international trade with affiliates, subsidiaries or branch
offices in the Asia-Pacific Region and other foreign markets.
(b) A duly authenticated certification from the principal officer
of the foreign entity to the effect that the said foreign entity
has been authorized by its Board of Directors or governing
body to establish its regional or area headquarters in the
Philippines, specifying that:
(1) The activities of the regional or area headquarters shall be
limited to acting as a supervisory, communications and
coordinating center for its subsidiaries, affiliates and branches
in the region;
(2) The regional or area headquarters will not derive any
income from sources within the Philippines and will not
participate in any manner in the management of any
subsidiary or branch office it might have in the Philippines nor
shall it solicit or market goods and services whether on behalf
of its mother company or its branches, affiliates, subsidiaries
or any other company; and
(3) The regional or area headquarters shall notify the Board of
Investments and the Securities and Exchange Commission of
any decision to close down or suspend operations of its
headquarters at least fifteen (15) days before the same is
effected.
(c) An undertaking that the multinational company will remit
into the country such amount as may be necessary to cover
its operations in the Philippines but which amount will not be
less than Fifty thousand United States dollars ($50,000) or its
equivalent in other foreign currencies annually. Within thirty
(30) days from receipt of certificate of registration from the
Securities and Exchange Commission, the multinational
company will submit to the Securities and Exchange
Commission a certificate of inward remittance from a local
bank showing that it has remitted to the Philippines the
amount of at least Fifty thousand United States dollars
($50,000) or its equivalent in other foreign currencies and
converted the same to Philippine currency. Annually, within
thirty (30) days from the anniversary date of the multinational
company's registration as a regional or area headquarters
with the Securities and Exchange Commission, it will submit
proof to the Securities and Exchange Commission of inward
remittance amounting to at least Fifty thousand United States
dollars ($50,000) or its equivalent in other foreign currencies
during the past year.

(d) Any violation by the regional or area headquarters of a

multinational company of any of the provisions of this Code,
or its implementing rules and regulations, or other terms and
conditions of its registration, or any provision of existing laws,
shall constitute a sufficient cause for the cancellation of its
license or registration.
Section 4. Book III of the same Code is hereby further
amended by adding a new chapter designated as Chapter II to
read as follows:
"CHAPTER II
"LICENSING OF REGIONAL OPERATING HEADQUARTERS
"Art. 59. Qualification of Regional Operating Headquarters
(ROHQs). - Any foreign business entity formed, organized and
existing under any laws other than those of the Philippines
may establish a regional operating headquarters in the
Philippines to service its own affiliates, subsidiaries or
branches in the Philippines, in the Asia-Pacific Region and
other foreign markets. ROHQs will be allowed to derive
income by performing the qualifying services enumerated
under paragraph (b) 1 hereunder. ROHQs of non-banking and
non-financial institutions are required to secure a license from
the Securities and Exchange Commission, upon the favorable
recommendation of the Board of Investments. ROHQs of
banking and financial institutions, on the other hand, are
required to secure licenses from the Securities and Exchange
Commission and the Bangko Sentral ng Pilipinas, upon the
favorable recommendation of the Board of Investments.
"The Securities and Exchange Commission and the Bangko
Sentral ng Pilipinas shall, within thirty (30) days from the
effectivity of this Code, issue the implementing rules and
regulations.
"The following minimum requirements shall be complied with
by the said foreign entity:
"(a) A certification from the Philippine Consulate/Embassy, or
a duly authenticated certification from the Department of
Trade and Industry or its equivalent in the foreign firm's home
country that said foreign firm is an entity engaged in
international trade with affiliates, subsidiaries or branch
offices in the Asia-Pacific Region and other foreign markets.
"(b) A duly authenticated certification from the principal
officer of the foreign entity to the effect that the said foreign
entity has been authorized by its Board of Directors or
governing body to establish its regional operating
headquarters in the Philippines, specifying that:
"(1) The regional operating headquarters may engage in any
of the following qualifying services:
- General administration and planning;
- Business planning and coordination;
- Sourcing/procurement of raw materials and components;
- Corporate finance advisory services;
- Marketing control and sales promotion;
- Training and personnel management;
- Logistics services;
- Research and development services, and product
development;
- Technical support and maintenance;
- Data processing and communication; and
- Business development.
"ROHQs are prohibited from offering qualifying services to
entities other than their affiliates, branches or subsidiaries, as
declared in their registration with the Securities and Exchange
Commission nor shall they be allowed to directly and
indirectly solicit or market goods and services whether on
behalf of their mother company, branches, affiliates,
subsidiaries or any other company.
"(2) The regional operating headquarters shall notify the
Board of Investments, the Securities and Exchange
Commission and the Bangko Sentral ng Pilipinas, as the case
may be, of any decision to close down or suspend operations
of its headquarters at least fifteen (15) days before the same
is effected.
"(c) An undertaking that the multinational company will
initially remit into the country such amount as may be

necessary to cover its operations in the Philippines but which

amount will not be less than Two hundred thousand United
States dollars ($200,000) or its equivalent in other foreign
currencies.
"Within thirty (30) days from receipt of certificate of
registration, the multinational company will submit to the
Securities and Exchange Commission a certificate of inward
remittance from a local bank showing that it has remitted to
the Philippines the amount of at least Two hundred thousand
United States dollars ($200,000) or its equivalent in other
foreign currencies and converted the same to Philippine
currency.
"(d) Any violation by the regional operating headquarters of a
multinational company of the provisions of this Code, or its
implementing rules and regulations, or other terms and
conditions of its registration, or any provision of existing laws,
shall constitute a sufficient cause for the cancellation of its
license or registration."
Section 5. Chapter II of the same Code is hereby amended
and designated as Chapter III. Articles 59, 60, 61 and 62
under the same Chapter are hereby amended as follows:
"CHAPTER III
"INCENTIVES TO EXPATRIATES
"Art. 60. Multiple Entry Visa. - Foreign personnel of regional or
area headquarters and regional operating headquarters of
multinational companies, their respective spouses and
unmarried children under twenty-one (21) years of age, if
accompanying them or if following to join them after their
admission into the Philippines as non-immigrant shall be
issued a multiple entry special visa within seventy-two hours
upon submission of all required documents, and which shall
be valid for a period of three (3) years to enter the
Philippines: Provided, That a responsible officer of the
applicant company submits a duly authenticated certificate to
the effect that the person who seeks entry into the Philippines
is an executive of the applicant company and will work
exclusively for applicant's regional or area headquarters or
regional operating headquarters which is duly licensed to
operate in the Philippines, and that he will receive a salary
and will be paid by the headquarters in the Philippines an
amount equivalent to at least Twelve thousand United States
dollars ($12,000), or the equivalent in other foreign
currencies per annum.
"The admission and stay shall be coterminous with the validity
of the multiple entry special visa. The stay, however, is
extendible for three years upon submission to the Bureau of
Immigration of a sworn certification by a responsible officer of
the regional or area headquarters or regional operating
headquarters: that its license to operate remains valid and
subsisting and that the regional or area headquarters or
regional operating headquarters has withheld tax due on
compensation and the same has been paid to the Bureau of
Internal Revenue.
"Non-immigrants who have been admitted under the multiple
entry special visa, as well as their respective spouses and
dependents, shall be exempt from: the payment of all fees
due under the immigration and alien registration laws;
securing alien certificates of registration; and obtaining
emigration clearance certificates, and all types of clearances
required by any government department or agency, except
that upon final departure from the Philippines the employer of
the said nonimmigrants shall so advise in writing the Bureau
of Immigration at least five (5) working days prior to the nonimmigrant's departure, and the finally departing nonimmigrant employee shall be required to submit to the said
office a tax clearance from the Bureau of Internal Revenue.
"Art. 61. Withholding Tax of 15% on Compensation Income. Aliens employed by the regional or area headquarters and
regional operating headquarters of multinational companies
shall be subject for each taxable year upon their gross income
received as salaries, wages, annuities, compensations,
remuneration and emoluments to a tax equal to fifteen per
centum (15%) of such gross income. The same tax treatment

is applicable to Filipinos employed and occupying the same

positions as those aliens employed by multinational
companies: Provided, That said Filipinos shall have the option
to be taxed at either 15% of gross income or at the regular
tax rate on their taxable income in accordance with the
National Internal Revenue Code, as amended by Republic Act
No. 8424.
"Art. 62. Tax and Duty Free Importation. - An alien executive of
the regional or area headquarters and regional operating
headquarters of a multinational company shall enjoy tax and
duty free importation of personal and household effects as
provided for under Section 105(h) of the Tariff and Customs
Code, as amended, and Section 109(I) of the National Internal
Revenue Code, as amended: Provided, That the personal and
household effects shall arrive in the Philippines within ninety
(90) days before or after conversion of the alien executive's
admission category to multiple entry visa issued under this
Act.
"Art. 63. Travel Tax Exemption. - Personnel of regional or area
headquarters and regional operating headquarters of
multinational companies and the dependents of such foreign
personnel if joining them during the period of their
assignment in the Philippines, as certified by the Board of
Investments, shall be exempted from the payment of travel
tax imposed under Section 1 of Presidential Decree No. 1183,
as amended."
Section 6. Chapter III of the same Code is hereby amended
and designated as Chapter IV. Articles 63, 64, 65, 66 and 67
are hereby amended to read as follows:
"CHAPTER IV
"INCENTIVES TO REGIONAL OR AREA HEADQUARTERS AND
REGIONAL OPERATING HEADQUARTERS
"Art. 64. Corporate Income Tax Incentive to Regional or Area
Headquarters and Regional Operating Headquarters.
- Regional or area headquarters established in the Philippines
by multinational companies and which headquarters do not
earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for
their affiliates, subsidiaries, or branches in the Asia-Pacific
Region and other foreign markets shall not be subject to
income tax. Regional operating headquarters shall be subject
to a tax rate of ten percent (10%) of their taxable income as
provided for under the National Internal Revenue Code, as
amended by Republic Act No. 8424: Provided, That any
income derived from Philippine sources by the ROHQ when
remitted to the parent company shall be subject to the tax on
branch profit remittances as provided for in Section 28(a)(5)
of the National Internal Revenue Code.
"Art. 65. Value-Added Tax. - The regional or area headquarters
established in the Philippines by multinational companies shall
be exempted from the value-added tax. In addition, the sale
or lease of goods and property and the rendition of services to
regional or area headquarters shall be subject to zero percent
(0%) VAT rate as provided for in the National Internal Revenue
Code, as amended.
"Regional operating headquarters shall be subject to the ten
percent (10%) value-added tax as provided for under the
National Internal Revenue Code, as amended.
"Art. 66. Exemption From All Kinds of Local Taxes, Fees, or
Charges. - The regional or area headquarters and regional
operating headquarters of multinational companies shall be
exempt from all kinds of local taxes, fees, or charges imposed
by a local government unit except real property tax on land
improvements and equipment.
"Art. 67. Tax and Duty Free Importation of Training Materials
and Equipment; Importation of Motor Vehicles. - Regional or
area headquarters and regional operating headquarters shall
enjoy tax and duty free importation of equipment and
materials for training and conferences which are needed and
used solely for their functions as regional or area
headquarters or regional operating headquarters and which
are not locally available subject to the prior approval of the
Board of Investments.

"The sale or disposition of equipment within two (2) years

after importation, entered tax and duty free, shall require
prior approval of the Board of Investments and prior payment
of applicable taxes and duties waived in favor of RHQ/ROHQ.
"Regional or area headquarters and regional operating
headquarters shall be entitled to the importation of new motor
vehicles subject to the payment of the corresponding taxes
and duties.
"BOOK IV
"INCENTIVES TO MULTINATIONAL COMPANIES ESTABLISHING
REGIONAL WAREHOUSES TO SUPPLY SPARE PARTS,
COMPONENTS, SEMI-FINISHED PRODUCTS AND RAW
MATERIALS TO THE ASIA-PACIFIC REGION AND OTHER
FOREIGN MARKETS"
Section 7. Articles 68, 69, 70, 71 and 72 of the same Code are
hereby amended to read as follows:
"Art. 68. Qualifications. - A multinational company organized
and existing under any laws other than those of the
Philippines which is engaged in international trade and
supplies spare parts, components, semi-finished products and
raw materials to its distributors or markets in the Asia-Pacific
area and other foreign areas and which has established or will
simultaneously establish a regional or area headquarters
and/or regional operating headquarters in the Philippines in
accordance with the provisions of Book III of this Code and the
rules and regulations implementing the same may also
establish a regional warehouse or warehouses in ecozones in
the Philippines, after securing a license therefor from the
Philippine Economic Zone Authority (PEZA). With respect to
regional warehouses located or will locate in ecozones with
special charters, such license shall be secured from the
concerned ecozone authorities. For existing regional
warehouses, said license shall be secured from the Board of
Investments unless they choose to relocate inside
ecozones: Provided, That:
"(1) The activities of the regional warehouse shall be limited
to serving as a supply depot for the storage, deposit,
safekeeping of its spare parts, components, semi-finished
products and raw materials including the packing, covering,
putting up, marking, labelling and cutting or altering to
customer's specification, mounting and/or packaging into kits
or marketable lots thereof, to fill up transactions and sales
made by its head offices or parent companies and to serving
as a storage or warehouse of goods purchased locally by the
home office of the multinational for export abroad. The
regional warehouse shall not directly engage in trade nor
directly solicit business, promote any sale, nor enter into any
contract for the sale or disposition of goods in the
Philippines: Provided, That a regional warehouse may be
allowed to withdraw imported goods from said warehouse/s
for delivery to an authorized distributor in the
Philippines: Provided, however, That the corresponding taxes,
customs duties and charges under the Tariff and Customs
Code have been paid by the headquarters of the said
multinational upon arrival of such goods: Provided,
further, That the delivery of said goods to the aforesaid
distributor in the Philippines shall be treated as a sale made
by the headquarters rather than that of its head office, and
shall be reflected in a separate book of accounts, any
representation as to who is the seller to the contrary
notwithstanding: Provided, furthermore, That the
aforementioned sale shall be governed by the provisions on
value-added tax in accordance with the National Internal
Revenue Code, as amended by Republic Act No.
8424: Provided, finally, That the income from the
aforementioned sale to said distributor shall be treated as
income derived by the said headquarters from sources within
the Philippines and shall be subject to the corporate income
tax of a resident foreign corporation under the National
Internal Revenue Code, as amended, the provision of any law
to the contrary notwithstanding.
"(2) The personnel of a regional warehouse will not participate
in any manner in the management of any subsidiary, affiliate

or branch office it might have in the Philippines other than the

activities allowed under this Act.
"(3) The personnel of the regional or area headquarters or
regional operating headquarters shall be responsible for the
operation of the regional warehouse subject to the provisions
of this Code.
"(4) The multinational company shall pay the Board of
Investments, the PEZA or concerned ecozone authorities, as
the case may be, and the appropriate Collector of Customs
concerned the corresponding license fees and storage fees to
be determined by said offices.
"(5) An application for the establishment of a regional
warehouse located outside an ecozone shall be made in
writing to the Board of Investments, to the PEZA, or to
concerned ecozone authorities in the case of regional
warehouses located in ecozones. The application shall
describe the premises, the location and capacity of the
regional warehouse and the purpose for which the building is
to be used.
"The jurisdiction and responsibility of supervising the regional
warehouses located outside ecozones shall be vested on the
Bureau of Customs, and the Board of Investments, or the
PEZA or concerned ecozone authorities for warehouses within
ecozones.
"The Board of Investments, the PEZA or concerned ecozone
authorities, in consultation with the Regional Director of
Customs of the district where the warehouse will be situated
shall cause an examination of the premises to be made and if
found satisfactory, it may authorize its establishment without
complying with the requirements of any other government
body, subject to the following conditions:
"(1) That the articles to be stored in the warehouse are spare
parts, components, semi-finished products and raw materials
of the multinational company operator for distribution and
supply to its Asia-Pacific and other foreign markets including
packaging, coverings, brands, labels and warehouse
equipment as provided in Article 69(a) hereof;
"(2) That the entry or importation, storage or re-export of the
goods destined for or to be stored in the regional warehouse
will not involve any dollar outlay from Philippine sources;
"(3) That they are of such character as to be readily
identifiable for re-export; and in case of local distribution they
shall be subject to Article 68(1), Article 69 paragraph (b) and
the guidelines implementing Book IV of this Code;
"(4) That it shall file an ordinary warehousing bond in an
amount equal to one hundred percent (100%) of the
ascertained customs duties on the articles imported without
prejudice to its filing a general warehousing bond in lieu of the
ordinary warehousing bond;
"(5) The percentage of annual allowable withdrawal from
warehouses located outside ecozones for domestic use shall
be subject to the approval of the Board of Investments, or of
the PEZA or concerned ecozone authorities with respect to
warehouses located within the ecozones of their
jurisdiction: Provided, however, That in the case of existing
warehouses, in no case shall their withdrawals exceed thirty
percent (30%) of the value of goods they have brought in for
any given year and the payment of the corresponding taxes
and duties shall have been made upon the arrival of such
goods imported: Provided, further, That the PEZA or
concerned ecozone authorities may allow withdrawal
exceeding thirty percent (30%) of the value of goods under
such terms and conditions the PEZA or concerned ecozone
authorities may impose.
"Art. 69. Tax Treatment of Imported Articles in the Regional
Warehouse. "(a) Tax Incentives for Qualified Goods Destined for
Reexportation to the Asia-Pacific and Other Foreign Markets. Except as otherwise provided in this Code, imported spare
parts, components, semi-finished products, raw materials and
other items including any packages, coverings, brands and
labels and warehouse equipment as may be allowed by the
Board of Investments, the PEZA or concerned ecozone

authorities, as the case may be, for use exclusively on the

goods stored, except those prohibited by law, brought into the
regional warehouse from abroad to be kept, stored and/or
deposited or used therein and re-exported directly therefrom
under the supervision of the Collector of Customs concerned
for distribution to its Asia-Pacific and other foreign markets in
accordance with the guidelines implementing Book IV of this
Code including to a bonded manufacturing warehouse in the
Philippines and eventually re-exported shall not be subject to
customs duty, internal revenue tax, export tax nor to local
taxes, the provisions of law to the contrary notwithstanding.
"(b) Payment of Applicable Duties and Taxes on Qualified
Goods Subject to Laws and Regulations Covering Imported
Merchandise if Destined for the Local Market. - Any spare
parts, components, semi-finished products, raw materials and
other items sent, delivered, released or taken from the
regional warehouse to the local market in accordance with the
guidelines implementing Book IV of this Code shall be subject
to the payment of income taxes, customs duties, taxes and
other charges provided for under Section 68 hereof and for
which purpose, the proper commercial invoice of the head
offices or parent companies shall be submitted to the
Collector of Customs concerned; and shall be subject to laws
and regulations governing imported
merchandise: Provided, That in case any of the foregoing
items are sold, bartered, hired or used for purposes other than
they were intended for without prior compliance with the
guidelines implementing Book IV of this Code and without
prior payment of the duty, tax or other charges which would
have been due and payable at the time of entry if the articles
had been entered without the benefit of this Order, shall be
subject to forfeiture and the importation shall constitute a
fraudulent practice against customs revenue punishable
under Section 3602, as amended, of the Tariff and Customs
Code of the Philippines: Provided, further, That a sale
pursuant to a judicial order shall not be subject to the
preceding proviso without prejudice to the payment of duties,
taxes and other charges.
"Art. 70. Exemption From the Maximum Storage Period Under
the Tariff and Customs Code; Period of Storage in the Regional
Warehouse. - The provision of the law in Section 1908 of the
Tariff and Customs Code of the Philippines, as amended, to
the contrary notwithstanding, articles duly entered for
warehousing may remain in the regional warehouses for a
period of two (2) years from the time of their transfer to the
regional warehouse, which period may be extended with the
approval of the Board of Investments for an additional period
of one (1) year upon payment of the corresponding storage
fee on the unexported articles, as provided for under Article
68(4) for each extension until they are re-exported in
accordance with the guidelines implementing Book IV of this
Code. Any articles withdrawn, released or removed contrary to
the provisions of said guidelines shall be forfeited pursuant to
the provisions of Article 69, paragraph (b) hereof.
"Art. 71. Rules and Regulations on the Jurisdiction, Operation
and Control Over Qualified Goods in the Regional Warehouse. The Board of Investments, the PEZA, concerned ecozone
authorities and the Bureau of Customs shall jointly issue
special rules and regulations on the receiving, handling,
custody, entry, examination, classifications, delivery, storage,
warehousing, manipulation and packaging, release for
reexportation or for importation and delivery to a Philippine
distributor and for the safekeeping, recording, inventory and
liquidation of said qualified goods, any existing law
notwithstanding. Such rules and regulations shall be
formulated in consultation with the applicants/operators of
regional warehouses.
"Art. 72. Cancellation of License or Registration. - Any willful
violation by the regional or area headquarters or regional
operating headquarters of a multinational company which has
established a regional warehouse or warehouses contrary to
or in violation of the provisions of existing laws and the
implementing guidelines of Book IV of this Code shall

constitute a sufficient cause for the cancellation of its license

or registration in addition to the penalties hereinabove
provided in Article 69, paragraph (b) hereof.
"The Board, the PEZA or concerned ecozone authorities, as
the case may be, shall have the authority to impose such
fines in amounts that are just and reasonable in cases of late
submission or non-compliance on the part of registered
enterprises, with reporting and other requirements under this
Code and its implementing rules and regulations."
Section 8. Article 73 of the same Code is hereby repealed.
Section 9. A new article is hereby inserted to read as follows:
"Art. 73. Implementing Rules and Regulations. - To implement
the provisions of Books III and IV of this Code, the Department
of Trade and Industry, in coordination with the Department of
Foreign Affairs, the Board of Investments, the Philippine
Economic Zone Authority, the ecozone authorities with special
charters, the Securities and Exchange Commission, the
Bureau of Internal Revenue, the Bureau of Customs, Bangko
Sentral ng Pilipinas, Philippine Tourism Authority, and the
Bureau of Immigration shall jointly promulgate such rules and
regulations which shall take effect thirty (30) days after their
publication in at least two (2) national newspapers of general
circulation in the Philippines."
Section 10. Separability Clause. - If any part or section of this
Act is declared unconstitutional for any reason or whatsoever,
such parts not so declared shall remain in full force and effect.
Section 11. Repealing Clause. - All laws, decrees, orders, rules
and regulations or issuances or parts thereof inconsistent with
the provisions of this Act are hereby repealed or modified
accordingly.
Section 12. Effectivity Clause. - This Act shall take effect after
thirty (30) days following its full publication in at least two (2)
newspapers of general circulation in the Philippines.
Approved, November 23, 1999.