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G.R. No.

L-14441

December 17, 1966

PEDRO R. PALTING, petitioner,


vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958, later
supplemented and amplified by another dated September 9, 1958, of the
Securities and Exchange Commission denying the opposition to, and
instead, granting the registration, and licensing the sale in the Philippines,
of 5,000,000 shares of the capital stock of the respondent-appellee San Jose
Petroleum, Inc. (hereafter referred to as SAN JOSE PETROLEUM), a
corporation organized and existing in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with the Philippine
Securities and Exchange Commission a sworn registration statement, for the
registration and licensing for sale in the Philippines Voting Trust Certificates
representing 2,000,000 shares of its capital stock of a par value of $0.35 a
share, at P1.00 per share. It was alleged that the entire proceeds of the sale
of said securities will be devoted or used exclusively to finance the
operations of San Jose Oil Company, Inc. (a domestic mining corporation
hereafter to be referred to as SAN JOSE OIL) which has 14 petroleum
exploration concessions covering an area of a little less than 1,000,000
hectares, located in the provinces of Pangasinan, Tarlac, Nueva Ecija, La
Union, Iloilo, Cotabato, Davao and Agusan. It was the express condition of
the sale that every purchaser of the securities shall not receive a stock
certificate, but a registered or bearer-voting-trust certificate from the voting
trustees named therein James L. Buckley and Austin G.E. Taylor, the first
residing in Connecticut, U.S.A., and the second in New York City. While this
application for registration was pending consideration by the Securities and
Exchange Commission, SAN JOSE PETROLEUM filed an amended Statement
on June 20, 1958, for registration of the sale in the Philippines of its shares
of capital stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share. At this time the par
value of the shares has also been reduced from $.35 to $.01 per share.1
Pedro R. Palting and others, allegedly prospective investors in the shares of
SAN JOSE PETROLEUM, filed with the Securities and Exchange Commission
an opposition to registration and licensing of the securities on the grounds
that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian
corporation and SAN JOSE OIL, a domestic corporation, violates the
Constitution of the Philippines, the Corporation Law and the Petroleum Act of
1949; (2) the issuer has not been licensed to transact business in the
Philippines; (3) the sale of the shares of the issuer is fraudulent, and works
or tends to work a fraud upon Philippine purchasers; and (4) the issuer as an
enterprise, as well as its business, is based upon unsound business
principles. Answering the foregoing opposition of Palting, et al., the
registrant SAN JOSE PETROLEUM claimed that it was a "business enterprise"
enjoying parity rights under the Ordinance appended to the Constitution,
which parity right, with respect to mineral resources in the Philippines, may
be exercised, pursuant to the Laurel-Langley Agreement, only through the
medium of a corporation organized under the laws of the Philippines. Thus,
registrant which is allegedly qualified to exercise rights under the Parity
Amendment, had to do so through the medium of a domestic corporation,
which is the SAN JOSE OIL. It refused the contention that the Corporation
Law was being violated, by alleging that Section 13 thereof applies only to

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foreign corporations doing business in the Philippines, and registrant was


not doing business here. The mere fact that it was a holding company of
SAN JOSE OIL and that registrant undertook the financing of and giving
technical assistance to said corporation did not constitute transaction of
business in the Philippines. Registrant also denied that the offering for sale
in the Philippines of its shares of capital stock was fraudulent or would work
or tend to work fraud on the investors. On August 29, 1958, and on
September 9, 1958 the Securities and Exchange Commissioner issued the
orders object of the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a "prospective investor" in
respondent's securities, has personality to file the present petition for
review of the order of the Securities and Exchange Commission;
2. Whether or not the issue raised herein is already moot and academic;
3. Whether or not the "tie-up" between the respondent SAN JOSE
PETROLEUM, a foreign corporation, and SAN JOSE OIL COMPANY, INC., a
domestic mining corporation, is violative of the Constitution, the LaurelLangley Agreement, the Petroleum Act of 1949, and the Corporation Law;
and
4. Whether or not the sale of respondent's securities is fraudulent, or would
work or tend to work fraud to purchasers of such securities in the
Philippines.
1. In answer to the notice and order of the Securities and Exchange
Commissioner, published in 2 newspapers of general circulation in the
Philippines, for "any person who is opposed" to the petition for registration
and licensing of respondent's securities, to file his opposition in 7 days,
herein petitioner so filed an opposition. And, the Commissioner, having
denied his opposition and instead, directed the registration of the securities
to be offered for sale, oppositor Palting instituted the present proceeding for
review of said order.
Respondent raises the question of the personality of petitioner to bring this
appeal, contending that as a mere "prospective investor", he is not an
"Aggrieved" or "interested" person who may properly maintain the suit.
Citing a 1931 ruling of Utah State Supreme Court2 it is claimed that the
phrase "party aggrieved" used in the Securities Act3 and the Rules of Court4
as having the right to appeal should refer only to issuers, dealers and
salesmen of securities.
It is true that in the cited case, it was ruled that the phrase "person
aggrieved" is that party "aggrieved by the judgment or decree where it
operates on his rights of property or bears directly upon his interest", that
the word "aggrieved" refers to "a substantial grievance, a denial of some
personal property right or the imposition upon a party of a burden or
obligation." But a careful reading of the case would show that the appeal
therein was dismissed because the court held that an order of registration
was not final and therefore not appealable. The foregoing pronouncement
relied upon by herein respondent was made in construing the provision
regarding an order of revocation which the court held was the one
appealable. And since the law provides that in revoking the registration of
any security, only the issuer and every registered dealer of the security are
notified, excluding any person or group of persons having no such interest in

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the securities, said court concluded that the phrase "interested person"
refers only to issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State Court as
controlling on the issue in this case. Our Securities Act in Section 7(c)
thereof, requires the publication and notice of the registration statement.
Pursuant thereto, the Securities and Exchange Commissioner caused the
publication of an order in part reading as follows:
. . . Any person who is opposed with this petition must file his written
opposition with this Commission within said period (2 weeks). . . .
In other words, as construed by the administrative office entrusted with the
enforcement of the Securities Act, any person (who may not be "aggrieved"
or "interested" within the legal acceptation of the word) is allowed or
permitted to file an opposition to the registration of securities for sale in the
Philippines. And this is in consonance with the generally accepted principle
that Blue Sky Laws are enacted to protect investors and prospective
purchasers and to prevent fraud and preclude the sale of securities which
are in fact worthless or worth substantially less than the asking price. It is
for this purpose that herein petitioner duly filed his opposition giving
grounds therefor. Respondent SAN JOSE PETROLEUM was required to reply
to the opposition. Subsequently both the petition and the opposition were
set for hearing during which the petitioner was allowed to actively
participate and did so by cross-examining the respondent's witnesses and
filing his memorandum in support of his opposition. He therefore to all
intents and purposes became a party to the proceedings. And under the
New Rules of Court,5 such a party can appeal from a final order, ruling or
decision of the Securities and Exchange Commission. This new Rule
eliminating the word "aggrieved" appearing in the old Rule, being
procedural in nature,6 and in view of the express provision of Rule 144 that
the new rules made effective on January 1, 1964 shall govern not only cases
brought after they took effect but all further proceedings in cases then
pending, except to the extent that in the opinion of the Court their
application would not be feasible or would work injustice, in which event the
former procedure shall apply, we hold that the present appeal is properly
within the appellate jurisdiction of this Court.
The order allowing the registration and sale of respondent's securities is
clearly a final order that is appealable. The mere fact that such authority
may be later suspended or revoked, depending on future developments,
does not give it the character of an interlocutory or provisional ruling. And
the fact that seven days after the publication of the order, the securities are
deemed registered (Sec. 7, Com. Act 83, as amended), points to the finality
of the order. Rights and obligations necessarily arise therefrom if not
reviewed on appeal.
Our position on this procedural matter that the order is appealable and
the appeal taken here is proper is strengthened by the intervention of the
Solicitor General, under Section 23 of Rule 3 of the Rules of Court, as the
constitutional issues herein presented affect the validity of Section 13 of the
Corporation Law, which, according to the respondent, conflicts with the
Parity Ordinance and the Laurel-Langley Agreement recognizing, it is
claimed, its right to exploit our petroleum resources notwithstanding said
provisions of the Corporation Law.
2.
Respondent
likewise
contends
that
since
the
order
of
Registration/Licensing dated September 9, 1958 took effect 30 days from

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September 3, 1958, and since no stay order has been issued by the
Supreme Court, respondent's shares became registered and licensed under
the law as of October 3, 1958. Consequently, it is asserted, the present
appeal has become academic. Frankly we are unable to follow respondent's
argumentation. First it claims that the order of August 29 and that of
September 9, 1958 are not final orders and therefor are not appealable.
Then when these orders, according to its theory became final and were
implemented, it argues that the orders can no longer be appealed as the
question of registration and licensing became moot and academic.
But the fact is that because of the authority to sell, the securities are, in all
probabilities, still being traded in the open market. Consequently the issue is
much alive as to whether respondent's securities should continue to be the
subject of sale. The purpose of the inquiry on this matter is not fully served
just because the securities had passed out of the hands of the issuer and its
dealers. Obviously, so long as the securities are outstanding and are placed
in the channels of trade and commerce, members of the investing public are
entitled to have the question of the worth or legality of the securities
resolved one way or another.
But more fundamental than this consideration, we agree with the late
Senator Claro M. Recto, who appeared as amicus curiae in this case, that
while apparently the immediate issue in this appeal is the right of
respondent SAN JOSE PETROLEUM to dispose of and sell its securities to the
Filipino public, the real and ultimate controversy here would actually call for
the construction of the constitutional provisions governing the disposition,
utilization, exploitation and development of our natural resources. And
certainly this is neither moot nor academic.
3. We now come to the meat of the controversy the "tie-up" between SAN
JOSE OIL on the one hand, and the respondent SAN JOSE PETROLEUM and its
associates, on the other. The relationship of these corporations involved or
affected in this case is admitted and established through the papers and
documents which are parts of the records: SAN JOSE OIL, is a domestic
mining corporation, 90% of the outstanding capital stock of which is owned
by respondent SAN JOSE PETROLEUM, a foreign (Panamanian) corporation,
the majority interest of which is owned by OIL INVESTMENTS, Inc., another
foreign (Panamanian) company. This latter corporation in turn is wholly
(100%) owned by PANTEPEC OIL COMPANY, C.A., and PANCOASTAL
PETROLEUM COMPANY, C.A., both organized and existing under the laws of
Venezuela. As of September 30, 1956, there were 9,976 stockholders of
PANCOASTAL PETROLEUM found in 49 American states and U.S. territories,
holding 3,476,988 shares of stock; whereas, as of November 30, 1956,
PANTEPEC OIL COMPANY was said to have 3,077,916 shares held by 12,373
stockholders scattered in 49 American state. In the two lists of stockholders,
there is no indication of the citizenship of these stockholders,7 or of the
total number of authorized stocks of each corporation, for the purpose of
determining the corresponding percentage of these listed stockholders in
relation to the respective capital stock of said corporation.
Petitioner, as well as the amicus curiae and the Solicitor General8 contend
that the relationship between herein respondent SAN JOSE PETROLEUM and
its subsidiary, SAN JOSE OIL, violates the Petroleum Law of 1949, the
Philippine Constitution, and Section 13 of the Corporation Law, which
inhibits a mining corporation from acquiring an interest in another mining
corporation. It is respondent's theory, on the other hand, that far from
violating the Constitution; such relationship between the two corporations is
in accordance with the Laurel-Langley Agreement which implemented the

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Ordinance Appended to the Constitution, and that Section 13 of the


Corporation Law is not applicable because respondent is not licensed to do
business, as it is not doing business, in the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1.
All agricultural, timber, and mineral lands of the public domain,
waters, minerals, coal, petroleum, and other mineral oils, all forces of
potential energy, and other natural resources of the Philippines belong to
the State, and their disposition, exploitation, development, or utilization
shall be limited to citizens of the Philippines, or to corporations or
associations at least sixty per centum of the capital of which is owned by
such citizens, subject to any existing right, grant, lease or concession at the
time of the inauguration of this Government established under this
Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right (to utilize
and exploit our natural resources) was extended to citizens of the United
States, thus:
Notwithstanding the provisions of section one, Article Thirteen, and section
eight, Article Fourteen, of the foregoing Constitution, during the effectivity
of the Executive Agreement entered into by the President of the Philippines
with the President of the United States on the fourth of July, nineteen
hundred and forty-six, pursuant to the provisions of Commonwealth Act
Numbered Seven hundred and thirty-three, but in no case to extend beyond
the third of July, nineteen hundred and seventy-four, the disposition,
exploitation, development, and utilization of all agricultural, timber, and
mineral lands of the public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, and other natural resources
of the Philippines, and the operation of public utilities shall, if open to any
person, be open to citizens of the United States, and to all forms of business
enterprises owned or controlled, directly or indirectly, by citizens of the
United States in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or associations
owned or controlled by citizens of the Philippines (Emphasis supplied.)
In the 1954 Revised Trade Agreement concluded between the United States
and the Philippines, also known as the Laurel-Langley Agreement, embodied
in Republic Act 1355, the following provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and utilization of all
agricultural, timber, and mineral lands of the public domain, waters,
minerals, coal, petroleum and other mineral oils, all forces and sources of
potential energy, and other natural resources of either Party, and the
operation of public utilities, shall, if open to any person, be open to citizens
of the other Party and to all forms of business enterprise owned or
controlled, directly or indirectly, by citizens of such other Party in the same
manner as to and under the same conditions imposed upon citizens or
corporations or associations owned or controlled by citizens of the Party
granting the right.
2. The rights provided for in Paragraph 1 may be exercised, . . . in the case
of citizens of the United States, with respect to natural resources in the
public domain in the Philippines, only through the medium of a corporation

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organized under the laws of the Philippines and at least 60% of the capital
stock of which is owned or controlled by citizens of the United States. . . .
3. The United States of America reserves the rights of the several States of
the United States to limit the extent to which citizens or corporations or
associations owned or controlled by citizens of the Philippines may engage
in the activities specified in this Article. The Republic of the Philippines
reserves the power to deny any of the rights specified in this Article to
citizens of the United States who are citizens of States, or to corporations or
associations at least 60% of whose capital stock or capital is owned or
controlled by citizens of States, which deny like rights to citizens of the
Philippines, or to corporations or associations which are owned or controlled
by citizens of the Philippines. . . . (Emphasis supplied.)
Re-stated, the privilege to utilize, exploit, and develop the natural resources
of this country was granted, by Article XIII of the Constitution, to Filipino
citizens or to corporations or associations 60% of the capital of which is
owned by such citizens. With the Parity Amendment to the Constitution, the
same right was extended to citizens of the United States and business
enterprises owned or controlled directly or indirectly, by citizens of the
United States.
There could be no serious doubt as to the meaning of the word "citizens"
used in the aforementioned provisions of the Constitution. The right was
granted to 2 types of persons: natural persons (Filipino or American citizens)
and juridical persons (corporations 60% of which capital is owned by
Filipinos and business enterprises owned or controlled directly or indirectly,
by citizens of the United States). In American law, "citizen" has been defined
as "one who, under the constitution and laws of the United States, has a
right to vote for representatives in congress and other public officers, and
who is qualified to fill offices in the gift of the people. (1 Bouvier's Law
Dictionary, p. 490.) A citizen is
One of the sovereign people. A constituent member of the sovereignty,
synonymous with the people." (Scott v. Sandford, 19 Ho. [U.S.] 404, 15 L.
Ed. 691.)
A member of the civil state entitled to all its privileges. (Cooley, Const. Lim.
77. See U.S. v. Cruikshank 92 U.S. 542, 23 L. Ed. 588; Minor v. Happersett 21
Wall. [U.S.] 162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE PETROLEUM an
American business enterprise entitled to parity rights in the Philippines? The
answer must be in the negative, for the following reasons:
Firstly It is not owned or controlled directly by citizens of the United
States, because it is owned and controlled by a corporation, the OIL
INVESTMENTS, another foreign (Panamanian) corporation.
Secondly Neither can it be said that it is indirectly owned and controlled
by American citizens through the OIL INVESTMENTS, for this latter
corporation is in turn owned and controlled, not by citizens of the United
States, but still by two foreign (Venezuelan) corporations, the PANTEPEC OIL
COMPANY and PANCOASTAL PETROLEUM.
Thirdly Although it is claimed that these two last corporations are owned
and controlled respectively by 12,373 and 9,979 stockholders residing in the
different American states, there is no showing in the certification furnished

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by respondent that the stockholders of PANCOASTAL or those of them


holding the controlling stock, are citizens of the United States.
Fourthly Granting that these individual stockholders are American
citizens, it is yet necessary to establish that the different states of which
they are citizens, allow Filipino citizens or corporations or associations
owned or controlled by Filipino citizens, to engage in the exploitation, etc. of
the natural resources of these states (see paragraph 3, Article VI of the
Laurel-Langley Agreement, supra). Respondent has presented no proof to
this effect.
Fifthly But even if the requirements mentioned in the two immediately
preceding paragraphs are satisfied, nevertheless to hold that the set-up
disclosed in this case, with a long chain of intervening foreign corporations,
comes within the purview of the Parity Amendment regarding business
enterprises indirectly owned or controlled by citizens of the United States, is
to unduly stretch and strain the language and intent of the law. For, to what
extent must the word "indirectly" be carried? Must we trace the ownership
or control of these various corporations ad infinitum for the purpose of
determining whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock of the
PANTEPEC and PANCOASTAL which are allegedly owned or controlled directly
by citizens of the United States, are traded in the stock exchange in New
York, and you have a situation where it becomes a practical impossibility to
determine at any given time, the citizenship of the controlling stock required
by the law. In the circumstances, we have to hold that the respondent SAN
JOSE PETROLEUM, as presently constituted, is not a business enterprise that
is authorized to exercise the parity privileges under the Parity Ordinance,
the Laurel-Langley Agreement and the Petroleum Law. Its tie-up with SAN
JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about 90% of whose stock
is owned by SAN JOSE PETROLEUM? This is a query which we need not
resolve in this case as SAN JOSE OIL is not a party and it is not necessary to
do so to dispose of the present controversy. But it is a matter that probably
the Solicitor General would want to look into.
There is another issue which has been discussed extensively by the parties.
This is whether or not an American mining corporation may lawfully "be in
anywise interested in any other corporation (domestic or foreign) organized
for the purpose of engaging in agriculture or in mining," in the Philippines or
whether an American citizen owning stock in more than one corporation
organized for the purpose of engaging in agriculture or in mining, may own
more than 15% of the capital stock then outstanding and entitled to vote, of
each of such corporations, in view of the express prohibition contained in
Section 13 of the Philippine Corporation Law. The petitioner in this case
contends that the provisions of the Corporation Law must be applied to
American citizens and business enterprise otherwise entitled to exercise the
parity privileges, because both the Laurel-Langley Agreement (Art. VI, par.
1) and the Petroleum Act of 1948 (Art. 31), specifically provide that the
enjoyment by them of the same rights and obligations granted under the
provisions of both laws shall be "in the same manner as to, and under the
same conditions imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the Philippines." The
petitioner further contends that, as the enjoyment of the privilege of
exploiting mineral resources in the Philippines by Filipino citizens or
corporations owned or controlled by citizens of the Philippines (which
corporation must necessarily be organized under the Corporation Law), is

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made subject to the limitations provided in Section 13 of the Corporation


Law, so necessarily the exercise of the parity rights by citizens of the United
States or business enterprise owned or controlled, directly or indirectly, by
citizens of the United States, must equally be subject to the same
limitations contained in the aforesaid Section 13 of the Corporation Law.
In view of the conclusions we have already arrived at, we deem it not
indispensable for us to pass upon this legal question, especially taking into
account the statement of the respondent (SAN JOSE PETROLEUM) that it is
essentially a holding company, and as found by the Securities and Exchange
Commissioner, its principal activity is limited to the financing and giving
technical assistance to SAN JOSE OIL.
4.
Respondent SAN JOSE PETROLEUM, whose shares of stock were
allowed registration for sale in the Philippines, was incorporated under the
laws of Panama in April, 1956 with an authorized capital stock of
$500,000.00, American currency, divided into 50,000,000 shares at par
value of $0.01 per share. By virtue of a 3-party Agreement of June 14, 1956,
respondent was supposed to have received from OIL INVESTMENTS
8,000,000 shares of the capital stock of SAN JOSE OIL (at par value of $0.01
per share), plus a note for $250,000.00 due in 6 months, for which
respondent issued in favor of OIL INVESTMENTS 16,000,000 shares of its
capital stock, at $0.01 per share or with a value of $160,000.00, plus a note
for $230,297.97 maturing in 2 years at 6% per annum interest,9 and the
assumption of payment of the unpaid price of 7,500,000 (of the 8,000,000
shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE PETROLEUM was increased
from $500,000.00 to $17,500,000.00 by increasing the par value of the
same 50,000,000 shares, from $0.01 to $0.35. Without any additional
consideration, the 16,000,000 shares of $0.01 previously issued to OIL
INVESTMENTS with a total value of $160,000.00 were changed with
16,000,000 shares of the recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received for these reissued 16,000,000 shares, the board of directors of respondent corporation
placed a valuation of $5,900,000.00 on the 8,000,000 shares of SAN JOSE
OIL (still having par value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000 shares at $0.01 per
share.
In the Balance Sheet of respondent, dated July 12, 1956, from the
$5,900,000.00, supposedly the value of the 8,000,000 shares of SAN JOSE
OIL, the sum of $5,100,000.00 was deducted, corresponding to the alleged
difference between the "value" of the said shares and the subscription price
thereof which is $800,000.00 (at $0.10 per share). From this $800,000.00,
the subscription price of the SAN JOSE OIL shares, the amount of
$319,702.03 was deducted, as allegedly unpaid subscription price, thereby
giving a difference of $480,297.97, which was placed as the amount
allegedly paid in on the subscription price of the 8,000,000 SAN JOSE OIL
shares. Then, by adding thereto the note receivable from OIL INVESTMENTS,
for $250,000.00 (part-consideration for the 16,000,000 SAN JOSE
PETROLEUM shares), and the sum of $6,516.21, as deferred expenses, SAN
JOSE PETROLEUM appeared to have assets in the sum of $736,814.18.
These figures are highly questionable. Take the item $5,900,000.00 the
valuation placed on the 8,000,000 shares of SAN JOSE OIL. There appears no
basis for such valuation other than belief by the board of directors of
respondent that "should San Jose Oil Company be granted the bulk of the

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concessions applied for upon reasonable terms, that it would have a


reasonable value of approximately $10,000,000." 10 Then, of this amount,
the subscription price of $800,000.00 was deducted and called it "difference
between the (above) valuation and the subscription price for the 8,000,000
shares." Of this $800,000.00 subscription price, they deducted the sum of
$480,297.97 and the difference was placed as the unpaid portion of the
subscription price. In other words, it was made to appear that they paid in
$480,297.97 for the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid by OIL INVESMENTS
for 7,500,000 shares of SAN JOSE OIL, embodied in the June 14 Agreement,
and a sum of $230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an item among
respondent's liabilities, for $230,297.97 appearing as note payable to Oil
Investments, maturing in two (2) years at six percent (6%) per annum. 11
As far as it appears from the records, for the 16,000,000 shares at $0.35 per
share issued to OIL INVESTMENTS, respondent SAN JOSE PETROLEUM
received from OIL INVESTMENTS only the note for $250,000.00 plus the
8,000,000 shares of SAN JOSE OIL, with par value of $0.10 per share or a
total of $1,050,000.00 the only assets of the corporation. In other words,
respondent actually lost $4,550,000.00, which was received by OIL
INVESTMENTS.
But this is not all. Some of the provisions of the Articles of Incorporation of
respondent SAN JOSE PETROLEUM are noteworthy; viz:
(1)

the directors of the Company need not be shareholders;

(2)
that in the meetings of the board of directors, any director may be
represented and may vote through a proxy who also need not be a director
or stockholder; and
(3)
that no contract or transaction between the corporation and any
other association or partnership will be affected, except in case of fraud, by
the fact that any of the directors or officers of the corporation is interested
in, or is a director or officer of, such other association or partnership, and
that no such contract or transaction of the corporation with any other
person or persons, firm, association or partnership shall be affected by the
fact that any director or officer of the corporation is a party to or has an
interest in, such contract or transaction, or has in anyway connected with
such other person or persons, firm, association or partnership; and finally,
that all and any of the persons who may become director or officer of the
corporation shall be relieved from all responsibility for which they may
otherwise be liable by reason of any contract entered into with the
corporation, whether it be for his benefit or for the benefit of any other
person, firm, association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation law and
corporate practices in this country. These provisions alone would outlaw any
corporation locally organized or doing business in this jurisdiction. Consider
the unique and unusual provision that no contract or transaction between
the company and any other association or corporation shall be affected
except in case of fraud, by the fact that any of the directors or officers of the
company may be interested in or are directors or officers of such other
association or corporation; and that none of such contracts or transactions
of this company with any person or persons, firms, associations or
corporations shall be affected by the fact that any director or officer of this
company is a party to or has an interest in such contract or transaction or
has any connection with such person or persons, firms associations or

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corporations; and that any and all persons who may become directors or
officers of this company are hereby relieved of all responsibility which they
would otherwise incur by reason of any contract entered into which this
company either for their own benefit, or for the benefit of any person, firm,
association or corporation in which they may be interested.
The impact of these provisions upon the traditional judiciary relationship
between the directors and the stockholders of a corporation is too obvious
to escape notice by those who are called upon to protect the interest of
investors. The directors and officers of the company can do anything, short
of actual fraud, with the affairs of the corporation even to benefit
themselves directly or other persons or entities in which they are interested,
and with immunity because of the advance condonation or relief from
responsibility by reason of such acts. This and the other provision which
authorizes the election of non-stockholders as directors, completely
disassociate the stockholders from the government and management of the
business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity of the
management and stability of SAN JOSE PETROLEUM, OIL INVESTMENTS, as
holder of the only subscribed stock of the former corporation and acting "on
behalf of all future holders of voting trust certificates," entered into a voting
trust agreement12 with James L. Buckley and Austin E. Taylor, whereby said
Trustees were given authority to vote the shares represented by the
outstanding trust certificates (including those that may henceforth be
issued) in the following manner:
(a) At all elections of directors, the Trustees will designate a suitable proxy
or proxies to vote for the election of directors designated by the Trustees in
their own discretion, having in mind the best interests of the holders of the
voting trust certificates, it being understood that any and all of the Trustees
shall be eligible for election as directors;
(b) On any proposition for removal of a director, the Trustees shall designate
a suitable proxy or proxies to vote for or against such proposition as the
Trustees in their own discretion may determine, having in mind the best
interest of the holders of the voting trust certificates;
(c) With respect to all other matters arising at any meeting of stockholders,
the Trustees will instruct such proxy or proxies attending such meetings to
vote the shares of stock held by the Trustees in accordance with the written
instructions of each holder of voting trust certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be binding upon
the parties thereto, their successors, and upon all holders of voting trust
certificates.
And these are the voting trust certificates that are offered to investors as
authorized by Security and Exchange Commissioner. It can not be doubted
that the sale of respondent's securities would, to say the least, work or tend
to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion of respondent to
dismiss this appeal, is denied and the orders of the Securities and Exchange
Commissioner, allowing the registration of Respondent's securities and
licensing their sale in the Philippines are hereby set aside. The case is
remanded to the Securities and Exchange Commission for appropriate

10 | c o r p o c a s e s 2 1 - 4 0

action in consonance with this decision. With costs. Let a copy of this
decision be furnished the Solicitor General for whatever action he may deem
advisable to take in the premises. So ordered.
LIM v. CA
In 1994, Pastor Lim died. His wife, Rufina Lim petitioned with the lower
court, acting as a probate court, for the inclusion of 5 corporations into the
inventory of the estate of Pastor Lim. The 5 corporations were: Auto Truck
Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active
Distributing, Inc. and Action Company. Rufina alleged that the assets of
these corporations were owned wholly by Pastor; that these corporations
themselves are owned by Pastor and they are mere dummies of Pastor. The
corporations filed a motion for exclusion from the estate. They presented
proof (Torrens Titles) showing that the assets of the corporations are in their
respective names and titles. The probate court denied their motion. The
Court of Appeals reversed the decision of the probate court.
ISSUE: Whether or not the corporations and/or their assets should be
included in the inventory of the estate.
HELD: No. As regards the assets, the corporations were able to present their
respective Torrens Titles over the disputed assets. It is true that a probate
court may pass upon the question ownership albeit in a provisional manner
but still, a Torrens Title cannot be attacked collaterally in a probate
proceeding, it must be attacked directly in a separate proceeding.
As regards the corporations, to include them in the inventory is tantamount
to the piercing of the veil of corporate fiction because the probate court
effectively adopted the theory of Rufina. This cannot be done. Firstly, the
probate court is sitting in a limited capacity. Secondly, Rufina was not able
to present sufficient evidence that indeed the corporations are mere
conduits of Pastor. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of
itself a sufficient reason for disregarding the fiction of separate corporate
personalities. The veil cant be pierced without any showing that indeed the
corporation is being used merely as a dummy. To disregard the separate
juridical personality of a corporation, the wrong-doing must be clearly and
convincingly established. It cannot be presumed.

[G.R. No. 124715. January 24, 2000]

RUFINA LUY LIM petitioner, vs. COURT OF APPEALS, AUTO


TRUCK TBA CORPORATION, SPEED DISTRIBUTING, INC.,
ACTIVE
DISTRIBUTORS,
ALLIANCE
MARKETING
CORPORATION, ACTION COMPANY, INC. respondents.
DECISION
BUENA, J.:
May a corporation, in its universality, be the proper subject of and be included in the
inventory of the estate of a deceased person?
Petitioner disputes before us through the instant petition for review on certiorari, the
decision of the Court of Appeals promulgated on 18 April 1996, in CA-GR SP No.
38617, which nullified and set aside the orders dated 04 July 1995 , 12 September
[1]

[2]

11 | c o r p o c a s e s 2 1 - 4 0

1995 and 15 September 1995 of the Regional Trial Court of Quezon City, Branch 93,
sitting as a probate court.
[3]

[4]

Petitioner Rufina Luy Lim is the surviving spouse of the late Pastor Y. Lim whose estate
is the subject of probate proceedings in Special Proceedings Q-95-23334, entitled, "In
Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by George Luy,
Petitioner".
Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed
Distributing, Inc., Active Distributing, Inc. and Action Company are corporations
formed, organized and existing under Philippine laws and which owned real properties
covered under the Torrens system.
On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse
and duly represented by her nephew George Luy, filed on 17 March 1995, a joint
petition for the administration of the estate of Pastor Y. Lim before the Regional Trial
Court of Quezon City.
[5]

Private respondent corporations, whose properties were included in the inventory of the
estate of Pastor Y. Lim, then filed a motion for the lifting of lis pendens and motion for
exclusion of certain properties from the estate of the decedent.
[6]

[7]

In an order dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93,
sitting as a probate court, granted the private respondents twin motions, in this wise:
[8]

"Wherefore, the Register of Deeds of Quezon City is hereby ordered to


lift, expunge or delete the annotation of lis pendens on Transfer
Certificates of Title Nos. 116716, 116717, 116718, 116719 and 5182 and
it is hereby further ordered that the properties covered by the same titles
as well as those properties by (sic) Transfer Certificate of Title Nos.
613494, 363123, 236236 and 263236 are excluded from these
proceedings.
SO ORDERED."
Subsequently, Rufina Luy Lim filed a verified amended petition which contained the
following averments:
[9]

"3. The late Pastor Y. Lim personally owned during his lifetime the
following business entities, to wit:
Business Entity
X

Address:
X

Alliance Marketing ,Inc.

Block 3, Lot 6, Dacca

BF Homes,
Paraaque,
Metro Manila.
X

12 | c o r p o c a s e s 2 1 - 4 0

Speed Distributing Inc.

910 Barrio Niog,

Aguinaldo Highway,
Bacoor, Cavite.
X

Auto Truck
Avenue,

TBA Corp.

2251

Roosevelt

Quezon City.
X

Active Distributors, Inc.


BF

Block 3, Lot 6, Dacca

Homes, Paraaque,
Metro Manila.
X

Action Company

X
100 20th Avenue

Murphy, Quezon City


or
92-D Mc-Arthur Highway
Valenzuela Bulacan.
"3.1 Although the above business entities dealt and engaged in business
with the public as corporations, all their capital, assets and equity were
however, personally owned by the late Pastor Y Lim. Hence the alleged
stockholders and officers appearing in the respective articles of
incorporation of the above business entities were mere dummies of
Pastor Y. Lim, and they were listed therein only for purposes of
registration with the Securities and Exchange Commission.
"4. Pastor Lim, likewise, had Time, Savings and Current Deposits with
the following banks: (a) Metrobank, Grace Park, Caloocan City and
Quezon Avenue, Quezon City Branches and (b) First Intestate Bank
(formerly Producers Bank), Rizal Commercial Banking Corporation and
in other banks whose identities are yet to be determined.
"5. That the following real properties, although registered in the name of
the above entities, were actually acquired by Pastor Y. Lim during his
marriage with petitioner, to wit:

13 | c o r p o c a s e s 2 1 - 4 0

Corporation
cation
X

Title

Lo

k. Auto Truck
Domingo

TCT No. 617726

Sto.

TBA
Corporation
Cainta, Rizal
q.
27896

Alliance

Marketing
Prance,

TCT

No.

Metro Manila
Copies of the above-mentioned Transfer Certificate of Title and/or Tax
Declarations are hereto attached as Annexes "C" to "W".
X

"7. The aforementioned properties and/or real interests left by the late
Pastor Y. Lim, are all conjugal in nature, having been acquired by him
during the existence of his marriage with petitioner.
"8. There are other real and personal properties owned by Pastor Y. Lim
which petitioner could not as yet identify. Petitioner, however will
submit to this Honorable Court the identities thereof and the necessary
documents covering the same as soon as possible."
On 04 July 1995, the Regional Trial Court acting on petitioners motion issued an
order , thus:
[10]

"Wherefore, the order dated 08 June 1995 is hereby set aside and the
Registry of Deeds of Quezon City is hereby directed to reinstate the
annotation of lis pendens in case said annotation had already been
deleted and/or cancelled said TCT Nos. 116716, 116717, 116718, 116719
and 51282.
Further more (sic), said properties covered by TCT Nos. 613494,
365123, 236256 and 236237 by virtue of the petitioner are included in
the instant petition.
SO ORDERED."
On 04 September 1995, the probate court appointed Rufina Lim as special
administrator and Miguel Lim and Lawyer Donald Lee, as co-special administrators of
the estate of Pastor Y. Lim, after which letters of administration were accordingly
issued.
[11]

In an order dated 12 September 1995, the probate court denied anew private
respondents motion for exclusion, in this wise:
[12]

14 | c o r p o c a s e s 2 1 - 4 0

"The issue precisely raised by the petitioner in her petition is whether the
corporations are the mere alter egos or instrumentalities of Pastor Lim,
Otherwise (sic) stated, the issue involves the piercing of the corporate
veil, a matter that is clearly within the jurisdiction of this Honorable
Court and not the Securities and Exchange Commission. Thus, in the
case of Cease vs. Court of Appeals, 93 SCRA 483, the crucial issue
decided by the regular court was whether the corporation involved
therein was the mere extension of the decedent. After finding in the
affirmative, the Court ruled that the assets of the corporation are also
assets of the estate.
A reading of P.D. 902, the law relied upon by oppositors, shows that the
SECs exclusive (sic) applies only to intra-corporate controversy. It is
simply a suit to settle the intestate estate of a deceased person who,
during his lifetime, acquired several properties and put up corporations
as his instrumentalities.
SO ORDERED."
On 15 September 1995, the probate court acting on an ex parte motion filed by
petitioner, issued an order the dispositive portion of which reads:
[13]

"Wherefore, the parties and the following banks concerned herein under
enumerated are hereby ordered to comply strictly with this order and to
produce and submit to the special administrators , through this
Honorable Court within (5) five days from receipt of this order their
respective records of the savings/current accounts/time deposits and
other deposits in the names of Pastor Lim and/or corporations abovementioned, showing all the transactions made or done concerning
savings /current accounts from January 1994 up to their receipt of this
court order.
XXX

XXX

XXX

SO ORDERED."
Private respondent filed a special civil action for certiorari , with an urgent prayer for a
restraining order or writ of preliminary injunction, before the Court of Appeals
questioning the orders of the Regional Trial Court, sitting as a probate court.
[14]

On 18 April 1996, the Court of Appeals, finding in favor of herein private respondents,
rendered the assailed decision , the decretal portion of which declares:
[15]

"Wherefore, premises considered, the instant special civil action for


certiorari is hereby granted, The impugned orders issued by respondent
court on July 4,1995 and September 12, 1995 are hereby nullified and set
aside. The impugned order issued by respondent on September 15, 1995
is nullified insofar as petitioner corporations" bank accounts and records
are concerned.
SO ORDERED."
Through the expediency of Rule 45 of the Rules of Court, herein petitioner Rufina Luy
Lim now comes before us with a lone assignment of error :
[16]

15 | c o r p o c a s e s 2 1 - 4 0

"The respondent Court of Appeals erred in reversing the orders of the


lower court which merely allowed the preliminary or provisional
inclusion of the private respondents as part of the estate of the late
deceased (sic) Pastor Y. Lim with the respondent Court of Appeals
arrogating unto itself the power to repeal, to disobey or to ignore the
clear and explicit provisions of Rules 81,83,84 and 87 of the Rules of
Court and thereby preventing the petitioner, from performing her duty as
special administrator of the estate as expressly provided in the said
Rules."
Petitioners contentions tread on perilous grounds.
In the instant petition for review, petitioner prays that we affirm the orders issued by the
probate court which were subsequently set aside by the Court of Appeals.
Yet, before we delve into the merits of the case, a review of the rules on jurisdiction
over probate proceedings is indeed in order.
The provisions of Republic Act 7691 , which introduced amendments to Batas
Pambansa Blg. 129, are pertinent:
[17]

"Section 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as


the "Judiciary Reorganization Act of 1980", is hereby amended to read as
follows:
Section 19. Jurisdiction in civil cases. Regional Trial Courts shall
exercise exclusive jurisdiction:
xxx

xxx

xxx

(4) In all matters of probate, both testate and intestate, where the gross
value of the estate exceeds One Hundred Thousand Pesos (P100,000) or,
in probate matters in Metro Manila, where such gross value exceeds Two
Hundred Thousand Pesos (P200,000);
xxx

xxx

xxx

Section 3. Section 33 of the same law is hereby amended to read as


follows:
Section 33. Jurisdiction of Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts
in Civil Cases.-Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts shall exercise:
1.
Exclusive original jurisdiction over civil actions
and probate proceedings, testate and intestate, including
the grant of provisional remedies in proper cases, where
the value of the personal property, estate or amount of the
demand does not exceed One Hundred Thousand
Pesos(P100,000) or, in Metro Manila where such personal
property, estate or amount of the demand does not exceed
Two Hundred Thousand Pesos (P200,000), exclusive of
interest, damages of whatever kind, attorneys fees,

16 | c o r p o c a s e s 2 1 - 4 0

litigation expenses and costs, the amount of which must


be specifically alleged, Provided, that interest, damages of
whatever kind, attorneys, litigation expenses and costs
shall be included in the determination of the filing fees,
Provided further, that where there are several claims or
causes of actions between the same or different parties,
embodied in the same complaint, the amount of the
demand shall be the totality of the claims in all the causes
of action, irrespective of whether the causes of action
arose out of the same or different transactions;
xxx

xxx

xxx"

Simply put, the determination of which court exercises jurisdiction over matters of
probate depends upon the gross value of the estate of the decedent.
As to the power and authority of the probate court, petitioner relies heavily on the
principle that a probate court may pass upon title to certain
properties, albeit provisionally, for the purpose of determining whether a certain
property should or should not be included in the inventory.
In a litany of cases, We defined the parameters by which the court may extend its
probing arms in the determination of the question of title in probate proceedings.
This Court, in PASTOR, JR. vs. COURT OF APPEALS, held:
[18]

"X X X As a rule, the question of ownership is an extraneous matter


which the probate court cannot resolve with finality. Thus, for the
purpose of determining whether a certain property should or should not
be included in the inventory of estate properties, the Probate Court may
pass upon the title thereto, but such determination is provisional, not
conclusive, and is subject to the final decision in a separate action to
resolve title."
We reiterated the rule in PEREIRA vs. COURT OF APPEALS :
[19]

"X X X The function of resolving whether or not a certain property


should be included in the inventory or list of properties to be
administered by the administrator is one clearly within the competence
of the probate court. However, the courts determination is only
provisional in character, not conclusive, and is subject to the final
decision in a separate action which may be instituted by the parties."
Further, in MORALES vs. CFI OF CAVITE citing CUIZON vs. RAMOLETE , We
made an exposition on the probate courts limited jurisdiction:
[20]

[21]

"It is a well-settled rule that a probate court or one in charge of


proceedings whether testate or intestate cannot adjudicate or determine
title to properties claimed to be a part of the estate and which are equally
claimed to belong to outside parties. All that the said court could do as
regards said properties is to determine whether they should or should not
be included in the inventory or list of properties to be administered by
the administrator. If there is no dispute, well and good; but if there is,
then the parties, the administrator and the opposing parties have to resort

17 | c o r p o c a s e s 2 1 - 4 0

to an ordinary action for a final determination of the conflicting claims of


title because the probate court cannot do so."
Again, in VALERA vs. INSERTO , We had occasion to elucidate, through Mr. Justice
Andres Narvasa :
[22]

[23]

"Settled is the rule that a Court of First Instance (now Regional Trial
Court), acting as a probate court, exercises but limited jurisdiction, and
thus has no power to take cognizance of and determine the issue of title
to property claimed by a third person adversely to the decedent, unless
the claimant and all other parties having legal interest in the property
consent, expressly or impliedly, to the submission of the question to the
probate court for adjudgment, or the interests of third persons are not
thereby prejudiced, the reason for the exception being that the question
of whether or not a particular matter should be resolved by the court in
the exercise of its general jurisdiction or of its limited jurisdiction as a
special court (e.g. probate, land registration, etc.), is in reality not a
jurisdictional but in essence of procedural one, involving a mode of
practice which may be waived. x x x
x x x. These considerations assume greater cogency where, as here,
the Torrens title is not in the decedents name but in others, a
situation on which this Court has already had occasion to rule x x
x."(emphasis Ours)
Petitioner, in the present case, argues that the parcels of land covered under the Torrens
system and registered in the name of private respondent corporations should be included
in the inventory of the estate of the decedent Pastor Y. Lim, alleging that after all the
determination by the probate court of whether these properties should be included or
not is merely provisional in nature, thus, not conclusive and subject to a final
determination in a separate action brought for the purpose of adjudging once and for all
the issue of title.
Yet, under the peculiar circumstances, where the parcels of land are registered in the
name of private respondent corporations, the jurisprudence pronounced in BOLISAY
vs., ALCID is of great essence and finds applicability, thus:
[24]

"It does not matter that respondent-administratrix has evidence


purporting to support her claim of ownership, for, on the other hand,
petitioners have a Torrens title in their favor, which under the law is
endowed with incontestability until after it has been set aside in the
manner indicated in the law itself, which, of course, does not include,
bringing up the matter as a mere incident in special proceedings for the
settlement of the estate of deceased persons. x x x"
"x x x. In regard to such incident of inclusion or exclusion, We hold that
if a property covered by Torrens title is involved, the presumptive
conclusiveness of such title should be given due weight, and in the
absence of strong compelling evidence to the contrary, the holder thereof
should be considered as the owner of the property in controversy until
his title is nullified or modified in an appropriate ordinary action,
particularly, when as in the case at bar, possession of the property itself is
in the persons named in the title. x x x"

18 | c o r p o c a s e s 2 1 - 4 0

A perusal of the records would reveal that no strong compelling evidence was ever
presented by petitioner to bolster her bare assertions as to the title of the deceased
Pastor Y. Lim over the properties. Even so, P.D. 1529, otherwise known as, " The
Property Registration Decree", proscribes collateral attack on Torrens Title, hence:
"xxx

xxx

xxx

Section 48. Certificate not subject to collateral attack.


- A certificate of title shall not be subject to collateral attack. It cannot be
altered, modified or cancelled except in a direct proceeding in
accordance with law."
In CUIZON vs. RAMOLETE, where similarly as in the case at bar, the property subject
of the controversy was duly registered under the Torrens system, We categorically
stated:
"x x x Having been apprised of the fact that the property in question was
in the possession of third parties and more important, covered by a
transfer certificate of title issued in the name of such third parties, the
respondent court should have denied the motion of the respondent
administrator and excluded the property in question from the inventory
of the property of the estate. It had no authority to deprive such third
persons of their possession and ownership of the property. x x x"
Inasmuch as the real properties included in the inventory of the estate of the late Pastor
Y. Lim are in the possession of and are registered in the name of private respondent
corporations, which under the law possess a personality separate and distinct from their
stockholders, and in the absence of any cogency to shred the veil of corporate fiction,
the presumption of conclusiveness of said titles in favor of private respondents should
stand undisturbed.
Accordingly, the probate court was remiss in denying private respondents motion for
exclusion. While it may be true that the Regional Trial Court, acting in a restricted
capacity and exercising limited jurisdiction as a probate court, is competent to issue
orders involving inclusion or exclusion of certain properties in the inventory of the
estate of the decedent, and to adjudge, albeit, provisionally the question of title over
properties, it is no less true that such authority conferred upon by law and reinforced by
jurisprudence, should be exercised judiciously, with due regard and caution to the
peculiar circumstances of each individual case.
Notwithstanding that the real properties were duly registered under the Torrens system
in the name of private respondents, and as such were to be afforded the presumptive
conclusiveness of title, the probate court obviously opted to shut its eyes to this gleamy
fact and still proceeded to issue the impugned orders.
By its denial of the motion for exclusion, the probate court in effect acted in utter
disregard of the presumption of conclusiveness of title in favor of private respondents.
Certainly, the probate court through such brazen act transgressed the clear provisions of
law and infringed settled jurisprudence on this matter.
Moreover, petitioner urges that not only the properties of private respondent
corporations are properly part of the decedents estate but also the private respondent
corporations themselves. To rivet such flimsy contention, petitioner cited that the late

19 | c o r p o c a s e s 2 1 - 4 0

Pastor Y. Lim during his lifetime, organized and wholly-owned the five corporations,
which are the private respondents in the instant case. Petitioner thus attached as
Annexes "F" and "G" of the petition for review affidavits executed by Teresa Lim
and Lani Wenceslao which among others, contained averments that the incorporators of
Uniwide Distributing, Inc. included on the list had no actual participation in the
organization and incorporation of the said corporation. The affiants added that the
persons whose names appeared on the articles of incorporation of Uniwide Distributing,
Inc., as incorporators thereof, are mere dummies since they have not actually
contributed any amount to the capital stock of the corporation and have been merely
asked by the late Pastor Y. Lim to affix their respective signatures thereon.
[25]

[26]

[27]

It is settled that a corporation is clothed with personality separate and distinct from that
of the persons composing it. It may not generally be held liable for that of the persons
composing it. It may not be held liable for the personal indebtedness of its stockholders
or those of the entities connected with it.
[28]

Rudimentary is the rule that a corporation is invested by law with a personality distinct
and separate from its stockholders or members. In the same vein, a corporation by legal
fiction and convenience is an entity shielded by a protective mantle and imbued by law
with a character alien to the persons comprising it.
Nonetheless, the shield is not at all times invincible. Thus, in FIRST PHILIPPINE
INTERNATIONAL BANK vs. COURT OF APPEALS , We enunciated:
[29]

"x x x When the fiction is urged as a means of perpetrating a fraud or an


illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the
law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals. x x x"
Piercing the veil of corporate entity requires the court to see through the protective
shroud which exempts its stockholders from liabilities that ordinarily, they could be
subject to, or distinguishes one corporation from a seemingly separate one, were it not
for the existing corporate fiction.
[30]

The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where badges
of fraud exist, where public convenience is defeated; where a wrong is sought to be
justified thereby, the corporate fiction or the notion of legal entity should come to
naught.
[31]

Further, the test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows: 1) Control, not mere majority or complete stock control,
but complete domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this transaction had
at the time no separate mind, will or existence of its own; (2) Such control must have
been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal right; and (3) The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of. The absence of any of these elements
prevent "piercing the corporate veil".
[32]

20 | c o r p o c a s e s 2 1 - 4 0

Mere ownership by a single stockholder or by another corporation of all or nearly all of


the capital stock of a corporation is not of itself a sufficient reason for disregarding the
fiction of separate corporate personalities.
[33]

Moreover, to disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed.
[34]

Granting arguendo that the Regional Trial Court in this case was not merely acting in a
limited capacity as a probate court, petitioner nonetheless failed to adduce competent
evidence that would have justified the court to impale the veil of corporate fiction.
Truly, the reliance reposed by petitioner on the affidavits executed by Teresa Lim and
Lani Wenceslao is unavailing considering that the aforementioned documents possess
no weighty probative value pursuant to the hearsay rule. Besides it is imperative for us
to stress that such affidavits are inadmissible in evidence inasmuch as the affiants were
not at all presented during the course of the proceedings in the lower court. To put it
differently, for this Court to uphold the admissibility of said documents would be to
relegate from Our duty to apply such basic rule of evidence in a manner consistent with
the law and jurisprudence.
Our pronouncement in PEOPLE
LEONIDAS finds pertinence:

BANK

AND

TRUST

COMPANY

vs.

[35]

"Affidavits are classified as hearsay evidence since they are not generally
prepared by the affiant but by another who uses his own language in
writing the affiants statements, which may thus be either omitted or
misunderstood by the one writing them. Moreover, the adverse party is
deprived of the opportunity to cross-examine the affiants. For this
reason, affidavits are generally rejected for being hearsay, unless the
affiant themselves are placed on the witness stand to testify thereon."
As to the order of the lower court, dated 15 September 1995, the Court of Appeals
correctly observed that the Regional Trial Court, Branch 93 acted without jurisdiction in
issuing said order; The probate court had no authority to demand the production of bank
accounts in the name of the private respondent corporations.
[36]

WHEREFORE, in view of the foregoing disquisitions, the instant petition is hereby


DISMISSED for lack of merit and the decision of the Court of Appeals which nullified
and set aside the orders issued by the Regional Trial Court, Branch 93, acting as a
probate court, dated 04 July 1995 and 12 September 1995 is AFFIRMED.
SO ORDERED.
[G.R. No. 141617. August 14, 2001]
ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT CORPORATION,
petitioners, vs. RITA C. MEJIA, as Executrix of Testate Estate of ANDREA
CORDOVA VDA. DE GUTIERREZ, respondent.
DECISION
GONZAGA-REYES, J.:
In this petition for review by certiorari, petitioners pray for the setting aside
of the Decision of the Court of Appeals promulgated on 13 April 1999 and its
15 December 1999 Resolution in CA-G.R. CV No. 19281.

21 | c o r p o c a s e s 2 1 - 4 0

As culled from the decisions of the lower courts and the pleadings of the
parties, the factual background of this case is as set out herein:
Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a
parcel of land in Camarin, Caloocan City known as Lot 861 of the Tala Estate.
The land had an aggregate area of twenty-five (25) hectares and was
covered by Transfer Certificate of Title (TCT) No. 5779 of the Registry of
Deeds of Caloocan City. The property was later subdivided into five lots with
an area of five hectares each and pursuant thereto, TCT No. 5779 was
cancelled and five new transfer certificates of title were issued in the name
of Gutierrez, namely TCT No. 7123 covering Lot 861-A, TCT No. 7124
covering Lot 861-B, TCT No. 7125 covering Lot 861-C, TCT No. 7126 covering
Lot 861-D and TCT No. 7127 covering Lot 861-E.
On 21 December 1964, Gutierrez and Cardale Financing and Realty
Corporation (Cardale) executed a Deed of Sale with Mortgage relating to the
lots covered by TCT Nos. 7124, 7125, 7126 and 7127, for the consideration
of P800,000.00. Upon the execution of the deed, Cardale paid Gutierrez
P171,000.00. It was agreed that the balance of P629,000.00 would be paid
in several installments within five years from the date of the deed, at an
interest of nine percent per annum based on the successive unpaid
principal balances. Thereafter, the titles of Gutierrez were cancelled and in
lieu thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale.
To secure payment of the balance of the purchase price, Cardale constituted
a mortgage on three of the four parcels of land covered by TCT Nos. 7531,
7532 and 7533, encompassing fifteen hectares of land.[1] The encumbrance
was annotated upon the certificates of title and the owners duplicate
certificates. The owners duplicates were retained by Gutierrez.
On 26 August 1968, owing to Cardales failure to settle its mortgage
obligation, Gutierrez filed a complaint for rescission of the contract with the
Quezon City Regional Trial Court (RTC), which was docketed as Civil Case No.
Q-12366.[2] On 20 October 1969, during the pendency of the rescission
case, Gutierrez died and was substituted by her executrix, respondent Rita
C. Mejia (Mejia).
In 1971, plaintiffs presentation of evidence was
terminated. However, Cardale, which was represented by petitioner Adalia
B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of
Cardale, lost interest in proceeding with the presentation of its evidence and
the case lapsed into inactive status for a period of about fourteen years.
In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532
and 7533 became delinquent in the payment of real estate taxes in the
amount of P102,300.00, while the other mortgaged property covered by TCT
No. 7531 became delinquent in the amount of P89,231.37, which
culminated in their levy and auction sale on 1 and 12 September 1983, in
satisfaction of the tax arrears. The highest bidder for the three parcels of
land was petitioner Merryland Development Corporation (Merryland), whose
President and majority stockholder is Francisco. A memorandum based upon
the certificate of sale was then made upon the original copies of TCT Nos.
7531 to 7533.
On 13 August 1984, before the expiration of the one year redemption
period, Mejia filed a Motion for Decision with the trial court. The hearing of
said motion was deferred, however, due to a Motion for Postponement filed
by Cardale through Francisco, who signed the motion in her capacity as
officer-in-charge, claiming that Cardale needed time to hire new counsel.

22 | c o r p o c a s e s 2 1 - 4 0

However, Francisco did not mention the tax delinquencies and sale in favor
of Merryland. Subsequently, the redemption period expired and Merryland,
acting through Francisco, filed petitions for consolidation of title,[3] which
culminated in the issuance of certain orders[4] decreeing the cancellation of
Cardales TCT Nos. 7531 to 7533 and the issuance of new transfer
certificates of title free from any encumbrance or third-party claim
whatsoever in favor of Merryland. Pursuant to such orders, the Register of
Deeds of Caloocan City issued new transfer certificates of title in the name
of Merryland which did not bear a memorandum of the mortgage liens in
favor of Gutierrez.
Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366
an undated Manifestation to the effect that the properties subject of the
mortgage and covered by TCT Nos. 7531 to 7533 had been levied upon by
the local government of Caloocan City and sold at a tax delinquency sale.
Francisco further claimed that the delinquency sale had rendered the issues
in Civil Case No. Q-12366 moot and academic. Agreeing with Francisco, the
trial court dismissed the case, explaining that since the properties
mortgaged to Cardale had been transferred to Merryland which was not a
party to the case for rescission, it would be more appropriate for the parties
to resolve their controversy in another action.
On 14 January 1987, Mejia, in her capacity as executrix of the Estate of
Gutierrez, filed with the RTC of Quezon City a complaint for damages with
prayer for preliminary attachment against Francisco, Merryland and the
Register of Deeds of Caloocan City. The case was docketed as Civil Case No.
Q-49766. On 15 April 1988, the trial court rendered a decision[5] in favor of
the defendants, dismissing the complaint for damages filed by Mejia. It was
held that plaintiff Mejia, as executrix of Gutierrezs estate, failed to establish
by clear and convincing evidence her allegations that Francisco controlled
Cardale and Merryland and that she had employed fraud by intentionally
causing Cardale to default in its payment of real property taxes on the
mortgaged properties so that Merryland could purchase the same by means
of a tax delinquency sale. Moreover, according to the trial court, the failure
to recover the property subject of the Deed of Sale with Mortgage was due
to Mejias failure to actively pursue the action for rescission (Civil Case No.
12366), allowing the case to drag on for eighteen years. Thus, it ruled that xxx

xxx

xxx

The act of not paying or failing to pay taxes due the government by the
defendant Adalia B. Francisco, as treasurer of Cardale Financing and Realty
Corporation do not, per se, constitute perpetration of fraud or an illegal act.
It do [sic] not also constitute an act of evasion of an existing obligation (to
plaintiff) if there is no clear showing that such an act of non-payment of
taxes was deliberately made despite its (Cardales) solvency and capability
to pay. There is no evidence showing that Cardale Financing and Realty
Corporation was financially capable of paying said taxes at the time.
There are times when the corporate fiction will be disregarded: (1) where
all the
members or stockholders commit illegal act; (2) where the
corporation is used as dummy to commit fraud or wrong; (3) where the
corporation is an agency for a parent corporation; and (4) where the stock of
a corporation is owned by one person. (I, Fletcher, 58, 59, 61 and 63).
None of the foregoing reasons can be applied to the incidents in this case:
(1) there appears no illegal act committed by the stockholders of defendant
Merryland Development Corporation and Cardale Financing and Realty
Corporation; (2) the incidents proven by evidence of the plaintiff as well as

23 | c o r p o c a s e s 2 1 - 4 0

that of the defendants do not show that either or both corporations were
used as dummies by defendant Adalia B. Francisco to commit fraud or
wrong. To be used as [a] dummy, there has to be a showing that the
dummy corporation is controlled by the person using it. The evidence of
plaintiff failed to prove that defendant Adalia B. Francisco has controlling
interest in either or both corporations. On the other hand, the evidence of
defendants clearly show that defendant Francisco has no control over either
of the two corporations; (3) none of the two corporations appears to be an
agency for a parent (the other) corporation; and (4) the stock of either of
the two corporation [sic] is not owned by one person (defendant Adalia B.
Francisco). Except for defendant Adalia B. Francisco, the incorporators and
stockholders of one corporation are different from the other.
xxx

xxx

xxx

The said case (Civil Case No. 12366) remained pending for almost 18 years
before the then Court of First Instance, now the Regional Trial Court. Even if
the trial of the said case became protracted on account of the retirement
and/or promotion of the presiding judge, as well as the transfer of the case
from one sala to another, and as claimed by the plaintiff that the defendant
lost interest, (which allegation is unusual, so to speak), the court believe
[sic] that it would not have taken that long to dispose [of] said case had
plaintiff not slept on her rights, and her duty and obligation to see to it that
the case is always set for hearing so that it may be adjudicated [at] the
earliest possible time. This duty pertains to both parties, but plaintiff should
have been more assertive, as it was her obligation, similar to the obligation
of plaintiff relative to the service of summons in other cases. The fact that
Cardale Financing and Realty Corporation did not perform its obligation as
provided in the said Deed of Sale with Mortgage (Exhibit A) is very clear.
Likewise, the fact that Andrea Cordova, the contracting party, represented
by the plaintiff in this case did not also perform her duties and/or obligation
provided in the said contract is also clear. This could have been the reason
why the plaintiff in said case (Exhibit E) slept on her rights and allowed
the same to remain pending for almost 18 years. However, and irrespective
of any other reason behind the same, the court believes that plaintiff,
indeed, is the one to blame for the failure of the testate estate of the late
Andrea Cordova Vda. de Gutierrez to recover the money or property due it
on the basis of Exhibit A.
xxx

xxx

xxx

xxx Had the plaintiff not slept on her rights and had it not been for her
failure to perform her commensurate duty to pursue vigorously her case
against Cardale Financing and Realty Corporation in said Civil Case No.
12366, she could have easily known said non-payment of realty taxes on the
said properties by said Cardale Financing and Realty Corporation, or, at least
the auction sales that followed, and from which she could have redeemed
said properties within the one year period provided by law, or, have availed
of remedies at the time to protect the interest of the testate estate of the
late Andrea Cordova Vda. de Gutierrez.
xxx

xxx

xxx

The dispositive portion of the trial courts decision states WHEREFORE, in view of all the foregoing consideration, the court hereby
renders judgment in favor of the defendants Register of Deeds of Caloocan
City, Merryland Development Corporation and Adalia B. Francisco, and

24 | c o r p o c a s e s 2 1 - 4 0

against plaintiff Rita C. Mejia, as Executrix of the Testate Estate of Andrea


Cordova Vda. De Gutierrez, and hereby orders:
1. That this case for damages be dismissed, at the same time, plaintiffs
motion for reconsideration dated September 23, 1987 is denied;
2. Plaintiff pay the defendants Merryland Development Corporation and the
Register of Deeds the sum of P20,000.00, and another sum of P20,000.00 to
the defendant Adalia B. Francisco, as and for attorneys fees and litigation
expenses, and pay the costs of the proceedings.
SO ORDERED.
The Court of Appeals,[6] in its decision[7] promulgated on 13 April 1999,
reversed the trial court, holding that the corporate veil of Cardale and
Merryland must be pierced in order to hold Francisco and Merryland
solidarily liable since these two corporations were used as dummies by
Francisco, who employed fraud in allowing Cardale to default on the realty
taxes for the properties mortgaged to Gutierrez so that Merryland could
acquire the same free from all liens and encumbrances in the tax
delinquency sale and, as a consequence thereof, frustrating Gutierrezs
rights as a mortgagee over the subject properties. Thus, the Court of
Appeals premised its findings of fraud on the following circumstances
xxx

xxx

xxx

xxx Appellee Francisco knew that Cardale of which she was vice-president
and treasurer had an outstanding obligation to Gutierrez for the unpaid
balance of the real properties covered by TCT Nos. 7531 to 7533, which
Cardale purchased from Gutierrez which account, as of December 1988,
already amounted to P4,414,271.43 (Exh. K, pp. 39-44, record); she also
knew that Gutierrez had a mortgage lien on the said properties to secure
payment of the aforesaid obligation; she likewise knew that the said
mortgaged properties were under litigation in Civil Case No. Q-12366 which
was an action filed by Gutierrez against Cardale for rescission of the sale
and/or recovery of said properties (Exh. E). Despite such knowledge,
appellee Francisco did not inform Gutierrezs Estate or the Executrix (herein
appellant) as well as the trial court that the mortgaged properties had
incurred tax delinquencies, and that Final Notices dated July 9, 1982 had
been sent by the City Treasurer of Caloocan demanding payment of such tax
arrears within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 37-38,
record). Both notices which were addressed to
Cardale Financing & Realty Corporation c/o Merryland Development
Corporation
and sent to appellee Franciscos address at 83 Katipunan Road, White Plains,
Quezon City, gave warning that if the taxes were not paid within the
aforesaid period, the properties would be sold at public auction to satisfy the
tax delinquencies.
To reiterate, notwithstanding receipt of the aforesaid notices, appellee
Francisco did not inform the Estate of Gutierrez or her executrix about the
tax delinquencies and of the impending auction sale of the said properties.
Even a modicum of good faith and fair play should have encouraged
appellee Francisco to at least advise Gutierrezs Estate through her
executrix (herein appellant) and the trial court which was hearing the
complaint for rescission and recovery of said properties of such fact, so that

25 | c o r p o c a s e s 2 1 - 4 0

the Estate of Gutierrez, which had a real interest on the properties as


mortgagee and as plaintiff in the rescission and recovery suit, could at least
take steps to forestall the auction sale and thereby preserve the properties
and protect its interests thereon. And not only did appellee Francisco allow
the auction sale to take place, but she used her other corporation
(Merryland) in participating in the auction sale and in acquiring the very
properties which her first corporation (Cardale) had mortgaged to Gutierrez.
Again, appellee Francisco did not thereafter inform the Estate of Gutierrez or
its executrix (herein appellant) about the auction sale, thus precluding the
Estate from exercising its right of redemption. And it was only after the
expiration of the redemption period that appellee Francisco filed a
Manifestation in Civil Case No. Q-12366 (Exh. I, p. 36, record), in which she
disclosed for the first time to the trial court and appellant that the properties
subject of the case and on which Gutierrez or her Estate had a mortgage
lien, had been sold in a tax delinquency sale. And in order to further
conceal her deceptive maneuver, appellee Francisco did not divulge in her
aforesaid Manifestation that it was her other corporation (Merryland) that
acquired the properties in the auction sale.
We are not impressed by appellees submission that no evidence was
adduced to prove that Cardale had the capacity to pay the tax arrears and
therefore she or Cardale may not be faulted for the tax delinquency sale of
the properties in question. Appellee Franciscos bad faith or deception did
not necessarily lie in Cardales or her failure to settle the tax deliquencies in
question, but in not disclosing to Gutierrezs estate or its executrix (herein
appellant) which had a mortgage lien on said properties the tax
delinquencies and the impending auction sale of the encumbered
properties.
Appellee Franciscos deception is further shown by her concealment of the
tax delinquency sale of the properties from the estate or its executrix, thus
preventing the latter from availing of the right of redemption of said
properties.
That appellee Francisco divulged the auction sale of the
properties only after such redemption period had lapsed clearly betrays her
intention to keep Gutierrezs Estate or its Executrix from availing of such
right. And as the evidence would further show, appellee Francisco had a
hand in securing for Merryland consolidation of its ownership of the
properties and in seeing to it that Merrylands torrens certificates for the
properties were free from liens and encumbrances. All these appellee
Francisco did even as she was fully aware that Gutierrez or her estate had a
valid and subsisting mortgage lien on the said properties.
It is likewise worthy of note that early on appellee Francisco had testified in
the action for rescission of sale and recovery of possession and ownership of
the properties which Gutierrez filed against Cardale (Civil Case No. Q-12366)
in her capacity as defendant Cardales vice-president and treasurer. But
then, for no plausible reason whatsoever, she lost interest in continuing
with the presentation of evidence for defendant Cardale. And then, when
appellant Mejia as executrix of Gutierrezs Estate filed on August 13, 1984 a
Motion for Decision in the aforesaid case, appellee Francisco moved to defer
consideration of appellants Motion on the pretext that defendant Cardale
needed time to employ another counsel. Significantly, in her aforesaid
Motion for Postponement dated August 16, 1984 which appellee Francisco
personally signed as Officer-in-Charge of Cardale, she also did not disclose
the fact that the properties subject matter of the case had long been sold at
a tax delinquency sale and acquired by her other corporation Merryland.

26 | c o r p o c a s e s 2 1 - 4 0

And as if what she had already accomplished were not enough fraudulence,
appellee Francisco, acting in behalf of Merryland, caused the issuance of
new transfer certificates of title in the name of Merryland, which did not
anymore bear the mortgage lien in favor of Gutierrez. In the meantime, to
further avoid payment of the mortgage indebtedness owing to Gutierrezs
estate, Cardale corporation was dissolved. Finally, to put the properties
beyond the reach of the mortgagee, Gutierrezs estate, Merryland caused
the subdivision of such properties, which were subsequently sold on
installment basis.
In its petition for certiorari, petitioners argue that there is no law requiring
the mortgagor to inform the mortgagee of the tax delinquencies, if any, of
the mortgaged properties. Moreover, petitioners claim that Cardales failure
to pay the realty taxes, per se, does not constitute fraud since it was not
proven that Cardale was capable of paying the taxes. Petitioners also
contend that if Mejia, as executrix of Gutierrezs estate, was not remiss in
her duty to pursue Civil Case No. 12366, she could have easily learned of
the non-payment of realty taxes on the subject properties and of the auction
sale that followed and thus, have redeemed the properties or availed of
some other remedy to conserve the estate of Gutierrez. In addition, Mejia
could have annotated a notice of lis pendens on the titles of the mortgaged
properties, but she failed to do so. It is the stand of petitioners that
respondent has not adduced any proof that Francisco controlled both
Cardale and Merryland and that she used these two corporations to
perpetuate a fraud upon Gutierrez or her estate. Petitioners maintain that
the evidence shows that, apart form the meager share of petitioner
Francisco, the stockholdings of both corporations comprise other
shareholders, and the stockholders of either of them, aside from petitioner
Francisco, are composed of different persons. As to Civil Case No. 12366,
petitioners insist that the decision of the trial court in that case constitutes
res judicata to the instant case.[8]
It is dicta in corporation law that a corporation is a juridical person with a
separate and distinct personality from that of the stockholders or members
who compose it.[9] However, when the legal fiction of the separate
corporate personality is abused, such as when the same is used for
fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. One of the earliest formulations of this doctrine of piercing
the corporate veil was made in the American case of United States v.
Milwaukee Refrigerator Transit Co.[10] If any general rule can be laid down, in the present state of authority, it is
that a corporation will be looked upon as a legal entity as a general rule,
and until sufficient reason to the contrary appears; but, when the notion of
legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, the law will regard the corporation as an association
of persons.
Since then a good number of cases have firmly implanted this doctrine in
Philippine jurisprudence.[11] One such case is Umali v. Court of Appeals[12]
wherein the Court declared that
Under the doctrine of piercing the veil of corporate entity, when valid
grounds therefore exist, the legal fiction that a corporation is an entity with
a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be
considered as a mere association of persons. The members or stockholders
of the corporation will be considered as the corporation, that is, liability will

27 | c o r p o c a s e s 2 1 - 4 0

attach directly to the officers and stockholders. The doctrine applies when
the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, or when it is made as a shield to confuse the
legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
With specific regard to corporate officers, the general rule is that the officer
cannot be held personally liable with the corporation, whether civilly or
otherwise, for the consequences of his acts, if he acted for and in behalf of
the corporation, within the scope of his authority and in good faith. In such
cases, the officers acts are properly attributed to the corporation.[13]
However, if it is proven that the officer has used the corporate fiction to
defraud a third party,[14] or that he has acted negligently, maliciously or in
bad faith,[15] then the corporate veil shall be lifted and he shall be held
personally liable for the particular corporate obligation involved.
The Court, after an assiduous study of this case, is convinced that the
totality of the circumstances appertaining conduce to the inevitable
conclusion that petitioner Francisco acted in bad faith. The events leading
up to the loss by the Gutierrez estate of its mortgage security attest to this.
It has been established that Cardale failed to comply with its obligation to
pay the balance of the purchase price for the four parcels of land it bought
from Gutierrez covered by TCT Nos. 7531 to 7534, which obligation was
secured by a mortgage upon the lands covered by TCT Nos. 7531, 7532 and
7533. This prompted Gutierrez to file an action for rescission of the Deed of
Sale with Mortgage (Civil Case No. Q-12366), but the case dragged on for
about fourteen years when Cardale, as represented by Francisco, who was
Vice-President and Treasurer of the same,[16] lost interest in completing its
presentation of evidence.
Even before 1984 when Mejia, in her capacity as executrix of Gutierrezs
estate, filed a Motion for Decision with the trial court, there is no question
that Francisco knew that the properties subject of the mortgage had
become tax delinquent. In fact, as treasurer of Cardale, Francisco herself
was the officer charged with the responsibility of paying the realty taxes on
the corporations properties. This was admitted by the trial court in its
decision.[17] In addition, notices dated 9 July 1982 from the City Treasurer
of Caloocan demanding payment of the tax arrears on the subject properties
and giving warning that if the realty taxes were not paid within the given
period then such properties would be sold at public auction to satisfy the tax
delinquencies were sent directly to Franciscos address in White Plains,
Quezon City.[18] Thus, as early as 1982, Francisco could have informed the
Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax
arrears and of the notice from the City Treasurer so that the estate could
have taken the necessary steps to prevent the auction sale and to protect
its interests in the mortgaged properties, but she did no such thing. Finally,
in 1983, the properties were levied upon and sold at public auction wherein
Merryland - a corporation where Francisco is a stockholder[19] and
concurrently acts as President and director[20] - was the highest bidder.
When Mejia filed the Motion for Decision in Civil Case No. Q-12366,[21] the
period for redeeming the properties subject of the tax sale had not yet
expired.[22] Under the Realty Property Tax Code,[23] pursuant to which the
tax levy and sale were prosecuted,[24] both the delinquent taxpayer and in
his absence, any person holding a lien or claim over the property shall have
the right to redeem the property within one year from the date of

28 | c o r p o c a s e s 2 1 - 4 0

registration of the sale.[25] However, if these persons fail to redeem the


property within the time provided, then the purchaser acquires the property
free from any encumbrance or third party claim whatsoever.[26] Cardale
made no attempts to redeem the mortgaged property during this time.
Moreover, instead of informing Mejia or the trial court in Q-12366 about the
tax sale, the records show that Francisco filed a Motion for
Postponement[27] in behalf of Cardale - even signing the motion in her
capacity as officer-in-charge - which worked to defer the hearing of Mejias
Motion for Decision. No mention was made by Francisco of the tax sale in
the motion for postponement. Only after the redemption period had expired
did Francisco decide to reveal what had transpired by filing a Manifestation
stating that the properties subject of the mortgage in favor of Gutierrez had
been sold at a tax delinquency sale; however, Francisco failed to mention
that it was Merryland that acquired the properties since she was probably
afraid that if she did so the court would see behind her fraudulent scheme.
In this regard, it is also significant to note that it was Francisco herself who
filed the petitions for consolidation of title and who helped secure for
Merryland titles over the subject properties free from any encumbrance or
third-party claim whatsoever.
It is exceedingly apparent to the Court that the totality of Francisos actions
clearly betray an intention to conceal the tax delinquencies, levy and public
auction of the subject properties from the estate of Gutierrez and the trial
court in Civil Case No. Q-12366 until after the expiration of the redemption
period when the remotest possibility for the recovery of the properties
would be extinguished.[28] Consequently, Francisco had effectively
deprived the estate of Gutierrez of its rights as mortgagee over the three
parcels of land which were sold to Cardale. If Francisco was acting in good
faith, then she should have disclosed the status of the mortgaged properties
to the trial court in Civil Case No. Q-12366 - especially after Mejia had filed a
Motion for Decision, in response to which she filed a motion for
postponement wherein she could easily have mentioned the tax sale - since
this action directly affected such properties which were the subject of both
the sale and mortgage.
That Merryland acquired the property at the public auction only serves to
shed more light upon Franciscos fraudulent purposes. Based on the
findings of the Court of Appeals, Francisco is the controlling stockholder and
President of Merryland.[29] Thus, aside from the instrumental role she
played as an officer of Cardale, in evading that corporations legitimate
obligations to Gutierrez, it appears that Franciscos actions were also
oriented towards securing advantages for another corporation in which she
had a substantial interest. We cannot agree, however, with the Court of
Appeals decision to hold Merryland solidarily liable with Francisco. The only
act imputable to Merryland in relation to the mortgaged properties is that it
purchased the same and this by itself is not a fraudulent or wrongful act. No
evidence has been adduced to establish that Merryland was a mere alter
ego or business conduit of Francisco. Time and again it has been reiterated
that mere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personality.[30] Neither has
it been alleged or proven that Merryland is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of Cardale.[31] Even assuming that the businesses of
Cardale and Merryland are interrelated, this alone is not justification for
disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third

29 | c o r p o c a s e s 2 1 - 4 0

persons of their rights.[32] Thus, Merrylands separate juridical personality


must be upheld.
Based on a statement of account submitted by Mejia, the Court of Appeals
awarded P4,314,271.43 in favor of the estate of Gutierrez which represents
the unpaid balance of the purchase price in the amount of P629,000.00 with
an interest rate of nine percent (9%) per annum, in accordance with the
agreement of the parties under the Deed of Sale with Mortgage,[33] as of
December 1988.[34] Therefore, in addition to the amount awarded by the
appellate court, Francisco should pay the estate of Gutierrez interest on the
unpaid balance of the purchase price (in the amount of P629,000.00) at the
rate of nine percent (9%) per annum computed from January, 1989 until
fully satisfied.
Finally, contrary to petitioners assertions, we agree with the Court of
Appeals that the decision of the trial court in Civil Case No. Q-12366 does
not constitute res judicata insofar as the present case is concerned because
the decision in the first case was not a judgment on the merits. Rather, it
was merely based upon the premise that since Cardale had been dissolved
and the property acquired by another corporation, the action for rescission
would not prosper. As a matter of fact, it was even expressly stated by the
trial court that the parties should ventilate their issues in another action.
WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby
accordingly MODIFIED so as to hold ADALIA FRANCISCO solely liable to the
estate of Gutierrez for the amount of P4,314,271.43 and for interest on the
unpaid balance of the purchase price (in the amount of P629,000.00) at the
rate of nine percent (9%) per annum computed from January, 1989 until
fully satisfied. MERRYLAND is hereby absolved from all liability.
SO ORDERED.
[G.R. No. 126554. May 31, 2000]
ARB CONSTRUCTION CO., INC., and MARK MOLINA, petitioners, vs. COURT
OF APPEALS, TBS SECURITY AND INVESTIGATION AGENCY represented by
CECILIA R. BACLAY, respondents.
DECISION
BELLOSILLO, J.:
ARB CONSTRUCTION CO., INC. (ARBC) and MARK MOLINA, Vice President for
Operations of ARBC, in this consolidated petition, assail the Decision of the
Court of Appeals in CA-G.R. SP Nos. 36330 and 36489 as well as the orders
of the trial court dated 9 September 1994 and 9 December 1994 granting
private respondent TBS Security and Investigation Agencys Motion for
Leave to File Amended and Supplemental Complaint and denying petitioner
Mark Molina's Motion to Dismiss, respectively.
On 15 August 1993 TBS Security and Investigation Agency (TBSS) entered
into two (2) Service Contracts with ARBC wherein TBSS agreed to provide
and post security guards in the five (5) establishments being maintained by
ARBC. Clause 10 of the Service Contracts provides 10. This contract shall be effective for a period of one (1) year commencing
from 15th August 1993 and shall be considered automatically renewed for
the same period unless otherwise a written notice of termination shall have
been given by one party to the other party thirty (30) days in advance.

30 | c o r p o c a s e s 2 1 - 4 0

In a letter dated 23 February 1994 ARBC informed TBSS of its desire to


terminate the Service Contracts effective thirty (30) days after receipt of the
letter. Also, in a letter dated 22 March 1994, ARBC through its Vice President
for Operations, Mark Molina, informed TBSS that it was replacing its security
guards with those of Global Security Investigation Agency (GSIA).
In response to both letters, TBSS informed ARBC that the latter could not
preterminate the Service Contracts nor could it post security guards from
GSIA as it would run counter to the provisions of their Service Contracts.
On 23 March 1994 Molina wrote TBSS conceding that indeed the "security
contract dated 15 August 1993 stipulates that the duration of the service
shall be for a period of one year, ending on 15 August 1994 x x x and could
not be preterminated until then."[1] Nevertheless, Molina decreased the
security guards to only one (1) allegedly pursuant to Clause 2 of the Service
Contracts which provides 2. The AGENCY shall adopt a guarding system and post guards in
accordance thereof, in the premises of the client throughout the whole 24
hours daily, using variable shifts of the guards at such hours as may be
designated by the CLIENT or AGENCY. As required by the CLIENT, the
security guards to be assigned by the AGENCY shall consist initially of the
following x x x subject to be increased or decreased by the CLIENT at its
sole discretion depending on the security situation or the exigency of the
service, by giving the AGENCY at least SEVEN (7) days prior notice.[2]
Thus on 28 March 1994 TBSS filed a Complaint for Preliminary Injunction
against ARBC and GSIA praying A. Forthwith and Ex-parte, that a Temporary Restraining Order be issued
declaring the status quo and directing the Defendants or any person(s)
acting in their behalf from performing acts of replacing the Plaintiffs
security guards from other agencies;
B. After due hearing that a Writ of Preliminary Injunction, in like tenor, be
issued upon posting of such bond as the Honorable Court may require;
C. After due hearing, that judgment be rendered 1. Declaring the two (2) contracts for Security Services between Plaintiff and
ARBC to be subsisting until August 15, 1994;
2. Ordering Defendant GLOBAL to refrain from taking over the security
services of ARBC and to withdraw its guards from the premises of ARBC, if
they have been posted earlier;
3. Ordering ARBC to pay Plaintiff attorneys fees in the amount of
P50,000.00 x x x [3]
In Answer, ARBC claimed that it decreased the number of security guards
being posted at its establishments to only one (1) as the security guards
assigned by TBSS were found to be grossly negligent and inefficient, citing
the following incidents 8. On February 6, 1994, a Mitsubishi roadgrader of herein defendant was
stripped of parts amounting to P58,642.00;

31 | c o r p o c a s e s 2 1 - 4 0

9. On February 25, 1994, a concrete vibrator and mercury light assembly


were stolen from the construction site of the Multipurpose Hall beside the
swimming pool of herein defendant which is worth P2,800.00 x x x x[4]
In conclusion, it prayed that the complaint against it be dismissed for lack of
merit.
On 16 May 1994 TBSS filed a Motion for Leave to File Attached Amended
and Supplemental Complaint. TBSS submitted that it now desired to pursue
a case for Sum of Money and Damages instead of the one previously filed
for Preliminary Injunction. It maintained that the Amended and
Supplemental Complaint would not substantially alter its cause of action as
both the original and amended complaint were based on the same set of
facts.[5]
In addition to the allegations in its original complaint, TBSS alleged in its
Amended and Supplemental Complaint that ARBC illegally deducted from
the payroll the amounts of P15,500.00 and P2,800.00 representing the value
of one (1) unit concrete vibrator and cassette recorder, respectively. It
further argued that ARBC withheld additional amounts from its payroll as
payment for the parts of the grader that were stolen.[6] TBSS maintained
that ARBC had an outstanding obligation of P472,080.46. Corollarily, TBSS
prayed for moral damages of P500,000.00, exemplary damages of
P200.000.00 and attorney's fees of P50,000.00.
On 2 May 1994 the trial court issued a temporary restraining order but due
to the exigency of the situation TBSS decided to withdraw its security
contingent from ARBC's premises on 13 May 1994.
ARBC opposed the Motion for Leave to File Amended and Supplemental
Complaint [7] contending that the cause of action had been substantially
altered.
On 9 September 1994 the RTC of Makati, Br. 59, granted the motion of TBSS
to file the Amended and Supplemental Complaint rationalizing thus Should the court find the allegations in the pleadings to be inadequate, the
Court should allow the party to file proper amendments in accordance with
the mandate of the Rules of Court that amendments to pleadings are
favored and should be liberally allowed, particularly in the early stages of
the law suit, so that the actual merit of the controversy may be speedily
determined without regard to technicalities and in the most expeditious and
inexpensive manner x x x x [8]
ARBC filed a Motion for Reconsideration but on 3 November 1994 the motion
was denied.
Meanwhile, Mark Molina filed a Motion to Dismiss [9] the Amended and
Supplemental Complaint on the ground that it did not state a cause of
action insofar as he was concerned. But on 9 December 1994 the trial court
denied the motion to dismiss and directed Molina instead to file his answer
within ten (10) days from receipt of the order.
On 30 January 1995 ARBC filed a Petition [10] with the Court of Appeals
alleging that the trial court committed grave abuse of discretion in issuing
the Orders of 9 September 1994 and 3 November 1994. On 15 February
1995 Molina likewise filed a Petition before the Court of Appeals similarly

32 | c o r p o c a s e s 2 1 - 4 0

attributing grave abuse of discretion to the trial court in issuing the order of
9 December 1994.
Parenthetically, upon motion of TBSS, the petition of Mark Molina in CA-G.R.
SP No. 36484 was consolidated with the petition of ARBC in CA-G.R. SP No.
36330.
On 16 August 1996 the Court of Appeals rendered a Decision [11] denying
both petitions of ARBC and Molina. On 3 October 1996 petitioners Motion
for Reconsideration [12] was denied. Hence, this petition.
In their consolidated Petition before this Court, petitioners first submit that
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT
HAD THE RIGHT TO CHANGE ITS CAUSE OF ACTION IN VIEW OF A CHANGE IN
THE SITUATION OF THE PARTIES AFTER THE FILING OF THE ORIGINAL
COMPLAINT.[13] In support of this assigned error petitioners insist that x x x (T)here was not only a substantial change in private respondents
cause of action but there was even an alteration in the theory of the case x
x x (W)hile in the original complaint the only thing alleged and is being
prayed for is for petitioner ARB (ARBC) to be enjoined from replacing the
security guards of private respondent x x x and for the two contracts x x x
to be enforced until August 15, 1994 and for petitioner ARB (ARBC) to be
ordered to pay x x x attorneys fees, what is alleged and is being prayed for
in the amended and supplemental complaint is for both petitioners to be
ordered to pay P171,853.80 (for unpaid services) x x x and P300,226.66 (for
lost income) x x x plus moral and exemplary damages and attorneys fees.
Obviously, petitioner ARB (ARBC) is being required to answer for a liability or
legal obligation under the amended and supplemental complaint wholly
different from that stated in the original complaint such as but not limited to
the amount of P171,852.80 which was never mentioned in the original
contract. Under these circumstances, a different cause of action was
introduced by the amendment.
Also, there was a change in the theory of the case. Whereas in the original
contract what is sought for by private respondent is the enforcement of the
two (2) contracts which is what is known in legal parlance as specific
performance, in the amended and supplemental complaint what is sought
for is x x x a rescission of the contracts with damages x x x x [14]
We cannot subscribe to the contention of petitioners that the Amended and
Supplemental Complaint substantially changed TBSS' cause of action nor
was there any alteration in the theory of the case. As correctly observed by
the Court of Appeals, "the amendatory allegations are mere amplifications
of the cause of action for damages x x x x An amendment will not be
considered as stating a new cause of action if the facts alleged in the
amended complaint show substantially the same wrong with respect to the
same transaction, or if what are alleged refer to the same matter but are
more fully and differently stated, or where averments which were implied
are made in expressed terms, and the subject of the controversy or the
liability sought to be enforced remains the same."[15]
The original as well as amended and supplemental complaints readily
disclose that the averments contained therein are almost identical. In the
original complaint, TBSS prays, among others, that the two (2) Service
Contracts be declared as subsisting until 15 August 1994 and that
petitioners be made to pay P50,000.00 as attorneys fees.[16] Significantly,

33 | c o r p o c a s e s 2 1 - 4 0

in its penultimate paragraph, TBSS prays "for such other reliefs that are
considered just and equitable under the premises."[17] This is a "catch-all"
phrase which definitely covers the amplifications and additional averments
contained in the Amended and Supplemental Complaint. Due to events
supervening after the filing of the original complaint, it became incumbent
upon TBSS to amend its original complaint. One of the supervening events
was the withholding by petitioner ARBC of some amounts intended for the
payroll of TBSS due to pilferage or losses which allegedly occurred due to
the negligence and inefficiency of TBSS' security guards. Plainly, this
withholding of the payroll was only an offshoot of the pretermination of the
two (2) Service Contracts on the part of ARBC.
Significantly, the pretermination of the Service Contracts was already
alleged in the original complaint. In fact it was one, if not the most basic,
issue discussed therein. Since the withholding of the payroll was only an
offshoot of the issue on the pretermination of the contract, we can safely
conclude that the allegation on the withholding of the payroll in the
Amended and Supplemental Complaint was only an amplification of an issue
that was already included and discussed in the original complaint. It was
therefore error on the part of petitioners to conclude that private respondent
changed its cause of action in the Amended and Supplemental Complaint.
Neither could they say that they were being made to answer for a liability or
legal obligation that was wholly different from that stated in the original
complaint.
Grave abuse of discretion therefore could not be imputed to the trial court
for admitting the Amended and Supplemental Complaint of private
respondent TBSS. It also follows that the appellate court could not be faulted
for putting its stamp of approval on the order of the trial court admitting the
same.
Petitioners also argue, as their second assigned error, that THE COURT OF
APPEALS ERRED IN HOLDING THAT THE ALLEGATIONS IN THE AMENDED AND
SUPPLEMENTAL COMPLAINT WERE SUFFICIENT TO HOLD PETITIONER
MOLINA LIABLE TO PRIVATE RESPONDENT IN HIS PERSONAL CAPACITY. In
support of their contention petitioners submit x x x (W)hen x x x Molina allegedly applied P171,853.80 payable to private
respondent to the losses suffered by petitioner ARB (ARBC) due to the
negligence and indifference of the private respondents security guards and
when petitioner Molina replaced the said security guards x x x Molina was
not acting in his personal capacity but x x x as officer of petitioner ARB
(ARBC).
Since petitioner Molina did not so act in his personal capacity but only in his
official capacity as officer of petitioner ARB (ARBC) then petitioner Molina
cannot be held personally liable for the alleged liability of petitioner ARB
(ARBC) x x x x [18]
In affirming the order of the trial court denying petitioner Molinas Motion to
Dismiss, the appellate court ruled Similarly, We find no error committed by respondent Judge in denying the
motion to dismiss.
In paragraphs 5, 17, 18 of the amended and supplemental complaint, it is
alleged:

34 | c o r p o c a s e s 2 1 - 4 0

5. But fate would have it that defendant ARBC would subsequently breach
the aforesaid contracts by surreptitiously preterminating the same and as
precursor thereto, defendant ARBC, through defendant Mark Molina, would
impute against plaintiff pretended and fabricated violations and baselessly
blame plaintiff for alleged losses of company properties by just deducting
the values thereof from plaintiffs billings without even complying with the
procedure agreed upon in the contracts x x x x
It may be pertinent to state that all these accusations and imputations,
albeit false and concocted, were made by defendant Mark P. Molina x x x x
17. Such unsalutary breach of contract by defendant ARBC through
defendant Mark Molina has resulted to plaintiffs damage and prejudice by
way of lost income consisting of the unexpired portion of the contract, i.e.,
up to August 15, 1994, entailing a total amount of P300, 266.66 x x x x
The above allegations, particularly the subparagraph, "It may be pertinent
to state that all these accusations and imputations, albeit false and
concocted, were made by defendant Mark P. Molina," are sufficient
statement of a cause of action against petitioner Mark Molina in his personal
capacity.[19]
In this regard, we agree with petitioners. It is basic that a corporation is
invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which
it may be related. As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal entities
to which it may be connected and vice versa. However, the veil of corporate
fiction may be pierced when it is used as a shield to further an end
subversive of justice; or for purposes that could not have been intended by
the law that created it; or to defeat public convenience, justify wrong,
protect fraud, or defend crime; or to perpetuate deception; or as an alter
ego, adjunct or business conduit for the sole benefit of the stockholders.[20]
Prescinding from the foregoing, the general rule is that officers of a
corporation are not personally liable for their official acts unless it is shown
that they have exceeded their authority.[21] Article 31 of the Corporation
Code is in point Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors, or trustees shall be liable jointly
and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons x x x x
On the basis hereof, petitioner Molina could not be held jointly and severally
liable for any obligation which petitioner ARBC may be held accountable for,
absent any proof of bad faith or malice on his part. Corollarily, it is also
incorrect on the part of the Court of Appeals to conclude that there was a
sufficient cause of action against Molina as to make him personally liable for
his actuations as Vice President for Operations of ARBC. A cursory reading of
the records of the instant case would reveal that Molina did not summarily
withhold certain amounts from the payroll of TBSS. Instead, he enumerated
instances [22] which in his view were enough bases to do so.

35 | c o r p o c a s e s 2 1 - 4 0

Finally, petitioners contend that THE COURT OF APPEALS ERRED IN HOLDING


THAT THE TRIAL COURT DID NOT GRAVELY ABUSE ITS DISCRETION IN
GRANTING PRIVATE RESPONDENTS MOTION FOR LEAVE TO FILE AMENDED
AND SUPPLEMENTAL COMPLAINT AND IN DENYING PETITIONER MOLINAS
MOTION TO DISMISS. In support hereof, petitioners submit that x x x (T)he trial court admitted the amended and supplemental complaint
which substantially changed the cause of action and theory of the case of
the private respondent. Therefore, there is (sic) abuse of discretion on the
part of the trial court contrary to the ruling of the Court of Appeals that
there is none.[23]
As already discussed, the Amended and Supplemental Complaint did not
substantially alter the cause of action and theory of the case. Consequently,
the trial court and the appellate court could not be charged with grave
abuse of discretion in admitting the same.
WHEREFORE, the PETITION is PARTIALLY GRANTED. The assailed Decision of
the Court of Appeals in CA-G.R. SP No. 36489 affirming the 9 December
1994 Order of the Regional Trial Court-Br. 59, Makati City, which denied the
Motion to Dismiss of petitioner Mark Molina is REVERSED and SET ASIDE.
However, the assailed Decision of the appellate court in CA-G.R. SP No.
36330 affirming the 9 September 1994 Order of the Regional Trial Court-Br.
59, Makati City, granting TBS Security and Investigation Agency's Motion for
Leave to File Amended and Supplemental Complaint is likewise AFFIRMED.
The case is remanded to the trial court for further proceedings. No costs.
SO ORDERED.
G.R. No. 93397

March 3, 1997

TRADERS ROYAL BANK, petitioner,


vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and
CENTRAL BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:


Assailed in this Petition for Review on Certiorari is the Decision of the
respondent Court of Appeals dated January 29, 1990, 1 affirming the nullity
of the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891,
2 with a face value of P500,000.00, from the Philippine Underwriters Finance
Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under
a Repurchase Agreement 3 dated February 4, 1981, and a Detached
Assignment 4 dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila,
Branch 32, the action was originally filed as a Petition for Mandamus 5
under Rule 65 of the Rules of Court, to compel the Central Bank of the
Philippines to register the transfer of the subject CBCI to petitioner Traders
Royal Bank (TRB).
In the said petition, TRB stated that:
3.
On November 27, 1979, Filriters Guaranty Assurance Corporation
(Filriters) executed a "Detached Assignment" . . ., whereby Filriters, as

36 | c o r p o c a s e s 2 1 - 4 0

registered owner, sold, transferred, assigned and delivered unto Philippine


Underwriters Finance Corporation (Philfinance) all its rights and title to
Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED
THOUSAND (P500,000) and having an aggregate value of PESOS: THREE
MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);
4.
The aforesaid Detached Assignment (Annex "A") contains an express
authorization executed by the transferor intended to complete the
assignment through the registration of the transfer in the name of
PhilFinance, which authorization is specifically phrased as follows: '(Filriters)
hereby irrevocably authorized the said issuer (Central Bank) to transfer the
said bond/certificates on the books of its fiscal agent;
5.
On February 4, 1981, petitioner entered into a Repurchase Agreement
with PhilFinance . . ., whereby, for and in consideration of the sum of PESOS:
FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face
value of P500,000.00 . . ., which CBCI was among those previously acquired
by PhilFinance from Filriters as averred in paragraph 3 of the Petition;
6.
Pursuant to the aforesaid Repurchase Agreement (Annex "B"),
Philfinance agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the
stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE
HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;
7.
PhilFinance failed to repurchase the CBCI on the agreed date of
maturity, April 27, 1981, when the checks it issued in favor of petitioner
were dishonored for insufficient funds;
8.
Owing to the default of PhilFinance, it executed a Detached
Assignment in favor of the Petitioner to enable the latter to have its title
completed and registered in the books of the respondent. And by means of
said Detachment, Philfinance transferred and assigned all, its rights and title
in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby
"irrevocably authorize the said issuer (respondent herein) to transfer the
said bond/certificate on the books of its fiscal agent." . . .
9.
Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the
Securities Servicing Department of the respondent, and requested the latter
to effect the transfer of the CBCI on its books and to issue a new certificate
in the name of petitioner as absolute owner thereof;
10.
Respondent failed and refused to register the transfer as requested,
and continues to do so notwithstanding petitioner's valid and just title over
the same and despite repeated demands in writing, the latest of which is
hereto attached as Annex "E" and made an integral part hereof;
11.
The express provisions governing the transfer of the CBCI were
substantially complied with the petitioner's request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the
Certificate has been registered) by the registered owner hereof, in person or
by his attorney duly authorized in writing, and similarly noted hereon, and
upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered holder thereof."

37 | c o r p o c a s e s 2 1 - 4 0

and, without a doubt, the Detached Assignments presented to respondent


were sufficient authorizations in writing executed by the registered owner,
Filriters, and its transferee, PhilFinance, as required by the above-quoted
provision;
12.
Upon such compliance with the aforesaid requirements, the
ministerial duties of registering a transfer of ownership over the CBCI and
issuing a new certificate to the transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank
of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of
the defendant Central Bank of the Philippines' Motion for Admission of
Amended Answer with Counter Claim for Interpleader 6 thereby calling to
fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the
registered owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11.

Respondent is the registered owner of CBCI No. 891;

12.
The CBCI constitutes part of the reserve investment against liabilities
required of respondent as an insurance company under the Insurance Code;
13.
Without any consideration or benefit whatsoever to Filriters, in
violation of law and the trust fund doctrine and to the prejudice of
policyholders and to all who have present or future claim against policies
issued by Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of
Filriters, without any board resolution, knowledge or consent of the board of
directors of Filriters, and without any clearance or authorization from the
Insurance Commissioner, executed a detached assignment purportedly
assigning CBCI No. 891 to Philfinance;
xxx

xxx

xxx

14.
Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are
Pilar Jacobe, Vice-President-Treasury of Filriters (both of whom were holding
the same positions in Philfinance), without any consideration or benefit
redounding to Filriters and to the grave prejudice of Filriters, its policy
holders and all who have present or future claims against its policies,
executed similar detached assignment forms transferring the CBCI to
plaintiff;
xxx

xxx

xxx

15.
The detached assignment is patently void and inoperative because
the assignment is without the knowledge and consent of directors of
Filriters, and not duly authorized in writing by the Board, as requiring by
Article V, Section 3 of CB Circular No. 769;
16.
The assignment of the CBCI to Philfinance is a personal act of Alfredo
Banaria and not the corporate act of Filriters and such null and void;
a)
The assignment was executed without consideration and for that
reason, the assignment is void from the beginning (Article 1409, Civil Code);

38 | c o r p o c a s e s 2 1 - 4 0

b)
The assignment was executed without any knowledge and consent of
the board of directors of Filriters;
c)
The CBCI constitutes reserve investment of Filriters against liabilities,
which is a requirement under the Insurance Code for its existence as an
insurance company and the pursuit of its business operations. The
assignment of the CBCI is illegal act in the sense of malum in se or malum
prohibitum, for anyone to make, either as corporate or personal act;
d)
The transfer of dimunition of reserve investments of Filriters is
expressly prohibited by law, is immoral and against public policy;
e)
The assignment of the CBCI has resulted in the capital impairment
and in the solvency deficiency of Filriters (and has in fact helped in placing
Filriters under conservatorship), an inevitable result known to the officer
who executed assignment.
17.
Plaintiff had acted in bad faith and with knowledge of the illegality
and invalidity of the assignment.
a)
The CBCI No. 891 is not a negotiable instrument and as a certificate
of indebtedness is not payable to bearer but is a registered in the name of
Filriters;
b)
The provision on transfer of the CBCIs provides that the Central Bank
shall treat the registered owner as the absolute owner and that the value of
the registered certificates shall be payable only to the registered owner; a
sufficient notice to plaintiff that the assignments do not give them the
registered owner's right as absolute owner of the CBCI's;
c)
CB Circular 769, Series of 1980 (Rules and Regulations Governing
CBCIs) provides that the registered certificates are payable only to the
registered owner (Article II, Section 1).
18.
Plaintiff knew full well that the assignment by Philfinance of CBCI No.
891 by Filriters is not a regular transaction made in the usual of ordinary
course of business;
a)
The CBCI constitutes part of the reserve investments of Filriters
against liabilities requires by the Insurance Code and its assignment or
transfer is expressly prohibited by law. There was no attempt to get any
clearance or authorization from the Insurance Commissioner;
b)
The assignment by Filriters of the CBCI is clearly not a transaction in
the usual or regular course of its business;
c)
The CBCI involved substantial amount and its assignment clearly
constitutes disposition of "all or substantially all" of the assets of Filriters,
which requires the affirmative action of the stockholders (Section 40,
Corporation [sic] Code. 7
In its Decision 8 dated April 29, 1988, the Regional Trial Court of Manila,
Branch XXXIII found the assignment of CBCI No. D891 in favor of Philfinance,
and the subsequent assignment of the same CBCI by Philfinance in favor of
Traders Royal Bank null and void and of no force and effect. The dispositive
portion of the decision reads:

39 | c o r p o c a s e s 2 1 - 4 0

ACCORDINGLY, judgment is hereby rendered in favor of the respondent


Filriters Guaranty Assurance Corporation and against the plaintiff Traders
Royal Bank:
(a)
Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and
the subsequent assignment of CBCI by PhilFinance in favor of the plaintiff
Traders Royal Bank as null and void and of no force and effect;
(b)
Ordering the respondent Central Bank of the Philippines to disregard
the said assignment and to pay the value of the proceeds of the CBCI No.
D891 to the Filriters Guaranty Assurance Corporation;
(c)
Ordering the plaintiff Traders Royal Bank to pay respondent Filriters
Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and
(d)

to pay the costs.

SO ORDERED. 9
The petitioner assailed the decision of the trial court in the Court of Appeals
10, but their appeals likewise failed. The findings of the fact of the said court
are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI
No. D891. Under a deed of assignment dated November 27, 1971, Filriters
transferred CBCI No. D891 to Philippine Underwriters Finance Corporation
(Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which
was still registered in the name of Filriters, to appellant Traders Royal Bank
(TRB). The transfer was made under a repurchase agreement dated
February 4, 1981, granting Philfinance the right to repurchase the
instrument on or before April 27, 1981. When Philfinance failed to buy back
the note on maturity date, it executed a deed of assignment, dated April 27,
1981, conveying to appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and
registration of CBCI No. D891 in its name before the Security and Servicing
Department of the Central Bank (CB). Central Bank, however, refused to
effect the transfer and registration in view of an adverse claim filed by
defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus
against the Central Bank in the Regional Trial Court of Manila. The suit,
however, was subsequently treated by the lower court as a case of
interpleader when CB prayed in its amended answer that Filriters be
impleaded as a respondent and the court adjudge which of them is entitled
to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB
now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a
negotiable instrument, and having acquired the said certificate from
Philfinance as a holder in due course, its possession of the same is thus free
fro any defect of title of prior parties and from any defense available to prior
parties among themselves, and it may thus, enforce payment of the
instrument for the full amount thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a
negotiable instrument, since the instrument clearly stated that it was
payable to Filriters, the registered owner, whose name was inscribed

40 | c o r p o c a s e s 2 1 - 4 0

thereon, and that the certificate lacked the words of negotiability which
serve as an expression of consent that the instrument may be transferred
by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was
fictitious, having made without consideration, and did not conform to
Central Bank Circular No. 769, series of 1980, better known as the "Rules
and Regulations Governing Central Bank Certificates of Indebtedness",
which provided that any "assignment of registered certificates shall not be
valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from
Philfinance whose interest was inexistent, having acquired the certificate
through simulation. What happened was Philfinance merely borrowed CBCI
No. D891 from Filriters, a sister corporation, to guarantee its financing
operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated as the same time Central Bank Circular No. 769 which has the force
and effect of a law, resulting in the nullity of the transfer (People v. Que Po
Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it
could assign or transfer to Traders Royal Bank and which the latter can
register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against
plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance
owns 90% of Filriters equity and the two corporations have identical
corporate officers, thus demanding the application of the doctrine or
piercing the veil of corporate fiction, as to give validity to the transfer of the
CBCI from registered owner to petitioner TRB. 14 This renders the payment
by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is
no merit to the lower court's ruling that the transfer of the CBCI from
Filriters to Philfinance was null and void for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence
of words of negotiability within the meaning of the negotiable instruments
law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx

xxx

xxx

The Central Bank of the Philippines (the Bank) for value received, hereby
promises to pay bearer, of if this Certificate of indebtedness be registered,

41 | c o r p o c a s e s 2 1 - 4 0

to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner


hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx

xxx

xxx

Properly understood, a certificate of indebtedness pertains to certificates for


the creation and maintenance of a permanent improvement revolving fund,
is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is
properly understood as acknowledgment of an obligation to pay a fixed sum
of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable
instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty
Assurance Corporation, the registered owner hereof." Very clearly, the
instrument is payable only to Filriters, the registered owner, whose name is
inscribed thereon. It lacks the words of negotiability which should have
served as an expression of consent that the instrument may be transferred
by negotiation. 15
A reading of the subject CBCI indicates that the same is payable to
FILRITERS GUARANTY ASSURANCE CORPORATION, and to no one else, thus,
discounting the petitioner's submission that the same is a negotiable
instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a
credit instrument is its freedom to circulate as a substitute for money.
Hence, freedom of negotiability is the touchtone relating to the protection of
holders in due course, and the freedom of negotiability is the foundation for
the protection which the law throws around a holder in due course (11 Am.
Jur. 2d, 32). This freedom in negotiability is totally absent in a certificate
indebtedness as it merely to pay a sum of money to a specified person or
entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the
instrument itself. In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. While the writing may
be read in the light of surrounding circumstance in order to more perfectly
understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their
meaning, no other words are to be added to it or substituted in its stead.
The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the
parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The
pertinent question then is, was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with
existing law, so as to entitle TRB to have the CBCI registered in its name
with the Central Bank?
The following are the appellate court's pronouncements on the matter:

42 | c o r p o c a s e s 2 1 - 4 0

Clearly shown in the record is the fact that Philfinance's title over CBCI No.
D891 is defective since it acquired the instrument from Filriters fictitiously.
Although the deed of assignment stated that the transfer was for "value
received", there was really no consideration involved. What happened was
Philfinance merely borrowed CBCI No. D891 from Filriters, a sister
corporation. Thus, for lack of any consideration, the assignment made is a
complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did
not conform to Central Bank Circular No. 769, series of 1980, otherwise
known as the "Rules and Regulations Governing Central Bank Certificates of
Indebtedness", under which the note was issued. Published in the Official
Gazette on November 19, 1980, Section 3 thereof provides that any
assignment of registered certificates shall not be valid unless made . . . by
the registered owner thereof in person or by his representative duly
authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated at the same time Central Bank Circular No. 769 which has the force
and effect of a law, resulting in the nullity of the transfer (People vs. Que Po
Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it
could assign or transfer to Traders Royal Bank and which the latter can
register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must
upheld, as the respondent Filriters and Philfinance, though separate
corporate entities on paper, have used their corporate fiction to defraud TRB
into purchasing the subject CBCI, which purchase now is refused registration
by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have
the same corporate officers, if the principle of piercing the veil of corporate
entity were to be applied in this case, then TRB's payment to Philfinance for
the CBCI purchased by it could just as well be considered a payment to
Filriters, the registered owner of the CBCI as to bar the latter from claiming,
as it has, that it never received any payment for that CBCI sold and that said
CBCI was sold without its authority.
xxx

xxx

xxx

We respectfully submit that, considering that the Court of Appeals has held
that the CBCI was merely borrowed by Philfinance from Filriters, a sister
corporation, to guarantee its (Philfinance's) financing operations, if it were
to be consistent therewith, on the issued raised by TRB that there was a
piercing a veil of corporate entity, the Court of Appeals should have ruled
that such veil of corporate entity was, in fact, pierced, and the payment by
TRB to Philfinance should be construed as payment to Filriters. 17
We disagree with Petitioner.

43 | c o r p o c a s e s 2 1 - 4 0

Petitioner cannot put up the excuse of piercing the veil of corporate entity,
as this merely an equitable remedy, and may be awarded only in cases
when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime or where a corporation is a mere alter
ego or business conduit of a person. 18
Peiercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that
ordinarily, they could be subject to, or distinguished one corporation from a
seemingly separate one, were it not for the existing corporate fiction. But to
do this, the court must be sure that the corporate fiction was misused, to
such an extent that injustice, fraud, or crime was committed upon another,
disregarding, thus, his, her, or its rights. It is the protection of the interests
of innocent third persons dealing with the corporate entity which the law
aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains,
despite the petitioners insistence on the contrary. For one, other than the
allegation that Filriters is 90% owned by Philfinance, and the identity of one
shall be maintained as to the other, there is nothing else which could lead
the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a
corporation is an entity with a juridical personality separate from its
stockholders and from other corporations may be disregarded, 19 in the
absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to
disregard the independent corporate status of Filriters. In Liddel & Co., Inc.
vs. Collector of Internal Revenue, 20 the mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock
of a corporation is not of itself a sufficient reason for disregarding the fiction
of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness
from Philfinance.
On its face the subject certificates states that it is registered in the name of
Filriters. This should have put the petitioner on notice, and prompted it to
inquire from Filriters as to Philfinance's title over the same or its authority to
assign the certificate. As it is, there is no showing to the effect that
petitioner had any dealings whatsoever with Filriters, nor did it make
inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in
the owner's name at any office of the Bank or any agency duly authorized
by the Bank, and such registration is noted hereon. After such registration
no transfer thereof shall be valid unless made at said office (where the
Certificates has been registered) by the registered owner hereof, in person,
or by his attorney, duly authorized in writing and similarly noted hereon and
upon payment of a nominal transfer fee which may be required, a new
Certificate shall be issued to the transferee of the registered owner thereof.
The bank or any agency duly authorized by the Bank may deem and treat
the bearer of this Certificate, or if this Certificate is registered as herein
authorized, the person in whose name the same is registered as the

44 | c o r p o c a s e s 2 1 - 4 0

absolute owner of this Certificate, for the purpose of receiving payment


hereof, or on account hereof, and for all other purpose whether or not this
Certificate shall be overdue.
This is notice to petitioner to secure from Filriters a written authorization for
the transfer or to require Philfinance to submit such an authorization from
Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No.
D891. The fact that a non-owner was disposing of the registered CBCI
owned by another entity was a good reason for petitioner to verify of inquire
as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990
21, known as the Rules and Regulations Governing Central Bank Certificates
of Indebtedness, Section 3, Article V of which provides that:
Sec. 3.
Assignment of Registered Certificates. Assignment of
registered certificates shall not be valid unless made at the office where the
same have been issued and registered or at the Securities Servicing
Department, Central Bank of the Philippines, and by the registered owner
thereof, in person or by his representative, duly authorized in writing. For
this purpose, the transferee may be designated as the representative of the
registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank
Circular 769, and its requirements. An entity which deals with corporate
agents within circumstances showing that the agents are acting in excess of
corporate authority, may not hold the corporation liable. 22 This is only fair,
as everyone must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and
good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said.
Central Bank Circular, which for all intents, is considered part of the law. As
found by the courts a quo, Alfredo O. Banaria, who had signed the deed of
assignment from Filriters to Philfinance, purportedly for and in favor of
Filriters, did not have the necessary written authorization from the Board of
Directors of Filriters to act for the latter. As it is, the sale from Filriters to
Philfinance was fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause, for then,
Philfinance had no title over the subject certificate to convey the Traders
Royal Bank. Nemo potest nisi quod de jure potest no man can do
anything except what he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its
legal and capital reserves, which are required by law 24 to be maintained at
a mandated level. This was pointed out by Elias Garcia, Manager-in-Charge
of respondent Filriters, in his testimony given before the court on May 30,
1986.
Q
Do you know this Central Bank Certificate of Indebtedness, in short,
CBCI No. D891 in the face value of P5000,000.00 subject of this case?
A

Yes, sir.

Why do you know this?

45 | c o r p o c a s e s 2 1 - 4 0

A
Well, this was CBCI of the company sought to be examined by the
Insurance Commission sometime in early 1981 and this CBCI No. 891 was
among the CBCI's that were found to be missing.
Q
Let me take you back further before 1981. Did you have the
knowledge of this CBCI No. 891 before 1981?
A
Yes, sir. This CBCI is an investment of Filriters required by the
Insurance Commission as legal reserve of the company.
Q

Legal reserve for the purpose of what?

A
Well, you see, the Insurance companies are required to put up legal
reserves under Section 213 of the Insurance Code equivalent to 40 percent
of the premiums receipt and further, the Insurance Commission requires this
reserve to be invested preferably in government securities or government
binds. This is how this CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating
requirements of the law. Thus, the anauthorized use or distribution of
same by a corporate officer of Filriters cannot bind the said corporation,
without the approval of its Board of Directors, and the maintenance of
required reserve fund.

the
the
not
the

Consequently, the title of Filriters over the subject certificate of


indebtedness must be upheld over the claimed interest of Traders Royal
Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from
dated January 29, 1990 is hereby AFFIRMED.
SO ORDERED.

[G.R. No. 100812. June 25, 1999]


FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and
SPOUSES GREGORIO and LIBRADA MANUEL, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court,
seeks to annul the decision[1] of the Court of Appeals in C.A. G.R. CV No.
10014 affirming the decision rendered by Branch 135, Regional Trial Court of
Makati, Metro Manila. The procedural antecedents of this petition are as
follows:
On January 23, 1985, petitioner filed a complaint[2] against private
respondents to recover three thousand four hundred twelve and six
centavos (P3,412.06), representing the balance of the jeep body purchased
by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid
balance on the cost of repair of the vehicle; and six thousand pesos
(P6,000.00) for cost of suit and attorneys fees.[3] To the original balance on
the price of jeep body were added the costs of repair.[4] In their answer,

46 | c o r p o c a s e s 2 1 - 4 0

private respondents interposed a counterclaim for unpaid legal services by


Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was
not paid by the incorporators, directors and officers of the petitioner. The
trial court decided the case on June 26, 1985, in favor of petitioner in regard
to the petitioners claim for money, but also allowed the counter-claim of
private respondents. Both parties appealed. On April 15, 1991, the Court of
Appeals sustained the trial courts decision.[5] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim
which private respondents filed together with their answer to petitioners
complaint for a sum of money. Private respondent Gregorio Manuel alleged
as an affirmative defense that, while he was petitioners Assistant Legal
Officer, he represented members of the Francisco family in the intestate
estate proceedings of the late Benita Trinidad. However, even after the
termination of the proceedings, his services were not paid. Said family
members, he said, were also incorporators, directors and officers of
petitioner.
Hence to counter petitioners collection suit, he filed a
permissive counterclaim for the unpaid attorneys fees.[6]
For failure of petitioner to answer the counterclaim, the trial court declared
petitioner in default on this score, and evidence ex-parte was presented on
the counterclaim. The trial court ruled in favor of private respondents and
found that Gregorio Manuel indeed rendered legal services to the Francisco
family in Special Proceedings Number 7803- In the Matter of Intestate
Estate of Benita Trinidad. Said court also found that his legal services were
not compensated despite repeated demands, and thus ordered petitioner to
pay him the amount of fifty thousand (P50,000.00) pesos.[7]
Dissatisfied with the trial courts order, petitioner elevated the matter to the
Court of Appeals, posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL
AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE
DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE
ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE
CLAIM OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT
TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.[8]
Petitioner contended that the trial court did not acquire jurisdiction over it
because no summons was validly served on it together with the copy of the
answer containing the permissive counterclaim.
Further, petitioner
questions the propriety of its being made party to the case because it was
not the real party in interest but the individual members of the Francisco
family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of
Appeals held that a counterclaim must be answered in ten (10) days,
pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it

47 | c o r p o c a s e s 2 1 - 4 0

state in the Rules that a party still needed to be summoned anew if a


counterclaim was set up against him. Failure to serve summons, said
respondent court, did not effectively negate trial courts jurisdiction over
petitioner in the matter of the counterclaim. It likewise pointed out that
there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G.
Alvarez, received the copy of the answer with counterclaim two (2) days
prior to his withdrawal as counsel for petitioner. Moreover when petitioners
new counsel, Jose N. Aquino, entered his appearance, three (3) days still
remained within the period to file an answer to the counterclaim. Having
failed to answer, petitioner was correctly considered in default by the trial
court.[9] Even assuming that the trial court acquired no jurisdiction over
petitioner, respondent court also said, but having filed a motion for
reconsideration seeking relief from the said order of default, petitioner was
estopped from further questioning the trial courts jurisdiction.[10]
On the question of its liability for attorneys fees owing to private
respondent Gregorio Manuel, petitioner argued that being a corporation, it
should not be held liable therefor because these fees were owed by the
incorporators, directors and officers of the corporation in their personal
capacity as heirs of Benita Trinidad. Petitioner stressed that the personality
of the corporation, vis--vis the individual persons who hired the services of
private respondent, is separate and distinct,[11] hence, the liability of said
individuals did not become an obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created
by law for convenience and to promote justice. Accordingly, this separate
personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for found (sic)
illegality, or to work an injustice, or where necessary to achieve equity or
when necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs.
Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons
and the legal fiction of a separate corporate personality is not a shield for
the commission of injustice and inequity. (Chemplex Philippines, Inc. vs.
Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff-appellant Francisco
Motors Corporation is composed of the heirs of the late Benita Trinidad as
directors and incorporators for whom defendant Gregorio Manuel rendered
legal services in the intestate estate case of their deceased mother.
Considering the aforestated principles and circumstances established in this
case, equity and justice demands plaintiff-appellants veil of corporate
identity should be pierced and the defendant be compensated for legal
services rendered to the heirs, who are directors of the plaintiff-appellant
corporation.[12]
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING
THE VEIL OF CORPORATE ENTITY.
II.

48 | c o r p o c a s e s 2 1 - 4 0

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE


JURISDICTION
OVER
PETITIONER
WITH
RESPECT
TO
COUNTERCLAIM.[13]

WAS
THE

Petitioner submits that respondent court should not have resorted to


piercing the veil of corporate fiction because the transaction concerned only
respondent Gregorio Manuel and the heirs of the late Benita Trinidad.
According to petitioner, there was no cause of action by said respondent
against petitioner; personal concerns of the heirs should be distinguished
from those involving corporate affairs. Petitioner further contends that the
present case does not fall among the instances wherein the courts may look
beyond the distinct personality of a corporation. According to petitioner, the
services for which respondent Gregorio Manuel seeks to collect fees from
petitioner are personal in nature. Hence, it avers the heirs should have
been sued in their personal capacity, and not involve the corporation.[14]
With regard to the permissive counterclaim, petitioner also insists that there
was no proper service of the answer containing the permissive
counterclaim. It claims that the counterclaim is a separate case which can
only be properly served upon the opposing party through summons. Further
petitioner states that by nature, a permissive counterclaim is one which
does not arise out of nor is necessarily connected with the subject of the
opposing partys claim. Petitioner avers that since there was no service of
summons upon it with regard to the counterclaim, then the court did not
acquire jurisdiction over petitioner. Since a counterclaim is considered an
action independent from the answer, according to petitioner, then in effect
there should be two simultaneous actions between the same parties: each
party is at the same time both plaintiff and defendant with respect to the
other,[15] requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by
petitioner. They defend the propriety of piercing the veil of corporate
fiction, but deny the necessity of serving separate summonses on petitioner
in regard to their permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts found that
respondent Gregorio Manuel was employed as assistant legal officer of
petitioner corporation, and that his services were solicited by the
incorporators, directors and members to handle and represent them in
Special Proceedings No. 7803, concerning the Intestate Estate of the late
Benita Trinidad. They assert that the members of petitioner corporation
took advantage of their positions by not compensating respondent Gregorio
Manuel after the termination of the estate proceedings despite his repeated
demands for payment of his services. They cite findings of the appellate
court that support piercing the veil of corporate identity in this particular
case. They assert that the corporate veil may be disregarded when it is
used to defeat public convenience, justify wrong, protect fraud, and defend
crime. It may also be pierced, according to them, where the corporate
entity is being used as an alter ego, adjunct, or business conduit for the sole
benefit of the stockholders or of another corporate entity.
In these
instances, they aver, the corporation should be treated merely as an
association of individual persons.[16]
Private respondents dispute petitioners claim that its right to due process
was violated when respondents counterclaim was granted due course,
although no summons was served upon it. They claim that no provision in
the Rules of Court requires service of summons upon a defendant in a
counterclaim. Private respondents argue that when the petitioner filed its

49 | c o r p o c a s e s 2 1 - 4 0

complaint before the trial court it voluntarily submitted itself to the


jurisdiction of the court. As a consequence, the issuance of summons on it
was no longer necessary. Private respondents say they served a copy of
their answer with affirmative defenses and counterclaim on petitioners
former counsel, Nicanor G. Alvarez. While petitioner would have the Court
believe that respondents served said copy upon Alvarez after he had
withdrawn his appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records disclose that the
answer was received two (2) days before the former counsel for petitioner
withdrew his appearance, according to private respondents. They maintain
that the present petition is but a form of dilatory appeal, to set off
petitioners obligations to the respondents by running up more interest it
could recover from them. Private respondents therefore claim damages
against petitioner.[17]
To resolve the issues in this case, we must first determine the propriety of
piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a separate
personality distinct from its stockholders and from other corporations to
which it may be connected.[18] However, under the doctrine of piercing the
veil of corporate entity, the corporations separate juridical personality may
be disregarded, for example, when the corporate identity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Also,
where the corporation is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be ignored.
[19] In these circumstances, the courts will treat the corporation as a mere
aggrupation of persons and the liability will directly attach to them. The
legal fiction of a separate corporate personality in those cited instances, for
reasons of public policy and in the interest of justice, will be justifiably set
aside.
In our view, however, given the facts and circumstances of this case, the
doctrine of piercing the corporate veil has no relevant application here.
Respondent court erred in permitting the trial courts resort to this doctrine.
The rationale behind piercing a corporations identity in a given case is to
remove the barrier between the corporation from the persons comprising it
to thwart the fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities.
However, in the case at bar, instead of holding certain individuals or persons
responsible for an alleged corporate act, the situation has been reversed. It
is the petitioner as a corporation which is being ordered to answer for the
personal liability of certain individual directors, officers and incorporators
concerned. Hence, it appears to us that the doctrine has been turned
upside down because of its erroneous invocation. Note that according to
private respondent Gregorio Manuel his services were solicited as counsel
for members of the Francisco family to represent them in the intestate
proceedings over Benita Trinidads estate. These estate proceedings did not
involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco
family members but also from petitioner corporation on the claims that its
management had requested his services and he acceded thereto as an
employee of petitioner from whom it could be deduced he was also
receiving a salary. His move to recover unpaid legal fees through a
counterclaim against Francisco Motors Corporation, to offset the unpaid

50 | c o r p o c a s e s 2 1 - 4 0

balance of the purchase and repair of a jeep body could only result from an
obvious misapprehension that petitioners corporate assets could be used to
answer for the liabilities of its individual directors, officers, and
incorporators.
Such result if permitted could easily prejudice the
corporation, its own creditors, and even other stockholders; hence, clearly
inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever
obligation said incorporators, directors and officers of the corporation had
incurred, it was incurred in their personal capacity. When directors and
officers of a corporation are unable to compensate a party for a personal
obligation, it is far-fetched to allege that the corporation is perpetuating
fraud or promoting injustice, and be thereby held liable therefor by piercing
its corporate veil. While there are no hard and fast rules on disregarding
separate corporate identity, we must always be mindful of its function and
purpose. A court should be careful in assessing the milieu where the
doctrine of piercing the corporate veil may be applied. Otherwise an
injustice, although unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators, directors
and officers in their personal capacities ought to be kept separate in this
case.
The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed against
the corporation without violating basic principles governing corporations.
Moreover, every action including a counterclaim must be prosecuted or
defended in the name of the real party in interest.[20] It is plainly an error
to lay the claim for legal fees of private respondent Gregorio Manuel at the
door of petitioner (FMC) rather than individual members of the Francisco
family.
However, with regard to the procedural issue raised by petitioners
allegation, that it needed to be summoned anew in order for the court to
acquire jurisdiction over it, we agree with respondent courts view to the
contrary.
Section 4, Rule 11 of the Rules of Court provides that a
counterclaim or cross-claim must be answered within ten (10) days from
service. Nothing in the Rules of Court says that summons should first be
served on the defendant before an answer to counterclaim must be made.
The purpose of a summons is to enable the court to acquire jurisdiction over
the person of the defendant. Although a counterclaim is treated as an
entirely distinct and independent action, the defendant in the counterclaim,
being the plaintiff in the original complaint, has already submitted to the
jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules of Civil
Procedure,[21] if a defendant (herein petitioner) fails to answer the
counterclaim, then upon motion of plaintiff, the defendant may be declared
in default. This is what happened to petitioner in this case, and this Court
finds no procedural error in the disposition of the appellate court on this
particular issue.
Moreover, as noted by the respondent court, when
petitioner filed its motion seeking to set aside the order of default, in effect
it submitted itself to the jurisdiction of the court. As well said by respondent
court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he
records show that upon its request, plaintiff-appellant was granted time to
file a motion for reconsideration of the disputed decision. Plaintiff-appellant
did file its motion for reconsideration to set aside the order of default and
the judgment rendered on the counterclaim.

51 | c o r p o c a s e s 2 1 - 4 0

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on


the counterclaim, as it vigorously insists, plaintiff-appellant is considered to
have submitted to the courts jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA
447). A party is estopped from assailing the jurisdiction of a court after
voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella, 159
SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction.
(Balais vs. Balais, 159 SCRA 37).[22]
WHEREFORE, the petition is hereby GRANTED and the assailed decision is
hereby REVERSED insofar only as it held Francisco Motors Corporation liable
for the legal obligation owing to private respondent Gregorio Manuel; but
this decision is without prejudice to his filing the proper suit against the
concerned members of the Francisco family in their personal capacity. No
pronouncement as to costs.
SO ORDERED.
[G.R. No. 125986. January 28, 1999]
LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners, vs.
HONORABLE COURT OF APPEALS, JAMES BUILDER CONSTRUCTION and/or
JAIME T. BRAVO, respondents.
DECISION
MARTINEZ, J.:
This petition for review assails the decision of the respondent Court of
Appeals dated March 15, 1996,[1] which affirmed with modification the
judgment of default rendered by the Regional Trial Court of Muntinlupa,
Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed for in
the complaint of private respondent James Builder Construction and/or Jaime
T. Bravo.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6
hectare property in Sucat, Muntinlupa, which was occupied by squatters.
Petitioner Posadas entered into negotiations with private respondent Jaime
T. Bravo regarding the development of the said property into a residential
subdivision.
On May 3, 1989, she authorized private respondent to
negotiate with the squatters to leave the said property. With a written
authorization, respondent Bravo buckled down to work and started
negotiations with the squatters.
Meanwhile, some seven (7) months later, on December 11, 1989, petitioner
Posadas and her two (2) children, through a Deed of Assignment, assigned
the said property to petitioner Luxuria Homes, Inc., purportedly for
organizational and tax avoidance purposes. Respondent Bravo signed as
one of the witnesses to the execution of the Deed of Assignment and the
Articles of Incorporation of petitioner Luxuria Homes, Inc.
Then sometime in 1992, the harmonious and congenial relationship of
petitioner Posadas and respondent Bravo turned sour when the former
supposedly could not accept the management contracts to develop the 1.6
hectare property into a residential subdivision, the latter was proposing. In
retaliation, respondent Bravo demanded payment for services rendered in
connection with the development of the land. In his statement of account

52 | c o r p o c a s e s 2 1 - 4 0

dated 21 August 1991[2] respondent demanded the payment of


P1,708,489.00 for various services rendered, i.e., relocation of squatters,
preparation of the architectural design and site development plan, survey
and fencing.
Petitioner Posadas refused to pay the amount demanded.
Thus, in
September 1992, private respondents James Builder Construction and Jaime
T. Bravo instituted a complaint for specific performance before the trial court
against petitioners Posadas and Luxuria Homes, Inc. Private respondents
alleged therein that petitioner Posadas asked them to clear the subject
parcel of land of squatters for a fee of P1,100,000.00 for which they were
partially paid the amount of P461,511.50, leaving a balance of P638,488.50.
They were also supposedly asked to prepare a site development plan and an
architectural design for a contract price of P450,000.00 for which they were
partially paid the amount of P25,000.00, leaving a balance of P425,000.00.
And in anticipation of the signing of the land development contract, they
had to construct a bunkhouse and warehouse on the property which
amounted to P300,000.00, and a hollow blocks factory for P60,000.00.
Private respondents also claimed that petitioner Posadas agreed that private
respondents will develop the land into a first class subdivision thru a
management contract and that petitioner Posadas is unjustly refusing to
comply with her obligation to finalize the said management contract.
The prayer in the complaint of the private respondents before the trial court
reads as follows:
WHEREFORE, premises considered, it is respectfully prayed of this
Honorable Court that after hearing/trial judgment be rendered ordering
defendant to:
a) Comply with its obligation to deliver/finalize Management Contract of its
land in Sucat, Muntinlupa, Metro Manila and to pay plaintiff its balance in
the amount of P1,708,489.00;
b)
Pay plaintiff moral and exemplary damages in the amount of
P500,000.00;
c)
Pay plaintiff actual damages in the amount of P500,000.00
(Bunkhouse/warehouse P300,000.00, Hollow-block factory P60,000.00,
lumber, cement, etc., P120,000.00, guard P20,000.00);
d) Pay plaintiff attorneys fee of P50,000 plus P700 per appearance in court
and 5% of that which may be awarded by the court to plaintiff re its
monetary claims;
e) Pay cost of this suit.[3]
On September 27, 1993, the trial court declared petitioner Posadas in
default and allowed the private respondents to present their evidence exparte. On March 8, 1994, it ordered petitioner Posadas, jointly and in
solidum with petitioner Luxuria Homes, Inc., to pay private respondents as
follows:
1. x x x the balance of the payment for the various services performed by
Plaintiff with respect to the land covered by TCT NO. 167895 previously No.
158290 in the total amount of P1,708,489.00.

53 | c o r p o c a s e s 2 1 - 4 0

2.
x x x actual damages incurred for the construction of the
warehouses/bunks, and for the materials used in the total sum of
P1,500,000.00.
3. Moral and exemplary damages of P500,000.00.
4. Attorneys fee of P50,000.00.
5. And cost of this proceedings.
Defendant Aida Posadas as the Representative of the Corporation Luxuria
Homes, Incorporated, is further directed to execute the management
contract she committed to do, also in consideration of the various
undertakings that Plaintiff rendered for her.[4]
Aggrieved by the aforecited decision, petitioners appealed to respondent
Court of Appeals, which, as aforestated, affirmed with modification the
decision of the trial court. The appellate court deleted the award of moral
damages on the ground that respondent James Builder Construction is a
corporation and hence could not experience physical suffering and mental
anguish. It also reduced the award of exemplary damages. The dispositive
portion of the decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with the
modification that the award of moral damages is ordered deleted and the
award of exemplary damages to the plaintiffs-appellee should only be in the
amount of FIFTY THOUSAND (P50,000.00) PESOS.[5]
Petitioners motion for reconsideration was denied, prompting the filing of
this petition for review before this Court.
On January 15, 1997, the Third Division of this Court denied due course to
this petition for failing to show convincingly any reversible error on the part
of the Court of Appeals. This Court however deleted the grant of exemplary
damages and attorneys fees. The Court also reduced the trial courts
award of actual damages from P1,500,000.00 to P500,000.00 reasoning that
the grant should not exceed the amount prayed for in the complaint. In the
prayer in the complaint respondents asked for actual damages in the
amount of P500,000.00 only.
Still feeling aggrieved with the resolution of this Court, petitioners filed a
motion for reconsideration. On March 17, 1997, this Court found merit in
the petitioners motion for reconsideration and reinstated this petition for
review.
From their petition for review and motion for reconsideration before this
Court, we now synthesize the issues as follows:
1. Were private respondents able to present ex-parte sufficient evidence to
substantiate the allegations in their complaint and entitle them to their
prayers?
2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents
for the transactions supposedly entered into between petitioner Posadas
and private respondents?

54 | c o r p o c a s e s 2 1 - 4 0

3. Can petitioners be compelled to enter into a management contract with


private respondents?
Petitioners who were declared in default assert that the private respondents
who presented their evidence ex-parte nonetheless utterly failed to
substantiate the allegations in their complaint and as such cannot be
entitled to the reliefs prayed for.
A perusal of the record shows that petitioner
respondents Bravo to render various services for the
the property as shown by vouchers evidencing
petitioner Posadas to respondents Bravo for
architectural design, survey and fencing.

Posadas contracted
initial development of
payments made by
squatter relocation,

Respondents prepared the architectural design, site development plan and


survey in connection with petitioner Posadas application with the Housing
and Land Regulatory Board (HLRUB) for the issuance of the Development
Permit, Preliminary Approval and Locational Clearance.[6] Petitioner
benefited from said services as the Development Permit and the Locational
Clearance were eventually issued by the HLURB in her favor. Petitioner
Posadas is therefore liable to pay for these services rendered by
respondents. The contract price for the survey of the land is P140,000.00.
Petitioner made partial payments totaling P130,000.00 leaving a payable
balance of P10,000.00.
In his testimony,[7] he alleged that the agreed price for the preparation of
the site development plan is P500,000.00 and that the preparation of the
architectural designs is for P450,000, or a total of P950,000.00 for the two
contracts. In his complaint however, respondent Bravo alleged that he was
asked to prepare the site development plan and the architectural designs x
x x for a contract price of P450,000.00 x x x.[8] The discrepancy or
inconsistency was never reconciled and clarified.
We reiterate that we cannot award an amount higher than what was claimed
in the complaint. Consequently for the preparation of both the architectural
design and site development plan, respondent is entitled to the amount of
P450,000.00 less partial payments made in the amount of P25,000.00. In
Policarpio v. RTC of Quezon City,[9] it was held that a court is bereft of
jurisdiction to award, in a judgment by default, a relief other than that
specifically prayed for in the complaint.
As regards the contracts for the ejectment of squatters and fencing, we
believe however that respondents failed to show proof that they actually
fulfilled their commitments therein. Aside from the bare testimony of
respondent Bravo, no other evidence was presented to show that all the
squatter were ejected from the property. Respondent Bravo failed to show
how many shanties or structures were actually occupying the property
before he entered the same, to serve as basis for concluding whether the
task was finished or not.
His testimony alone that he successfully
negotiated for the ejectment of all the squatters from the property will not
suffice.
Likewise, in the case of fencing, there is no proof that it was accomplished
as alleged. Respondent Bravo claims that he finished sixty percent (60%) of
the fencing project but he failed to present evidence showing the area
sought to be fenced and the actual area fenced by him. We therefore have
no basis to determining the veracity respondents allegations. We cannot
assume that the said services rendered for it will be unfair to require

55 | c o r p o c a s e s 2 1 - 4 0

petitioner to pay the full amount claimed in case the respondents


obligations were not completely fulfilled.
For respondents failure to show proof of accomplishment of the aforesaid
services, their claims cannot be granted. In P.T. Cerna Corp. v. Court of
Appeals,[10] we ruled that in civil cases, the burden of proof rests upon the
party who, as determined by the pleadings or the nature of the case, asserts
the affirmative of an issue. In this case the burden lies on the complainant,
who is duty bound to prove the allegations in the complaint. As this Court
has held, he who alleges a fact has the burden of proving it and A MERE
ALLEGATION IS NOT EVIDENCE.
And the rules do not change even if the defendant is declared in default. In
the leading case of Lopez v. Mendezona,[11] this Court ruled that after entry
of judgment in default against a defendant who has neither appeared nor
answered, and before final judgment in favor of the plaintiff, the latter must
establish by competent evidence all the material allegations of his
complaint upon which he bases his prayer for relief. In De los Santos v. De
la Cruz[12] this Court declared that a judgment by default against a
defendant does not imply a waiver of rights except that of being heard and
of presenting evidence in his favor. It does not imply admission by the
defendant of the facts and causes of action of the plaintiff, because the
codal section requires the latter to adduce his evidence in support of his
allegations as an indispensable condition before final judgment could be
given in his favor. Nor could it be interpreted as an admission by the
defendant that the plaintiffs causes of action finds support in the law or
that the latter is entitled to the relief prayed for.
We explained the rule in judgments by default in Pascua v. Florendo,[13]
where we said that nowhere is it stated that the complainants are
automatically entitled to the relief prayed for, once the defendants are
declared in default. Favorable relief can be granted only after the court has
ascertained that the evidence offered and the facts proven by the
presenting party warrant the grant of the same. Otherwise it would be
meaningless to require presentation of evidence if everytime the other party
is declared in default, a decision would automatically be rendered in favor of
the non-defaulting party and exactly according to the tenor of his prayer. In
Lim Tanhu v. Ramolete[14] we elaborated and said that a defaulted
defendant is not actually thrown out of court. The rules see to it that any
judgment against him must be in accordance with law. The evidence to
support the plaintiffs cause is, of course, presented in his absence, but the
court is not supposed to admit that which is basically incompetent.
Although the defendant would not be in a position to object, elementary
justice requires that only legal evidence should be considered against him.
If the evidence presented should not be sufficient to justify a judgment for
the plaintiff, the complaint must be dismissed. And if an unfavorable
judgment should be justifiable, it cannot exceed the amount or be different
in kind from what is prayed for in the complaint.
The prayer for actual damages in the amount of P500,000.00, supposedly
for the bunkhouse/warehouse, hollow-block factory, lumber, cement, guard,
etc., which the trial court granted and even increased to P1,500,000.00, and
which this Court would have rightly reduced to the amount prayed for in the
complaint, was not established, as shown upon further review of the record.
No receipts or vouchers were presented by private respondents to show that
they actually spent the amount. In Salas v. Court of Appeals,[15] we said
that the burden of proof of the damages suffered is on the party claiming
the same. It his duty to present evidence to support his claim for actual

56 | c o r p o c a s e s 2 1 - 4 0

damages. If he failed to do so, he has only himself to blame if no award for


actual damages is handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of
Appeals,[16] basic is the rule that to recover actual damages, the amount of
loss must not only be capable of proof but must actually be proven with
reasonable degree of certainty, premised upon competent proof or best
evidence obtainable of the actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc., was a party to
the transactions entered into by petitioner Posadas and private respondents
and thus could be held jointly and severally with petitioner Posadas. Private
respondents contend that petitioner Posadas surreptitiously formed Luxuria
Homes, Inc., and transferred the subject parcel of land to it to evade
payment and defraud creditors, including private respondents.
This
allegation does not find support in the evidence on record.
On the contrary we hold that respondents Court of Appeals committed a
reversible error when it upheld the factual finding of the trial court that
petitioners liability was aggravated by the fact that Luxuria Homes, Inc.,
was formed by petitioner Posadas after demand for payment had been
made, evidently for her to evade payment of her obligation, thereby
showing that the transfer of her property to Luxuria Homes, Inc., was in
fraud of creditors.
We easily glean from the record that private respondents sent demand
letters on 21 August 1991 and 14 September 1991, or more than a year and
a half after the execution of the Deed of Assignment on 11 December 1989,
and the issuance of the Articles of Incorporation of petitioner Luxuria Homes
on 26 January 1990.
And, the transfer was made at the time the
relationship between petitioner Posadas and private respondents was
supposedly very pleasant. In fact the Deed of Assignment dated 11
December 1989 and the Articles of Incorporation of Luxuria Homes, Inc.,
issued 26 January 1990 were both signed by respondent Bravo himself as
witness. It cannot be said then that the incorporation of petitioner Luxuria
Homes and the eventual transfer of the subject property to it were in fraud
of private respondent as such were done with the full knowledge of
respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of petitioner
Luxuria Homes, Inc., as erroneously stated by the lower court. The Articles
of Incorporation of petitioner Luxuria Homes, Inc., clearly show that
petitioner Posadas owns approximately 33% only of the capital stock.
Hence petitioner Posadas cannot be considered as an alter ego of petitioner
Luxuria Homes, Inc.
To disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot be
presumed. This is elementary. Thus in Bayer-Roxas v. Court of Appeals,[17]
we said that the separate personality of the corporation may be disregarded
only when the corporation is used as a cloak or cover for fraud or illegality,
or to work injustice, or where necessary for the protection of the creditors.
Accordingly in Del Rosario v. NLRC,[18] where the Philsa International
Placement and Services Corp. was organized and registered with the POEA
in 1981, several years before the complainant was filed a case in 1985, we
held that this cannot imply fraud.

57 | c o r p o c a s e s 2 1 - 4 0

Obviously in the instant case, private respondents failed to show proof that
petitioner Posadas acted in bad faith.
Consequently since private
respondents failed to show that petitioner Luxuria Homes, Inc., was a party
to any of the supposed transactions, not even to the agreement to negotiate
with and relocate the squatters, it cannot be held liable, nay jointly and in
solidum, to pay private respondents. In this case since it was petitioner
Aida M. Posadas who contracted respondent Bravo to render the subject
services, only she is liable to pay the amounts adjudged herein.
We now resolved the third and final issue. Private respondents urge the
court to compel petitioners to execute a management contract with them on
the basis of the authorization letter dated May 3, 1989. The full text of Exh
D reads:
I hereby certify that we have duly authorized the bearer, Engineer Bravo to
negotiate, in our behalf, the ejectment of squatters from our property of 1.6
hectares, more or less, in Sucat, Muntinlupa. This authority is extended to
him as the representatives of the Managers, under our agreement for them
to undertake the development of said area and the construction of housing
units intended to convert the land into a first class subdivision.
The aforecited document is nothing more than a to-whom-it-may-concern
authorization letter to negotiate with the squatters. Although it appears
that there was an agreement for the development of the area, there is no
showing that same was never perfected and finalized. Private respondents
presented in evidence only drafts of a proposed management contract with
petitioners handwritten marginal notes but the management contract was
not put in its final form. The reason why there was no final uncorrected
draft was because the parties could not agree on the stipulations of said
contract, which even the private respondents admitted as found by the trial
court.[19] As a consequence the management drafts submitted by the
private respondents should at best be considered as mere unaccepted
offers. We find no cogent reason, considering that the parties no longer are
in a harmonious relationship, for the execution of a contract to develop a
subdivision.
It is fundamental that there can be no contract in the true sense in the
absence of the element of agreement, or of mutual assent of the parties. To
compel petitioner Posadas, whether as representatives of petitioners Luxuria
Homes or in her personal capacity, to execute a management contract
under the terms and conditions of private respondents would be to violate
the principle of consensuality of contracts. In Philippine National bank v.
Court of Appeals,[20] we held that if the assent is wanting on the part of one
who contracts, his act has no more efficacy than if it had been done under
duress or by a person of unsound mind. In ordering petitioner Posadas to
execute a management contract with private respondents, the trial court in
effect is putting her under duress.
The parties are bound to fulfill the stipulations in a contract only upon its
perfection. At anytime prior to the perfection of a contract, unaccepted
offers and proposals remain as such and cannot be considered as binding
commitments; hence not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision
dated March 15, 1996, of respondent Honorable Court of Appeals and its
Resolution dated August 12, 1996, are MODIFIED ordering PETITIONER AIDA
M. POSADAS to pay PRIVATE RESPONDENTS the amount of P435,000.00 as
balance for the preparation of the architectural design, site development

58 | c o r p o c a s e s 2 1 - 4 0

plan and survey. All other claims of respondents are hereby DENIED for lack
of merit.
SO ORDERED
Adm. Matter No. R-181-P

July 31, 1987

ADELIO C. CRUZ, complainant,


vs.
QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents.
RESOLUTION

FERNAN, J.:
In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged Quiterio L.
Dalisay, Senior Deputy Sheriff of Manila, with "malfeasance in office, corrupt
practices and serious irregularities" allegedly committed as follows:
1.
Respondent sheriff attached and/or levied the money belonging to
complainant Cruz when he was not himself the judgment debtor in the final
judgment of NLRC NCR Case No. 8-12389-91 sought to be enforced but
rather the company known as "Qualitrans Limousine Service, Inc.," a duly
registered corporation; and,
2.
Respondent likewise caused the service of the alias writ of execution
upon complainant who is a resident of Pasay City, despite knowledge that
his territorial jurisdiction covers Manila only and does not extend to Pasay
City.
In his Comments, respondent Dalisay explained that when he garnished
complainant's cash deposit at the Philtrust bank, he was merely performing
a ministerial duty. While it is true that said writ was addressed to Qualitrans
Limousine Service, Inc., yet it is also a fact that complainant had executed
an affidavit before the Pasay City assistant fiscal stating that he is the
owner/president of said corporation and, because of that declaration, the
counsel for the plaintiff in the labor case advised him to serve notice of
garnishment on the Philtrust bank.
On November 12, 1984, this case was referred to the Executive Judge of the
Regional Trial Court of Manila for investigation, report and recommendation.
Prior to the termination of the proceedings, however, complainant executed
an affidavit of desistance stating that he is no longer interested in
prosecuting the case against respondent Dalisay and that it was just a
"misunderstanding" between them. Upon respondent's motion, the
Executive Judge issued an order dated May 29, 1986 recommending the
dismissal of the case.
It has been held that the desistance of complainant does not preclude the
taking of disciplinary action against respondent. Neither does it dissuade the
Court from imposing the appropriate corrective sanction. One who holds a
public position, especially an office directly connected with the
administration of justice and the execution of judgments, must at all times
be free from the appearance of impropriety.1

59 | c o r p o c a s e s 2 1 - 4 0

We hold that respondent's actuation in enforcing a judgment against


complainant who is not the judgment debtor in the case calls for disciplinary
action. Considering the ministerial nature of his duty in enforcing writs of
execution, what is incumbent upon him is to ensure that only that portion of
a decision ordained or decreed in the dispositive part should be the subject
of execution.2 No more, no less. That the title of the case specifically names
complainant as one of the respondents is of no moment as execution must
conform to that directed in the dispositive portion and not in the title of the
case.
The tenor of the NLRC judgment and the implementing writ is clear enough.
It directed Qualitrans Limousine Service, Inc. to reinstate the discharged
employees and pay them full backwages. Respondent, however, chose to
"pierce the veil of corporate entity" usurping a power belonging to the court
and assumed improvidently that since the complainant is the
owner/president of Qualitrans Limousine Service, Inc., they are one and the
same. It is a well-settled doctrine both in law and in equity that as a legal
entity, a corporation has a personality distinct and separate from its
individual stockholders or members. The mere fact that one is president of a
corporation does not render the property he owns or possesses the property
of the corporation, since the president, as individual, and the corporation
are separate entities.3
Anent the charge that respondent exceeded his territorial jurisdiction,
suffice it to say that the writ of execution sought to be implemented was
dated July 9, 1984, or prior to the issuance of Administrative Circular No. 12
which restrains a sheriff from enforcing a court writ outside his territorial
jurisdiction without first notifying in writing and seeking the assistance of
the sheriff of the place where execution shall take place.
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay
NEGLIGENT in the enforcement of the writ of execution in NLRC Case-No. 812389-91, and a fine equivalent to three [3] months salary is hereby
imposed with a stern warning that the commission of the same or similar
offense in the future will merit a heavier penalty. Let a copy of this
Resolution be filed in the personal record of the respondent.
SO ORDERED.
EN BANC
[G.R. No. L-20886. April 27, 1967.]
NATIONAL MARKETING CORPORATION (NAMARCO), Plaintiff-Appellant, v.
ASSOCIATED FINANCE COMPANY, INC. and FRANCISCO SYCIP, defendant,
FRANCISCO SYClP, Defendant-Appellee.
Tomas P. Matic, Jr. for plaintiff and Appellant.
Francisco Sycip on his behalf as defendant and appellee.
SYLLABUS
1.
CORPORATION;
STOCKHOLDERS;
LIABILITY
FOR
CORPORATE
OBLIGATIONS. A stockholder is guilty of fraud where, through false
representations, he succeeded in inducing another corporation to enter into
an exchange agreement with the corporation he represented and over

60 | c o r p o c a s e s 2 1 - 4 0

whose business he had absolute control knowing that the letter was in no
position to comply with the obligation it had assumed. Consequently, said
stockholder cannot now seek refuge behind the general principle that a
corporation has a personality distinct and separate from that of its
stockholders and that the latter are not personally liable for the corporate
obligations. Upon the facts proven, the court is justified in "piercing the veil
of corporate fiction" and in holding said stockholder personally liable, jointly
and severally with the corporation, for the sums of money adjudged in favor
of the aggrieved party.
2. ID.; WHEN MAY CORPORATE FICTION BE DISREGARDED. It is settled law
in this and other jurisdictions that when the corporation is the mere alter
ego of a person, the corporate fiction may be disregarded; the same being
true when the corporation is controlled, and its affairs are so conducted as
to make it merely an instrumentality, agency or conduit of another (Koppel
Phils. etc. v. Yatco etc., 43 Off. Gaz., No. 11, November, 1947; Yutivo Sons
etc. v. Court of Tax Appeals etc., 110 Phil., 751; promulgated on January 28,
1961.)
DECISION
DIZON, J.:
Appeal taken by the National Marketing Corporation hereinafter referred
to as NAMARCO, from the decision of the Court of First Instance of Manila in
Civil Case No. 45770 ordering the Associated Finance Company, Inc.
hereinafter referred to as the ASSOCIATED to pay the NAMARCO the sum
of P403,514.28, with legal interest thereon from the date of filing of the
action until fully paid, P80,702.26 as liquidated damages, P5,000.00 as
attorneys fees, plus costs, but dismissing the complaint insofar as
defendant Francisco Sycip was concerned, as well as the latters
counterclaim. The appear is only from that portion of the decision dismissing
the case as against Francisco Sycip.
On March 25, 1958, ASSOCIATED, a domestic corporation, through its
President, appellee Francisco Sycip, entered into an agreement to exchange
sugar with NAMARCO, represented by its then General Manager, Benjamin
Estrella, whereby the former would deliver to the latter 22,516 bags (each
weighing 100 pounds) of "Victorias" and/or "National" refined sugar in
exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil"
raw sugar belonging to NAMARCO, both agreeing to pay liquidated damages
equivalent to 20% of the contractual value of the sugar should either party
fail to comply with the terms and conditions stipulated (Exhibit A). Pursuant
thereto, on May 19, 1958, NAMARCO delivered to ASSOCIATED 7,732.71
bags of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As
ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victorias"
and/or "National" refined sugar agreed upon, latter, an January 12, 1959,
demanded in writing from the ASSOCIATED either (a) immediate delivery
thereof before January 20, or (b) payment of its equivalent cash value
amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through Sycip, offered to pay NAMARCO
the value of 22,516 bags of refined sugar at the rate of P15.30 per bag, but
the latter rejected the offer. Instead, on January 21 of the same year, it
demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30

61 | c o r p o c a s e s 2 1 - 4 0

per bag, amounting to P118,310.40, and of the 17,285.08 piculs of


"Pasumil" raw sugar at P16.50 per picul, amounting to P285,203.82, or a
total price of P403,514.28 for both kinds of sugar, based on the sugar
quotations (Exhibit H) as of March 20, 1958 the date when the exchange
agreement was entered into.
As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar
delivered to it, in spite of repeated demands therefore, NAMARCO instituted
the present action in the lower court to recover the sum of P403,514.28 in
payment of the raw sugar received by defendants from it; P80,702.86; as
liquidated damages; P10,000.00 as attorneys fees, expenses of litigation
and exemplary damages, with legal interest thereon from the filing of the
complaint until fully paid.
In their amended answer defendants, by way of affirmative defenses,
alleged that the correct value of the sugar delivered by NAMARCO to them
was P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and
not P403,514.58 as claimed by NAMARCO. As counterclaim they prayed for
the award of P500,000.00 as moral damages, P100,000.00 as exemplary
damages and P10,000.00 as attorneys fees.
After trial the court rendered the appealed judgment. The appeal was taken
to the Court of Appeals, but on January 15, 1963 the latter certified the case
to Us for final adjudication pursuant to sections 17 and 31 of the Judiciary
Act of 1948, as amended, the amount involved being more than
P200,000.00, exclusive of interests and costs.
The only issue to be resolved is whether, upon the facts found by the trial
court, which, in our opinion, are fully supported by the evidence
Francisco Sycip may be held liable, jointly and severally with his codefendant, for the sums of money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital stock of ASSOCIATED,
Sycip owned P60,000.00 worth of shares, while his wife the second
biggest stockholder owned P20,000.00 worth of shares; that the par value
of the subscribed capital stock of ASSOCIATED was only P105,000.00; that
negotiations that lead to the execution of the exchange agreement in
question were conducted exclusively by Sycip on behalf of ASSOCIATED;
that, as a matter of fact, in the course of his testimony, Sycip referred to
himself as the one who contracted or transacted the business in his
personal capacity, and asserted that the exchange agreement was his
personal contract; that it was Sycip who made personal representations and
gave assurances that ASSOCIATED was in actual possession of the 22,516
bags of "Victorias" and/or "National" refined sugar which the latter had
agreed to deliver to NAMARCO, and that the same was ready for delivery;
that, as a matter of fact, ASSOCIATED was at that time already insolvent;
that when NAMARCO made written demands upon ASSOCIATED to deliver
the 22,516 bags of refined sugar it was under obligation to deliver to the
former, ASSOCIATED and Sycip, instead of making delivery of the sugar,
offered to pay its value at the rate of P15.30 per bag a clear indication
that they did not have the sugar contracted for.
The foregoing facts, fully established by the evidence, can lead to no other
conclusion than that Sycip was guilty of fraud because through false
representations he succeeded in inducing NAMARCO to enter into the
aforesaid exchange agreement, with full knowledge, on his part of the fact
that ASSOCIATED whom he represented and over whose business and affairs
he had absolute control, was in no position to comply with the obligation it

62 | c o r p o c a s e s 2 1 - 4 0

had assumed. Consequently, he can not now seek refuge behind the general
principle that a corporation has a personality distinct and separate from that
of its stockholders and that the latter are not personally liable for the
corporate obligations. To the contrary, upon the proven facts, We feel
perfectly justified in "piercing the veil of corporate fiction" and in holding
Sycip personally liable, jointly and severally with his co-defendant, for the
sums of money adjudged in favor of appellant. It is settled law in this and
other jurisdictions that when the corporation is the mere alter ego of a
person, the corporate fiction may be disregarded; the same being true when
the corporation is controlled, and its affairs are so conducted as to make it
merely an instrumentality, agency or conduit of another (Koppel Phils. etc. v.
Yatco etc., 43 Off. Gaz. No. 11, November, 1947; Yutivo Sons etc. v. Court of
Tax Appeals etc., G.R. No. L-13203 promulgated on January 28, 1961.)
Wherefore, the decision appealed from is modified by sentencing defendantappellee Francisco Sycip to pay, jointly and severally with the Associated
Finance Company, Inc., the sums of money which the trial court sentenced
the latter to pay to the National Marketing Corporation, as follows: the sum
of FOUR HUNDRED THREE THOUSAND FIVE HUNDRED FOURTEEN P E S O S
AND TWENTY-EIGHT CENTAVOS (P403,514.28), with interest at the legal rate
from the date of the filing of the action until fully paid plus an additional
amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS AND EIGHTYSIX CENTAVOS (80,702.86) as liquidated damages and P5,000.00 as
attorneys fees and further to pay the costs. With costs.
G.R. No. L-41337 June 30, 1988
TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH
XVIII of the Court of First Instance of Manila, GRAPHIC PUBLISHING, INC., and
PHILIPPINE AMERICAN CAN DRUG COMPANY, respondents.
De Santos, Balgos & Perez Law Office for petitioner.
Araneta Mendoza & Papa Law Office for respondent Phil. American Drug
Company.

PARAS, J.:
This is a petition for certiorari, with prayer for preliminary injunction, to
annul and set aside the March 26, 1975 Order of the then Court of First
Instance of Manila, Branch XXIII, setting aside the sale of "Heidelberg"
cylinder press executed by the sheriff in favor of the herein petitioner, as
well as the levy on the said property, and ordering the sheriff to return the
said machinery to its owner, herein private respondent Philippine American
Drug Company.
Petitioner herein, doing business under the name and style of Anchor Supply
Co., sold on credit to herein private respondent Graphic Publishing, Inc.
(GRAPHIC for short) paper products amounting to P55,214.73. On December
20, 1972, GRAPHIC made partial payment by check to petitioner in the total
amount of P24,848.74; and on December 21, 1972, a promissory note was
executed to cover the balance of P30,365.99. In the said promissory note, it
was stipulated that the amount will be paid on monthly installments and
that failure to pay any installment would make the amount immediately
demandable with an interest of 12% per annum. On September 6, 1973, for

63 | c o r p o c a s e s 2 1 - 4 0

failure of GRAPHIC to pay any installment, petitioner filed with the then
Court of First Instance of Manila, Branch XXIII, presided over by herein
respondent judge, Civil Case No. 91857 for a Sum of Money (Rollo, pp. 3638). Respondent judge declared GRAPHIC in default for failure to file its
answer within the reglementary period and plaintiff (petitioner herein) was
allowed to present its evidence ex parte. In a Decision dated January 18,
1974 (Ibid., pp. 39-40), the trial court ordered GRAPHIC to pay the petitioner
the sum of P30,365.99 with 12% interest from March 30, 1973 until fully
paid, plus the costs of suit. On motion of petitioner, a writ of execution was
issued by respondent judge; but the aforestated writ having expired without
the sheriff finding any property of GRAPHIC, an alias writ of execution was
issued on July 2, 1974.
Pursuant to the said issued alias writ of execution, the executing sheriff
levied upon one (1) unit printing machine Identified as "Original Heidelberg
Cylinder Press" Type H 222, NR 78048, found in the premises of GRAPHIC. In
a Notice of Sale of Execution of Personal Property dated July 29, 1974, said
printing machine was scheduled for auction sale on July 26, 1974 at 10:00
o'clock at 14th St., Cor. Atlanta St., Port Area, Manila (lbid., p. 45); but in a
letter dated July 19, 1974, herein private respondent, Philippine American
Drug Company (PADCO for short) had informed the sheriff that the printing
machine is its property and not that of GRAPHIC, and accordingly, advised
the sheriff to cease and desist from carrying out the scheduled auction sale
on July 26, 1974. Notwithstanding the said letter, the sheriff proceeded with
the scheduled auction sale, sold the property to the petitioner, it being the
highest bidder, and issued a Certificate of Sale in favor of petitioner (Rollo,
p. 48). More than five (5) hours after the auction sale and the issuance of
the certificate of sale, PADCO filed an "Affidavit of Third Party Claim" with
the Office of the City Sheriff (Ibid., p. 47). Thereafter, on July 30,1974,
PADCO filed with the Court of First Instance of Manila, Branch XXIII, a Motion
to Nullify Sale on Execution (With Injunction) (Ibid., pp, 49-55), which was
opposed by the petitioner (Ibid., pp. 5668). Respondent judge, in an Order
dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The
decretal portion of the said order, reads:
WHEREFORE, the sale of the 'Heidelberg cylinder press executed by the
Sheriff in favor of the plaintiff as well as the levy on the said property is
hereby set aside and declared to be without any force and effect. The Sheriff
is ordered to return the said machinery to its owner, the Philippine American
Drug Co.
Petitioner filed a Motion For Reconsideration (Ibid., pp. 7093) and an
Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but in an Order
dated August 13, 1975, the same was denied for lack of merit (Ibid., p. 109).
Hence, the instant petition.
In a Resolution dated September 12, 1975, the Second Division of this Court
resolved to require the respondents to comment, and to issue a temporary
restraining order (Rollo, p. 111 ). After submission of the parties'
Memoranda, the case was submitted for decision in the Resolution of
November 28, 1975 (Ibid., p. 275).
Petitioner, to support its stand, raised two (2) issues, to wit:
I
THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT ACTED WITHOUT
JURISDICTION WHEN HE ACTED UPON THE MOTION OF PADCO, NOT ONLY

64 | c o r p o c a s e s 2 1 - 4 0

BECAUSE SECTION 17, RULE 39 OF THE RULES OF COURT WAS NOT


COMPLIED WITH, BUT ALSO BECAUSE THE CLAIMS OF PADCO WHICH WAS
NOT A PARTY TO THE CASE COULD NOT BE VENTILATED IN THE CASE
BEFORE HIM BUT IN INDEPENDENT PROCEEDING.
II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION WHEN HE
REFUSED TO PIERCE THE PADCO'S (IDENTITY) AND DESPITE THE
ABUNDANCE OF EVIDENCE CLEARLY SHOWING THAT PADCO WAS
CONVENIENTLY SHIELDING UNDER THE THEORY OF CORPORATE PETITION.
Petitioner contends that respondent judge gravely exceeded, if not, acted
without jurisdiction, in nullifying the sheriffs sale not only because Section
17, Rule 39 of the Rules of Court was not complied with, but more
importantly because PADCO could not have litigated its claim in the same
case, but in an independent civil proceeding.
This contention is well-taken.
In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA 355, 366-367
[1975]), this Court categorically ruled as follows:
In other words, constitution, Section 17 of Rule 39 of the Revised Rules of
Court, the rights of third-party claimants over certain properties levied upon
by the sheriff to satisfy the judgment should not be decided inthe action
where the third-party claims have been presented, but in the separate
action instituted by the claimants.
... Otherwise stated, the court issuing a writ of execution is supposed to
enforce the authority only over properties of the judgment debtor, and
should a third party appeal- to claim the property levied upon by the sheriff,
the procedure laid down by the Rules is that such claim should be the
subject of a separate and independent action.
xxx

xxx

xxx

... This rule is dictated by reasons of convenience, as "intervention is more


likely to inject confusion into the issues between the parties in the case . . .
with which the third-party claimant has nothing to do and thereby retard
instead of facilitate the prompt dispatch of the controversy which is the
underlying objective of the rules of pleading and practice." Besides,
intervention may not be permitted after trial has been concluded and a final
judgment rendered in the case.
However, the fact that petitioner questioned the jurisdiction of the court
during the initial hearing of the case but nevertheless actively participated
in the trial, bars it from questioning now the court's jurisdiction. A party who
voluntarily participated in the trial, like the herein petitioner, cannot later on
raise the issue of the court's lack of jurisdiction (Philippine National Bank vs.
Intermediate Appellate Court, 143 SCRA [1986]).
As to the second issue (the non-piercing of PADCO's corporate Identity) the
decision of respondent judge is as follows:
The plaintiff, however, contends that the controlling stockholders of the
Philippine American Drug Co. are also the same controlling stockholders of
the Graphic Publishing, Inc. and, therefore, the levy upon the said

65 | c o r p o c a s e s 2 1 - 4 0

machinery which was found in the premises occupied by the Graphic


Publishing, Inc. should be upheld. This contention cannot be sustained
because the two corporations were duly incorporated under the Corporation
Law and each of them has a juridical personality distinct and separate from
the other and the properties of one cannot be levied upon to satisfy the
obligation of the other. This legal preposition is elementary and
fundamental.
It is true that a corporation, upon coming into being, is invested by law with
a personality separate and distinct from that of the persons composing it as
well as from any other legal entity to which it may be related (Yutivo & Sons
Hardware Company vs. Court of Tax Appeals, 1 SCRA 160 [1961]; and Emilio
Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 [1965]). As a matter of fact, the
doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in
all cases which are within reason and the law (Villa Rey Transit, Inc. vs.
Ferrer, 25 SCRA 845 [1968]). However, this separate and distinct personality
is merely a fiction created by law for convenience and to promote justice
(Laguna Transportation Company vs. SSS, 107 Phil. 833 [1960]).
Accordingly, this separate personality of the corporation may be
disregarded, or the veil of corporate fiction pierced, in cases where it is used
as a cloak or cover for fraud or illegality, or to work an injustice, or where
necessary to achieve equity or when necessary for the protection of
creditors (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347 [1976]).
Corporations are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission of injustice
and inequity (Chenplex Philippines, Inc., et al. vs. Hon. Pamatian et al., 57
SCRA 408 (19741). Likewise, this is true when the corporation is merely an
adjunct, business conduit or alter ego of another corporation. In such case,
the fiction of separate and distinct corporation entities should be
disregarded (Commissioner of Internal Revenue vs. Norton & Harrison, 11
SCRA 714 [1964]).
In the instant case, petitioner's evidence established that PADCO was never
engaged in the printing business; that the board of directors and the officers
of GRAPHIC and PADCO were the same; and that PADCO holds 50% share of
stock of GRAPHIC. Petitioner likewise stressed that PADCO's own evidence
shows that the printing machine in question had been in the premises of
GRAPHIC since May, 1965, long before PADCO even acquired its alleged title
on July 11, 1966 from Capitol Publishing. That the said machine was
allegedly leased by PADCO to GRAPHIC on January 24, 1966, even before
PADCO purchased it from Capital Publishing on July 11, 1966, only serves to
show that PADCO's claim of ownership over the printing machine is not only
farce and sham but also unbelievable.
Considering the aforestated principles and the circumstances established in
this case, respondent judge should have pierced PADCO's veil of corporate
Identity.
Respondent PADCO argues that if respondent judge erred in not piercing the
veil of its corporate fiction, the error is merely an error of judgment and not
an error of jurisdiction correctable by appeal and not by certiorari.
To this argument of respondent, suffice it to say that the same is a mere
technicality. In the case of Rubio vs. Mariano (52 SCRA 338, 343 [1973]), this
Court ruled:

66 | c o r p o c a s e s 2 1 - 4 0

While We recognize the fact that these movants the MBTC, the Phillips
spouses, the Phillips corporation and the Hacienda Benito, Inc. did raise in
their respective answers the issue as to the propriety of the instant petition
for certiorari on the ground that the remedy should have been appeal within
the reglementary period, We considered such issue as a mere technicality
which would have accomplished nothing substantial except to deny to the
petitioner the right to litigate the matters he raised ...
Litigations should, as much as possible, be decided on their merits and not
on technicality (De las Alas vs. Court of Appeals, 83 SCRA 200, 216 [1978]).
Every party-litigant must be afforded the amplest opportunity for the proper
and just determination of his cause, free from the unacceptable plea of
technicalities (Heirs of Ceferino Morales vs. Court of Appeals, 67 SCRA 304,
310 [1975]).
PREMISES CONSIDERED, the March 26,1975 Order of the then Court of First
Instance of Manila, is ANNULLED and SET ASIDE, and the Temporary
Restraining Order issued is hereby made permanent.
SO ORDERED.
[G.R. No. 117416. December 8, 2000]
Avelina G. Ramoso, Renato B. Salvatierra, Benefrido M. Cruz, Leticia L.
Medina, Pelagio Pascual, Domingo P. Santiago, Amado S. Veloira, Concepcion
F. Blaylock, in their own behalf and in behalf of numerous other persons
similarly situated, Commercial Credit Corp. of North Manila, Commercial
Credit Corp. of Cagayan Valley, Commercial Credit Corp. of Olongapo City,
and Commercial Credit Corp. of Quezon City, petitioners, vs. Court of
Appeals, General Credit Corp. (Formerly Commercial Credit Corp.), CCC
Equity Corp., Resource and Finance Corp., Generoso G. Villanueva and
Leonardo B. Alejandrino, and Securities and Exchange Commission,
respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the decision[1] of the Court of
Appeals dated October 8, 1993, and its resolution[2] dated September 22,
1994 in CA G.R. SP No. 29225, which affirmed the Securities and Exchange
Commissions decision stating thus:
WHEREFORE, the appealed decision of the hearing officer in SEC Case No.
2581 is hereby MODIFIED as follows:
1. Piercing the veil of corporate fiction among GCC, CCC Equity and the
franchise companies - Commercial Credit Corporation of North Manila,
Commercial Credit Corporation of Cagayan Valley, Commercial Credit
Corporation of Olongapo City, and Commercial Credit Corporation of Quezon
City - is not proper for being without merit; and
2. The declaration that petitioning franchise corporations and individual
petitioners are not liable for the payment of bad accounts assigned to, and
discounted by GCC is SET ASIDE for being in excess of jurisdiction.[3]
The facts of this case as gleaned from the records are as follows:

67 | c o r p o c a s e s 2 1 - 4 0

On March 11, 1957, Commercial Credit Corporation was registered with SEC
as a general financing and investment corporation. CCC made proposals to
several investors for the organization of franchise companies in different
localities. The proposed trade names and indicated areas were: (a)
Commercial Credit Corporation - Cagayan Valley; (b) Commercial Credit
Corporation - Olongapo City; and (c) Commercial Credit Corporation Quezon City.
Petitioners herein invested and bought majority shares of stocks, while CCC
retained minority holdings. Management contracts were executed between
each franchise company and CCC, under the following terms and conditions:
(1) The franchise company shall be managed by CCCs resident manager.
(2) Management fee equivalent to 10% of net profit before taxes shall be
paid to CCC. (3) All expenses shall be borne by the franchise company,
except the salary of the resident manager and the cost of credit
investigation. (4) CCC shall set prime rates for discounting or rediscounting
of receivables. Apart from these, each investor was required to sign a
continuing guarantee for bad accounts that might be incurred by CCC due to
discounting activities.
In 1974, CCC attempted to obtain a quasi-banking license from Central Bank
of the Philippines. But there was a hindrance because Section 1326 of CBs
Manual of Regulations for Banks and Other Financial Intermediaries,
states:
Sec. 1326. General Policy. Dealings of a bank with any of its directors,
officers or stockholders and their related interests should be in the regular
course of business and upon terms not less favorable to the bank than those
offered to others. (Emphasis supplied)
The above DOSRI regulation and set guidelines are entitled to make sure
that lendings by banks or other financial institutions to its own directors,
officers, stockholders or related interests are above board. In view of said
hindrance, what CCC did was divest itself of its shareholdings in the
franchise companies.
It incorporated CCC Equity to take over the
administration of the franchise companies under new management
contracts. In the meantime, CCC continued providing a discounting line for
receivables of the franchise companies through CCC Equity. Thereafter, CCC
changed its name to General Credit Corporation (GCC).
The companies operations were on course until 1981, when adverse media
reports unraveled anomalies in the business of GCC. Upon investigation,
petitioners allegedly discovered the dissipation of the assets of their
respective franchise companies. Among the alleged fraudulent schemes by
GCC involved transfer or assignment of its uncollectible notes and accounts;
utilization of spurious commercial papers to generate paper revenues; and
release of collateral in connivance with unauthorized loans. Furthermore,
GCC allegedly divested itself of its assets through a questionable offset of
receivables arrangement with one of its creditors, Resource and Finance
Corporation.
On February 24, 1984, petitioners filed a suit against GCC, CCC Equity and
RFC. Petitioners prayed for (1) receivership, (2) an order directing GCC and
CCC Equity solidarily to pay petitioners and depositors for the losses they
sustained, and (3) nullification of the agreement between GCC and RFC.
On June 6, 1984, all respondents, except CCC Equity, filed a motion to
dismiss asserting that SEC lacked jurisdiction, and that petitioners were not

68 | c o r p o c a s e s 2 1 - 4 0

the real parties in interest. Both motions, for receivership and for dismissal,
were subsequently denied by the hearing officer.
On February 23, 1990, the hearing officer ordered piercing the corporate
veil of GCC, CCC Equity, and the franchise companies. He later declared
that GCC was not liable to individual petitioners for the losses, since as
investors they assumed the risk of their respective investments. The
franchise companies and the individual petitioners were held not liable to
GCC for the bad accounts incurred by the latter through the discounting
process. The decretal portion of his order reads:
WHEREFORE, judgment is hereby rendered, as follows:
1. Declaring GCC, CCC-Equity
Credit Corporation of North
Cagayan Valley, Commercial
Commercial Credit Corporation

and the franchised companies - Commercial


Manila, Commercial Credit Corporation of
Credit Corporation of Olongapo City and
of Quezon City - as one corporation;

2. Declaring that the petitioning franchised companies are not liable for the
payment of bad accounts assigned to, and discounted by GCC;
3. Declaring the individual petitioners who executed continuing guaranties
to secure the obligation of the franchised companies to GCC arising from the
discounting accounts should not be held liable thereon;
4.
Declaring that GCC is not liable to individual petitioners for the
investments they made in the franchised companies;
5. Dismissing the petition with respect to respondent Resource Finance
Corporation, Generoso Villanueva and Leonardo Alejandrino.[4]
In an en banc decision, dated October 6, 1992, the SEC reversed the ruling
of its hearing officer. Petitioners appealed to the Court of Appeals. On
October 8, 1993, the appellate court affirmed respondent SECs decision.
Petitioners moved for a reconsideration, but it was denied on September 22,
1994.
Hence, the instant petition raising the following issues:
I. WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE
THAT GCCS FRAUD UPON PETITIONERS AND MISMANAGEMENT OF THE
FRANCHISE COMPANIES WARRANT THE PIERCING OF ITS VEIL OF CORPORATE
FICTION.
II. WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE
THAT ONLY THE SEC HAS JURISDICTION OVER THE ISSUE OF WHETHER
INDIVIDUAL PETITIONERS MAY BE HELD LIABLE ON THE SURETY
AGREEMENTS FOR BAD ACCOUNTS INCURRED BY GCC THROUGH THE
DISCOUNTING PROCESS.
III.WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO
REVERSE AND SET ASIDE THE 06, OCTOBER 1992 SEC DECISION.
Petitioners pray for the piercing of the corporate fiction of GCC, CCC Equity,
RFC and the franchise companies. They allege that (1) GCC was the alterego of CCC Equity and the franchise companies; (2) GCC created CCC Equity
to circumvent CBs DOSRI Regulation; and (3) GCC mismanaged the
franchise companies. Ultimately, petitioners pray that the SEC en banc

69 | c o r p o c a s e s 2 1 - 4 0

reinstate the decision of the hearing officer absolving individual investors of


their respective liabilities attached to the continuing guaranty of bad debts.
They pray that should the afore-stated companies be considered as one,
then petitioners liabilities should be nullified.
SEC en banc decided against the petitioners, saying:
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the instrumentality may be
disregarded... [T]he control and breach of duty must proximately cause the
injury or unjust loss for which the complaint is made.
The test may be stated as follows:
In any given case, except express agency, estoppel, or direct tort, three
elements must be proved:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetrate the violation of the statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiffs legal rights;
and
3. the aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate
veil.[5]
The SEC stated further that:
The second element required for the application of the instrumentality rule
is not present in this case. Upon close scrutiny of the various testamentary
and documentary evidence presented during trial, it may be observed that
petitioners claim of dissipation of assets and resources belonging to the
franchise companies has not been reasonably supported by said evidence at
hand with the Commission. In fact, the disputed decision of the hearing
officer dealt mainly with the aspect of control exercised by GCC over the
franchise companies without a concrete finding of fraud on the part of the
former to the prejudice of individual petitioners interests. As previously
discussed, mere control on the part of GCC through CCC Equity over the
operations and business policies of the franchise companies does not
necessarily warrant piercing the veil of corporate fiction without proof of
fraud. In order to determine whether or not the control exercised by GCC
through CCC Equity over the franchise companies was used to commit fraud
or wrong, to violate a statutory or other positive legal duty, or dishonest and
unjust act in contravention of petitioners legal rights, the circumstances
that caused the bankruptcy of the franchise companies must be taken into
consideration.[6]
As a general rule, a corporation will be looked upon as a legal entity, unless
and until sufficient reason to the contrary appears. When the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or

70 | c o r p o c a s e s 2 1 - 4 0

defend crime, the law will regard the corporation as an association of


persons.[7] Also, the corporate entity may be disregarded in the interest of
justice in such cases as fraud that may work inequities among members of
the corporation internally, involving no rights of the public or third
persons. In both instances, there must have been fraud, and proof of it. For
the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established.[8] It cannot be
presumed.[9]
We agree with the findings of the SEC concurred in by the appellate court
that there was no fraud nor mismanagement in the control exercised by
GCC and by CCC Equity, over the franchise companies. Whether the
existence of the corporation should be pierced depends on questions of
facts, appropriately pleaded. Mere allegation that a corporation is the alter
ego of the individual stockholders is insufficient. The presumption is that
the stockholders or officers and the corporation are distinct entities. The
burden of proving otherwise is on the party seeking to have the court pierce
the veil of the corporate entity.[10] In this, petitioner failed.
Petitioners contend that the issue of whether the investors may be held
liable on the surety agreements for bad accounts incurred by GCC through
the discounting process cannot be isolated from the fundamental issue of
validly piercing GCCs corporate veil. They argue that since these surety
agreements are intra-corporate matters, only the SEC has the specialized
knowledge to evaluate whether fraud was perpetrated.
We note, however, that petitioners signed the continuing guaranty of the
franchise companies bad debts in their own personal capacities.
Consequently, they are responsible for their individual acts. The liabilities of
petitioners as investors arose out of the regular financing venture of the
franchise companies. There is no evidence that these bad debts were
fraudulently incurred. Any taint of bad faith on the part of GCC in enticing
investors may be resolved in ordinary courts, inasmuch as this is in the
nature of a contractual relationship.
Changing petitioners subsidiary
liabilities by converting them to guarantors of bad debts cannot be done by
piercing the veil of corporate identity.
Private respondents claim they had actually filed collection cases against
most, if not all, of the petitioners to enforce the suretyship liability on
accounts discounted with then CCC (now GCC).[11] In such cases, the trial
court may determine the validity of the promissory notes and the
corresponding guarantee contracts. The existence of the corporate entities
need not be disregarded.
On the matter of jurisdiction, we agree with the Court of Appeals when it
held that:
. . . [T]he ruling of the hearing officer in relation to the liabilities of the
franchise companies and individual petitioners for the bad accounts incurred
by GCC through the discounting process would necessary entail a prior
interpretation of the discounting agreements entered into between GCC and
the various franchise companies as well as the continuing guaranties
executed to secure the same. A judgment on the aforementioned liabilities
incurred through the discounting process must likewise involve a
determination of the validity of the said discounting agreements and
continuing guaranties in order to properly pass upon the enforcement or
implementation of the same.
It is crystal clear from the aforecited
authorities and jurisprudence[12] that there is no need to apply the

71 | c o r p o c a s e s 2 1 - 4 0

specialized knowledge and skill of the SEC to interpret the said discounting
agreements and continuing guaranties executed to secure the same
because the regular courts possess the utmost competence to do so by
merely applying the general principles laid down under civil law on
contracts.
xxx
The matter of whether the petitioners must be held liable on their separate
suretyship is one that belongs to the regular courts. As the respondent SEC
notes in its comment, the franchised companies accounts discounted by
GCC would arise even if there is no intra-corporate relationship between the
parties. In other words, the controversy did not arise out of the parties
relationships as stockholders. The Court agrees. This matter is better left to
the regular courts in which the private respondents have filed suits to
enforce the suretyship agreements allegedly executed by the
petitioners.[13]
Not every conflict between a corporation and its stockholders involves
corporate matters that only the SEC can resolve. In Viray vs. Court of
Appeals, 191 SCRA 308, 323 (1990), we stressed that a contrary
interpretation would dissipate the powers of the regular courts and distort
the meaning and intent of PD No. 902-A.
It is true that the trend is toward vesting administrative bodies like the SEC
with the power to adjudicate matters coming under their particular
specialization, to insure a more knowledgeable solution of the problems
submitted to them.
This would also relieve the regular courts of a
substantial number of cases that would otherwise swell their already
clogged dockets. But as expedient as this policy may be, it should not
deprive the courts of justice of their power to decide ordinary cases in
accordance with the general laws that do not require any particular
expertise or training to interpret and apply. Otherwise, the creeping takeover by the administrative agencies of the judicial power vested in the
courts would render the Judiciary virtually impotent in the discharge of the
duties assigned to it by the Constitution.
Finally, we note that petitioners were given ample opportunity to present
evidence in support of their claims. But mere allegations do not constitute
convincing evidence. We find no sufficient reason to overturn the decisions
of both the SEC and the appellate court.
WHEREFORE, the instant petition is DENIED for lack of merit. The assailed
decision and resolution of the Court of Appeals dated October 8, 1993 and
September 22, 1994, respectively, are AFFIRMED. Costs against petitioners.
SO ORDERED.
G.R. No. L-20502

February 26, 1965

EMILIO CANO ENTERPRISES, INC., petitioner,


vs.
COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.
D. T. Reyes and Associates for petitioner.
Mariano B. Tuason for respondent Court of Industrial Relations.
C. E. Santiago for respondent Honorata Cruz.
BAUTISTA ANGELO, J.:

72 | c o r p o c a s e s 2 1 - 4 0

In a complaint for unfair labor practice filed before the Court of Industrial
Relations on June 6, 1956 by a prosecutor of the latter court, Emilio, Ariston
and Rodolfo, all surnamed Cano, were made respondents in their capacity as
president and proprietor, field supervisor and manager, respectively, of
Emilio Cano Enterprises, Inc.
After trial, Presiding Judge Jose S. Bautista rendered decision finding Emilio
Cano and Rodolfo Cano guilty of the unfair labor practice charge, but
absolved Ariston for insufficiency of evidence. As a consequence, the two
were ordered, jointly and severally, to reinstate Honorata Cruz, to her
former position with payment of backwages from the time of her dismissal
up to her reinstatement, together with all other rights and privileges
thereunto appertaining.
Meanwhile, Emilio Cano died on November 14, 1958, and the attempt to
have the case dismissed against him having failed, the case was appealed
to the court en banc, which in due course affirmed the decision of Judge
Bautista. An order of execution was issued on August 23, 1961 the
dispositive part of which reads: (1) to reinstate Honorata Cruz to her former
position as ordered in the decision; and (2) to deposit with the court the
amount of P7,222.58 within ten days from receipt of the order, failing which
the court will order either a levy on respondents' properties or the filing of
an action for contempt of court.
The order of execution having been directed against the properties of Emilio
Cano Enterprises, Inc. instead of those of the respondents named in the
decision, said corporation filed an ex parte motion to quash the writ on the
ground that the judgment sought to be enforced was not rendered against it
which is a juridical entity separate and distinct from its officials. This motion
was denied. And having failed to have it reconsidered, the corporation
interposed the present petition for certiorari.1wph1.t
The issue posed before us is: Can the judgment rendered against Emilio and
Rodolfo Cano in their capacity as officials of the corporation Emilio Cano
Enterprises, Inc. be made effective against the property of the latter which
was not a party to the case?
The answer must be in the affirmative. While it is an undisputed rule that a
corporation has a personality separate and distinct from its members or
stockholders because of a fiction of the law, here we should not lose sight of
the fact that the Emilio Cano Enterprises, Inc. is a closed family corporation
where the incorporators and directors belong to one single family. Thus, the
following are its incorporators: Emilio Cano, his wife Juliana, his sons Rodolfo
and Carlos, and his daughter-in-law Ana D. Cano. Here is an instance where
the corporation and its members can be considered as one. And to hold
such entity liable for the acts of its members is not to ignore the legal fiction
but merely to give meaning to the principle that such fiction cannot be
invoked if its purpose is to use it as a shield to further an end subversive of
justice. 1 And so it has been held that while a corporation is a legal entity
existing separate and apart from the persons composing it, that concept
cannot be extended to a point beyond its reason and policy, and when
invoked in support of an end subversive of this policy it should be
disregarded by the courts (12 Am. Jur. 160-161).
A factor that should not be overlooked is that Emilio and Rodolfo Cano are
here indicted, not in their private capacity, but as president and manager,

73 | c o r p o c a s e s 2 1 - 4 0

respectively, of Emilio Cano Enterprises, Inc. Having been sued officially


their connection with the case must be deemed to be impressed with the
representation of the corporation. In fact, the court's order is for them to
reinstate Honorata Cruz to her former position in the corporation and
incidentally pay her the wages she had been deprived of during her
separation. Verily, the order against them is in effect against the
corporation. No benefit can be attained if this case were to be remanded to
the court a quo merely in response to a technical substitution of parties for
such would only cause an unwarranted delay that would work to Honorata's
prejudice. This is contrary to the spirit of the law which enjoins a speedy
adjudication of labor cases disregarding as much as possible the
technicalities of procedure. We, therefore, find unmeritorious the relief
herein prayed for.
WHEREFORE, petition is dismissed, with costs.
[G.R. No. 129049. August 6, 1999]
BALTAZAR G. CAMPOREDONDO, petitioner, vs. NATIONAL LABOR RELATIONS
COMMISSION (NLRC), Fifth Division, Cagayan de Oro City, THE PHILIPPINE
NATIONAL RED CROSS (PNRC), represented by GOVERNOR ROMEO C.
ESPINO and DR. CELSO SAMSON, respondents.
DECISION
PARDO, J.:
At issue in this case is whether the Philippine National Red Cross (PNRC for
short) is a government owned and controlled corporation or it has been
impliedly converted to a private organization subject to the jurisdiction of
labor tribunals in a complaint filed by petitioner, a former PNRC chapter
administrator in Surigao del Norte, for illegal dismissal and damages, as he
was forced to "retire" after he was required to restitute shortages and
unremitted collections in the total sum of P135,927.78.
Having obviously no merit, we dismiss the petition.
All suitors must come to court with clean hands. This is especially true of
paid staff of the Philippine National Red Cross. Like its unpaid volunteers,
they must be men of unquestioned honesty and integrity serving in selfless
manner to aid the sick and wounded of armed forces in time of war, acting
in voluntary relief in time of peace and war, maintaining a system of
national and international relief in meeting emergency relief needs caused
by typhoons, floods, fires, earthquakes, and other natural disasters, and
promoting such service in time of peace and war to improve the health,
safety and welfare of the Filipino people.[1] Paid staff of the PNRC are
government employees who are members of the Government Service
Insurance System and covered by the Civil Service Law. Unlike government
service in other agencies, Red Cross service demands of its paid staff
uberrima fides, the utmost good faith and dedication to work.
Since 1980, petitioner was employed with the PNRC, and until his early
"retirement" on December 15, 1995, he was administrator of the Surigao del
Norte Chapter, Philippine National Red Cross.[2]
In July, 1995, a field auditor of the PNRC conducted an audit of the books of
account of the Surigao del Norte Chapter headed by petitioner and found
him short in the total sum of P109,000.00.[3]

74 | c o r p o c a s e s 2 1 - 4 0

On November 21, 1995, Dr. Celso Samson, Secretary General of the PNRC
wrote petitioner requiring him to restitute within seventy two (72) hours
from notice, the total sum of P135,927.78 representing cash shortage,
technical shortage and unremitted collections.[4]
On December 15, 1995, petitioner applied for early retirement from the
service, and later wrote Dr. Samson requesting for a re-audit by an
independent auditor of his accounts. However, Dr. Samson denied the
request.[5]
On May 28, 1996, petitioner filed with the National Labor Relations
Commission, Sub-Regional Arbitration Branch X, Butuan City, a complaint for
illegal dismissal, damages and underpayment of wages against the
Philippine National Red Cross and its key officials.[6]
On June 14, 1996, respondent Philippine National Red Cross filed with the
Surigao del Norte provincial office, Department of Labor and Employment, a
motion to dismiss the complaint for lack of jurisdiction over the subject
matter of the case because the PNRC is a government corporation whose
employees are members of the Government Service Insurance System
(GSIS), and embraced within the Civil Service Law and regulations.[7]
On July 25, 1996, petitioner filed an opposition to motion to dismiss arguing
that there was between the PNRC and its duly appointed paid staff, an
employer-employee relationship, governed by the Labor Code of the
Philippines.[8]
On October 11, 1996, the Labor Arbiter issued an order dismissing the
complaint for lack of jurisdiction, finding that the Philippine National Red
Cross is a government corporation with an original charter, having been
created by Republic Act No. 95.[9]
On November 12, 1996, the Labor Arbiter denied petitioner's motion for
reconsideration filed on October 14, 1996.[10]
On November 20, 1996, petitioner filed a notice of appeal and appeal
memorandum with the National Labor Relations Commission.[11]
On March 21, 1997, the National Labor Relations Commission, Fifth Division,
issued a resolution dismissing the appeal and confirming the decision of the
Labor Arbiter that dismissed petitioner's complaint for lack of jurisdiction.
[12]
Hence, this recourse.
On July 7, 1997, we resolved to require respondents to comment on the
petition within ten (10) days from notice.[13]
On August 7, 1997, respondent Philippine National Red Cross filed its
comment.[14] On November 7, 1997, the Solicitor General filed its
comment.[15]
Resolving the issue set out in the opening paragraph of this opinion, we rule
that the Philippine National Red Cross (PNRC) is a government owned and
controlled corporation, with an original charter under Republic Act No. 95, as
amended. The test to determine whether a corporation is government
owned or controlled, or private in nature is simple. Is it created by its own
charter for the exercise of a public function, or by incorporation under the

75 | c o r p o c a s e s 2 1 - 4 0

general corporation law? Those with special charters are government


corporations subject to its provisions, and its employees are under the
jurisdiction of the Civil Service Commission, and are compulsory members of
the Government Service Insurance System. The PNRC was not "impliedly
converted to a private corporation" simply because its charter was amended
to vest in it the authority to secure loans, be exempted from payment of all
duties, taxes, fees and other charges of all kinds on all importations and
purchases for its exclusive use, on donations for its disaster relief work and
other services and in its benefits and fund raising drives, and be alloted one
lottery draw a year by the Philippine Charity Sweepstakes Office for the
support of its disaster relief operation in addition to its existing lottery draws
for blood program.
Having served in the Philippine National Red Cross for a number of years
since his initial employment, he must know that it is a government
corporation with its own charter and that he was covered by compulsory
membership in the Government Service Insurance System, which is why he
could apply, as he did, for "early" retirement from the service under
Presidential Decree No. 1146 or Republic Act No. 1616.[16]
WHEREFORE, the Court hereby DISMISSES the petition, and AFFIRMS the
ruling of the National Labor Relations Commission.
Double costs taxed against petitioner.
SO ORDERED.
G.R. No. 89070

May 18, 1992

BENGUET ELECTRlC COOPERATIVE, INC., petitioner,


vs.
NATIONAL LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD OF
DIRECTORS OF BENGUET ELECTRIC COOPERATIVE, INC., * respondents.
Raymundo W. Celino for respondent Peter Cosalan.
Reenan Orate for respondent Board of Directors of BENECO.

FELICIANO, J.:
Private respondent Peter Cosalan was the General Manager of Petitioner
Benguet Electric Cooperative, Inc. ("Beneco"), having been elected as such
by the Board of Directors of Beneco, with the approval of the National
Electrification Administrator, Mr. Pedro Dumol, effective 16 October 1982.
On 3 November 1982, respondent Cosalan received Audit Memorandum No.
1 issued by the Commission on Audit ("COA"). This Memorandum noted that
cash advances received by officers and employees of petitioner Beneco in
the amount of P129,618.48 had been virtually written off in the books of
Beneco. In the Audit Memorandum, the COA directed petitioner Beneco to
secure the approval of the National Electrification Administration ("NEA")
before writing off or condoning those cash advances, and recommended the
adoption of remedial measures.
On 12 November 1982, COA issued another Memorandum Audit
Memorandum No. 2 addressed to respondent Peter Cosalan, inviting
attention to the fact that the audit of per diems and allowances received by

76 | c o r p o c a s e s 2 1 - 4 0

officials and members of the Board of Directors of Beneco showed


substantial inconsistencies with the directives of the NEA. The Audit
Memorandum once again directed the taking of immediate action in
conformity with existing NEA regulations.
On 19 May 1983, petitioner Beneco received the COA Audit Report on the
financial status and operations of Beneco for the eight (8) month period
ended 30 September 1982. This Audit Report noted and enumerated
irregularities in the utilization of funds amounting to P37 Million released by
NEA to Beneco, and recommended that appropriate remedial action be
taken.
Having been made aware of the serious financial condition of Beneco and
what appeared to be mismanagement, respondent Cosalan initiated
implementation of the remedial measures recommended by the COA. The
respondent members of the Board of Beneco reacted by adopting a series of
resolutions during the period from 23 June to 24 July 1984. These Board
Resolutions abolished the housing allowance of respondent Cosalan;
reduced his salary and his representation and commutable allowances;
directed him to hold in abeyance all pending personnel disciplinary actions;
and struck his name out as a principal signatory to transactions of petitioner
Beneco.
During the period from 28 July to 25 September 1984, the respondent
Beneco Board members adopted another series of resolutions which
resulted in the ouster of respondent Cosalan as General Manager of Beneco
and his exclusion from performance of his regular duties as such, as well as
the withholding of his salary and allowances. These resolutions were as
follows:
1.

Resolution No. 91-4 dated 28 July 1984:

. . . that the services of Peter M. Cosalan as General Manager of BENECO is


terminated upon approval of the National Electrification Administration;
2.

Resolution No. 151-84 dated September 15, 1984;

. . . that Peter M. Cosalan is hereby suspended from his position as General


Manager of the Benguet Electric Cooperative, Inc. (BENECO) effective as of
the start of the office hours on September 24, 1984, until a final decision
has been reached by the NEA on his dismissal;
. . . that GM Cosalan's suspension from office shall remain in full force and
effect until such suspension is sooner lifted, revoked or rescinded by the
Board of Directors; that all monies due him are withheld until cleared;
3.

Resolution No. 176-84 dated September 25, 1984;

. . . that Resolution No. 151-84, dated September 15, 1984 stands as


preventive suspension for GM Peter M. Cosalan. 1
Respondent Cosalan nevertheless continued to work as General Manager of
Beneco, in the belief that he could be suspended or removed only by duly
authorized officials of NEA, in accordance with provisions of P.D. No, 269, as
amended by P.D. No. 1645 (the statute creating the NEA, providing for its
capitalization, powers and functions and organization), the loan agreement
between NEA and petitioner Beneco 2 and the NEA Memorandum of 2 July
1980. 3 Accordingly, on 5 October and 10 November 1984, respondent

77 | c o r p o c a s e s 2 1 - 4 0

Cosalan requested petitioner Beneco to release the compensation due him.


Beneco, acting through respondent Board members, denied the written
request of respondent Cosalan.
Respondent Cosalan then filed a complaint with the National Labor Relations
Commission ("NLRC") on 5 December 1984 against respondent members of
the Beneco Board, challenging the legality of the Board resolutions which
ordered his suspension and termination from the service and demanding
payment of his salaries and allowances. On 18 February 1985, Cosalan
amended his complaint to implead petitioner Beneco and respondent Board
members, the latter in their respective dual capacities as Directors and as
private individuals.
In the course of the proceedings before the Labor Arbiter, Cosalan filed a
motion for reinstatement which, although opposed by petitioner Beneco,
was granted on 23 October 1987 by Labor Arbiter Amado T. Adquilen.
Petitioner Beneco complied with the Labor Arbiter's order on 28 October
1987 through Resolution No. 10-90.
On 5 April 1988, the Labor Arbiter rendered a decision (a) confirming
Cosalan's reinstatement; (b) ordering payment to Cosalan of his backwages
and allowances by petitioner Beneco and respondent Board members,
jointly and severally, for a period of three (3) years without deduction or
qualification, amounting to P344,000.00; and (3) ordering the individual
Board members to pay, jointly and severally, to Cosalan moral damages of
P50,000.00 plus attorney's fees of ten percent (10%) of the wages and
allowances awarded him.
Respondent Board members appealed to the NLRC, and there filed a
Memorandum on Appeal. Petitioner Beneco did not appeal, but moved to
dismiss the appeal filed by respondent Board members and for execution of
judgment. By this time, petitioner Beneco had a new set of directors.
In a decision dated 21 November 1988, public respondent NLRC modified
the award rendered by the Labor Arbiter by declaring that petitioner Beneco
alone, and not respondent Board members, was liable for respondent
Cosalan's backwages and allowances, and by ruling that there was no legal
basis for the award of moral damages and attorney's fees made by the
Labor Arbiter.
Beneco, through its new set of directors, moved for reconsideration of the
NLRC decision, but without success.
In the present Petition for Certiorari, Beneco's principal contentions are twofold: first, that the NLRC had acted with grave abuse of discretion in
accepting and giving due course to respondent Board members' appeal
although such appeal had been filed out of time; and second, that the NLRC
had acted with grave abuse of discretion amounting to lack of jurisdiction in
holding petitioner alone liable for payment of the backwages and
allowances due to Cosalan and releasing respondent Board members from
liability therefor.
We consider that petitioner's first contention is meritorious. There is no
dispute about the fact that the respondent Beneco Board members received
the decision of the labor Arbiter on 21 April 1988. Accordingly, and because
1 May 1988 was a legal holiday, they had only up to 2 May 1988 within
which to perfect their appeal by filing their memorandum on appeal. It is
also not disputed that the respondent Board members' memorandum on

78 | c o r p o c a s e s 2 1 - 4 0

appeal was posted by registered mail on 3 May 1988 and received by the
NLRC the following day. 4 Clearly, the memorandum on appeal was filed out
of time.
Respondent Board members, however, insist that their Memorandum on
Appeal was filed on time because it was delivered for mailing on 1 May 1988
to the Garcia Communications Company, a licensed private letter carrier.
The Board members in effect contend that the date of delivery to Garcia
Communications was the date of filing of their appeal memorandum.
Respondent Board member's contention runs counter to the established rule
that transmission through a private carrier or letter-forwarder instead of
the Philippine Post Office is not a recognized mode of filing pleadings. 5
The established rule is that the date of delivery of pleadings to a private
letter-forwarding agency is not to be considered as the date of filing thereof
in court, and that in such cases, the date of actual receipt by the court, and
not the date of delivery to the private carrier, is deemed the date of filing of
that pleading. 6
There, was, therefore, no reason grounded upon substantial justice and the
prevention of serious miscarriage of justice that might have justified the
NLRC in disregarding the ten-day reglementary period for perfection of an
appeal by the respondent Board members. Accordingly, the applicable rule
was that the ten-day reglementary period to perfect an appeal is mandatory
and jurisdictional in nature, that failure to file an appeal within the
reglementary period renders the assailed decision final and executory and
no longer subject to review. 7 The respondent Board members had thus lost
their right to appeal from the decision of the Labor Arbiter and the NLRC
should have forthwith dismissed their appeal memorandum.
There is another and more compelling reason why the respondent Board
members' appeal should have been dismissed forthwith: that appeal was
quite bereft of merit. Both the Labor Arbiter and the NLRC had found that
the indefinite suspension and termination of services imposed by the
respondent Board members upon petitioner Cosalan was illegal. That
illegality flowed, firstly, from the fact that the suspension of Cosalan was
continued long after expiration of the period of thirty (30) days, which is the
maximum period of preventive suspension that could be lawfully imposed
under Section 4, Rule XIV of the Omnibus Rules Implementing the Labor
Code. Secondly, Cosalan had been deprived of procedural due process by
the respondent Board members. He was never informed of the charges
raised against him and was given no opportunity to meet those charges and
present his side of whatever dispute existed; he was kept totally in the dark
as to the reason or reasons why he had been suspended and effectively
dismissed from the service of Beneco Thirdly, respondent Board members
failed to adduce any cause which could reasonably be regarded as lawful
cause for the suspension and dismissal of respondent Cosalan from his
position as General Manager of Beneco. Cosalan was, in other words, denied
due process both procedural and substantive. Fourthly, respondent Board
members failed to obtain the prior approval of the NEA of their suspension
now dismissal of Cosalan, which prior approval was required, inter alia,
under the subsisting loan agreement between the NEA and Beneco. The
requisite NEA approval was subsequently sought by the respondent Board
members; no NEA approval was granted.
In reversing the decision of the Labor Arbiter declaring petitioner Beneco
and respondent Board members solidarily liable for the salary, allowances,

79 | c o r p o c a s e s 2 1 - 4 0

damages and attorney's fees awarded to respondent Cosalan, the NLRC


said:
. . . A perusal of the records show that the members of the Board never
acted in their individual capacities. They were acting as a Board passing
resolutions affecting their general manager. If these resolutions and
resultant acts transgressed the law, to then BENECO for which the Board
was acting in behalf should bear responsibility. The records do not disclose
that the individual Board members were motivated by malice or bad faith,
rather, it reveals an intramural power play gone awry and misapprehension
of its own rules and regulations. For this reason, the decision holding the
individual board members jointly and severally liable with BENECO for
Cosalan's backwages is untenable. The same goes for the award of
damages which does not have the proverbial leg to stand on.
The Labor Arbiter below should have heeded his own observation in his
decision
Respondent BENECO as an artificial person could not have, by itself, done
anything to prevent it. But because the former have acted while in office
and in the course of their official functions as directors of BENECO, . . .
Thus, the decision of the Labor Arbiter should be modified conformably with
all the foregoing holding BENECO solely liable for backwages and releasing
the appellant board members from any individual liabilities. 8 (Emphasis
supplied)
The applicable general rule is clear enough. The Board members and
officers of a corporation who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting, and
act in good faith, do not become liable, whether civilly or otherwise, for the
consequences of their acts, Those acts, when they are such a nature and
are done under such circumstances, are properly attributed to the
corporation alone and no personal liability is incurred by such officers and
Board members. 9
The major difficulty with the conclusion reached by the NLRC is that the
NLRC clearly overlooked or disregarded the circumstances under which
respondent Board members had in fact acted in the instant case. As noted
earlier, the respondent Board members responded to the efforts of Cosalan
to take seriously and implement the Audit Memoranda issued by the COA
explicitly addressed to the petitioner Beneco, first by stripping Cosalan of
the privileges and perquisites attached to his position as General Manager,
then by suspending indefinitely and finally dismissing Cosalan from such
position. As also noted earlier, respondent Board members offered no
suggestion at all of any just or lawful cause that could sustain the
suspension and dismissal of Cosalan. They obviously wanted to get rid of
Cosalan and so acted, in the words of the NLRC itself, "with indecent haste"
in removing him from his position and denying him substantive and
procedural due process. Thus, the record showed strong indications that
respondent Board members had illegally suspended and dismissed Cosalan
precisely because he was trying to remedy the financial irregularities and
violations of NEA regulations which the COA had brought to the attention of
Beneco. The conclusion reached by the NLRC that "the records do not
disclose that the individual Board members were motivated by malice or
bad faith" flew in the face of the evidence of record. At the very least, a
strong presumption had arisen, which it was incumbent upon respondent
Board members to disprove, that they had acted in reprisal against

80 | c o r p o c a s e s 2 1 - 4 0

respondent Cosalan and in an effort to suppress knowledge about and


remedial measures against the financial irregularities the COA Audits had
unearthed. That burden respondent Board members did not discharge.
The Solicitor General has urged that respondent Board members may be
held liable for damages under the foregoing circumstance under Section 31
of the Corporation Code which reads as follows:
Sec. 31.
Liability of directors, trustees or officers. Directors or
trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or trustees shall be
jointly liable and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons . . .
(Emphasis supplied)
We agree with the Solicitor General, firstly, that Section 31 of the
Corporation Code is applicable in respect of Beneco and other electric
cooperatives similarly situated. Section 4 of the Corporation Code renders
the provisions of that Code applicable in a supplementary manner to all
corporations, including those with special or individual charters so long as
those provisions are not inconsistent with such charters. We find no
provision in P.D. No. 269, as amended, that would exclude expressly or by
necessary implication the applicability of Section 31 of the Corporation Code
in respect of members of the boards of directors of electric cooperatives.
Indeed, P.D. No. 269 expressly describes these cooperatives as
"corporations:"
Sec. 15.
Organization and Purpose. Cooperative non-stock, non-profit
membership corporations may be organized, and electric cooperative
corporations heretofore formed or registered under the Philippine nonAgricultural Co-operative Act may as hereinafter provided be converted,
under this Decree for the purpose of supplying, and of promoting and
encouraging-the fullest use of, service on an area coverage basis at the
lowest cost consistent with sound economy and the prudent management of
the business of such corporations. 10 (Emphasis supplied)
We agree with the Solicitor General, secondly, that respondent Board
members were guilty of "gross negligence or bad faith in directing the
affairs of the corporation" in enacting the series of resolutions noted earlier
indefinitely suspending and dismissing respondent Cosalan from the position
of General Manager of Beneco. Respondent Board members, in doing so,
acted belong the scope of their authority as such Board members. The
dismissal of an officer or employee in bad faith, without lawful cause and
without procedural due process, is an act that is contra legem. It cannot be
supposed that members of boards of directors derive any authority to
violate the express mandates of law or the clear legal rights of their officers
and employees by simply purporting to act for the corporation they control.
We believe and so hold, further, that not only are Beneco and respondent
Board members properly held solidarily liable for the awards made by the
Labor Arbiter, but also that petitioner Beneco which was controlled by and
which could act only through respondent Board members, has a right to be
reimbursed for any amounts that Beneco may be compelled to pay to
respondent Cosalan. Such right of reimbursement is essential if the innocent
members of Beneco are not to be penalized for the acts of respondent Board
members which were both done in bad faith and ultra vires. The liability-

81 | c o r p o c a s e s 2 1 - 4 0

generating acts here are the personal and individual acts of respondent
Board members, and are not properly attributed to Beneco itself.
WHEREFORE, the Petition for Certiorari is GIVEN DUE COURSE, the comment
filed by respondent Board members is TREATED as their answer, and the
decision of the National Labor Relations Commission dated 21 November
1988 in NLRC Case No. RAB-1-0313-84 is hereby SET ASIDE and the decision
dated 5 April 1988 of Labor Arbiter Amado T. Adquilen hereby REINSTATED
in toto. In addition, respondent Board members are hereby ORDERED to
reimburse petitioner Beneco any amounts that it may be compelled to pay
to respondent Cosalan by virtue of the decision of Labor Arbiter Amado T.
Adquilen. No pronouncement as to costs.
SO ORDERED.
SECOND DIVISION
[G.R. No. L-61145. February 20, 1984.]
REPUBLIC OF THE PHILIPPINES (Director of Lands), Petitioner, v. IGLESIA NI
CRISTO and JUDGE DOMINGO M. ANGELES, Branch I, Court of First Instance
of Camarines Norte, Respondents.
The Solicitor General for Petitioner.
Joaquin Ortega
Respondents.

and

Cruz,

Esguerra,

Tafalla

Perel

&

Associates

for

SYLLABUS
1.
CIVIL LAW; LAND REGISTRATION; PUBLIC LAND LAW; IGLESIA NI
CRISTO NOT ENTITLED TO APPLY FOR REGISTRATION OF LAND UNDER
SECTION 48(b) THEREOF. The trial court found, and it is a matter of
judicial notice, that the Iglesia "is a duly registered corporation sole." As the
application is for confirmation of an imperfect or incomplete title, that
application is necessarily subject to the provisions of law only Filipino
citizens are entitled to apply for registration of lands of the public domain.
The Iglesia is not a Filipino citizen. The lands in question are still public lands
until registered.
2.
CONSTITUTIONAL LAW; PATRIMONY OF THE NATION; IGLESIA NI
CRISTO AS A CORPORATION CANNOT ACQUIRE ALIENABLE PUBLIC LAND.
Under Section 11 of Article XIV of the Constitution, the Iglesia ni Cristo is
disqualified as a corporation to hold lands of the public domain except by
lease. The Iglesia in its appellees brief has not shown that it is not covered
by the said constitutional and statutory provisions. Its statement on page 2
of its brief that it "is not a religious corporation" when it filed its application
is belied by the facts.
3.
MERCANTILE LAW; CORPORATION LAW; IGLESIA NI CRISTO,
REGISTERED AS A CORPORATION SOLE, NOT AS A TRUSTEE; NOT QUALIFIED
TO REGISTER LAND AS TRUSTEE IN THE CASE AT BAR. Iglesia ni Cristo
contends that it is entitled to register the lands as a trustee. This contention
is erroneous. The unarguable fact is that it is a corporation sole governed by
section 109 et sequitur of the Corporation Code. It did not apply for
registration as a trustee. As stated at the outset, the matter is subject to the

82 | c o r p o c a s e s 2 1 - 4 0

governing principle of stare decisis et non quieta movere (follow past


precedents and do not disturb what has been settled).
DECISION
AQUINO, J.:
This case is about the same issue which was resolved against the Iglesia ni
Cristo and is, therefore, res judicata: that, as a corporation sole, (1) it is not
entitled to register lands under section 48(b) of the Public Land Law, which
refers only to Filipino citizens, and (2) that it is disqualified under section 11,
Article XIV of the Constitution to hold alienable public lands except by lease.
(Republic v. Villanueva, G.R. No. 55289, June 29, 1982, 114 SCRA 875;
Republic v. Gonong, G.R. No. 56025, November 25, 1982, 118 SCRA 729;
Republic v. Court of Appeals, G.R. No. 59447 and Republic v. Cendaa, G.R.
No. 60188, December 27, 1982, 119 SCRA 449 and Republic v. Court of First
Instance of Nueva Ecija, L-35273, July 25, 1983, 123 SCRA
516.)chanrobles.com.ph : virtual law library
The Iglesia on November 6, 1976 filed an application for confirmation and
registration of its title over two parcels of land located at Barrio Calabaca
and the poblacion of Capalonga, Camarines Norte with areas of 300 and 599
square meters used as sites of its chapels.
The town lot was purchased by the Iglesia on May 30, 1955 from Josefina
Diezmo who in turn purchased it from Esteban Arcea who had used the lot
for residential purposes since 1920. The realty taxes had been paid up to
the time Diezmo possessed the lot.
The Calabaca lot was purchased by the Iglesia on July 18, 1973 from Basilio
Parale who inherited it from his father Simeon. It used to be coconut land.
Simeon possessed the lot since 1920 and used it for residential purposes.
He paid realty taxes on the land.
The Iglesia and its predecessors claimed to have actual, public, peaceful,
continuous and uninterrupted possession of the two lots in the concept of an
owner for more than thirty years preceding the filing of the application. No
realty taxes were paid by the Iglesia because it is an exempt corporation.
The Director of Lands opposed the application. The trial court in its decision
of April 30, 1982 granted it, confirmed the title of the applicant and ordered
the lands registered "in the name of Iglesia ni Cristo, with its Executive
Minister Erao G. Manalo, as corporation sole, with office and postal address
at corner Central and Don Mariano Marcos Avenues, Diliman, Quezon City,
Metro Manila."cralaw virtua1aw library
The Republic appealed under Republic Act No. 5440 in relation to Rule 45 of
the Rules of Court. The trial court found, and it is a matter of judicial notice,
that the Iglesia "is a duly registered corporation sole" (Exhs. E and F). As the
application is for confirmation of an imperfect or incomplete title, that
application is necessarily subject to the following provisions of the Public
Land Law, Commonwealth Act No. 141:jgc:chanrobles.com.ph
"SEC. 48.
The following described citizens of the Philippines, occupying
lands of the public domain or claiming to own any such lands or an interest

83 | c o r p o c a s e s 2 1 - 4 0

therein, but whose titles have not been perfected or completed, may apply
to the Court of First Instance of the province where the land is located for
confirmation of their claims and the issuance of a certificate of title therefor,
unless the Land Registration Act, to wit:chanrob1es virtual 1aw library
(a)

...

(b)
Those who by themselves or through their predecessors in interest
have been in open, continuous, exclusive, and notorious possession and
occupation of agricultural lands of the public domain, under a bona fide
claim of acquisition of ownership, for at least thirty years immediately
preceding the filing of the application for confirmation of title except when
prevented by war or force majeure. These shall be conclusively presumed to
have performed all the conditions essential to a Government grant and shall
be entitled to a certificate of title under the provisions of this
chapter."cralaw virtua1aw library
(c)

...

"Sec. 49.
No person claiming title to lands of the public domain not in
possession of the qualifications specified in the last preceding section may
apply for the benefits of this chapter."cralaw virtua1aw library
The Iglesia is not a Filipino citizen, The lands in question are still public lands
until registered (Heirs of Pelagio Zara v. Director of Lands, 127 Phil. 8).
Moreover, under the aforecited section 11 of Article XIV, it is disqualified as
a corporation to hold lands of the public domain except by lease. (Manila
Electric Company v. Castro Bartolome, L-49623, June 29, 182, 114 SCRA
799; Director of Lands, v. Lood, L-32521, September 2, 1983, 124 SCRA
460).
The Iglesia in its appellees brief has not shown that it is not covered by the
said constitutional and statutory provisions. Its statement on page 2 of its
brief that it "is not a religious corporation" when it filed its application is
belied by the facts.
It contends that it is entitled to register the lands as a trustee. This
contention is erroneous. The unarguable fact is that it is a corporation sole
governed by section 109 et sequitur of the Corporation Code. It did not
apply for registration as a trustee.
As stated at the outset, the matter is subject to the governing principle of
stare decisis et non quieta movere (follow past precedents and do not
disturb what has been settled).
WHEREFORE, the trial courts decision is reversed and set aside and the
Iglesias application is dismissed with costs against it.
SO ORDERED.
[G.R. No. 80767. April 22, 1991.]
BOY SCOUTS OF THE PHILIPPINES, Petitioner, v. NATIONAL LABOR
RELATIONS COMMISSION, FORTUNATO ESGUERRA, ROBERTO MALABORBOR,
ESTANISLAO MISA, VICENTE EVANGELISTA, and MARCELINO GARCIA,
Respondents.
Julio O. Lopez for Petitioner.

84 | c o r p o c a s e s 2 1 - 4 0

SYLLABUS
1.
COMMONWEALTH ACT NO. III AS AMENDED BY PRESIDENTIAL DECREE
NO. 460; BOY SCOUTS OF THE PHILIPPINES; FUNCTION, WITH PUBLIC
ASPECT. BSPs functions as set out in its statutory charter do have a
public aspect. BSPs functions do relate to the fostering of the public virtues
of citizenship and patriotism and the general improvement of the moral
spirit and fiber of our youth. The social value of activities like those to which
the BSP dedicates itself by statutory mandate have in fact, been accorded
constitutional recognition (Article II of the 1987 Constitution). The public
character of BSPs functions and activities must be conceded, for they
pertain to the educational, civic and social development of the youth which
constitutes a very substantial and important part of the nation.
2.
ID.; ID.; NATIONAL EXECUTIVE BOARD; SUBSTANTIAL GOVERNMENTAL
PARTICIPATION IN THE CHOICE OF
MEMBERS. The second aspect that the Court must take into account
relates to the governance of the BSP. The composition of the National
Executive Board of the BSP includes, as noted from Section 5 of its charter
quoted earlier, includes seven (7) Secretaries of Executive Departments.
The seven (7) Secretaries (now six [6] in view of the abolition of the
Department of Youth and Sports and merger thereof into the Department of
Education, Culture and Sports) by themselves do not constitute a majority of
the members of the National Executive Board. We must note at the same
time that the appointments of members of the National Executive Board,
except only the appointments of the Regional Chairman and Scouts of
Senior age from the various Scout Regions, are subject to ratification and
confirmation by the Chief Scout, who is the President of the Philippines.
Vacancies to the Board are filled by a majority vote of the remaining
members thereof, but again subject to ratification and confirmation by the
Chief Scout. We must assume that such confirmation or ratification involves
the exercise of choice or discretion on the part of ratifying or confirming
power. It does appears therefore that there is substantial governmental (i.e.,
Presidential) participation or intervention in the choice of the majority of the
members of the National Executive Board of the BSP.
3.
ID.; ID.; CHARACTER OF ASSETS AND FUNDS. The third aspect
relates to the character of the assets and funds of the BSP. The original
assets of the BSP were acquired by purchase or gift or other equitable
arrangement with the Boy Scouts of America, of which the BSP was part
before the establishment of the Commonwealth of the Philippines. The BSP
charter, however, does not indicate that such assets were public or statal in
character or had originated from the Government or the State. According to
petitioner BSP, its operating funds used for carrying out its purposes and
programs, are derived principally from membership dues paid by the Boy
Scouts themselves and from property rentals. In this respect, the BSP
appears similar to private non-stock, non-profit corporations, although its
charter expressly envisages donations and contributions to it from the
Government and any of its agencies and instrumentalities. We note only
that BSP funds have not apparently heretofore been regarded as public
funds by the Commission on Audit, considering that such funds have not
been audited by the Commission.
4.
ID.; ID.; A GOVERNMENT-CONTROLLED
CORPORATION AND
INSTRUMENTALITY OF THE GOVERNMENT. While the BSP may be seen to

85 | c o r p o c a s e s 2 1 - 4 0

be a mixed type of entity, combining aspects of both public and private


entities, we believe that considering the character of its purposes and its
functions, the statutory designation of the BSP as "a public corporation" and
the substantial participation of the Government in the selection of members
of the National Executive Board of the BSP, the BSP, as presently constituted
under its charter, is a government-controlled corporation within the meaning
of Article IX (B) (2) (1) of the Constitution. We are fortified in this conclusion
when we note that the Administrative Code of 1987 designates the BSP as
one of the attached agencies of the Department of Education, Culture and
Sports ("DECS"). We believe that the BSP is appropriately regarded as "a
government instrumentality" under the 1987 Administrative Code.
5.
ADMINISTRATIVE LAW; ADMINISTRATIVE CODE OF 1987; AGENCY OF
THE GOVERNMENT, DEFINED. An "agency of the Government" is defined
as referring to any of the various units of the Government including a
department, bureau, office, instrumentality, government-owned orcontrolled corporation, or local government or distinct unit therein.
6.
ID.; ID.; GOVERNMENT INSTRUMENTALITY, DEFINED. "Government
instrumentality" is in turn defined in the 1987 Administrative Code in the
following manner: "Instrumentality refers to any 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 or controlled
corporations."cralaw virtua1aw library
7.
ID.; ID.; CHARTERED INSTITUTION, DEFINED. The same Code
describes a "chartered institution" in the following terms: "Chartered
institution refers to any agency organized or operating under a special
charter, and vested by law with functions relating to specific constitutional
policies or objectives. This term includes the state universities and colleges,
and the monetary authority of the State."cralaw virtua1aw library
8.
ID.; ID.; EMPLOYEE, EMBRACED WITHIN THE CIVIL SERVICE. It thus
appears that the BSP may be regarded as both a "government controlled
corporation with an original charter" and as an "instrumentality of the
Government within the meaning of Article IX (B) (2) (1) of the Constitution. It
follows that the employees of petitioner BSP are embraced within the Civil
Service and are accordingly governed by the Civil Service Law and
Regulations.
9.
LABOR & SOCIAL LEGISLATION; LABOR CODE; NATIONAL LABOR
RELATIONS OFFICE; WITHOUT JURISDICTION OVER ILLEGAL DISMISSAL OF
EMPLOYEE OF THE BOY SCOUTS OF THE PHILIPPINES. In view of the
foregoing, we hold that both the Labor Arbiter and public respondent NLRC
had no jurisdiction over the complaint filed by private respondents in NLRC
Case No. 1637-84; neither labor agency had before it any matter which
could validly have been passed upon by it in the exercise of original or
appellate jurisdiction. The appealed Decision and Resolution in this case,
having been rendered without jurisdiction, vested no rights and imposed no
liabilities upon any of the parties here involved.
10.
REMEDIAL LAW; SUPREME COURT; MAY MOTU PROPIO TAKE
COGNIZANCE OF THE ISSUE OF EXISTENCE OR ABSENCE OF JURISDICTION.
That neither party had expressly raised the issue of jurisdiction in the
pleadings poses no obstacle to this ruling of the Court, which may motu

86 | c o r p o c a s e s 2 1 - 4 0

proprio take cognizance of the issue of existence or absence of jurisdiction


and pass upon the same.
DECISION
FELICIANO, J.:
This Petition for Certiorari is directed at (1) the Decision, 1 dated 27
February 1987, and (2) the Resolution 2 dated 16 October 1987, both issued
by the National Labor Relations Commission ("NLRC") in Case No. 1637-84.
Private respondents Fortunato C. Esquerra, Roberto O. Malaborbor,
Estanislao M. Misa, Vicente N. Evangelista and Marcelino P. Garcia, had all
been rank-and-file employees of petitioner Boy Scouts of the Philippines
("BSP"). At the time of termination of their services in February 1985,
private respondents were stationed at the BSP Camp in Makiling, Los Baos,
Laguna.
The events which led to such
follows:chanrob1es virtual 1aw library

termination

of

services

are

as

On 19 October 1984, the Secretary-General of petitioner BSP issued Special


Orders Nos. 80, 81, 83, 84 and 85 addressed separately to the five (5)
private respondents, informing them that on 20 November 1984, they were
to be transferred from the BSP Camp in Makiling to the BSP Land Grant in
Asuncion, Davao del Norte. These Orders were opposed by private
respondents who, on 4 November 1984, appealed the matter to the BSP
National President.
On 6 November 1984, petitioner BSP conducted a pre-transfer briefing at its
National Headquarters in Manila. Private respondents were in attendance
during the briefing and they were there assured that their transfer to Davao
del Norte would not involve any diminution in salary, and that each of them
would receive a relocation allowance equivalent to one (1) months basic
pay. This assurance, however, failed to persuade private respondents to
abandon their opposition to the transfer orders issued by the BSP SecretaryGeneral.
On 13 November 1984, a complaint 3 (docketed as NLRC Case No. 1 6-84J)
for illegal transfer was filed with the then Ministry of Labor and Employment,
Sub-Regional Arbitration Branch IV, San Pablo City, Laguna. Private
respondents there sought to enjoin implementation of Special Orders Nos.
80, 81, 83, 84 and 85, alleging, among other things, that said orders were
"indubitable and irrefutable action[s] prejudicial not only to [them] but to
[their] families and [would] seriously affect [their] economic stability and
solvency considering the present cost of living."cralaw virtua1aw library
On 21 November 1984 (or the day immediately following the date of
scheduled transfer), the BSP Camp Manager in Makiling issued a
Memorandum requiring the five (5) private respondents to explain why they
should not be charged administratively for insubordination. The
Memorandum was a direct result of the refusal by private respondents, two
(2) days earlier, to accept from petitioner BSP their respective boat tickets
to Davao del Norte and their relocation allowances.chanrobles law library

87 | c o r p o c a s e s 2 1 - 4 0

Meanwhile, in a letter of the same date, the BSP National President informed
private respondents that their refusal to comply with the Special Orders was
not sufficiently justified and constituted rank disobedience. Memoranda
subsequently issued by the BSP Secretary-General stressed that such
refusal as well as the explanations proffered therefor, were unacceptable
and could altogether result in termination of employment with petitioner
BSP. These warnings notwithstanding, private respondents continued
pertinaciously to disobey the disputed transfer orders.
Petitioner BSP consequently imposed a five-day suspension on the five (5)
private respondents, in the latter part of January 1985. Subsequently, by
Special Order dated 12 February 1985 issued by the BSP Secretary-General,
private respondents services were ordered terminated effective 15
February 1985.
On 22 February 1985, private respondents amended their original complaint
to include charges of illegal dismissal and unfair labor practice against
petitioner BSP. 4 The Labor Arbiter thereafter proceeded to hear the
complaint.
In a decision 5 dated 31 July 1985, the Labor Arbiter ordered the dismissal of
private respondents complaint for lack of merit.
On 27 February 1987, however, the ruling of the Labor Arbiter was reversed
by public respondent, NLRC, which held that private respondents had been
illegally dismissed by petitioner BSP. The dispositive portion of the NLRC
decision read:jgc:chanrobles.com.ph
"WHEREFORE, premises considered, the Decision appealed from is hereby
SET ASIDE and a new one entered ordering the respondent-appellee
[petitioner BSP] to reinstate the complainants-appellants [private
respondents] to their former positions without loss of seniority rights and
other benefits appurtenant thereto and with full backwages from the time
they were illegally dismissed from the service up to date of their actual
reinstatement.
SO ORDERED."cralaw virtua1aw library
The Court notes at the outset that in the Position Paper 6 filed by petitioner
BSP with the Labor Arbiter, it was alleged in the second paragraph thereof,
that petitioner is a "civic service, non-stock and non-profit organization,
relying mostly [on] government and public support, existing under and by
virtue of Commonwealth Act. No. 111, as amended, by Presidential Decree
No. 460 . . ." A similar allegation was contained in the Brief for Appellee 7
and in the Petition 8 and Memorandum 9 filed by petitioner BSP with public
respondent NLRC and this Court, respectively. The same allegation,
moreover, appeared in the Comment 10 (also treated as the Memorandum)
submitted to this Court by the Solicitor General on behalf of public
respondent NLRC; for their part private respondents stated in their Appeal
Memorandum 11 with the NLRC that petitioner BSP is "by mandate of law a
Public Corporation," a statement reiterated by them in their Memorandum
12 before this Court.chanrobles law library
In a Resolution dated 9 August 1989, this Court required the parties and the
Office of the Government Corporate Counsel to file a comment on the
question of whether or not petitioner BSP is in fact a government-owned or
controlled corporation.

88 | c o r p o c a s e s 2 1 - 4 0

Petitioner, private respondents, the Office of the Solicitor General and the
Office of the Government Corporate Counsel filed their respective
comments.
The central issue is whether or not the BSP is embraced within the Civil
Service as that term is defined in Article IX (B) (2) (1) of the 1987
Constitution which reads as follows:jgc:chanrobles.com.ph
"The Civil Service embraces all branches, subdivisions, instrumentalities,
and agencies of the Government, including government-owned or controlled
corporations with original charters.
x

x"

The answer to the central issue will determine whether or not private
respondent NLRC had jurisdiction to render the Decision and Resolution
which are here sought to be nullified.
The responses of the parties, on the one hand, and of the Office of the
Solicitor General and the Office of the Government Corporate Counsel, upon
the other hand, in compliance with the Resolution of this Court of 9 August
1989, present a noteworthy uniformity. Petitioner BSP and private
respondents submit substantially the same view "that the BSP is a purely
private organization." In contrast, the Solicitor General and the Government
Corporate Counsel take much the same position, that is, that the BSP is a
"public corporation or a "quasi-public corporation" and, as well, a
"government controlled corporation."cralaw virtua1aw library
Petitioner BSPs compliance with our Resolution invokes the following
provisions of its Constitution and By-laws:jgc:chanrobles.com.ph
"The Boy Scouts of the Philippines declares that it is an independent,
voluntary, non-political, non-sectarian and non-governmental organization,
with obligations towards nation building and with international
orientation."cralaw virtua1aw library
The BSP, petitioner stresses, does not receive any monetary or financial
subsidy from the Government whether on the national or local level. 13
Petitioner declares that it is a "purely private organization" directed and
controlled by its National Executive Board the members of which are, it is
said, all "voluntary scouters, including seven (7) Cabinet Secretaries. 14
Private respondents submitted a supplementary memorandum arguing that
while petitioner BSP was created as a public corporation, it had lost that
status when Section 2 of Commonwealth Act No. 111 as amended by P.D.
No. 460 conferred upon it the powers which ordinary private corporations
organized under the Corporation Code have:chanrobles virtual lawlibrary
"Sec. 2.
The said corporation shall have perpetual succession with
power to sue and be sued; to hold such real and personal estate as shall be
necessary for corporate purposes, and to receive real and personal property
by gift, devise, or bequest; to adopt a seal, and to alter or destroy the same
at pleasure; to have offices and conduct its business and affairs in the City
of Manila and in the several provinces; to make and adopt by-laws, rules and
regulations not inconsistent with the laws of the Philippines, and generally
to do all such acts and things (including the establishment of regulations for
the election of associates and successors: as may be necessary to carry into

89 | c o r p o c a s e s 2 1 - 4 0

effect the provisions of the Act and promote the purposes of said
corporation."cralaw virtua1aw library
Private respondents also point out that the BSP is registered as a private
employer with the Social Security System and that all its staff members and
employees are covered by the Social Security Act, indicating that the BSP
had lost its personality or standing as a public corporation. It is further
alleged that the BSPs assets and liabilities, official transactions and
financial statements have never been subjected to audit by the government
auditing office, i.e., the Commission on Audit, being audited rather by the
private auditing firm of Sycip Gorres Velayo and Co. Private respondents
finally state that the appointments of BSP officers and staff were not
approved or confirmed by the Civil Service Commission.
The views of the Office of the Solicitor General and the Office of the
Government Corporate Counsel on the above issue appeared to be generally
similar. The Solicitor Generals Office, although it had appeared for the NLRC
and filed a Comment on the latters behalf on the merits of the Petition for
Certiorari, submitted that the BSP is a government-owned or controlled
corporation, having been created by virtue of Commonwealth Act No. 111
entitled "An Act to Create a Public Corporation to be known as the Boy
Scouts of the Philippines and to Define its Powers and Purposes." The
Solicitor General stressed that the BSP was created in order to "promote,
through organization, and cooperation with other agencies the ability of
boys to do things for themselves and others, to train them in scout craft,
and to teach them patriotism, courage, self-reliance, and kindred virtues,
using the methods which are now in common use by boy scouts." 15 He
further noted that the BSPs objectives and purposes are "solely of a
benevolent character and not for pecuniary profit by its members. 16 The
Solicitor General also underscored the extent of government participation in
the BSP under its charter as reflected in the composition of its governing
body:chanrobles law library
"The governing body of the said corporation shall consist of a National
Executive Board composed of (a) the President of the Philippines or his
representative; (b) the charter and life members of the Boy Scouts of the
Philippines; (c) the Chairman of the Board of Trustees of the Philippine
Scouting Foundation; (d) the Regional Chairman of the Scout Regions of the
Philippines; (e) the Secretary of Education and Culture, the Secretary of
Social Welfare, the Secretary of National Defense, the Secretary of Labor,
the Secretary of Finance, the Secretary of Youth and Sports, and the
Secretary of Local Government and Community Development; (f) an equal
number of individuals from the private sector; (g) the National President of
the Girl Scouts of the Philippines; (h) one Scout of Senior age from each
Scout Region to represent the boy membership; and (i) three
representatives of the cultural minorities. Except for the Regional Chairman
who shall be elected by the Regional Scout Councils during their annual
meetings, and the Scouts of their respective regions, all members of the
National Executive Board shall be either by appointment or cooption, subject
to ratification and confirmation by the Chief Scout, who shall be the Head of
State. . . ." 17 (Emphasis supplied)
The Government Corporate Counsel, like the Solicitor General, describes the
BSP as a "public corporation" but, unlike the Solicitor General, suggests that
the BSP is more of a "quasi corporation" than a "public corporation." The
BSP, unlike most public corporations which are created for a political
purpose, is not vested with political or governmental powers to be exercised
for the public good or public welfare in connection with the administration of

90 | c o r p o c a s e s 2 1 - 4 0

civil government. The Government Corporate Counsel submits, more


specifically, that the BSP falls within the ambit of the term "governmentowned or controlled corporation" as defined in Section 2 of P.D. No. 2029
(approved
on
4
February
1986)
which
reads
as
follows:jgc:chanrobles.com.ph
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions,
which is directly chartered by special law or if organized under the general
corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the
extent of at least a majority of its outstanding capital stock or of its
outstanding voting capital stock.
x

x"

(Emphasis supplied)
Examining the relevant statutory provisions and the arguments outlined
above, the Court considers that the following need to be considered in
arriving at the appropriate legal characterization of the BSP for purposes of
determining whether its officials and staff members are embraced in the
Civil Service. Firstly, BSPs functions as set out in its statutory charter do
have a public aspect. BSPs functions do relate to the fostering of the public
virtues of citizenship and patriotism and the general improvement of the
moral spirit and fiber of our youth. The social value of activities like those to
which the BSP dedicates itself by statutory mandate have in fact, been
accorded constitutional recognition. Article II of the 1987 Constitution
includes in the "Declaration of Principles and State Policies," the
following:chanrobles.com.ph : virtual law library
"Sec. 13.
The State recognizes the vital role of the youth in nationbuilding and shall promote and protect their physical, moral, spiritual,
intellectual, and social well-being. It shall inculcate in the youth patriotism
and nationalism, and encourage their involvement in public and civic
affairs."cralaw virtua1aw library
At the same time, BSPs functions do not relate to the governance of any
part of territory of the Philippines; BSP is not a public corporation in the
same sense that municipal corporations or local governments are public
corporations. BSPs functions can not also be described as proprietary
functions in the same sense that the functions or activities of governmentowned or controlled corporations like the National Development Company or
the National Steel Corporation can be described as proprietary or "businesslike" in character. Nevertheless, the public character of BSPs functions and
activities must be conceded, for they pertain to the educational, civic and
social development of the youth which constitutes a very substantial and
important part of the nation.
The second aspect that the Court must take into account relates to the
governance of the BSP. The composition of the National Executive Board of
the BSP includes, as noted from Section 5 of its charter quoted earlier,
includes seven (7) Secretaries of Executive Departments. The seven (7)
Secretaries (now six [6] in view of the abolition of the Department of Youth
and Sports and merger thereof into the Department of Education, Culture
and Sports) by themselves do not constitute a majority of the members of
the National Executive Board. We must note at the same time that the
appointments of members of the National Executive Board, except only the

91 | c o r p o c a s e s 2 1 - 4 0

appointments of the Regional Chairman and Scouts of Senior age from the
various Scout Regions, are subject to ratification and confirmation by the
Chief Scout, who is the President of the Philippines. Vacancies to the Board
are filled by a majority vote of the remaining members thereof, but again
subject to ratification and confirmation by the Chief Scout. 18 We must
assume that such confirmation or ratification involves the exercise of choice
or discretion on the part of ratifying or confirming power. It does appears
therefore that there is substantial governmental (i.e., Presidential)
participation or intervention in the choice of the majority of the members of
the National Executive Board of the BSP.
The third aspect relates to the character of the assets and funds of the BSP.
The original assets of the BSP were acquired by purchase or gift or other
equitable arrangement with the Boy Scouts of America, of which the BSP
was part before the establishment of the Commonwealth of the Philippines.
The BSP charter, however, does not indicate that such assets were public or
statal in character or had originated from the Government or the State.
According to petitioner BSP, its operating funds used for carrying out its
purposes and programs, are derived principally from membership dues paid
by the Boy Scouts themselves and from property rentals. In this respect, the
BSP appears similar to private non-stock, non-profit corporations, although
its charter expressly envisages donations and contributions to it from the
Government and any of its agencies and instrumentalities. 19 We note only
that BSP funds have not apparently heretofore been regarded as public
funds by the Commission on Audit, considering that such funds have not
been audited by the Commission.
While the BSP may be seen to be a mixed type of entity, combining aspects
of both public and private entities, we believe that considering the character
of its purposes and its functions, the statutory designation of the BSP as "a
public corporation" and the substantial participation of the Government in
the selection of members of the National Executive Board of the BSP, the
BSP, as presently constituted under its charter, is a government-controlled
corporation within the meaning of Article IX (B) (2) (1) of the Constitution.
We are fortified in this conclusion when we note that the Administrative
Code of 1987 designates the BSP as one of the attached agencies of the
Department of Education, Culture and Sports ("DECS"). 20 An "agency of the
Government" is defined as referring to any of the various units of the
Government including a department, bureau, office, instrumentality,
government-owned or-controlled corporation, or local government or distinct
unit therein. 21 "Government instrumentality" is in turn defined in the 1987
Administrative Code in the following manner:chanrobles virtual lawlibrary
"Instrumentality refers to any 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 or controlled corporations." 22
(Emphasis supplied)
The same Code describes a "chartered institution" in the following
terms:jgc:chanrobles.com.ph
"Chartered institution refers to any agency organized or operating under
a special charter, and vested by law with functions relating to specific
constitutional policies or objectives. This term includes the state universities

92 | c o r p o c a s e s 2 1 - 4 0

and colleges, and the monetary authority of the State." 23 (Emphasis


supplied)
We believe that the BSP is appropriately regarded as "a government
instrumentality" under the 1987 Administrative Code.
It thus appears that the BSP may be regarded as both a "government
controlled corporation with an original charter" and as an "instrumentality
of the Government within the meaning of Article IX (B) (2) (1) of the
Constitution. It follows that the employees of petitioner BSP are embraced
within the Civil Service and are accordingly governed by the Civil Service
Law and Regulations.
It remains only to note that even before the effectivity of the 1987
Constitution employees of the BSP already fell within the scope of the Civil
Service. In National Housing Corporation v. Juco, 24 decided in 1985, the
Court, speaking through Mr. Justice Gutierrez, held:jgc:chanrobles.com.ph
"There should no longer be any question at this time that employees of
government-owned or controlled corporations are governed by the civil
service law and civil service rules and regulations.
Section 1, Article XII-B of the
provides:chanrob1es virtual 1aw library

[1973]

Constitution

specifically

The Civil Service embraces every branch, agency, subdivision and


instrumentality of the Government, including every government-owned or
controlled corporation. . . .
The 1935 Constitution had a similar provision in its Section 1, Article XII
which stated:chanrob1es virtual 1aw library
A Civil Service embracing all branches and subdivisions of the Government
shall be provided by law.
The inclusion of government-owned or controlled corporations within the
embrace of the civil service shows a deliberate effort of the framers to plug
an earlier loophole which allowed government-owned or controlled
corporations to avoid the full consequences of the all encompassing
coverage of the civil service system. The same explicit intent is shown by
the addition of agency and instrumentality to branches and subdivisions
of the Government. All offices and firms of the government are covered. The
amendments introduced in 1973 are not idle exercises or meaningless
gestures. They carry the strong message that civil service coverage is broad
and all-embracing insofar as employment in the government in any of its
governmental or corporate arms is concerned."25cralaw:red
The complaint in NLRC Case No. 1637-84 having been filed on 13 November
1984, when the 1973 Constitution was still in force, our ruling in Juco applies
in the case at bar. 26
In view of the foregoing, we hold that both the Labor Arbiter and public
respondent NLRC had no jurisdiction over the complaint filed by private
respondents in NLRC Case No. 1637-84; neither labor agency had before it
any matter which could validly have been passed upon by it in the exercise
of original or appellate jurisdiction. The appealed Decision and Resolution in
this case, having been rendered without jurisdiction, vested no rights and
imposed no liabilities upon any of the parties here involved. That neither

93 | c o r p o c a s e s 2 1 - 4 0

party had expressly raised the issue of jurisdiction in the pleadings poses no
obstacle to this ruling of the Court, which may motu proprio take cognizance
of the issue of existence or absence of jurisdiction and pass upon the same.
27
ACCORDINGLY, the Decision of the Labor Arbiter dated 31 July 1985, and the
Decision dated 27 February 1987 and Resolution dated 16 October 1987,
issued by public respondent NLRC, in NLRC Case No. 1637-84, are hereby
SET ASIDE. All other orders and resolutions rendered in this case by the
Labor Arbiter and the NLRC are likewise SET ASIDE. No pronouncement as to
costs.
Fernan, C.J., Gutierrez, Jr., Bidin and Davide, Jr., JJ., concur.
G.R. No. L-4043
May 26, 1952
CENON S. CERVANTES, petitioner,
vs.
THE AUDITOR GENERAL, respondent.
Cenon Cervantes in his own behalf.
Office of the Solicitor General Pompeyo Diaz and Solicitor Felix V. Makasiar
for respondent.
REYES, J.:
This is a petition to review a decision of the Auditor General denying
petitioner's claim for quarters allowance as manager of the National Abaca
and Other Fibers Corporation, otherwise known as the NAFCO.
It appears that petitioner was in 1949 the manager of the NAFCO with a
salary of P15,000 a year. By a resolution of the Board of Directors of this
corporation approved on January 19 of that year, he was granted quarters
allowance of not exceeding P400 a month effective the first of that month.
Submitted the Control Committee of the Government Enterprises Council for
approval, the said resolution was on August 3, 1949, disapproved by the
said Committee on strenght of the recommendation of the NAFCO auditor,
concurred in by the Auditor General, (1) that quarters allowance constituted
additional compensation prohibited by the charter of the NAFCO, which fixes
the salary of the general manager thereof at the sum not to exceed P15,000
a year, and (2) that the precarious financial condition of the corporation did
not warrant the granting of such allowance.
On March 16, 1949, the petitioner asked the Control Committee to
reconsider its action and approve his claim for allowance for January to June
15, 1949, amounting to P1,650. The claim was again referred by the Control
Committee to the auditor General for comment. The latter, in turn referred it
to the NAFCO auditor, who reaffirmed his previous recommendation and
emphasized that the fact that the corporation's finances had not improved.
In view of this, the auditor General also reiterated his previous opinion
against the granting of the petitioner's claim and so informed both the
Control Committee and the petitioner. But as the petitioner insisted on his
claim the Auditor General Informed him on June 19, 1950, of his refusal to
modify his decision. Hence this petition for review.
The NAFCO was created by the Commonwealth Act No. 332, approved on
June 18, 1939, with a capital stock of P20,000,000, 51 per cent of which was
to be able to be subscribed by the National Government and the remainder
to be offered to provincial, municipal, and the city governments and to the

94 | c o r p o c a s e s 2 1 - 4 0

general public. The management the corporation was vested in a board of


directors of not more than 5 members appointed by the president of the
Philippines with the consent of the Commission on Appointments. But the
corporation was made subject to the provisions of the corporation law in so
far as they were compatible with the provisions of its charter and the
purposes of which it was created and was to enjoy the general powers
mentioned in the corporation law in addition to those granted in its charter.
The members of the board were to receive each a per diem of not to exceed
P30 for each day of meeting actually attended, except the chairman of the
board, who was to be at the same time the general manager of the
corporation and to receive a salary not to exceed P15,000 per annum.
On October 4, 1946, Republic Act No. 51 was approved authorizing the
President of the Philippines, among other things, to effect such reforms and
changes in government owned and controlled corporations for the purpose
of promoting simplicity, economy and efficiency in their operation Pursuant
to this authority, the President on October 4, 1947, promulgated Executive
Order No. 93 creating the Government Enterprises Council to be composed
of the President of the Philippines as chairman, the Secretary of Commerce
and Industry as vice-chairman, the chairman of the board of directors and
managing heads of all such corporations as ex-officio members, and such
additional members as the President might appoint from time to time with
the consent of the Commission on Appointments. The council was to advise
the President in the excercise of his power of supervision and control over
these corporations and to formulate and adopt such policy and measures as
might be necessary to coordinate their functions and activities. The
Executive Order also provided that the council was to have a Control
Committee composed of the Secretary of Commerce and Industry as
chairman, a member to be designated by the President from among the
members of the council as vice-chairman and the secretary as ex-officio
member, and with the power, among others
(1) To supervise, for and under the direction of the President, all the
corporations owned or controlled by the Government for the purpose of
insuring efficiency and economy in their operations;
(2) To pass upon the program of activities and the yearly budget of
expenditures approved by the respective Boards of Directors of the said
corporations; and
(3) To carry out the policies and measures formulated by the Government
Enterprises Council with the approval of the President. (Sec. 3, Executive
Order No. 93.)
With its controlling stock owned by the Government and the power of
appointing its directors vested in the President of the Philippines, there can
be no question that the NAFCO is Government controlled corporation subject
to the provisions of Republic Act No. 51 and the executive order (No. 93)
promulgated in accordance therewith. Consequently, it was also subject to
the powers of the Control Committee created in said executive order, among
which is the power of supervision for the purpose of insuring efficiency and
economy in the operations of the corporation and also the power to pass
upon the program of activities and the yearly budget of expenditures
approved by the board of directors. It can hardly be questioned that under
these powers the Control Committee had the right to pass upon, and
consequently to approve or disapprove, the resolution of the NAFCO board
of directors granting quarters allowance to the petitioners as such allowance
necessarily constitute an item of expenditure in the corporation's budget.

95 | c o r p o c a s e s 2 1 - 4 0

That the Control Committee had good grounds for disapproving the
resolution is also clear, for, as pointed out by the Auditor General and the
NAFCO auditor, the granting of the allowance amounted to an illegal
increase of petitioner's salary beyond the limit fixed in the corporate charter
and was furthermore not justified by the precarious financial condition of the
corporation.
It is argued, however, that Executive Order No. 93 is null and void, not only
because it is based on a law that is unconstitutional as an illegal delegation
of legislature power to executive, but also because it was promulgated
beyond the period of one year limited in said law.
The second ground ignores the rule that in the computation of the time for
doing an act, the first day is excluded and the last day included (Section 13
Rev. Ad. Code.) As the act was approved on October 4, 1946, and the
President was given a period of one year within which to promulgate his
executive order and that the order was in fact promulgated on October 4,
1947, it is obvious that under the above rule the said executive order was
promulgated within the period given.
As to the first ground, the rule is that so long as the Legislature "lays down a
policy and a standard is established by the statute" there is no undue
delegation. (11 Am. Jur. 957). Republic Act No. 51 in authorizing the
President of the Philippines, among others, to make reforms and changes in
government-controlled corporations, lays down a standard and policy that
the purpose shall be to meet the exigencies attendant upon the
establishment of the free and independent government of the Philippines
and to promote simplicity, economy and efficiency in their operations. The
standard was set and the policy fixed. The President had to carry the
mandate. This he did by promulgating the executive order in question
which, tested by the rule above cited, does not constitute an undue
delegation of legislative power.
It is also contended that the quarters allowance is not compensation and so
the granting of it to the petitioner by the NAFCO board of directors does not
contravene the provisions of the NAFCO charter that the salary of the
chairman of said board who is also to be general manager shall not exceed
P15,000 per anum. But regardless of whether quarters allowance should be
considered as compensation or not, the resolution of the board of the
directors authorizing payment thereof to the petitioner cannot be given
effect since it was disapproved by the Control Committee in the exercise of
powers granted to it by Executive Order No. 93. And in any event,
petitioner's contention that quarters allowance is not compensation, a
proposition on which American authorities appear divided, cannot be
insisted on behalf of officers and employees working for the Government of
the Philippines and its Instrumentalities, including, naturally, governmentcontrolled corporations. This is so because Executive Order No. 332 of 1941,
which prohibits the payment of additional compensation to those working
for the Government and its Instrumentalities, including governmentcontrolled corporations, was in 1945 amended by Executive Order No. 77 by
expressly exempting from the prohibition the payment of quarters allowance
"in favor of local government officials and employees entitled to this under
existing law." The amendment is a clear indication that quarters allowance
was meant to be included in the term "additional compensation", for
otherwise the amendment would not have expressly excepted it from the
prohibition. This being so, we hold that, for the purpose of the executive
order just mentioned, quarters allowance is considered additional
compensation and, therefore, prohibited.

96 | c o r p o c a s e s 2 1 - 4 0

In view of the foregoing, the petition for review is dismissed, with costs.
G.R. No. 79182
September 11, 1991
PNOC-ENERGY DEVELOPMENT CORPORATION, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION (Third Division) and DANILO
MERCADO, respondents.
Bacorro & Associates for petitioner.
Alberto L. Dalmacion for private respondent.

PARAS, J.:p
This is a petition for certiorari to set aside the Resolution * dated July 3,
1987 of respondent National Labor Relations Commission (NLRC for brevity)
which affirmed the decision dated April 30, 1986 of Labor Arbiter Vito J.
Minoria of the NLRC, Regional Arbitration Branch No. VII at Cebu City in Case
No. RAB-VII-0556-85 entitled "Danilo Mercado, Complainant, vs. Philippine
National Oil Company-Energy Development Corporation, Respondent",
ordering the reinstatement of complainant Danilo Mercado and the award of
various monetary claims.
The factual background of this case is as follows:
Private respondent Danilo Mercado was first employed by herein petitioner
Philippine National Oil Company-Energy Development Corporation (PNOCEDC for brevity) on August 13, 1979. He held various positions ranging from
clerk, general clerk to shipping clerk during his employment at its Cebu
office until his transfer to its establishment at Palimpinon, Dumaguete,
Oriental Negros on September 5, 1984. On June 30, 1985, private
respondent Mercado was dismissed. His last salary was P1,585.00 a month
basic pay plus P800.00 living allowance (Labor Arbiter's Decision, Annex "E"
of Petition, Rollo, p. 52).
The grounds for the dismissal of Mercado are allegedly serious acts of
dishonesty committed as follows:
1.
On ApriI 12, 1985, Danilo Mercado was ordered to purchase 1,400
pieces of nipa shingles from Mrs. Leonardo Nodado of Banilad, Dumaguete
City, for the total purchase price of Pl,680.00. Against company policy,
regulations and specific orders, Danilo Mercado withdrew the nipa shingles
from the supplier but paid the amount of P1,000.00 only. Danilo Mercado
appropriated the balance of P680.00 for his personal use;
2.
In the same transaction stated above, the supplier agreed to give the
company a discount of P70.00 which Danilo Mercado did not report to the
company;
3.
On March 28, 1985, Danilo Mercado was instructed to contract the
services of Fred R. Melon of Dumaguete City, for the fabrication of rubber
stamps, for the total amount of P28.66. Danilo Mercado paid the amount of
P20.00 to Fred R. Melon and appropriated for his personal use the balance of
P8.66.

97 | c o r p o c a s e s 2 1 - 4 0

In addition, private respondent, Danilo Mercado violated company rules and


regulations in the following instances:
1.
On June 5, 1985, Danilo Mercado was absent from work without leave,
without proper turn-over of his work, causing disruption and delay of
company work activities;
2.
On June 15, 1985, Danilo Mercado went on vacation leave without
prior leave, against company policy, rules and regulations. (Petitioner's
Memorandum, Rollo, p. 195).
On September 23, 1985, private respondent Mercado filed a complaint for
illegal dismissal, retirement benefits, separation pay, unpaid wages, etc.
against petitioner PNOC-EDC before the NLRC Regional Arbitration Branch
No. VII docketed as Case No. RAB-VII-0556-85.
After private respondent Mercado filed his position paper on December 16,
1985 (Annex "B" of the Petition, Rollo, pp. 28-40), petitioner PNOC-EDC filed
its Position Paper/Motion to Dismiss on January 15, 1986, praying for the
dismissal of the case on the ground that the Labor Arbiter and/or the NLRC
had no jurisdiction over the case (Annex "C" of the Petition, Rollo, pp. 4145), which was assailed by private respondent Mercado in his Opposition to
the Position Paper/Motion to Dismiss dated March 12, 1986 (Annex "D" of
the Petition, Rollo, pp. 46-50).
The Labor Arbiter ruled in favor of private respondent Mercado. The
dispositive onion of said decision reads as follows:
WHEREFORE, in view of the foregoing, respondents are hereby ordered:
1)
To reinstate complainant to his former position with full back wages
from the date of his dismissal up to the time of his actual reinstatement
without loss of seniority rights and other privileges;
2)
To pay complainant the amount of P10,000.00 representing his
personal share of his savings account with the respondents;
3)
To pay complainants the amount of P30,000.00 moral damages;
P20,000.00 exemplary damages and P5,000.00 attorney's fees;
4)
To pay complainant the amount of P792.50 as his proportionate 13th
month pay for 1985.
Respondents are hereby further ordered to deposit the aforementioned
amounts with this Office within ten days from receipt of a copy of this
decision for further disposition.
SO ORDERED.
(Labor Arbiter's Decision, Rollo, p. 56)
The appeal to the NLRC was dismissed for lack of merit on July 3, 1987 and
the assailed decision was affirmed.
Hence, this petition.
The issues raised by petitioner in this instant petition are:

98 | c o r p o c a s e s 2 1 - 4 0

1.
Whether or not matters of employment affecting the PNOC-EDC, a
government-owned and controlled corporation, are within the jurisdiction of
the Labor Arbiter and the NLRC.
2.
Assuming the affirmative, whether or not the Labor Arbiter and the
NLRC are justified in ordering the reinstatement of private respondent,
payment of his savings, and proportionate 13th month pay and payment of
damages as well as attorney's fee.
Petitioner PNOC-EDC alleges that it is a corporation wholly owned and
controlled by the government; that the Energy Development Corporation is
a subsidiary of the Philippine National Oil Company which is a government
entity created under Presidential Decree No. 334, as amended; that being a
government-owned and controlled corporation, it is governed by the Civil
Service Law as provided for in Section 1, Article XII-B of the 1973
Constitution, Section 56 of Presidential Decree No. 807 (Civil Service
Decree) and Article 277 of Presidential Decree No. 442, as amended (Labor
Code).
The 1973 Constitution provides:
The Civil Service embraces every branch, agency, subdivision and
instrumentality of the government including government-owned or
controlled corporations.
Petitioner PNOC-EDC argued that since Labor Arbiter Minoria rendered the
decision at the time when the 1973 Constitution was in force, said decision
is null and void because under the 1973 Constitution, government-owned
and controlled corporations were governed by the Civil Service Law. Even
assuming that PNOC-EDC has no original or special charter and Section 2(i),
Article IX-B of the 1987 Constitution provides that:
The Civil Service embraces all branches, subdivision, instrumentalities and
agencies of the Government, including government-owned or controlled
corporations with original charters.
such circumstances cannot give validity to the decision of the Labor Arbiter
(Ibid., pp. 192-193).
This issue has already been laid to rest in the case of PNOC-EDC vs.
Leogardo, 175 SCRA 26 (July 5, 1989), involving the same petitioner and the
same issue, where this Court ruled that the doctrine that employees of
government-owned and/or con controlled corporations, whether created by
special law or formed as subsidiaries under the General Corporation law are
governed by the Civil Service Law and not by the Labor Code, has been
supplanted by the present Constitution. "Thus, under the present state of
the law, the test in determining whether a government-owned or controlled
corporation is subject to the Civil Service Law are the manner of its creation,
such that government corporations created by special charter are subject to
its provisions while those incorporated under the General Corporation Law
are not within its coverage."
Specifically, the PNOC-EDC having been incorporated under the General
Corporation Law was held to be a government owned or controlled
corporation whose employees are subject to the provisions of the Labor
Code (Ibid.).

99 | c o r p o c a s e s 2 1 - 4 0

The fact that the case arose at the time when the 1973 Constitution was still
in effect, does not deprive the NLRC of jurisdiction on the premise that it is
the 1987 Constitution that governs because it is the Constitution in place at
the time of the decision (NASECO v. NLRC, G.R. No. 69870, 168 SCRA 122
[1988]).
In the case at bar, the decision of the NLRC was promulgated on July 3,
1987. Accordingly, this case falls squarely under the rulings of the
aforementioned cases.
As regards the second issue, the record shows that PNOC-EDC's accusations
of dishonesty and violations of company rules are not supported by
evidence. Nonetheless, while acknowledging the rule that administrative
bodies are not governed by the strict rules of evidence, petitioner PNOCEDC alleges that the labor arbiter's propensity to decide the case through
the position papers submitted by the parties is violative of due process
thereby rendering the decision null and void (Ibid., p. 196).
On the other hand, private respondent contends that as can be seen from
petitioner's Motion for Reconsideration and/or Appeal dated July 28, 1986
(Annex "F" of the Petition, Rollo, pp. 57- 64), the latter never questioned the
findings of facts of the Labor Arbiter but simply limited its objection to the
lack of legal basis in view of its stand that the NLRC had no jurisdiction over
the case (Private Respondent's Memorandum, Rollo, p. 104).
Petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss dated January
15, 1986 (Annex "C" of the Petition Rollo, pp. 41-45) before the Regional
Arbitration Branch No. VII of Cebu City and its Motion for Reconsideration
and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 5764) before the NLRC of Cebu City. Indisputably, the requirements of due
process are satisfied when the parties are given an opportunity to submit
position papers. What the fundamental law abhors is not the absence of
previous notice but rather the absolute lack of opportunity to ventilate a
party's side. There is no denial of due process where the party submitted its
position paper and flied its motion for reconsideration (Odin Security Agency
vs. De la Serna, 182 SCRA 472 [February 21, 1990]). Petitioner's subsequent
Motion for Reconsideration and/or Appeal has the effect of curing whatever
irregularity might have been committed in the proceedings below (T.H.
Valderama and Sons, Inc. vs. Drilon, 181 SCRA 308 [January 22, 1990]).
Furthermore, it has been consistently held that findings of administrative
agencies which have acquired expertise because their jurisdiction is
confined to specific matters are accorded not only respect but even finality
(Asian Construction and Development Corporation vs. NLRC, 187 SCRA 784
[July 27, 1990]; Lopez Sugar Corporation vs. Federation of Free Workers, 189
SCRA 179 [August 30, 1990]). Judicial review by this Court does not go so far
as to evaluate the sufficiency of the evidence but is limited to issues of
jurisdiction or grave abuse of discretion (Filipinas Manufacturers Bank vs.
NLRC, 182 SCRA 848 [February 28, 1990]). A careful study of the records
shows no substantive reason to depart from these established principles.
While it is true that loss of trust or breach of confidence is a valid ground for
dismissing an employee, such loss or breach of trust must have some basis
(Gubac v. NLRC, 187 SCRA 412 [July 13, 1990]). As found by the Labor
Arbiter, the accusations of petitioner PNOC-EDC against private respondent
Mercado have no basis. Mrs. Leonardo Nodado, from whom the nipa shingles
were purchased, sufficiently explained in her affidavit (Rollo, p. 36) that the
total purchase price of P1,680.00 was paid by respondent Mercado as

100 | c o r p o c a s e s 2 1 - 4 0

agreed upon. The alleged discount given by Mrs. Nodado is not supported
by evidence as well as the alleged appropriation of P8.66 from the cost of
fabrication of rubber stamps. The Labor Arbiter, likewise, found no evidence
to support the alleged violation of company rules. On the contrary, he found
respondent Mercado's explanation in his affidavit (Rollo, pp. 38-40) as to the
alleged violations to be satisfactory. Moreover, these findings were never
contradicted by petitioner petitioner PNOC-EDC.
PREMISES CONSIDERED, the petition is DENIED and the resolution of
respondent NLRC dated July 3, 1987 is AFFIRMED with the modification that
the moral damages are reduced to Ten Thousand (P10,000.00) Pesos, and
the exemplary damages reduced to Five Thousand (P5,000.00) Pesos.
SO ORDERED.

[G.R. No. 120138. September 5, 1997]

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS,


RODOLFO L. JOCSON, JR., MELVIN S. JURISPRUDENCIA,
AUGUSTUS CESAR AZURA and EDGARDO D.
PABALAN, petitioners,
vs. COURT
OF
APPEALS,
SECURITIES AND EXCHANGE COMMISSION, TORMIL
REALTY & DEVELOPMENT CORPORATION, ANTONIO P.
TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T.
MORALES, and DANTE D. MORALES, respondents.
DECISION
KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioners seek to annul the decision of the Court of Appeals in CA-G.R.
SP. No. 31748 dated 23 May 1994 and its subsequent resolution dated 10 May
1995 denying petitioners motion for reconsideration.
The present case involves two separate but interrelated conflicts. The facts
leading to the first controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority
stockholder of Tormil Realty & Development Corporation while private
respondents who are the children of Judge Torres deceased brother Antonio
A. Torres, constituted the minority stockholders. In particular, their respective
shareholdings and positions in the corporation were as follows:
Name of Stockholder

Number of

Percentage

Position(s)

Shares
Manuel A. Torres, Jr.

100,120

101 | c o r p o c a s e s 2 1 - 4 0

57.21

Dir./Pres./Chair

Milagros
Torres

P.
33,430

Josefina
Torres
Sec.
Ma.
Carlos

19.10

8,290

4.73

Antonio
Jr. 8,290

Ma.
Morales

T.
Dir./Cor-Sec.

P.

Torres,

4.73

Luisa
4.45

7,790

Dante D. Morales

Director

Jacinta
4.73

8,290

P.
Cor-

Dir./Ass.

Cristina
4.73

8,290

Ma.
Torres

Dir./Treasurer

500

P.
Director
T.
Director

.28

Director

[1]

In 1984, Judge Torres, in order to make substantial savings in taxes,


adopted an estate planning scheme under which he assigned to Tormil Realty
& Development Corporation (Tormil for brevity) various real properties he
owned and his shares of stock in other corporations in exchange for 225,972
Tormil Realty shares. Hence, on various dates in July and August of 1984, ten
(10) deeds of assignment were executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES


TO
BE ISSUED
1. July 13, 1984

TCT 81834
TCT 144240

2. July 13, 1984

3.
374079

Quezon City 13,252


Quezon City

TCT 77008

Manila

TCT 65689

Manila

TCT 109200

Manila

July

13,
Makati

4. July 24, 1984

1984

TCT

8,307
TCT 41527

TCT 41528

102 | c o r p o c a s e s 2 1 - 4 0

78,493

Pasay
Pasay

9,855

TCT 41529
5.
Aug.
Stocks

06,

6,
Aug.
Stocks

9.
Stocks
10.
Stocks

El

06,
1984
48,737

7.
Aug.
Stocks
8.
Aug.
Stocks

1984
2,000

07,
1984
6,300
20,

Aug.

Jockey

Filipino
Club

San

Miguel

Corp.

China

Banking

Corp.

Ayala

Corp.

Ayala

Fund

1984
7,468

29,

Hogar

Manila

07,
1984
50,283

Aug.

Pasay

1984
1,322

225,972

[2]

Consequently, the aforelisted properties were duly recorded in the inventory


of assets of Tormil Realty and the revenues generated by the said properties
were correspondingly entered in the corporations books of account and
financial records.
Likewise, all the assigned parcels of land were duly registered with the
respective Register of Deeds in the name of Tormil Realty, except for the ones
located in Makati and Pasay City.
At the time of the assignments and exchange, however, only 225,000 Tormil
Realty shares remained unsubscribed, all of which were duly issued to and
received by Judge Torres (as evidenced by stock certificates Nos. 17, 18, 19,
20, 21, 22, 23, 24 & 25).
[3]

Due to the insufficient number of shares of stock issued to Judge Torres


and the alleged refusal of private respondents to approve the needed increase
in the corporations authorized capital stock (to cover the shortage of 972
shares due to Judge Torres under the estate planning scheme), on 11
September 1986, Judge Torres revoked the two (2) deeds of assignment
covering the properties in Makati and Pasay City.
[4]

Noting the disappearance of the Makati and Pasay City properties from the
corporations inventory of assets and financial records private respondents, on
31 March 1987, were constrained to file a complaint with the Securities and
Exchange Commission (SEC) docketed as SEC Case No. 3153 to compel
Judge Torres to deliver to Tormil Corporation the two (2) deeds of assignment
covering the aforementioned Makati and Pasay City properties which he had
unilaterally revoked and to cause the registration of the corresponding titles in
the name of Tormil. Private respondents alleged that following the
disappearance of the properties from the corporations inventory of assets, they

103 | c o r p o c a s e s 2 1 - 4 0

found that on October 24, 1986, Judge Torres, together with Edgardo Pabalan
and Graciano Tobias, then General Manager and legal counsel, respectively, of
Tormil, formed and organized a corporation named Torres-Pabalan Realty and
Development Corporation and that as part of Judge Torres contribution to the
new corporation, he executed in its favor a Deed of Assignment conveying the
same Makati and Pasay City properties he had earlier transferred to Tormil.
The second controversy--involving the same parties--concerned the
election of the 1987 corporate board of directors.
The 1987 annual stockholders meeting and election of directors of Tormil
corporation was scheduled on 25 March 1987 in compliance with the provisions
of its by-laws.
Pursuant thereto, Judge Torres assigned from his own shares, one (1)
share each to petitioners Tobias, Jocson, Jurisprudencia, Azura and
Pabalan. These assigned shares were in the nature of qualifying shares, for
the sole purpose of meeting the legal requirement to be able to elect
them (Tobias and company) to the Board of Directors as Torres nominees.
The assigned shares were covered by corresponding Tormil Stock
Certificates Nos. 030, 029, 028, 027, 026 and at the back of each certificate the
following inscription is found:

The present certificate and/or the one share it represents, conformably to the
purpose and intention of the Deed of Assignment dated March 6, 1987, is not
held by me under any claim of ownership and I acknowledge that I hold the
same merely as trustee of Judge Manuel A. Torres, Jr. and for the sole purpose
of qualifying me as Director;
(Signature of Assignee)

[5]

The reason behind the aforestated action was to remedy the inequitable
lopsided set-up obtaining in the corporation, where, notwithstanding his
controlling interest in the corporation, the late Judge held only a single seat in
the nine-member Board of Directors and was, therefore, at the mercy of the
minority, a combination of any two (2) of whom would suffice to overrule the
majority stockholder in the Boards decision making functions.
[6]

On 25 March 1987, the annual stockholders meeting was held as


scheduled. What transpired therein was ably narrated by Attys. Benito Cataran
and Bayani De los Reyes, the official representatives dispatched by the SEC to
observe the proceedings (upon request of the late Judge Torres) in their report
dated 27 March 1987:
xxx.

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential
bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina
Torres introduced us to the stockholders namely: Milagros Torres, Antonio
Torres, Jr., Ma. Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta
Torres. Antonio Torres, Jr. questioned our authority and personality to appear

104 | c o r p o c a s e s 2 1 - 4 0

in the meeting claiming subject corporation is a family and private firm. We


explained that our appearance there was merely in response to the request of
Manuel Torres, Jr. and that SEC has jurisdiction over all registered
corporations. Manuel Torres, Jr., a septuagenarian, argued that as holder of
the major and controlling shares, he approved of our attendance in the
meeting.
At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano
Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty.
Augustus Cesar Azura arrived. Atty. Azura told the body that they came as
counsels of Manuel Torres, Jr. and as stockholders having assigned qualifying
shares by Manuel Torres, Jr.
The stockholders meeting started at 2:45 p.m. with Mr. Pabalan presiding
after verbally authorized by Manuel Torres, Jr., the President and Chairman of
the Board. The secretary when asked about the quorum, said that there was
more than a quorum. Mr. Pabalan distributed copies of the presidents report
and the financial statements. Antonio Torres, Jr. requested time to study the
said reports and brought out the question of auditing the finances of the
corporation which he claimed was approved previously by the board. Heated
arguments ensued which also touched on family matters. Antonio Torres, Jr.
moved for the suspension of the meeting but Manuel Torres, Jr. voted for the
continuation of the proceedings.
Mr. Pabalan suggested that the opinion of the SEC representatives be asked on
the propriety of suspending the meeting but Antonio Torres, Jr. objected
reasoning out that we were just observers.
When the Chairman called for the election of directors, the Secretary refused
to write down the names of nominees prompting Atty. Azura to initiate the
appointment of Atty. Jocson, Jr. as Acting Secretary.
Antonio Torres, Jr. nominated the present members of the Board. At this
juncture, Milagros Torres cried out and told the group of Manuel Torres, Jr. to
leave the house.
Manuel Torres, Jr., together with his lawyers-stockholders went to the
residence of Ma. Jacinta Torres in San Miguel Village, Makati, Metro
Manila. The undersigned joined them since the group with Manuel Torres, Jr.
the one who requested for S.E.C. observers, represented the majority of the
outstanding capital stock and still constituted a quorum.
At the resumption of the meeting, the following were nominated and elected
as directors for the year 1987-1988:
1.

Manuel Torres, Jr.


2.

Ma. Jacinta Torres

105 | c o r p o c a s e s 2 1 - 4 0

3.

Edgardo Pabalan

4.

Graciano Tobias

5.

Rodolfo Jocson, Jr.

6.

Melvin Jurisprudencia

7.

Augustus Cesar Azura

8.

Josefina Torres

9.

Dante Morales

After the election, it was resolved that after the meeting, the new board of
directors shall convene for the election of officers.
xxx

. [7]

Consequently, on 10 April 1987, private respondents instituted a complaint


with the SEC (SEC Case No. 3161) praying in the main, that the election of
petitioners to the Board of Directors be annulled.
Private respondents alleged that the petitioners-nominees were not
legitimate stockholders of Tormil because the assignment of shares to them
violated the minority stockholders right of pre-emption as provided in the
corporations articles and by-laws.
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were
consolidated for joint hearing and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a
decision in favor of private respondents. The dispositive portion thereof states,
thus:

WHEREFORE, premises considered, judgment is hereby rendered as follows:


1.
Ordering and directing the respondents, particularly respondent
Manuel A. Torres, Jr., to turn over and deliver to TORMIL through its
Corporate Secretary, Ma. Cristina T. Carlos: (a) the originals of the Deeds of
Assignment dated July 13 and 24, 1984 together with the owners duplicates
of Transfer Certificates of Title Nos. 374079 of the Registry of Deeds for
Makati, and 41527, 41528 and 41529 of the Registry of Deeds for Pasay City
and/or to cause the formal registration and transfer of title in and over such
real properties in favor of TORMIL with the proper government agency; (b)
all corporate books of account, records and papers as may be necessary for the
conduct of a comprehensive audit examination, and to allow the examination
and inspection of such accounting books, papers and records by any or all of
the corporate directors, officers and stockholders and/or their duly authorized
representatives or auditors;

106 | c o r p o c a s e s 2 1 - 4 0

2.
Declaring as permanent and final the writ of preliminary injunction
issued by the Hearing Panel on February 13, 1989;
3.
Declaring as null and void the election and appointment of
respondents to the Board of Directors and executive positions of TORMIL
held on March 25, 1987, and all their acts and resolutions made for and in
behalf of TORMIL by authority of and pursuant to such invalid appointment
& election held on March 25, 1987;
4.
Ordering the respondents jointly and severally, to pay the
complainants the sum of ONE HUNDRED THOUSAND PESOS
(P100,000.00) and by way of attorneys fees.
[8]

Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC


No. 339). Thereafter, on 3 April 1991, during the pendency of said appeal,
petitioner Manuel A. Torres, Jr. died. However, notice thereof was brought to
the attention of the SEC not by petitioners counsel but by private respondents
in a Manifestation dated 24 April 1991.
[9]

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on


grounds that no administrator or legal representative of the late Judge Torres
estate has yet been appointed by the Regional Trial Court of Makati where Sp.
Proc. No. M-1768 (In Matter of the Issuance of the Last Will and Testament of
Manuel A. Torres, Jr.) was pending. Two similar motions for suspension were
filed by petitioners on 28 June 1993 and 9 July 1993.
On 19 July 1993, the SEC en banc issued an Order denying petitioners
aforecited motions on the following ground:

Before the filing of these motions, the Commission en banc had already
completed all proceedings and had likewise ruled on the merits of the
appealed cases. Viewed in this light, we thus feel that there is nothing left to
be done except to deny these motions to suspend proceedings.
[10]

On the same date, the SEC en banc rendered a decision, the dispositive
portion of which reads, thus:

WHEREFORE, premises considered, the appealed decision of the hearing


panel is hereby affirmed and all motions pending before us incident to this
appealed case are necessarily DISMISSED.
SO ORDERED.

[11]

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to


the Court of Appeals by way of a petition for review (docketed as CA-G.R. SP
No. 31748).
On 23 May 1994, the Court of Appeals rendered a decision, the dispositive
portion of which states:

107 | c o r p o c a s e s 2 1 - 4 0

WHEREFORE, the petition for review is DISMISSED and the appealed


decision is accordingly affirmed.
SO ORDERED.

[12]

From the said decision, petitioners filed a motion for reconsideration which
was denied in a resolution issued by the Court of Appeals dated 10 May 1995.
[13]

Insisting on their cause, petitioners filed the present petition for review
alleging that the Court of Appeals committed the following errors in its decision:

(1)
WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A
FULL LENGTH DECISION, WITHOUT THE EVIDENCE AND THE
ORIGINAL RECORD OF S.E.C. - AC NO. 339 BEING PROPERLY
BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN
OMISSION RESULTING IN A CLEAR TRANSGRESSION OR
CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO
PROCEDURAL DUE PROCESS;
(2)
WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE
RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN
RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE
DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO. 339
AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE
SAID DECEASEDS TESTATE ESTATE, AND MOREOVER, WHEN IT
SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS
APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM
GESTIO;
(3)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE
AND THE ORIGINAL RECORD OF S.E.C. -AC NO. 339 NOT HAVING
ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153
INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE
(AS CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE)
AND WAS NOT A MERE CASE OF LESION OR INADEQUACY OF
CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO
ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and,
(4)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE
AND THE ORIGINAL RECORD OF S.E.C.-AC NO. 339 NOT HAVING
ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE LATE

108 | c o r p o c a s e s 2 1 - 4 0

JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED


ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS
AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN ACTING
CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL NOTICE
OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER
STOCKHOLDERS.
[14]

We shall resolve the issues in seriatim.


I

Petitioners insist that the failure to transmit the original records to the Court
of Appeals deprived them of procedural due process. Without the evidence and
the original records of the proceedings before the SEC, the Court of Appeals,
petitioners adamantly state, could not have possibly made a proper
appreciation and correct determination of the issues, particularly the factual
issues they had raised on appeal. Petitioners also assert that since the Court of
Appeals allegedly gave due course to their petition, the original records should
have been forwarded to said court.
Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91
(dated 27 February 1991) which provides that:

8. WHEN PETITION GIVEN DUE COURSE.-The Court of Appeals shall


give due course to the petition only when it shows prima facie that the court,
commission, board, office or agency concerned has committed errors of fact
or law that would warrant reversal or modification of the order, ruling or
decision sought to be reviewed. The findings of fact of the court commission,
board, office or agency concerned when supported by substantial evidence
shall be final.
xxx.

11. TRANSMITTAL OF RECORD.-Within fifteen (15) days from notice


that the petition has been given due course, the court, commission, board,
office or agency concerned shall transmit to the Court of Appeals the original
or a certified copy of the entire record of the proceeding under review. The
record to be transmitted may be abridged by agreement of all parties to the
proceeding. The Court of Appeals may require or permit subsequent
correction or addition to the record.
Petitioners contend that the Court of Appeals had given due course to their
petition as allegedly indicated by the following acts:

a)
it granted the restraining order applied for by the herein petitioners, and
after hearing, also the writ of preliminary injunction sought by them; under
the original SC Circular No. 1-91, a petition for review may be given due
course at the onset (paragraph 8) upon a mere prima facie finding of errors of
fact or law having been committed, and such prima facie finding is but
consistent with the grant of the extra-ordinary writ of preliminary injunction;

109 | c o r p o c a s e s 2 1 - 4 0

b)
it required the parties to submit simultaneous memoranda in its
resolution dated October 15, 1993 (this is in addition to the comment required
to be filed by the respondents) and furthermore declared in the same
resolution that the petition will be decided on the merits, instead of
outrightly dismissing the same;
c)
it rendered a full length decision, wherein: (aa) it expressly declared
the respondent S.E.C. as having erred in denying the pertinent motions to
suspend proceedings; (bb) it declared the supposed error as having become a
non-issue when the respondent C.A. proceeded to hear (the) appeal; (cc) it
formulated and applied its own theory ofnegotiorum gestio in justifying the
non-substitution of the deceased principal party in S.E C. -AC No. 339 and
moreover, its theory of di minimis non curat lex (this, without first
determining the true extent of and the correct legal characterization of the socalled shortage of Tormil shares; and, (dd) it expressly affirmed the
assailed decision of respondent S.E.C .
[15]

Petitioners contention is unmeritorious.


There is nothing on record to show that the Court of Appeals gave due
course to the petition. The fact alone that the Court of Appeals issued a
restraining order and a writ of preliminary injunction and required the parties to
submit their respective memoranda does not indicate that the petition was given
due course. The office of an injunction is merely to preserve the
status quo pending the disposition of the case. The court can require the
submission of memoranda in support of the respective claims and positions of
the parties without necessarily giving due course to the petition. The matter of
whether or not to give due course to a petition lies in the discretion of the court.
It is worthy to mention that SC Circular No. 1-91 has been replaced by
Revised Administrative Circular No. 1-95 (which took effect on 1 June 1995)
wherein the procedure for appeals from quasi-judicial agencies to the Court of
Appeals was clarified thus:

10. Due course.-- If upon the filing of the comment or such other pleadings
or documents as may be required or allowed by the Court of Appeals or upon
the expiration of the period for the filing thereof, and on the bases of the
petition or the record the Court of Appeals finds prima facie that the court or
agency concerned has committed errors of fact or law that would warrant
reversal or modification of the award, judgment, final order or resolution
sought to be reviewed, it may give due course to the petition; otherwise, it
shall dismiss the same. The findings of fact of the court or agency concerned,
when supported by substantial evidence, shall be binding on the Court of
Appeals.
11. Transmittal of record.-- Within fifteen (15) days from notice that the
petition has been given due course, the Court of Appeals may require the court
or agency concerned to transmit the original or a legible certified true copy of
the entire record of the proceeding under review. The record to be transmitted
may be abridged by agreement of all parties to the proceeding. The Court of

110 | c o r p o c a s e s 2 1 - 4 0

Appeals may require or permit subsequent correction of or addition to the


record. (Underscoring ours.)
The aforecited circular now formalizes the correct practice and clearly
states that in resolving appeals from quasi judicial agencies, it is within the
discretion of the Court of Appeals to have the original records of the
proceedings under review be transmitted to it. In this connection, petitioners
claim that the Court of Appeals could not have decided the case on the merits
without the records being brought before it is patently lame. Indubitably, the
Court of Appeals decided the case on the basis of the uncontroverted facts and
admissions contained in the pleadings, that is, the petition, comment, reply,
rejoinder, memoranda, etc. filed by the parties.
II

Petitioners contend that the decisions of the SEC and the Court of Appeals
are null and void for being rendered without the necessary substitution of
parties (for the deceased petitioner Manuel A. Torres, Jr.) as mandated by Sec.
17, Rule 3 of the Revised Rules of Court, which provides as follows:

SEC. 17. Death of party.--After a party dies and the claim is not thereby
extinguished, the court shall order, upon proper notice, the legal representative
of the deceased to appear and to be substituted for the deceased, within a
period of thirty (30) days, or within such time as may be granted. If the legal
representative fails to appear within said time, the court may order the
opposing party to procure the appointment of a legal representative of the
deceased within a time to be specified by the court, and the representative
shall immediately appear for and on behalf of the interest of the
deceased. The court charges involved in procuring such appointment, if
defrayed by the opposing party, may be recovered as costs. The heirs of the
deceased may be allowed to be substituted for the deceased, without requiring
the appointment of an executor or administrator and the court may appoint
guardian ad litem for the minor heirs.
Petitioners insist that the SEC en banc should have granted the motions to
suspend they filed based as they were on the ground that the Regional Trial
Court of Makati, where the probate of the late Judge Torres will was pending,
had yet to appoint an administrator or legal representative of his estate.
We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that survives, and no order
is issued by the Court for the appearance of the legal representative or of the
heirs of the deceased to be substituted for the deceased, and as a matter of fact
no such substitution has ever been effected, the trial held by the court without
such legal representative or heirs, and the judgment rendered after such trial,
are null and void because the court acquired no jurisdiction over the persons
of the legal representative or of the heirs upon whom the trial and the
judgment are not binding.
[16]

111 | c o r p o c a s e s 2 1 - 4 0

As early as 8 April 1988, Judge Torres instituted Special Proceedings No.


M-1768 before the Regional Trial Court of Makati for the ante-mortem probate
of his holographic will which he had executed on 31 October 1986. Testifying in
the said proceedings, Judge Torres confirmed his appointment of petitioner
Edgardo D. Pabalan as the sole executor of his will and administrator of his
estate. The proceedings, however, were opposed by the same parties, herein
private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma.
Cristina T. Carlos, who are nephew and nieces of Judge Torres, being the
children of his late brother Antonio A. Torres.
[17]

It can readily be observed therefore that the parties involved in the present
controversy are virtually the same parties fighting over the representation of the
late Judge Torres estate. It should be recalled that the purpose behind the rule
on substitution of parties is the protection of the right of every party to due
process. It is to ensure that the deceased party would continue to be properly
represented in the suit through the duly appointed legal representative of his
estate. In the present case, this purpose has been substantially fulfilled
(despite the lack of formal substitution) in view of the peculiar fact that both
proceedings involve practically the same parties. Both parties have been
fiercely fighting in the probate proceedings of Judge Torres holographic will for
appointment as legal representative of his estate. Since both parties claim
interests over the estate, the rights of the estate were expected to be fully
protected in the proceedings before the SEC en banc and the Court of
Appeals. In either case, whoever shall be appointed legal representative of
Judge Torres estate (petitioner Pabalan or private respondents) would no
longer be a stranger to the present case, the said parties having voluntarily
submitted to the jurisdiction of the SEC and the Court of Appeals and having
thoroughly participated in the proceedings.
The foregoing rationale finds support in the recent case of Vda. de Salazar
v. CA, wherein the Court expounded thus:
[18]

The need for substitution of heirs is based on the right to due process accruing
to every party in any proceeding. The rationale underlying this requirement in
case a party dies during the pendency of proceedings of a nature not
extinguished by such death, is that xxx the exercise of judicial power to hear
and determine a cause implicitly presupposes in the trial court, amongst other
essentials, jurisdiction over the persons of the parties. That jurisdiction was
inevitably impaired upon the death of the protestee pending the proceedings
below such that unless and until a legal representative is for him duly named
and within the jurisdiction of the trial court, no adjudication in the cause could
have been accorded any validity or binding effect upon any party, in
representation of the deceased, without trenching upon the fundamental right
to a day in court which is the very essence of the constitutionally enshrined
guarantee of due process.
We are not unaware of several cases where we have ruled that a party having
died in an action that survives, the trial held by the court without appearance
of the deceaseds legal representative or substitution of heirs and the judgment
rendered after such trial, are null and void because the court acquired no
jurisdiction over the persons of the legal representatives or of the heirs upon

112 | c o r p o c a s e s 2 1 - 4 0

whom the trial and the judgment would be binding. This general rule
notwithstanding, in denying petitioners motion for reconsideration, the Court
of Appeals correctly ruled that formal substitution of heirs is not necessary
when the heirs themselves voluntarily appeared, participated in the case and
presented evidence in defense of deceased defendant. Attending the case at
bench, after all, are these particular circumstances which negate petitioners
belated and seemingly ostensible claim of violation of her rights to due
process. We should not lose sight of the principle underlying the general rule
that formal substitution of heirs must be effectuated for them to be bound by a
subsequent judgment. Such had been the general rule established not because
the rule on substitution of heirs and that on appointment of a legal
representative are jurisdictional requirements per se but because noncompliance therewith results in the undeniable violation of the right to due
process of those who, though not duly notified of the proceedings, are
substantially affected by the decision rendered therein. xxx.
It is appropriate to mention here that when Judge Torres died on April 3,
1991, the SEC en banc had already fully heard the parties and what remained
was the evaluation of the evidence and rendition of the judgment.
Further, petitioners filed their motions to suspend proceedings only after
more than two (2) years from the death of Judge Torres. Petitioners counsel
was even remiss in his duty under Sec. 16, Rule 3 of the Revised Rules of
Court. Instead, it was private respondents who informed the SEC of Judge
Torres death through a manifestation dated 24 April 1991.
[19]

For the SEC en banc to have suspended the proceedings to await the
appointment of the legal representatives by the estate was impractical and
would have caused undue delay in the proceedings and a denial of
justice. There is no telling when the probate court will decide the issue, which
may still be appealed to the higher courts.
In any case, there has been no final disposition of the properties of the late
Judge Torres before the SEC. On the contrary, the decision of the
SEC enbanc as affirmed by the Court of Appeals served to protect and preserve
his estate. Consequently, the rule that when a party dies, he should be
substituted by his legal representative to protect the interest of his estate in
observance of due process was not violated in this case in view of its peculiar
situation where the estate was fully protected by the presence of the parties
who claim interest thereto either as directors, stockholders or heirs.
Finally, we agree with petitioners contention that the principle
of negotiorum gestio does not apply in the present case. Said principle
explicitly covers abandoned or neglected property or business.
[20]

III

Petitioners find legal basis for Judge Torres act of revoking the assignment
of his properties in Makati and Pasay City to Tormil corporation by relying on
Art. 1191 of the Civil Code which provides that:

113 | c o r p o c a s e s 2 1 - 4 0

ART. 1191. The power to rescind obligations is implied in reciprocal ones,


in case one of the obligors should not comply with what is incumbent upon
him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who
have acquired the thing, in accordance with articles 1385 and 1388 and the
Mortgage Law.
Petitioners contentions cannot be sustained. We see no justifiable reason
to disturb the findings of SEC, as affirmed by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision appealed from (Rollo,
pp. 45-46) that x x x the shortage of 972 shares would not be valid ground for respondent
Torres to unilaterally revoke the deeds of assignment he had executed on July
13, 1984 and July 24, 1984 wherein he voluntarily assigned to TORMIL real
properties covered by TCT No. 374079 (Makati) and TCT No. 41527, 41528
and 41529 (Pasay) respectively.
A comparison of the number of shares that respondent Torres received from
TORMIL by virtue of the deeds of assignment and the stock certificates
issued by the latter to the former readily shows that TORMIL had
substantially performed what was expected of it. In fact, the first two
issuances were in satisfaction to the properties being revoked by respondent
Torres. Hence, the shortage of 972 shares would never be a valid ground for
the revocation of the deeds covering Pasay and Quezon City properties.
In Universal Food Corp. vs. CA, the Supreme Court held:
The general rule is that rescission of a contract will not be permitted for a
slight or carnal breach, but only for such substantial and fundamental breach
as would defeat the very object of the parties in making the agreement.
The shortage of 972 shares definitely is not substantial and fundamental
breach as would defeat the very object of the parties in entering into
contract. Art. 1355 of the Civil Code also provides: Except in cases
specified by law, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influences. There being no
fraud, mistake or undue influence exerted on respondent Torres by TORMIL
and the latter having already issued to the former of its 225,000 unissued

114 | c o r p o c a s e s 2 1 - 4 0

shares, the most logical course of action is to declare as null and void the deed
of revocation executed by respondent Torres. (Rollo, pp. 45-46.)
[21]

The aforequoted Civil Code provision does not apply in this particular
situation for the obvious reason that a specific number of shares of stock (as
evidenced by stock certificates) had already been issued to the late Judge
Torres in exchange for his Makati and Pasay City properties. The records thus
disclose:

DATE
SHARES

OF
ORDER OF

PROPERTY

LOCATION

ASSIGNMENT
ASSIGNED
ISSUED
COMPLIANCE
1.
City)

July
13,252

13,

NO.

OF

TO
1984

TCT

BE
81834

Quezon

3rd
TCT 144240

2. July 13, 1984

Quezon City)

TCT 77008

Manila)

TCT
65689

Manila)

78,493
TCT 102200

3.
374079

July
Makati

4. July 24, 1984

2nd

Manila)
13,

8,307

1984

TCT

1st

TCT 41527

Pasay)

TCT
41528

Pasay)

9,855
TCT 41529

5.
August
6,
Stocks
2,000
6.
August
Stocks
48,737

6,

Pasay)

1984

El
7th

1984

Manila

Hogar
Jockey

Filipino
Club

5th

7.
August
7,
Stocks
50,238
8.
August
Stocks
6,300

4th

7,

1984

San
8th

Miguel

Corp.

1984
China
6th

Banking

Corp.

115 | c o r p o c a s e s 2 1 - 4 0

9.
Stocks

August

20,
7,468.2)

1984
9th

Ayala

10. August 29, 1984 Ayala Fund Stocks


TOTAL

Corp.

1,322.1)
225,972.3

* Order of stock certificate issuances by TORMIL to respondent Torres relative to the


Deeds of Assignment he executed sometime in July and August, 1984. (Emphasis
ours.)
[22]

Moreover, we agree with the contention of the Solicitor General that the
shortage of shares should not have affected the assignment of the Makati and
Pasay City properties which were executed in 13 and 24 July 1984 and the
consideration for which have been duly paid or fulfilled but should have been
applied logically to the last assignment of property -- Judge Torres Ayala Fund
shares--which was executed on 29 August 1984.
[23]

IV

Petitioners insist that the assignment of qualifying shares to the nominees


of the late Judge Torres (herein petitioners) does not partake of the real nature
of a transfer or conveyance of shares of stock as would call for the imposition
of stringent requirements (with respect to the) recording of the transfer of said
shares. Anyway, petitioners add, there was substantial compliance with the
above-stated requirement since said assignments were entered by the late
Judge Torres himself in the corporations stock and transfer book on 6 March
1987, prior to the 25 March 1987 annual stockholders meeting and which
entries were confirmed on 8 March 1987 by petitioner Azura who was appointed
Assistant Corporate Secretary by Judge Torres.
Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to
penalize the late Judge Torres by invalidating the questioned entries in the
stock and transfer book, simply because he initially made those entries (they
were later affirmed by an acting corporate secretary) and because the stock
and transfer book was in his possession instead of the elected corporate
secretary, if the background facts herein-before narrated and the serious
animosities that then reigned between the deceased Judge and his relatives are
to be taken into account;
xxx.

10.12. Indeed it was a practice in the corporate respondent, a family


corporation with only a measly number of stockholders, for the late judge to
have personal custody of corporate records; as president, chairman and
majority stockholder, he had the prerogative of designating an acting
corporate secretary or to himself make the needed entries, in instances where
the regular secretary, who is a mere subordinate, is unavailable or
intentionally defaults, which was the situation that obtained immediately prior

116 | c o r p o c a s e s 2 1 - 4 0

to the 1987 annual stockholders meeting of Tormil, as the late Judge Torres
had so indicated in the stock and transfer book in the form of the entries now
in question;
10.13. Surely, it would have been futile nay foolish for him to have insisted
under those circumstances, for the regular secretary, who was then part of a
group ranged against him, to make the entries of the assignments in favor of
his nominees;
[24]

Petitioners contentions lack merit.


It is precisely the brewing family discord between Judge Torres and private
respondents--his nephew and nieces that should have placed Judge Torres on
his guard. He should have been more careful in ensuring that his actions
(particularly the assignment of qualifying shares to his nominees) comply with
the requirements of the law. Petitioners cannot use the flimsy excuse that it
would have been a vain attempt to force the incumbent corporate secretary to
register the aforestated assignments in the stock and transfer book because the
latter belonged to the opposite faction. It is the corporate secretarys duty and
obligation to register valid transfers of stocks and if said corporate officer
refuses to comply, the transferor-stockholder may rightfully bring suit to compel
performance. In other words, there are remedies within the law that petitioners
could have availed of, instead of taking the law in their own hands, as the cliche
goes.
[25]

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court
of Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of


the Corporation Code, as follows (Rollo, p. 45):
In the absence of (any) provision to the contrary, the corporate secretary is the
custodian of corporate records. Corollarily, he keeps the stock and transfer
book and makes proper and necessary entries therein.
Contrary to the generally accepted corporate practice, the stock and transfer
book of TORMIL was not kept by Ms. Maria Cristina T. Carlos, the corporate
secretary but by respondent Torres, the President and Chairman of the Board
of Directors of TORMIL. In contravention to the above cited provision, the
stock and transfer book was not kept at the principal office of the corporation
either but at the place of respondent Torres.
These being the obtaining circumstances, any entries made in the stock and
transfer book on March 8, 1987 by respondent Torres of an alleged transfer of
nominal shares to Pabalan and Co. cannot therefore be given any valid
effect. Where the entries made are not valid, Pabalan and Co. cannot
therefore be considered stockholders of record of TORMIL. Because they are
not stockholders, they cannot therefore be elected as directors of
TORMIL. To rule otherwise would not only encourage violation of clear
mandate of Sec. 74 of the Corporation Code that stock and transfer book shall

117 | c o r p o c a s e s 2 1 - 4 0

be kept in the principal office of the corporation but would likewise open the
flood gates of confusion in the corporation as to who has the proper custody
of the stock and transfer book and who are the real stockholders of records of
a certain corporation as any holder of the stock and transfer book, though not
the corporate secretary, at pleasure would make entries therein.
The fact that respondent Torres holds 81.28% of the outstanding capital stock
of TORMIL is of no moment and is not a license for him to arrogate unto
himself a duty lodged to (sic) the corporate secretary.
[26]

All corporations, big or small, must abide by the provisions of the


Corporation Code. Being a simple family corporation is not an
exemption. Such corporations cannot have rules and practices other than
those established by law.
WHEREFORE, premises considered, the petition for review on certiorari is
hereby DENIED.
SO ORDERED.

118 | c o r p o c a s e s 2 1 - 4 0

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