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Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 126891 August 5, 1998
LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and
THE ESTATE OF ALFONSO LIM, respondents.
PANGANIBAN, J.:

The duty of a corporate secretary to record transfers of stocks is


ministerial. However, he cannot be compelled to do so when the
transferee's title to said shares has no prima facie validity or is
uncertain. More specifically, a pledgor, prior to foreclosure and sale,
does not acquire ownership rights over the pledged shares and thus
cannot compel the corporate secretary to record his alleged
ownership of such shares on the basis merely of the contract of
pledge. Similarly, the SEC does not acquire jurisdiction over a
dispute when a party's claim to being a shareholder is, on the face
of the complaint, invalid or inadequate or is otherwise negated by
the very allegations of such complaint. Mandamus will not issue to
establish a right, but only to enforce one that is already
established.
Statement of the Case
There are the principles, used by this Court in resolving this Petition
for Review on Certiorari before us, assailing the October 24, 1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40832, the
dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is
DENIED DUE COURSE and is hereby DISMISSED. With costs against
the [p]etitioner. 3
By the foregoing disposition, the Court of Appeals effectively
affirmed the March 7, 1996 Decision 4 of the Securities and
Exchange Commission (SEC) en banc:

WHEREFORE, in view of all the foregoing, judgment is hereby


rendered dismissing the appeal on the ground that mandamus will
only issue upon a clear showing of ownership over the assailed
shares of stock, [t]he determination of which, on the basis of the
foregoing facts, is within the jurisdiction of the regular courts and
not with the SEC. 5
The SEC en banc upheld the August 16, 1993 Decision 6 of SEC
Hearing Officer Rolando C. Malabonga, which dismissed the action
for mandamus filed by petitioner.
The Facts
As found by the Court of Appeals, the facts of the case are as
follows:
. . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a
loan from the [p]etitioner in the amount of P40,000 payable within
six (6) months. To secure the payment of the aforesaid loan and
interest thereon, Respondent Guiok executed a Contract of Pledge
in favor of the [p]etitioner whereby he pledged his three hundred
(300) shares of stock in the Go Fay & Company Inc., Respondent
Corporation, for brevity's sake. Respondent Guiok obliged himself to
pay interest on said loan at the rate of 10% per annum from the
date of said contract of pledge. On the same date, Alfonso Sy Lim
secured a loan from the [p]etitioner in the amount of P40,000
payable in six (6) months. To secure the payment of his loan, Sy
Lim executed a "Contract of Pledge" covering his three hundred
(300) shares of stock in Respondent Corporation. Under said
contract, Sy Lim obliged himself to pay interest on his loan at the
rate of 10% per annum from the date of the execution of said
contract.
Under said "Contracts of Pledge," Respondent[s] Guiok and Sy Lim
covenanted, inter alia, that:
3. In the event of the failure of the PLEDGOR to pay the amount
within a period of six (6) months from the date hereof, the PLEDGEE
is hereby authorized to foreclose the pledge upon the said shares of
stock hereby created by selling the same at public or private sale
with or without notice to the PLEDGOR, at which sale the PLEDGEE
may be the purchaser at his option; and the PLEDGEE is hereby
authorized and empowered at his option to transfer the said shares
of stock on the books of the corporation to his own name and to
hold the certificate issued in lieu thereof under the terms of this

pledge, and to sell the said shares to issue to him and to apply the
proceeds of the sale to the payment of the said sum and interest, in
the manner hereinabove provided;

transfer of the shares of stock of Respondent Guiok and Sy Lim in


favor of and under the name of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner.

4. In the event of the foreclosure of this pledge and the sale of the
pledged certificate, any surplus remaining in the hands of the
PLEDGEE after the payment of the said sum and interest, and the
expenses, if any, connected with the foreclosure sale, shall be paid
by the PLEDGEE to the PLEDGOR;

The Respondent Corporation filed its Answer to the Complaint and


alleged, as Affirmative Defense, that:

5. Upon payment of the said amount and interest in full, the


PLEDGEE will, on demand of the PLEDGOR, redeliver to him the said
shares of stock by surrendering the certificate delivered to him by
the PLEDGOR or by retransferring each share to the PLEDGOR, in
the event that the PLEDGEE, under the option hereby granted, shall
have caused such shares to be transferred to him upon the books
of the issuing company."(idem, supra)
Respondent Guiok and Sy Lim endorsed their respective shares of
stock in blank and delivered the same to the [p]etitioner. 7
However, Respondent Guiok and Sy Lim failed to pay their
respective loans and the accrued interests thereon to the
[p]etitioner. In October, 1990, the [p]etitioner filed a "Petition for
Mandamus" against Respondent Corporation, with the SEC entitled
"Lim Tay versus Go Fay & Company. Inc., SEC Case No. 03894",
praying that:
PRAYER
WHEREFORE, premises considered, it is respectfully prayed that an
order be issued directing the corporate secretary of [R]espondent
Go Fay & Co., Inc. to register the stock transfers and issue new
certificates in favor of Lim Tay. It is likewise prayed that
[R]espondent Go Fay & Co., Inc[.] be ordered to pay all dividends
due and unclaimed on the said certificates to [P]laintiff Lim Tay.
Plaintiff further prays for such other relief just and equitable in the
premises. ( page 34,Rollo)
The [p]etitioner alleged, inter alia, in his Petition that the
controversy between him as stockholder and the Respondent
Corporation was intra-corporate in view of the obstinate refusal of
the corporate secretary of Respondent Corporation to record the

AFFIRMATIVE DEFENSE
7. Respondent repleads and incorporates herein by reference the
foregoing allegations.
8. The Complaint states no cause of action against [r]espondent.
9. Complainant is not a stockholder of [r]espondent. Hence, the
Honorable Commission has no jurisdiction to enter the present
controversy since their [sic] is no intracorporate relationship
between complainant and respondent.
10. Granting arguendo that a pledge was constituted over
shareholdings of Sy Guiok in favor of the complainant and that
former defaulted in the payment of his obligations to the latter,
same did not automatically vest [i]n complainant ownership of
pledged shares. ( pace 37, Rollo)

the
the
the
the

In the interim, Sy Lim died. Respondents Guiok and the Intestate


Estate of Alfonso Sy Lim, represented by Conchita Lim, filed their
Answer-In-Intervention with the SEC alleging, inter alia, that:
xxx xxx xxx
3. Deny specifically the allegation under paragraph 5 of the
Complaint that, failure to pay the loan within the contract period
automatically foreclosed the pledged shares of stocks and that the
share of stocks are automatically purchased by the plaintiff, for
being false and distorted, the truth being that pursuant to the [sic]
paragraph 3 of the contract of pledges, Annexes "A" and "B", it is
clear that upon failure to pay the amount within the stipulated
period, the pledgee is authorized to foreclose the pledge and
thereafter, to sell the same to satisfy the loan. [H]owever, to this
point in time, plaintiff has not performed any operative act of
foreclosing the shares of stocks of [i]ntervenors in accordance with
the Chattel Mortgage law, [n]either was there any sale of stocks
by way of public or private auction made after foreclosure in

favor of the plaintiff to speak about, and therefore, the respondent


company could not be force[d] to [sic] by way of mandamus, to
transfer the subject shares of stocks from the name of your
[i]ntervenors to that of the plaintiff in the absence of clear and legal
basis for such;

allows redemption, for which intervenors are willing to redeem the


share of stocks pledged;

4. DENY specifically the allegations under paragraphs 6, 7 and 8 of


the complaint as to the existence of the alleged intracorporate
dispute between plaintiff and company for being without proper
and legal basis. In the first place, plaintiff is not a stockholder of the
respondent corporation; there was no foreclosure of shares
executed in accordance with the Chattel Mortgage Law whatsoever;
there were no sales consummated that would transfer to the
plaintiff the subject shares of stocks and therefore, any demand to
transfer the shares of stocks to the name of the plaintiff has no
legal basis. In the second place, [i]ntervenors had been in the past
negotiating possible compromise and at the same time, had
tendered payment of the loan secured by the subject pledges but
plaintiff refused unjustifiably to oblige and accept payment o[r]
even agree on the computation of the principal amount of the loan
and interest on top of a substantial amount offered just to settle
and compromise the indebtedness of [i]ntervenors;

11. As a matter of fact, on several occasions, [i]ntervenors had


made representations with the plaintiff for the compromise and
settlement of all the obligations secured by the subject pledges
even offering to pay compensation over and above the value of the
obligations, interest[s] and dividends accruing to the share of
stocks but, plaintiff unjustly refused to accept the offer of payment;
( pages 39-42, Rollo)

II. SPECIAL AFFIRMATIVE DEFENSES


Intervenors replead by way of reference all the foregoing
allegations to form part of the special affirmative defenses;
5. This Honorable Commission has no jurisdiction over the person of
the respondent and nature of the action, plaintiff having no
personality at all to compel respondent by way of mandamus to
perform certain corporate function[s];

10. Even the Chattel Mortgage law allowed redemption of the


[c]hattel foreclosed;

The [r]espondents-[i]ntervenors prayed the SEC that judgment be


rendered in their favor, as follows:
IV. PRAYER
It is respectfully prayed to this Honorable Commission after due
hearing, to dismiss the case for lack of merit, ordering plaintiff to
accept payment for the loans secured by the subject shares of
stocks and to pay plaintiff:
1. The sum of P50,000.00, as moral damages;
2. the sum of P50,000.00, as attorneys fees; and,
3. costs of suit.
Other reliefs just and
( pages 42-43, Rollo)

equitable

[are]

likewise

prayed

for.

6. The complaint states no cause of action;


7. That respondent is not [a] real party in interest;
8. The appropriation of the subject shares of stocks by plaintiff,
without compliance with the formality of law, amounted to
"[p]actum commis[s]orium" therefore, null and void;
9. Granting for the sake of argument only that there was a valid
foreclosure and sale of the subject st[o]cks in favor of the plaintiff
which [i]ntervenors deny still paragraph 5 of the contract

After due proceedings, the [h]earing [o]fficer promulgated a


Decision dismissing [p]etitioner's Complaint on the ground that
although the SEC had jurisdiction over the action, pursuant to the
Decision of the Supreme Court in the case of "Rural Bank of
Salinas, et al. vs. Court of Appeals, et al., 210 SCRA 510", he failed
to prove the legal basis for the secretary of the Respondent
Corporation to be compelled to register stock transfers in favor of
the [p]etitioner and to issue new certificates of stock under his
name ( pages 67-77, Rollo). The [p]etitioner appealed the Decision
of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the SEC
promulgated a Decision, dismissing [p]etitioner's appeal on the

grounds that: (a) the issue between the [p]etitioner and the
[r]espondents being one involving the ownership of the shares of
stock pledged by Respondent Guiok and Sy Lim, the SEC had no
jurisdiction over the action filed by the [p]etitioner; (b) the latter
had no cause of action for mandamus against the Respondent
Corporation, the right of ownership of the [p]etitioner over the 300
shares of stock pledged by Respondent Guiok and Sy Lim not
having been as yet, established, preparatory to the institution of
said Petition for Mandamus with the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
In ascertaining whether or not the SEC had exclusive jurisdiction
over [p]etitioner's action, the [a]ppellate [c]ourt must delve into
and ascertain: (a) whether or not there is a need to enlist the
expertise and technical know-how of the SEC in resolving the issue
of the ownership of the shares of stock; (b) the status of the
relationships of the parties; [and] (c) the nature of the question that
is the subject of the controversy. Where the controversy is purely a
civil matter resoluble by civil law principles and there is no need for
the application of the expertise and technical know-how of the SEC,
then the regular courts have jurisdiction over the action. 8 [citations
omitted]
On the issue of whether mandamus can be availed of by the
petitioner, the Court of Appeals agreed with the SEC,viz.:
. . . [T]he [p]etitioner failed to establish a clear and legal right to
the writ of mandamus prayed for by him. . . . Mandamus will not
issue to enforce a right which is in substantial dispute or to which a
substantial doubt exists . . . . The principal function of the writ of
mandamus is to command and expedite, and not to inquire and
adjudicate and, therefore it is not the purpose of the writ to
establish a legal right, but to enforce one which has already been
established. 9 [citations omitted]

ownership of the shares by virtue of prescription was likewise


dismissed by Respondent Court in this wise:
The prescriptive period for the action of Respondent[s] Guiok and
Sy Lim to recover the shares of stock from the [p]etitioner accrued
only from the time they paid their loans and the interests thereon
and [made] a demand for their return. 10
Hence, the petitioner brought before us this Petition for Review
on Certiorari in accordance with Rule 45 of the Rules of Court. 11
Assignment of Errors
Petitioner submits, for the consideration of this Court, these
issues: 12
(a) Whether the Securities and Exchange Commission
jurisdiction over the complaint filed by the petitioner; and

had

(b) Whether the petitioner is entitled to the relief of mandamus as


against the respondent Go Fay & Co., Inc.
In addition, petitioner contends that it has acquired ownership of
the shares "through extraordinary prescription," pursuant to Article
1132 of the Civil Code, and through respondents' subsequent acts,
which amounted to a novation of the contracts of pledge. Petitioner
also claims that there was dacion en pago, in which the shares of
stock were deemed sold to petitioner, the consideration for which
was the extinguishment of the loans and the interests thereon.
Petitioner likewise claims that laches bars respondents from
recovering the subject shares.
The Court's Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC

The Court of Appeals debunked petitioner's claim that he had


acquired ownership over the shares by virtue of novation, holding
that respondents' indorsement and delivery of the shares were
pursuant to Articles 2093 and 2095 of the Civil Code and that
petitioner's receipt of dividends was in compliance with Article
2102 of the same Code. Petitioner's claim that he had acquired

Claiming that the present controversy is intra-corporate and falls


within the exclusive jurisdiction of the SEC, petitioner relies heavily
on Abejo v. De la Cruz, 13 which upheld the jurisdiction of the SEC
over a suit filed by an unregistered stockholder seeking to enforce
his rights. He also seeks support from Rural Bank of Salinas, Inc. v.
Court of Appeals, 14 which ruled that the right of a transferee or an

assignee to have stocks transferred to his name was an inherent


right flowing from his ownership of the said stocks.
The registration of shares in a stockholder's name, the issuance of
stock certificates, and the right to receive dividends which pertain
to the said shares are all rights that flow from ownership. The
determination of whether or not a shareholder is entitled to
exercise the above-mentioned rights falls within the jurisdiction of
the SEC. However, if ownership of the shares is not clearly
established and is still unresolved at the time the action for
mandamus is filed, then jurisdiction lies with the regular courts.
Sec. 5 of Presidential Decree No. 902-A sets forth the jurisdiction of
the SEC as follows:

they respectively fall due or in cases where the corporation,


partnership or association has no sufficient assets to cover its
liabilities, but is under the Management Committee created
pursuant to this decree. 15
Thus, a controversy "among stockholders, partners or associates
themselves" 16 is intra-corporate in nature and falls within the
jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the
subject matter is determined by the allegations in the
complaint. 17 In the present case, however, petitioner's claim that
he was the owner of the shares of stock in question has no prima
facie basis.

Sec. 5. In addition to the regulatory and adjudicative functions of


the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases
involving:

In his Complaint, petitioner alleged that, pursuant to the contracts


of pledge, he became the owner of the shares when the term for
the loans expired. The Complaint contained the following pertinent
averments:

a) Devices or schemes employed by or any acts of the board of


directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the
interest of the public and/or of stockholders, partners, members of
associations or organizations registered with the Commission;

3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay


received three hundred (300) shares of stock of Go Fay & Co., Inc.,
from Sy Guiok as security for the payment of a loan of [f]orty
[t]housand [p]esos (P40,000.00) Philippine currency, the sum of
which was payable within six (6) months [with interest] at ten
percentum (10%) per annum from the date of the execution of the
contract; a copy of this Contract of Pledge is attached as
Annex "A" and made part hereof;

(b) Controversies arising out of intra-corporate or partnership


relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members
or associates, respectively; and between such corporation,
partnership or association and the State insofar as it concerns their
individual franchise or right to exist as such entity;

xxx xxx xxx

(c) Controversies in the election or appointment of directors,


trustees, officers or managers of such corporations, partnerships or
associations.

4. On the same date January 8, 1980, under a similar Contract of


Pledge, Lim Tay received three hundred (300) shares of stock of Go
Pay & Co., Inc. from Alfonso Sy Lim as security for the payment of a
loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine currency,
the sum of which was payable within six (6) months [with interest]
at ten percentum (10%) per annum from the date of the execution
of the contract; a copy of this Contract of Pledge is attached as
Annex "B" and made part hereof;

(d) Petitions of corporations, partnerships or associations to be


declared in the state of suspension of payments in cases where the
corporation, partnership or association possesses property to cover
all its debts but foresees the impossibility of meeting them when

5. By the
borrowers
pledge is
[p]laintiff,

express terms of the agreements, upon failure of the


to pay the stated amounts within the contract period, the
foreclosed and the shares of stock are purchased by
who is expressly authorized and empowered to transfer

the duly endorsed shares of stock on the books of the corporation


to his own name; . . . 18 (emphasis supplied)
However, the contracts of pledge, which were made integral parts
of the Complaint, contain this common proviso:
3. In the event of the failure of the PLEDGOR to pay the amount
within a period of six (6) months from the date hereof, the PLEDGEE
is hereby authorized to foreclose the pledge upon the said shares of
stock hereby created by selling the same at public or private sale
with or without notice to the PLEDGOR, at which sale the PLEDGEE
may be the purchaser at his option; and the PLEDGEE is hereby
authorized and empowered at his option, to transfer the said shares
of stock on the books of the corporation to his own name and to
hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the
proceeds of the sale to the payment of the said sum and interest, in
the manner hereinabove provided;
This contractual stipulation, which was part of the Complaint, shows
that plaintiff was merely authorized to foreclosethe pledge upon
maturity of the loans, not to own them. Such foreclosure is not
automatic, for it must be done in a public or private sale. Nowhere
did the Complaint mention that petitioner had in fact foreclosed the
pledge and purchased the shares after such foreclosure. His status
as a mere pledgee does not, under civil law, entitle him to
ownership of the subject shares. It is also noteworthy that
petitioner's Complaint did not aver that said shares were acquired
through extraordinary prescription, novation or laches. Moreover,
petitioner's claim, subsequent to the filing of the Complaint, that he
acquired ownership of the said shares through these three modes is
not indubitable and still has to be resolved. In fact, as will be
shown, such allegation-has no merit. Manifestly, the Complaint by
itself did not contain any prima facie showing that petitioner was
the owner of the shares of stocks. Quite the contrary, it
demonstrated that he was merely a pledgee, not an owner.
Accordingly, it failed to lay down a sufficient basis for the SEC to
exercise jurisdiction over the controversy. In fact, the very
allegations of the Complaint and its annexes negated the
jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth in Abejo v. De la
Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is
misplaced. In Abejo, he Abejo spouses sold to Telectronic Systems,
Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent to

such contract of sale, the corporate secretary, Norberto Braga,


refused to record the transfer of the shares in the corporate books
and instead asked for the annulment of the sale, claiming that he
and his wife had a preemptive right over some of the shares, and
that his wife's shares were sold without consideration or consent.
At the time the Bragas questioned the validity of the sale, the
contract had already been perfected, thereby demonstrating that
Telectronic Systems, Inc. was already the prima facie owner of the
shares and, consequently, a stockholder of Pocket Bell Philippines,
Inc. Even if the sale were to be annulled later on, Telectronic
Systems, Inc. had, in the meantime, title over the shares from the
time the sale was perfected until the time such sale was annulled.
The effects of an annulment operate prospectively and do not, as a
rule, retroact to the time the sale was made. Therefore, at the time
the Bragas questioned the validity of the tranfers made by the
Abejos,
Telectronic
Systems,
Inc.
was
already
a prima
facie shareholder of the corporation, thus making the dispute
between the Bragas and the Abejos "intra-corporate" in nature.
Hence, the Court held that "the issue is not on ownership of shares
but rather the non-performance by the corporate secretary of the
ministerial duty of recording transfers of shares of stock of the
corporation of which he is secretary." 19
Unlike Abejo, however, petitioner's ownership over the shares in
this case was not yet perfected when the Complaint was filed. The
contract of pledge certainly does not make him the owner of the
shares pledged. Further, whether prescription effectively
transferred ownership of the shares, whether there was a novation
of the contracts of pledge, and whether laches had set in were
difficult legal issues, which were unpleaded and unresolved when
herein petitioner asked the corporate secretary of Go Fay to effect
the transfer, in his favor, of the shares pledged to him.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of
assignment for the shares in favor of the respondents in that case.
When the corporate secretary refused to register the transfer, an
action for mandamus was instituted. Subsequently, a motion for
intervention was filed, seeking the annulment of the deeds of
assignment on the grounds that the same were fictitious and
antedated, and that they were in fact donations because the
considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of
Salinas were already prima facie shareholders when the deeds of

assignment were questioned. If the said deeds were to be annulled


later on, respondents would still be considered shareholders of the
corporation from the time of the assignment until the annulment of
such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of mandamus, directing
the corporate secretary of respondent corporation to have the
shares transferred to his name in the corporate books, to issue new
certificates of stock and to deliver the corresponding dividends to
him. 20
In order that a writ of mandamus may issue, it is essential that the
person petitioning for the same has a clear legal right to the thing
demanded and that it is the imperative duty of the respondent to
perform the act required. It neither confers powers nor imposes
duties and is never issued in doubtful cases. It is simply a command
to exercise a power already possessed and to perform a duty
already imposed. 21
In the present case, petitioner has failed to establish a clear legal
right. Petitioner's contention that he is the owner of the said shares
is completely without merit. Quite the contrary and as already
shown, he does not have any ownership rights at all. At the time
petitioner instituted his suit at the SEC, his ownership claim had
no prima facie leg to stand on. At best, his contention was
disputable and uncertain Mandamus will not issue to establish a
legal right, but only to enforce one that is already clearly
established.
Without Foreclosure and
Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged had
passed to him, upon Respondents Sy Guiok and Sy Lim's failure to
pay their respective loans. But on appeal, petitioner claimed that
ownership over the shares had passed to him, not via the contracts
of pledge, but by virtue of prescription and by respondents'
subsequent acts which amounted to a novation of the contracts of
pledge. We do not agree.

At the outset, it must be underscored that petitioner did not acquire


ownership of the shares by virtue of the contracts of pledge. Article
2112 of the Civil Code states:
The creditor to whom the credit has not been satisfied in due time,
may proceed before a Notary Public to the sale of the thing
pledged. This sale shall be made at a public auction, and with
notification to the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with
the same formalities shall be held; and if at the second auction
there is no sale either, the creditor may appropriate the thing
pledged. In this case he shall be obliged to give an acquittance for
his entire claim.
Furthermore, the contracts of pledge contained a common proviso,
which we quote again for the sake of clarity:
3. In the event of the failure of the PLEDGOR to pay the amount
within a period of six (6) months from the date hereof, the PLEDGEE
is hereby authorized to foreclose the pledge upon the said shares of
stock hereby created by selling the same at public or private sale
with or without notice to the PLEDGOR, at which sale the PLEDGEE
may be the purchaser at his option; and "the PLEDGEE is hereby
authorized and empowered at his option to transfer the said shares
of stock on the books of the corporation to his own name, and to
hold the certificate issued in lieu thereof under the terms of this
pledge, and to sell the said shares to issue to him and to apply the
proceeds of the sale to the payment of the said sum and interest, in
the
manner
hereinabove
provided; 22
There is no showing that petitioner made any attempt to foreclose
or sell the shares through public or private auction, as stipulated in
the contracts of pledge and as required by Article 2112 of the Civil
Code. Therefore, ownership of the shares could not have passed to
him. The pledgor remains the owner during the pendency of the
pledge and prior to foreclosure and sale, as explicitly provided by
Article 2103 of the same Code:
Unless the thing pledged is expropriated, the debtor continues to
be the owner thereof.

Nevertheless, the creditor may bring the actions which pertain to


the owner of the thing pledged in order to recover it from, or
defend it against a third person.
No Ownership
by Prescription
Petitioner did not acquire the shares by prescription either. The
period of prescription of any cause of action is reckoned only from
the date the cause of action accrued.
Since a cause of action requires as an essential element not only a
legal right of the plaintiff and a correlative obligation of the
defendant, but also an act or omission of the defendant in violation
of said legal right, the cause of action does not accrue until the
party obligated refuses, expressly or impliedly, to comply with its
duty." 23Accordingly, a cause of action on a written contract accrues
when a breach or violation thereof occurs.
Under the contracts of pledge, private respondents would have a
right to ask for the redelivery of their certificates of stock upon
payment of their debts to petitioner, consonant with Article 2105 of
the Civil Code, which reads:
The debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt and its
interest, with expenses in a proper case. 24
Thus, the right to recover the shares based on the written contract
of pledge between petitioner and respondents would arise only
upon payment of their respective loans. Therefore, the prescriptive
period within which to demand the return of the thing pledged
should begin to run only after the payment of the loan and a
demand for the thing has been made, because it is only then that
respondents acquire a cause of action for the return of the thing
pledged.
Prescription should not begin to run on the action to demand the
return of the thing pledged while the loan still exists. This is
because the right to ask for the return of the thing pledged will not
arise so long as the loan subsists. In the present case, the
prescriptive period did not begin to run when the loan became due.
On the other hand, it is petitioner's right to demand payment
that may be in danger of prescription.

Petitioner contends that he can be deemed to have acquired


ownership over the certificates of stock through extraordinary
prescription, as provided for in Article 1132 of the Civil Code which
states:
Art. 1132. The ownership of movables prescribes
uninterrupted possession for four years in good faith.

through

The ownership of personal property also prescribes through


uninterrupted possession for eight years, without need of any other
condition. . . . .
Petitioner's argument is untenable. What is required by Article 1132
is possession in the concept of an owner. In the present case,
petitioner's possession of the stock certificates came about
because they were delivered to him pursuant to the contracts of
pledge. His possession as a pledgee cannot ripen into ownership by
prescription. As aptly pointed out by Justice Jose C. Vitug:
Acquisitive prescription is a mode of acquiring ownership by a
possessor through the requisite lapse of time. In order to ripen into
ownership, possession must be in the concept of an owner, public,
peaceful and uninterrupted. Thus, possession with a juridical title,
such as by a usufructory, a trustee, a lessee, agent or a pledgee,
not being in the concept of an owner, cannot ripen into ownership
by acquisitive prescription unless the juridical relation is first
expressly repudiated and such repudiation has been communicated
to the other party. 25
Petitioner expressly repudiated the pledge, only when he filed his
Complaint and claimed that he was not a mere pledgee, but that he
was already the owner of the shares. Based on the foregoing,
petitioner has not acquired the certificates of stock through
extraordinary prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue of a novation of
the contract of pledge. Novation is defined as "the extinguishment
of an obligation by a subsequent one which terminates it, either by
changing its object or principal conditions, by substituting a new
debtor in place of the old one, or by subrogating a third person to
the rights of the creditor." 26 Novation of a contract must not be

presumed. "In the absence of an express agreement, novation


takes place only when the old and the new obligations are
incompatible on every point." 27
In the present case, novation cannot be presumed by (a)
respondents' indorsement and delivery of the certificates of stock
covering the 600 shares, (b) petitioner's receipt of dividends from
1980 to 1983, and (c) the fact that respondents have not instituted
any action to recover the shares since 1980.
Respondents' indorsement and delivery of the certificates of stock
were pursuant to paragraph 2 of the contract of pledge which
reads:
2. The said certificates had been delivered by the PLEDGOR
endorsed in blank to be held by the PLEDGEE under the pledge as
security for the payment of the aforementioned sum and interest
thereon
accruing. 28
This stipulation did not effect the transfer of ownership to
petitioner. It was merely in compliance with Article 2093 of the Civil
Code, 29 which requires that the thing pledged be placed in the
possession of the creditor or a third person of common agreement;
and Article 2095, 30 which states that if the thing pledged are
shares of stock, then the "instrument proving the right pledged"
must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to
receive dividends pertaining to the shares was not meant to
relinquish ownership thereof. As stated by respondent corporation,
the same was done pursuant to an agreement between the
petitioner and Respondents Sy Guiok and Sy Lim, following Article
2102 of the civil Code which provides:
It the pledge earns or produces fruits, income, dividends, or
interests, the creditor shall compensate what he receives with
those which are owing him; but if none are owing him, or insofar as
the amount may exceed that which is due, he shall apply it to the
principal. Unless there is a stipulation to the contrary, the pledge
shall extend to the interest and the earnings of the right pledged.
Novation cannot be inferred from the mere fact that petitioner has
not, since 1980, instituted any action to recover the shares. Such

action is in fact premature, as the loan is still outstanding. Besides,


as already pointed out, novation is never presumed or inferred.
No Dacion en Pago
in Favor of Petitioner
Neither can there be dacion en pago, in which the certificates of
stock are deemed sold to petitioner, the consideration for which is
the extinguishment of the loans and the accrued interests
thereon. Dacion en pago is a form of novation in which a change
takes place in the object involved in the original contract. Absent an
explicit agreement, petitioner cannot simply presume dacion en
pago.
Laches Not
a Bar to Petitioner
Petitioner submits that "the inaction of the individual respondents
with respect to the recovery of the shares of stock serves to bar
them from asserting rights over said shares on the basis of
laches." 31
Laches has been defined as "the failure or neglect, for an
unreasonable length of time, to do that which by exercising due
diligence could or should have been done earlier; it is negligence or
omission to assert a right within a reasonable time, warranting a
presumption that the party entitled to assert it either has
abandoned it or declined to assert it." 32
In this case, it is in fact petitioner who may be guilty of laches.
Petitioner had all the time to demand payment of the debt. More
important, under the contracts of pledge, petitioner could have
foreclosed the pledges as soon as the loans became due. But for
still unknown or unexplained reasons, he failed to do so, preferring
instead to pursue his baseless claim to ownership.
WHEREFORE, the petition is hereby DENIED and the assailed
Decision is AFFIRMED. Costs against petitioner.
SO ORDERED.
SECOND DIVISION
[G.R. No. 149357. March 04, 2005]

MOBILIA PRODUCTS, INC., petitioner, vs. HAJIME


UMEZAWA, respondent.

Susumo Kodaira and the other members of the Board of


Directors of Mobilia.

[G.R. No. 149403. March 04, 2005]


PEOPLE OF THE PHILIPPINES, petitioner, vs. HON. JUDGE
RUMOLDO R. FERNANDEZ and HAJIME
UMEZAWA, respondents.

The said company would be engaged in the same business as


Mobilia. Spouses Umezawa recruited Justin Legaspi, former
Production Manager of Mobilia, to act as Manager and one
Yoshikazu Hayano of Phoenix Marble Corporation to serve as
investors [sic].

DECISION
CALLEJO, SR., J.:
Before the Court are two consolidated petitions: a petition for
review on certiorari filed by the People of the Philippines, docketed
as G.R. No. 149403 of the Resolution [1] of the Court of Appeals (CA)
in CA-G.R. SP No. 52440 which reversed its decision and granted
the petition for certiorari, prohibition and mandamus filed by
respondent Hajime Umezawa; and the petition for review
on certiorari docketed as G.R. No. 149357 filed by petitioner Mobilia
Products, Inc. (MPI), the intervenor in the CA, assailing the same
Resolution of the appellate court.
The Antecedents
The antecedents were amply summarized by the Office of the
Solicitor General (OSG) in the petition at bar, to wit:
Mobilia Products, Inc. is a corporation engaged in the manufacture
and export of quality furniture which caters only to the purchase
orders booked and placed through Mobilia Products Japan, the
mother company which does all the marketing and booking. After
orders from customers are booked at the mother company in Japan,
the same are coursed through Mobilia Philippines for
implementation and production, after which, the ordered items are
shipped to Japan through the mother company.
Mobilia Products Japan sent Hajime Umezawa to the Philippines in
order to head Mobilia Products, Inc. as President and General
Manager. To qualify him as such and as a Board Director, he was
entrusted with one nominal share of stock.
Sometime in the last week of January 1995, Umezawa, then the
President and General Manager of Mobilia Products, Inc., organized
another company with his wife Kimiko, and his sister, Mitsuyo
Yaguchi, to be known as Astem Philippines Corporation, without
the knowledge of the Chairman and Chief Executive Officer

Pending formal organization, Spouses Umezawa, Justin Legaspi and


Yoshikazu Hayano wanted to accelerate the market potentials of
Astem by participating in the International Furniture Fair 1995 held
at the Word Trade Centre of Singapore on March 6 to 10, 1995.
One of the requirements of such Fair was that the furniture exhibits
must arrive and be received at Singapore not later than February
23, 1995. Pressed for time, with less than one month to prepare
and while Astem had yet no equipment and machinery, no staff and
no ready personnel, Umezawa, with grave abuse of the confidence
reposed on him as President and General Manager of Mobilia
Products, Inc., and in conspiracy with his wife, his sister Mitsuyo
Yaguchi, Yoshikazu Hayano and Justin Legaspi, all with intent to gain
for themselves and for their company Astem Philippines
Corporation, stole prototype furniture from petitioner Mobilia so
that the said pieces of furniture would be presented and exhibited
as belonging to Astem in the International Furniture Fair 95 in
Singapore.
In order to avoid detection, Umezawa contacted Henry Chua, the
owner of Dew Foam, one of the suppliers of Mobilia, for that the
latter to load several pieces of prototype furniture into a Dew Foam
truck and store them at the Dew Foam warehouse. The first batch
of furniture was stolen on February 8, 1995, when Mr. Henry Chua,
upon the request of respondent Umezawa, caused to be loaded
into his Dew Foam truck two prototype sofa models
worth P500,000.00, after which, the same were spirited from the
Mobilia compound, then transported and stored in Henry Chuas
warehouse.
Again, on February 18, 1995, Umezawa, with grave abuse of
confidence and taking advantage of his position as President and
General Manager, unlawfully stole expensive furniture from
Mobilias factory worth P2,964,875.00. In order to avoid detection,
the said furniture were loaded in the truck belonging to Dew Foam,
with respondent Umezawa personally supervising the loading, the

carting and spiriting away of the said furniture. Thus, taking


advantage of his position as General Manager, he managed to have
the said furniture taken out of the company premises and passed
the company guard without any problem and difficulty.
Further, on February 19, 1995, around 1 oclock in the afternoon,
respondent Umezawa again loaded into his motor vehicle, and took
away from company premises under the same irregular and
unlawful
circumstances,
an
expensive
three-seater
sofa
worth P255,000.00.
The taking out of the said furniture was effected in violation of the
standard procedures established by petitioner corporation which
requires that every shipment or taking out of the furniture be
checked and reviewed by Mobilias Production, Planning, Inventory
Costing and Control (PPICC) Division. All the foregoing furniture
were transported to and stored at Henry Chuas warehouse. After
sometime, the foregoing furniture were photographed for slide
photos at Photo Folio at the Reclamation Area, Cebu City and then
finally catalogued for use in the Singapore Fair for the use of Astem
and its supposed owners, namely: spouses Umezawa, Hayano and
Legaspi. The foregoing furniture models were finally shipped for
exhibition at the International Furniture Fair 95 in Singapore as
furniture belonging to Astem Philippines Corporation.
Sometime in March 1995, based on orders booked for Astem,
Umezawa, with unfaithfulness and abuse of confidence reposed on
him as the President and General Manager of petitioner Mobilia,
ordered and caused the manufacture of eighty-nine (89) pieces of
furniture with a total value of P17,108,500.00. The said pieces of
furniture were made with Mobilia supplies, materials and
machineries, as well as with Mobilia time and personnel, all of
which were under the administration and control of Umezawa as
President and General Manager. The said materials and supplies,
the time and labor, were supposed to be used for the manufacture
and production of quality furniture for the EXCLUSIVE USE of
Mobilia. However, Umezawa, in violation of his duty to apply the
same for the use of Mobilia and the duty to account for the same,
converted their use for the benefit of Astem or for the use and
benefit of Umezawa, his wife and sister, Yoshikazu Hayano and
Legaspi, much to the damage and prejudice of Mobilia Products.
The same furniture could also have been taken out of the company
premises by Umezawa and cohorts for shipment and delivery to

Astem customers had it not been for the timely discovery of the
previous theft. [2]
The Board of Directors of MPI, consisting of its Chairman
Susumo Kodaira and members Yasushi Kato and Rolando Nonato,
approved a Resolution on May 2, 1995 authorizing the filing of a
complaint against Umezawa for two counts of qualified theft
allegedly committed on February 18 and 19, 1995. Attached to the
complaint was the Joint Affidavit of Danilo Lallaban, George del Rio
and Yasushi Kato. The case was docketed as I.S. No. 95-275.
On May 15, 1995, the public prosecutor filed an Information for
qualified theft against Umezawa with the Regional Trial Court (RTC)
of Lapu-Lapu City. The accusatory portion of the Information,
docketed as Criminal Case No. 013231-L, reads:
That during or about the period comprised between the 18 th and
19th day of February 1995, in the City of Lapu-Lapu, Philippines,
within the jurisdiction of this Honorable Court, the accused, while
being then the President and General Manager of Mobilia Products,
Inc., a corporation engaged in the manufacture and export of
furniture, holding office and doing business in the Mactan Export
Processing Zone, Lapu-Lapu City, with grave abuse of the
confidence reposed upon him by his employer, with intent to gain,
did then and there willfully, unlawfully and feloniously take, steal
and carry away from the corporations factory in Mactan Export
Processing Zone, Lapu-Lapu City, expensive pieces of furniture, to
wit:
1) 1 set, Model No. 3, 2-seater
German leather sofa, worth - - - - - - - - - - - - - - - - - - P
208,125.00
2) 1 set, Model No. 8, 2-seater
German leather sofa, worth - - - - - - - - - - - - - - - - - - P
315,000.00
3) 1 set, Model No. 5, 2-seater
German leather sofa, worth - - - - - - - - - - - - - - - - - - P
108,000.00
4) 1 set, Model No. 4, 2-seater
German leather sofa, worth - - - - - - - - - - - - - - - - - - P
277,500.00
5) 1 set, Model No. 6, 1-seater
German leather sofa, worth - - - - - - - - - - - - - - - - - - P
146,250.00
6) 1 set, Model No. 2, 2-seater

German leather sofa, worth - - - - - - - - - - - - - - - - - - P


225,000.00
7) 1 set, Model No. 1, 2-seater
German leather sofa, worth - - - - - - - - - - - - - - - - - - P
275,000.00
8) 1 piece, Model Table No. 2,
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
93,750.00
9) 1 piece, Model Table No. 4,
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
105,000.00
10) 2 pieces, Model Pedestal
No. 6, Italian marble pedestal, worth - - - - - - - - - - - - - P
150,000.00
11) 1 piece, Model Column
Standard No. 11, Italian marble worth - - - - - - - - - - - - P
93,750.00
12) 1 piece, Model Table No. 1,
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
105,000.00
13) 1 piece, Model High Table
No. 10, Italian marble, worth - - - - - - - - - - - - - - - - - - - P
187,500.00
14) 1 piece, Model Table No. 8,
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
187,500.00
15) 1 piece, Model Table No. 7
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
187,500.00
16) 1 piece, Model Table No. 5
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
112,500.00
17) 1 piece, Model Table No. 9,
Italian marble table, worth - - - - - - - - - - - - - - - - - - - - P
187,500.00
18) 3-seater sofa, worth- - - - - - - - - - - - - - - - - P 255,000.00

On motion of the prosecution, the trial court issued a writ of


preliminary attachment covering the properties of Umezawa.

with an aggregate value of P3,219,875.00, Philippine currency,


without the consent of his employer, to the damage and prejudice
of Mobilia Products, Inc., in the said amount of P3,219,875.00.

That on the 8th day of February 1995, in the City of Lapu-Lapu,


Philippines, within the jurisdiction of this Honorable Court, the
above-named accused, while being the President and General
Manager of Mobilia Products, Inc., a corporation engaged in the
manufacture and export of quality furniture, whose principal place
of business is at the Mactan Export Processing Zone, Lapu-Lapu
City, with intent to gain, without the consent of his employer, and
with grave abuse of confidence, did then and there willfully,

Contrary to law.[3]

Umezawa then filed an Omnibus Motion to quash the


information filed against him, the discharge of the writ of
attachment issued by the trial court, and to set the case for
preliminary investigation. MPI, the private complainant therein,
opposed the motion.
In the meantime on July 21, 1995, MPI filed another criminal
complaint for qualified theft against Umezawa, his wife Kimiko
Umezawa, Mitsuyo Yaguchi, Justin Legaspi, Yoshikazu Hayano and
Henry Chua allegedly committed in March 1995, with the Office of
the City Prosecutor. The case was docketed as I.S. No. 95-442.
On July 25, 1995, the trial court issued an Order in Criminal
Case No. 013231-L denying the omnibus motion. On joint motion of
Umezawa and the public prosecutor, the trial court ordered a
reinvestigation of the case. Conformably, the public prosecutor
conducted a reinvestigation of Criminal Case No. 013231-L jointly
with I.S. No. 95-442.
On September 25, 1995, Umezawa filed a petition with the
Securities and Exchange Commission (SEC), docketed as SEC Case
No. 002919, for the nullification of the Resolution issued by the
three alleged members of MPI Board of Directors, authorizing the
filing of criminal complaints against him in behalf of the
corporation.
On January 3, 1996, the public prosecutor issued a Joint
Resolution finding probable cause for qualified theft and one count
of estafa against Umezawa, and dismissing the case against the
other accused. The Prosecutor maintained his finding of probable
cause against Umezawa in Criminal Case No. 013231-L.
On February 20, 1996, the public prosecutor filed an
Information for qualified theft with the RTC of Lapu-Lapu City
against Umezawa, docketed as Criminal Case No. 013423-L. The
accusatory portion reads:

unlawfully and feloniously take, steal and carry away from the
corporations factory the following expensive pieces of furniture, to
wit:
1) 1 set, Model No. 2, 2-seater Germanleather sofa, all valued
at . . . . . . . . . . . . . . P
225,000.00
2) 1 set, Model No. 1, 2-seater Germanleather sofa, all valued
at . . . . . . . . . . . . . . . . P
275,000.00
with an aggregate value of P500,000.00 Philippine Currency, to
the damage and prejudice of Mobilia Products, Inc.
CONTRARY TO LAW.[4]
Another Information for estafa was thereafter filed against the
same accused, docketed as Criminal Case No. 013424-L. The
accusatory portion reads:
That sometime in March 1995, in the City of Lapu-Lapu, Philippines,
within the jurisdiction of this Honorable Court, the above-named
accused, by means of unfaithfulness and abuse of confidence
reposed upon him as the President and General Manager of Mobilia
Products, Inc., did then and there willfully, unlawfully and
feloniously misappropriate and convert to his own personal use and
benefit the amount of Seventeen Million One Hundred Eight
Thousand Five Hundred (P17,108,500.00) Pesos, Philippine
Currency, which was the total value of the furnitures ordered and
manufactured by the accused or at his instance using Mobilia
supplies, materials and machineries, as well as time and personnel
which were supposed to be for the exclusive use of Mobilia
Products, Inc. but were converted for the use and benefit of the
accused and Astem Philippines Corporation, a company or firm
engaged in the same business as that of Mobilia Products, Inc.,
which is, [in] the manufacture and production of quality furniture
for export, owned by the accused, to the damage and prejudice of
Mobilia Products, Inc.
CONTRARY TO LAW.[5]
On April 25, 1996, Umezawa filed a motion for the suspension
of the proceedings on the ground of the pendency of his petition
with the SEC in Case No. 002919. The trial court, however, issued
an Order on May 21, 1996, denying the said motion. It held that the
filing and the pendency of a petition before the SEC did not warrant
a suspension of the criminal cases.
On September 25, 1998, Umezawa was arraigned and pleaded
not guilty.

On September 30, 1998, Umezawa filed anew a Joint Motion to


Quash the Informations in Criminal Cases Nos. 013231-L and
013423-L, on the ground that the facts alleged therein did not
constitute the felony of qualified theft. Umezawa claimed that
based on the Joint Affidavit of the witnesses for the prosecution
submitted during the preliminary investigation, Yasushi Kato and
George del Rio, MPI Vice-President and the head of the Upholstery
Department, respectively, the appropriate charge should
be estafa and not qualified theft. Umezawa further claimed that for
their failure to object to and resist his alleged delictual acts, the
said witnesses were as guilty as he was and should have been
included in the Information. He also asserted that there was,
likewise, no allegation in the Informations as to who was the owner
of the articles stolen; hence, there was no offended party. He noted
that the Informations merely alleged that MPI was his employer. He
further posited that there was no valid charge against him because
the resolution authorizing the filing of the cases against him was
approved by a mere minority of the members of the MPI Board of
Directors.[6]
Umezawa, likewise, filed a Motion to Quash [7] the Information in
Criminal Case No. 013424-L on the ground that the facts alleged in
the Information did not constitute the felony of estafa. He posited
that the Information did not contain any allegation that any
demand was made for him to return the goods. Furthermore, the
owner of the said articles was not specified. He noted that as
gleaned from the Joint Affidavit of the witnesses for the
prosecution, there was no lawful private complainant. He reiterated
that the MPI board resolution authorizing the filing of the charge
against him was not approved by the majority of the members of its
board of directors. Umezawa also alleged that the charge for
estafa with abuse of confidence was already included in the charge
for qualified theft, where it was alleged that he committed theft
with abuse of confidence; hence, the charge for estafa should be
quashed, otherwise, he would be placed in double jeopardy. The
motion was duly opposed by the prosecution.
On January 29, 1999, the trial court issued a Joint
Order[8] dismissing the cases for lack of jurisdiction. It held that the
dispute between the private complainant and the accused over the
ownership of the properties subject of the charges is intracorporate in nature, and was within the exclusive jurisdiction of the
SEC. It ruled that Umezawa, as a member of the board of directors
and president of MPI, was also a stockholder thereof. While
Umezawa claimed to be the bona fide owner of the properties
subject of the Informations which he appropriated for himself, the
private complainant disputes the same; hence, according to the

trial court, the conflicting claims of the parties should be resolved


by the SEC. The private and public prosecutors received their
respective copies of the Joint Order on February 2, 1999.
The MPI, through the private prosecutor, filed a motion for
reconsideration of the joint order of the court and for the
reinstatement of the cases on February 15, 1999. The MPI relied on
the following grounds:
a.
The Honorable Court has jurisdiction and must exercise it
over these cases;
b.
The above-entitled case is not an intra-corporate
controversy;
and
c.
The accused could not claim ownership nor co-ownership of
the properties of private complainant corporation.[9]
The MPI maintained that the trial court had jurisdiction over the
cases and cited Section 5 of Presidential Decree (P.D.) No. 902-A,
which provides the rules on cases over which the SEC has original
and exclusive jurisdiction. A copy of the motion was served on the
public prosecutor for his approval. However, the public prosecutor
did not affix his conformity to the motion, and instead opted to
appear before the trial court during the hearing of the same.
During the hearing, both the public and private prosecutors
appeared. In support of his motion, the private prosecutor argued
that the trial of the case must be done in the presence of and under
the control and supervision of the public prosecutor.[10]
The trial court denied the motion in an Order dated April 19,
1999. It held that the SEC, not the trial court, had jurisdiction over
intra-corporate controversies. It also ruled that the motion of the
private complainant was pro forma, it appearing that the public
prosecutor had not approved the same.
The public prosecutor received a copy of the Order on April 20,
1999. On April 26, 1999, the People of the Philippines, through the
OSG, filed a petition for certiorari and mandamus with the CA
against Presiding Judge Rumuldo R. Fernandez and Umezawa,
docketed as CA-G.R. SP No. 52440. The CA allowed the MPI to
intervene as petitioner, and admitted its petition- in-intervention.
The People of the Philippines, as the petitioner therein, raised
the following issues:
I

WHETHER OR NOT IT IS THE LEGAL AND MINISTERIAL DUTY OF THE


REGIONAL TRIAL COURT TO TAKE COGNIZANCE AND JURISDICTION
OF THESE SUBJECT CRIMINAL CASES;
II
WHETHER OR NOT THE SECURITIES AND EXCHANGE COMMISSION
HAS JURISDICTION OVER THE CRIMINAL CASES AGAINST
RESPONDENT HAJIME UMEZAWA;
III
WHETHER OR NOT
RESPONDENT JUDGE COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN DISMISSING THE CRIMINAL CASES AND DENYING
PETITIONERS MOTION FOR RECONSIDERATION.[11]
The People asserted that the controversy involving the criminal
cases was not between Umezawa and the other stockholders of
MPI, but one between him as the accused therein and the People of
the Philippines. It averred that under Section 20(b) of Batas
Pambansa (B.P.) Blg. 129, the RTC has exclusive jurisdiction over
the cases against Umezawa. It also alleged that in dismissing the
criminal cases against Umezawa on the ground that it had no
jurisdiction over the crimes charged, the RTC committed grave
abuse of its discretion amounting to excess or lack of jurisdiction.
On September 2, 1999, the CA rendered judgment granting the
petition and nullifying the assailed Orders of the RTC. It ruled that
the issue of ownership of the properties subject of the Informations
was not an intra-corporate dispute. It held that Umezawa, although
president and general manager of the MPI and a stockholder
thereof, was not a joint owner or co-owner of the personal
properties subject of the charges. It also held that the dispute
between a private corporation and any of its stockholders relative
to the ownership of properties does not ipso factonegate the
jurisdiction of the RTC over the criminal cases under B.P. Blg. 129,
as amended. It also declared that the material averments of the
Informations sufficiently charged qualified theft and estafa.
Umezawa filed a motion for the reconsideration of the decision
of the CA. In a complete volte face, the appellate court issued a
Resolution on August 8, 2001, granting the motion and reversing
its decision. It affirmed the ruling of the RTC that the dispute
between Umezawa and the other stockholders and officers over the
implementation of the MPIs standard procedure is intra-corporate

in nature; hence, within the exclusive jurisdiction of the SEC. Citing


Section 5(a)(b) of P.D. No. 902-A, and the ruling of this Court
in Alleje v. Court of Appeals,[12] the appellate court ruled that based
on the material allegations of the Solicitor General in the petition
before the CA, the SEC had exclusive jurisdiction over the
conflicting claims of the parties. It likewise affirmed the ruling of
the RTC that the absence of any allegation in the Information that
the MPI was the owner of the properties subject of the Information
is fatal.
The petitioner MPI filed the instant petition for review on
certiorari, raising the following issues:
I
WHETHER OR NOT THE SECURITIES AND EXCHANGE COMMISSION
HAS JURISDICTION OVER THE CRIMINAL CASES AGAINST
UMEZAWA.

1.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW AND GRAVE ABUSE OF DISCRETION IN FINDING THAT THE
PETITION FOR MANDAMUS, CERTIORARI AND INJUNCTION WAS
FILED OUT OF TIME AND THAT PETITIONER HAS LOST ITS RIGHT TO
APPEAL;
2.
THE COURT OF APEALS COMMITTED SERIOUS ERRORS OF
LAW IN RULING THAT NOT ALL THE ELEMENTS OF QUALIFIED THEFT
AND ESTAFA ARE PRESENT;
3.
THE COURT OF APPEALS COMMITTED BLATANT AND SERIOUS
ERRORS OF LAW IN FINDING THAT THE SECURITIES AND EXCHANGE
COMMISSION (SEC) HAS JURISDICTION OVER THE SUBJECT
CRIMINAL CASES;
4.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF
LAW AND GRAVE ABUSE OF DISCRETION IN GIVING DUE COURSE TO
THE PRO-FORMA MOTION FOR RECONSIDERATION OF UMEZAWA.[14]

II
WHETHER OR NOT ALL THE NECESSARY ELEMENTS OF THE CRIMES
OF QUALIFIED THEFT AND ESTAFA ARE SUFFICIENTLY ALLEGED IN
THE INFORMATIONS.
III
EVEN ASSUMING ARGUENDO THAT THE FACTS ALLEGED DO NOT
CONSTITUTE AN OFFENSE THE CORRECT RULING IS NOT TO
DISMISS THE CASE BUT TO ORDER AMENDMENT.
IV
WHETHER OR NOT THE STATE HS LOST ITS RIGHT TO APPEAL.
V
WHETHER OR NOT THE MOTION FOR RECONSIDERATION OF
UMEZAWA IS PRO FORMA.[13]
The People of the Philippines filed a separate petition for review
on certiorari, contending that:

The two petitions were consolidated in the Second Division of


the Court.
The threshold issues for resolution are the following: (a)
whether or not the petition for certiorari of the People of the
Philippines in the CA assailing the January 29, 1999 Joint Order of
the trial court was time-barred; (b) whether the RTC has jurisdiction
over the crimes charged in the said Informations; (c) whether the
Informations sufficiently charge the felonies of qualified theft and
estafa; and (d) if in the affirmative, whether all the elements of
qualified theft and estafa are alleged in the Informations.
On the first issue, the CA held that the Public Prosecutor failed
to file a motion for the reconsideration of the trial courts January
29, 1999 Joint Order dismissing the cases, that is, within fifteen
days from receipt of a copy of the said order on February 2, 1999;
neither did the People appeal the said Order within the period
therefor. Thus, according to the CA, the People filed its petition
for certiorari, prohibition and mandamus assailing the January 29,
1999 Joint Order of the trial court only on April 26, 1999, well
beyond the 60-day period therefor. The appellate court, likewise,
held that the filing of the motion for reconsideration of the said Joint
Order by the private prosecutor without the conformity of the Public
Prosecutor did not toll the period for the People to file its motion for
reconsideration thereof, or to appeal therefrom, or to file a petition
for certiorari, prohibition or mandamus. It ruled that, having lost its
right to appeal in due course, the People was proscribed from filing

a petition for certiorari, prohibition or mandamus. The CA declared


that the motion for reconsideration filed by petitioner MPI of the
Joint Order of the RTC is pro forma, the public prosecutor not having
signified his written conformity thereto.
On the other hand, the petitioner People of the Philippines
insists that while the public prosecutor did not expressly conform to
the motion for reconsideration of the January 29, 1999 Joint Order
of the trial court filed by the private prosecutor, through the public
prosecutors presence during the hearing of the said motion, his
supervision and control over the private prosecutor during the said
hearing, he in effect adopted and conformed to the said motion for
reconsideration.
In his comment on the petitions, respondent Umezawa
maintains that the motion for reconsideration of the joint order of
the trial court filed by the private prosecutor did not interrupt the
period within which the People could appeal, citing the ruling of this
Court in Cabral v. Puno.[15] The respondent posits that the finding of
the trial court, which was affirmed by the CA, that the public
prosecutor did not conform to the motion for reconsideration of the
private prosecutor, is binding on this Court. The respondent also
avers that the petitioner has no personality to file the petition.
Moreover, he insists that whether the public prosecutor conformed
to the private prosecutors motion for reconsideration is a question
of fact which is not proper in a petition for review on certiorari.

The Courts Ruling


The contention of the petitioner People of the Philippines is not
correct. All criminal actions commenced by complaint or
information shall be prosecuted under the direction and control of
the public prosecutor.[16] When the civil action for civil liability is
instituted in the criminal action pursuant to Rule 111 of the Rules
on Criminal Procedure, the offended party may intervene, by
counsel, in the prosecution of the offense. [17] In Ramiscal, Jr. v.
Sandiganbayan,[18] we held that under Section 16, Rule 110 of the
Rules of Criminal Procedure, the offended party may intervene in
the criminal action personally or by counsel, who will then act as
private prosecutor for the protection of his interests and in the
interest of the speedy and inexpensive administration of justice. A
separate action for the purpose would only prove to be costly,
burdensome and time-consuming for both parties and further delay
the final disposition of the case. The multiplicity of suits must be

avoided. With the implied institution of the civil action in the


criminal action, the two actions are merged into one composite
proceeding, with the criminal action predominating the civil. The
prime purpose of the criminal action is to punish the offender in
order to deter him and others from committing the same or similar
offense, to isolate him from society, reform and rehabilitate him or,
in general, to maintain social order.[19]
The intervention of the private offended party, through
counsel, and his prosecution of the case shall be under the control
and supervision of the public prosecutor until the final termination
of the case. A public prosecutor who has been entrusted by law
with the prosecution of criminal cases is duty-bound to take charge
thereof until its final termination, for under the law, he assumes full
responsibility for his failure or success since he is the one more
adequately prepared to pursue it to its termination. [20] The
prosecution of offenses is a public function. Indeed, the sole
purpose of the civil action is the resolution, reparation or
indemnification of the private offended party for the damage or
injury he sustained by reason of the delictual or felonious act of the
accused. [21] Under Article 104 of the Revised Penal Code, the
following are the civil liabilities of the accused:
ART. 104. What is included in civil liability. The civil liability
established in Articles 100, 101, 102 and 103 of this Code includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
Thus, when the offended party, through counsel, has asserted
his right to intervene in the proceedings, it is error to consider his
appearance merely as a matter of tolerance.[22]
The public prosecutor may turn over the actual prosecution of
the criminal case, in the exercise of his discretion, but he may, at
any time, take over the actual conduct of the trial. However, it is
necessary that the public prosecutor be present at the trial until the
final termination of the case; otherwise, if he is absent, it cannot be
gainsaid that the trial is under his supervision and control.[23]
In a criminal case in which the offended party is the State, the
interest of the private complainant or the offended party is limited
to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a
reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal

aspect thereof is concerned and may be made only by the public


prosecutor; or in the case of an appeal, by the State only, through
the OSG. The private complainant or offended party may not
undertake such motion for reconsideration or appeal on the
criminal aspect of the case. [24] However, the offended party or
private complainant may file a motion for reconsideration of such
dismissal or acquittal or appeal therefrom but only insofar as the
civil aspect thereof is concerned. [25] In so doing, the private
complainant or offended party need not secure the conformity of
the public prosecutor. If the court denies his motion for
reconsideration, the private complainant or offended party may
appeal or file a petition for certiorari or mandamus, if grave abuse
amounting to excess or lack of jurisdiction is shown and the
aggrieved party has no right of appeal or given an adequate
remedy in the ordinary course of law.
The public and private prosecutors are not precluded,
whenever feasible, from filing a joint motion for the reconsideration
of the dismissal of the case or the acquittal of the accused, on the
criminal and civil aspects of the cases.
In the present case, only petitioner MPI, through counsel, filed
a motion for the reconsideration of the trial courts Joint Order
dated January 29, 1999, praying for the reinstatement of the cases
insofar as the civil aspect thereof is concerned. The public
prosecutor did not approve nor conform to the said motion.
Although petitioner MPI provided ample space for the said
conformity of the public prosecutor, the latter did not do so; he
merely appeared during the hearing of the said motion with the
private prosecutor when the latter presented his oral arguments in
support of the said motion.
The fact that the public prosecutor did not conform to the said
motion, however, does not mean that the same is pro forma. It
must be stressed that the propriety and efficacy of the motion,
insofar as the civil aspect of the cases is concerned, is not
dependent upon the conformity of the public prosecutor. Hence,
the filing of the joint motion for reconsideration effectively
suspended the running of the period for petitioner MPI to assail the
joint order in the CA via an appeal or a special civil action
for certiorari or mandamus under Rule 65 of the Rules of Court.
However, since the public prosecutor did not file any motion for
the reconsideration of the joint order nor conform to the motion of
petitioner MPI, insofar as the criminal aspect of the cases is
concerned, the period for the State to assail the said joint order was
not suspended. Only the motion for reconsideration filed by the

public prosecutor of the joint order of dismissal of the cases could


have tolled the period within which the State could appeal, insofar
as the criminal aspect of the cases was concerned. The bare fact
that the public prosecutor appeared for the State during the
hearing of the motion for reconsideration of petitioner MPI does not
amount to or constitute his adoption of the said motion as that of
the State. As ruled by this Court inCabral v. Puno:[26]
While it is true that the offended party, Silvino San Diego, through
the private prosecutor, filed a motion for reconsideration within the
reglementary fifteen-day period, such move did not stop the
running of the period for appeal. He did not have the legal
personality to appeal or file the motion for reconsideration on his
behalf. The prosecution in a criminal case through the private
prosecutor is under the direction and control of the Fiscal, and only
the motion for reconsideration or appeal filed by the Fiscal could
have interrupted the period for appeal.[27]
We agree with the ruling of the CA that the petition for
certiorari filed by the petitioner People of the Philippines with the
CA on April 26, 1999 was filed beyond the 60-day period as
provided in Section 4, Rule 65 of the Rules of Court, [28] it appearing
that the public prosecutor received a copy of the joint order of the
trial court on February 2, 1999, and, thus, had only until April 3,
1999 within which to file the said petition.
Even then, the Court still holds that the CA erred in dismissing
the petition of the People of the Philippines simply because the
public prosecutor erred in not himself filing a motion for
reconsideration of the joint order of the trial court, on his
perception that by being present during the hearing of the motion
for reconsideration of petitioner MPI, he thereby adopted the said
motion as that of the States. The settled rule is that the State is
not estopped by the mistakes of its officers and employees. Indeed,
in Cruz, Jr. v. Court of Appeals,[29] the Court declared:
Estoppel does not lie against the government because of the
supposedly mistaken acts or omissions of its agents. As we
declared in People v. Castaeda, there is the long familiar rule that
erroneous application and enforcement of the law by public officers
do not block subsequent correct application of the statute and that
the government is never estopped by mistake or error on the part
of its agents.
The Court also held in Chua v. Court of Appeals:[30]

While ordinarily, certiorari is unavailing where the appeal period


has lapsed, there are exceptions. Among them are (a) when public
welfare and the advancement of public policy dictates; (b) when
the broader interest of justice so requires; (c) when the writs issued
are null and void; or (d) when the questioned order amounts to an
oppressive exercise of judicial authority. [31]
On the second issue, the petitioners assert that the CA erred in
holding that the dispute between it and the respondent is intracorporate in nature; hence, within the exclusive jurisdiction of the
SEC. As gleaned from the material allegations of the Informations,
the RTC had exclusive jurisdiction over the crimes charged.
Petitioner MPI further avers that even if there is no allegation in the
Informations identifying it as the owner of the personal properties
described in the Informations, its ownership of the properties can
be inferred from the other allegations. The petitioners maintain
that even if the Informations are deficient, the remedy is the
amendment of the Informations and not the dismissal of the cases.
For his part, the respondent avers that the assailed Resolution
of the CA is correct, and that it is the appellate courts decision
which is erroneous.
We agree with the petitioners.
According to Section 20 of B.P. Blg. 129
SEC. 20. Jurisdiction in criminal cases. Regional Trial Courts shall
exercise exclusive original jurisdiction in all criminal cases not
within the exclusive jurisdiction of any court, tribunal or body,
except those now falling under the exclusive and concurrent
jurisdiction of the Sandiganbayan which shall hereafter be
exclusively taken cognizance of by the latter.
Section 32 thereof was later amended by Section 2 of Republic
Act No. 7691, as follows:
Sec. 32. Jurisdiction of Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in Criminal Cases. Except
in cases falling within the exclusive original jurisdiction of the
Regional Trial Court and of the Sandiganbayan, the Metropolitan
Trial Courts, and Municipal Circuit Trial Courts shall exercise:
(1) Exclusive original jurisdiction over all violations of city or
municipal ordinances committed within their respective territorial
jurisdiction; and

(2) Exclusive original jurisdiction over all offenses punishable with


imprisonment not exceeding six (6) years irrespective of the
amount of fine, and regardless of other imposable accessory or
other penalties, including the civil liability arising from such
offenses or predicated thereon, irrespective of kind, nature, value
or amount thereof: Provided, however, That in offenses involving
damage to property through criminal negligence, they shall have
exclusive original jurisdiction thereof.
Case law has it that in order to determine the jurisdiction of the
court in criminal cases, the complaint or Information must be
examined for the purpose of ascertaining whether or not the facts
set out therein and the prescribed period provided for by law are
within the jurisdiction of the court, and where the said Information
or complaint is filed. It is settled that the jurisdiction of the court in
criminal cases is determined by the allegations of the complaint or
Information and not by the findings based on the evidence of the
court after trial.[32] Jurisdiction is conferred only by the Constitution
or by the law in force at the time of the filing of the Information or
complaint. Once jurisdiction is vested in the court, it is retained up
to the end of the litigation. Indeed, inPeople v. Purisima,[33] this
Court held that:
In criminal prosecutions, it is settled that the jurisdiction of the
court is not determined by what may be meted out to the offender
after trial or even by the result of the evidence that would be
presented at the trial, but by the extent of the penalty which the
law imposes for the misdemeanor, crime or violation charged in the
complaint. If the facts recited in the complaint and the punishment
provided for by law are sufficient to show that the court in which
the complaint is presented has jurisdiction, that court must assume
jurisdiction.
In Criminal Case No. 013231-L, the value of the properties
subject of qualified theft is P3,219,875.00, while in Criminal Case
No. 013423-L, the value of the property was pegged atP255,000.00.
Under Article 309 of the Revised Penal Code, the penalty for theft
when the value of the stolen property exceeds P22,000.00 is as
follows:
1.
The penalty of prision mayor in its minimum and medium
periods, if the value of the thing stolen is more than 12,000 pesos
but does not exceed 20,000 pesos; but if the value of the thing
stolen exceeds the latter amount, the penalty shall be the
maximum period of the one prescribed in this paragraph and one

year of each additional ten thousand pesos, but the total of the
penalty which may be imposed shall not exceed twenty years. In
such cases, and in connection with the accessory penalties which
may be imposed and for the purpose of the other provisions of this
Code, the penalty shall be termed prision mayor orreclusion
temporal, as the case may be.
Article 310 of the Revised Penal Code further provides for the
penalty for qualified theft:
Art. 310. Qualified theft. The crime of theft shall be punished by
the penalties next higher by two degrees than those respectively
specified in the next preceding article, if committed by a domestic
servant, or with grave abuse of confidence, or if the property stolen
is motor vehicle, mail matter or large cattle or consists of coconuts
taken from the premises of a plantation, fish taken from a fishpond
or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular
accident or civil disturbance.
On the other hand, in Criminal Case No. 013424-L for estafa,
the amount of the fraud involved is P500,000.00, and under Article
315 of the Revised Penal Code, the penalty for such crime is
1st. The penalty of prision correccional in its maximum period
to prision mayor in its minimum period, if the amount of the fraud
is over 12,000 pesos but does not exceed 22,000 pesos; and if such
amount exceeds the latter sum, the penalty provided in this
paragraph shall be imposed in its maximum period, adding one
year for each additional 10,000 pesos; but the total penalty which
may be imposed shall not exceed twenty years. In such cases, and
in connection with the accessory penalties which may be imposed
and for the purpose of the other provisions of this Code, the penalty
shall be termed prision mayor or reclusion temporal, as the case
may be.
Patently, then, based on the material allegations of the
Informations in the three cases, the court a quo had exclusive
jurisdiction over the crimes charged.
The bare fact that the respondent was the president and
general manager of the petitioner corporation when the crimes
charged were allegedly committed and was then a stockholder
thereof does not in itself deprive the court a quo of its exclusive
jurisdiction over the crimes charged. The property of the

corporation is not the property of the stockholders or members or


of its officers who are stockholders. [34] As the Court held in an
avuncular case:[35]
... Properties registered in the name of the corporation are owned
by it as an entity separate and distinct from its members. While
shares of stock constitute personal property, they do not represent
property of the corporation. The corporation has property of its own
which consists chiefly of real estate (Nelson v. Owen, 113 Ala., 372,
21 So. 75; Morrow v. Gould, 145 Iowa, 1, 123 N.W. 743). A share of
stock only typifies an aliquot part of the corporations property, or
the right to share in its proceeds to that extent when distributed
according to law and equity (Hall & Faley v. Alabama Terminal, 173
Ala., 398, 56 So. 235), but its holder is not the owner of any part of
the capital of the corporation (Bradley v. Bauder, 36 Ohio St., 28).
Nor is he entitled to the possession of any definite portion of its
property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis,
35 Ohio St., 474). The stockholder is not a co-owner or tenant in
common of the corporate property (Harton v. Johnston, 166 Ala.,
317, 51 So., 992) [36]
As early as the case of Fisher v. Trinidad,[37] the Court already
declared that [t]he distinction between the title of a corporation,
and the interest of its members or stockholders in the property of
the corporation, is familiar and well-settled. The ownership of that
property is in the corporation, and not in the holders of shares of its
stock. The interest of each stockholder consists in the right to a
proportionate part of the profits whenever dividends are declared
by the corporation, during its existence, under its charter, and to a
like proportion of the property remaining, upon the termination or
dissolution of the corporation, after payment of its debts.[38]
We also agree with the ruling of the CA in its decision that the
SEC (now the Regional Trial Court) had no jurisdiction over the
cases filed in the court a quo. The appellate courts reliance in the
assailed Resolution issued by the Board of Directors of the
petitioner corporation, on Section 5(b) of P.D. No. 902, has no
factual and legal basis.
Section 5 of P.D. No. 902-A provides that the SEC [39] shall have
original and exclusive jurisdiction to hear and decide cases
involving the following:
(a)
devices or schemes employed by, or any acts of, the board of
directors, business associates, its officers or partners, amounting to
fraud and misrepresentation which may be detrimental to the

interest of the public and/or of the stockholders, partners, members


of association or organizations registered with the Commission, and
(b)
controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members
or associates, respectively.
In Fabia v. Court of Appeals,[40] the Court explained that Section
5 of P.D. No. 902-A should be taken in conjunction with Section 6 of
the law. It then proceeded to explain:
In synthesis, Sec. 5 of PD 902-A mandates that cases involving
fraudulent actions and devices which are detrimental to the interest
of stockholders, members or associates and directors of the
corporation are within the original and exclusive jurisdiction of the
SEC. Taken in conjunction with Sec. 6 of the same law, it will be
gathered that the fraudulent acts/schemes which the SEC shall
exclusively investigate and prosecute are those in violation of any
law or rules and regulations administered and enforced by the
Commission alone. This investigative and prosecutorial powers of
the SEC are further without prejudice to any liability for violation of
any provision of The Revised Penal Code.
From the foregoing, it can thus be concluded that the filing of the
civil/intra-corporate case before the SEC does not preclude the
simultaneous and concomitant filing of a criminal action before the
regular courts; such that, a fraudulent act may give rise to liability
for violation of the rules and regulations of the SEC cognizable by
the SEC itself, as well as criminal liability for violation of
the Revised Penal Codecognizable by the regular courts, both
charges to be filed and proceeded independently, and may be
simultaneously with the other.[41]
Thus, the filing of a petition in the SEC for the nullification of
the Resolution of May 2, 1995 issued by the Chairman and two
members of the Board of Directors of petitioner MPI, which
authorized the filing of criminal cases against respondent
Umezawa, was not a bar to his prosecution for estafa and qualified
theft for his alleged fraudulent and delictual acts. The relationship
of the party-litigants with each other or the position held by
petitioner as a corporate officer in respondent MPI during the time
he committed the crime becomes merely incidental and holds no
bearing on jurisdiction. What is essential is that the fraudulent acts

are likewise of a criminal nature and hence cognizable by the


regular courts.[42] Thus, notwithstanding the fact that respondent
Umezawa was the president and general manager of petitioner MPI
and a stockholder thereof, the latter may still be prosecuted for the
crimes charged. The alleged fraudulent acts of respondent
Umezawa in this case constitute the element of abuse of
confidence, deceit or fraudulent means, and damage under Article
315 of the Revised Penal Code on estafa.[43]
We agree with the encompassing disquisitions of the CA in its
decision, to wit:
A dispute involving the corporation and its stockholders is not
necessarily an intra-corporate dispute cognizable only by the
Securities and Exchange Commission. Nor does it ipso facto negate
the jurisdiction of the Regional Trial Court over the subject cases.
The Supreme Court citing the case of Viray v. Court of Appeals (G.R.
No. 92481, 191 SCRA 308 [1990]) in Torio v. Court of Appeals (G.R.
No. 107293, March 2, 1994, 230 SCRA 626) held:
It should be obvious that not every conflict between a corporation
and its stockholders involves corporate matters that only the SEC
can resolve in the exercise of its adjudicatory or quasi-judicial
powers.
As the Supreme Court further ruled in the Torio case that a
contrary interpretation would distort the meaning and intent of P.D.
902-A, the law re-organizing the Securities and Exchange
Commission. The better policy in determining which body has
jurisdiction over a case would be to consider not only the
relationship of the parties but also the nature of the questions
raised in the subject of the controversy.[44]
On the last issue, we find and so hold that the Informations
state all the essential elements of estafa and qualified theft. It was
adequately alleged that respondent Umezawa, being the President
and General Manager of petitioner MPI, stole and misappropriated
the properties of his employer, more specifically, petitioner MPI. As
expostulated by the CA in its decision:
In any event, the allegations in the informations, if hypothetically
admitted, are sufficient to bind Umezawa to the charges of qualified
theft and estafa. As aptly ruled by the court a quo in its Order of
July 25, 1995, all the elements of the offense of qualified theft are
present. There is no basis for claiming otherwise. Furthermore,

the private offended party, as well as the subject matter of the


felonious taking and the ownership thereof, have been adequately
indicated or identified leaving no room for any doubt on these
matters. Considering that the motions to quash of September 30,
1998 are fundamentally rehash of the motion to quash filed on May
29, 1995 and the culpable acts subject of the new informations are
virtually the same as the first information filed against Umezawa,
there is no conceivable reason why the court a quo abandoned its
previous stand and controverted itself in regard the sufficiency of
the informations.
In our considered view, and as the court a quo had correctly held in
its Order of May 26, 1996, even a SEC ruling voiding the resolution
authorizing the filing of criminal charges versus the accused Hajime
Umezawa can have no bearing on the validity of the informations
filed in these three criminal cases as pointed out by private
complainant, the public offenses of qualified theft and estafa can
[be] prosecuted de officio. The resolution of the office of the
prosecutor on the preliminary investigation as well as the reinvestigation conducted on the letter-complaint filed by private
complainant company sufficiently established prima facie case
against the accused and the legality or illegality of the constitution
of the board which authorized the filing of the complaint does not
materially affect either the informations filed against Umezawa or
the pending criminal proceedings. As petitioners contend, the
action is now between the People of the Philippines and herein
private respondent.[45]
IN LIGHT OF ALL THE FOREGOING, the petitions are
GRANTED. The Resolution of the Court of Appeals in CA-G.R. SP No.
52440 dated August 8, 2001 is REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated September 2, 1999 is
AFFIRMED.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 165744
August 11, 2008
OSCAR C. REYES, petitioner,
vs.
HON. REGIONAL TRIAL COURT OF MAKATI, Branch 142,

ZENITH INSURANCE CORPORATION, and RODRIGO C.


REYES, respondents.
DECISION
BRION, J.:

This Petition for Review on Certiorari under Rule 45 of the Rules of


Court seeks to set aside the Decision of the Court of Appeals
(CA)1 promulgated on May 26, 2004 in CA-G.R. SP No. 74970. The
CA Decision affirmed the Order of the Regional Trial Court (RTC),
Branch 142, Makati City dated November 29, 2002 2 in Civil Case
No. 00-1553 (entitled "Accounting of All Corporate Funds and
Assets, and Damages") which denied petitioner Oscar C. Reyes
(Oscar) Motion to Declare Complaint as Nuisance or Harassment
Suit.
BACKGROUND FACTS
Oscar and private respondent Rodrigo C. Reyes (Rodrigo) are two of
the four children of the spouses Pedro and Anastacia Reyes. Pedro,
Anastacia, Oscar, and Rodrigo each owned shares of stock of Zenith
Insurance Corporation (Zenith), a domestic corporation established
by their family. Pedro died in 1964, while Anastacia died in 1993.
Although Pedros estate was judicially partitioned among his heirs
sometime in the 1970s, no similar settlement and partition appear
to have been made with Anastacias estate, which included her
shareholdings in Zenith. As of June 30, 1990, Anastacia owned
136,598 shares of Zenith; Oscar and Rodrigo owned 8,715,637 and
4,250 shares, respectively.3
On May 9, 2000, Zenith and Rodrigo filed a complaint 4 with the
Securities and Exchange Commission (SEC) against Oscar,
docketed as SEC Case No. 05-00-6615. The complaint stated that it
is "a derivative suit initiated and filed by the complainant Rodrigo
C. Reyes to obtain an accounting of the funds and assets of
ZENITH INSURANCE CORPORATION which are now or formerly
in the control, custody, and/or possession of respondent [herein
petitioner Oscar] and to determine the shares of stock of
deceased spouses Pedro and Anastacia Reyes that were
arbitrarily and fraudulently appropriated [by Oscar] for himself
[and] which were not collated and taken into account in the
partition, distribution, and/or settlement of the estate of the
deceased spouses, for which he should be ordered to account for

all the income from the time he took these shares of stock, and
should now deliver to his brothers and sisters their just and
respective shares."5 [Emphasis supplied.]

Accordingly, the motion is denied. However, only the


derivative suit consisting of the first cause of action will be
taken cognizance of by this Court.10

In his Answer with Counterclaim, 6 Oscar denied the charge that he


illegally acquired the shares of Anastacia Reyes. He asserted, as a
defense, that he purchased the subject shares with his own funds
from the unissued stocks of Zenith, and that the suit is not a bona
fide derivative suit because the requisites therefor have not been
complied with. He thus questioned the SECs jurisdiction to
entertain the complaint because it pertains to the settlement of the
estate of Anastacia Reyes.

Oscar thereupon went to the CA on a petition for certiorari,


prohibition, and mandamus11 and prayed that the RTC Order be
annulled and set aside and that the trial court be prohibited from
continuing with the proceedings. The appellate court affirmed the
RTC Order and denied the petition in its Decision dated May 26,
2004. It likewise denied Oscars motion for reconsideration in a
Resolution dated October 21, 2004.

When Republic Act (R.A.) No. 87997 took effect, the SECs exclusive
and original jurisdiction over cases enumerated in Section 5 of
Presidential Decree (P.D.) No. 902-A was transferred to the RTC
designated as a special commercial court.8 The records of Rodrigos
SEC case were thus turned over to the RTC, Branch 142, Makati,
and docketed as Civil Case No. 00-1553.

Petitioner now comes before us on appeal through a petition for


review on certiorari under Rule 45 of the Rules of Court.
ASSIGNMENT OF ERRORS
Petitioner Oscar presents the following points as conclusions the CA
should have made:

On October 22, 2002, Oscar filed a Motion to Declare Complaint as


Nuisance or Harassment Suit.9He claimed that the complaint is a
mere nuisance or harassment suit and should, according to the
Interim Rules of Procedure for Intra-Corporate Controversies, be
dismissed; and that it is not a bona fide derivative suit as it
partakes of the nature of a petition for the settlement of estate of
the deceased Anastacia that is outside the jurisdiction of a special
commercial court. The RTC, in its Order dated November 29, 2002
(RTC Order), denied the motion in part and declared:

1. that the complaint is a mere nuisance or harassment suit that


should be dismissed under the Interim Rules of Procedure of IntraCorporate Controversies; and

A close reading of the Complaint disclosed the presence of


two (2) causes of action, namely: a) a derivative suit for
accounting of the funds and assets of the corporation which
are in the control, custody, and/or possession of the
respondent [herein petitioner Oscar] with prayer to appoint
a management committee; and b) an action for
determination of the shares of stock of deceased spouses
Pedro and Anastacia Reyes allegedly taken by respondent,
its accounting and the corresponding delivery of these
shares to the parties brothers and sisters. The latter is not a
derivative suit and should properly be threshed out in a
petition for settlement of estate.

Accordingly, he prays for the setting aside and annulment of the CA


decision and resolution, and the dismissal of Rodrigos complaint
before the RTC.

2. that the complaint is not a bona fide derivative suit but is in fact
in the nature of a petition for settlement of estate; hence, it is
outside the jurisdiction of the RTC acting as a special commercial
court.

THE COURTS RULING


We find the petition meritorious.
The core question for our determination is whether the trial court,
sitting as a special commercial court, has jurisdiction over the
subject matter of Rodrigos complaint. To resolve it, we rely on the
judicial principle that "jurisdiction over the subject matter of a case
is conferred by law and is determined by the allegations of the
complaint, irrespective of whether the plaintiff is entitled to all or
some of the claims asserted therein."12

JURISDICTION OF SPECIAL COMMERCIAL COURTS


P.D. No. 902-A enumerates the cases over which the SEC (now the
RTC acting as a special commercial court) exercises exclusive
jurisdiction:
SECTION 5. In addition to the regulatory and adjudicative
functions of the Securities and Exchange Commission over
corporations, partnership, and other forms of associations
registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive jurisdiction
to hear and decide cases involving:
a) Devices or schemes employed by or any acts of
the board of directors, business associates, its
officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders,
partners, members of associations or organizations
registered with the Commission.
b) Controversies arising out of intra-corporate or
partnership
relations,
between
and
among
stockholders, members, or associates; between any
or all of them and the corporation, partnership or
association of which they are stockholders, members,
or associates, respectively; and between such
corporation, partnership or association and the State
insofar as it concerns their individual franchise or
right to exist as such entity; and
c) Controversies in the election or appointment of
directors, trustees, officers, or managers of such
corporations, partnerships, or associations.
The allegations set forth in Rodrigos complaint principally invoke
Section 5, paragraphs (a) and (b) above as basis for the exercise of
the RTCs special court jurisdiction. Our focus in examining the
allegations of the complaint shall therefore be on these two
provisions.
Fraudulent Devices and Schemes

The rule is that a complaint must contain a plain, concise, and


direct statement of the ultimate facts constituting the plaintiffs
cause of action and must specify the relief sought. 13 Section 5, Rule
8 of the Revised Rules of Court provides that in all averments of
fraud or mistake, the circumstances constituting fraud or
mistake must be stated with particularity.14 These rules find
specific application to Section 5(a) of P.D. No. 902-A which speaks
of corporate devices or schemes that amount to fraud or
misrepresentation detrimental to the public and/or to the
stockholders.
In an attempt to hold Oscar responsible for corporate fraud, Rodrigo
alleged in the complaint the following:
3. This is a complaintto determine the shares of stock
of the deceased spouses Pedro and Anastacia Reyes
that were arbitrarily and fraudulently appropriated
for himself [herein petitioner Oscar] which were not
collated and taken into account in the partition, distribution,
and/or settlement of the estate of the deceased Spouses
Pedro and Anastacia Reyes, for which he should be ordered
to account for all the income from the time he took these
shares of stock, and should now deliver to his brothers and
sisters their just and respective shares with the
corresponding equivalent amount of P7,099,934.82 plus
interest thereon from 1978 representing his obligations to
the Associated Citizens Bank that was paid for his account
by his late mother, Anastacia C. Reyes. This amount was not
collated or taken into account in the partition or distribution
of the estate of their late mother, Anastacia C. Reyes.
3.1. Respondent Oscar C. Reyes, through other
schemes of fraud including misrepresentation,
unilaterally, and for his own benefit, capriciously
transferred and took possession and control of the
management of Zenith Insurance Corporation which is
considered as a family corporation, and other properties and
businesses belonging to Spouses Pedro and Anastacia
Reyes.
xxxx
4.1. During the increase of capitalization of Zenith Insurance
Corporation, sometime in 1968, the property covered by TCT

No. 225324 was illegally


respondent as a collateral.

and

fraudulently

used

by

xxxx
5. The complainant Rodrigo C. Reyes discovered that by
some manipulative scheme, the shareholdings of
their deceased mother, Doa Anastacia C. Reyes,
shares of stocks and [sic] valued in the corporate
books at P7,699,934.28, more or less, excluding
interest and/or dividends, had been transferred solely in
the
name
of
respondent. By
such
fraudulent
manipulations and misrepresentation, the shareholdings of
said respondent Oscar C. Reyes abruptly increased to
P8,715,637.00 [sic] and becomes [sic] the majority
stockholder of Zenith Insurance Corporation, which portion
of said shares must be distributed equally amongst the
brothers and sisters of the respondent Oscar C. Reyes
including the complainant herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes
and Anastacia C. Reyes valued at P7,099,934.28 were
illegally and fraudulently transferred solely to the
respondents [herein petitioner Oscar] name and
installed himself as a majority stockholder of
ZenithInsurance Corporation [and] thereby deprived his
brothers and sisters of their respective equal shares thereof
including complainant hereto.
xxxx
10.1 By refusal of the respondent to account of his
[sic] shareholdings in the company, he illegally and
fraudulently transferred solely in his name wherein
[sic] the shares of stock of the deceased Anastacia C.
Reyes [which] must be properly collated and/or
distributed equally amongst the children, including
the complainant Rodrigo C. Reyes herein, to their
damage and prejudice.
xxxx

11.1 By continuous refusal of the respondent to account of


his [sic] shareholding with Zenith Insurance Corporation[,]
particularly the number of shares of stocks illegally and
fraudulently transferred to him from their deceased parents
Sps. Pedro and Anastacia Reyes[,] which are all subject for
collation and/or partition in equal shares among their
children. [Emphasis supplied.]
Allegations
of
deceit,
machination,
false
pretenses,
misrepresentation, and threats are largely conclusions of law that,
without supporting statements of the facts to which the allegations
of fraud refer, do not sufficiently state an effective cause of
action.15 The late Justice Jose Feria, a noted authority in Remedial
Law, declared that fraud and mistake are required to be averred
with particularity in order to enable the opposing party to
controvert the particular facts allegedly constituting such fraud or
mistake.16
Tested against these standards, we find that the charges of fraud
against Oscar were not properly supported by the required factual
allegations. While the complaint contained allegations of fraud
purportedly committed by him, these allegations are not particular
enough to bring the controversy within the special commercial
courts jurisdiction; they are not statements of ultimate facts, but
are mere conclusions of law: how and why the alleged appropriation
of shares can be characterized as "illegal and fraudulent" were not
explained nor elaborated on.
Not every allegation of fraud done in a corporate setting or
perpetrated by corporate officers will bring the case within the
special commercial courts jurisdiction. To fall within this
jurisdiction, there must be sufficient nexus showing that the
corporations nature, structure, or powers were used to facilitate
the fraudulent device or scheme. Contrary to this concept, the
complaint presented a reverse situation. No corporate power or
office was alleged to have facilitated the transfer of the shares;
rather, Oscar, as an individual and without reference to his
corporate personality, was alleged to have transferred the shares of
Anastacia to his name, allowing him to become the majority and
controlling stockholder of Zenith, and eventually, the corporations
President. This is the essence of the complaint read as a whole and
is particularly demonstrated under the following allegations:
5. The complainant Rodrigo C. Reyes discovered that by
some manipulative scheme, the shareholdings of their

deceased mother, Doa Anastacia C. Reyes, shares of stocks


and [sic] valued in the corporate books at P7,699,934.28,
more or less, excluding interest and/or dividends, had been
transferred solely in the name of respondent. By such
fraudulent manipulations and misrepresentation, the
shareholdings of said respondent Oscar C. Reyes
abruptly increased to P8,715,637.00 [sic] and
becomes [sic] the majority stockholder of Zenith
Insurance Corporation, which portion of said shares must
be distributed equally amongst the brothers and sisters of
the respondent Oscar C. Reyes including the complainant
herein.
xxxx
9.1 The shareholdings of deceased Spouses Pedro Reyes
and Anastacia C. Reyes valued at P7,099,934.28 were
illegally and fraudulently transferred solely to the
respondents [herein petitioner Oscar] name and
installed himself as a majority stockholder of
ZenithInsurance Corporation [and] thereby deprived his
brothers and sisters of their respective equal shares thereof
including complainant hereto. [Emphasis supplied.]
In ordinary cases, the failure to specifically allege the fraudulent
acts does not constitute a ground for dismissal since such defect
can be cured by a bill of particulars. In cases governed by the
Interim Rules of Procedure on Intra-Corporate Controversies,
however, a bill of particulars is a prohibited pleading. 17 It is
essential, therefore, for the complaint to show on its face what are
claimed to be the fraudulent corporate acts if the complainant
wishes to invoke the courts special commercial jurisdiction.
We note that twice in the course of this case, Rodrigo had been
given the opportunity to study the propriety of amending or
withdrawing the complaint, but he consistently refused. The courts
function in resolving issues of jurisdiction is limited to the review of
the allegations of the complaint and, on the basis of these
allegations, to the determination of whether they are of such nature
and subject that they fall within the terms of the law defining the
courts jurisdiction. Regretfully, we cannot read into the complaint
any specifically alleged corporate fraud that will call for the
exercise of the courts special commercial jurisdiction. Thus, we
cannot affirm the RTCs assumption of jurisdiction over Rodrigos
complaint on the basis of Section 5(a) of P.D. No. 902-A.18

Intra-Corporate Controversy
A review of relevant jurisprudence shows a development in the
Courts approach in classifying what constitutes an intra-corporate
controversy. Initially, the main consideration in determining
whether a dispute constitutes an intra-corporate controversy was
limited to a consideration of the intra-corporate relationship
existing between or among the parties. 19 The types of relationships
embraced under Section 5(b), as declared in the case of Union
Glass & Container Corp. v. SEC,20 were as follows:
a) between the corporation, partnership, or association and
the public;
b) between the corporation, partnership, or association and
its stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and
the State as far as its franchise, permit or license to operate
is concerned; and
d) among the stockholders, partners, or associates
themselves. [Emphasis supplied.]
The existence of any of the above intra-corporate relations was
sufficient to confer jurisdiction to the SEC, regardless of the subject
matter of the dispute. This came to be known as the relationship
test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol
Mountain Reserve, Inc.,21 the Court introduced the nature of the
controversy test. We declared in this case that it is not the mere
existence of an intra-corporate relationship that gives rise to an
intra-corporate controversy; to rely on the relationship test alone
will divest the regular courts of their jurisdiction for the sole reason
that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or
minimizing the value of the nature of the transactions which gives
rise to the dispute.
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate.22 The controversy
must not only be rooted in the existence of an intra-corporate

relationship, but must as well pertain to the enforcement of the


parties correlative rights and obligations under the Corporation
Code and the internal and intra-corporate regulatory rules of the
corporation. If the relationship and its incidents are merely
incidental to the controversy or if there will still be conflict even if
the relationship does not exist, then no intra-corporate controversy
exists.
The Court then combined the two tests and declared that
jurisdiction should be determined by considering not only the status
or relationship of the parties, but also the nature of the question
under controversy.23 This two-tier test was adopted in the recent
case of Speed Distribution, Inc. v. Court of Appeals:24
To determine whether a case involves an intra-corporate
controversy, and is to be heard and decided by the branches
of the RTC specifically designated by the Court to try and
decide such cases, two elements must concur: (a) the status
or relationship of the parties; and (2) the nature of the
question that is the subject of their controversy.
The first element requires that the controversy must arise
out of intra-corporate or partnership relations between any
or all of the parties and the corporation, partnership, or
association of which they are stockholders, members or
associates; between any or all of them and the corporation,
partnership, or association of which they are stockholders,
members, or associates, respectively; and between such
corporation, partnership, or association and the State insofar
as it concerns their individual franchises. The second
element requires that the dispute among the parties be
intrinsically connected with the regulation of the
corporation. If the nature of the controversy involves
matters that are purely civil in character, necessarily, the
case does not involve an intra-corporate controversy.
Given these standards, we now tackle the question posed for our
determination under the specific circumstances of this case:
Application of the Relationship Test
Is there an intra-corporate relationship between the parties that
would characterize the case as an intra-corporate dispute?

We point out at the outset that while Rodrigo holds shares of stock
in Zenith, he holds them in two capacities: in his own right with
respect to the 4,250 shares registered in his name, and as one of
the heirs of Anastacia Reyes with respect to the 136,598 shares
registered in her name. What is material in resolving the issues of
this case under the allegations of the complaint is
Rodrigos interest as an heir since the subject matter of the present
controversy centers on the shares of stocks belonging to Anastacia,
not on Rodrigos personally-owned shares nor on his personality as
shareholder owning these shares. In this light, all reference to
shares of stocks in this case shall pertain to the shareholdings of
the deceased Anastacia and the parties interest therein as her
heirs.
Article 777 of the Civil Code declares that the successional rights
are transmitted from the moment of death of the decedent.
Accordingly, upon Anastacias death, her children acquired legal
title to her estate (which title includes her shareholdings in Zenith),
and they are, prior to the estates partition, deemed co-owners
thereof.25 This status as co-owners, however, does not immediately
and necessarily make them stockholders of the corporation. Unless
and until there is compliance with Section 63 of the Corporation
Code on the manner of transferring shares, the heirs do not
become registered stockholders of the corporation. Section 63
provides:
Section 63. Certificate of stock and transfer of shares. The
capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vicepresident, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall
be issued in accordance with the by-laws. Shares of stock so
issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until
the transfer is recorded in the books of the
corporation so as to show the names of the parties to
the transaction, the date of the transfer, the number
of the certificate or certificates, and the number of
shares transferred. [Emphasis supplied.]

No shares of stock against which the corporation holds any


unpaid claim shall be transferable in the books of the
corporation.
Simply stated, the transfer of title by means of succession, though
effective and valid between the parties involved (i.e., between the
decedents estate and her heirs), does not bind the corporation and
third parties. The transfer must be registered in the books of the
corporation to make the transferee-heir a stockholder entitled to
recognition as such both by the corporation and by third parties. 26
We note, in relation with the above statement, that in Abejo v. Dela
Cruz27 and TCL Sales Corporation v. Court of Appeals 28 we did not
require the registration of the transfer before considering the
transferee a stockholder of the corporation (in effect upholding the
existence of an intra-corporate relation between the parties and
bringing the case within the jurisdiction of the SEC as an intracorporate controversy). A marked difference, however, exists
between these cases and the present one.
In Abejo and TCL Sales, the transferees held definite and
uncontested titles to a specific number of shares of the
corporation; after the transferee had established prima
facie ownership over the shares of stocks in question, registration
became a mere formality in confirming their status as stockholders.
In the present case, each of Anastacias heirs holds only an
undivided interest in the shares. This interest, at this point, is still
inchoate and subject to the outcome of a settlement proceeding;
the right of the heirs to specific, distributive shares of inheritance
will not be determined until all the debts of the estate of the
decedent are paid. In short, the heirs are only entitled to what
remains after payment of the decedents debts; 29 whether there will
be residue remains to be seen. Justice Jurado aptly puts it as
follows:
No succession shall be declared unless and until a
liquidation of the assets and debts left by the decedent shall
have been made and all his creditors are fully paid. Until a
final liquidation is made and all the debts are paid, the right
of the heirs to inherit remains inchoate. This is so because
under our rules of procedure, liquidation is necessary in
order to determine whether or not the decedent has
left any liquid assets which may be transmitted to his
heirs.30 [Emphasis supplied.]

Rodrigo must, therefore, hurdle two obstacles before he can be


considered a stockholder of Zenith with respect to the
shareholdings originally belonging to Anastacia. First, he must
prove that there are shareholdings that will be left to him and his
co-heirs, and this can be determined only in a settlement of the
decedents estate. No such proceeding has been commenced to
date. Second, he must register the transfer of the shares allotted to
him to make it binding against the corporation. He cannot demand
that this be done unless and until he has established his specific
allotment (and prima facieownership) of the shares. Without the
settlement of Anastacias estate, there can be no definite partition
and distribution of the estate to the heirs. Without the partition and
distribution, there can be no registration of the transfer. And
without the registration, we cannot consider the transferee-heir a
stockholder who may invoke the existence of an intra-corporate
relationship as premise for an intra-corporate controversy within
the jurisdiction of a special commercial court.
In sum, we find that insofar as the subject shares of stock (i.e.,
Anastacias shares) are concerned Rodrigo cannot be considered
a stockholder of Zenith. Consequently, we cannot declare that an
intra-corporate relationship exists that would serve as basis to bring
this case within the special commercial courts jurisdiction under
Section 5(b) of PD 902-A, as amended. Rodrigos complaint,
therefore, fails the relationship test.
Application of the Nature of Controversy Test
The body rather than the title of the complaint determines the
nature of an action.31 Our examination of the complaint yields the
conclusion that, more than anything else, the complaint is about
the protection and enforcement of successional rights. The
controversy it presents is purely civil rather than corporate,
although it is denominated as a "complaint for accounting of all
corporate funds and assets."
Contrary to the findings of both the trial and appellate courts, we
read only one cause of action alleged in the complaint. The
"derivative suit for accounting of the funds and assets of the
corporation which are in the control, custody, and/or possession of
the respondent [herein petitioner Oscar]" does not constitute a
separate cause of action but is, as correctly claimed by Oscar, only
an incident to the "action for determination of the shares of stock of
deceased spouses Pedro and Anastacia Reyes allegedly taken by
respondent, its accounting and the corresponding delivery of these

shares to the parties brothers and sisters." There can be no


mistake of the relationship between the "accounting" mentioned in
the complaint and the objective of partition and distribution when
Rodrigo claimed in paragraph 10.1 of the complaint that:
10.1 By refusal of the respondent to account of [sic] his
shareholdings in the company, he illegally and fraudulently
transferred solely in his name wherein [sic] the shares of
stock of the deceased Anastacia C. Reyes [which] must be
properly collated and/or distributed equally amongst the
children including the complainant Rodrigo C. Reyes herein
to their damage and prejudice.
We particularly note that the complaint contained no sufficient
allegation that justified the need for an accounting other than to
determine the extent of Anastacias shareholdings for purposes of
distribution.
Another significant indicator that points us to the real nature of the
complaint are Rodrigos repeated claims of illegal and fraudulent
transfers of Anastacias shares by Oscar to the prejudice of the
other heirs of the decedent; he cited these allegedly fraudulent
acts as basis for his demand for the collation and distribution of
Anastacias shares to the heirs. These claims tell us unequivocally
that the present controversy arose from the parties relationship as
heirs of Anastacia and not as shareholders of Zenith. Rodrigo, in
filing the complaint, is enforcing his rights as a co-heir and not as a
stockholder of Zenith. The injury he seeks to remedy is one suffered
by an heir (for the impairment of his successional rights) and not by
the corporation nor by Rodrigo as a shareholder on record.
More than the matters of injury and redress, what Rodrigo clearly
aims to accomplish through his allegations of illegal acquisition by
Oscar is the distribution of Anastacias shareholdings without a
prior settlement of her estate an objective that, by law and
established jurisprudence, cannot be done. The RTC of Makati,
acting as a special commercial court, has no jurisdiction to settle,
partition, and distribute the estate of a deceased. A relevant
provision Section 2 of Rule 90 of the Revised Rules of Court that
contemplates properties of the decedent held by one of the heirs
declares:
Questions as to advancement made or alleged to have
been made by the deceased to any heir may be heard and
determined by the court having jurisdiction of the

estate proceedings; and the final order of the court


thereon shall be binding on the person raising the questions
and on the heir. [Emphasis supplied.]
Worth noting are this Courts statements in the case of Natcher v.
Court of Appeals:32
Matters which involve settlement and distribution of
the estate of the decedent fall within the exclusive
province of the probate court in the exercise of its
limited jurisdiction.
xxxx
It is clear that trial courts trying an ordinary action
cannot resolve to perform acts pertaining to a special
proceeding because it is subject to specific prescribed
rules. [Emphasis supplied.]
That an accounting of the funds and assets of Zenith to determine
the extent and value of Anastacias shareholdings will be
undertaken by a probate court and not by a special commercial
court is completely consistent with the probate courts limited
jurisdiction. It has the power to enforce an accounting as a
necessary means to its authority to determine the properties
included in the inventory of the estate to be administered, divided
up, and distributed. Beyond this, the determination of title or
ownership over the subject shares (whether belonging to Anastacia
or Oscar) may be conclusively settled by the probate court as a
question of collation or advancement. We had occasion to
recognize the courts authority to act on questions of title or
ownership in a collation or advancement situation inCoca v.
Pangilinan33 where we ruled:
It should be clarified that whether a particular matter should
be resolved by the Court of First Instance in the exercise of
its general jurisdiction or of its limited probate jurisdiction is
in reality not a jurisdictional question. In essence, it is a
procedural question involving a mode of practice "which
may be waived."
As a general rule, the question as to title to property should
not be passed upon in the testate or intestate proceeding.
That question should be ventilated in a separate action. That

general rule has qualifications or exceptions justified by


expediency and convenience.

Based on these standards, we hold that the allegations of the


present complaint do not amount to a derivative suit.

Thus, the probate court may provisionally pass upon in an


intestate or testate proceeding the question of inclusion in,
or exclusion from, the inventory of a piece of property
without prejudice to its final determination in a separate
action.

First, as already discussed above, Rodrigo is not a shareholder with


respect to the shareholdings originally belonging to Anastacia; he
only stands as a transferee-heir whose rights to the share are
inchoate and unrecorded. With respect to his own individually-held
shareholdings, Rodrigo has not alleged any individual cause or
basis as a shareholder on record to proceed against Oscar.

Although generally, a probate court may not decide a


question of title or ownership, yet ifthe interested
parties are all heirs, or the question is one of collation
or advancement, or the parties consent to the assumption
of jurisdiction by the probate court and the rights of third
parties are not impaired, the probate court is competent
to decide the question of ownership. [Citations omitted.
Emphasis supplied.]
In sum, we hold that the nature of the present controversy is not
one which may be classified as an intra-corporate dispute and is
beyond the jurisdiction of the special commercial court to resolve.
In short, Rodrigos complaint also fails the nature of the controversy
test.
DERIVATIVE SUIT
Rodrigos bare claim that the complaint is a derivative suit will not
suffice to confer jurisdiction on the RTC (as a special commercial
court) if he cannot comply with the requisites for the existence of a
derivative suit. These requisites are:
a. the party bringing suit should be a shareholder during the
time of the act or transaction complained of, the number of
shares not being material;
b. the party has tried to exhaust intra-corporate remedies,
i.e., has made a demand on the board of directors for the
appropriate relief, but the latter has failed or refused to
heed his plea; and
c. the cause of action actually devolves on the corporation;
the wrongdoing or harm having been or being caused to the
corporation and not to the particular stockholder bringing
the suit.34

Second, in order that a stockholder may show a right to sue on


behalf of the corporation, he must allege with some particularity in
his complaint that he has exhausted his remedies within the
corporation by making a sufficient demand upon the directors or
other officers for appropriate relief with the expressed intent to sue
if relief is denied.35 Paragraph 8 of the complaint hardly satisfies
this requirement since what the rule contemplates is the
exhaustion of remedies within the corporate setting:
8. As members of the same family, complainant Rodrigo C.
Reyes has resorted [to] and exhausted all legal means of
resolving the dispute with the end view of amicably settling
the case, but the dispute between them ensued.
Lastly, we find no injury, actual or threatened, alleged to have been
done to the corporation due to Oscars acts. If indeed he illegally
and fraudulently transferred Anastacias shares in his own name,
then the damage is not to the corporation but to his co-heirs; the
wrongful transfer did not affect the capital stock or the assets of
Zenith. As already mentioned, neither has Rodrigo alleged any
particular cause or wrongdoing against the corporation that he can
champion in his capacity as a shareholder on record.36
In summary, whether as an individual or as a derivative suit, the
RTC sitting as special commercial court has no jurisdiction to
hear Rodrigos complaint since what is involved is the
determination and distribution of successional rights to the
shareholdings of Anastacia Reyes. Rodrigos proper remedy, under
the circumstances, is to institute a special proceeding for the
settlement of the estate of the deceased Anastacia Reyes, a move
that is not foreclosed by the dismissal of his present complaint.
WHEREFORE, we hereby GRANT the petition and REVERSE the
decision of the Court of Appeals dated May 26, 2004 in CA-G.R. SP
No. 74970. The complaint before the Regional Trial Court, Branch

142, Makati, docketed as Civil Case


ordered DISMISSED for lack of jurisdiction.

No.

00-1553,

is

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 177066

September 11, 2009

JOSELITO MUSNI PUNO (as heir of the late Carlos


Puno), Petitioner,
vs.
PUNO ENTERPRISES, INC., represented by JESUSA
PUNO, Respondent.
DECISION
NACHURA, J.:

Upon the death of a stockholder, the heirs do not automatically


become stockholders of the corporation; neither are they
mandatorily entitled to the rights and privileges of a stockholder.
This, we declare in this petition for review on certiorari of the Court
of Appeals (CA) Decision1 dated October 11, 2006 and Resolution
dated March 6, 2007 in CA-G.R. CV No. 86137.

Respondent filed a motion to dismiss on the ground that petitioner


did not have the legal personality to sue because his birth
certificate names him as "Joselito Musni Muno." Apropos, there was
yet a need for a judicial declaration that "Joselito Musni Puno" and
"Joselito Musni Muno" were one and the same.
The court ordered that the proceedings be held in abeyance,
ratiocinating that petitioners certificate of live birth was no proof of
his paternity and relation to Carlos L. Puno.
Petitioner submitted the corrected birth certificate with the name
"Joselito M. Puno," certified by the Civil Registrar of the City of
Manila, and the Certificate of Finality thereof. To hasten the
disposition of the case, the court conditionally admitted the
corrected birth certificate as genuine and authentic and ordered
respondent to file its answer within fifteen days from the order and
set the case for pretrial.3
On October 11, 2005, the court rendered a Decision, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered ordering Jesusa Puno
and/or Felicidad Fermin to allow the plaintiff to inspect the
corporate books and records of the company from 1962 up to the
present including the financial statements of the corporation.
The costs of copying shall be shouldered by the plaintiff. Any
expenses to be incurred by the defendant to be able to comply with
this order shall be the subject of a bill of costs.

The facts of the case follow:

SO ORDERED.4

Carlos L. Puno, who died on June 25, 1963, was an incorporator of


respondent Puno Enterprises, Inc. On March 14, 2003, petitioner
Joselito Musni Puno, claiming to be an heir of Carlos L. Puno,
initiated a complaint for specific performance against respondent.
Petitioner averred that he is the son of the deceased with the
latters common-law wife, Amelia Puno. As surviving heir, he
claimed entitlement to the rights and privileges of his late father as
stockholder of respondent. The complaint thus prayed that
respondent allow petitioner to inspect its corporate book, render an
accounting of all the transactions it entered into from 1962, and
give petitioner all the profits, earnings, dividends, or income
pertaining to the shares of Carlos L. Puno.2

On appeal, the CA ordered the dismissal of the complaint in its


Decision dated October 11, 2006. According to the CA, petitioner
was not able to establish the paternity of and his filiation to Carlos
L. Puno since his birth certificate was prepared without the
intervention of and the participatory acknowledgment of paternity
by Carlos L. Puno. Accordingly, the CA said that petitioner had no
right to demand that he be allowed to examine respondents books.
Moreover, petitioner was not a stockholder of the corporation but
was merely claiming rights as an heir of Carlos L. Puno, an
incorporator of the corporation. His action for specific performance
therefore appeared to be premature; the proper action to be taken

was to prove the paternity of and his filiation to Carlos L. Puno in a


petition for the settlement of the estate of the latter. 5
Petitioners motion for reconsideration was denied by the CA in its
Resolution6 dated March 6, 2007.
In this petition, petitioner raises the following issues:
I. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING
THAT THE JOSELITO PUNO IS ENTITLED TO THE RELIEFS DEMANDED
HE BEING THE HEIR OF THE LATE CARLOS PUNO, ONE OF THE
INCORPORATORS [OF] RESPONDENT CORPORATION.
II. HONORABLE COURT OF APPEALS ERRED IN RULING THAT
FILIATION OF JOSELITO PUNO, THE PETITIONER[,] IS NOT DULY
PROVEN OR ESTABLISHED.
III. THE HONORABLE COURT ERRED IN NOT RULING THAT JOSELITO
MUNO AND JOSELITO PUNO REFERS TO THE ONE AND THE SAME
PERSON.
IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING
THAT WHAT RESPONDENT MERELY DISPUTES IS THE SURNAME OF
THE PETITIONER WHICH WAS MISSPELLED AND THE FACTUAL
ALLEGATION E.G. RIGHTS OF PETITIONER AS HEIR OF CARLOS PUNO
ARE DEEMED ADMITTED HYPOTHETICALLY IN THE RESPONDENT[S]
MOTION TO DISMISS.
V. THE HONORABLE COURT OF APPEALS THEREFORE ERRED I[N]
DECREEING THAT PETITIONER IS NOT ENTITLED TO INSPECT THE
CORPORATE BOOKS OF DEFENDANT CORPORATION.7
The petition is without merit. Petitioner failed to establish the right
to inspect respondent corporations books and receive dividends on
the stocks owned by Carlos L. Puno.

an appeal via certiorari, the Court may not review the factual
findings of the CA. It is not the Courts function under Rule 45 of the
Rules of Court to review, examine, and evaluate or weigh the
probative value of the evidence presented. 9
A certificate of live birth purportedly identifying the putative father
is not competent evidence of paternity when there is no showing
that the putative father had a hand in the preparation of the
certificate. The local civil registrar has no authority to record the
paternity of an illegitimate child on the information of a third
person.10 As correctly observed by the CA, only petitioners mother
supplied the data in the birth certificate and signed the same.
There was no evidence that Carlos L. Puno acknowledged petitioner
as his son.
As for the baptismal certificate, we have already decreed that it can
only serve as evidence of the administration of the sacrament on
the date specified but not of the veracity of the entries with respect
to the childs paternity.11
In any case, Sections 74 and 75 of the Corporation Code enumerate
the persons who are entitled to the inspection of corporate books,
thus
Sec. 74. Books to be kept; stock transfer agent. x x x.
The records of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any
director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing,
for a copy of excerpts from said records or minutes, at his expense.
xxxx

Petitioner anchors his claim on his being an heir of the deceased


stockholder. However, we agree with the appellate court that
petitioner was not able to prove satisfactorily his filiation to the
deceased stockholder; thus, the former cannot claim to be an heir
of the latter.

Sec. 75. Right to financial statements. Within ten (10) days from
receipt of a written request of any stockholder or member, the
corporation shall furnish to him its most recent financial statement,
which shall include a balance sheet as of the end of the last taxable
year and a profit or loss of statement for said taxable year, showing
in reasonable detail its assets and liabilities and the result of its
operations.12

Incessantly, we have declared that factual findings of the CA


supported by substantial evidence, are conclusive and binding. 8 In

The stockholders right of inspection of the corporations books and


records is based upon his ownership of shares in the corporation

and the necessity for self-protection. After all, a shareholder has the
right to be intelligently informed about corporate affairs. 13 Such
right rests upon the stockholders underlying ownership of the
corporations assets and property.14
Similarly, only stockholders of record are entitled to receive
dividends declared by the corporation, a right inherent in the
ownership of the shares.151avvphi1
Upon the death of a shareholder, the heirs do not automatically
become stockholders of the corporation and acquire the rights and
privileges of the deceased as shareholder of the corporation. The
stocks must be distributed first to the heirs in estate proceedings,
and the transfer of the stocks must be recorded in the books of the
corporation. Section 63 of the Corporation Code provides that no
transfer shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation. 16 During such
interim period, the heirs stand as the equitable owners of the
stocks, the executor or administrator duly appointed by the court
being vested with the legal title to the stock. 17 Until a settlement
and division of the estate is effected, the stocks of the decedent are
held by the administrator or executor. 18 Consequently, during such
time, it is the administrator or executor who is entitled to exercise
the rights of the deceased as stockholder.

WHEREFORE, premises considered, the petition is DENIED. The


Court of Appeals Decision dated October 11, 2006 and Resolution
dated March 6, 2007 are AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 165887
June 6, 2011
MAJORITY STOCKHOLDERS OF RUBY INDUSTRIAL
CORPORATION, Petitioners,
vs.
MIGUEL LIM, in his personal capacity as Stockholder of Ruby
Industrial Corporation and representing the MINORITY
STOCKHOLDERS OF RUBY INDUSTRIAL CORPORATION and
the MANAGEMENT COMMITTEE OF RUBY INDUSTRIAL
CORPORATION, Respondents.
x-----------------------x
G.R. No. 165929

Thus, even if petitioner presents sufficient evidence in this case to


establish that he is the son of Carlos L. Puno, he would still not be
allowed to inspect respondents books and be entitled to receive
dividends from respondent, absent any showing in its transfer book
that some of the shares owned by Carlos L. Puno were transferred
to him. This would only be possible if petitioner has been
recognized as an heir and has participated in the settlement of the
estate of the deceased.

CHINA BANKING CORPORATION, Petitioner,


vs.
MIGUEL LIM, in his personal capacity as a stockholder of
Ruby Industrial Corporation and representing the MINORITY
STOCKHOLDERS OF RUBY INDUSTRIAL
CORPORATION, Respondent.

Corollary to this is the doctrine that a determination of whether a


person, claiming proprietary rights over the estate of a deceased
person, is an heir of the deceased must be ventilated in a special
proceeding instituted precisely for the purpose of settling the
estate of the latter. The status of an illegitimate child who claims to
be an heir to a decedents estate cannot be adjudicated in an
ordinary civil action, as in a case for the recovery of property. 19 The
doctrine applies to the instant case, which is one for specific
performance to direct respondent corporation to allow petitioner
to exercise rights that pertain only to the deceased and his
representatives.

VILLARAMA, JR., J.:

DECISION

This case is brought to us on appeal for the fourth time, involving


the same parties and interests litigating on issues arising from
rehabilitation proceedings initiated by Ruby Industrial Corporation
wayback in 1983.
Following is the factual backdrop of the present controversy, as
culled from the records and facts set forth in the ponencia of Chief

Justice Reynato S. Puno in Ruby Industrial Corporation v. Court of


Appeals.1

operations. For its service, BENHAR shall receive a management fee


equivalent to 7.5% of RUBYs net sales.

The Antecedents

The BENHAR/RUBY Plan was opposed by 40% of the stockholders,


including Lim, a minority shareholder of RUBY. ALFC, the biggest
unsecured creditor of RUBY and chairman of the management
committee, also objected to the plan as it would transfer RUBYs
assets beyond the reach and to the prejudice of its unsecured
creditors.

Ruby Industrial Corporation (RUBY) is a domestic corporation


engaged in glass manufacturing. Reeling from severe liquidity
problems beginning in 1980, RUBY filed on December 13, 1983 a
petition for suspension of payments with the Securities and
Exchange Commission (SEC) docketed as SEC Case No. 2556. On
December 20, 1983, the SEC issued an order declaring RUBY under
suspension of payments and enjoining the disposition of its
properties pending hearing of the petition, except insofar as
necessary in its ordinary operations, and making payments outside
of the necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel created the
management committee (MANCOM) for RUBY, composed of
representatives from Allied Leasing and Finance Corporation (ALFC),
Philippine Bank of Communications (PBCOM), China Banking
Corporation (China Bank), Pilipinas Shell Petroleum Corporation
(Pilipinas Shell), and RUBY represented by Mr. Yu Kim Giang. The
MANCOM was tasked to perform the following functions: (1)
undertake the management of RUBY; (2) take custody and control
over all existing assets and liabilities of RUBY; (3) evaluate RUBYs
existing assets and liabilities, earnings and operations; (4)
determine the best way to salvage and protect the interest of its
investors and creditors; and (5) study, review and evaluate the
proposed rehabilitation plan for RUBY.
Subsequently, two (2) rehabilitation plans were submitted to the
SEC: the BENHAR/RUBY Rehabilitation Plan of the majority
stockholders led by Yu Kim Giang, and the Alternative Plan of the
minority stockholders represented by Miguel Lim (Lim).
Under the BENHAR/RUBY Plan, Benhar International, Inc. (BENHAR)
-- a domestic corporation engaged in the importation and sale of
vehicle spare parts which is wholly owned by the Yu family and
headed by Henry Yu, who is also a director and majority stockholder
of RUBY -- shall lend its P60 million credit line in China Bank to
RUBY, payable within ten (10) years. Moreover, BENHAR shall
purchase the credits of RUBYs creditors and mortgage RUBYs
properties to obtain credit facilities for RUBY. Upon approval of the
rehabilitation plan, BENHAR shall control and manage RUBYs

On the other hand, the Alternative Plan of RUBYs minority


stockholders proposed to: (1) pay all RUBYs creditors without
securing any bank loan; (2) run and operate RUBY without charging
management fees; (3) buy-out the majority shares or sell their
shares to the majority stockholders; (4) rehabilitate RUBYs two
plants; and (5) secure a loan at 25% interest, as against the 28%
interest charged in the loan under the BENHAR/RUBY Plan.
Both plans were endorsed by the SEC to the MANCOM for
evaluation.
On October 28, 1988, the SEC Hearing Panel approved the
BENHAR/RUBY Plan. The minority stockholders thru Lim appealed to
the SEC En Banc which, in its November 15, 1988 Order, enjoined
the implementation of the BENHAR/RUBY Plan. On December 20,
1988 after the expiration of the temporary restraining order (TRO),
the SEC En Banc granted the writ of preliminary injunction against
the enforcement of the BENHAR/RUBY Plan. BENHAR, Henry Yu,
RUBY and Yu Kim Giang questioned the issuance of the writ in their
petition filed in the Court of Appeals (CA), docketed as CA-G.R. SP
No. 16798. The CA denied their appeal. 2 Upon elevation to this
Court (G.R. No. L-88311), we issued a minute resolution dated
February 28, 1990 denying the petition and upholding the
injunction against the implementation of the BENHAR/RUBY Plan.
Meanwhile, BENHAR paid off Far East Bank & Trust Company
(FEBTC), one of RUBYs secured creditors. By May 30, 1988, FEBTC
had already executed a deed of assignment of credit and mortgage
rights in favor of BENHAR. BENHAR likewise paid the other secured
creditors who, in turn, assigned their rights in favor of BENHAR.
These acts were done by BENHAR despite the SECs TRO and
injunction and even before the SEC Hearing Panel approved the
BENHAR/RUBY Plan on October 28, 1988.

ALFC and Miguel Lim moved to nullify the deeds of assignment


executed in favor of BENHAR and cite the parties thereto in
contempt for willful violation of the December 20, 1983 SEC order
enjoining RUBY from disposing its properties and making payments
pending the hearing of its petition for suspension of payments.
They also charged that in paying off FEBTCs credits, FEBTC was
given undue preference over the other creditors of RUBY. Acting on
the motions, the SEC Hearing Panel nullified the deeds of
assignment executed by RUBYs creditors in favor of BENHAR and
declared the parties thereto guilty of indirect contempt. BENHAR
and RUBY appealed to the SEC En Banc which denied their appeal.
BENHAR and RUBY joined by Henry Yu and Yu Kim Giang appealed
to the CA (CA-G.R. SP No. 18310). By Decision 3 dated August 29,
1990, the CA affirmed the SEC ruling nullifying the deeds of
assignment. The CA also declared its decision final and executory
as to RUBY and Yu Kim Giang for their failure to file their pleadings
within the reglementary period. By Resolution dated August 26,
1991 in G.R. No. 96675,4 this Court affirmed the CAs decision.
Earlier, on May 29, 1990, after the SEC En Banc enjoined the
implementation of BENHAR/RUBY Plan, RUBY filed with the SEC En
Banc an ex parte petition to create a new management committee
and to approve its revised rehabilitation plan (Revised
BENHAR/RUBY Plan). Under the revised plan, BENHAR shall
receive P34.068 million of the P60.437 Million credit facility to be
extended to RUBY, as reimbursement for BENHARs payment to
some of RUBYs creditors. The SEC En Banc directed RUBY to submit
its revised rehabilitation plan to its creditors for comment and
approval while the petition for the creation of a new management
committee was remanded for further proceedings to the SEC
Hearing Panel. The Alternative Plan of RUBYs minority stockholders
was also forwarded to the hearing panel for evaluation.
On April 26, 1991, over ninety percent (90%) of RUBYs creditors
objected to the Revised BENHAR/RUBY Plan and the creation of a
new management committee. Instead, they endorsed the minority
stockholders Alternative Plan. At the hearing of the petition for the
creation of a new management committee, three (3) members of
the original management committee (Lim, ALFC and Pilipinas Shell)
opposed the Revised BENHAR/RUBY Plan on grounds that: (1) it
would legitimize the entry of BENHAR, a total stranger, to RUBY as
BENHAR would become the biggest creditor of RUBY; (2) it would
put RUBYs assets beyond the reach of the unsecured creditors and
the minority stockholders; and (3) it was not approved by RUBYs
stockholders in a meeting called for the purpose.

Notwithstanding the objections of 90% of RUBYs creditors and


three members of the MANCOM, the SEC Hearing Panel approved
on September 18, 1991 the Revised BENHAR/RUBY Plan and
dissolved the existing management committee. It also created a
new management committee and appointed BENHAR as one of its
members. In addition to the powers originally conferred to the
management committee under Presidential Decree (P.D.) No. 902-A,
the new management committee was tasked to oversee the
implementation by the Board of Directors of the revised
rehabilitation plan for RUBY.
The original management committee (MANCOM), Lim and ALFC
appealed to the SEC En Banc which affirmed the approval of the
Revised BENHAR/RUBY Plan and the creation of a new management
committee on July 30, 1993. To ensure that the management of
RUBY will not be controlled by any group, the SEC appointed SEC
lawyers Ruben C. Ladia and Teresita R. Siao as additional members
of the new management committee. Further, it declared that
BENHARs membership in the new management committee is
subject to the condition that BENHAR will extend its credit facilities
to RUBY without using the latters assets as security or collateral.
Lim, ALFC and MANCOM moved for reconsideration while RUBY and
BENHAR asked the SEC to reconsider the portion of its Order
prohibiting BENHAR from utilizing RUBYs assets as collateral. On
October 15, 1993, the SEC denied the motion of Lim, ALFC and the
original management committee but granted RUBY and BENHARs
motion and allowed BENHAR to use RUBYs assets as collateral for
loans, subject to the approval of the majority of all the members of
the new management committee. Lim, ALFC and MANCOM
appealed to the CA (CA-G.R. SP Nos. 32404, 32469 & 32483) which
by Decision5 dated March 31, 1995 set aside the SECs approval of
the Revised BENHAR/RUBY Plan and remanded the case to the SEC
for further proceedings. The CA ruled that the revised plan
circumvented its earlier decision (CA-G.R. SP No. 18310) nullifying
the deeds of assignment executed by RUBYs creditors in favor of
BENHAR. Since under the revised plan, BENHAR was to
receive P34.068 Million of theP60.437 Million credit facility to be
extended to RUBY, as settlement for its advance payment to RUBYs
seven (7) secured creditors, such payments made by BENHAR
under the void Deeds of Assignment, in effect were recognized as
payable to BENHAR under the revised plan. The motion for
reconsideration filed by BENHAR and RUBY was likewise denied by
the CA.6

Undaunted, RUBY and BENHAR filed a petition for review in this


Court (G.R. Nos. 124185-87 entitled Ruby Industrial Corporation v.
Court of Appeals) alleging that the CA gravely abused its discretion
in substituting its judgment for that of the SEC, and in allowing Lim,
ALFC and MANCOM to file separate petitions prepared by lawyers
representing themselves as belonging to different firms. By
Decision7 dated January 20, 1998, we sustained the CAs ruling that
the Revised BENHAR/RUBY Plan contained provisions which
circumvented its final decision in CA-G.R. SP No. 18310, nullifying
the deeds of assignment of credits and mortgages executed by
RUBYs creditors in favor of BENHAR, as well as this Courts
Resolution in G.R. No. 96675, affirming the said CAs decision. We
thus held:
Specifically, the Revised BENHAR/RUBY Plan considered as valid
the advance payments made by BENHAR in favor of some of
RUBYs creditors. The nullity of BENHARs unauthorized dealings
with RUBYs creditors is settled. The deeds of assignment between
BENHAR and RUBYs creditors had been categorically declared void
by the SEC Hearing Panel in two (2) orders issued on January 12,
1989 and March 15, 1989. x x x
xxxx
These orders were upheld by the SEC en banc and the Court of
Appeals. In CA-G.R. SP No. 18310, the Court of Appeals ruled as
follows:
"x x x

xxx

xxx

"1) x x x when the Deed of Assignment was executed on


May 30, 1988 by and between Ruby Industrial Corp., Benhar
International, Inc., and FEBTC, the Rehabilitation Plan
proposed by petitioner Ruby Industrial Corp. for Benhar
International, Inc. to assume all petitioners obligation has
not been approved by the SEC. The Rehabilitation Plan was
not approved until October 28, 1988. There was a willful and
blatant violation of the SEC order dated December 20, 1983
on the part of petitioner Ruby Industrial Corp., represented
by Yu Kim Giang, by Benhar International, Inc., represented
by Henry Yu and by FEBTC.
"2) The magnitude and coverage of the transactions
involved were such that Yu Kim Giang and the other
signatories cannot feign ignorance or pretend lack of

knowledge thereto in view of the fact that they were all


signatories to the transaction and privy to all the
negotiations leading to the questioned transactions. In
executing the Deeds of Assignment, the petitioners totally
disregarded the mandate contained in the SEC order not to
dispose the properties of Ruby Industrial Corp. in any
manner whatsoever pending the approval of the
Rehabilitation Plan and rendered illusory the SEC efforts to
rehabilitate the petitioner corporation to the best interests
of all the creditors.
"3) The assignments were made without prior approval of
the Management Committee created by the SEC in an Order
dated August 10, 1984. Under Sec. 6, par. d, sub. par. (2) of
P.D. 902-A as amended by P.D. 1799, the Management
Committee, rehabilitation receiver, board or body shall have
the power to take custody and control over all existing
assets of such entities under management notwithstanding
any provision of law, articles of incorporation or by-law to
the contrary. The SEC therefore has the power and authority,
through a Management Committee composed of petitioners
creditors or through itself directly, to declare all assignment
of assets of the petitioner Corporation declared under
suspension of payments, null and void, and to conserve the
same in order to effect a fair, equitable and meaningful
rehabilitation of the insolvent corporation."
"4) x x x. The acts for which petitioners were held in indirect
contempt by the SEC arose from the failure or willful refusal
by petitioners to obey the lawful order of the SEC not to
dispose of any of its properties in any manner whatsoever
without authority or approval of the SEC. The execution of
the Deeds of Assignment tend to defeat or obstruct the
administration of justice. Such acts are offenses against the
SEC because they are calculated to embarrass, hinder and
obstruct the tribunal in the administration of justice or
lessen its authority.
"x x x
Even the SEC en banc, in its July 30, 1993 Order affirming the
approval of the Revised BENHAR/RUBY Plan, has acknowledged the
invalidity of the subject deeds of assignment. However, to justify
its approval of the plan and the appointment of BENHAR to the
new management committee, it gave the lame excuse that

BENHAR became RUBYs creditor for having paid RUBYs debts. x x


x
xxxx
For its part, the Court of Appeals noted that the approved Revised
BENHAR/RUBY Plan gave undue preference to BENHAR. The
records, indeed, show that BENHARs offer to lend its credit facility
in favor of RUBY is conditioned upon the payment of the amount it
advanced to RUBYs creditors, x x x
xxxx

in the amount of sixty to eighty million pesos to RUBY. It is to be


noted that BENHAR is not a lending or financing corporation and
lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its
Articles of Incorporation. Significantly, Henry Yu, a director and a
majority stockholder of RUBY is, at the same time, a stockholder of
BENHAR, a corporation owned and controlled by his family. These
circumstances render the deals between BENHAR and RUBY highly
irregular.
xxxx

In fact, BENHAR shall receive P34.068 Million out of the P60.437


Million credit facility to be extended to RUBY for the latters
rehabilitation.

Moreover, when RUBY initiated its petition for suspension of


payments with the SEC, BENHAR was not listed as one of RUBYs
creditors. BENHAR is a total stranger to RUBY. If at all, BENHAR only
served as a conduit of RUBY. As aptly stated in the challenged Court
of Appeals decision:

Rehabilitation contemplates a continuance of corporate life and


activities in an effort to restore and reinstate the corporation to its
former position of successful operation and solvency. When a
distressed company is placed under rehabilitation, the appointment
of a management committee follows to avoid collusion between the
previous management and creditors it might favor, to the prejudice
of the other creditors. All assets of a corporation under
rehabilitation receivership are held in trust for the equal benefit of
all creditors to preclude one from obtaining an advantage or
preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key phrase is
equality in equity. Once the corporation threatened by bankruptcy
is taken over by a receiver, all the creditors ought to stand on equal
footing. Not any one of them should be paid ahead of the others.
This is precisely the reason for suspending all pending claims
against the corporation under receivership. 8(Additional emphasis
supplied.)

"Benhars role in the Revised Benhar/Ruby Plan, as envisioned by


the majority stockholders, is to contract the loan for Ruby and,
serving the role of a financier, relend the same to Ruby. Benhar is
merely extending its credit line facility with China Bank, under
which the bank agrees to advance funds to the company should the
need arise. This is unlikely a loan in which the entire amount is
made available to the borrower so that it can be used and
programmed for the benefit of the companys financial and
operational needs. Thus, it is actually China Bank which will be the
source of the funds to be relent to Ruby. Benhar will not shell out a
single centavo of its own funds. It is the assets of Ruby which will
be mortgaged in favor of Benhar. Benhars participation will only
make the rehabilitation plan more costly and, because of the
mortgage of its (Rubys) assets to a new creditor, will create a
situation which is worse than the present. x x x"

Aside from the undue preference that would have been given to
BENHAR under the Revised BENHAR/RUBY Plan, we also found
RUBYs dealing with BENHAR highly irregular and its proposed
financing scheme more costly and ultimately prejudicial to RUBY.
Thus:
Parenthetically, BENHAR is a domestic corporation engaged in
importing and selling vehicle spare parts with an authorized capital
stock of thirty million pesos. Yet, it offered to lend its credit facility

We need not say more.9 (Additional emphasis supplied.)


After the finality of the above decision, the SEC set the case for
further proceedings.10 On March 14, 2000, Bank of the Philippine
Islands (BPI), one of RUBYs secured creditors, filed a Motion to
Vacate Suspension Order11 on grounds that there is no existing
management committee and that no decision has been rendered in
the case for more than 16 years already, which is beyond the
period mandated by Sec. 3-8 of the Rules of Procedure on
Corporate Recovery. RUBY filed its opposition,12 asserting that the
MANCOM never relinquished its status as the duly appointed

management committee as it resisted the orders of the second and


third management committees subsequently created, which have
been nullified by the CA and later this Court. As to the applicability
of the cited rule under the Rules on Corporate Recovery, RUBY
pointed out that this case was filed long before the effectivity of
said rules. It also pointed out that the undue delay in the approval
of the rehabilitation plan being due to the numerous appeals taken
by the minority stockholders and MANCOM to the CA and this Court,
from the SEC approval of the BENHAR/RUBY Plan. Since there have
already been steps taken to finally settle RUBYs obligations with its
creditors, it was contended that the application of the mandatory
period under the cited provision would cause prejudice and injustice
to RUBY.
It appears that even earlier during the pendency of the appeals in
the CA, BENHAR and RUBY have performed other acts in pursuance
of the BENHAR/RUBY Plan approved by the SEC.
On September 1, 1996, Lim received a Notice of Stockholders
Meeting scheduled on September 3, 1996 signed by a certain Mr.
Edgardo M. Magtalas, the "Designated Secretary" of RUBY and
stating the matters to be taken up in said meeting, which include
the extension of RUBYs corporate term for another twenty-five (25)
years and election of Directors.13 At the scheduled stockholders
meeting of September 3, 1996, Lim together with other minority
stockholders, appeared in order to put on record their objections on
the validity of holding thereof and the matters to be taken therein.
Specifically, they questioned the percentage of stockholders
present in the meeting which the majority claimed stood at 74.75%
of the outstanding capital stock of RUBY.
The aforesaid stockholders meeting was the subject of the Motion
to Cite For Contempt14 and Supplement to Motion to Cite For
Contempt15 filed by Lim before the CA where their petitions for
review (CA-G.R. Nos. 32404, 32469 and 32483) were then pending.
Lim argued that the majority stockholders claimed to have
increased their shares to 74.75% by subscribing to the unissued
shares of the authorized capital stock (ACS). Lim pointed out that
such move of the majority was in implementation of the
BENHAR/RUBY Plan which calls for capital infusion ofP11.814 Million
representing the unissued and unsubscribed portion of the present
ACS of P23.7 Million, and the Revised BENHAR/RUBY Plan which
proposed an additional subscription of P30 Million. Since the
implementation of both majority plans have been enjoined by the
SEC and CA, the calling of the special stockholders meeting by the

majority stockholders clearly violated the said injunction orders.


This circumstance certainly affects the determination of quorum,
the voting requirements for corporate term extension, as well as
the election of Directors pursuant to the July 30, 1993 Order and
October 15, 1993 Resolution of the SEC enjoining not only the
implementation of the revised plan but also the doing of any act
that may render the appeal from the approval of the said plan moot
and academic.
The aforementioned capital infusion was taken up by RUBYs board
of directors in a special meeting 16 held on October 2, 1991 following
the issuance by the SEC of its Order dated September 18,
199117 approving the Revised BENHAR/RUBY Plan and creating a
new management committee to oversee its implementation. During
the said meeting, the board asserted its authority and resolved to
take over the management of RUBYs funds, properties and records
and to demand an accounting from the MANCOM which was
ordered dissolved by the SEC. The board thus resolved that:
The corporation be authorized to issue out of the unissued portion
of the authorized capital stocks of the corporation in the form of
common stocks 11.8134.00 [Million] after comparing this with the
audited financial statement prepared by SGV as of December 31,
1982, to be subscribed and paid in full by the present stockholders
in proportion to their present stockholding in the corporation on
staggered basis starting October 28, December 27 then February
28 and April 28 as the last installment date at 25% for each period.
It was also moved and seconded that should any of the
stockholders fail to exercise their rights to buy the number of
shares they are qualified to buy by making the first installment
payment of 25% on or before October 13, 1991, then the other
stockholders may buy the same and that only when none of the
present stockholders are interested in the shares may there be a
resort to selling them by public auction.18
As reflected in the Minutes of the special board meeting, a
representative of the absent directors (Tan Chai, Tomas Lim, Miguel
Lim and Yok Lim) came to submit their letter addressed to the
Chairman suggesting that said meeting be deferred until the
September 18, 1991 SEC Order becomes final and executory. The
directors present nevertheless proceeded with the meeting upon
their belief that neither appeal nor motion for reconsideration can
stay the SEC order.19

The resolution to extend RUBYs corporate term, which was to


expire on January 2, 1997, was approved during the September 3,
1996 stockholders meeting, as recommended by the board of
directors composed of Henry Yu (Chairman), James Yu, David
Yukimteng, Harry L. Yu, Yu Kim Giang, Mary L. Yu and Vivian L. Yu.
The board certified that said resolution was approved by
stockholders representing two-thirds (2/3) of RUBYs outstanding
capital stock.20 Per Certification21 dated August 31, 1995 issued by
Yu Kim Giang as Executive Vice-President of RUBY, the majority
stockholders own 74.75% of RUBYs outstanding capital stock as of
October 27, 1991. The Amended Articles of Incorporation was filed
with the SEC on September 24, 1996.22
23

On March 17, 2000, Lim filed a Motion informing the SEC of acts
being performed by BENHAR and RUBY through directors who were
illegally elected, despite the pendency of the appeal before this
Court questioning the SEC approval of the BENHAR/RUBY Plan and
creation of a new management committee, and after this Court had
denied their motion for reconsideration of the January 20, 1998
decision in G.R. Nos. 124185-87. Lim reiterated that before the
matter of extension of corporate life can be passed upon by the
stockholders, it is necessary to determine the percentage
ownership of the outstanding shares of the corporation. The
majority stockholders claimed that they have increased their
shareholdings from 59.828% to 74.75% as a result of the illegal and
invalid stockholders meeting on September 3, 1996. The additional
subscription of shares cannot be done as it implements the
BENHAR/RUBY Plan against which an existing injunction is still
effective based on the SEC Order dated January 6, 1989, and which
was struck down under the final decision of this Court in G.R. Nos.
124185-87. Hence, the implementation of the new percentage
stockholdings of the majority stockholders and the calling of
stockholders meeting and the subsequent resolution approving the
extension of corporate life of RUBY for another twenty-five (25)
years, were all done in violation of the decisions of the CA and this
Court, and without compliance with the legal requirements under
the Corporation Code. There being no valid extension of corporate
term, RUBYs corporate life had legally ceased. Consequently, Lim
moved that the SEC: (1) declare as null and void the infusion of
additional capital made by the majority stockholders and restore
the capital structure of RUBY to its original structure prior to the
time injunction was issued; and (2) declare as null and void the
resolution of the majority stockholders extending the corporate life
of RUBY for another twenty-five (25) years.

The MANCOM concurred with Lim and made a similar


manifestation/comment24 regarding the irregular and invalid capital
infusion and extension of RUBYs corporate term approved by
stockholders representing only 60% of RUBYs outstanding capital
stock. It further stated that the foregoing acts were perpetrated by
the majority stockholders without even consulting the MANCOM,
which technically stepped into the shoes of RUBYs board of
directors. Since RUBY was still under a state of suspension of
payment at the time the special stockholders meeting was called,
all corporate acts should have been made in consultation and close
coordination with the MANCOM.
Lim likewise filed an Opposition25 to BPIs Motion to Vacate
Suspension Order, asserting that the management committee
originally created by the SEC continues to control the corporate
affairs and properties of RUBY. He also contended that the
SEC Rules of Procedure on Corporate Recovery cannot apply in this
case which was filed long before the effectivity of said rules.
On the other hand, RUBY filed its Opposition 26 to the Motion filed by
Lim denying the allegation of Lim that RUBYs corporate existence
had ceased. RUBY claimed that due notice were given to all
stockholders of the October 2, 1991 special meeting in which the
infusion of additional capital was discussed. It further contended
that the CA decision setting aside the SEC orders approving the
Revised BENHAR/RUBY Plan, which was subsequently affirmed by
this Court on January 20, 1998, did not nullify the resolution of
RUBYs board of directors to issue the previously unissued shares.
The amendment of its articles of incorporation on the extension of
RUBYs corporate term was duly submitted with and approved by
the SEC as per the Certification dated September 24, 1996.
The MANCOM also filed its Opposition27 to BPIs Motion to Vacate
Suspension Order, stating that it has continuously performed its
primary function of preserving the assets of RUBY and undertaken
the management of RUBYs day-to-day affairs. It expressed belief
that between chaotic foreclosure proceedings and collection suits
that would be triggered by the vacation of the suspension order
and an orderly settlement of creditors claims before the SEC, the
latter path is the more prudent and logical course of action. On
April 28, 2000, it submitted to the court copies of the minutes of
meetings held from January 18, 1999 to December 1, 1999 in
pursuance of its mandate to preserve the assets and administer the
business affairs of RUBY.28

On August 23, 2000, China Bank filed a Manifestation 29 echoing the


contentions of BPI that as there is no existing management
committee and no rehabilitation plan approved even after the 240day period, warrants the application of Sec. 4-9 of the SEC Rules of
Procedure on Corporate Recovery such that the petition is "deemed
ipso facto denied and dismissed." China Bank lamented that the
length of time that has lapsed, as well as the parties actuations,
completely betrays a genuine attempt to rehabilitate RUBYs
moribund operations all to the dismay, damage and prejudice of
RUBYs creditors. It stressed that the proceedings cannot be
prolonged nor used as a ploy to defer indefinitely the payment of
long overdue obligations of RUBY to its creditors. With the case
having been ipso facto dismissed, there is no need of further action
from the parties or an order from the SEC. Consequently, RUBYs
creditors may now take whatever legal action they may deem
appropriate to protect their rights including, but not limited to
extrajudicial foreclosure.
On September 11, 2000, the SEC granted Lims request for the
issuance of subpoena duces tecum/ad testificandum to Ms. Jocelyn
Sta. Ana of BPI for the latter to testify and bring all documents and
records pertaining to RUBY.30 Earlier, Lim moved for a hearing to
verify the information that China Bank and BPI had separately
executed deeds of assignment in favor of Greener Investment
Corporation, a company owned by Yu Kim Giang, one of RUBYs
majority stockholders.31 Said hearing, however, did not push
through in view of RUBYs proposal for a compromise
agreement.32 Lim submitted his comments on the Proposed
Compromise Agreement, but there was no response from RUBY and
the majority stockholders.33 The minority stockholders likewise
served a copy of the revised Compromise Agreement to the
majority stockholders.34 Lim moved that the case be assigned to a
new Panel of Hearing Officers and the majority stockholders be
made to declare in a hearing whether they accept the
counterproposals of the minority in their draft Amicable Settlement
in order that the case can proceed immediately to liquidation. 35
On January 25, 2001, the MANCOM filed with the SEC its Resolution
unanimously adopted on January 19, 2001 affirming that: (1)
MANCOM was never informed nor advised of the supposed capital
infusion by the majority stockholders in October 1991 and it never
actually received any such additional subscription nor signed any
document attesting to or authorizing the said increase of RUBYs
capital stock or the extension of its corporate life; (2) MANCOM
continuously recognizes the 60%-40% ratio of shareholding profile

between the majority and minority stockholders, with the majority


having 59.828% while the minority holds 40.172% shareholding; (3)
as there was no valid increase in the shareholding of the majority
and consequently no valid extension of corporate term, the
liquidation of RUBY is thus in order; (4) to date, the majority
stockholders or Yu Kim Giang have not complied with the December
22, 1989 SEC order for them to turn over the cash including bank
deposits, all other financial records and documents of RUBY
including transfer certificates of title over its real properties, and
render an accounting of all the money received by RUBY; and (5)
pursuant to this Courts ruling in G.R. No. 96675 dated August 26,
1991, the previous deeds of assignment made in favor of BENHAR
by Florence Damon, Philippine Bank of Communications, Philippine
Commercial International Bank, Philippine Trust Company, PCI
Leasing and Finance, Inc. and FEBTC, having been earlier declared
void by the SEC Hearing Panel, and the CA decision in CA-G.R. SP
No. 18310 affirmed by this Court have no legal effect and are
deemed void.36
On the other hand, Lim filed a Supplement (to Manifestation and
Motion dated January 18, 2001)37 reiterating his pending motion
filed on March 15, 2000 for the SEC to implement this Courts
January 20, 1998 Decision in G.R. Nos. 124185-87 which states in
part that "[t]he SEC therefore has the power and authority, directly
to declare all assignment of assets of the petitioner Corporation
declared under suspension of payments, null and void, and to
conserve the same in order to effect a fair, equitable and
meaningful rehabilitation of the insolvent corporation." Lim
contended that the SEC retains jurisdiction over pending
suspension of payment/rehabilitation cases filed as of June 30,
2000 until these are finally disposed, pursuant to Sec. 5.2 of the
Securities Regulation Code (Republic Act [R.A.] No. 8799).
Considering that the Management Committee is intact, the majority
stockholders cannot act in an illegal manner with regard to RUBYs
assets. He thus concluded that the continued disobedience of the
majority stockholders to the orders and decisions of the SEC and
CA, as affirmed by this Court, have certainly rendered any
additional assignments, such as the Deeds of Assignment executed
by BPI and China Bank with BENHAR, Henry Yu or conduits of the
majority stockholders, null and void.
The MANCOM manifested that it is adopting in toto the
Manifestation and Motion dated January 18, 2001 filed by Lim. It
also moved for the SEC to conduct further proceedings as directed
by this Court. Considering that there is no chance at all for the

proposed rehabilitation of RUBY in light of strict implementation by


government authorities of environmental laws particularly on
pollution control, and MANCOMs assent to effect a liquidation, the
MANCOM asserted that a hearing should focus on the eventual
liquidation of RUBY. It added that a dismissal under the
circumstances would be tantamount to a perceived shirking by the
SEC of its mandate to afford all creditors ample opportunity to
recover on their respective financial exposure with RUBY.38
On May 15, 2001, the MANCOM submitted copies of minutes of
meetings held from April 13, 2000 to December 29, 2000. 39
On September 20, 2001, the SEC issued an Order directing the
Management Committee to submit a detailed report not mere
minutes of meetings -- on the status of the rehabilitation process
and financial condition of RUBY, which should contain a statement
on the feasibility of the rehabilitation plan.40 The MANCOM complied
with the said order on February 15, 2002. 41 The majority
stockholders and RUBY moved to dismiss the petition and strike
from the records the Compliance/Report. MANCOM filed its omnibus
opposition to the said motions. There was further exchange of
pleadings by the parties on the matter of whether the SEC should
already dismiss the petition of RUBY as prayed for by the majority
stockholders and RUBY, or proceed with supervised liquidation of
RUBY as proposed by the MANCOM and minority stockholders.
The SECs Ruling
On September 18, 2002, the SEC issued its Order 42 denying the
petition for suspension of payments, as follows:
WHEREFORE, in view of the foregoing, the Commission hereby
resolves to terminate the proceedings and DENY the instant
petition.
Accordingly, pursuant to Sec. 5-5 of the SECs Rules of Procedure on
Corporate Recovery, which provides:
"Discharge of the Management Committee -- The Management
Committee shall be discharged and dissolved under the following
circumstances:

a. Whenever the Commission, on motion or motu prop[r]io,


has determined that the necessity for the Management
Committee no longer exists;
b. Upon the appointment of a liquidator under these Rules;
c. By agreement of the parties;
d. Upon termination of the proceedings.
Upon its discharge and dissolution, the Management Committee
shall submit its final report and render an accounting of its
management within such reasonable time as the Commission may
allow."
the Management Committee is hereby DISSOLVED. It is likewise
ordered to:
(1) Make an inventory of the assets, funds and properties of
the petitioner;
(2) Turn-over the aforementioned
properties to the proper party(ies);

assets,

funds

and

(3) Render an accounting of its management; and


(4) Submit its Final Report to the Commission.
The MANCOM is ordered to comply with the foregoing within a nonextendible period of thirty (30) days from receipt of this Order.
Relative to any compensation owing to the MANCOM, it is left to the
determination of the parties concerned.
No pronouncement as to costs.
SO ORDERED.43
The SEC declared that since its order declaring RUBY under a state
of suspension of payments was issued on December 20, 1983, the
180-day period provided in Sec. 4-9 of the Rules of Procedure on
Corporate Recovery had long lapsed. Being a remedial rule, said
provision can be applied retroactively in this case. The SEC also
overruled the objections raised by the minority stockholders

regarding the questionable issuance of shares of stock by the


majority stockholders and extension of RUBYs corporate term,
citing the presumption of regularity in the act of a government
entity which obtains upon the SECs approval of RUBYs
amendment of articles of incorporation. It pointed out that Lim
raised the issue only in the year 2000. Moreover, the SEC found
that notwithstanding his allegations of fraud, Lim never proved the
illegality of the additional infusion of the capitalization by RUBY so
as to warrant a finding that there was indeed an unlawful act. 44

creditors of Ruby Industrial Corporation during the effectivity


of the suspension of payments order including that of China
Bank and BPI and to deliver to MANCOM or the Liquidator all
the original of the Deeds of Assignments and the registered
titles thereto and any other documents related thereto; and
order their unwinding and requiring the majority
stockholders to account for all illegal assignments (amounts,
dates, interests, etc. and present the original documents
supporting the same); and

Lim, in his personal capacity and in representation of the minority


stockholders of RUBY, filed a petition for review with prayer for a
temporary restraining order and/or writ of preliminary injunction
before the CA (CA-G.R. SP No. 73195) assailing the SEC order
dismissing the petition and dissolving the MANCOM.

(4) ordering the Securities and Exchange Commission to


supervise the liquidation of Ruby Industrial Corporation after
the foregoing steps shall have been undertaken.

Ruling of the CA
On May 26, 2004, the CA rendered its Decision, 45 the dispositive
portion of which states:
WHEREFORE, the Questioned Order dated 18 September 2002
issued by the Securities and Exchange Commission in SEC Case No.
2556 entitled "In the Matter of the Petition for Suspension of
Payments, Ruby Industrial Corporation, Petitioner," is hereby SET
ASIDE, and consequently:
(1) the infusion of additional capital made by the majority
stockholders be declared null and void and restoring the
capital structure of Ruby to its original structure prior to the
time the injunction was issued, that is, majority stockholders
59.828% and the minority stockholders 40.172% of the
authorized capital stock of Ruby Industrial Corporation.
(2) the resolution of the majority stockholders, who
represents only 59.828% of the outstanding capital stock of
Ruby, extending the corporate life of Ruby for another
twenty-five (25) years which was made during the supposed
stockholders meeting held on 03 September 1996 be
declared null and void;
(3) implementing the invalidation of any and all illegal
assignments of credit/purchase of credits and the
cancellation of mortgages connected therewith made by the

SO ORDERED.46
According to the CA, the SEC erred in not finding that the October
2, 1991 meeting held by RUBYs board of directors was illegal
because the MANCOM was neither involved nor consulted in the
resolution approving the issuance of additional shares of RUBY.
The CA further noted that the October 2, 1991 board meeting was
conducted on the basis of the September 18, 1991 order of the SEC
Hearing Panel approving the Revised BENHAR/RUBY Plan, which
plan was set aside under this Courts January 20, 1998 Decision in
G.R. Nos. 124185-87. The CA pointed out that records confirmed
the proposed infusion of additional capital for RUBYs rehabilitation,
approved during said meeting, as implementing the Revised
BENHAR/RUBY Plan. Necessarily then, such capital infusion is
covered by the final injunction against the implementation of the
revised plan. It must be recalled that this Court affirmed the CAs
ruling that the revised plan not only recognized the void deeds of
assignments entered into with some of RUBYs creditors in violation
of the CAs decision in CA-G.R. SP No. 18310, but also maintained a
financing scheme which will just make the rehabilitation plan more
costly and create a worse situation for RUBY.
On the supposed delay of the minority stockholders in raising the
issue of the validity of the infusion of additional capital effected by
the board of directors, the CA held that laches is inapplicable in this
case. It noted that Lim sought relief while the case is still pending
before the SEC. If ever there was delay, the same is not fatal to the
cause of the minority stockholders.

The CA likewise faulted the SEC in relying on the presumption of


regularity on the matter of the extension of RUBYs corporate term
through the filing of amended articles of incorporation. In doing so,
the CA totally disregarded the evidence which rebutted said
presumption, as demonstrated by Lim: (1) it was the board of
directors and not the stockholders which conducted the meeting
without the approval of the MANCOM; (2) there was no written
waivers of the minority stockholders pre-emptive rights and thus it
was irregular to merely notify them of the board of directors
meeting and ask them to exercise their option; (3) there was an
existing permanent injunction against any additional capital
infusion on the BENHAR/RUBY Plan, while the CA and this Court
both rejected the Revised BENHAR/RUBY Plan; (4) there was no
General Information Sheet reports made to the SEC on the alleged
capital infusion, as per certification by the SEC; (5) the Certification
stating the present percentage of majority shareholding, dated
December 21, 1993 and signed by Yu Kim Giang -- which was not
sworn to before a Notary Public -- was supposedly filed in 1996 with
the SEC but it does not bear a stamped date of receipt, and was
only attached in a 2000 motion long after the October 1991 board
meeting; (6) said Certification was contradicted by the SEC list of
all stockholders of RUBY, in which the majority remained at
59.828% and the minority shareholding at 40.172% as of October
27, 1991; (7) certain receipts for the amount of P1.7 million was
presented by the majority stockholders only in the year 2000, long
after Lim questioned the inclusion of extension of corporate term in
the Notice of Meeting when Lim filed before the CA a motion to cite
for contempt (CA-G.R. Nos. 32404, 32469 and 32483); and (8) this
Courts decisions in the cases elevated to it had recognized the
40% stockholding of the minority. Upon the foregoing grounds, the
CA said that the SEC should have invalidated the resolution
extending the corporate term of RUBY for another twenty-five (25)
years.
With the expiration of the RUBYs corporate term, the CA ruled that
it was error for the SEC in not commencing liquidation proceedings.
As to the dismissal of RUBYs petition for suspension of payments,
the CA held that the SEC erred when it retroactively applied Sec. 49 of the Rules of Procedure on Corporate Recovery. Such retroactive
application of procedural rules admits of exceptions, as when it
would impair vested rights or cause injustice. In this case, the CA
emphasized that the two decisions of this Court still have to be
implemented by the SEC, but to date the SEC has failed to
unwound the illegal assignments and order the assignees to
surrender the Deeds of Assignment to the MANCOM.

On the issue of violation of the rule against forum shopping, the CA


held that this is not applicable because the parties in CA-G.R. SP
No. 73169 (filed by MANCOM) and CA-G.R. SP No. 73195 (filed by
Lim) are not the same and they do not have the same interest. This
issue was in fact already resolved in G.R. Nos. 124185-87 wherein
this Court, citing Ramos, Sr. v. Court of Appeals47 declared that
private respondents Lim, the unsecured creditors (ALFC) and
MANCOM cannot be considered to have engaged in forum shopping
in filing separate petitions with the CA as each have distinct rights
to protect.
The CA also found that the belated submission of the special power
of attorney executed by the other minority stockholders
representing 40.172% of RUBYs ownership has no bearing to the
continuation of the petition filed with the appellate court. Moreover,
since the petition is in the nature of a derivative suit, Lim clearly
can file the same not only in representation of the minority
stockholders but also in behalf of the corporation itself which is the
real party in interest. Thus, notwithstanding that Lims ownership in
RUBY comprises only 1.4% of the outstanding capital stock, as
claimed by the majority stockholders, his petition may not be
dismissed on this ground.
The Consolidated Petitions
From the Decision of the CA, China Bank and the Majority
Stockholder joined by RUBY, filed separate petitions before this
Court.
In G.R. No. 165887, petitioners Majority Stockholders and RUBY
raised the following grounds for the reversal of the assailed
decision and the reinstatement of the SECs September 18, 2002
Order:
First Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT
ACTED CONTRARY TO LAW AND PRECEDENTS WHEN IT
GAVE DUE COURSE TO, AND, THEREAFTER, SUSTAINED, A
FORMALLY AND SUBSTANTIALLY DEFECTIVE PETITION FOR
REVIEW.
Second Reason

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT


ACTED IN A MANNER AT WAR WITH ORDERLY PROCEDURE
AND APPLICABLE JURISPRUDENCE WHEN IT REVERSED THE
ORDER OF DISMISSAL OF THE SECURITIES AND EXCHANGE
COMMISSION AND SUBSTITUTED ITS JUDGMENT FOR THAT
OF THE LATTER IN THE DETERMINATION OF ISSUES WELL
WITHIN THE EXPERTISE OF THE COMMISSION.
Third Reason
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT
ACTED IN GRAVE ABUSE OF ITS DISCRETION AND, IN FACT,
IN EXCESS OR LACK OF JURISDICTION -- WHEN IT SUSTAINED
COLLATERAL ATTACKS OF FINAL ADJUDICATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION.48
On the other hand, petitioner China Bank in G.R. No. 165929 puts
forth the argument that the principle of stare decisis cannot be
given effect in this case considering the prevailing factual
circumstances, as to do so would result in manifest injustice. It
contends that the reason for the declaration of nullity of the Deed
of Assignment pronounced more than a decade ago, has become
legally inefficacious by its obsolescence. The creditors of RUBY
have the right to recover their credit. But when the CA ordered the
nullification of China Banks Deed of Assignment in favor of Greener
Investment Corporation, it practically dashed its last hope for ever
recovering its credit.
China Bank is of the view that the CA overstretched the import of
this Courts January 20, 1998 decision in G.R. Nos. 124185-87 when
the SEC was ordered to "conduct further proceedings," as to include
the unwinding of the alleged illegal assignment of credits. The
rehabilitation of RUBY, if it still may be capable of, is not made
dependent on the unwinding by the SEC of the illegal assignments,
as the same concerns only the issue of who shall now become the
creditors of RUBY, and does not alter the fact that RUBY has hefty
loan obligations and it has not enough cash flow to pay for the
same.
Deploring the principal parties penchant for prolonged litigation
resulting considerably in irreversible losses to RUBY, China Bank
maintains that from the report submitted by the MANCOM to the
SEC, it can be clearly seen that no attempt at rehabilitation
whatsoever had been pursued. Given the current situation, China
Bank prays that the CA Decision be reversed and its Deed of

Assignment in favor of Greener Investment


recognized and given full legal effect.

Corporation

be

In fine, main issues to be resolved are: (1) whether private


respondents MANCOM and Lim engaged in forum shopping when
they filed separate petitions before the CA assailing the September
18, 2002 SEC Order; (2) whether the defects in the certification of
non-forum shopping submitted by Lim warrant the dismissal of his
petition before the CA; (3) whether the CA was correct in reversing
the SECs order dismissing the petition for suspension of payment.
Our Ruling
The petitions have no merit.
On the charge of forum shopping, we have already ruled on the
matter in G.R. Nos. 124185-87. Thus:
We hold that private respondents are not guilty of forum-shopping.
In Ramos, Sr. v. Court of Appeals, we ruled:
"The private respondents can be considered to have engaged in
forum shopping if all of them, acting as one group, filed identical
special civil actions in the Court of Appeals and in this Court. There
must be identity of parties or interests represented, rights asserted
and relief sought in different tribunals. In the case at bar, two
groups of private respondents appear to have acted independently
of each other when they sought relief from the appellate court.
Both groups sought relief from the same tribunal.
"It would not matter even if there are several divisions in the Court
of Appeals. The adverse party can always ask for the consolidation
of the two cases. x x x"
In the case at bar, private respondents represent different groups
with different interests the minority stockholders group,
represented by private respondent Lim; the unsecured creditors
group, Allied Leasing & Finance Corporation; and the old
management group. Each group has distinct rights to protect. In
line with our ruling in Ramos, the cases filed by private respondents
should be consolidated. In fact, BENHAR and RUBY did just that in
their urgent motions filed on December 1, 1993 and December 6,
1993, respectively, they prayed for the consolidation of the cases
before the Court of Appeals.49

In the present case, no consolidation of CA-G.R. SP Nos. 73169


(filed by MANCOM) which was earlier assigned to the Thirteenth
Division and CA-G.R. SP No. 73195 (filed by Lim) decided by the
Second Division, took place. In their Comment filed before CA-G.R.
SP No. 73169, the Majority Stockholders and RUBY (private
respondents therein) prayed for the dismissal of said case arguing
that MANCOM, of which Lim is a member, circumvented the
proscription against forum shopping. The CAs Thirteenth Division,
however, disagreed with private respondents and granted the
motion to withdraw petition filed by MANCOM which manifested
that the Second Division in CA-G.R. SP No. 73195 by Decision dated
May 26, 2004 had granted the reliefs similar to those prayed for in
their petition, said decision being binding on MANCOM which was
also impleaded in said case (CA-G.R. SP No. 73195). The Thirteenth
Division also cited our pronouncement in G.R. Nos. 124185-87 to
the effect that there was no violation on the rule on forum shopping
because MANCOM and Lim or the minority shareholders of RUBY
represent different interests.50

A derivative action is a suit by a shareholder to enforce a corporate


cause of action.51 It is a remedy designed by equity and has been
the principal defense of the minority shareholders against abuses
by the majority.52 For this purpose, it is enough that a member or a
minority of stockholders file a derivative suit for and in behalf of a
corporation.53 An individual stockholder is permitted to institute a
derivative suit on behalf of the corporation wherein he holds stock
in order to protect or vindicate corporate rights, whenever officials
of the corporation refuse to sue or are the ones to be sued or hold
the control of the corporation. In such actions, the suing
stockholder is regarded as the nominal party, with the corporation
as the party in interest.54

As to the alleged defects in the certificate of non-forum shopping


submitted by Lim, we find no error committed by the CA in holding
that the belated submission of a special power of attorney executed
in Lims favor by the minority stockholders has no bearing to the
continuation of the case as supported by ample jurisprudence. To
appreciate the liberal stance adopted by the CA, one must take into
account the previous history of the petitions for review before the
CA involving the SEC September 18, 2002 Order. It was actually the
third time that Lim and/or MANCOM have challenged certain acts
perpetrated by the majority stockholders which are prejudicial to
RUBY, such as the execution of deeds of assignment during the
effectivity of the suspension order in pursuit of two rehabilitation
plans submitted by them together with BENHAR. The assignment of
RUBYs credits to BENHAR gave the secured creditors undue
advantage over RUBYs prime properties and put these assets
beyond the reach of the unsecured creditors. Each time they go to
court, Lim and MANCOM essentially advance the interest of the
corporation itself. They have consistently taken the position that
RUBYs assets should be preserved for the equal benefit of all its
creditors, and vigorously resisted any attempt of the controlling
stockholders to favor any or some of its creditors by entering into
questionable deals or financing schemes under two BENHAR/RUBY
Plans. Viewed in this light, the CA was therefore correct in
recognizing Lims right to institute a stockholders action in which
the real party in interest is the corporation itself.

SEC. 4-9. Period of Suspension Order. The suspension order shall


be effective for a period of sixty (60) days from the date of its
issuance. The order shall be automatically vacated upon the lapse
of the sixty-day period unless extended by the Commission. Upon
motion, the Commission may grant an extension thereof for a
period of not more than sixty (60) days in each application if the
Commission is satisfied that the debtor and its officers have been
acting in good faith and with due diligence, and that the debtor
would likely be able to make a viable rehabilitation plan. After the
lapse of one hundred and eighty (180) days from the issuance of
the suspension order, no extension of the said order shall be
granted by the Commission if opposed in writing by a majority of
any class of creditors. The Commission may grant an extension
beyond one hundred eighty (180) days only if it appears by
convincing evidence that there is a good chance for the successful
rehabilitation of the debtor and the opposition thereto by the
creditor appears manifestly unreasonable.

Now, on the third and substantive issue concerning the SECs


dismissal of RUBYs petition for suspension of payment.
The SEC based its action on Sec. 4-9 of the Rules of Procedure on
Corporate Recovery,55 which provides:

In any event, the petition is deemed ipso facto denied and


dismissed if no Rehabilitation Plan was approved by the
Commission upon the lapse of the order or the last extension
thereof. In such case, the debtor shall come under the dissolution
and liquidation proceedings of Rule V of these Rules. (Emphasis
supplied.)

According to the SEC, even if the 180 days maximum period of


suspension order is counted from the finality of this Courts decision
in G.R. Nos. 124185-87 in December 1998, still this case had gone
beyond the period mandated in the Rules for a corporation under
suspension of payment to have a rehabilitation plan approved by
the Commission.
While it is true that the Rules of Procedure on Corporate
Recovery authorizes the dismissal of a petition for suspension of
payment where there is no rehabilitation plan approved within the
maximum period of the suspension order, it must be recalled that
there was in fact not one, but two rehabilitation plans
(BENHAR/RUBY Plan and Revised BENHAR/RUBY Plan) submitted by
the majority stockholders which were approved by the SEC. The
implementation of the first plan was enjoined when it was seriously
challenged in the courts by the minority stockholders through Lim.
The second revised plan superseded the first plan, but eventually
nullified by the CA and the CA decision declaring it void was
affirmed by this Court in G.R. Nos. 124185-87. Given this factual
milieu, the automatic application of the lifting of the suspension
order as interpreted by the SEC in its September 18, 2002 Order
would be unfair and highly prejudicial to the financially distressed
corporation.
Moreover, records reveal that the delay in the proceedings after the
case was set for hearing following this Courts final judgment in
G.R. Nos. 124185-87, was not due to any fault or neglect on the
part of MANCOM or the minority stockholders. The idea propounded
by the petitioners majority stockholders that this case is about a
minority in a corporation holding hostage the majority indefinitely
by simple assertion that the formers rights have been transgressed
by the latter is, downright misleading.
First, the SEC did not even mention in its September 18, 2002 Order
that when this Court remanded to it the case for further
proceedings, there remained only the Alternative Plan of RUBYs
minority stockholders which had earlier been forwarded to the SEC
Hearing Panel. With the CA Decision setting aside the SEC approval
of the Revised BENHAR/RUBY Plan, as affirmed by this Court, it
behooves on the SEC to recognize the fact that the Alternative Plan
was endorsed by 90% of the RUBYs creditors who had objected to
the Revised BENHAR/RUBY Plan. Yet, not a single step was taken by
the SEC to address those findings and conclusions made by the CA
and this Court on the highly disadvantageous and onerous
provisions of the Revised BENHAR/RUBY Plan.

Moreover, the SEC failed to act on motions filed by Lim and


MANCOM to implement this Courts January 20, 1998 Decision in
G.R. Nos. 124185-87, by declaring all deeds of assignment with
BENHAR and/or the conduits of Henry Yu of no force and legal
effect, which of course necessitates the surrender by the concerned
creditors of those void deeds of assignment. Petitioner China Bank
dismisses it as unnecessary and immaterial to the continued
inability of RUBY to settle its long overdue debts. However, the CA
said that the foregoing acts should have been done by the SEC for
proper documentation and orderly settlement after proper
accounting of the assignment transactions. The appellate court
then concluded that dismissal of the petition under Sec. 4-9 of
the Rules of Procedure on Corporate Recovery would impair the
vested rights of the minority stockholders under this Courts
decision invalidating the aforesaid deeds of assignment, thus:
We agree with the observations of the petition that if the illegal
assignments not having been unwound and the mortgages not
canceled, the majority, their alter ego, and/or cohorts will claim to
be secured creditors and freely collect extra-judicially the
obligations covered by the illegal assignments. Ruby has very little
money compared to the P200 Million probable liability to the illegal
assignees as unilaterally stated by Ruby without audit (previously
merely totaled to P34 Million in 1998 as stated in the revised
rehabilitation plan). Foreclosure of the mortgages by the illegal
assignees will follow; Ruby will lose all its prime properties; there
will be no assets left for unsecured creditors; and there will be no
residual P600 Million assets to divide.56
Evidently, the minority stockholders and MANCOM had already
foreseen the impossibility of implementing a viable rehabilitation
plan if the illegal assignments made by its creditors with BENHAR
and the majority stockholders, and subsequently, with conduits of
RUBY or Henry Yu, are not properly unwound and those directors
responsible for the void transactions not required to make a full
accounting. Contrary to petitioner China Banks insinuation that the
minority stockholders merely want to prolong the litigation to the
great prejudice and damage to RUBYs creditors, MANCOM and Lim
had determined and moved for SEC-supervised liquidation
proceedings as the more prudent course of action for an orderly
and equitable settlement of RUBYs liabilities.
Records likewise revealed that the SEC chose to keep silent and
failed to assist the MANCOM and minority stockholders in their
efforts to demand compliance from the majority stockholders or Yu

Kim Giang (who headed the first MANCOM) with the December 22,
1989 Order directing them to turn over the cash, financial records
and documents of RUBY, including certificates of title over RUBYs
real properties, and render an accounting of all moneys received
and payments made by RUBY. On January 18, 2002, the MANCOM
even filed a Motion57 to require Yu Kim Giang to render
report/accounting of RUBY from 1983 to the 1st quarter of 1990,
stating that despite a commitment from Mr. Giang, he has
seemingly delayed his compliance, hence frustrating the desire of
MANCOM to submit a comprehensive and complete report for the
whole period of 1983 up to the present. To underscore the
importance of making the said records available for scrutiny of the
SEC and MANCOM, Lim manifested before the SEC that-Indeed, the majority is actually unwilling (and not merely unable) to
submit such records because these will show, among others:
(1) The majority to minority ratio in the corporate ownership
is 59.828% :40.172%;
(2) The actual amounts of the bank loans paid off by Benhar
International[,] Inc. and/or Henry Yu would be very low;
(3) The illegal payment of the bank loans and illegal
assignments of the mortgages to Benhar/Henry Yu are
contrary to the Honorable Commissions Order of 20
December 1983 for suspension of payments;
(4) The earnings of the corporation from 1983 to 1989
amounted to millions and cannot be accounted for by the
majority and the first Mancom;
(5) The money may have been spent to pay off some of the
loans to the bank but Benhar and Henry Yu fraudulently
claim credit therefor.58
It must be noted that MANCOM had rejected the two rehabilitation
plans proposed by BENHAR and the majority stockholders. In
shifting the blame to the MANCOM and minority stockholders for
the delay in the approval of a viable rehabilitation plan, the SEC
apparently overlooked that from the time the SEC approved the
Revised BENHAR/RUBY Plan and dissolved the MANCOM, the
majority stockholders has denied MANCOM access to corporate
papers, documents evidencing the amounts actually paid to

creditor banks/assignors, financial statements and titles over


RUBYs real properties.
Although the SEC granted MANCOM and Lims request for a hearing
and direct a representative from BPI to bring all documents relative
to the assignment of RUBYs credit, said hearing did not materialize
after the majority stockholders proposed a compromise agreement
with the minority stockholders. But as it turned out, this
development only caused further delay because the majority
stockholders were unwilling to turn over documents, funds and
properties in their possession, and would neither make a full
accounting or disclosure of RUBYs transactions, especially the
actual amounts paid and rates of interest on the loan assignments.
In this state of things, the MANCOM and minority stockholders
resolved that the more reasonable and practical option is to move
for a SEC-supervised liquidation proceedings.
The other ground invoked by Lim and MANCOM for the propriety of
liquidation is the expiration of RUBYs corporate term. The SEC,
however, held that the filing of the amendment of articles of
incorporation by RUBY in 1996 complied with all the legal requisites
and hence the presumption of regularity stands. Records show that
the validity of the infusion of additional capital which resulted in the
alleged increase in the shareholdings of petitioners majority
stockholders in October 1991 was questioned by MANCOM and Lim
even before the majority stockholders filed their motion to dismiss
in the year 2000.
A stock corporation is expressly granted the power to issue or sell
stocks.59 The power to issue shares of stock in a corporation is
lodged in the board of directors and no stockholders meeting is
required to consider it because additional issuances of shares of
stock does not need approval of the stockholders. 60 What is only
required is the board resolution approving the additional issuance
of shares. The corporation shall also file the necessary application
with the SEC to exempt these from the registration requirements
under the Revised Securities Act (now the Securities Regulation
Code).
The new management committee created pursuant to SEC Order
dated September 18, 1991 apparently had no participation in the
October 2, 1991 board resolution approving the issuance of
additional shares. The move was part of the boards assertion of
control over the management in RUBY following the approval of the
Revised BENHAR/RUBY Plan. The minority stockholders registered

their objection during the said meeting by asking the board to defer
action as the SEC September 18, 1991 Order was still on appeal
with the SEC En Banc. When the SEC En Banc denied their appeal
and motion for reconsideration under its July 30, 1993 and October
15, 1993 orders, Lim, MANCOM and ALFC filed petitions for review
with the CA which set aside the said orders. As already mentioned,
this Court affirmed the CA ruling in G.R. Nos. 124185-87.
Contrary to the assertion of petitioners majority stockholders, our
decision in G.R. Nos. 124185-87 nullified the deeds of assignment
not solely on the ground of violation of the injunction orders issued
by the SEC and CA. As earlier mentioned, we affirmed the CAs
finding that the re-lending scheme under the Revised
BENHAR/RUBY Plan will not only make rehabilitation more costly for
RUBY, but also worsen its financial condition because of the
mortgage of its assets to a new creditor. To better illumine this
point, we quote from the CA decision in CA-G.R. SP Nos. 32404,
32469 and 32483 comparing the provisions of the rehabilitation
proposals submitted by the majority stockholders (Revised
BENHAR/RUBY Plan) and the minority stockholders (Alternative
Plan):
there is no need for Benhar to act as financier, as Ruby itself can
very well secure such credit accommodation using its assets as
collateral. Verily, Benhars pretext at magnanimity is deception of
the highest order considering that: (1) as embodied in the heading
Sources and Uses of Funds in the Revised Benhar/Ruby Plan,
the P80-Million loan/credit facility to be extended by Benhar will be
used to pay P60.437-Million loans of Ruby. Of the P60.437Million, P34.068-Million will be paid to Benhar as payment for the
amounts it paid in consideration of the nullified assignments; (2)
The Deed of Assignment of Credit Facility will be executed by
Benhar in favor of Ruby only upon payment of Ruby of such amount
already advanced by Benhar, i.e. the P34.068-Million credit
assigned to Benhar by the seven (7) secured creditors.

Benhar/Ruby Plan

Alternative Plan

1. Benhar plays a major role. It will be paidP34.068M


out of P60.437 M total amount due to creditors but
not explained as to how arrived at.

1. The original creditors are the ones recognized. The


amount payable is lower because interests are not
capitalized.

2. Benhar will not assign the credit facility of P80M


unless the P34.068M above stated is paid.

3. The main assets are to be mortgaged to the


creditor- assignor of Benhar and if the illegal
assignments are recognized, then Benhar shall have
to be recognized as mortgagee even when it is a
disqualified creditor and/or mortgagee.

The Revised Benhar/Ruby


Plan, in fact, gives Benhar
undue preference on the
matter of repayment. Under
the said plan, the creditors
of Ruby will be paid in
accordance
with
the
following schedules:

"Secured
Creditors P17.022M
China
Banking
Corp.
BPI
Philippine Orient
2. Direct credit of P80M loan and will be borrowed
from the bank(s) like
Allied, UCPB,
Metrobank
or
Unsecured
Creditors
P 9.347M
Equitable Bank or even
China Bank. Leasing
Allied
Filcor Finance

To be paid in cash with 12%

Benhar
For
having
paid
Ruby
obligations
3. Mortgaged to bank(s)
to 7 directly.
creditors

P34.068M

To
be
paid
with interest charge

P2.871M
(p.a. for 3 years)

Totalling P8.614M to be
installment, interest-free"

Trade/Other
Creditors

To be paid in cash interest-f

(Rollo, CA-G.R. SP No. 32404,


p. 727)

4. Start up cost P16,880 and based on 1988 figures


and projections.

4. Plant B = P25,640
Year IV estimated P40. M
Plant A = 22.40
Year V estimated P30. M

5. Rehabilitation only of Plant B.

5. Rehabilitation of both plants.

Needless
to
state,
the
foregoing
payment
schedules as embodied in
the said plan which gives
Benhar undue advantage
over the other creditors goes
against the very essence of
rehabilitation, which requires
that no creditor should be
preferred over the other.
Indeed, a comparison of the
salient
features
of
the
Revised Benhar/Ruby Plan
and the Alternative Plan will

readily show just how stacked in favor of Benhar are the provisions
of the former plan:
1wphi1
x x x x61
Prior to the September 18, 1991 Order approving the Revised
BENHAR/RUBY Plan and dissolving the MANCOM, majority of RUBYs
creditors (90%) have already withdrawn their support to the revised
plan and manifested that they were only lately informed about
another plan submitted by the minority stockholders. Hence, these
creditors wrote individual letters to the SEC Hearing Panel
expressing their agreement with and endorsement of the
Alternative Plan of the minority stockholders.62
The Revised BENHAR/RUBY Plan had proposed the calling for
subscription of unissued shares through a Board Resolution from
the P11.814 million of the P23.7 million ACS "in order to allow the
long overdue program of the REHAB Program." RUBY will offer for
subscription 118,140 shares of stocks at par value of P100 each to
all stockholders on record, payable within 15 days, or within a
reasonable period from SEC approval of the revised plan. 63 This was
implemented by the October 2, 1991 meeting of the Board of
Directors led by Yu Kim Giang. The minority directors claimed they
were not notified of said board meeting. At any rate, the CA
decision nullifying the Revised BENHAR/RUBY Plan was affirmed by
this Court on January 20, 1998. Hence, the legitimate concerns of
the minority stockholders and MANCOM who objected to the capital
infusion which resulted in the dilution of their shareholdings, the
expiration of RUBYs corporate term and the pending incidents on
the void deeds of assignment of credit all these should have been
duly considered and acted upon by the SEC when the case was
remanded to it for further proceedings. With the final rejection of
the courts of the Revised BENHAR/RUBY Plan, it was grave error for
the SEC not to act decisively on the motions filed by the minority
stockholders who have maintained that the issuance of additional
shares did not help improve the situation of RUBY except to stifle
the opposition coming from the MANCOM and minority stockholders
by diluting the latters shareholdings. Worse, the SEC ignored the
evidence adduced by the minority stockholders indicating that the
correct amount of subscription of additional shares was not paid by
the majority stockholders and that SEC official records still reflect
the 60%-40% percentage of ownership of RUBY.

The SEC remained indifferent to the reliefs sought by the minority


stockholders, saying that the issue of the validity of the additional
capital infusion was belatedly raised. Even assuming the October 2,
1991 board meeting indeed took place, the SEC did nothing to
ascertain whether indeed, as the minority claimed: (1) the minority
stockholders were not given notice as required and reasonable time
to exercise their pre-emptive rights; and (2) the capital infusion was
not for the purpose of rehabilitation but a mere ploy to divest the
minority stockholders of their 40.172% shareholding and reduce it
to a mere 25.25%.
The foregoing matters, along with the persistent refusal of the
majority stockholders, led by Yu Kim Giang, to give a full accounting
of their transactions involving RUBYs credits and properties, were
extensively argued by the minority stockholders in their opposition
to the motions to dismiss/vacate suspension order filed by the
majority stockholders and BPI, as follows:
Their receipts only show supposed payment by the majority of a
total of P1,759,150.00 out of the correct amount of
P7,068,079.92.00 (sic) (59.828% of P11.814 million required capital
infusion under the MRP and RRP) which should have been the
amount paid by them under the RRP which requires full payment.
Thus, they sought to attain a 74.75% equity from a 59.828%
original equity by playing more tricks and stating that, under the
general rule, they are supposedly allowed to pay-up only 25% of
their subscription. Unfortunately for them, in a rehabilitation
supervised by the SEC and with an existing Mancom, the general
rule does not apply. What is stated in the rehabilitation plan must
be strictly followed provided the rehabilitation plan has been finally
approved.
It must be remembered that in October 2 to 17, 1991, the amounts
owed by Ruby to the banks who illegally assigned their loans/credit
was stated at P34 Million. Operations needed another P20 Million
plus. A capital infusion of P1,759,150.00 was so miniscule and
clearly not for rehabilitation but was intended to deprive the
minority of its blocking position and property rights since
distribution after liquidation is based on the percentage of
stockholdings. It is not only unfair, inequitable and not meaningful
it is clearly dishonest.
xxxx

Assuming arguendo that the Board of Directors could act


independently and this did not violate any injunction, if the capital
infusion was actually made, the Board of Directors had the duty to
report this to the Mancom because they would then fall under
"existing assets" and would be part of the evaluation of the
proposed RRP, necessary for management and in the overall plan
of rehabilitation. Nothing of this kind happened and the belated
proof cannot correct this situation.
xxxx
It is not true that there is benevolence on the part of the majority
when they maneuvered the illegal assignments and paid the banks.
The loan obligations remain as accounts payable of Ruby and have
even been bloated to gigantic proportions and yet the SEC does not
even ask them to account how much these obligations are now and
the majority should have reported these to the Mancom, but the
majority has not. These anomalous situations have been made to
continue long enough and, we pray, should be addressed by the
Honorable Commission.
xxxx
The SEC must understand that, being head of the first Mancom,
YU KIM GIANG had the same obligation to render a report to the
SEC as the present Mancom now. To single out the present Mancom
to do this when a complete report cannot be made without these
starting records is discriminatory, unfair and violates the rules of
accountancy. For example, where is the report on the illegal
assignments and mortgages complete with details? Where did the
rentals for the period from 1983 to 1989 go? This amounted to
millions. There are no reports on these. By not requiring the first
Mancom to Report, the SEC is preventing the complete picture on
the liabilities and finances of Ruby from being seen and is
sheltering Ruby and the majority.64 (Additional emphasis supplied.)
Pre-emptive right under Sec. 39 of the Corporation Code refers to
the right of a stockholder of a stock corporation to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied
under the articles of incorporation, and subject to certain
exceptions and limitations. The stockholder must be given a
reasonable time within which to exercise their preemptive rights.
Upon the expiration of said period, any stockholder who has not
exercised such right will be deemed to have waived it. 65

The validity of issuance of additional shares may be questioned if


done in breach of trust by the controlling stockholders. Thus, even
if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Section 39 or because it is denied or
limited in the articles of incorporation, an issue of shares may still
be objectionable if the directors acted in breach of trust and their
primary purpose is to perpetuate or shift control of the corporation,
or to "freeze out" the minority interest. 66 In this case, the following
relevant observations should have signaled greater circumspection
on the part of the SEC -- upon the third and last remand to it
pursuant to our January 20, 1998 decision -- to demand
transparency and accountability from the majority stockholders, in
view of the illegal assignments and objectionable features of the
Revised BENHAR/RUBY Plan, as found by the CA and as affirmed by
this Court:
There can be no gainsaying the well-established rule in corporate
practice and procedure that the will of the majority shall govern in
all matters within the limits of the act of incorporation and lawfully
enacted by-laws not proscribed by law. It is, however, equally true
that other stockholders are afforded the right to intervene
especially during critical periods in the life of a corporation like
reorganization, or in this case, suspension of payments, more so,
when the majority seek to impose their will and through fraudulent
means, attempt to siphon off Rubys valuable assets to the great
prejudice of Ruby itself, as well as the minority stockholders and
the unsecured creditors.
Certainly, the minority stockholders and the unsecured creditors
are given some measure of protection by the law from the abuses
and impositions of the majority, more so in this case, considering
the give-away signs of private respondents perfidy strewn all over
the factual landscape. Indeed, equity cannot deprive the minority of
a remedy against the abuses of the majority, and the present
action has been instituted precisely for the purpose of protecting
the true and legitimate interests of Ruby against the Majority
Stockholders. On this score, the Supreme Court, has ruled that:
"Generally speaking, the voice of the majority of the stockholders is
the law of the corporation, but there are exceptions to this
rule. There must necessarily be a limit upon the power of the
majority. Without such a limit the will of the majority will be
absolute and irresistible and might easily degenerate into absolute
tyranny. x x x"67 (Additional emphasis supplied.)

Lamentably, the SEC refused to heed the plea of the minority


stockholders and MANCOM for the SEC to order RUBY to commence
liquidation proceedings, which is allowed under Sec. 4-9 of the
Rules on Corporate Recovery. Under the circumstances, liquidation
was the only hope of the minority stockholders for effecting an
orderly and equitable settlement of RUBYs obligations, and
compelling the majority stockholders to account for all funds,
properties and documents in their possession, and make full
disclosure on the nullified credit assignments. Oblivious to these
pending incidents so crucial to the protection of the interest of the
majority of creditors and minority shareholders, the SEC simply
stated that in the interim, RUBYs corporate term was validly
extended, as if such extension would provide the solution to RUBYs
myriad problems.
Extension of corporate term requires the vote of 2/3 of the
outstanding capital stock in a stockholders meeting called for the
purpose.68 The actual percentage of shareholdings in RUBY as of
September 3, 1996 -- when the majority stockholders allegedly
ratified the board resolution approving the extension of RUBYs
corporate life to another 25 years was seriously disputed by the
minority stockholders, and we find the evidence of compliance with
the notice and quorum requirements submitted by the majority
stockholders insufficient and doubtful. Consequently, the SEC had
no basis for its ruling denying the motion of the minority
stockholders to declare as without force and effect the extension of
RUBYs corporate existence.
Liquidation, or the settlement of the affairs of the corporation,
consists of adjusting the debts and claims, that is, of collecting all
that is due the corporation, the settlement and adjustment of
claims against it and the payment of its just debts. 69 It involves the
winding up of the affairs of the corporation, which means the
collection of all assets, the payment of all its creditors, and the
distribution of the remaining assets, if any, among the stockholders
thereof in accordance with their contracts, or if there be no special
contract, on the basis of their respective interests.70
Section 122 of the Corporation Code, which is applicable to the
present case, provides:
SEC. 122. Corporate liquidation. -- Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued as

a body corporate for three (3) years after the time when it would
have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close
its affairs, to dispose of and convey its property and to distribute its
assets, but not for the purpose of continuing the business for which
it was established.
At any time during said three (3) years, said corporation is
authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other
persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest, all
interests which the corporation had in the property terminates, the
legal interest vests in the trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to
any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as otherwise allowed by
this Code, no corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its
debts and liabilities.
Since the corporate life of RUBY as stated in its articles of
incorporation expired, without a valid extension having been
effected, it was deemed dissolved by such expiration without need
of further action on the part of the corporation or the State. 71 With
greater reason then should liquidation ensue considering that the
last paragraph of Sec. 4-9 of the Rules of Procedure on Corporate
Recovery mandates the SEC to order the dissolution and liquidation
proceedings under Rule VI. Sec. 6-1, Rule VI likewise authorizes the
SEC on motion or motu proprio, or upon recommendation of the
management committee, to order dissolution of the debtor
corporation and the liquidation of its remaining assets, appointing a
Liquidator for the purpose, if "the continuance in business of the
debtor is no longer feasible or profitable or no longer works to the
best interest of the stockholders, parties-litigants, creditors, or the
general public."
It cannot be denied that with the current divisiveness, distrust and
antagonism between the majority and minority stockholders, the

long agony and extreme prejudice caused by numerous litigations


to the creditors, and the bleak prospects for business recovery in
the light of problems with the local government which are
implementing more restrictions and anti-pollution measures that
practically banned the operation of RUBYs glass plant liquidation
becomes the only viable course for RUBY to stave off any further
losses and dissipation of its assets. Liquidation would also ensure
an orderly and equitable settlement of all creditors of RUBY, both
secured and unsecured.
The SECs utter disregard of the rights of the minority in applying
the provisions of the Rules of Procedure on Corporate Recovery is
inconsistent with the policy of liberal construction of the said rules
"to assist the parties in obtaining a just, expeditious and
inexpensive
settlement
of
cases.72 Petitioners
majority
stockholders, however, assert that the findings and conclusions of
the SEC on the matter of the dismissal of RUBYs petition are
binding and conclusive upon the CA and this Court. They contend
that reviewing courts are not supposed to substitute their judgment
for those made by administrative bodies specifically clothed with
authority to pass upon matters over which they have acquired
expertise.73 Given our foregoing findings clearly showing that the
SEC acted arbitrarily and committed patent errors and grave abuse
of discretion, this case falls under the exception to the general rule.
As we held in Ruby Industrial Corporation v. Court of Appeals:
The settled doctrine is that factual findings of an administrative
agency are accorded respect and, at times, finality for they have
acquired the expertise inasmuch as their jurisdiction is confined to
specific matters. Nonetheless, these doctrines do not apply when
the board or official has gone beyond his statutory authority,
exercised unconstitutional powers or clearly acted arbitrarily and
without regard to his duty or with grave abuse of discretion. In
Leongson vs. Court of Appeals, we held: "once the actuation of the
administrative official or administrative board or agency is tainted
by a failure to abide by the command of the law, then it is
incumbent on the courts of justice to set matters right, with this
Tribunal having the last say on the matter." 74
Petitioners majority stockholders further insist that the minority
stockholders were mistaken when they contended that the
rehabilitation of RUBY is dependent on the unwinding by the SEC of
the illegal assignments and mortgages. They assert that aside from
the fact that the SEC had nothing to unwind because the alleged

illegal assignments and mortgages were already declared null and


void, the said assignments and mortgages will not affect the
rehabilitation of Ruby; the same affecting only the issue of how, as
to who will be its creditors.
Such contention is untenable and contrary to our previous ruling in
G.R. Nos. 124185-87. With the nullification of the deeds of
assignments of credit executed by some of Rubys secured
creditors in favor of BENHAR, it logically follows that the assignors
or the original bank creditors remain as the creditors on record of
RUBY. We have noted that BENHAR, which is controlled by the
family of Henry Yu who is also a director and stockholder of RUBY,
was not listed as one of RUBYs creditors at the time RUBY filed the
petition for suspension of payment. Petitioners majority
stockholders insinuation that RUBYs credits may have been
assigned to third parties, if not referring to BENHAR or its conduits,
implies two things: either the assignments declared void by this
Courts January 20, 1998 decision continues to be recognized by
the majority stockholders, in violation of the said decision, or other
third parties in connivance with BENHAR and/or the controlling
stockholders had subsequently entered the picture, without
approval of the SEC and while the SEC December 20, 1983 Order
enjoining the disposition of RUBYs properties was in force.
The majority stockholders eagerness to have the suspension order
lifted or vacated by the SEC without any order for its liquidation
evinces a total disregard of the mandate of Sec. 4-9 of the Rules of
Procedure on Corporate Recovery, and their obvious lack of any
intent to render an accounting of all funds, properties and details of
the unlawful assignment transactions to the prejudice of RUBY,
minority stockholders and the majority of RUBYs creditors. The
majority stockholders and BENHARs conduits must not be allowed
to evade the duty to make such full disclosure and account any
money due to RUBY to enable the latter to effect a fair, orderly and
equitable settlement of all its obligations, as well as distribution of
any remaining assets after paying all its debtors.
In fine, no error was committed by the CA when it set aside the
September 18, 2002 Order of the SEC and declared the nullity of
the acts of majority stockholders in implementing capital infusion
through issuance of additional shares in October 1991, the board
resolution approving the extension of RUBYs corporate term for
another 25 years, and any illegal assignment of credit executed by
RUBYs creditors in favor of third parties and/or conduits of the
controlling stockholders. The CA likewise correctly ordered the

delivery of all documents relative to the said assignment of credits


to the MANCOM or the Liquidator, the unwinding of these void
deeds of assignment, and their full accounting by the majority
stockholders.
The petitioners majority stockholders and China Bank cannot be
permitted to raise any issue again regarding the validity of any
assignment of credit made during the effectivity of the suspension
order and before the finality of the September 18, 2002 Order
lifting the same. While China Bank is not precluded from
questioning the validity of the December 20, 1983 suspension order
on the basis of res judicata, it is, however, barred from doing so by
the principle of law of the case. We have held that when the validity
of an interlocutory order has already been passed upon on appeal,
the Decision of the Court on appeal becomes the law of the case
between the same parties. Law of the case has been defined as
"the opinion delivered on a former appeal. More specifically, it
means that whatever is once irrevocably established as the
controlling legal rule of decision between the same parties in the
same case continues to be the law of the case, whether correct on
general principles or not, so long as the facts on which such
decision was predicated continue to be the facts of the case before
the court."75
The unwinding process of all such illegal assignment of RUBYs
credits is critical and necessary, in keeping with good faith and as a
matter of fairness and justice to all parties affected, particularly the
unsecured creditors who stands to suffer most if left with nothing of
the assets of RUBY, and the minority stockholders who waged legal
battles to defend the interest of RUBY and protect the rights of the
minority from the abuses of the controlling stockholders. As
correctly stated by the CA:
Liquidation is imperative because the unsecured creditor must
negotiate the amount of the imputable interest rate on its long
unpaid credit, the decision on which assets are to be sold to
liquidate the illegally assigned credits must be made, the other
secured credits and the trade credits must be determined, and
most importantly, the restoration of the 40.172% minority
percentage of ownership must be done.76
However, we do not agree that it is the SEC which has the authority
to supervise RUBYs liquidation.

In the case of Union Bank of the Philippines v. Concepcion, 77 the


Court is presented with the issue of whether the SEC had
jurisdiction to proceed with insolvency proceedings after it was
shown that the debtor corporation can no longer be rehabilitated.
We held that although jurisdiction over a petition to declare a
corporation in a state of insolvency strictly lies with regular courts,
the SEC possessed ample power under P.D. No. 902-A, as amended,
to declare a corporation insolvent as an incident of and in
continuation of its already acquired jurisdiction over the petition to
be declared in a state of suspension of payments in the two
instances provided in Sec. 5 (d)78 thereof.
Subsequently, in Consuelo Metal Corporation v. Planters
Development Bank79 the Court was again confronted with the same
issue. The original petition filed by the debtor corporation was for
suspension of payment, rehabilitation and appointment of a
rehabilitation receiver or management committee. Finding the
petition sufficient in form and substance, the SEC issued an order
suspending immediately all actions for claims against the petitioner
pending before any court, tribunal or body until further orders from
the court. It also created a management committee to undertake
petitioners rehabilitation. Four years later, upon the management
committees recommendation, the SEC issued an omnibus order
directing the dissolution and liquidation of the petitioner, and that
the proceedings on and implementation of the order of liquidation
be commenced at the Regional Trial Court to which the case was
transferred. However, the trial court refused to act on the motion
filed by the petitioner who requested for the issuance of a TRO
against the extrajudicial foreclosure initiated by one of its creditors.
The trial court ruled that since the SEC had already terminated and
decided on the merits the petition for suspension of payment, the
trial court no longer had legal basis to act on petitioners motion. It
likewise denied the motion for reconsideration stating that petition
for suspension of payment could not be converted into a petition
for dissolution and liquidation because they covered different
subject matters and were governed by different rules. Petitioners
remedy thus was to file a new petition for dissolution and
liquidation either with the SEC or the trial court.
When the case was elevated to the CA, the petition was dismissed
affirming that under Sec. 121 of the Corporation Code, the SEC had
jurisdiction to hear the petition for dissolution and liquidation. On
motion for reconsideration, the CA remanded the case to the SEC
for proceedings under Sec. 121 of the Corporation Code. The CA
denied the motion for reconsideration filed by the respondent

creditor, who
Court.1wphi1

then

filed

petition

for

review

with

this

We ruled that the SEC observed the correct procedure under the
present law, in cases where it merely retained jurisdiction over
pending cases for suspension of payments/rehabilitation, thus:
Republic Act No. 8799 (RA 8799) transferred to the appropriate
regional trial courts the SECs jurisdiction defined under Section
5(d) of Presidential Decree No. 902-A. Section 5.2 of RA 8799
provides:
The Commissions jurisdiction over all cases enumerated under
Sec. 5 of Presidential Decree No. 902-A is hereby transferred to the
Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that
shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate
disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The
Commission
shall
retain
jurisdiction
over
pending
suspension of payments/rehabilitation cases filed as of 30
June 2000 until finally disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for suspension of
payment and issued a suspension order on 2 April 1996 after it
found CMCs petition to be sufficient in form and substance. While
CMCs petition was still pending with the SEC as of 30 June 2000, it
was finally disposed of on 29 November 2000 when the SEC issued
its Omnibus Order directing the dissolution of CMC and the transfer
of the liquidation proceedings before the appropriate trial court.
The SEC finally disposed of CMCs petition for suspension of
payment when it determined that CMC could no longer be
successfully rehabilitated.
However, the SECs jurisdiction does not extend to the liquidation of
a corporation. While the SEC has jurisdiction to order the
dissolution of a corporation, jurisdiction over the liquidation of the
corporation now pertains to the appropriate regional trial courts.
This is the reason why the SEC, in its 29 November 2000 Omnibus
Order, directed that "the proceedings on and implementation of the
order of liquidation be commenced at the Regional Trial Court to
which this case shall be transferred." This is the correct procedure
because the liquidation of a corporation requires the settlement of

claims for and against the corporation, which clearly falls under the
jurisdiction of the regular courts. The trial court is in the best
position to convene all the creditors of the corporation, ascertain
their claims, and determine their preferences. 80 (Additional
emphasis supplied.)
In view of the foregoing, the SEC should now be directed to transfer
this case to the proper RTC which shall supervise the liquidation
proceedings under Sec. 122 of the Corporation Code. Under Sec. 6
(d) of P.D. 902-A, the SEC is empowered, on the basis of the
findings and recommendations of the management committee or
rehabilitation receiver, or on its own findings, to determine that the
continuance in business of a debtor corporation under suspension
of payment or rehabilitation would not be feasible or profitable nor
work to the best interest of the stockholders, parties-litigants,
creditors, or the general public, order the dissolution of such
corporation and its remaining assets liquidated accordingly. As
mentioned earlier, the procedure is governed by Rule VI of the
SECRules of Procedure on Corporate Recovery.
However, R.A. No. 1014281 otherwise known as the Financial
Rehabilitation and Insolvency Act (FRIA) of 2010, now provides for
court proceedings in the rehabilitation or liquidation of debtors,
both juridical and natural persons, in a manner that will "ensure or
maintain certainty and predictability in commercial affairs, preserve
and maximize the value of the assets of these debtors, recognize
creditor rights and respect priority of claims, and ensure equitable
treatment of creditors who are similarly situated." Considering that
this case was still pending when the new law took effect last year,
the RTC to which this case will be transferred shall be guided by
Sec. 146 of said law, which states:
SEC. 146. Application to Pending Insolvency, Suspension of
Payments and Rehabilitation Cases. This Act shall govern all
petitions filed after it has taken effect. All further proceedings in
insolvency, suspension of payments and rehabilitation cases then
pending, except to the extent that in opinion of the court their
application would not be feasible or would work injustice, in which
event the procedures set forth in prior laws and regulations shall
apply.
WHEREFORE, the petitions for review on certiorari are DENIED. The
Decision dated May 26, 2004 and Resolution dated November 4,
2004 of the Court of Appeals in CA-G.R. SP No. 73195 are hereby
AFFIRMED with MODIFICATION in that the Securities and Exchange

Commission is hereby ordered to TRANSFER SEC Case No. 2556 to


the appropriate Regional Trial Court which is hereby DIRECTED to
supervise the liquidation of Ruby Industrial Corporation under the
provisions of R.A. No. 10142.
With costs against the petitioners.
SO ORDERED
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23241

March 14, 1925

HENRY FLEISCHER, plaintiff-appellee,


vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio Gonzalez for appellant.
Emilio M. Javier for appellee.
JOHNSON, J.:

This action was commenced in the Court of First Instance of the


Province of Oriental Negros on the 14th day of August, 1923,
against the board of directors of the Botica Nolasco, Inc., a
corporation duly organized and existing under the laws of the
Philippine Islands. The plaintiff prayed that said board of directors
be ordered to register in the books of the corporation five shares of
its stock in the name of Henry Fleischer, the plaintiff, and to pay
him the sum of P500 for damages sustained by him resulting from
the refusal of said body to register the shares of stock in question.
The defendant filed a demurrer on the ground that the facts alleged
in the complaint did not constitute sufficient cause of action, and
that the action was not brought against the proper party, which was
the Botica Nolasco, Inc. The demurrer was sustained, and the
plaintiff was granted five days to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint
against the Botica Nolasco, Inc., alleging that he became the owner
of five shares of stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said shares were

fully paid; and that the defendant refused to register said shares in
his name in the books of the corporation in spite of repeated
demands to that effect made by him upon said corporation, which
refusal caused him damages amounting to P500. Plaintiff prayed for
a judgment ordering the Botica Nolasco, Inc. to register in his name
in the books of the corporation the five shares of stock recorded in
said books in the name of Manuel Gonzalez, and to indemnify him
in the sum of P500 as damages, and to pay the costs. The
defendant again filed a demurrer on the ground that the amended
complaint did not state facts sufficient to constitute a cause of
action, and that said amended complaint was ambiguous,
unintelligible, uncertain, which demurrer was overruled by the
court.
The defendant answered the amended complaint denying generally
and specifically each and every one of the material allegations
thereof, and, as a special defense, alleged that the defendant,
pursuant to article 12 of its by-laws, had preferential right to buy
from the plaintiff said shares at the par value of P100 a share, plus
P90 as dividends corresponding to the year 1922, and that said
offer was refused by the plaintiff. The defendant prayed for a
judgment absolving it from all liability under the complaint and
directing the plaintiff to deliver to the defendant the five shares of
stock in question, and to pay damages in the sum of P500, and the
costs.
Upon the issue presented by the pleadings above stated, the cause
was brought on for trial, at the conclusion of which, and on August
21, 1924, the Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in
conflict with Act No. 1459 (Corporation Law), especially with section
35 thereof; and rendered a judgment ordering the defendant
corporation, through its board of directors, to register in the books
of said corporation the said five shares of stock in the name of the
plaintiff, Henry Fleischer, as the shareholder or owner thereof,
instead of the original owner, Manuel Gonzalez, with costs against
the defendant.
The defendant appealed from said judgment, and now makes
several assignment of error, all of which, in substance, raise the
question whether or not article 12 of the by-laws of the corporation
is in conflict with the provisions of the Corporation Law (Act No.
1459).

There is no controversy as to the facts of the present case. They


are simple and may be stated as follows:
That Manuel Gonzalez was the original owner of the five shares of
stock in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco,
Inc.; that on March 11, 1923, he assigned and delivered said five
shares to the plaintiff, Henry Fleischer, by accomplishing the form
of endorsement provided on the back thereof, together with other
credits, in consideration of a large sum of money owed by Gonzalez
to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13,
1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said
corporation, offered to buy from Henry Fleischer, on behalf of the
corporation, said shares of stock, at their par value of P100 a share,
for P500; that by virtue of article 12 of the by-laws of Botica
Nolasco, Inc., said corporation had the preferential right to buy from
Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to
sell them to the defendant; that the plaintiff requested Doctor
Miciano to register said shares in his name; that Doctor Miciano
refused to do so, saying that it would be in contravention of the bylaws of the corporation.
It also appears from the record that on the 13th day of March,
1923, two days after the assignment of the shares to the plaintiff,
Manuel Gonzales made a written statement to the Botica Nolasco,
Inc., requesting that the five shares of stock sold by him to Henry
Fleischer be noted transferred to Fleischer's name. He also
acknowledged in said written statement the preferential right of the
corporation to buy said five shares (Exhibit 3). On June 14, 1923,
Gonzalez wrote a letter to the Botica Nolasco, withdrawing and
cancelling his written statement of March 13, 1923 (Exhibit C), to
which letter the Botica Nolasco on June 15, 1923, replied, declaring
that his written statement was in conformity with the by-laws of the
corporation; that his letter of June 14th was of no effect, and that
the shares in question had been registered in the name of the
Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is


whether or not article 12 of the by-laws of the Botica Nolasco, Inc.,
is in conflict with the provisions of the Corporation Law (Act No.
1459). Appellant invoked said article as its ground for denying the
request of the plaintiff that the shares in question be registered in
his (plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.)
had the preferential right to buy said shares from Gonzalez.
Appellant now contends that article 12 of the said by-laws is in
conformity with the provisions of Act No. 1459. Said article is as
follows:
ART. 12. Las acciones de la Corporacion pueden ser
transferidas a otra persona, pero para que estas
transferencias tengan validez legal, deben constar en los
registros de la Corporacion con el debido endoso del
accionista a cuyo nombre se ha expedido la accion o
acciones que se transfieran, o un documento de
transferencia. Entendiendose
que,
ningun
accionista
transferira accion alguna a otra persona sin participar antes
por
escrito
al
Secretario-Tesorero. En
igualdad
de
condiciones, la sociedad tendra el derecho de adquirir para
si la accion o acciones que se traten de transferir. (Exhibit
2.)
The above-quoted article constitutes a by-law or regulation adopted
by the Botica Nolasco, Inc., governing the transfer of shares of
stock of said corporation. The latter part of said article creates in
favor of the Botica Nolasco, Inc., a preferential right to buy, under
the same conditions, the share or shares of stock of a retiring
shareholder. Has said corporation any power, under the Corporation
Law (Act. No. 1459), to adopt such by-law?
The particular provisions of the Corporation Law referring to
transfer of shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx

xxx

xxx

(7) To make by-laws, not inconsistent with any existing law,


for the fixing or changing of the number of its officers and
directors within the limits prescribed by law, and for
the transferring of its stock, the administration of its
corporate affairs, etc.

xxx

xxx

xxx

SEC. 35. The capital stock of stock corporations shall de


divided into shares for which certificates signed by the
president or the vice-president, countersigned by the
secretary or clerk and sealed with the seal of the
corporation, shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and
may be transferred by delivery of the certificate indorsed by
the owner or his attorney in fact or other person legally
authorized to make the transfer. No transfer, however, shall
be valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as
to show the names of the parties to the transaction, that
date of the transfer, the number of the certificate, and the
number of shares transferred.
No share of stock against which the corporation holds any
unpaid claim shall be transferable on the books of the
corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to
make by-laws, not inconsistent with any existing law, for the
transferring of its stock. It follows from said provision, that a by-law
adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. The law on
this subject is found in section 35 of Act No. 1459 above quoted.
Said section specifically provides that the shares of stock "are
personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc." Said section 35 defines the
nature, character and transferability of shares of stock. Under said
section they are personal property and may be transferred as
therein provided. Said section contemplates no restriction as to
whom they may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or
against a certain purchaser. The holder of shares, as owner of
personal property, is at liberty, under said section, to dispose of
them in favor of whomsoever he pleases, without any other
limitation in this respect, than the general provisions of law.
Therefore, a stock corporation in adopting a by-law governing
transfer of shares of stock should take into consideration the
specific provisions of section 35 of Act No. 1459, and said by-law
should be made to harmonize with said provisions. It should not be
inconsistent therewith.

The by-law now in question was adopted under the power conferred
upon the corporation by section 13, paragraph 7, above quoted;
but in adopting said by-law the corporation has transcended the
limits fixed by law in the same section, and has not taken into
consideration the provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they
reasonable and calculated to carry into effect the objects of
corporation, and are not contradictory to the general policy of
laws of the land. (Supreme Commandery of the Knights of
Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)

are
the
the
the

On the other hand, it is equally well settled that by-laws of a


corporation must be reasonable and for a corporate purpose, and
always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land.
They must not infringe the policy of the state, nor be hostile to
public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge
the substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law. (People's Home
Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep.,
147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of
law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer
of stock must be found in the governing statute or the
charter. Restrictions upon the traffic in stock must have their
source in legislative enactment, as the corporation itself
cannot create such impediments. By-law are intended
merely for the protection of the corporation, and prescribe
regulation and not restriction; they are always subject to the
charter of the corporation. The corporation, in the absence
of such a power, cannot ordinarily inquire into or pass upon
the legality of the transaction by which its stock passes from
one person to another, nor can it question the consideration
upon which a sale is based. A by-law cannot take away or
abridge the substantial rights of stockholder. Under a
statute authorizing by- laws for the transfer of stock, a
corporation can do no more than prescribe a general mode
of transfer on the corporate books and cannot justify an
unreasonable restriction upon the right of sale. (4 Thompson
on Corporations, sec. 4137, p. 674.

The right of unrestrained transfer of shares inheres in the


very nature of a corporation, and courts will carefully
scrutinize any attempt to impose restrictions or limitations
upon the right of stockholders to sell and assign their
stock. The right to impose any restraint in this respect must
be conferred upon the corporation either by the governing
statute or by the articles of the corporation. It cannot be
done by a by-law without statutory or charter authority. (4
Thompson on Corporations, sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of
property, the general rule (subject to exceptions hereafter
pointed out and discussed) is that every owner of corporate
shares has the same uncontrollable right to alien them
which attaches to the ownership of any other species of
property. A shareholder is under no obligation to refrain
from selling his shares at the sacrifice of his personal
interest, in order to secure the welfare of the corporation, or
to enable another shareholder to make gains and profits. (10
Cyc., p. 577.)
It follows from the foregoing that a corporation has no
power to prevent or to restrain transfers of its shares, unless
such power is expressly conferred in its charter or governing
statute. This conclusion follows from the further
consideration that by-laws or other regulations restraining
such transfers, unless derived from authority expressly
granted by the legislature, would be regarded as
impositions in restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking
on this question. They hold that the power of a corporation to enact
by-laws restraining the sale and transfer of shares, should not only
be in harmony with the law or charter of the corporation, but such
power should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of
shares is found in section 35 of Act No. 1459, quoted above, as
follows: "No transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon the books
of the corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred." This restriction is necessary
in order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers,

in calling meeting of stockholders, and for other purposes. but any


restriction of the nature of that imposed in the by-law now in
question, is ultra vires, violative of the property rights of
shareholders, and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect
on the appellee. He had no knowledge of such by-law when the
shares were assigned to him. He obtained them in good faith and
for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzalez
and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his
shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of
the by-law and took part in its adoption. (10 Cyc., 579;
Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any
contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber
Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one
who has assented to an unauthorized by-law has only the
effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue
of the assignment alone. (Ireland vs. Globe Milling Co., 21
R.I., 9.)
A by-law of a corporation which provides that transfers of
stock shall not be valid unless approved by the board of
directors, while it may be enforced as a reasonable
regulation for the protection of the corporation against
worthless stockholders, cannot be made available to defeat
the rights of third persons. (Farmers' and Merchants' Bank of
Lineville vs. Wasson, 48 Iowa, 336.)
Counsel for defendant incidentally argues in his brief, that the
plaintiff does not have any right of action against the defendant
corporation, but against the president and secretary thereof,
inasmuch as the signing and registration of shares is incumbent

upon said officers pursuant to section 35 of the Corporation Law.


This contention cannot be sustained now. The question should have
been raised in the lower court. It is too late to raise it now in this
appeal. Besides, as stated above, the corporation was made
defendant in this action upon the demurrer of the attorney of the
original defendant in the lower court, who contended that the
Botica Nolasco, Inc., should be made the party defendant in this
action. Accordingly, upon order of the court, the complaint was
amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer and register stock in
cases like the present, mandamus will lie to compel the officers of
the corporation to transfer said stock upon the books of the
corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that
the decision of the lower court is in accordance with law and should
be and is hereby affirmed, with costs. So ordered.
Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SPECIAL FIRST DIVISION
G.R. No. 124293

January 31, 2005

J.G. SUMMIT HOLDINGS, INC., petitioner,


vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its
Chairman and Members; ASSET PRIVATIZATION TRUST; and
PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:

For resolution before this Court are two motions filed by the
petitioner, J.G. Summit Holdings, Inc. for reconsideration of our
Resolution dated September 24, 2003 and to elevate this case to
the Court En Banc. The petitioner questions the Resolution which
reversed our Decision of November 20, 2000, which in turn

reversed and set aside a Decision of the Court of Appeals


promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of
September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development
Corporation (NIDC), a government corporation, entered into a Joint
Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of
Kobe, Japan (KAWASAKI) for the construction, operation and
management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering
Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI
will contribute P330 million for the capitalization of PHILSECO in the
proportion of 60%-40% respectively. One of its salient features is
the grant to the parties of the right of first refusal should either
of them decide to sell, assign or transfer its interest in the joint
venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [PHILSECO] to any third party without giving the
other under the same terms the right of first refusal. This provision
shall not apply if the transferee is a corporation owned or controlled
by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and
interest in PHILSECO to the Philippine National Bank (PNB). Such
interests were subsequently transferred to the National
Government pursuant to Administrative Order No. 14. On December
8, 1986, President Corazon C. Aquino issued Proclamation No. 50
establishing the Committee on Privatization (COP) and the Asset
Privatization Trust (APT) to take title to, and possession of,
conserve, manage and dispose of non-performing assets of the
National Government. Thereafter, on February 27, 1987, a trust
agreement was entered into between the National Government and
the APT wherein the latter was named the trustee of the National
Government's share in PHILSECO. In 1989, as a result of a quasireorganization of PHILSECO to settle its huge obligations to PNB,
the National Government's shareholdings in PHILSECO increased to
97.41% thereby reducing KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the
COP and the APT deemed it best to sell the National Government's

share in PHILSECO to private entities. After a series of negotiations


between the APT and KAWASAKI, they agreed that the latter's right
of first refusal under the JVA be "exchanged" for the right to top by
five percent (5%) the highest bid for the said shares. They further
agreed that KAWASAKI would be entitled to name a company in
which it was a stockholder, which could exercise the right to top.
On September 7, 1990, KAWASAKI informed APT that Philyards
Holdings, Inc. (PHI)1 would exercise its right to top.
At the pre-bidding conference held on September 18, 1993,
interested bidders were given copies of the JVA between NIDC and
KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted
for the National Government's 87.6% equity share in PHILSECO. The
provisions of the ASBR were explained to the interested bidders
who were notified that the bidding would be held on December 2,
1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through
public bidding is the National Government's equity in PHILSECO
consisting of 896,869,942 shares of stock (representing 87.67% of
PHILSECO's outstanding capital stock), which will be sold as a whole
block in accordance with the rules herein enumerated.

its nominee, [PHILYARDS] Holdings, Inc., that the highest bid is


acceptable to the National Government. Kawasaki Heavy Industries,
Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a period of
thirty (30) calendar days from the date of receipt of such advice
from APT within which to exercise their "Option to Top the Highest
Bid" by offering a bid equivalent to the highest bid plus five (5%)
percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. exercise their "Option to Top the Highest Bid," they
shall so notify the APT about such exercise of their option and
deposit with APT the amount equivalent to ten percent (10%) of the
highest bid plus five percent (5%) thereof within the thirty (30)-day
period mentioned in paragraph 6.0 above. APT will then serve
notice upon Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. declaring them as the preferred bidder and they shall
have a period of ninety (90) days from the receipt of the APT's
notice within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]
Holdings, Inc. fail to exercise their "Option to Top the Highest Bid"
within the thirty (30)-day period, APT will declare the highest bidder
as the winning bidder.

xxx xxx xxx


xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the
final approval of both the APT Board of Trustees and the Committee
on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all
bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis.
The Indicative price set for the National Government's 87.67%
equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED
MILLION (P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of
Trustees at its regular meeting following the bidding, for the
purpose of determining whether or not it should be endorsed by the
APT Board of Trustees to the COP, and the latter approves the
same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or

12.0 The bidder shall be solely responsible for examining with


appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding period.
The bidder shall likewise be responsible for informing itself with
respect to any and all conditions concerning the PHILSECO Shares
which may, in any manner, affect the bidder's proposal. Failure on
the part of the bidder to so examine and inform itself shall be its
sole risk and no relief for error or omission will be given by APT or
COP. . . .
At the public bidding on the said date, petitioner J.G. Summit
Holdings, Inc.2 submitted a bid of Two Billion and Thirty Million
Pesos (P2,030,000,000.00) with an acknowledgment of KAWASAKI/
[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has
up to thirty (30) days to act on APT's recommendation based on the
result of this bidding. Should the COP approve the highest bid, APT
shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,

[PHILYARDS] Holdings, Inc. that the highest bid is acceptable to the


National Government. Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. shall then have a period of thirty (30)
calendar days from the date of receipt of such advice from APT
within which to exercise their "Option to Top the Highest Bid" by
offering a bid equivalent to the highest bid plus five (5%) percent
thereof.
As petitioner was declared the highest bidder, the COP approved
the sale on December 3, 1993 "subject to the right of Kawasaki
Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid
by 5% as specified in the bidding rules."
On December 29, 1993, petitioner informed APT that it was
protesting the offer of PHI to top its bid on the grounds that: (a) the
KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS],
Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR
because the last four (4) companies were the losing bidders
thereby circumventing the law and prejudicing the weak winning
bidder; (b) only KAWASAKI could exercise the right to top; (c) giving
the same option to top to PHI constituted unwarranted benefit to a
third party; (d) no right of first refusal can be exercised in a public
bidding or auction sale; and (e) the JG Summit consortium was not
estopped from questioning the proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid
the balance of the purchase price of the subject bidding. On
February 7, 1994, the APT notified petitioner that PHI had exercised
its option to top the highest bid and that the COP had approved the
same on January 6, 1994. On February 24, 1994, the APT and PHI
executed a Stock Purchase Agreement. Consequently, petitioner
filed with this Court a Petition for Mandamus under G.R. No.
114057. On May 11, 1994, said petition was referred to the Court of
Appeals. On July 18, 1995, the Court of Appeals denied the same
for lack of merit. It ruled that the petition for mandamus was not
the proper remedy to question the constitutionality or legality of
the right of first refusal and the right to top that was exercised by
KAWASAKI/PHI, and that the matter must be brought "by the proper
party in the proper forum at the proper time and threshed out in a
full blown trial." The Court of Appeals further ruled that the right of
first refusal and the right to top are prima facie legal and that the
petitioner, "by participating in the public bidding, with full
knowledge of the right to top granted to KAWASAKI/[PHILYARDS]
isestopped from questioning the validity of the award given to
[PHILYARDS] after the latter exercised the right to top and had paid

in full the purchase price of the subject shares, pursuant to the


ASBR." Petitioner filed a Motion for Reconsideration of said Decision
which was denied on March 15, 1996. Petitioner thus filed a Petition
for Certiorari with this Court alleging grave abuse of discretion on
the part of the appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision
ruling among others that the Court of Appeals erred when it
dismissed the petition on the sole ground of the impropriety of the
special civil action of mandamus because the petition was also one
of certiorari. It further ruled that a shipyard like PHILSECO is a
public utility whose capitalization must be sixty percent (60%)
Filipino-owned. Consequently, the right to top granted to KAWASAKI
under the Asset Specific Bidding Rules (ASBR) drafted for the sale
of the 87.67% equity of the National Government in PHILSECO is
illegal not only because it violates the rules on competitive
bidding but more so, because it allows foreign corporations to
own more than 40% equity in the shipyard. It also held that
"although the petitioner had the opportunity to examine the ASBR
before it participated in the bidding, it cannot be estopped from
questioning the unconstitutional, illegal and inequitable provisions
thereof." Thus, this Court voided the transfer of the national
government's 87.67% share in PHILSECO to Philyard[s] Holdings,
Inc., and upheld the right of JG Summit, as the highest bidder, to
take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is
GRANTED. The assailed Decision and Resolution of the Court of
Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay
to APT its bid price of Two Billion Thirty Million Pesos
(P2,030,000,000.00), less its bid deposit plus interests upon the
finality of this Decision. In turn, APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid
deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the
certificates of stocks representing 87.6% of PHILSECO's total
capitalization;
(d) return to private respondent PHGI the amount of Two
Billion One Hundred Thirty-One Million Five Hundred
Thousand Pesos (P2,131,500,000.00); and

(e) cause the cancellation of the stock certificates issued to


PHI.

2. Whether the motion for reconsideration raises any new


matter or cogent reason to warrant a reconsideration of this
Courts Resolution of September 24, 2003.

SO ORDERED.
Motion to Elevate this Case to the
In separate Motions for Reconsideration, respondents submit[ted]
three basic issues for x x x resolution: (1) Whether PHILSECO is a
public utility; (2) Whether under the 1977 JVA, KAWASAKI can
exercise its right of first refusal only up to 40% of the total
capitalization of PHILSECO; and (3) Whether the right to top
granted to KAWASAKI violates the principles of competitive
bidding.3 (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor
of the respondents. On the first issue, we held that Philippine
Shipyard and Engineering Corporation (PHILSECO) is not a public
utility, as by nature, a shipyard is not a public utility 4 and that no
law declares a shipyard to be a public utility. 5 On the second issue,
we found nothing in the 1977 Joint Venture Agreement (JVA) which
prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan
(KAWASAKI) from acquiring more than 40% of PHILSECOs total
capitalization.6 On the final issue, we held that the right to top
granted to KAWASAKI in exchange for its right of first refusal did not
violate the principles of competitive bidding. 7
On October 20, 2003, the petitioner filed a Motion for
Reconsideration8 and a Motion to Elevate This Case to the Court En
Banc.9 Public respondents Committee on Privatization (COP) and
Asset Privatization Trust (APT), and private respondent Philyards
Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit
Holdings, Inc.s (JG Summits) Motion for Reconsideration and
Motion to Elevate This Case to the Court En Banc on January 29,
2004 and February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this
litigation are the following:
1. Whether there are sufficient bases to elevate the case at
bar to the Court en banc.

Court En Banc
The petitioner prays for the elevation of the case to the Court en
banc on the following grounds:
1. The main issue of the propriety of the bidding process
involved in the present case has been confused with the
policy issue of the supposed fate of the shipping industry
which has never been an issue that is determinative of this
case.10
2. The present case may be considered under the Supreme
Court Resolution dated February 23, 1984 which included
among en banc cases those involving a novel question of
law and those where a doctrine or principle laid down by the
Court en banc or in division may be modified or reversed.11
3. There was clear executive interference in the judicial
functions of the Court when the Honorable Jose Isidro
Camacho, Secretary of Finance, forwarded to Chief Justice
Davide, a memorandum dated November 5, 2001, attaching
a copy of the Foreign Chambers Report dated October 17,
2001, which matter was placed in the agenda of the Court
and noted by it in a formal resolution dated November 28,
2001.12
Opposing J.G. Summits motion to elevate the case en banc,
PHILYARDS
points
out
the
petitioners
inconsistency
in
previously opposing PHILYARDS Motion to Refer the Case to the
Court En Banc. PHILYARDS contends that J.G. Summit should now
be estopped from asking that the case be referred to the Court en
banc. PHILYARDS further contends that the Supreme Court en
banc is not an appellate court to which decisions or resolutions of
its divisions may be appealed citing Supreme Court Circular No. 289 dated February 7, 1989.13 PHILYARDS also alleges that there is
no novel question of law involved in the present case as the
assailed Resolution was based on well-settled jurisprudence.
Likewise, PHILYARDS stresses that the Resolution was merely an

outcome of the motions for reconsideration filed by it and the COP


and APT and is "consistent with the inherent power of courts to
amend and control its process and orders so as to make them
conformable to law and justice. (Rule 135, sec. 5)" 14Private
respondent belittles the petitioners allegations regarding the
change in ponente and the alleged executive interference as shown
by former Secretary of Finance Jose Isidro Camachos memorandum
dated November 5, 2001 arguing that these do not justify a referral
of the present case to the Court en banc.

elongated discussion. Fundamental principles on public bidding


were likewise used to resolve the issues raised by the petitioner. To
be sure, petitioner leans on the right to top in a public bidding in
arguing that the case at bar involves a novel issue. We are not
swayed. The right to top was merely a condition or a reservation
made in the bidding rules which was fully disclosed to all bidding
parties. In Bureau Veritas, represented by Theodor H.
Hunermann v. Office of the President, et al., 19 we dealt with
this conditionality, viz:

In insisting that its Motion to Elevate This Case to the Court En


Banc should be granted, J.G. Summit further argued that: its
Opposition to the Office of the Solicitor Generals Motion to Refer is
different from its own Motion to Elevate; different grounds are
invoked by the two motions; there was unwarranted "executive
interference"; and the change in ponente is merely noted in
asserting that this case should be decided by the Court en banc.15

x x x It must be stressed, as held in the case of A.C. Esguerra &


Sons v. Aytona, et al., (L-18751, 28 April 1962, 4 SCRA 1245), that
in an "invitation to bid, there is a condition imposed upon the
bidders to the effect that the bidding shall be subject to the
right of the government to reject any and all bids subject to
its discretion. In the case at bar, the government has made
its choice and unless an unfairness or injustice is shown,
the losing bidders have no cause to complain nor right to
dispute that choice. This is a well-settled doctrine in this
jurisdiction and elsewhere."

We find no merit in petitioners contention that the propriety of the


bidding process involved in the present case has been confused
with the policy issue of the fate of the shipping industry which,
petitioner maintains, has never been an issue that is determinative
of this case. The Courts Resolution of September 24, 2003 reveals
a clear and definitive ruling on the propriety of the bidding process.
In discussing whether the right to top granted to KAWASAKI in
exchange for its right of first refusal violates the principles of
competitive bidding, we made an exhaustive discourse on the rules
and principles of public bidding and whether they were complied
with in the case at bar. 16This Court categorically ruled on the
petitioners argument that PHILSECO, as a shipyard, is a public
utility which should maintain a 60%-40% Filipino-foreign equity
ratio, as it was a pivotal issue. In doing so, we recognized the
impact of our ruling on the shipbuilding industry which was beyond
avoidance.17
We reject petitioners argument that the present case may be
considered under the Supreme Court Resolution dated February 23,
1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down
by the court en banc or in division may be modified or reversed.
The case was resolved based on basic principles of the right of first
refusal in commercial law and estoppel in civil law. Contractual
obligations arising from rights of first refusal are not new in this
jurisdiction
and
have
been
recognized
in
numerous
cases.18 Estoppel is too known a civil law concept to require an

The discretion to accept or reject a bid and award contracts is


vested in the Government agencies entrusted with that function.
The discretion given to the authorities on this matter is of such
wide latitude that the Courts will not interfere therewith, unless it is
apparent that it is used as a shield to a fraudulent award (Jalandoni
v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion
is a policy decision that necessitates prior inquiry, investigation,
comparison, evaluation, and deliberation. This task can best be
discharged by the Government agencies concerned, not by the
Courts. The role of the Courts is to ascertain whether a branch or
instrumentality of the Government has transgressed its
constitutional boundaries. But the Courts will not interfere with
executive or legislative discretion exercised within those
boundaries. Otherwise, it strays into the realm of policy decisionmaking.
It is only upon a clear showing of grave abuse of discretion that the
Courts will set aside the award of a contract made by a government
entity. Grave abuse of discretion implies a capricious, arbitrary and
whimsical exercise of power (Filinvest Credit Corp. v. Intermediate
Appellate Court, No. 65935, 30 September 1988, 166 SCRA 155).
The abuse of discretion must be so patent and gross as to amount
to an evasion of positive duty or to a virtual refusal to perform a
duty enjoined by law, as to act at all in contemplation of law, where

the power is exercised in an arbitrary and despotic manner by


reason of passion or hostility (Litton Mills, Inc. v. Galleon Trader,
Inc., et al[.], L-40867, 26 July 1988, 163 SCRA 489).
The facts in this case do not indicate any such grave abuse of
discretion on the part of public respondents when they awarded the
CISS contract to Respondent SGS. In the "Invitation to Prequalify
and Bid" (Annex "C," supra), the CISS Committee made an
express reservation of the right of the Government to
"reject any or all bids or any part thereof or waive any
defects contained thereon and accept an offer most
advantageous to the Government." It is a well-settled rule
that where such reservation is made in an Invitation to Bid,
the highest or lowest bidder, as the case may be, is not
entitled to an award as a matter of right (C & C Commercial
Corp. v. Menor, L-28360, 27 January 1983, 120 SCRA 112). Even the
lowest Bid or any Bid may be rejected or, in the exercise of sound
discretion, the award may be made to another than the lowest
bidder (A.C. Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur.,
788). (emphases supplied)1awphi1.nt
Like the condition in the Bureau Veritas case, the right to top was
a condition imposed by the government in the bidding rules which
was made known to all parties. It was a condition imposed on
all bidders equally, based on the APTs exercise of its
discretion in deciding on how best to privatize the
governments shares in PHILSECO. It was not a whimsical or
arbitrary condition plucked from the ether and inserted in the
bidding rules but a condition which the APT approved as the best
way the government could comply with its contractual obligations
to KAWASAKI under the JVA and its mandate of getting the most
advantageous deal for the government. The right to top had its
history in the mutual right of first refusal in the JVA and was
reached by agreement of the government and KAWASAKI.
Further, there is no "executive interference" in the functions of this
Court by the mere filing of a memorandum by Secretary of Finance
Jose Isidro Camacho. The memorandum was merely "noted" to
acknowledge its filing. It had no further legal significance. Notably
too, the assailed Resolution dated September 24, 2003 was
decided unanimously by the Special First Division in favor
of the respondents.
Again, we emphasize that a decision or resolution of a Division is
that of the Supreme Court20 and the Court en banc is not an

appellate court to which decisions or resolutions of a Division may


be appealed.21
For all the foregoing reasons, we find no basis to elevate this case
to the Court en banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioners Motion for
Reconsideration. First, that a fair resolution of the case should be
based on contract law, not on policy considerations; the contracts
do not authorize the right to top to be derived from the right of first
refusal.22 Second, that neither the right of first refusal nor the right
to top can be legally exercised by the consortium which is not the
proper party granted such right under either the JVA or the Asset
Specific Bidding Rules (ASBR).23 Third, that the maintenance of the
60%-40% relationship between the National Investment and
Development Corporation (NIDC) and KAWASAKI arises from
contract and from the Constitution because PHILSECO is a
landholding corporation and need not be a public utility to be
bound by the 60%-40% constitutional limitation. 24
On the other hand, private respondent PHILYARDS asserts that J.G.
Summit has not been able to show compelling reasons to warrant a
reconsideration of the Decision of the Court. 25 PHILYARDS denies
that the Decision is based mainly on policy considerations and
points out that it is premised on principles governing obligations
and contracts and corporate law such as the rule requiring respect
for contractual stipulations, upholding rights of first refusal, and
recognizing the assignable nature of contracts rights. 26 Also, the
ruling that shipyards are not public utilities relies on established
case law and fundamental rules of statutory construction.
PHILYARDS stresses that KAWASAKIs right of first refusal or even
the right to top is not limited to the 40% equity of the latter. 27 On
the landholding issue raised by J.G. Summit, PHILYARDS emphasizes
that this is a non-issue and even involves a question of fact. Even
assuming that this Court can take cognizance of such question of
fact even without the benefit of a trial, PHILYARDS opines that
landholding by PHILSECO at the time of the bidding is irrelevant
because what is essential is that ultimately a qualified entity would
eventually hold PHILSECOs real estate properties. 28 Further, given
the assignable nature of the right of first refusal, any applicable
nationality restrictions, including landholding limitations, would not
affect the right of first refusal itself, but only the manner of its
exercise.29 Also, PHILYARDS argues that if this Court takes

cognizance of J.G. Summits allegations of fact regarding


PHILSECOs landholding, it must also recognize PHILYARDS
assertions that PHILSECOs landholdings were sold to another
corporation.30 As regards the right of first refusal, private
respondent explains that KAWASAKIs reduced shareholdings (from
40% to 2.59%) did not translate to a deprivation or loss of its
contractually granted right of first refusal. 31 Also, the bidding was
valid because PHILYARDS exercised the right to top and it was of no
moment that losing bidders later joined PHILYARDS in raising the
purchase price.32
In cadence with the private respondent
respondents COP and APT contend:

PHILYARDS,

public

1. The conversion of the right of first refusal into a right to


top by 5% does not violate any provision in the JVA between
NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not
governed by the constitutional restriction on foreign
ownership.
3. The petitioner is legally estopped from assailing the
validity of the proceedings of the public bidding as it
voluntarily submitted itself to the terms of the ASBR which
included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the
nominee of KAWASAKI and the fact that PHILYARDS formed a
consortium to raise the required amount to exercise the
right to top the highest bid by 5% does not violate the JVA or
the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement
for the acquisition of lands does not apply to PHILSECO
because as admitted by petitioner itself, PHILSECO no longer
owns real property.
6. Petitioners motion to elevate the case to the Court en
banc is baseless and would only delay the termination of
this case.33

In a Consolidated Comment dated March 8, 2004, J.G. Summit


countered the arguments of the public and private respondents in
this wise:
1. The award by the APT of 87.67% shares of PHILSECO to
PHILYARDS with losing bidders through the exercise of a
right to top, which is contrary to law and the constitution is
null and void for being violative of substantive due process
and the abuse of right provision in the Civil Code.
a. The bidders[] right to top was actually exercised
by losing bidders.
b. The right to top or the right of first refusal cannot
co-exist with a genuine competitive bidding.
c. The benefits derived from the right to top were
unwarranted.
2. The landholding issue has been a legitimate issue since
the start of this case but is shamelessly ignored by the
respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of
fact.
c. That PHILSECO owned land at the time that the
right of first refusal was agreed upon and at the time
of the bidding are most relevant.
d. Whether a shipyard is a public utility is not the
core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an
inexistent right of first refusal to the right to top.
a. The history behind the birth of the right to top
shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively
useless."

4. Petitioner is not legally estopped to challenge the right to


top in this case.
a. Estoppel is unavailing as it would stamp validity to
an act that is prohibited by law or against public
policy.
b. Deception was patent; the right to top was an
attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced
from the right of first refusal is not new and we have already ruled
on the issue in our Resolution of September 24, 2003. We upheld
the mutual right of first refusal in the JVA. 34 We also ruled that
nothing in the JVA prevents KAWASAKI from acquiring more than
40% of PHILSECOs total capitalization.35 Likewise, nothing in the
JVA or ASBR bars the conversion of the right of first refusal to the
right to top. In sum, nothing new and of significance in the
petitioners pleading warrants a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the
right of first refusal nor the right to top can legally be exercised by
the consortium which is not the proper party granted such right
under either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of
Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI), has
joined PHILYARDS in the latter's effort to raise P2.131 billion
necessary in exercising the right to top is not contrary to law, public
policy or public morals. There is nothing in the ASBR that bars the
losing bidders from joining either the winning bidder (should the
right to top is not exercised) or KAWASAKI/PHI (should it exercise its
right to top as it did), to raise the purchase price. The petitioner did
not allege, nor was it shown by competent evidence, that the
participation of the losing bidders in the public bidding was done
with fraudulent intent. Absent any proof of fraud, the formation by
[PHILYARDS] of a consortium is legitimate in a free enterprise
system. The appellate court is thus correct in holding the petitioner
estopped from questioning the validity of the transfer of the
National Government's shares in PHILSECO to respondent.36

Further, we see no inherent illegality on PHILYARDS act in seeking


funding from parties who were losing bidders. This is a purely
commercial decision over which the State should not interfere
absent any legal infirmity. It is emphasized that the case at bar
involves the disposition of shares in a corporation which the
government sought to privatize. As such, the persons with whom
PHILYARDS desired to enter into business with in order to raise
funds to purchase the shares are basically its business. This is in
contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity of
the
buyer/bidder
or
financier
constitutes
an
important
consideration. In such cases, the government would have to take
utmost precaution to protect public interest by ensuring that the
parties with which it is contracting have the ability to satisfactorily
construct or operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO
is a landholding company, KAWASAKI could exercise its right of first
refusal only up to 40% of the shares of PHILSECO due to the
constitutional prohibition on landholding by corporations with more
than 40% foreign-owned equity. It further argues that since
KAWASAKI already held at least 40% equity in PHILSECO, the right
of first refusal was inutile and as such, could not subsequently be
converted into the right to top. 37 Petitioner also asserts that, at
present, PHILSECO continues to violate the constitutional provision
on landholdings as its shares are more than 40% foreignowned.38 PHILYARDS admits that it may have previously held land
but had already divested such landholdings.39 It contends, however,
that even if PHILSECO owned land, this would not affect the right of
first refusal but only the exercise thereof. If the land is retained, the
right of first refusal, being a property right, could be assigned to a
qualified party. In the alternative, the land could be divested before
the exercise of the right of first refusal. In the case at bar,
respondents assert that since the right of first refusal was validly
converted into a right to top, which was exercised not by
KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e.,
60% of its shares are owned by Filipinos), then there is no violation
of the Constitution.40 At first, it would seem that questions of fact
beyond cognizance by this Court were involved in the issue.
However, the records show that PHILYARDS admits it had
owned land up until the time of the bidding. 41 Hence, the
only issue is whether KAWASAKI had a valid right of first
refusal over PHILSECO shares under the JVA considering
that PHILSECO owned land until the time of the bidding and
KAWASAKI already held 40% of PHILSECOs equity.

We uphold the validity of the mutual rights of first refusal under the
JVA between KAWASAKI and NIDC. First of all, the right of first
refusal is a property right of PHILSECO shareholders, KAWASAKI and
NIDC, under the terms of their JVA. This right allows them to
purchase the shares of their co-shareholder before they are offered
to a third party. The agreement of co-shareholders to
mutually grant this right to each other, by itself, does not
constitute a violation of the provisions of the Constitution
limiting
land
ownership
to
Filipinos
and
Filipino
corporations. As PHILYARDS correctly puts it, if PHILSECO still
owns land, the right of first refusal can be validly assigned to a
qualified Filipino entity in order to maintain the 60%-40% ratio. This
transfer, by itself, does not amount to a violation of the AntiDummy Laws, absent proof of any fraudulent intent. The transfer
could be made either to a nominee or such other party which the
holder of the right of first refusal feels it can comfortably do
business with. Alternatively, PHILSECO may divest of its
landholdings, in which case KAWASAKI, in exercising its right of first
refusal, can exceed 40% of PHILSECOs equity. In fact, it can even
be said that if the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign stockholders
ownership of the shares which is adversely affected but the
capacity of the corporation to own land that is, the
corporation becomes disqualified to own land. This finds support
under the basic corporate law principle that the corporation and its
stockholders are separate juridical entities. In this vein, the right of
first refusal over shares pertains to the shareholders whereas the
capacity to own land pertains to the corporation. Hence, the fact
that PHILSECO owns land cannot deprive stockholders of their right
of first refusal. No law disqualifies a person from purchasing
shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law disqualifies
is the corporation from owning land. This is the clear import of
the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal,
petroleum, and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated.
The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The
State may directly undertake such activities, or it may enter into
co-production,
joint
venture,
or
production-sharing
agreements with Filipino citizens, or corporations or
associations at least sixty per centum of whose capital is

owned by such citizens. Such agreements may be for a period


not exceeding twenty-five years, renewable for not more than
twenty-five years, and under such terms and conditions as may be
provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of water
power, beneficial use may be the measure and limit of the grant.
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private
lands shall be transferred or conveyed except to
individuals, corporations, or associations qualified to
acquire or hold lands of the public domain.42(emphases
supplied)
The petitioner further argues that "an option to buy land is void in
itself (Philippine Banking Corporation v. Lui She, 21 SCRA 52
[1967]). The right of first refusal granted to KAWASAKI, a Japanese
corporation, is similarly void. Hence, the right to top, sourced from
the right of first refusal, is also void."43 Contrary to the contention of
petitioner, the case of Lui She did not that say "an option to buy
land is void in itself," for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period
is valid. So is an option giving an alien the right to buy real
property on condition that he is granted Philippine
citizenship. As this Court said in Krivenko vs. Register of
Deeds:
[A]liens are not completely excluded by the Constitution from the
use of lands for residential purposes. Since their residence in the
Philippines is temporary, they may be granted temporary rights
such as a lease contract which is not forbidden by the Constitution.
Should they desire to remain here forever and share our fortunes
and misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an
option to buy, a piece of land, by virtue of which the Filipino
owner cannot sell or otherwise dispose of his property, this
to last for 50 years, then it becomes clear that the
arrangement is a virtual transfer of ownership whereby the
owner divests himself in stages not only of the right to
enjoy the land (jus possidendi, jus utendi, jus fruendi and
jus abutendi) but also of the right to dispose of it (jus
disponendi) rights the sum total of which make up

ownership. It is just as if today the possession is


transferred, tomorrow, the use, the next day, the
disposition, and so on, until ultimately all the rights of
which ownership is made up are consolidated in an alien. And yet
this is just exactly what the parties in this case did within this pace
of one year, with the result that Justina Santos'[s] ownership of her
property was reduced to a hollow concept. If this can be done, then
the Constitutional ban against alien landholding in the Philippines,
as announced in Krivenko vs. Register of Deeds, is indeed in
grave peril.44 (emphases supplied; Citations omitted)

xxx xxx xxx

In Lui She, the option to buy was invalidated because it amounted


to a virtual transfer of ownership as the owner could not sell or
dispose of his properties. The contract in Lui She prohibited the
owner of the land from selling, donating, mortgaging, or
encumbering the property during the 50-year period of the option
to buy. This is not so in the case at bar where the mutual right of
first refusal in favor of NIDC and KAWASAKI does not amount to a
virtual transfer of land to a non-Filipino. In fact, the case at bar
involves a right of first refusal over shares of stock while
the Lui She case involves an option to buy the land itself. As
discussed earlier, there is a distinction between the shareholders
ownership of shares and the corporations ownership of land arising
from the separate juridical personalities of the corporation and its
shareholders.

32.1 This provision is the same as Section 7, Article XII of the 1987
Constitution.

We note that in its Motion for Reconsideration, J.G. Summit alleges


that PHILSECO continues to violate the Constitution as its foreign
equity is above 40% and yet owns long-term leasehold rights
which are real rights.45It cites Article 415 of the Civil Code which
includes in the definition of immovable property, "contracts for
public works, and servitudes and other real rights over immovable
property."46 Any existing landholding, however, is denied by
PHILYARDS citing its recent financial statements. 47 First, these are
questions of fact, the veracity of which would require introduction
of evidence. The Court needs to validate these factual allegations
based on competent and reliable evidence. As such, the Court
cannot resolve the questions they pose. Second, J.G. Summit
misreads the provisions of the Constitution cited in its own
pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private
respondent is not a 60%-40% corporation, and this violates the
Constitution x x x The violation continues to this day because under
the law, it continues to own real property

32. To review the constitutional provisions involved, Section 14,


Article XIV of the 1973 Constitution (the JVA was signed in 1977),
provided:
"Save in cases of hereditary succession, no private lands shall be
transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public
domain."

32.2 Under the Public Land Act, corporations qualified to acquire or


hold lands of the public domain are corporations at least 60% of
which is owned by Filipino citizens (Sec. 22, Commonwealth Act
141, as amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in
the Constitution applies only to ownership of land.48 It does not
extend to immovable or real property as defined under
Article 415 of the Civil Code.Otherwise, we would have a
strange situation where the ownership of immovable property such
as trees, plants and growing fruit attached to the land 49 would be
limited to Filipinos and Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for
Reconsideration is DENIED WITH FINALITY and the decision
appealed from is AFFIRMED. The Motion to Elevate This Case to the
Court En Banc is likewise DENIED for lack of merit.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN
CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN

NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P.


LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of
the Corporation Code is based on the number of outstanding voting
stocks. For nonstock corporations, only those who are actual, living
members with voting rightsshall be counted in determining the
existence of a quorum during members meetings. Dead members
shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the
Rules of Court seeks the reversal of the January 23 2 and May 7,
2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No.
68202. The first assailed Resolution dismissed the appeal filed by
petitioners with the CA. Allegedly, without the proper authorization
of the other petitioners, the Verification and Certification of NonForum Shopping were signed by only one of them -- Atty. Sabino
Padilla Jr. The second Resolution denied reconsideration.

their rights (including the right to vote) and interests in the


corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998
meeting null and void for lack of quorum. She held that the basis
for determining the quorum in a meeting of members should be
their number as specified in the articles of incorporation, not simply
the number of living members. 8 She explained that the qualifying
phrase "entitled to vote" in Section 24 9 of the Corporation Code,
which provided the basis for determining a quorum for the election
of directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws
of GCHS, insofar as it prescribed the mode of filling vacancies in the
board of trustees, must be interpreted in conjunction with Section
29 12 of the Corporation Code. The SEC en banc denied the appeal
of petitioners and affirmed the Decision of the hearing officer in
toto. 13 It found to be untenable their contention that the word
"members," as used in Section 52 14 of the Corporation Code,
referred only to the living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners,
because the Verification and Certification of Non-Forum Shopping
had been signed only by Atty. Sabino Padilla Jr. No Special Power of
Attorney had been attached to show his authority to sign for the
rest of the petitioners.

The Facts

Hence, this Petition.

Petitioner Grace Christian High School (GCHS) is a nonstock, nonprofit educational corporation with fifteen (15) regular members,
who also constitute the board of trustees. [4] During the annual
members meeting held on April 6, 1998, there were only eleven
(11) [5] living member-trustees, as four (4) had already died. Out of
the eleven, seven (7) 6 attended the meeting through their
respective proxies. The meeting was convened and chaired by Atty.
Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who
argued that there was no quorum. 7 In the meeting, Petitioners
Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted
to replace the four deceased member-trustees.

Issues

When the controversy reached the Securities and Exchange


Commission (SEC), petitioners maintained that the deceased
member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all

16

Petitioners state the issues as follows:


"Petitioners principally pray for the resolution of the legal question
of
whether
or
not
in
NON-STOCK
corporations,dead
members should still be counted in determination of quorum for
purposed of conducting the Annual Members Meeting.
"Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum
primarily on the ground that members rights are personal and
non-transferable as provided in Sections 90 and 91 of the
Corporation Code of the Philippines.

"The SEC ruled against the petitioners solely on the basis of a 1989
SEC Opinion that did not even involve a non-stock corporation as
petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused
to resolve this question and instead dismissed the petition for
review on a technicality the failure to timely submit an SPA from
the petitioners authorizing their co-petitioner Padilla, their counsel
and also a petitioner before the Court of Appeals, to sign the
petition on behalf of the rest of the petitioners.

at assuring the truthfulness and correctness of the allegations in


the Petition for Review and at discouraging forum shopping. 20 More
important, the substantial merits of petitioners case and the purely
legal question involved in the Petition should be considered special
circumstances 21 or compelling reasons that justify an exception to
the strict requirements of the verification and the certification of
non-forum shopping. 22
Main Issue:
Basis for Quorum

"Petitioners humbly submit that the action of both the SEC and the
Court of Appeals are not in accord with law particularly the
pronouncements of this Honorable Court in Escorpizo v. University
of Baguio (306 SCRA 497),Robern Development Corporation v.
Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360
SCRA 183). Due course should have been given the petition below
and the merits of the case decided in petitioners favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the
CA erred in denying the Petition below, on the basis of a defective
Verification and Certification; and 2) whether dead members should
still be counted in the determination of the quorum, for purposes of
conducting the annual members meeting.
The Courts Ruling

Generally, stockholders or members meetings are called for the


purpose of electing directors or trustees 23 and transacting some
other business calling for or requiring the action or consent of the
shareholders or members, 24such as the amendment of the articles
of incorporation and bylaws, sale or disposition of all or
substantially all corporate assets, consolidation and merger and the
like, or any other business that may properly come before the
meeting.
Under the Corporation Code, stockholders or members periodically
elect the board of directors or trustees, who are charged with the
management of the corporation. 25 The board, in turn, periodically
elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have
residual powers over fundamental and major corporate changes.

The present Petition is partly meritorious.


Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the
Verification and Certification of Non-Forum Shopping were signed
by only one, not by all, of the petitioners; further, it failed to show
proof that the signatory was authorized to sign on behalf of all of
them. Subsequently, however, petitioners submitted a Special
Power of Attorney, attesting that Atty. Padilla was authorized to file
the action on their behalf. 18
In the interest of substantial justice, this initial procedural lapse
may be excused. 19 There appears to be no intention to circumvent
the need for proper verification and certification, which are aimed

While stockholders and members (in some instances) are entitled


to receive profits, the management and direction of the corporation
are lodged with their representatives and agents -- the board of
directors or trustees. 26 In other words, acts of management pertain
to the board; and those of ownership, to the stockholders or
members. In the latter case, the board cannot act alone, but must
seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most
important rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or
trustees who are to manage the corporate affairs. 28The right to
choose the persons who will direct, manage and operate the
corporation is significant, because it is the main way in which a
stockholder can have a voice in the management of corporate
affairs, or in which a member in a nonstock corporation can have a
say on how the purposes and goals of the corporation may be

achieved. 29 Once the directors or trustees are elected, the


stockholders or members relinquish corporate powers to the board
in accordance with law.
In the absence of an express charter or statutory provision to the
contrary, the general rule is that every member of a nonstock
corporation, and every legal owner of shares in a stock corporation,
has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no
right to vote. 30 Voting may be expressed personally, or through
proxies who vote in their representative capacities. 31 Generally, the
right to be present and to vote in a meeting is determined by the
time in which the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. Unless otherwise provided for in
this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock
corporations."
In stock corporations, the presence of a quorum is ascertained and
counted on the basis of the outstanding capital stock, as defined by
the Code thus:
"SECTION 137. Outstanding capital stock defined. The term
outstanding capital stock as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares." (Underscoring supplied)
The Right to Vote in
Stock Corporations

The right to vote is inherent in and incidental to the ownership of


corporate stocks. 33 It is settled that unissued stocks may not be
voted or considered in determining whether a quorum is present in
a stockholders meeting, or whether a requisite proportion of the
stock of the corporation is voted to adopt a certain measure or act.
Only stock actually issued and outstanding may be voted. 34 Under
Section 6 of the Corporation Code, each share of stock is entitled to
vote, unless otherwise provided in the articles of incorporation or
declared delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent
shares that have never passed to the ownership of stockholders; or,
having so passed, have again been purchased by the
corporation. 36 These shares are not to be taken into consideration
in determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the
shares that have passed from the corporation, and that may be
voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. The shares of stock of stock
corporations may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, that there shall always be a class or series of
shares which have complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporation property;

4. Incurring, creating or increasing bonded indebtedness;


5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or business
in accordance with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the
vote necessary to approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks with voting
rights."
Taken in conjunction with Section 137, the last paragraph of Section
6 shows that the intention of the lawmakers was to base the
quorum mentioned in Section 52 on the number of outstanding
voting stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to
membership. 39 Members vote as persons, in accordance with the
law and the bylaws of the corporation. Each member shall be
entitled to one vote unless so limited, broadened, or denied in the
articles of incorporation or bylaws. 40 We hold that when the
principle for determining the quorum for stock corporations is
applied by analogy to nonstock corporations, only those who are
actual members with voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the
members representing the actual number of voting rights, not
the number or numerical constant that may originally be specified
in the articles of incorporation, constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses
the phrase "majority vote of the members"; likewise Section 48 of
the Corporation Code refers to 50 percent of 94 (the number of
registered members of the association mentioned therein) plus one.

The best evidence of who are the present members of the


corporation is the "membership book"; in the case of stock
corporations, it is the stock and transfer book. 43
Section 25 of the Code specifically provides that a majority of the
directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business
(unless the articles of incorporation or the bylaws provide for a
greater majority). If the intention of the lawmakers was to base the
quorum in the meetings of stockholders or members on their
absolute number as fixed in the articles of incorporation, it would
have expressly specified so. Otherwise, the only logical conclusion
is that the legislature did not have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members meeting is
to be reckoned as the actual number of members of the
corporation, the next question to resolve is what happens in the
event of the death of one of them.
In stock corporations, shareholders may generally transfer their
shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the legal
title to the stock and entitled to vote it. Until a settlement and
division of the estate is effected, the stocks of the decedent are
held by the administrator or executor. 44
On the other hand, membership in and all rights arising from a
nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not
"dead members" are entitled to exercise their voting rights
(through their executor or administrator), depends on those articles
of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall,
among
others,
be
terminated
by
the
death
of
the
member. 46 Section 91 of the Corporation Code further provides that
termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of
incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead


members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS are
not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members meeting.
With 11 remaining members, the quorum in the present case
should be 6. Therefore, there being a quorum, the annual members
meeting, conducted with six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section
29 of the Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any
vacancy occurring in the board of directors or trustees other than
by removal by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a
regular or special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected only for the
unexpired term of his predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that
those remaining still constitute a quorum. The phrase "may be
filled" in Section 29 shows that the filling of vacancies in the board
by the remaining directors or trustees constituting a quorum is
merely permissive, not mandatory. 48 Corporations, therefore, may
choose how vacancies in their respective boards may be filled up -either by the remaining directors constituting a quorum, or by the
stockholders or members in a regular or special meeting called for
the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up
existing vacancies in its board of directors; that is, by a majority
vote of the remaining members of the board. 50
While a majority of the remaining corporate members were present,
however, the "election" of the four trustees cannot be legally
upheld for the obvious reason that it was held in an annual meeting
of the members, not of the board of trustees. We are not unmindful

of the fact that the members of GCHS themselves also constitute


the trustees, but we cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up
by the remaining trustees. In other words, these remaining
member-trustees must sit as a board in order to validly elect the
new ones.
Indeed, there is a well-defined distinction between a corporate act
to be done by the board and that by the constituent members of
the corporation. The board of trustees must act, not individually or
separately, but as a body in a lawful meeting. On the other hand, in
their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members meeting of
GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed
Resolutions of the Court of Appeals are hereby REVERSED AND SET
ASIDE. The remaining members of the board of trustees of Grace
Christian High School (GCHS) may convene and fill up the
vacancies in the board, in accordance with this Decision. No
pronouncement as to costs in this instance.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. Nos. 177857-58

September 4, 2012

PHILIPPINE COCONUT PRODUCERS FEDERATION, INC.


(COCOFED), MANUEL V. DEL ROSARIO, DOMINGO P. ESPINA,
SALVADOR P. BALLARES, JOSELITO A. MORALEDA, PAZ M.
YASON, VICENTE A. CADIZ, CESARIA DE LUNA TITULAR, and
RAYMUNDO C. DE VILLA, Petitioners,
vs.
REPUBLIC OF THE PHILIPPINES, Respondent.
WIGBERTO E. TAADA, OSCAR F. SANTOS, SURIGAO DEL SUR
FEDERATION OF AGRICULTURAL COOPERATIVES (SUFAC) and
MORO FARMERS ASSOCIATION OF ZAMBOANGA DEL SUR
(MOFAZS), represented by ROMEO C.
ROYANDOYAN, Intervenors.

x-----------------------x
G.R. No. 178193
DANILO B. URSUA, Petitioner,
vs.
REPUBLIC OF THE PHILIPPINES, Respondent.
RESOLUTION
VELASCO, JR., J.:
For consideration is a Motion for Reconsideration of the Decision of
the Court dated January 24, 2012 interposed by petitioners in G.R.
Nos. 177857-58, namely: Philippine Coconut Producers Federation,
Inc. (COCOFED), Manuel V. del Rosario, Domingo P. Espina, Salvador
P. Ballares, Joselito A. Moraleda, Paz M. Yason, Vicente A. Cadiz,
Cesaria De Luna Titular, and Raymundo C. De Villa.
On March 14, 2012, petitioner-movants filed a Manifestation and
Motion stating that they failed to include the Office of the Solicitor
General (OSG) in the list of persons to be furnished with a copy of
the Motion for Reconsideration. They accordingly moved that their
belated service of a copy of the Motion for Reconsideration on the
OSG be considered compliance with the rules on service of motions
for reconsideration. This Court noted and accepted the
Manifestation and Motion. On March 15, 2012, petitioner-movants
filed a Memorandum in support of the instant motion for
reconsideration.
To the said motion, intervenors Wigberto E. Taada, et al. filed on
June 10, 2012 their Comment and Opposition. The OSG, on the
other hand, after filing two motions for extension on May 22, 2012
and June 21, 2012, respectively, filed its Motion to Admit Comment,
with Comment attached, on July 13, 2012. This Court noted and
admitted the Comment.
As will be recalled, the Court, in its January 24, 2012 Decision,
affirmed, with modification, the Partial Summary Judgments (PSJs)
rendered by the Sandiganbayan (1) on July 11, 2003 in Civil Case
No. 0033-A (PSJ-A), as amended by a Resolution issued on June 5,
2007; and (2) on
May 7, 2004 in Civil Case No. 0033-F (PSJ-F), as amended by a
Resolution issued on May 11, 2007.

In this recourse, petitioner-movants urge the Court to reconsider its


Decision of January 24, 2012 on the ground that it:
1. Made erroneous findings of fact;
2. Erred in affirming the Sandiganbayans jurisdiction of the
subject matter of the subdivided amended complaints;
3. Erred in ruling that due process was not violated;
4. Erred in ruling on the constitutionality of the coconut levy
laws;
5. Erred in ruling that the Operative Fact Doctrine does not
apply; and
6. Erred in ruling that the right to speedy disposition of
cases was not violated.
The instant motion is but a mere reiteration or rehash of the
arguments that have already been previously pleaded, discussed
and resolved by this Court in its January 24, 2012 Decision. And
considering that the motions arguments are unsubstantial to
warrant a reconsideration or at least a modification, this Court finds
no reason to modify or let alone reverse the challenged Decision.
As of 1983,1 the Class A and B San Miguel Corporation (SMC)
common shares in the names of the 14 CIIF Holding Companies are
33,133,266 shares. From 1983 to November 19, 2009 when the
Republic of the Philippines representing the Presidential
Commission on Good Government (PCGG) filed the "Motion To
Approve Sale of CIIF SMC Series I Preferred Shares," the common
shares of the CIIF Holding companies increased to 753,848,312
Class A and B SMC common shares.2
Owing, however, to a certain development that altered the factual
situation then obtaining in G.R. Nos. 177857-58, there is, therefore,
a compelling need to clarify the fallo of the January 24, 2012
Decision to reconcile it, vis-a-vis the shares of stocks in SMC which
were declared owned by the Government, with this development.
We refer to the Resolution3 issued by the Court on September 17,
2009 in the then consolidated cases docketed as G.R. Nos. 17785758, G.R. No. 178193 and G.R. No. 180705. In that Resolution which
has long become final and executory, the Court, upon motion of

COCOFED and with the approval of the Presidential Commission on


Good Government, granted the conversion of 753,848,312 Class
"A" and Class "B" SMC common shares registered in the name of
the CIIF companies to SMC Series 1 Preferred Shares of
753,848,312, subject to certain terms and conditions. The
dispositive portion of the aforementioned Resolution states:
WHEREFORE, the Court APPROVES the conversion of the
753,848,312 SMC Common Shares registered in the name of CIIF
companies to SMC SERIES 1 PREFERRED SHARES of 753,848,312,
the converted shares to be registered in the names of CIIF
companies in accordance with the terms and conditions specified in
the conversion offer set forth in SMCs Information Statement and
appended as Annex "A" of COCOFEDs Urgent Motion to Approve
the Conversion of the CIIF SMC Common Shares into SMC Series 1
Preferred Shares. The preferred shares shall remain in custodia
legis and their ownership shall be subject to the final ownership
determination of the Court. Until the ownership issue has been
resolved, the preferred shares in the name of the CIIF companies
shall be placed under sequestration and PCGG management.
(Emphasis added.)
The net dividend earnings and/or redemption proceeds from the
Series 1 Preferred Shares shall be deposited in an escrow account
with the Land Bank of the Philippines or the Development Bank of
the Philippines.
Respondent Republic, thru the PCGG, is hereby directed to cause
the CIIF companies, including their respective directors, officers,
employees, agents, and all other persons acting in their behalf, to
perform such acts and execute such documents as required to
effectuate the conversion of the common shares into SMC Series 1
Preferred Shares, within ten (10) days from receipt of this
Resolution.
Once the conversion is accomplished, the SMC Common Shares
previously registered in the names of the CIIF companies shall be
released from sequestration.
SO ORDERED.

The CIIF block of SMC shares, as converted, is the same shares of


stocks that are subject matter of, and declared as owned by the
Government in, the January 24, 2012 Decision. Hence, the need to
clarify.

WHEREFORE, the Court resolves to DENY with FINALITY the instant


Motion for Reconsideration dated February 14, 2012 for lack of
merit.
The Court further resolves to CLARIFY that the 753,848,312 SMC
Series 1 preferred shares of the CIIF companies converted from the
CIIF block of SMC shares, with all the dividend earnings as well as
all increments arising from, but not limited to, the exercise of
preemptive rights subject of the September 17, 2009 Resolution,
shall now be the subject matter of the January 24, 2012 Decision
and shall be declared owned by the Government and be used only
for the benefit of all coconut farmers and for the development of
the coconut industry.
As modified, the fallo of the January 24, 2012 Decision shall read,
as follows:
WHEREFORE, the petitions in G.R. Nos. 177857-58 and 178793 are
hereby DENIED. The Partial Summary Judgment dated July 11, 2003
in Civil Case No. 0033-A as reiterated with modification in
Resolution dated June 5, 2007, as well as the Partial Summary
Judgment dated May 7, 2004 in Civil Case No. 0033-F, which was
effectively amended in Resolution dated May 11, 2007, are
AFFIRMED with MODIFICATION, only with respect to those issues
subject of the petitions in G.R. Nos. 177857-58 and 178193.
However, the issues raised in G.R. No. 180705 in relation to Partial
Summary Judgment dated July 11, 2003 and Resolution dated June
5, 2007 in Civil Case No. 0033-A, shall be decided by this Court in a
separate decision.
The Partial Summary Judgment in Civil Case No. 0033-A dated July
11, 2003, is hereby MODIFIED, and shall read as follows:
WHEREFORE, in view of the foregoing, We rule as follows:
SUMMARY OF THE COURTS RULING.
A. Re: CLASS ACTION MOTION FOR A SEPARATE SUMMARY
JUDGMENT dated April 11, 2001 filed by Defendant Maria Clara L.
Lobregat, COCOFED, et al., and Ballares, et al.
The Class Action Motion for Separate Summary Judgment dated
April 11, 2001 filed by defendant Maria Clara L. Lobregat,

COCOFED, et al. and Ballares, et al., is hereby DENIED for lack of


merit.
B. Re: MOTION FOR PARTIAL SUMMARY JUDGMENT (RE: COCOFED,
ET AL. AND BALLARES, ET AL.) dated April 22, 2002 filed by
Plaintiff.
1. a. The portion of Section 1 of P.D. No. 755, which reads:
and that the Philippine Coconut Authority is hereby
authorized to distribute, for free, the shares of stock of the
bank it acquired to the coconut farmers under such rules
and regulations it may promulgate.
taken in relation to Section 2 of the same P.D., is
unconstitutional: (i) for having allowed the use of the CCSF
to benefit directly private interest by the outright and
unconditional grant of absolute ownership of the FUB/UCPB
shares paid for by PCA entirely with the CCSF to the
undefined
"coconut
farmers",
which
negated
or
circumvented the national policy or public purpose declared
by P.D. No. 755 to accelerate the growth and development
of the coconut industry and achieve its vertical integration;
and (ii) for having unduly delegated legislative power to the
PCA.
b. The implementing regulations issued by PCA, namely,
Administrative Order No. 1, Series of 1975 and Resolution
No. 074-78 are likewise invalid for their failure to see to it
that the distribution of shares serve exclusively or at least
primarily or directly the aforementioned public purpose or
national policy declared by P.D. No. 755.
2. Section 2 of P.D. No. 755 which mandated that the
coconut levy funds shall not be considered special and/or
fiduciary funds nor part of the general funds of the national
government and similar provisions of Sec. 5, Art. III, P.D. No.
961 and Sec. 5, Art. III, P.D. No. 1468 contravene the
provisions of the Constitution, particularly, Art. IX (D), Sec.
2; and Article VI, Sec. 29 (3).
3. Lobregat, COCOFED, et al. and Ballares, et al. have not
legally and validly obtained title of ownership over the
subject UCPB shares by virtue of P.D. No. 755, the

Agreement dated May 25, 1975 between the PCA and


defendant Cojuangco, and PCA implementing rules, namely,
Adm. Order No. 1, s. 1975 and Resolution No. 074-78.
4. The so-called "Farmers UCPB shares" covered by 64.98%
of the UCPB shares of stock, which formed part of the 72.2%
of the shares of stock of the former FUB and now of the
UCPB, the entire consideration of which was charged by PCA
to the CCSF, are hereby declared conclusively owned by, the
Plaintiff Republic of the Philippines.
xxx

xxx

xxx

SO ORDERED.
The Partial Summary Judgment in Civil Case No. 0033-F dated May
7, 2004, is hereby MODIFIED, and shall read as follows:
WHEREFORE, the MOTION FOR EXECUTION OF PARTIAL SUMMARY
JUDGMENT (RE: CIIF BLOCK OF SMC SHARES OF STOCK) dated
August 8, 2005 of the plaintiff is hereby denied for lack of merit.
However, this Court orders the severance of this particular claim of
Plaintiff. The Partial Summary Judgment dated May 7, 2004 is now
considered a separate final and appealable judgment with respect
to the said CIIF Block of SMC shares of stock.1wphi1
The Partial Summary Judgment rendered on May 7, 2004 is
modified by deleting the last paragraph of the dispositive portion,
which will now read, as follows:
WHEREFORE, in view of the foregoing, we hold that:
The Motion for Partial Summary Judgment (Re: Defendants CIIF
Companies, 14 Holding Companies and Cocofed, et al) filed by
Plaintiff is hereby GRANTED. ACCORDINGLY, THE CIIF COMPANIES,
NAMELY:
1. Southern Luzon Coconut Oil Mills (SOLCOM);
2. Cagayan de Oro Oil Co., Inc. (CAGOIL);
3. Iligan Coconut Industries, Inc. (ILICOCO);

4. San Pablo Manufacturing Corp. (SPMC);


5. Granexport Manufacturing Corp. (GRANEX); and
6. Legaspi Oil Co., Inc. (LEGOIL),

THE GOVERNMENT TO RE USED ONLY FOH THE BENEFIT OF ALL


COCONUT FARMERS AND FOR THE DEVELOPMENT OF THE
COCONUT INDUSTRY. AND ORDERED HECONVEYED TO THE
GOVERNMENT.

3. Roxas Shares, Inc.;

THE COURT AFFIRMIS THE RESOLUTIONS ISSUED BY THE


SANDIGANBAYAN ON JUNE 5, 2007 IN CIVIL CASE NO. 0033-A AND
ON MAY 11, 2007 IN CIVIL CASE NO. 0033-F, THAT THERE IS NO
MORE NECESSITY OF FURTHER TRIAL WITH RESPECT TO THE ISSUE
OF OWNERSHIP OF (1) THE SEQUESTERED UCPB SHARES, (2) THE
CHF BLOCK OF SMC SHARES AND (3) THE CIIF COMPANIES, AS THEY
HAVE FINALLY BEEN ADJUDICATED IN THE AFOREMIENTIONED
PARTIAL SUMMARY JUDGMENTS DATED JULY 11, 2003 AND MAY 7,
2004.

4. Arc Investors; Inc.;

SO ORDERED.

5. Toda Holdings, Inc.;

Costs against petitioners COCOFED, et al., in G.R. Nos. 177857-58


and Danilo S. Ursua in G.R. No. 178193.

AS WELL AS THE 14 HOLDING COMPANIES, NAMELY:


1. Soriano Shares, Inc.;
2. ACS Investors, Inc.;

6. AP Holdings, Inc.;
7. Fernandez Holdings, Inc.;

No further pleadings shall be entertained. Let Entry of Judgment be


made in due course.

8. SMC Officers Corps, Inc.;

SO ORDERED.

9. Te Deum Resources, Inc.;


10. Anglo Ventures, Inc.;

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

11. Randy Allied Ventures, Inc.;


12. Rock Steel Resources, Inc.;

G.R. No. 93695 February 4, 1992


13. Valhalla Properties Ltd., Inc.; and
14. First Meridian Development, Inc.
AND THE CONVERTED SMC SERIES 1 PREFERRED SHARES TOTALING
753,848,312 SHARES SUBJECT OF THE RESOLUTION OF THE COURT
DATED SEPTEMBER 17, 2009 TOGETHER "WITH ALL DIVIDENDS
DECLARED, PAID OR ISSUEDTHEREON AFTER THAT DATE, AS WELL
AS ANY INCREMENTS THERETO ARISING FROM, BUT NOT LIMITED
TO, EXERCISE OF PRE-EMPTIVE RIGHTS ARE DECLARED OWNED BY

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,


vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING
CORP., PABLO GONZALES, JR. and THOMAS
GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between


two parties in this case? Who owns the stocks of the corporation
under the terms of the voting trust agreement? How long can a
voting trust agreement remain valid and effective? Did a director of
the corporation cease to be such upon the creation of the voting
trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition
forcertiorari whether or not there was proper service of summons
on Alfa Integrated Textile Mills (ALFA, for short) through the
petitioners as president and vice-president, allegedly, of the subject
corporation after the execution of a voting trust agreement
between ALFA and the Development Bank of the Philippines (DBP,
for short).
From the records of the instant case, the following antecedent facts
appear:
On November 15, 1985, a complaint for a sum of money was filed
by the International Corporate Bank, Inc. against the private
respondents who, in turn, filed a third party complaint against ALFA
and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss
the third party complaint which the Regional Trial Court of Makati,
Branch 58 denied in an Order dated June 27, 1988.

On August 4, 1988, the trial court issued an order advising the


private respondents to take the appropriate steps to serve the
summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation
and Motion for the Declaration of Proper Service of Summons which
the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for
reconsideration submitting that Rule 14, section 13 of the Revised
Rules of Court is not applicable since they were no longer officers of
ALFA and that the private respondents should have availed of
another mode of service under Rule 14, Section 16 of the said
Rules, i.e., through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated
September 27, 1988, the private respondents argued that the
voting trust agreement dated March 11, 1981 did not divest the
petitioners of their positions as president and executive vicepresident of ALFA so that service of summons upon ALFA through
the petitioners as corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service
of summons on ALFA through the petitioners, thus, denying the
latter's motion for reconsideration and requiring ALFA to filed its
answer through the petitioners as its corporate officers.

Meanwhile, on July 12, 1988, the trial court issued an order


requiring the issuance of an alias summons upon ALFA through the
DBP as a consequence of the petitioner's letter informing the court
that the summons for ALFA was erroneously served upon them
considering that the management of ALFA had been transferred to
the DBP.

On January 19, 1989, a second motion for reconsideration was filed


by the petitioners reiterating their stand that by virtue of the voting
trust agreement they ceased to be officers and directors of ALFA,
hence, they could no longer receive summons or any court
processes for or on behalf of ALFA. In support of their second
motion for reconsideration, the petitioners attached thereto a copy
of the voting trust agreement between all the stockholders of ALFA
(the petitioners included), on the one hand, and the DBP, on the
other hand, whereby the management and control of ALFA became
vested upon the DBP.

In a manifestation dated July 22, 1988, the DBP claimed that it was
not authorized to receive summons on behalf of ALFA since the DBP
had not taken over the company which has a separate and distinct
corporate personality and existence.

On April 25, 1989, the trial court reversed itself by setting aside its
previous Order dated January 2, 1989 and declared that service
upon the petitioners who were no longer corporate officers of ALFA
cannot be considered as proper service of summons on ALFA.

On July 18, 1988, the petitioners filed their answer to the third party
complaint.

On May 15, 1989, the private respondents moved for a


reconsideration of the above Order which was affirmed by the court
in its Order dated August 14, 1989 denying the private
respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly
submitted by the private respondent before the public respondent
which, nonetheless, resolved to give due course thereto on
September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the
pending petition for certiorari with public respondent issued an
Order declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps
in prosecuting the third party complaint in order that the court
would not be constrained to dismiss the same for failure to
prosecute. Subsequently, on October 25, 1989 the private
respondents filed a motion for reconsideration on which the trial
court took no further action.
On March 19, 1990, after the petitioners filed their answer to the
private respondents' petition for certiorari, the public respondent
rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of
respondent judge dated April 25, 1989 and August
14, 1989 are hereby SET ASIDE and respondent
corporation is ordered to file its answer within the
reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of
the decision of the public respondent which resolved to deny the
same on May 10, 1990. Hence, the petitioners filed
this certiorari petition imputing grave abuse of discretion
amounting to lack of jurisdiction on the part of the public
respondent in reversing the questioned Orders dated April 25, 1989
and August 14, 1989 of the court a quo, thus, holding that there
was proper service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an
entry of judgment on July 16, 1990 erroneously applying the rule
that the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal.
However, in its Resolution dated January 3, 1991, the public
respondent set aside the aforestated entry of judgment after

further considering that the rule it relied on applies to appeals from


decisions of the Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate
Appellate Court, 176 SCRA 539 [1989]. (CARollo, pp. 249-250)
In their memorandum, the petitioners present the following
arguments, to wit:
(1) that the execution of the voting trust agreement
by a stockholders whereby all his shares to the
corporation have been transferred to the trustee
deprives the stockholders of his position as director
of the corporation; to rule otherwise, as the
respondent Court of Appeals did, would be violative
of section 23 of the Corporation Code ( Rollo, pp.
270-3273); and
(2) that the petitioners were no longer acting or
holding any of the positions provided under Rule 14,
Section 13 of the Rules of Court authorized to receive
service of summons for and in behalf of the private
domestic corporation so that the service of summons
on ALFA effected through the petitioners is not valid
and ineffective; to maintain the respondent Court of
Appeals' position that ALFA was properly served its
summons through the petitioners would be contrary
to the general principle that a corporation can only
be bound by such acts which are within the scope of
its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in
the instant case, we dwell first on the nature of a voting trust
agreement and the consequent effects upon its creation in the light
of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group
of the stockholders of a corporation and the trustee
or by a group of identical agreements between
individual stockholders and a common trustee,
whereby it is provided that for a term of years, or for
a period contingent upon a certain event, or until the
agreement is terminated, control over the stock

owned by such stockholders, either for certain


purposes or for all purposes, is to be lodged in the
trustee, either with or without a reservation to the
owners, or persons designated by them, of the power
to direct how such control shall be used. (98 ALR 2d.
379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).

from the other attributes of ownership; (2) that the voting rights
granted are intended to be irrevocable for a definite period of time;
and (3) that the principal purpose of the grant of voting rights is to
acquire voting control of the corporation. (5 Fletcher, Cyclopedia of
the Law on Private Corporations, section 2075 [1976] p.
331 citingTankersly v. Albright, 374 F. Supp. 538)

Under Section 59 of the new Corporation Code which expressly


recognizes voting trust agreements, a more definitive meaning may
be gathered. The said provision partly reads:

Under section 59 of the Corporation Code, supra, a voting trust


agreement may confer upon a trustee not only the stockholder's
voting rights but also other rights pertaining to his shares as long
as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations
in restraint of trade or used for purposes of fraud." (section 59, 5th
paragraph of the Corporation Code) Thus, the traditional concept of
a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made
irrevocable for a limited duration may in practice become a legal
device whereby a transfer of the stockholder's shares is effected
subject to the specific provision of the voting trust agreement.

Sec. 59. Voting Trusts One or more stockholders of


a stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the share
for a period rights pertaining to the shares for a
period not exceeding five (5) years at any one time:
Provided, that in the case of a voting trust specifically
required as a condition in a loan agreement, said
voting trust may be for a period exceeding (5) years
but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing
and notarized, and shall specify the terms and
conditions thereof. A certified copy of such
agreement shall be filed with the corporation and
with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name
of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to
said voting trust agreement.
By its very nature, a voting trust agreement results in the
separation of the voting rights of a stockholder from his other rights
such as the right to receive dividends, the right to inspect the
books of the corporation, the right to sell certain interests in the
assets of the corporation and other rights to which a stockholder
may be entitled until the liquidation of the corporation. However, in
order to distinguish a voting trust agreement from proxies and
other voting pools and agreements, it must pass three criteria or
tests, namely: (1) that the voting rights of the stock are separated

The execution of a voting trust agreement, therefore, may create a


dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholders, on the one hand, and the legal
title thereto on the other hand.
The law simply provides that a voting trust agreement is an
agreement in writing whereby one or more stockholders of a
corporation consent to transfer his or their shares to a trustee in
order to vest in the latter voting or other rights pertaining to said
shares for a period not exceeding five years upon the fulfillment of
statutory conditions and such other terms and conditions specified
in the agreement. The five year-period may be extended in cases
where the voting trust is executed pursuant to a loan agreement
whereby the period is made contingent upon full payment of the
loan.
In the instant case, the point of controversy arises from the effects
of the creation of the voting trust agreement. The petitioners
maintain that with the execution of the voting trust agreement
between them and the other stockholders of ALFA, as one party,
and the DBP, as the other party, the former assigned and
transferred all their shares in ALFA to DBP, as trustee. They argue
that by virtue to of the voting trust agreement the petitioners can
no longer be considered directors of ALFA. In support of their

contention, the petitioners invoke section 23 of the Corporation


Code which provides, in part, that:
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a
director which share shall stand in his name on the
books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital
stock of the corporation of which he is a director shall
thereby cease to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting
trust agreement between ALFA and the DBP had all the more
safeguarded the petitioners' continuance as officers and directors
of ALFA inasmuch as the general object of voting trust is to insure
permanency of the tenure of the directors of a corporation. They
cited the commentaries by Prof. Aguedo Agbayani on the right and
status of the transferring stockholders, to wit:
The "transferring stockholder", also called the
"depositing stockholder", is equitable owner for the
stocks represented by the voting trust certificates
and the stock reversible on termination of the trust
by surrender. It is said that the voting trust
agreement does not destroy the status of the
transferring stockholders as such, and thus render
them ineligible as directors. But a more accurate
statement seems to be that for some purposes the
depositing
stockholder
holding
voting
trust
certificates in lieu of his stock and being the
beneficial owner thereof, remains and is treated as a
stockholder. It seems to be deducible from the case
that he may sue as a stockholder if the suit is in
equity or is of an equitable nature, such as, a
technical stockholders' suit in right of the
corporation. [Commercial Laws of the Philippines by
Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326,
327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no
dispute as to the most immediate effect of a voting trust
agreement on the status of a stockholder who is a party to its
execution from legal titleholder or owner of the shares subject of

the voting trust agreement, he becomes the equitable or beneficial


owner. (Salonga, Philippine Law on Private Corporations, 1958 ed.,
p. 268; Pineda and Carlos, The Law on Private Corporations and
Corporate Practice, 1969 ed., p. 175; Campos and LopezCampos, The Corporation Code; Comments, Notes & Selected
Cases, 1981,
ed.,
p.
386;
Agbayani, Commentaries
and
Jurisprudence on the Commercial Laws of the Philippines,Vol. 3,
1988 ed., p. 536). The penultimate question, therefore, is whether
the change in his status deprives the stockholder of the right to
qualify as a director under section 23 of the present Corporation
Code which deletes the phrase "in his own right." Section 30 of the
old Code states that:
Every director must own in his own right at least one
share of the capital stock of the stock corporation of
which he is a director, which stock shall stand in his
name on the books of the corporation. A director who
ceases to be the owner of at least one share of the
capital stock of a stock corporation of which is a
director shall thereby cease to be a director . . .
(Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly
speaking, cannot be adversely affected by the simple act of such
director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares
subject of the voting trust agreement pursuant to which a transfer
of the stockholder's shares in favor of the trustee is required
(section 36 of the old Corporation Code). No disqualification arises
by virtue of the phrase "in his own right" provided under the old
Corporation Code.
With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not beneficial owners of
the shares registered in their names on the books of the
corporation becomes formally legalized (see Campos and LopezCampos, supra, p. 296) Hence, this is a clear indication that in
order to be eligible as a director, what is material is the legal title
to, not beneficial ownership of, the stock as appearing on the books
of the corporation (2 Fletcher, Cyclopedia of the Law of Private
Corporations, section 300, p. 92 [1969] citingPeople v. Lihme, 269
Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the
voting trust agreement executed in 1981 disposed ofall their shares

through assignment and delivery in favor of the DBP, as trustee.


Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the
petitioners' shares to the DBP created vacancies in their respective
positions as directors of ALFA. The transfer of shares from the
stockholder of ALFA to the DBP is the essence of the subject voting
trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver
TRUSTEE the certificate of the shares of the
owned by them respectively and shall do all
necessary for the transfer of their respective
to the TRUSTEE on the books of ALFA.

to the
stocks
things
shares

Considering that the voting trust agreement between ALFA and the
DBP transferred legal ownership of the stock covered by the
agreement to the DBP as trustee, the latter became the stockholder
of record with respect to the said shares of stocks. In the absence
of a showing that the DBP had caused to be transferred in their
names one share of stock for the purpose of qualifying as directors
of ALFA, the petitioners can no longer be deemed to have retained
their status as officers of ALFA which was the case before the
execution of the subject voting trust agreement. There appears to
be no dispute from the records that DBP has taken over full control
and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the
DBP through one Elsa A. Guevarra, Vice-President of its Special
Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as
of April 1982." (CA Rollo, pp. 140-142)

2. The TRUSTEE shall issue to each of the TRUSTORS


a trust certificate for the number of shares
transferred, which shall be transferrable in the same
manner and with the same effect as certificates of
stock subject to the provisions of this agreement;

Inasmuch as the private respondents in this case failed to


substantiate their claim that the subject voting trust agreement did
not deprive the petitioners of their position as directors of ALFA, the
public respondent committed a reversible error when it ruled that:

3. The TRUSTEE shall vote upon the shares of stock


at all meetings of ALFA, annual or special, upon any
resolution, matter or business that may be submitted
to any such meeting, and shall possess in that
respect the same powers as owners of the equitable
as well as the legal title to the stock;

. . . while the individual respondents (petitioners Lee


and Lacdao) may have ceased to be president and
vice-president, respectively, of the corporation at the
time of service of summons on them on August 21,
1987, they were at least up to that time, still
directors . . .

4. The TRUSTEE may cause to be transferred to any


person one share of stock for the purpose of
qualifying such person as director of ALFA, and cause
a certificate of stock evidencing the share so
transferred to be issued in the name of such person;

The aforequoted statement is quite inaccurate in the light of the


express terms of Stipulation No. 4 of the subject voting trust
agreement. Both parties, ALFA and the DBP, were aware at the time
of the execution of the agreement that by virtue of the transfer of
shares of ALFA to the DBP, all the directors of ALFA were stripped of
their positions as such.

xxx xxx xxx


9. Any stockholder not entering into this agreement
may transfer his shares to the same trustees without
the need of revising this agreement, and this
agreement shall have the same force and effect upon
that said stockholder. (CA Rollo, pp. 137-138;
Emphasis supplied)

There can be no reliance on the inference that the five-year period


of the voting trust agreement in question had lapsed in 1986 so
that the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial
owners pursuant to the 6th paragraph of section 59 of the new
Corporation Code which reads:

Unless expressly renewed, all rights granted in a


voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust
certificate as well as the certificates of stock in the
name of the trustee or trustees shall thereby be
deemed cancelled and new certificates of stock shall
be reissued in the name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting
trust agreement between ALFA and the DBP that the duration of the
agreement is contingent upon the fulfillment of certain obligations
of ALFA with the DBP. This is shown by the following portions of the
agreement.

Had the five-year period of the voting trust agreement expired in


1986, the DBP would not have transferred all its rights, titles and
interests in ALFA "effective June 30, 1986" to the national
government through the Asset Privatization Trust (APT) as attested
to in a Certification dated January 24, 1989 of the Vice President of
the DBP's Special Accounts Department II. In the same certification,
it is stated that the DBP, from 1987 until 1989, had handled APT's
account which included ALFA's assets pursuant to a management
agreement by and between the DBP and APT (CA Rollo, p. 142)
Hence, there is evidence on record that at the time of the service of
summons on ALFA through the petitioners on August 21, 1987, the
voting trust agreement in question was not yet terminated so that
the legal title to the stocks of ALFA, then, still belonged to the DBP.

WHEREAS, the TRUSTEE is one of the creditors of


ALFA, and its credit is secured by a first mortgage on
the manufacturing plant of said company;

In view of the foregoing, the ultimate issue of whether or not there


was proper service of summons on ALFA through the petitioners is
readily answered in the negative.

WHEREAS, ALFA is also indebted to other creditors for


various financial accomodations and because of the
burden of these obligations is encountering very
serious difficulties in continuing with its operations.

Under section 13, Rule 14 of the Revised Rules of Court, it is


provided that:

WHEREAS,
in
consideration
of
additional
accommodations from the TRUSTEE, ALFA had
offered and the TRUSTEE has accepted participation
in the management and control of the company and
to assure the aforesaid participation by the TRUSTEE,
the TRUSTORS have agreed to execute a voting trust
covering their shareholding in ALFA in favor of the
TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for
the purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5)
years, and is renewable for as long as the obligations
of ALFA with DBP, or any portion thereof, remains
outstanding; (CA Rollo, pp. 137-138)

Sec. 13. Service upon private domestic corporation


or partnership. If the defendant is a corporation
organized under the laws of the Philippines or a
partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent or
any of its directors.
It is a basic principle in Corporation Law that a corporation has a
personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347
[1976]; Osias Academy v. Department of Labor and Employment, et
al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule
on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind
the corporation considering the existence of a corporate entity
separate from those who compose it.
The rationale of the aforecited rule is that service must be made on
a representative so integrated with the corporation sued as to
make it a priori supposable that he will realize his responsibilities
and know what he should do with any legal papers served on him.
(Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey
Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).

The petitioners in this case do not fall under any of the enumerated
officers. The service of summons upon ALFA, through the
petitioners, therefore, is not valid. To rule otherwise, as correctly
argued by the petitioners, will contravene the general principle that
a corporation can only be bound by such acts which are within the
scope of the officer's or agent's authority. (see Vicente v. Geraldez,
52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED.
The appealed decision dated March 19, 1990 and the Court of

Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders
dated April 25, 1989 and October 17, 1989 issued by the Regional
Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.

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