DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION SIAIN ENTERPRISES v.

CUPERTINO
G.R. No. 170782 | June 22, 2009
NACHURA,
J
.
:

This is a is a petition for review on

certiorari
under Rule 45 of the Rules of Court assailing the decision of the Court of Appeals
which affirmed the decision of the Regional Trial Court

Siain Enterprises, Inc. obtained a loan of P37,000,000.00 from respondent Cupertino

Realty Corporation (Cupertino) c
overed by a promissory note signed by both petitioners and Cupertinos respective
presidents, Cua Le Leng and Wilfredo Lua. The parties then executed an amendment
to promissory note which provided for a seventeen percent (17%) interest per
annum
on the P37,000,000.00 loan. The amendment to promissory note was likewise
signed by Cua Le Leng and Wilfredo Lua on behalf of petitioner and Cupertino,
respectively.

Another promissory note was signed by Cua Le Leng in favor of Cupertino for
P160,000,000.00. Cua Le Leng signed the second promissory note as maker, on
behalf of petitioner, and as co-maker, liable to Cupertino in her personal capacity.

However, on March 11, 1996, through counsel, wrote Cupertino and demanded the
release of the P160,000,000.00 loan. In complete refutation, Cupertino, likewise
through counsel, responded and denied that it had yet to release the
P160,000,000.00 loan. Cupertino maintained that petitioner had long obtained the
proceeds of the aforesaid loan. With this, Cupertino instituted extrajudicial
foreclosure proceedings over the properties subject of the amended real estate
mortgage.

RTC rendered a decision dismissing petitioners complaint and ordering it to pay

Cupertino
P100,000.00 each for actual and exemplary damages, and P500,00
0.00 as attorneys fees. The RTC recalled and set
aside its previous order declaring the notarial foreclosure of the mortgaged
properties as null and void.
On appeal, the CA, as previously adverted to, affirmed the RTCs ruling.

In this regard, the lower c

ourts applied the doctrine of piercing the veil of corporate fiction to preclude
petitioner from disavowing receipt of the P160,000,000.00 and paying its obligation
under the amended real estate mortgage.
ISSUE:
Petitioner asseverates that the lower cou
rts erroneously applied the doctrine of piercing the veil of corporate fiction when
both gave credence to Cupertinos evidence showing that petitioners affiliates were
the

previous recipients of part of the P160,000,000.00 indebtedness of petitioner to

Cupertino. Is this valid?
HELD: Yes.
As a general rule, a corporation will be deemed a separate legal entity until
sufficient reason to the contrary appears.

But the rule is not absolute. A corporations separate and distinct legal personality
may be
disregarded and the veil of corporate fiction pierced when the notion of legal entity
is used to defeat public convenience, justify wrong, protect fraud, or defend crime.
In this case, Cupertino presented overwhelming evidence that petitioner and its
affiliate corporations had received the proceeds of the P160,000,000.00 loan
increase which was then made the consideration for the Amended Real Estate
Mortgage. The facts established in the case at bar has convinced the Court of the
propriety to apply the principle by virtue of which, the juridical personalities of the
various corporations involved are disregarded and the ensuing liability of the
corporation to attach directly to its responsible officers and stockholders These are
as follows: 1.

That the checks, debit memos and the pledges of the jewelries, condominium units
and trucks were constituted not exclusively in the name of [petitioner] but also
either in the name of Yuyek Manufacturing Corporation, Siain Transport, Inc., Cua
Leleng and Alberto Lim is of no moment. 2.

Siain and Yuyek have [a] common set of [incorporators], stockholders and board of
directors;

3.

They have the same internal bookkeeper and accountant in the person of Rosemarie
Ragodon; 4.

They have the same office address at 306 Jose Rizal St., Mandaluyong City; 5.

They have the same majority stockholder and president in the person of Cua Le
Leng; and 6.

In relation to Siain Transport, Cua Le Leng had the unlimited authority by and on
herself, without authority from the Board of Directors, to use the funds of Siain
Trucking to pay the obligation incurred by the [petitioner] corporation. 7.

As such, [petitioner] corporation is now estopped from denying the above apparent
authorities of Cua Le Leng who holds herself to the public as possessing the power
to do those acts, against any person who dealt in good faith as in the case of
Cupertino.

KUKAN INTERNATIONAL CORPORATION VS. HON. AMOR REYES G.R. NO. 182729,
SEPTEMBER 29, 2010 FACTS: Private respondent Romeo M. Morales doing business
under the name RM Morales Trophies and Plaques was awarded a P5 million
contract for the supply and installation of signages in a building constructed in
Makati sometime in March 1998. The contract price was later reduced to P3,388,502
because some items were deleted from the contract. Morales complied with his
contractual obligations but he was paid only the amount of P1,976,371.07 leaving a
balance of P1,412,130.93. He filed a case against Kukan, Inc., for sum of money
with the RTC of Manila docketed as Civil Case No. 99-93173. Kukan Inc., stopped
participating in the proceedings in November 2000, hence, it was declared in
default and Morales presented his evidence ex-parte against petitioner. On
November 28, 2002, the RTC rendered a decision in favor of Morales and against
Kunkan, Inc. ordering the latter to pay the sum of P1,201,724.00 with legal interest
of 12% per annum until fully paid; P50,000.00 as moral damages,P20,000.00 as
attorney's fees and P7,960.06 as litigation expenses. The counterclaimfiled by
Kunkan, Inc. was dismissed. The decision became final and executory During the
execution, the sheriff levied the personal properties found at the office of Kukan,
Inc.. Claiming it owned the properties levied, Kukan International Corporation (KIC)
fied an Affidavit of Third Party Claim. Morales filed an Omnibus Motion praying to
apply the principle of piercing the veil of corporate entity. He alleged that Kankun,
Inc. and KIC are one and the same corporation His Motion was denied. On Motion of
Morales the presiding Judge of Branch 17 of RTC Manila inhibited himself from
hearing the case. It was raffled to Branch 21 which granted the Motion filed by
Morales on March 12, 2007 and decreed that Kukan, Inc. and Kukan International
Inc., as one and the same corporation; that the levy made on the properties of KIC is
valid; and ordering Kunkan International Corp. and Michael Chan as jointly and

severally liable to pay the award pursuant to the Decision dated November 28,
2002. KIC filed a Motion for Reconsideration which was denied.KIC brought the case
to the Court of Appeals which rendered the Decision n January 23, 2008 denying
KIC's petition. The CA also denied its Motion for Reconsideration in the Resolution
dated June 7, 2007. Hence, this case. ISSUE/S: One of the issues raised is whether
or not the trial court and the appellate court correctly applied the principle of
piercing the veil of corporate entity. HELD: The Supreme Court ruled that the
doctrine of piercing the veil of corporate entity finds no application in this case.
According to the Supreme Court, the principle of piercing the veil of corporate entity
and the resulting treatment of two related corporation as one and the same juridical
person applies only to established liability and not to confer jurisdiction. In this case,
the Supreme Court ruled that KIC was not made a party defendant in Civil Case No.
99-93173. It entered a special but not a voluntary appearance in the trial court to
assert that it was a separate entity and has a separate legal personality from
Kunkan, Inc. KIC was not impleaded nor served with summons. Hence, it could only
assert its claim through the affidavits, comments and motions filed by special
apperance before the RTC that it is a separate juridical entity. The Supreme stated
that the doctrine of piercing the veil of corporate entity comes to play during the
trial of the case after the court has already acquired jurisdiction over the
corporation. To justify the piercing of the veil of corporate fiction, it must be shown
by clear and convincing proof that the separate and distinct personality of the
corporation was purposely employed to evade a legitimate and binding comittment
and perpetuate a fraud or like a wrongdoings. In those instances when the Court
pierced the veil of corporate fiction of two corporations, there was a confluence of
the following factors: 1. A first corporation is dissolved; 2. The assets of the first
corporation is transferred to a second corporation to avoid a financial liability of the
first corporation; and 3. Both corporations are owned and controlled by the same
persons such that the second corporation should be considered as a continuation
and successor of the first corporation. In this case, the second and third factors are
conspicuously absent. There is, therefore, no compelling justification for
disregarding the fiction of corporate entity separating Kukan, Inc. from KIC. In
applying the principle, both the RTC and the CA miserably failed to identify the
presence of the abovementioned factors. The High Court stated that neither should
the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a
badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code, which
only requires a minimum paid-up capital of PhP 5,000. The suggestion that KIC is
but a continuation and successor of Kukan, Inc., owned and controlled as they are
by the same stockholders, stands without factual basis. The fact that Michael Chan,
a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both corporations
standing alone, is insufficient to establish identity. There must be at least a
substantial identity of stockholders for both corporations in order to consider this
factor to be constitutive of corporate identity. Petition granted

kopel vs yatco
G.R. No. L-47673

October 10, 1946

Facts:

Koppel Philippines Inc. (KPI) has a capital stock divided into thousand (1,000) shares of P100 each.

The Koppel Industrial Car and Equipment Company (KICEC) owns 995 shares of the total capital stock. KICEC is organized under
US laws and not licensed to do business in the Philippines. The remaining five (5) shares only were and are owned one each by
officers of the KPI.

They have the following business process:

o (1) "When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for price quotations
from KPI";
o (2) "KPI then cabled for the quotation desired from Koppel Industrial Car and Equipment Company";
o (3) "KPI, however, quoted to the purchaser a selling price above the figures quoted by Koppel Industrial Car and Equipment
Company";
o (4) "On the basis of these quotations, orders were placed by the local purchasers

KPI paid under protest the P64,122.51 demanded by the CIR.

Total profit

Php 3,772,403,82

KPI Share

Php 132,201.30

KPI paid commercial brokers tax (4% of KPI Share)

Php 5,288.05

CIR demanded (1% of Total Profit) + 25% surcharge for late payment Paid tax

Php 64,122.51

It appears that KICEC is the only foreign principal of KPI.

The KPI corporation bore alone incidental expenses - as, for instance, cable expenses-not only those of its own cables but also
those of its "principal" .

The KPI's "share in the profits" realized from the transactions in which it intervened was left virtually in the hands of KICEC

Where drafts were not paid by the purchasers, the local banks were instructed not to protest them but to refer them to KPI which
was fully empowered by KICEC to instruct the banks with regards to disposition of the drafts and documents

Where the goods were European origin, consular invoices, bill of lading, and, in general, the documents necessary for clearance
were sent directly to KPI

If the KPI had in stock the merchandise desired by local buyers, it immediately filled the orders of such local buyers and made
delivery in the Philippines without the necessity of cabling its principal in America either for price quotations or confirmation or
rejection of that agreed upon between it and the buyer

Whenever the deliveries made by KICEC were incomplete or insufficient to fill the local buyer's orders, KPI used to make good the
deficiencies by deliveries from its own local stock, but in such cases it charged its principal only the actual cost of the
merchandise thus delivered by it from its stock and in such transactionsKPI did not realize any profit #fluffypeaches

CFI:

o KPI is a mere dummy or branch ("hechura") of KICEC.

o did not deny legal personality to Koppel (Philippines), Inc. for any and all purposes, but in effect its conclusion was that, in the
transactions involved herein, the public interest and convenience would be defeated and what would amount to a tax evasion
perpetrated, unless resort is had to the doctrine of "disregard of the corporate fiction."

Issues/Ruling:
1. WON KPI is a domestic corporation distinct and separate from, and not a mere branch of KICEC

KPI:

Its corporate existence as cannot be collaterally attacked and that the Government is estopped from so doing.
SC:

Koppel (Philippines), Inc. was a mere branch or agency or dummy ("hechura") of Koppel Industrial Car and Equipment Co. The
lower court did not hold that the corporate personality of KPI would also be disregarded in other cases or for other purposes. It
would have had no power to so hold. The courts' action in this regard must be confined to the transactions involved in the case at
bar "for the purpose of adjudging the rights and liabilities of the parties in the case. They have no jurisdiction to do more." <3
peaches

United States vs. Milwaukee Refrigeration Transit

o General Rule: a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears;
o Exception: Wthe notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.

Manifestly, the principle is the same whether the "person" be natural or artificial.

A very numerous and growing class of cases wherein the corporate entity is disregarded is that (it is so organized and controlled,
and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of another corporation)."

Where it appears that two business enterprises are owned, conducted and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third persons, disregard the legal fiction that two corporations are distinct entities, and treat
them as identical. (Abney vs. Belmont Peaches Country Club Properties, Inc., 279 Pac., 829.) #bebegurrpeaches

The fact that KPI is a mere branch is conclusively borne out by the fact, among others, that the amount of the so-called " share in
the profits" of KPIwas ultimately left to the sole, unbridled control of KICEC. If KPI was intended to function as a bona fide
separate corporation, we cannot conceive how this arrangement could have been adopted.

No group of businessmen could be expected to organize a mercantile corporation if the amount of that profit were to be subjected
to such a unilateral control of another corporation, unless indeed the former has previously been designed by the incorporators to
serve as a mere subsidiary, branch or agency of the latter.

KPI charged the parent corporation no more than actual cost - without profit whatsoever - for merchandise allegedly of its own to
complete deficiencies of shipments made by said parent corporation.

By-laws binding effect

The Government of the Philippine Islands vs. El Hogar Filipino G.R. No. L-26649 July
13, 1917 FACTS: The Philippine Commission enacted Act No. 1459, also known as
the Corporation Law, on March 1, 1906. El Hogar Filipino, organized in 1911 under
the laws of the Philippine Islands, was the first corporation organized under Sec.
171-190 Act No. 1459, devoted to the subject of building and loan associations,

their organization and administration. In the said law, the capital of the corporation
was not permitted to exceed P3M, but Act No. 2092 amended the statute,
permitting capitalization to the amount of ten millions. El Hogar took advantage of
the amendment of Act No. 1459 and amended its AOI as a result thereof, stating
that the amount of capital must not exceed what has been stated in Act No. 2092.
This resulted to El Hogar having 5,826 shareholders, 125,750 shares with paid-up
value of P8.7M. The corporation paid P7.16M to its withdrawing stockholders. The
Government of the Philippine Islands filed an action against El Hogar due to the
alleged illegal holding title to real property for a period exceeding five (5) years
after the same was bought in a foreclosure sale. Sec. 13(5) of the Corporation Law
states that corporations must dispose of real estate obtained within 5 years from
receiving the title. The Philippine Government also prays that El Hogar be excluded
from all corporate rights and privileges and effecting a final dissolution of said
corporation. It appears from the records that El Hogar was the holder of a recorded
mortgage on the San Clemente land as security for a P24K loan to El Hogar.
However, shareholders and borrowers defaulted in payment so El Hogar foreclosed
the mortgage and purchased the land during the auction sale. A deed of
conveyance in favor of El Hogar was executed and sent to the Register of Deeds of
Tralac with a request that the certificate of title be cancelled and a new one be
issued in favor of El Hogar from the Register of Deeds of Tarlac. However, no reply
was received. El Hogar filed a complaint with the Chief of the General Land
Registration Office. The certificate of title to the San Clemente land was received by
El Hogar and a board resolution authorizing Benzon to find a buyer was issued.
Alcantara, the buyer of the land, was given extension of time to make payment but
defaulted so the contract treated rescinded. Efforts were made to find another
buyer. Respondent acquired title in December 1920 until the property was finally
sold to Felipa Alberto in July 1926. The interval exceeded 5 years but the period did
not commence to run until May 7, 1921 when the register of deeds delivered the
new certificate of title. It has been held that a purchaser of land registered under
the Torrens system cannot acquire the status of an innocent purchaser for value
unless the vendor is able to place the owners duplicate in his hands showing the
title to be in the vendor. During the period before May 1921, El Hogar was not in a
position to pass an indefeasible title to any purchaser. Therefore, El Hogar cannot be
held accountable for this delay which was not due to its fault. Likewise, the period
from March 25, 1926 to April 20, 1926 must not be part of the five-year period
because this was the period where respondent was under the obligation to sell the
property to Alcantara prior to the contracts rescission due to Alcantaras nonpayment. Another circumstance causing the delay is the fact that El Hogar
purchased the property in the full amount of the loan made by the former owner
which is nearly P24K when it was subsequently found that the property was not
salable and later sold for P6K notwithstanding El Hogars efforts to find a purchaser
upon better terms. ISSUE: Whether the acts of respondent corporation merit its
dissolution or deprivation of its corporate franchise and to exclude it from all
corporate rights and privileges HELD: SUSTAINED only as to administering of real

property not owned by it and when permitted by contract. Causes of action: 1)

Alleged illegal holding of real property for a period exceeding five years from receipt
of title-Cause of delay is not respondents fault 2) That respondent is owning and
holding a business lot with the structure thereon in excess of its reasonable
requirements and in contravention of Sec. 13(5) of Corpo. Law- WITHOUT MERIT
Every corporation has the power to purchase, hold and lease such real property as
the transaction would of the lawful business may reasonably and necessarily
require. 3) That respondent is engaged in activities foreign to the purposes for
which the corporation was created and not reasonably necessary to its legitimate
ends-VALID The administration of property, payment of real estate taxes, causing
necessary repairs, managing real properties of nonborrowing shareholders is more
befitting to the business of a real estate agent or a trust company than a building
and loan association. 4) That the by-laws of the association stating that, the board
of directors by the vote of an absolute majority of its members is empowered to
cancel shares and to return the balance to the owner by reason of their conduct or
any other motive or liquidation is in direct conflict with Sec. 187 of the Corporation
Law which provides that the board of directors shall not have the power to force the
surrender and withdrawal of unmatured stock except in case of liquidation or
forfeiture of stock for delinquency-WITHOUT MERIT There is no provision of law
making it a misdemeanor to incorporate an invalid provision in the by-laws of a
corporation; and if there were such, the hazards incident to corporate effort would
be largely increased. 5) Art. 61 of El Hogars by-laws which states that attendance
in person or by proxy by shareholders owning one-half plus one of the shareholders
shall be necessary to constitute a quorum for the election of directors is contrary to
Sec. 31 of the Corpo Law which provides that owners of the majority of the
subscribed capital stock entitled to vote must be present either in person or by
proxy at all elections of directors- WITHOUT MERIT No fault can be imputed to the
corporation on account of the failure of the shareholders to attend the annual
meetings and their non-attendance in meetings is doubtless to be interpreted in
part as expressing their satisfaction of the way in which things have been
conducted. Mere failure of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation. The general rule is to allow
the officer to holdover until his successor is duly qualified. 6) That the directors of El
Hogar, instead of receiving nominal pay or serving without pay, have been receiving
large compensation, varying in amount from time to time, out of respondents
profits- WITHOUT MERIT With the growth of the corporation, the amount paid as
compensation to the directors has increased beyond what would probably be
necessary is a matter that cannot be corrected in this action. Nor can it properly be
made a basis for depriving respondent of its franchise or enjoining it from
compliance with the provisions of its own by-laws. If a mistake has been made, the
remedy is to lie rather in publicity and competition. 7) That the promoter and
organizer of El Hogar was Mr. Antonio Melian and that in the early stages of the
organization of the association, the board of directors authorized the association to
make a contract with him and that the royalty given to him as founder is

unconscionable, excessive and out of proportion to the services rendered-NOT

SUSTAINED The mere fact that compensation is in excess of what may be
considered appropriate is not a proper consideration for the court to resolve. That El
Hogar is in contact with its promoter did not affect the associations legal character.
The court is of the opinion that the traditional respect for the sanctity of the
contract obligation should prevail over the radical and innovating tendencies. 8)
That Art. 70 of El Hogars by-laws, requiring persons elected as board of directors to
be holders of shares of the paid up value of P5,000 which shall be held as security,
is objectionable since a poor member or wage earner cannot serve as a director
irrespective of other qualifications- NOT SUSTAINED Corpo. Law expressly gives the
power to the corporation to provide in its by-laws for the qualification of its directors
and the requirement of security from them for the proper discharge of the duties of
their pffice in the manner prescribed in Art. 70 is highly prudent and in conformity
with good practice. 9) That respondent abused its franchise in issuing special
shares alleged to be illegal and inconsistent with the plan and purposes of building
and loan associations- WITHOUT MERIT The said special shares are generally known
as advance payment shares which were evidently created for the purpose of
meeting the condition caused by the prepayment of dues that is permitted. Sec.
178 of Corpo Law allows payment of dues or interest to be paid in advance but the
corporation shall not allow interest on advance payment grater than 6% per annum
nor for a period longer than one year. The amount is satisfied by applying a portion
of the shareholders participation in the annual earnings.The mission of special
shares does not involve any violation of the principle that the shares must be sold at
par. 10) That in making purchases at foreclosure sales constituting as security for 54
of the loans, El Hogar bids the full amount after deducting the withdrawal value,
alleged to be pusuing a policy of depreciating at the rate of 10 percent per annum,
the value of the real properties it acquired and that this rate is excessiveUNSUSTAINABLE The board of directors possess discretion in this matter. There is no
provision of law prohibiting the association from writing off a reasonable amount for
depreciation on its assets for the purpose of determining its real profits. Art. 74 of
its by-laws expressly authorizes the board of directors to determine each year the
amount to be written down upon the expenses for the installation and the property
of the corporation. The court cannot control the discretion of the board of directors
about an administrative matter as to which they have no legitimate power of action.
11) That respondent maintains excessive reserve funds-UNFOUNDED The function
of this fund is to insure stockholders against losses. When the reserves become
excessive, the remedy is in the hands of the Legislature. No prudent person would
be inclined to take a policy in a company which had so improvidently conducted its
affairs that it only retained a fund barely sufficient to pay its present liabilities and
therefore was in a condition where any change by the reduction of interest upon or
depreciation in the value of securities or increase of mortality would render it
insolvent and subject to be placed in the hands of a receiver. 12) That the board of
directors has settled upon the unlawful policy of paying a straight annual dividend
of 10 percent per centum regardless of losses suffered and profits made by the

corporation, in contravention with the requirements of Sec. 188 of the Corpo lawUNFOUNDED As provided in the previous cause of action, the profits and losses shall
be determined by the board of directors and this means that they shall exercise the
usual discretion of good businessmen in allocating a portion of the annual profits to
purposes needful of the welfare of the association. The law contemplates
distribution of earnings and losses after legitimate obligations have been met. 13)
That El Hogar has made loans to the knowledge of its officers which were intended
to be used by the borrowers for other purposes than the building of homes and no
attempt has been made to control the borrowers with respect to the use made of
the borrowed funds- UNFOUNDED There is no statute expressly declaring that loans
may be made by these associations SOLELY for the purpose of building homes. The
building of himes in Sec. 171 of Corpo Law is only one among several ends which
building and loan associations are designed to promote and Sec. 181 authorizes the
board of directors of the association to fix the premium to be charged. 14) That the
loans made by defendant for purposes other than building or acquiring homes have
been extended in extremely large amounts and to wealthy persons and large
companies- WITHOUT MERIT The question of whether the making of large loans
constitutes a misuser of the franchise as would justify the court in depriving the
association of its corporate life is a matter confided to the discretion of the board of
directors. The law states no limit as to the size of the loans to be made by the
association. Resort should be had to the legislature because it is not a matter
amenable to judicial control 15) That when the franchise expires, supposing the
corporation is not reorganized, upon final liquidation of the corporation, a reserve
fund may exist which is out of all proportion to the requirements that may fall upon
it in the liquidation of the company-NO MERIT This matter may be left to the
discretion of the board of directors or to legislative action if it should be deemed
expedient to require the gradual suppression of reserve funds as the time for
dissolution approaches. It is no matter for judicial interference and much less could
the resumption of the franchise be justified on this ground. 16) That various
outstanding loans have been made by the respondent to corporations and
partnerships and such entities subscribed to respondents shares for the sole
purpose of obtaining such loans-NO MERIT Sec. 173 of Corpo Law declares that any
person may become a stockholder in building and loan associations. The phrase
ANY PERSON does not prevent a finding that the phrase may not be taken in its
proper and broad sense of either a natural or artificial person. 17) That in disposing
real estate purchased by it, some of the properties were sold on credit and the
persons and entities to which it was sold are not members nor shareholders nor
were they made members or shareholders, contrary to the provision of Corpo Law
requiring requiring loans to be stockholders only- NOT SUSTAINED The law does not
prescribe that the property must be sold for cash or that the purchaser shall be a
shareholder in the corporation. Such sales can be made upon the terms and
conditions approved by the parties. Respondent is enjoined in the future from
administering real property not owned by itself, except as may be permitted to it by

contract when a borrowing shareholder defaults in his obligation. In all other

respects, the complaint is DISMISSED.

Pmi vs nlrc

Effect of non- submission of by laws

SAWADJAAN v CA 459 SCRA 516, GR No 141735, June 8, 2005 FACTS: Sappari K.
Sawadjaan was among the first employees of the Philippine Amanah Bank (PAB)
when it was created by virtue of Presidential Decree No. 264 on 02 August 1973. He
started as a security guard and was eventually promoted to a loans analyst. In
February 1988, while designated as appraiser/investigator, Sawadjaan was assigned
to inspect the properties offered as collaterals by Compressed Air Machineries and
Equipment Corporation (CAMEC) for a credit line of Five Million Pesos
(P5,000,000.00). On the basis of his Inspection and Report, the PAB granted the loan
application. When the loan matured on 17 May 1989, CAMEC requested an
extension of 180 days, but was granted only 120 days to repay the loan. Sawadjaan
was then promoted to Loans Analyst I on 01 July 1989. In January 1990, Congress
passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which
created the PAB). All assets, liabilities and capital accounts of the PAB were
transferred to the AIIBP, and the existing personnel of the PAB were to continue to
discharge their functions unless discharged. In the reorganization, Sawadjaan was
among the personnel retained by the AIIBP. Upon failure of CAMEC to pay, the bank,
now AIIBP, discovered the ff: the TCT offered by CAMEC was spurious, the property
described therein was inexistent, and that the property covered by another TCT had
a prior existing mortgage in favor of one Divina Pablico. On 08 June 1993, the Board
of Directors of the AIIBP created an Investigating Committee to look into the CAMEC
transaction, which had cost the bank P6,000,000.00 in losses. The Board eventually
held Sawadjaan liable for the administrative offense of conduct prejudicial to the
best interest of the service and imposed on him the penalty from (originally)
dismissal to suspension for 6 months. Sawadjaan appealed the decision but the
court affirmed the banks finding. Sawadjaan filed a motion for new trial claiming
that he had recently discovered that at the time his employment was terminated,
the AIIBP had not yet adopted its corporate by-laws. ISSUE: W/N the alleged Islamic
Bank has no valid by-laws and has lost its juridical personality as a corporation on
16 April 1990 W/N Islamic Bank and its alleged Board of Directors have no
jurisdiction to act in the manner they did in the absence of a valid by-laws; RULING:
AIIBP has a juridical personality to act as corporation! The AIIBP was created by Rep.
Act No. 6848. It has a main office where it conducts business, has shareholders,
corporate officers, a board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel, "the principal law

office of government-owned corporations, one of which is respondent bank." At the

very least, by its failure to submit its by-laws on time, the AIIBP may be considered
a de facto corporation whose right to exercise corporate powers may not be
inquired into collaterally in any private suit to which such corporations may be a
party. Moreover, a corporation which has failed to file its by-laws within the
prescribed period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations, details the
procedures and remedies that may be availed of before an order of revocation can
be issued. There is no showing that such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a corporate
controversy, but a labor dispute; and it is an employers basic right to freely select
or discharge its employees, if only as a measure of self-protection against acts
inimical to its interest. Regardless of whether AIIBP is a corporation, a partnership, a
sole proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the
petitioners employer. AIIBP chose to retain his services during its reorganization,
controlled the means and methods by which his work was to be performed, paid his
wages, and, eventually, terminated his services. SECTION 21 Sec. 21. Corporation
by Estoppel. All persons who assume to act as a corporation knowing it to be
without authority to do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof: Provided, however, that when
any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as
a defense its lack of corporate personality. One who assumes an obligation to an
ostensible corporation as such, cannot resist performance thereof on the ground
that there was in fact no corporation.