FIRST DIVISION

questioning the boards creation of the following positions with a monthly remuneration
of P13,050.00 each, and the election thereto of certain members of the board, to wit:

FILIPINAS PORT SERVICES, INC., represented by

stockholders,
ELIODORO
C.
CRUZ
and
MINDANAO
TERMINAL
AND
BROKERAGE
SERVICES, INC.,
Petitioners,
- versus VICTORIANO S. GO, ARSENIO LOPEZ CHUA,
EDGAR C. TRINIDAD, HERMENEGILDO M.
TRINIDAD, JESUS SYBICO, MARY JEAN D. CO,
HENRY CHUA, JOSELITO S. JAYME, ERNESTO S.
JAYME, and ELIEZER B. DE JESUS,
Respondents.

G.R. No. 161886

Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

Promulgated:
March 16, 2007
x------------------------------------------------------------------------------------x
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review on certiorari is
the Decision dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No.
73827, reversing an earlier decision of the Regional Trial Court (RTC) of Davao City
and accordingly dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz
for and in behalf of the stockholders of co-petitioner Filipinas Port Services, Inc.
(Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic
corporation engaged in stevedoring services with principal office in Davao City. It was
initially instituted with the Securities and Exchange Commission (SEC) where the
case hibernated and remained unresolved for several years until it was overtaken by
the enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799, otherwise
known as the Securities Regulation Code. From the SEC and consistent with R.A.
No. 8799, the case was transferred to the RTC of Manila, Branch 14, sitting as a
corporate court. Subsequently, upon respondents motion, the case eventually landed
at the RTC of Davao City where it was docketed as Civil Case No. 28,552-2001.
RTC-Davao City, Branch 10, ruled in favor of the petitioners prompting respondents to
go to the CA in CA-G.R. CV No. 73827. This time, the respondents prevailed, hence,
this petition for review by the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports president from
1968 until he lost his bid for reelection as Filports president during the general
stockholders meeting in 1991, wrote a letter to the corporations Board of Directors

Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)

Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary action/actions to
recover from those elected to the aforementioned positions the salaries they have
received.
On 15 September 1992, the board met and took up Cruzs letter. The records do not
show what specific action/actions the board had taken on the letter. Evidently,
whatever action/actions the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders,
among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc.
(Minterbro), filed with the SEC a petition which he describes as a derivative suit
against the herein respondents who were then the incumbent members of Filports
Board of Directors, for alleged acts of mismanagement detrimental to the interest of
the corporation and its shareholders at large, namely:
1.

creation of an executive committee in 1991 composed of

seven (7) members of the board with compensation of
P500.00 for each member per meeting, an office which, to
Cruz, is not provided for in the by-laws of the corporation
and whose function merely duplicates those of the
President and General Manager;

2.

increase in the emoluments of the Chairman, VicePresident, Treasurer and Assistant General Manager
which increases are greatly disproportionate to the volume
and character of the work of the directors holding said
positions;

3.

re-creation of the positions of Assistant Vice-Presidents

(AVPs) for Corporate Planning, Operations, Finance and
Administration, and the election thereto of board members
Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and
Henry Chua, respectively; and

4.

creation of the additional positions of Special Assistants to

the President and the Board Chairman, with Fortunato V.
de Castro and Arsenio Lopez Chua elected to the same,
the directors elected/appointed thereto not doing any work
to deserve the monthly remuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that
despite demands made upon the respondent members of the board of directors to

desist from creating the positions in question and to account for the amounts incurred
in creating the same, the demands were unheeded. Cruz thus prayed that the
respondent members of the board of directors be made to pay Filport, jointly and
severally, the sums of money variedly representing the damages incurred as a result
of the creation of the offices/positions complained of and the aggregate amount of the
questioned increased salaries.
In their common Answer with Counterclaim, the respondents denied the
allegations of mismanagement and materially averred as follows:
1.

the creation of the executive committee and the grant of

per diems for the attendance of each member are allowed
under the by-laws of the corporation;

2.

the increases in the salaries/emoluments of the Chairman,

Vice-President, Treasurer and Assistant General Manager
were well within the financial capacity of the corporation
and well-deserved by the officers elected thereto; and

3.

the positions of AVPs for Corporate Planning, Operations,

Finance and Administration were already in existence
during the tenure of Cruz as president of the corporation,
and were merely recreated by the Board, adding that all
those appointed to said positions of Assistant Vice
Presidents, as well as the additional position of Special
Assistants to the Chairman and the President, rendered
services to deserve their compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner
Minterbro, while admittedly stockholders of Filport, have no authority nor standing to
bring the so-called derivative suit for and in behalf of the corporation; that respondent
Mary Jean D. Co has already ceased to be a corporate director and so with Fortunato
V. de Castro, one of those holding an assailed position; and that no demand to cease
and desist from further committing the acts complained of was made upon the board.
By way of affirmative defenses, respondents asserted that (1) the petition is not duly
verified by petitioner Filport which is the real party-in-interest; (2) Filport, as
represented by Cruz and Minterbro, failed to exhaust remedies for redress within the
corporation before bringing the suit; and (3) the petition does not show that the
stockholders bringing the suit are joined as nominal parties. In support of their
counterclaim, respondents averred that Cruz filed the alleged derivative suit in bad
faith and purely for harassment purposes on account of his non-reelection to the
board in the 1991 general stockholders meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with
the SEC for a long period of time. With the enactment of R.A. No. 8799, the case was
first turned over to the RTC of Manila, Branch 14, sitting as a corporate court.
Thereafter, on respondents motion, it was eventually transferred to the RTC of Davao
City whereat it was docketed as Civil Case No. 28,552-2001 and raffled to Branch 10
thereof.
On 10 December 2001, RTC-Davao City rendered its decision in the case. Even as it
found that (1) Filports Board of Directors has the power to create positions not

provided for in the by-laws of the corporation since the board is the governing body;
and (2) the increases in the salaries of the board chairman, vice-president, treasurer
and assistant general manager are reasonable, the trial court nonetheless rendered
judgment against the respondents by ordering the directors holding the positions of
Assistant Vice President for Corporate Planning, Special Assistant to the President
and Special Assistant to the Board Chairman to refund to the corporation the salaries
they have received as such officers considering that Filipinas Port Services is not a
big corporation requiring multiple executive positions and that said positions were just
created for accommodation. We quote the fallo of the trial courts decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of
action to restore to the corporation the total amount of salaries he
received as assistant vice president for corporate planning; and
likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua
under the fourth cause of action to restore to the corporation the
salaries they each received as special assistants respectively to the
president and board chairman. In case of insolvency of any or all of
them, the members of the board who created their positions are
subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents went on
appeal to the CA in CA-G.R. CV No. 73827.
In its decision of 19 January 2004, the CA, taking exceptions to the findings
of the trial court that the creation of the positions of Assistant Vice President for
Corporate Planning, Special Assistant to the President and Special Assistant to the
Board Chairman was merely for accommodation purposes, granted the respondents
appeal, reversed and set aside the appealed decision of the trial court and
accordingly dismissed the so-called derivative suit filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is
GRANTED, the challenged decision is REVERSED and SET
ASIDE, and a new one entered DISMISSING Civil Case No.
28,552-2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision, the CA,
before proceeding to address the merits of the appeal, prefaced its disposition with
the statement reading [T]he appeal is bereft of merit, thereby contradicting the very
fallo of its own decision and the discussions made in the body thereof, respondents
filed with the appellate court a Motion For Nunc Pro Tunc Order, thereunder
praying that the phrase [T]he appeal is bereft of merit, be corrected to read [T]he
appeal is impressed with merit. In its resolution of 23 April 2004, the CA granted the
respondents motion and accordingly effected the desired correction.
Hence, petitioners present recourse.

Petitioners assigned four (4) errors allegedly committed by the CA. For
clarity, we shall formulate the issues as follows:
1.

2.

Whether the CA erred in holding that Filports Board of Directors

acted within its powers in creating the executive committee and the
positions of AVPs for Corporate Planning, Operations, Finance and
Administration, and those of the Special Assistants to the President
and the Board Chairman, each with corresponding remuneration,
and in increasing the salaries of the positions of Board Chairman,
Vice-President, Treasurer and Assistant General Manager; and
Whether the CA erred in finding that no evidence exists to prove
that (a) the positions of AVP for Corporate Planning, Special
Assistant to the President and Special Assistant to the Board
Chairman were created merely for accommodation, and (b) the
salaries/emoluments corresponding to said positions were actually
paid to and received by the directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the
instant petition as the same allegedly raises only questions of fact and not of law, also
put in issue the purported derivative nature of the main suit initiated by petitioner
Eliodoro C. Cruz allegedly in representation of and in behalf of Filport and its
stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule 45 of the
Rules of Court, only questions of law may be raised and passed upon by the Court.
Factual findings of the CA are binding and conclusive and will not be reviewed or
disturbed on appeal. Of course, the rule is not cast in stone; it admits of certain
exceptions, such as when the findings of fact of the appellate court are at variance
with those of the trial court, as here. For this reason, and for a proper and complete
resolution of the case, we shall delve into the records and reexamine the same.
The governing body of a corporation is its board of directors. Section 23 of
the Corporation Code explicitly provides that unless otherwise provided therein, the
corporate powers of all corporations formed under the Code shall be exercised, all
business conducted and all property of the corporation shall be controlled and held by
a board of directors. Thus, with the exception only of some powers expressly granted
by law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to
determine policies, enter into contracts, and conduct the ordinary business of the
corporation within the scope of its charter, i.e., its articles of incorporation, by-laws
and relevant provisions of law. Verily, the authority of the board of directors is
restricted to the management of the regular business affairs of the corporation, unless
more extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers on the board of
directors is not lost on the Court. Indeed, the concentration in the board of the powers
of control of corporate business and of appointment of corporate officers and

managers is necessary for efficiency in any large organization. Stockholders are too
numerous, scattered and unfamiliar with the business of a corporation to conduct its
business directly. And so the plan of corporate organization is for the stockholders to
choose the directors who shall control and supervise the conduct of corporate
business.
In the present case, the boards creation of the positions of Assistant Vice
Presidents for Corporate Planning, Operations, Finance and Administration, and
those of the Special Assistants to the President and the Board Chairman, was in
accordance with the regular business operations of Filport as it is authorized to do so
by the corporations by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of
the Code which reads:
Sec. 25. Corporate officers, quorum. Immediately after their election, the
directors of a corporation must formally organize by the election of a president, who
shall be a director, a treasurer who may or may not be a director, a secretary who
shall be a resident and citizen of the Philippines, and such other officers as may be
provided for in the by-laws. (Emphasis supplied.)
In turn, the amended Bylaws of Filport provides the following:
Officers of the corporation, as provided for by the by-laws, shall be
elected by the board of directors at their first meeting after the election of Directors.
xxx
The officers of the corporation shall be a Chairman of the Board, President,
a Vice-President, a Secretary, a Treasurer, a General Manager and such other
officers as the Board of Directors may from time to time provide, and these
officers shall be elected to hold office until their successors are elected and qualified.
(Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the positions in
question is provided for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers
and agents of the corporation. (Emphasis supplied.)

Unfortunately, the bylaws of the corporation are silent as to the creation by

its board of directors of an executive committee. Under Section 35 of the
Corporation Code, the creation of an executive committee must be provided for in the
bylaws of the corporation.
Notwithstanding the silence of Filports bylaws on the matter, we cannot rule
that the creation of the executive committee by the board of directors is illegal or
unlawful. One reason is the absence of a showing as to the true nature and functions
of said executive committee considering that the executive committee, referred to in
Section 35 of the Corporation Code which is as powerful as the board of directors and

in effect acting for the board itself, should be distinguished from other committees
which are within the competency of the board to create at anytime and whose actions
require ratification and confirmation by the board. Another reason is that, ratiocinated
by both the two (2) courts below, the Board of Directors has the power to create
positions not provided for in Filports bylaws since the board is the corporations
governing body, clearly upholding the power of its board to exercise its prerogatives in
managing the business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and admitted by
petitioner Cruz himself, it was during his incumbency as Filport president that the
executive committee in question was created, and that he was even the one who
moved for the creation of the positions of the AVPs for Operations, Finance and
Administration. By his acquiescence and/or ratification of the creation of the aforesaid
offices, Cruz is virtually precluded from suing to declare such acts of the board as
invalid or illegal. And it makes no difference that he sues in behalf of himself and of
the other stockholders. Indeed, as his voice was not heard in protest when he was
still Filports president, raising a hue and cry only now leads to the inevitable
conclusion that he did so out of spite and resentment for his non-reelection as
president of the corporation.
With regard to the increased emoluments of the Board Chairman, VicePresident, Treasurer and Assistant General Manager which are supposedly
disproportionate to the volume and nature of their work, the Court, after a judicious
scrutiny of the increase vis--vis the value of the services rendered to the corporation
by the officers concerned, agrees with the findings of both the trial and appellate
courts as to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence
as to the alleged acts of mismanagement by the then incumbent board. A perusal of
the records, however, reveals that petitioners merely relied on the testimony of Cruz
in support of their bold claim of mismanagement. To the mind of the Court, Cruz
testimony on the matter of mismanagement is bereft of any foundation. As it were, his
testimony consists merely of insinuations of alleged wrongdoings on the part of the
board. Without more, petitioners posture of mismanagement must fall and with it goes
their prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement
resulting to corporate damages and/or business losses, still the respondents may not
be held liable in the absence, as here, of a showing of bad faith in doing the acts
complained of.
If the cause of the losses is merely error in business judgment, not
amounting to bad faith or negligence, directors and/or officers are not liable. For them
to be held accountable, the mismanagement and the resulting losses on account
thereof are not the only matters to be proven; it is likewise necessary to show that the
directors and/or officers acted in bad faith and with malice in doing the assailed acts.
Bad faith does not simply connote bad judgment or negligence; it imports a dishonest
purpose or some moral obliquity and conscious doing of a wrong, a breach of a
known duty through some motive or interest or ill-will partaking of the nature of fraud.
We have searched the records and nowhere do we find a dishonest purpose or some
moral obliquity, or conscious doing of a wrong on the part of the respondents that
partakes of the nature of fraud.

We thus extend concurrence to the following findings of the CA, affirmatory

of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as
president and director, that the executive committee was created.
What is more, it was appellee himself who moved for the creation of
the positions of assistant vice presidents for operations, for finance,
and for administration. He should not be heard to complain
thereafter for similar corporate acts.
The increase in the salaries of the board chairman,
president, treasurer, and assistant general manager are indeed
reasonable enough in view of the responsibilities assigned to them,
and the special knowledge required, to be able to effectively
discharge their respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the CA,
are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court
parted ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the
positions of the three (3) AVPs for Corporate Planning, Special Assistant to the
President and Special Assistant to the Board Chairman, each with a salary of
P13,050.00 a month, was merely for accommodation purposes considering that
Filport is not a big corporation requiring multiple executive positions. Hence, the trial
courts order for said officers to return the amounts they received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruzs
accommodation theory is not based on facts and without any evidentiary
substantiation.
We concur with the line of the appellate court. For truly, aside from Cruzs
bare and self-serving testimony, no other evidence was presented to show the fact of
accommodation. By itself, the testimony of Cruz is not enough to support his claim
that accommodation was the underlying factor behind the creation of the
aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not constitute
evidence adequate to support a conclusion. It is basic in the rule of evidence that he
who alleges a fact bears the burden of proving it by the quantum of proof required.
Bare allegations, unsubstantiated by evidence, are not equivalent to proof under the
Rules of Court. The party having the burden of proof must establish his case by a
preponderance of evidence.
Besides, the determination of the necessity for additional offices and/or
positions in a corporation is a management prerogative which courts are not wont to
review in the absence of any proof that such prerogative was exercised in bad faith or
with malice.

Indeed, it would be an improper judicial intrusion into the internal affairs of

Filport were the Court to determine the propriety or impropriety of the creation of
offices therein and the grant of salary increases to officers thereof. Such are
corporate and/or business decisions which only the corporations Board of Directors
can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA, the Court unequivocally
held:
Questions of policy or of management are left solely to the honest decision
of the board as the business manager of the corporation, and the court is without
authority to substitute its judgment for that of the board, and as long as it acts in good
faith and in the exercise of honest judgment in the interest of the corporation, its
orders are not reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA
went beyond the issues raised in the court of origin when it ruled on the absence of
receipt of actual payment of the salaries/emoluments pertaining to the positions of
Assistant Vice-President for Corporate Planning, Special Assistant to the Board
Chairman and Special Assistant to the President. Petitioners insist that the issue of
nonpayment was never raised by the respondents before the trial court, as in fact, the
latter allegedly admitted the same in their Answer With Counterclaim.

Under the Corporation Code, where a corporation is an injured party, its

power to sue is lodged with its board of directors or trustees. But an individual
stockholder may be permitted to institute a derivative suit in behalf of the corporation
in order to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary action
would be futile because they are the ones to be sued, or because they hold control of
the corporation. In such actions, the corporation is the real party-in-interest while the
suing stockholder, in behalf of the corporation, is only a nominal party.
Here, the action below is principally for damages resulting from alleged
mismanagement of the affairs of Filport by its directors/officers, it being alleged that
the acts of mismanagement are detrimental to the interests of Filport. Thus, the injury
complained of primarily pertains to the corporation so that the suit for relief should be
by the corporation. However, since the ones to be sued are the directors/officers of
the corporation itself, a stockholder, like petitioner Cruz, may validly institute a
derivative suit to vindicate the alleged corporate injury, in which case Cruz is only a
nominal party while Filport is the real party-in-interest. For sure, in the prayer portion
of petitioners petition before the SEC, the reliefs prayed were asked to be made in
favor of Filport.
Besides, the requisites before a derivative suit can be filed by a stockholder
are present in this case, to wit:
a)

the party bringing suit should be a shareholder as of the

time of the act or transaction complained of, the number of
his shares not being material;

b)

he 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.

We are not persuaded.

By claiming that Filport suffered damages because the directors appointed
to the assailed positions are not doing anything to deserve their compensation,
petitioners are saddled with the burden of proving that salaries were actually paid.
Since the trial court, in effect, found that the petitioners successfully proved payment
of the salaries when it directed the reimbursements of the same, respondents
necessarily have to raise the issue on appeal. And the CA rightly resolved the issue
when it found that no evidence of actual payment of the salaries in question was
actually adduced. Respondents alleged admission of the fact of payment cannot be
inferred from a reading of the pertinent portions of the parties respective initiatory
pleadings. Respondents allegations in their Answer With Counterclaim that the
officers corresponding to the positions created performed the work called for in their
positions or deserve their compensation, cannot be interpreted to mean that they
were actually paid such compensation. Directly put, the averment that one deserves
ones compensation does not necessarily carry the implication that such
compensation was actually remitted or received. And because payment was not duly
proven, there is no evidentiary or factual basis for the trial court to direct respondents
to make reimbursements thereof to the corporation.
This brings us to the respondents claim that the case filed by the petitioners
before the SEC, which eventually landed in RTC-Davao City as Civil Case No.
28,552-2001, is not a derivative suit, as maintained by the petitioners.
We sustain the petitioners.

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought

without success to have its board of directors remedy what he perceived as wrong
when he wrote a letter requesting the board to do the necessary action in his
complaint; and (3) the alleged wrong was in truth a wrong against the stockholders of
the corporation generally, and not against Cruz or Minterbro, in particular. In the end,
it is Filport, not Cruz which directly stands to benefit from the suit. And while it is true
that the complaining stockholder must show to the satisfaction of the court that he has
exhausted all the means within his reach to attain within the corporation itself the
redress for his grievances, or actions in conformity to his wishes, nonetheless, where
the corporation is under the complete control of the principal defendants, as here,
there is no necessity of making a demand upon the directors. The reason is obvious:
a demand upon the board to institute an action and prosecute the same effectively
would have been useless and an exercise in futility. In fine, we rule and so hold that
the petition filed with the SEC at the instance of Cruz, which ultimately found its way

to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which
Cruz has the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the
CA is AFFIRMED in all respects.
No pronouncement as to costs. SO ORDERED.
FIRST DIVISION
[G.R. No. 129459. September 29, 1998]
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.
DECISION
PANGANIBAN, J.
May a corporate treasurer, by herself and without any authorization from the
board of directors, validly sell a parcel of land owned by the corporation? May the veil
of corporate fiction be pierced on the mere ground that almost all of the shares of
stock of the corporation are owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the
Petition for Review on Certiorari before us, assailing the March 18, 1997 Decision of
the Court of Appeals in CA GR CV No. 46801 which, in turn, modified the July 18,
1994 Decision of the Regional Trial Court of Makati, Metro Manila, Branch 63 in Civil
Case No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed
by the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is
AFFIRMED WITH MODIFICATION ordering defendant-appellee Nenita
Lee Gruenberg to REFUND or return to plaintiff-appellant the
downpayment of P100,000.00 which she received from plaintiff-appellant.
There is no pronouncement as to costs.
The petition also challenges the June 10, 1997 CA Resolution denying
reconsideration.
The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s
amended complaint alleged that on 14 February 1989, plaintiff-appellant

entered into an agreement with defendant-appellee Motorich Sales

Corporation for the transfer to it of a parcel of land identified as Lot 30,
Block 1 of the Acropolis Greens Subdivision located in the District of
Murphy, Quezon City, Metro Manila, containing an area of Four Hundred
Fourteen (414) square meters, covered by TCT No. (362909) 2876; that
as stipulated in the Agreement of 14 February 1989, plaintiff-appellant
paid the down payment in the sum of One Hundred Thousand
(P100,000.00) Pesos, the balance to be paid on or before March 2, 1989;
that on March 1, 1989, Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich Sales
Corporation requesting for a computation of the balance to be paid; that
said letter was coursed through defendant-appellees broker, Linda Aduca,
who wrote the computation of the balance; that on March 2, 1989, plaintiffappellant was ready with the amount corresponding to the balance,
covered by Metrobank Cashiers Check No. 004223, payable to defendantappellee Motorich Sales Corporation; that plaintiff-appellant and
defendant-appellee Motorich Sales Corporation were supposed to meet in
the office of plaintiff-appellant but defendant-appellees treasurer, Nenita
Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter disregard of its
commitments had refused to execute the Transfer of Rights/Deed of
Assignment which is necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded as a necessary party
since Transfer Certificate of Title No. (362909) 2876 is still in the name of
said defendant; while defendant JNM Realty & Development Corp. is
likewise impleaded as a necessary party in view of the fact that it is the
transferor of right in favor of defendant-appellee Motorich Sales
Corporation; that on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered into a Deed of
Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of Quezon
City issued a new title in the name of Motorich Sales Corporation,
represented by defendant-appellee Nenita Lee Gruenberg and Reynaldo
L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations bad faith in refusing to execute a formal Transfer of
Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal
damages which may be assessed against defendants-appellees in the
sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations unjustified and unwarranted failure to execute the required
Transfer of Rights/Deed of Assignment or formal deed of sale in favor of
plaintiff-appellant, defendants-appellees should be assessed exemplary
damages in the sum of One Hundred Thousand (P100,000.00) Pesos;
that by reason of defendants-appellees bad faith in refusing to execute a
Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the
latter lost the opportunity to construct a residential building in the sum of
One Hundred Thousand (P100,000.00) Pesos; and that as a consequence
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations bad faith in refusing to execute a deed of sale in favor of
plaintiff-appellant, it has been constrained to obtain the services of
counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos

plus appearance fee for every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and
Nenita Lee Gruenberg interposed as affirmative defense that the
President and Chairman of Motorich did not sign the agreement adverted
to in par. 3 of the amended complaint; that Mrs. Gruenbergs signature on
the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind
Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President
and Chairman of Motorich, is required; that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of Rights (Annex B of
amended complaint) at the time the Agreement (Annex B of amended
complaint) was signed; that plaintiff-appellant itself drafted the Agreement
and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest
money; that granting, without admitting, the enforceability of the
agreement, plaintiff-appellant nonetheless failed to pay in legal tender
within the stipulated period (up to March 2, 1989); that it was the
understanding between Mrs. Gruenberg and plaintiff-appellant that the
Transfer of Rights/Deed of Assignment will be signed only upon receipt of
cash payment; thus they agreed that if the payment be in check, they will
meet at a bank designated by plaintiff-appellant where they will encash the
check and sign the Transfer of Rights/Deed. However, plaintiff-appellant
informed Mrs. Gruenberg of the alleged availability of the check, by phone,
only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment
appealed from[,] dismissing plaintiff-appellants complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to
compel defendants to execute a deed of absolute sale in
accordance with the agreement of February 14, 1989; and if so,
whether plaintiff is entitled to damages.
As to the first question, there is no evidence to show that
defendant Nenita Lee Gruenberg was indeed authorized by
defendant corporation, Motorich Sales, to dispose of that
property covered by T.C.T. No. (362909) 2876. Since the property
is clearly owned by the corporation, Motorich Sales, then its
disposition should be governed by the requirement laid down in
Sec. 40, of the Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets.
Subject to the provisions of existing laws on illegal
combination and monopolies, a corporation may by a
majority vote of its board of directors xxx sell, lease,
exchange, mortgage, pledge or otherwise dispose of all
or substantially all of its property and assets, including
its goodwill xxx when authorized by the vote of the
stockholders representing at least two third (2/3) of the
outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee

Gruenberg for that proposed sale[;] neither was there evidence to

show that the supposed transaction was ratified by the
corporation. Plaintiff should have been on the look out under
these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise,
does not find substantial evidence to hold defendant Nenita Lee
Gruenberg liable considering that she did not in anyway
misrepresent herself to be authorized by the corporation to sell
the property to plaintiff (tsn dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders
judgment DISMISSING the complaint at instance for lack of
merit.
Defendants counterclaim is also DISMISSED for lack of
basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly
organized and existing under and by virtue of Philippine Laws,
with principal office address at 5510 South Super Hi-way cor.
Balderama St., Pio del Pilar, Makati, Metro Manila, represented
herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter
referred to as the TRANSFEROR;
- and -SAN JUAN STRUCTURAL & STEEL FABRICATORS, a
corporation duly organized and existing under and by virtue of
the laws of the Philippines, with principal office address at
Sumulong Highway, Barrio Mambungan, Antipolo, Rizal,
represented herein by its President, ANDRES T. CO, hereinafter
referred to as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of
land identified as Lot 30 Block 1 of the ACROPOLIS GREENS
SUBDIVISION located at the District of Murphy, Quezon City,
Metro Manila, containing an area of FOUR HUNDRED

FOURTEEN (414) SQUARE METERS, covered by a

TRANSFER OF RIGHTS between JNM Realty& Dev. Corp. as
the Transferor and Motorich Sales Corp. as the Transferee;

By:
NENITA LEE GRUENBERG
ANDRES T. CO

By:

Treasurer
NOW, THEREFORE, for and in consideration of the
foregoing premises, the parties have agreed as follows:

President
Signed in the presence of:

1. That the purchase price shall be at FIVE THOUSAND

TWO HUNDRED PESOS (P5,200.00) per square
meter; subject to the following terms:
a.

b.
1989;

Earnest money amounting to ONE HUNDRED

THOUSAND PESOS (P100,000.00), will be
paid upon the execution of this agreement and
shall form part of the total purchase price;
Balance shall be payable on or before March 2,

2. That the monthly amortization for the month of February

1989 shall be for the account of the Transferor; and
that the monthly amortization starting March 21, 1989
shall be for the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of
the above-described property and that there [are] no existing
liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on
the date specified on 1. (b), the earnest money shall be forfeited
in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR
agrees to execute a TRANSFER OF RIGHTS/DEED OF
ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set
their hands this 14th day of February, 1989 at Greenhills, San
Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN STRUCTURAL
&

[SGD.]
[SGD.]
_________________________
_____________________
In its recourse before the Court of Appeals, petitioner insisted:
1.
Appellant is entitled to compel the appellees to execute a
Deed of Absolute Sale in accordance with the Agreement of February 14,
1989,
2.

As stated earlier, the Court of Appeals debunked petitioners arguments and

affirmed the Decision of the RTC with the modification that Respondent Nenita Lee
Gruenberg was ordered to refund P100,000 to petitioner, the amount remitted as
downpayment or earnest money. Hence, this petition before us.
The Issues
Before this Court, petitioner raises the following issues:
I.

Whether or not the doctrine of piercing the veil of corporate

fiction is applicable in the instant case

II.

Whether or not the appellate court may consider matters

which the parties failed to raise in the lower court

III.

Whether or not there is a valid and enforceable contract

between the petitioner and the respondent corporation

IV.

Whether or not the Court of Appeals erred in holding that

there is a valid correction/substitution of answer in the
transcript of stenographic note[s]

V.

Whether or not respondents are liable for damages and

attorneys fees

TRANSFEROR STEEL FABRICATORS

TRANSFEREE
[SGD.]
[SGD.]

Plaintiff is entitled to damages.

The Court synthesized the foregoing and will thus discuss them seriatim as
follows:

1. Was there a valid contract of sale between petitioner and

Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied
to Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in
the transcript of stenographic notes material to the disposition of
this case?
4. Are respondents liable for damages and attorneys fees?
The Courts Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on
February 14, 1989, it entered through its president, Andres Co, into the disputed
Agreement with Respondent Motorich Sales Corporation, which was in turn allegedly
represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that [w]hen
Gruenberg and Co affixed their signatures on the contract they both consented to be
bound by the terms thereof. Ergo, petitioner contends that the contract is binding on
the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement
according to which a lot owned by Motorich Sales Corporation was purportedly sold.
Such contract, however, cannot bind Motorich, because it never authorized or ratified
such sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members
without express authorization from the corporations board of directors. Section 23 of
BP 68, otherwise known as the Corporation Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks, or where there
is no stock, from among the members of the corporation, who shall hold
office for one (1) year and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors, or, when
authorized either by its bylaws or by its board resolution, through its officers or agents
in the normal course of business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law. Thus, this Court has held that a

corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that the authority to do so has been conferred upon him,
and this includes powers which have been intentionally conferred, and also such
powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage,
as usually pertaining to the particular officer or agent, and such apparent powers as
the corporation has caused persons dealing with the officer or agent to believe that it
has conferred.
Furthermore, the Court has also recognized the rule that persons dealing with
an assumed agent, whether the assumed agency be a general or special one, are
bound at their peril, if they would hold the principal liable, to ascertain not only the fact
of agency but also the nature and extent of authority, and in case either is
controverted, the burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19). Unless duly authorized, a treasurer, whose powers are limited,
cannot bind the corporation in a sale of its assets.
In the case at bar, Respondent Motorich categorically denies that it ever
authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of land.
Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact
authorized to represent and bind Motorich in the transaction. Petitioner failed to
discharge this burden. Its offer of evidence before the trial court contained no proof of
such authority. It has not shown any provision of said respondents articles of
incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed
such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from
the responsibility of ascertaining the extent of her authority to represent the
corporation. Petitioner cannot assume that she, by virtue of her position, was
authorized to sell the property of the corporation. Selling is obviously foreign to a
corporate treasurers function, which generally has been described as to receive and
keep the funds of the corporation, and to disburse them in accordance with the
authority given him by the board or the properly authorized officers.
Neither was such real estate sale shown to be a normal business activity of
Motorich. The primary purpose of Motorich is marketing, distribution, export and
import in relation to a general merchandising business. Unmistakably, its treasurer is
not cloaked with actual or apparent authority to buy or sell real property, an activity
which falls way beyond the scope of her general authority.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is
through an agent, the authority of the latter shall be in writing; otherwise,
the sale shall be void.
ART. 1878 Special powers of attorney are necessary in the following
case:
xxx

xxx

xxx

(5)
To enter any contract by which the ownership of an
immovable is transmitted or acquired either gratuitously or for a valuable
consideration;
xxx

xxx

x x x.

Petitioner further contends that Respondent Motorich has ratified said contract
of sale because of its acceptance of benefits, as evidenced by the receipt issued by
Respondent Gruenberg. Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their
authority are binding on the corporation. But when these officers exceed their
authority, their actions cannot bind the corporation, unless it has ratified such acts or
is estopped from disclaiming them.
In this case, there is a clear absence of proof that Motorich ever authorized
Nenita Gruenberg, or made it appear to any third person that she had the authority, to
sell its land or to receive the earnest money. Neither was there any proof that
Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on
the receipt, which, however, does not prove the fact of ratification. The document is a
hand-written one, not a corporate receipt, and it bears only Nenita Gruenbergs
signature. Certainly, this document alone does not prove that her acts were
authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected
contract: (1) consent of the contracting parties; (2) object certain which is the subject
matter of the contract; (3) cause of the obligation which is established. As found by
the trial court and affirmed by the Court of Appeals, there is no evidence that
Gruenberg was authorized to enter into the contract of sale, or that the said contract
was ratified by Motorich. This factual finding of the two courts is binding on this Court.
As the consent of the seller was not obtained, no contract to bind the obligor was
perfected. Therefore, there can be no valid contract of sale between petitioner and
Motorich.
Because Motorich had never given a written authorization to Respondent
Gruenberg to sell its parcel of land, we hold that the February 14, 1989 Agreement
entered into by the latter with petitioner is void under Article 1874 of the Civil Code.
Being inexistent and void from the beginning, said contract cannot be ratified.
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be
pierced, because the latter is a close corporation. Since Spouses Reynaldo L.
Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be
accurate, of the subscribed capital stock of Motorich, petitioner argues that
Gruenberg needed no authorization from the board to enter into the subject contract.
It adds that, being solely owned by the Spouses Gruenberg, the company can be
treated as a close corporation which can be bound by the acts of its principal

stockholder who needs no specific authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly, not having
done so during the trial, but only when it filed its sur-rejoinder before the Court of
Appeals. Thus, this Court cannot entertain said issue at this late stage of the
proceedings. It is well-settled that points of law, theories and arguments not brought
to the attention of the trial court need not be, and ordinarily will not be, considered by
a reviewing court, as they cannot be raised for the first time on appeal. Allowing
petitioner to change horses in midstream, as it were, is to run roughshod over the
basic principles of fair play, justice and due process.
Second, even if the above-mentioned argument were to be addressed at this
time, the Court still finds no reason to uphold it. True, one of the advantages of a
corporate form of business organization is the limitation of an investors liability to the
amount of the investment. This feature flows from the legal theory that a corporate
entity is separate and distinct from its stockholders. However, the statutorily granted
privilege of a corporate veil may be used only for legitimate purposes. On equitable
considerations, the veil can be disregarded when it is utilized as a shield to commit
fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or
serve as a mere alter ego or business conduit of a person or an instrumentality,
agency or adjunct of another corporation.
Thus, the Court has consistently ruled that [w]hen the fiction is used as a means
of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers
and isolates the corporation from the members or stockholders who compose it will
be lifted to allow for its consideration merely as an aggregation of individuals.
We stress that the corporate fiction should be set aside when it becomes a
shield against liability for fraud, illegality or inequity committed on third persons. The
question of piercing the veil of corporate fiction is essentially, then, a matter of proof.
In the present case, however, the Court finds no reason to pierce the corporate veil of
Respondent Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged fraudulent or
illegal activities of its officers or stockholders; or that the said veil was used to conceal
fraud, illegality or inequity at the expense of third persons, like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not.
Section 96 of the Corporation Code defines a close corporation as follows:
SEC. 96.
Definition and Applicability of Title. -- A close
corporation, within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All of the corporations issued stock of all
classes, exclusive of treasury shares, shall be held of record by not more
than a specified number of persons, not exceeding twenty (20); (2) All of
the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall
not list in any stock exchange or make any public offering of any of its
stock of any class. Notwithstanding the foregoing, a corporation shall be
deemed not a close corporation when at least two-thirds (2/3) of its voting

stock or voting rights is owned or controlled by another corporation which

is not a close corporation within the meaning of this Code. xxx.
The articles of incorporation of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a
preemption of shares is restricted in favor of any stockholder or of the corporation, or
(3) listing its stocks in any stock exchange or making a public offering of such stocks
is prohibited. From its articles, it is clear that Respondent Motorich is not a close
corporation. Motorich does not become one either, just because Spouses Reynaldo
and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The [m]ere
ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personalities. So too, a narrow distribution of ownership does not,
by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals wherein
the Court ruled that xxx petitioner corporation is classified as a close corporation and,
consequently, a board resolution authorizing the sale or mortgage of the subject
property is not necessary to bind the corporation for the action of its president. But the
factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of
real property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. In the present case, Motorich
is not a close corporation, as previously discussed, and the agreement was entered
into by the corporate treasurer without the knowledge of the board of directors.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of
stenographic notes(TSN):
Q

Did you ever represent to Mr. Co that you were authorized by the corporation
to sell the property?

Yes, sir.

Petitioner claims that the answer Yes was crossed out, and, in its place was
written a No with an initial scribbled above it. This, however, is insufficient to prove
that Nenita Gruenberg was authorized to represent Respondent Motorich in the sale
of its immovable property. Said excerpt should be understood in the context of her
whole testimony. During her cross-examination, Respondent Gruenberg testified:
Q

So, you signed in your capacity as the treasurer?

[A]

Yes, sir.

Even then you kn[e]w all along that you [were] not authorized?

Yes, sir.

The Court is not unaware that there are exceptional cases where an action by a
director, who singly is the controlling stockholder, may be considered as a binding
corporate act and a board action as nothing more than a mere formality. The present
case, however, is not one of them.

You stated on direct examination that you did not represent that you were
authorized to sell the property?

Yes, sir.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost

99.866% of Respondent Motorich. Since Nenita is not the sole controlling stockholder
of Motorich, the aforementioned exception does not apply. Granting arguendo that the
corporate veil of Motorich is to be disregarded, the subject parcel of land would then
be treated as conjugal property of Spouses Gruenberg, because the same was
acquired during their marriage. There being no indication that said spouses, who
appear to have been married before the effectivity of the Family Code, have agreed to
a different property regime, their property relations would be governed by conjugal
partnership of gains. As a consequence, Nenita Gruenberg could not have effected a
sale of the subject lot because [t]here is no co-ownership between the spouses in the
properties of the conjugal partnership of gains. Hence, neither spouse can alienate in
favor of another his or her interest in the partnership or in any property belonging to it;
neither spouse can ask for a partition of the properties before the partnership has
been legally dissolved.

But you also did not say that you were not authorized to sell the property,
you did not tell that to Mr. Co, is that correct?

That was not asked of me.

Yes, just answer it.

I just told them that I was the treasurer of the corporation and it [was] also
the president who [was] also authorized to sign on behalf of the corporation.

You did not say that you were not authorized nor did you say that you were
authorized?

Mr. Co was very interested to purchase the property and he offered to put up
a P100,000.00 earnest money at that time. That was our first meeting.

Assuming further, for the sake of argument, that the spouses property regime is
the absolute community of property, the sale would still be invalid. Under this regime,
alienation of community property must have the written consent of the other spouse
or the authority of the court without which the disposition or encumbrance is void.
Both requirements are manifestly absent in the instant case.

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her
to sell its property. On the other hand, her testimony demonstrates that the president
of Petitioner Corporation, in his great desire to buy the property, threw caution to the
wind by offering and paying the earnest money without first verifying Gruenbergs

authority to sell the lot.

negligence in entering into a contract with and paying an unauthorized officer of

another corporation.

Fourth Issue:
Damages and Attorneys Fees
Finally, petitioner prays for damages and attorneys fees, alleging that [i]n an
utter display of malice and bad faith, [r]espondents attempted and succeeded in
impressing on the trial court and [the] Court of Appeals that Gruenberg did not
represent herself as authorized by Respondent Motorich despite the receipt issued by
the former specifically indicating that she was signing on behalf of Motorich Sales
Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did
not authorize Respondent Gruenberg and that the contract [was] not binding, [insofar]
as it [was] concerned, despite receipt and enjoyment of the proceeds of Gruenbergs
act. Assuming that Respondent Motorich was not a party to the alleged fraud,
petitioner maintains that Respondent Gruenberg should be held liable because she
acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation.
As already stated, we sustain the findings of both the trial and the appellate
courts that the foregoing allegations lack factual bases. Hence, an award of damages
or attorneys fees cannot be justified. The amount paid as earnest money was not
proven to have redounded to the benefit of Respondent Motorich. Petitioner claims
that said amount was deposited to the account of Respondent Motorich, because it
was deposited with the account of Aren Commercial c/o Motorich Sales Corporation.
Respondent Gruenberg, however, disputes the allegations of petitioner. She testified
as follows:
Q

You voluntarily accepted the P100,000.00, as a matter of fact, that was

encashed, the check was encashed.

Yes, sir, the check was paid in my name and I deposit[ed] it . . .

In your account?

Yes, sir.

In any event, Gruenberg offered to return the amount to petitioner xxx since the sale
did not push through.
Moreover, we note that Andres Co is not a neophyte in the world of corporate
business. He has been the president of Petitioner Corporation for more than ten years
and has also served as chief executive of two other corporate entities. Co cannot
feign ignorance of the scope of the authority of a corporate treasurer such as
Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of
Gruenbergs authorization to enter into a contract to sell a parcel of land belonging to
Motorich.
Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to
persuade the Court. Indubitably, petitioner appears to be the victim of its own officers

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should

be ordered to return to petitioner the amount she received as earnest money, as no
one shall enrich himself at the expense of another, a principle embodied in Article
2154 of the Civil Code. Although there was no binding relation between them,
petitioner paid Gruenberg on the mistaken belief that she had the authority to sell the
property of Motorich. Article 2155 of the Civil Code provides that [p]ayment by reason
of a mistake in the construction or application of a difficult question of law may come
within the scope of the preceding article.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is
AFFIRMED.
SO ORDERED.

Acuerdo No. 1. Previa mocion debidamente

secundada, la Junta en consideracion a una peticion de
los plantadores hecha por un comite nombrado por los
mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-15092

May 18, 1962

ALFREDO
MONTELIBANO,
ET
AL.,
plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Taada,
Teehankee
and
Carreon
Hilado and Hilado for defendant-appellee.

for

plaintiffs-appellants.

REYES, J.B.L., J.:

Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to
compel the defendant Milling Company to increase plaintiff's share in the sugar
produced from their cane, from 60% to 62.33%, starting from the 1951-1952 crop
year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano,
and the Limited co-partnership Gonzaga and Company, had been and are sugar
planters adhered to the defendant-appellee's sugar central mill under identical milling
contracts. Originally executed in 1919, said contracts were stipulated to be in force for
30 years starting with the 1920-21 crop, and provided that the resulting product
should be divided in the ratio of 45% for the mill and 55% for the planters. Sometime
in 1936, it was proposed to execute amended milling contracts, increasing the
planters' share to 60% of the manufactured sugar and resulting molasses, besides
other concessions, but extending the operation of the milling contract from the original
30 years to 45 years. To this effect, a printed Amended Milling Contract form was
drawn up. On August 20, 1936, the Board of Directors of the appellee Bacolod-Murcia
Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1) granting further
concessions to the planters over and above those contained in the printed Amended
Milling Contract. The bone of contention is paragraph 9 of this resolution, that reads
as follows:
ACTA
SESSION
AGOSTO 20, 1936

No.
DE

LA

xxx

xxx

JUNTA

xxx

11
DIRECTIVA

xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de

Molienda Enmendado, lascentrales azucareras, de
Negros Occidental, cuya produccion anual de azucar
centrifugado sea mas de una tercera parte de la
produccion total de todas lascentrales azucareras de
Negros Occidental, concedieren a sus plantadores
mejores condiciones que la estipuladas en el presente
contrato, entonces esas mejores condiciones se
concederan y por el presente se entenderan concedidas a
los platadores que hayan otorgado este Contrato de
Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September
10, 1936, but a copy of the resolution of August 10, 1936, signed by the Central's
General Manager, was not attached to the printed contract until April 17, 1937; with
the notation
Las enmiendas arriba transcritas forman parte del contrato de
molienda enmendado, otorgado por y la Bacolod-Murcia Milling
Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros
sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual
production exceeding one-third of the production of all the sugar central mills in the
province, had already granted increased participation (of 62.5%) to their planters, and
that under paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the
appellee had become obligated to grant similar concessions to the plaintiffs
(appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,
and defended by urging that the stipulations contained in the resolution were made
without consideration; that the resolution in question was, therefore, null and void ab
initio, being in effect a donation that was ultra vires and beyond the powers of the
corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to
this Court.
We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation as
a supplement to, or further amendment of, the proposed milling contract, and that it
was approved on August 20, 1936, twenty-one days prior to the signing by appellants
on September 10, of the Amended Milling Contract itself; so that when the Milling
Contract was executed, the concessions granted by the disputed resolution had been

already incorporated into its terms. No reason appears of record why, in the face of
such concessions, the appellants should reject them or consider them as separate
and apart from the main amended milling contract, specially taking into account that
appellant Alfredo Montelibano was, at the time, the President of the Planters
Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the
resolution of August 20, 1936. That the resolution formed an integral part of the
amended milling contract, signed on September 10, and not a separate bargain, is
further shown by the fact that a copy of the resolution was simply attached to the
printed contract without special negotiations or agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20,
1936 were supported by the same causa or consideration underlying the main
amended milling contract; i.e., the promises and obligations undertaken thereunder
by the planters, and, particularly, the extension of its operative period for an additional
15 years over and beyond the 30 years stipulated in the original contract. Hence, the
conclusion of the court below that the resolution constituted gratuitous concessions
not supported by any consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if
the resolution in question had embodied a separate agreement after the appellants
had already bound themselves to the terms of the printed milling contract. But this
was not the case. When the resolution was adopted and the additional concessions
were made by the company, the appellants were not yet obligated by the terms of the
printed contract, since they admittedly did not sign it until twenty-one days later, on
September 10, 1936. Before that date, the printed form was no more than a proposal
that either party could modify at its pleasure, and the appellee actually modified it by
adopting the resolution in question. So that by September 10, 1936 defendant
corporation already understood that the printed terms were not controlling, save as
modified by its resolution of August 20, 1936; and we are satisfied that such was also
the understanding of appellants herein, and that the minds of the parties met upon
that basis. Otherwise there would have been no consent or "meeting of the minds",
and no binding contract at all. But the conduct of the parties indicates that they
assumed, and they do not now deny, that the signing of the contract on September
10, 1936, did give rise to a binding agreement. That agreement had to exist on the
basis of the printed terms as modified by the resolution of August 20, 1936, or not at
all. Since there is no rational explanation for the company's assenting to the further
concessions asked by the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension of the contract period, to
allow the company now to retract such concessions would be to sanction a fraud
upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There
can be no novation unless two distinct and successive binding contracts take place,
with the later designed to replace the preceding convention. Modifications introduced
before a bargain becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of
statutory forms or solemn agreements (and it is not claimed that this is one), it is the
assent and concurrence (the "meeting of the minds") of the parties, and not the

setting down of its terms, that constitutes a binding contract. And the fact that the
addendum is only signed by the General Manager of the milling company emphasizes
that the addition was made solely in order that the memorial of the terms of the
agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors
of the appellee company in November 19, 1936 (Exhibit 4) only made mention of
90%, the planters having agreed to the 60-40 sharing of the sugar set forth in the
printed "amended milling contracts", and did not make any reference at all to the
terms of the resolution of August 20, 1936. But a reading of this report shows that it
was not intended to inventory all the details of the amended contract; numerous
provisions of the printed terms are alao glossed over. The Directors of the appellee
Milling Company had no reason at the time to call attention to the provisions of the
resolution in question, since it contained mostly modifications in detail of the printed
terms, and the only major change was paragraph 9 heretofore quoted; but when the
report was made, that paragraph was not yet in effect, since it was conditioned on
other centrals granting better concessions to their planters, and that did not happen
until after 1950. There was no reason in 1936 to emphasize a concession that was
not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to
modify the proposed terms of the Amended Milling Contract for the purpose of making
its terms more acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the
act to the corporate purpose expressed in the charter. If that act is
one which is lawful in itself, and not otherwise prohibited, is done
for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, in a substantial, and not in
a remote and fanciful sense, it may fairly be considered within
charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporation's
business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to
do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950,
pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is
valid and binding, and whether or not it will cause losses or decrease the profits of the
central, the court has no authority to review them.
They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they
cannot be controlled in the reasonable exercise and performance of
such duty. Whether the business of a corporation should be
operated at a loss during depression, or close down at a smaller
loss, is a purely business and economic problem to be determined
by the directors of the corporation and not by the court. It is a wellknown rule of law that questions of policy or of management are left
solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its

judgment of the board of directors; the board is the business

manager of the corporation, and so long as it acts in good faith its
orders are not reviewable by the courts. (Fletcher on Corporations,
Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire
annual sugar production in Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of
62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential
or increase of participation in the milled sugar in accordance with paragraph 9 of the
appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in
the printed Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year,
said appellants having received an additional 2% corresponding to
said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year;
and
to
all
appellants
thereafter

4.2%
for
the
1952-1953
crop
year;
4.3%
for
the
1953-1954
crop
year;
4.5%
for
the
1954-1955
crop
year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they
were withheld; and the right is reserved to plaintiffs-appellants to sue for such
additional increases as they may be entitled to for the crop years subsequent to those
herein adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon, JJ.,
concur.

SECOND DIVISION
[G.R. No. 125469. October 27, 1997]
PHILIPPINE STOCK EXCHANGE, INC., petitioner, vs. THE HONORABLE COURT
OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
PUERTO AZUL LAND, INC., respondents.
DECISION
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the
direct general supervision of the Office of the President, with the immense task of
enforcing the Revised Securities Act, and all other duties assigned to it by pertinent
laws. Among its inumerable functions, and one of the most important, is the
supervision of all corporations, partnerships or associations, who are grantees or
primary franchise and/or a license or permit issued by the government to operate in
the Philippines. Just how far this regulatory authority extends, particularly, with regard
to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review of Certiorari, petitioner assails the resolution of the
respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the
Securities and Exchange Commission ordering the petitioner Philippine Stock
Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in
its stock market, thus paving the way for the public offering of PALIs shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had
sought to offer its shares to the public in order to raise funds allegedly to develop its
properties and pay its loans with several banking institutions. In January, 1995, PALI
was issued a Permit to Sell its shares to the public by the Securities and Exchange
Commission (SEC). To facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the Philippine Stock Exchange, Inc.
(PSE), for which purpose it filed with the said stock exchange an application to list its
shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of
PALIs application, recommended to the PSEs Board of Governors the approval of
PALIs listing application.
On February 14, 1996, before it could act upon PALIs application, the Board of
Governors of PSE received a letter from the heirs of Ferdinand E. Marcos, claiming
that the late President Marcos was the legal and beneficial owner of certain properties
forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims
to be among its assets and that the Ternate Development Corporation, which is
among the stockholders of PALI, likewise appears to have been held and continue to

be held in trust by one Rebecco Panlilio for then President Marcos and now,
effectively for his estate, and requested PALIs application to be deferred. PALI was
requested to comment upon the said letter.
PALIs answer stated that the properties forming part of Puerto Azul Beach Hotel
and Resort Complex were not claimed by PALI as its assets. On the contrary, the
resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country
Club, entities distinct from PALI. Furthermore, the Ternate Development Corporation
owns only 1.20% of PALI. The Marcoses responded that their claim is not confined to
the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby
implying that they are also asserting legal and beneficial ownership of other
properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
Presidential Commission on Good Government (PCGG) requesting for comments on
the letter of the PALI and the Marcoses. On March 4, 1996, the PSE was informed
that the Marcoses received a Temporary Restraining Order on the same date,
enjoining the Marcoses from, among others, further impeding, obstructing, delaying or
interfering in any manner by or any means with the consideration, processing and
approval by the PSE of the initial public offering of PALI. The TRO was issued by
Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No.
65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the
PSE reached its decision to reject PALIs application, citing the existence of serious
claims, issues and circumstances surrounding PALIs ownership over its assets that
adversely affect the suitability of listing PALIs shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting
Chairman, Perfecto R. Yasay, Jr., bringing to the SECs attention the action taken by
the PSE in the application of PALI for the listing of its shares with the PSE, and
requesting that the SEC, in the exercise of its supervisory and regulatory powers over
stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSEs action on
PALIs listing application and institute such measures as are just and proper and
under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching
thereto the letter of PALI and directing the PSE to file its comments thereto within five
days from its receipt and for its authorized representative to appear for an inquiry on
the matter. On April 22, 1996, the PSE submitted a letter to the SEC containing its
comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSEs decision.
The dispositive portion of the said order reads:
WHEREFORE,
premises
considered,
and
invoking
the
Commissioners authority and jurisdiction under Section 3 of the Revised
Securities Act, in conjunction with Section 3, 6(j) and 6(m) of the
Presidential Decree No. 902-A, the decision of the Board of Governors of
the Philippine Stock Exchange denying the listing of shares of Puerto Azul
Land, Inc., is hereby set aside, and the PSE is hereby ordered to

immediately cause the listing of the PALI shares in the Exchange, without
prejudice to its authority to require PALI to disclose such other material
information it deems necessary for the protection of the investing public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which
was, however denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to consider its order dated April 24, 1996, and in the
light of recent developments on the adverse claim against the PALI
properties, PSE should require PALI to submit full disclosure of material
facts and information to protect the investing public. In this regard, PALI is
hereby ordered to amend its registration statements filed with the
Commission to incorporate the full disclosure of these material facts and
information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17,
1996 a Petition for Review (with application for Writ of Preliminary Injunction and
Temporary Restraining Order), assailing the above mentioned orders of the SEC,
submitting the following as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER
TO ORDER THE LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE
DECISIONS OF PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN FINDING THAT PSE ACTED IN AN ARBITRARY
AND ABUSIVE MANNER IN DISAPPROVING PALIS LISTING
APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR
ALLOWING FURTHER DISPOSITION OF PROPERTIES IN
CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY
PROMULGATED AND ITS IMPLEMENTATION AND APPLICATION
IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE
CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and
subsequently, a Comment and Motion to Dismiss. On June 10, 1996, PSE filed its
Reply to Comment and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing
the PSEs Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to
look into the decision of the petitioner PSE, pursuant to Section 3 of the Revised
Securities Act in relation to Section 6(j) and 6(m) of P.D. No. 902-A, and Section 38(b)
of the Revised Securities Act, and for the purpose of ensuring fair administration of
the exchange. Both as a corporation and as a stock exchange, the petitioner is
subject to public respondents jurisdiction, regulation and control. Accepting the
argument that the public respondent has the authority merely to supervise or regulate,
would amount to serious consequences, considering that the petitioner is a stock
exchange whose business is impressed with public interest. Abuse is not remote if the
public respondent is left without any system of control. If the securities act vested the
public respondent with jurisdiction and control over all corporations; the power to
authorize the establishment of stock exchanges; the right to supervise and regulate
the same; and the power to alter and supplement rules of the exchange in the listing
or delisting of securities, then the law certainly granted to the public respondent the
plenary authority over the petitioner; and the power of review necessarily comes
within its authority.
All in all, the court held that PALI complied with all the requirements for public
listing, affirming the SECs ruling to the effect that:
x x x the Philippine Stock Exchange has acted in an arbitrary and
abusive manner in disapproving the application of PALI for listing of its
shares in the face of the following considerations:
1.
PALI has clearly and admittedly complied with
the Listing Rules and full disclosure requirements of the
Exchange;
2.
In applying its clear and reasonable standards
on the suitability for listing of shares, PSE has failed to justify
why it acted differently on the application of PALI, as compared
to the IPOs of other companies similarly that were allowed
listing in the Exchange;
3.
It appears that the claims and issues on the title
to PALIs properties were even less serious than the claims
against the assets of the other companies in that, the assertions
of the Marcoses that they are owners of the disputed properties
were not substantiated enough to overcome the strength of a
title to properties issued under the Torrens System as evidence
of ownership thereof;
4.
No action has been filed in any court of
competent jurisdiction seeking to nullify PALIs ownership over
the disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the import of
PSEs decision in denying PALIs application is that it would be
PALI, not the Marcoses, that must go to court to prove the

legality of its ownership on these properties before its shares

can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval
Reservation does not inspire belief. The point is, the PALI properties are now titled. A
property losses its public character the moment it is covered by a title. As a matter of
fact, the titles have long been settled by a final judgment; and the final decree having
been registered, they can no longer be re-opened considering that the one year
period has already passed. Lastly, the determination of what standard to apply in
allowing PALIs application for listing, whether the discretion method or the system of
public disclosure adhered to by the SEC, should be addressed to the Securities
Commission, it being the government agency that exercises both supervisory and
regulatory authority over all corporations.
On August 15, 1996, the PSE, after it was granted an extension, filed an instant
Petition for Review on Certiorari, taking exception to the rulings of the SEC and the
Court of Appeals. Respondent PALI filed its Comment to the petition on October 17,
1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGGs Petition for Intervention on October
21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The
Office of the Solicitor General, representing the SEC and the Court of Appeals,
likewise filed its Comment on December 26, 1996. In answer to the PCGGs motion
for leave to file petition for intervention, PALI filed its Comment thereto on January 17,
1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of
respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996).
On may 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority
to order the PSE to list the shares of PALI in the stock exchange. Under presidential
decree No. 902-A, the powers of the SEC over stock exchanges are more limited as
compared to its authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to reverse the decisions
of the stock exchange. Authorities are in abundance even in the United States, from
which the countrys security policies are patterned, to the effect of giving the Securities
Commission less control over stock exchanges, which in turn are given more lee-way
in making the decision whether or not to allow corporations to offer their stock to the
public through the stock exchange. This is in accord with the business judgment rule
whereby the SEC and the courts are barred from intruding into business judgments of
corporations, when the same are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALIs listing application, absent a
showing a bad faith on the part of the PSE. Under the listing rule of the PSE, to which
PALI had previously agreed to comply, the PSE retains the discretion to accept or
reject applications for listing. Thus, even if an issuer has complied with the PSE listing
rules and requirements, PSE retains the discretion to accept or reject the issuers
listing application if the PSE determines that the listing shall not serve the interests of
the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered

corporations, nor with corporations whose properties are under sequestration. A

reading of Republic of the Philippines vs. Sandiganbayan, G.R. No. 105205, 240
SCRA 376, would reveal that the properties of PALI, which were derived from the
Ternate Development Corporation (TDC) and the Monte del Sol Development
Corporation (MSDC), are under sequestration by the PCGG, and the subject of
forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the law of the
case between the Republic and the TDC and MSDC. It categorically declares that the
assets of these corporations were sequestered by the PCGG on March 10, 1986 and
April 4, 1988.
It is, likewise, intimidated that the Court of Appeals sanction that PALIs
ownership over its properties can no longer be questioned, since certificates of title
have been issued to PALI and more than one year has since lapsed, is erroneous and
ignores well settled jurisprudence on land titles. That a certificate of title issued under
the Torrens System is a conclusive evidence of ownership is not an absolute rule and
admits certain exceptions. It is fundamental that forest lands or military reservations
are non-alienable. Thus, when a title covers a forest reserve or a government
reservation, such title is void.
PSE, likewise, assails the SECs and the Court of Appeals reliance on the
alleged policy of full disclosure to uphold the listing of the PALIs shares with the PSE,
in the absence of a clear mandate for the effectivity of such policy. As it is, the case
records reveal the truth that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALIs documents supporting its application contained
misrepresentations and misleading statements, and concealed material information.
The matter of sequestration of PALIs properties and the fact that the same form part
of military/naval/forest reservations were not reflected in PALIs application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that
although it is clothed with the marking of a corporate entity, its functions as the
primary channel through which the vessels of capital trade ply. The PSEs relevance to
the continued operation and filtration of the securities transactions in the country
gives it a distinct color of importance such that government intervention in its affairs
becomes justified, if not necessary. Indeed, as the only operational stock exchange in
the country today, the PSE enjoys a monopoly of securities transactions, and as such,
it yields an immense influence upon the countrys economy.
Due to this special nature of stock exchanges, the countrys lawmakers has seen
it wise to give special treatment to the administration and regulation of stock
exchanges.
These provisions, read together with the general grant of jurisdiction, and right
of supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the
SEC the special mandate to be vigilant in the supervision of the affairs of stock
exchanges so that the interests of the investing public may be fully safeguarded.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to
uphold the SECs challenged control authority over the petitioner PSE even as it
provides that the Commission shall have absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations, who are the grantees of
primary franchises and/or a license or permit issued by the government to operate in

the Philippines The SECs regulatory authority over private corporations encompasses
a wide margin of areas, touching nearly all of a corporations concerns. This authority
springs from the fact that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SECs power to look into the subject ruling of the PSE, therefore, may be
implied from or be considered as necessary or incidental to the carrying out of the
SECs express power to insure fair dealing in securities traded upon a stock exchange
or to ensure the fair administration of such exchange. It is, likewise, observed that the
principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities
may be encouraged and protected, and their activities pursued for the promotion of
economic development.
Thus, it was in the alleged exercise of this authority that the SEC reversed the
decision of the PSE to deny the application for listing in the stock exchange of the
private respondent PALI. The SECs action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be traded or not in the
stock exchange. This is in line with the SECs mission to ensure proper compliance
with the laws, such as the Revised Securities Act and to regulate the sale and
disposition of securities in the country. As the appellate court explains:
Paramount policy also supports the authority of the public respondent
to review petitioners denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the national economy, as the
business is affected with public interest. As a matter of fact, it has often
been said that the economy moves on the basis of the rise and fall of
stocks being traded. By its economic power, the petitioner certainly can
dictate which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own rules liberally
as it may please. Petitioner can either allow or deny the entry to the market
of securities. To repeat, the monopoly, unless accompanied by control,
becomes subject to abuse; hence, considering public interest, then it
should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The
legislature, through the Revised Securities Act, Presidential Decree No. 902-A, and
other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws
affecting corporations and other forms of associations not otherwise vested in some
other government office.
This is not to say, however, that the PSEs management prerogatives are under
the absolute control of the SEC. The PSE is, after all, a corporation authorized by its
corporate franchise to engage in its proposed and duly approved business. One of
the PSEs main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to enter (or not to enter) into
contracts with third persons, and to perform all other legal acts within its allocated
express or implied powers.

A corporation is but an association of individuals, allowed to transact under an

assumed corporate name, and with a distinct legal personality. In organizing itself as
a collective body, it waives no constitutional immunities and perquisites appropriate to
such body. As to its corporate and management decisions, therefore, the state will
generally not interfere with the same. Questions of policy and of management are left
to the honest decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board of
directors. The board is the business manager of the corporation, and so long as it
acts in good faith, its orders are not reviewable by the courts.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the
resultant authority to reverse the PSEs decision in matters of application for listing in
the market, the SEC may exercise such power only if the PSEs judgment is attended
by bad faith. In board of Liquidators vs. Kalaw, it was held that bad faith does not
simply connote bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means a breach of a known duty
through some motive or interest of ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE
considered important facts, which in the general scheme, brings to serious question
the qualification of PALI to sell its shares to the public through the stock exchange.
During the time for receiving objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the Marcos estate. In time, the
PCGG confirmed this claim. In fact, an order of sequestration has been issued
covering the properties of PALI, and suit for reconveyance to the state has been filed
in the Sandiganbayan Court. How the properties were effectively transferred, despite
the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the
private respondent PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious doubt as to the
integrity of PALI as a stock issuer. The petitioner was in the right when it refused
application of PALI, for a contrary ruling was not to the best interest of the general
public. The purpose of the Revised Securities Act, after all, is to give adequate and
effective protection to the investing public against fraudulent representations, or false
promises, and the imposition of worthless ventures.
It is to be observed that the U.S. Securities Act emphasized its avowed
protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the truth in securities Act, was
designed not only to provide investors with adequate information upon
which to base their decisions to buy and sell securities, but also to protect
legitimate business seeking to obtain capital through honest presentation
against competition form crooked promoters and to prevent fraud in the
sale of securities. (Tenth Annual Report, U.S. Securities and Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1)
prevention of excesses and fraudulent transactions, merely by requirement
of that details be revealed; (2) placing the market during the early stages
of the offering of a security a body of information, which operating indirectly

through investment services and expert investors, will tend to produce a

more accurate appraisal of a security. x x x. Thus, the Commission may
refuse to permit a registration statement to become effective if it appears
on its face to be incomplete or inaccurate in any material respect, and
empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to include any
untrue statement of a material fact or to omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and
goodwill, and it has the right to protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to transact through its facilities. It was
reasonable for PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled upon, and
public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government
absolutism in a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no
longer be assailed is of no moment. At this juncture, there is the claim that the
properties were owned by the TDC and MSDC and were transferred in violation of
sequestration orders, to Rebecco Panlilio and later on to PALI, besides the claim of
the Marcoses that such properties belong to Marcos estate, and were held only in
trust by Rebecco Panlilio. It is also alleged by the petitioner that these properties
belong to naval and forest reserves, and therefore beyond private dominion. If any of
these claims is established to be true, the certificates of title over the subject
properties now held by PALI may be disregarded, as it is an established rule that a
registration of a certificate of title does not confer ownership over the properties
described therein to the person named as owner. The inscription in the registry, to be
effective, must be made in good faith. The defense of indefeasibility of a Torrens Title
does not extend to a transferee who takes the certificate of title with notice of a flaw.

paragraph of Section 4 of the said law, on the other hand, provides that no security,
unless exempt by law, shall be issued, endorsed, sold, transferred or in any other
manner conveyed to the public, unless registered in accordance with the rules and
regulations that shall be promulgated in the public interest and for the protection of
investors by the Commission. Presidential Decree No. 902-A, on the other hand,
provides that the SEC, as regulatory agency, has supervision and control over all
corporations and over the securities market as a whole, and as such, is given ample
authority in determining appropriate policies. Pursuant to this regulatory authority, the
SEC has manifested that it has adopted the policy of full material disclosure where all
companies, listed or applying for listing, are required to divulge truthfully and
accurately, all material information about themselves and the securities they sell, for
the protection of the investing public, and under pain of administrative, criminal and
civil sanctions. In connection with this, a fact is deemed material if it tends to induce
or otherwise effect the sale or purchase of its securities. While the employment of this
policy is recognized and sanctioned by laws, nonetheless, the Revised Securities Act
sets substantial and procedural standards which a proposed issuer of securities must
satisfy. Pertinently, Section 9 of the Revised Securities Act sets forth the possible
Grounds for the Rejection of the registration of a security:
- - The Commission may reject a registration statement and refuse to
issue a permit to sell the securities included in such registration statement
if it finds that - (1)
The registration statement is on its face
incomplete or inaccurate in any material respect or includes any
untrue statement of a material fact or omits to state a material
facts required to be stated therein or necessary to make the
statements therein not misleading; or
(2)

The issuer or registrant - -

(i)
is not solvent or not is sound financial
condition;

In any case, for the purpose of determining whether PSE acted correctly in
refusing the application of PALI, the true ownership of the properties of PALI need not
be determined as an absolute fact. What is material is that the uncertainty of the
properties ownership and alienability exists, and this puts to question the qualification
of PALIs public offering. In sum, the Court finds that the SEC had acted arbitrarily in
arrogating unto itself the discretion of approving the application for listing in the PSE
of the private respondent PALI, since this is a matter addressed to the sound
discretion of the PSE, a corporate entity, whose business judgments are respected in
the absence of bad faith.

(ii) has violated or has not complied with the

provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the Commission;

The question as to what policy is, or should be relied upon in approving the
registration and sale of securities in the SEC is not for the Court to determine, but is
left to the sound discretion of the Securities and Exchange Commission. In mandating
the SEC to administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under Section 3 thereof,
gives the SEC the power to promulgate such rules and regulations as it may consider
appropriate in the public interest for the enforcement of the said laws. The second

(iv) had been engaged or is engaged or is

about to engaged in fraudulent transactions;

(iii) has failed to comply with any of the

applicable requirements and conditions that the
Commission may, in the public interest and for the
protection of investors, impose before the security
can be registered;

(v) is in any was dishonest of is not of good

repute; or

(vi) does not conduct its business in

accordance with law or is engaged in a business that
is illegal or contrary or government rules and
regulations.
(3)
The enterprise or the business of the issuer is
not shown to be sound or to be based on sound business
principles;
(4)
An officer, member of the board of directors, or
principal stockholder of the issuer is disqualified to such officer,
director or principal stockholder; or
(5)
The issuer or registrant has not shown to the
satisfaction of the Commission that the sale of its security would
not work to the prejudice to the public interest or as a fraud
upon the purchaser or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to
make the registration and issuance of securities dependent, to a certain extent, on the
merits of the securities themselves, and of the issuer, to be determined by the
Securities and Exchange Commission. This measure was meant to protect the
interest of the investing public against fraudulent and worthless securities, and the
SEC is mandated by law to safeguard these interests, following the policies and rules
therefore provided. The absolute reliance on the full disclosure method in the
registration of securities is, therefore, untenable. At it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has failed to support
the propriety of the issue of its shares with unfailing clarity, thereby lending support to
the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for public offerings of
corporations wishing to do so. However, the SEC must recognize and implement the
mandate of the law, particularly the Revised Securities Act, the provisions of which
cannot be amended or supplanted my mere administrative issuance.
In resum, the Court finds that the PSE has acted with justified circumspection,
discounting, therefore, any imputation of arbitrariness and whimsical animation on its
part. Its action in refusing to allow the listing of PALI in the stock exchange is justified
by the law and by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby
GRANTS the Petition for Review on Certiorari. The decisions of the Court of Appeals
and the Securities and Exchage Commission dated July 27, 1996 and April 24, 1996,
respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby
ENTERED, affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED.

FIRST DIVISION
[G.R. No. 113032. August 21, 1997]
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS
ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS,
petitioners, vs. RICARDO T. SALAS, SOLEDAD SALAS-TUBILLEJA,
ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO
PARIAN, respondents.
DECISION

percentum of the net profits shall be distributed equally among

the ten members of the Board of Trustees. This shall amend
and superceed(sic) any previous resolution.
There were no other business.
The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of
the Board of Trustees of Western Institute of Technology, Inc. held on
March 30, 1986 is true and correct to the best of my knowledge and belief.

HERMOSISIMA, JR., J.:

(Sgd)
ANTONIO S. SALAS

Up for review on certiorari are: (1) the Decision September 6, 1993 and (2) the
order dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City
in Criminal Cases Nos. 37097 and 37098 for estafa and falsification of a public
document, respectively. The judgment acquitted the private respondents of both
charges, but petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad SalasTubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same family, are
the majority and controlling members of the Board of Trustees of Western Institute of
Technology, Inc. (WIT, for short), a stock corporation engaged in the operation,
among others, of an educational institution. According to petitioners, the minority
stockholders of WIT, sometime on June 1, 1986 in the principal office of WIT at La
Paz, Iloilo City, a Special Board meeting was held. In attendance were other
members of the Board including one of the petitioners Reginald Villasis. Prior to
aforesaid Special Board Meeting, copies of notice thereof, dated May 24, 1986, were
distributed to all Board Members. The notice allegedly indicated that the meeting to
be held on June 1, 1986 included item No. 6 which states:
"Possible implementation of Art. III, Sec. 6 of the Amended By-Laws
of Western Institute of Technology, Inc. on compensation of all officers of
the corporation."
In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986,
granting monthly compensation to the private respondents as corporate officers
retroactive June 1, 1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by
Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly
compensation for services rendered as follows: Chairman P9,000.00/month, Vice-Chairman - P3,500.00/month, Corporate
Treasurer - P3,500.00/month and Corporate Secretary P3,500.00/month, retroactive June 1, 1985 and the ten

Corporat
e Secretary
A few years later, that is, on March 13, 1991, petitioners Homero Villasis,
Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-complaint
against private respondents before the Office of the City Prosecutor of Iloilo, as a
result of which two (2) separate criminal informations, one for falsification of a public
document under Article 171 of the Revised Penal Code and the other for estafa under
Article 315, par. 1(b) of the RPC, were filed before Branch 33 of the Regional Trial
Court of Iloilo City. The charge for falsification of public document was anchored on
the private respondents submission of WITs income statement for the fiscal year
1985-1986 with the Securities and Exchange Commission (SEC) reflecting therein the
disbursement of corporate funds for the compensation of private respondents based
on Resolution No. 4, series of 1986, making it appear that the same was passed by
the board on March 30, 1986, when in truth, the same was actually passed on June 1,
1986, a date not covered by the corporations fiscal year 1985-1986 (beginning May 1,
1985 and ending April 30, 1986). The information for falsification of a public document
states:
The undersigned City Prosecutor accuses RICARDO T. SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS and RICHARD S. SALAS (whose dates and places of birth cannot
be ascertained) of the crime of FALSIFICATION OF A PUBLC
DOCUMENT, Art. 171 of the Revised Penal Code, committed as follows:
That on or about the 10th day of June, 1986, in the City of
Iloilo, Philippines and within the jurisdiction of this Honorable
Court, the above-named accused, being then the Chairman,
Vice-Chairman, Treasurer, Secretary and Trustee (who later
became the secretary), respectively, of the board of trustees of
the Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually
helping one another, to better realized (sic) their purpose, did
then and there wilfully, unlawfully and criminally prepare and

execute and subsequently cause to be submitted to the

Securities and Exchange Commission an income statement of
the corporation for the fiscal year 1985-1986, the same being
required to be submitted every end of the corporation fiscal year
by the aforesaid Commission and therefore, a public document,
including therein the disbursement of the retroactive
compensation of accused corporate officers in the amount of
P186,470.70, by then and there making it appear that the basis
thereof Resolution No. 4, Series of 1986 was passed by the
board of trustees on March 30, 1986, a date covered by the
corporations fiscal year 1985-1986 (i.e., from May 1, 1985 to
April 30, 1986), when in truth and in fact, as said accused well
knew, no such Resolution No. 48, Series of 1986 was passed
on March 30, 1986.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991. [Underscoring ours].
The Information, on the other hand, for estafa reads:
The undersigned City Prosecutor accuses RICARDO SALAS,
SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S.
SALAS, RICHARD S. SALAS (whose dates and places of birth cannot be
ascertained) of the crime of ESTAFA, Art. 315, par 1(b) of the Revised
Penal Code, committed as follows:
That on or about the 1 st day of June, 1986, in the City of
Iloilo, Philippines and within the jurisdiction of this Honorable
Court, the above-named accused, being then the Chairman,
Vice-Chairman, Treasurer, Secretary and Trustee (who later
became the secretary), respectively, of the board of trustees of
the Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and mutually
helping one another, to better realize their purpose, did then
and there wilfully, unlawfully and feloniously defraud the said
corporation (and its stockholders) in the following manner, to
wit: herein accused, knowing fully well that they have no
sufficient, lawful authority to disburse--- let alone violation of
applicable laws and jurisprudence, disbursed the funds of the
corporation by effecting payment of their retroactive salaries in
the amount of P186,470.70 and subsequently paying
themselves every 15th and 30th of the month starting June 15,
1986 until the present, in the amount of P19,500.00 per month,
as if the same were their own, and when herein accused were
informed of the illegality of these disbursements by the minority
stockholders by way of objections made in an annual
stockholders meeting held on June 14, 1986 and every year
thereafter, they refused, and still refuse, to rectify the same to
the damage and prejudice of the corporation (and its

stockholders) in the total sum of P1,453,970.79 as of November

15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22,1991. [Underscoring ours]
Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos.
37097 and 37098, was consolidated. After a full-blown hearing, Judge Porfirio Parian
handed down a verdict of acquittal on both counts dated September 6, 1993 without
imposing any civil liability against the accused therein.
Petitioners filed a Motion for Reconsideration of the civil aspect of the RTC
Decision which was, however, denied in an Order dated November 23, 1993.
Hence, the instant petition.
Significantly on December 8, 1994, a Motion for Intervention, dated December
2, 1994, was filed before this Court by Western Institute of Technology, Inc.,
supposedly one of the petitioners herein, disowning its inclusion in the petition and
submitting that Atty. Tranquilino R. Gale, counsel for the other petitioners, had no
authority whatsoever to represent the corporation in filing the petition. Intervenor
likewise prayed for the dismissal of the petition for being utterly without merit. The
Motion for Intervention was granted on January 16, 1995.
Petitioners would like us to hold private respondents civilly liable despite their
acquittal in Criminal Cases Nos. 37097 and 37098. They base their claim on the
alleged illegal issuance by private respondents of Resolution No. 48, series of 1986
ordering the disbursement of corporate funds in the amount of P186,470.70
representing the retroactive compensation as of June 1, 1985 in favor of private
respondents, board members of WIT, plus P1,453,970.79 for the subsequent
collective salaries of private respondent every 15th and 30th of the month until the filing
of the criminal complaints against them on March 1991. Petitioners maintain that this
grant of compensation to private respondents is proscribed under Section 30 of the
Corporation Code. Thus, private respondents are obliged to return these amounts to
the corporation with interest.
We cannot sustain the petitioners. The pertinent section of the Corporation
Code provides:
Sec. 30. Compensation of directors.--- In the absence of any
provision in the by-laws fixing their compensation, the directors shall not
receive any compensation, as such directors, except for reasonable per
diems: Provided, however, That any such compensation (other than per
diems) may be granted to directors by the vote of the stockholders
representing at least a majority of the outstanding capital stock at a regular
or special stockholders meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed ten (10%) percent of
the net income before income tax of the corporation during the preceding
year. [Underscoring ours]

There is no argument that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they perform nothing more than the
usual and ordinary duties of their office. This rule is founded upon a presumption that
directors /trustees render service gratuitously and that the return upon their shares
adequately furnishes the motives for service, without compensation Under the
foregoing section, there are only two (2) ways by which members of the board can be
granted compensation apart from reasonable per diems: (1) when there is a provision
in the by-laws fixing their compensation; and (2) when the stockholders representing
a majority of the outstanding capital stock at a regular or special stockholders meeting
agree to give it to them.
This proscription, however, against granting compensation to directors/trustees
of a corporation is not a sweeping rule. Worthy of note is the clear phraseology of
Section 30 which states: xxx [T]he directors shall not receive any compensation, as
such directors, xxx. The phrase as such directors is not without significance for it
delimits the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. The unambiguous
implication is that members of the board may receive compensation, in addition to
reasonable per diems, when they render services to the corporation in a capacity
other than as directors/trustees. In the case at bench, Resolution No. 48, s. 1986
granted monthly compensation to private respondents not in their capacity as
members of the board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of
Technology. We quote once more Resolution No. 48, s. 1986 for easy reference, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by
Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly
compensation for services rendered as follows: Chairman P9,000.00/month, Vice-Chairman - P3,500.00/month, Corporate
Treasurer - P3,500.00/month and Corporate Secretary P3,500.00/month, retroactive June 1, 1985 and the ten
percentum of the net profits shall be distributed equally among
the ten members of the Board of Trustees. This shall amend
and superceed(sic) any previous resolution.

Corpor
ate Secretary [Underscoring ours]
Clearly, therefore , the prohibition with respect to granting compensation to corporate
directors/trustees as such under Section 30 is not violated in this particular case.
Consequently, the last sentence of Section 30 which provides:
xxx xxx. In no case shall the total yearly compensation of directors,
as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year. [Underscoring
ours]
does not likewise find application in this case since the compensation is being given
to private respondents in their capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit brought by them as
minority shareholders of WIT for and on behalf of the corporation to annul Resolution
No. 48, s. 1986 which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by minority
shareholders in the name of the corporation to redress wrongs committed against it,
for which the directors refuse to sue. It is a remedy designed by equity and has been
the principal defense of the minority shareholders against abuses by the majority.
Here, however, the case is not a derivative suit but is merely an appeal on the civil
aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa
and falsification of public document. Among the basic requirements for a derivative
suit to prosper is that the minority shareholder who is suing for and on behalf of the
corporation must allege his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other shareholders
similarly situated who wish to join. This is necessary to vest jurisdiction upon the
tribunal in line with the rule that it is the allegations in the complaint that vests
jurisdiction upon the court or quasi-judicial body concerned over the subject matter
and nature of the action. This was not complied with by the petitioners either in their
complaint before the court a quo nor in the instant petition which, in part, merely
states that this is a petition for review on certiorari on pure questions of law to set
aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098 since
the trial courts judgment of acquittal failed to impose any civil liability against the
private respondents. By no amount of equity considerations, if at all deserved, can a
mere appeal on the civil aspect of a criminal case be treated as a derivative suit.

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.
This is to certify that the foregoing minutes of the regular meeting of
the Board of Trustees of Western Institute of Technology, Inc. held on
March 30, 1986 is true and correct to the best of my knowledge and belief.
(Sgd)
ANTONIO S. SALAS

Granting, for purposes of discussion, that this is a derivative suit as insisted by

petitioners, which it is not, the same is outrightly dismissible for having been
wrongfully filed in the regular court devoid of any jurisdiction to entertain the
complaint. The case should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive jurisdiction over derivative
suits, they being intra-corporate disputes, per Section 5(b) of P.D. No. 902-A:
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:

xxx xxx

xxx

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. [Underscoring ours]

Once the case is decided by the SEC, the losing party may file a petition for review
before the Court of Appeals raising questions of fact, of law, or mixed questions of
fact and law. It is only after the case has ran this course, and not earlier, can it be
brought to us via a petition for review on certiorari under Rule 45 raising only pure
questions of law. Petitioners, in pleading that we treat the instant petition as a
derivative suit, are trying to short-circuit the entire process which we cannot here
sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for
falsification of public document and estafa, which this petition truly is, we have to
deny the petition just the same. It will be well to quote the respondent courts
ratiocinations acquitting the private respondents on both counts:
The prosecution wants this Court to believe and agree that there is
falsification of public document because, as claimed by the prosecution,
Resolution No. 48, Series of 1986 (Exh. 1-E-1) was not taken up and
passed during the Regular Meeting of the Board of Trustees of the western
Institute of Technology (WIT), Inc. on March 30, 1986, but on June 1, 1986
special meeting of the same board of trustees.
This Court is reluctant to accept this claim of falsification. The
prosecution omitted to submit the complete minutes of the regular meeting
of the Board of Trustees on March 30, 1986. It only presented in evidence
Exh. C, which is page 5 or the last page of the said minutes. Had the
complete minutes (Exh. 1 consisting of five (5) pages, been submitted, it
can readily be seen and understood that Resolution No. 48, Series of 1986
(Exh. 1-E-1) giving compensation to corporate officers, was indeed
included in Other Business, No. 6 of the Agenda, and was taken up and
passed on March 30, 1986. The mere fact of existence of Exh. C also
proves that it was passed on March 30, 1986 for Exh,. C is a part and
parcel of the whole minutes of the Board of Trustees Regular Meeting on
March 30, 1986. No better and more credible proof can be considered
other than the Minutes (Exh. 1) itself of the Regular Meeting of the Board
of Trustees on March 30, 1986. The imputation that said Resolution No.48
was neither taken up nor passed on March 30, 1986 because the matter
regarding compensation was not specifically stated or written in the
Agenda and that the words possible implementation of said Resolution No.
48, was expressly written in the Agenda for the Special Meeting of the

Board on June 1, 1986, is simply an implication. This evidence by

implication to the mind of the court cannot prevail over the Minutes (Exh. 1)
and cannot ripen into proof beyond reasonable doubt which is demanded
in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. 3-D-1) of the
Articles of Incorporation (Exh. 3-B) of the Panay Educational Institution,
Inc., now the Western Institute of Technology, Inc., the officers of the
corporation shall receive such compensation as the Board of Directors
may provide. These Articles of Incorporation was adopted on May 17, 1957
(Exh. 3-E). The Officers of the corporation and their corresponding duties
are enumerated and stated in Sections 1, 2, 3 and 4 of Art. III of the
Amended By-Laws of the Corporation (Exh. 4-A) which was adopted on
May 31, 1957. According to Sec. 6, Art. III of the same By-Laws, all officers
shall receive such compensation as may be fixed by the Board of
Directors.
It is the perception of this Court that the grant of compensation or
salary to the accused in their capacity as officers of the corporation,
through Resolution No. 48, enacted on March 30, 1986 by the Board of
Trustees, is authorized by both the Articles of Incorporation and the ByLaws of the Corporation. To state otherwise is to depart from the clear
terms of the said articles and by-laws. In their defense the accused have
properly and rightly asserted that the grant of salary is not for directors, but
for their being officers of the corporation who oversee the day to day
activities and operations of the school.
xxx xxx

xxx

xxx [O]n the question of whether or not the accused can be held
liable for estafa under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it
is perceived by this Court that the receipt and the holding of the money by
the accused as salary on basis of the authority granted by the Articles and
By-Laws of the corporation are not tainted with abuse of confidence. The
money they received belongs to them and cannot be said to have been
converted and/or misappropriated by them.
xxx xxx

xxx. [Underscoring ours]

From the foregoing factual findings, which we find to be amply substantiated by

the records, it is evident that there is simply no basis to hold the accused, private
respondents herein, civilly liable. Section 2(b) of Rule 111 on the New Rules on
Criminal Procedure provides:
SEC. 2. Institution of separate civil action.
xxx xxx

xxx
(b) Extinction of the penal action does not carry with it
extinction of the civil, unless the extinction proceeds from a

declaration in a final judgment that the fact from which the civil
might arise did not exist. [Underscoring ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
SEC. 2. Form and contents of judgment.
xxx xxx

xxx
In case of acquittal, unless there is a clear showing that
the act from which the civil liability might arise did not exist, the
judgment shall make a finding on the civil liability of the accused
in favor of the offended party. [Underscoring ours]

The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on
reasonable doubt but rather on a finding that the accused-private respondents did not
commit the criminal acts complained of. Thus, pursuant to the above rule and settled
jurisprudence, any civil action ex delicto cannot prosper. Acquittal in a criminal action
bars the civil action arising therefrom where the judgment of acquittal holds that the
accused did not commit the criminal acts imputed to them.
WHEREFORE, the instant petition is hereby DENIED with costs against
petitioners.
SO ORDERED.

Republic
SUPREME
Manila

of

the

Philippines
COURT

(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons,
$160.00 per ton, c.i.f., Los Angeles, California, delivery: November,
1947.

EN BANC
G.R. No. L-18805

(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50
per ton, delivery: September, 1947.

August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE

REPUBLIC
OF
THE
PHILIPPINES,
plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED
CASIMIRO GARCIA,3 and LEONOR MOLL, defendants-appellees.
Simeon
M.
Gopengco
and
Solicitor
General
for
plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile,
Siguion Reyna, Montecillo and Belo for defendants-appellees.

(e) September 9, 1947: Franklin Baker Division of General Foods

Corporation, for 1,500 long tons, $164,00 per ton, c.i.f., New York,
to be shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for
3,000 long tons, $154.00 per ton, f.o.b., 3 Philippine ports, delivery:
November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00
per ton, delivery: November and December, 1947. This contract
was assigned to Pacific Vegetable Co.

SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for
the protection, preservation and development of the coconut industry in the
Philippines. On August 1, 1946, NACOCO's charter was amended [Republic Act 5] to
grant that corporation the express power "to buy, sell, barter, export, and in any other
manner deal in, coconut, copra, and dessicated coconut, as well as their by-products,
and to act as agent, broker or commission merchant of the producers, dealers or
merchants" thereof. The charter amendment was enacted to stabilize copra prices, to
serve coconut producers by securing advantageous prices for them, to cut down to a
minimum, if not altogether eliminate, the margin of middlemen, mostly aliens.4
General manager and board chairman was Maximo M. Kalaw; defendants Juan
Bocar and Casimiro Garcia were members of the Board; defendant Leonor Moll
became director only on December 22, 1947.
NACOCO, after the passage of Republic Act 5, embarked on copra trading activities.
Amongst the scores of contracts executed by general manager Kalaw are the
disputed contracts, for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons,
$167.00: per ton, f. o. b., delivery: August and September, 1947.
This contract was later assigned to Louis Dreyfus & Co. (Overseas)
Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons
$145.00 per long ton, f.o.b., Philippine ports, to be shipped:
September-October, 1947. This contract was also assigned to
Louis Dreyfus & Co. (Overseas) Ltd.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: December, 1947 and
January, 1948. This contract was assigned to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per
short ton, c.i.f., Pacific ports, delivery: January, 1948. This contract
was assigned to Pacific Vegetable Co.
An unhappy chain of events conspired to deter NACOCO from fulfilling these
contracts. Nature supervened. Four devastating typhoons visited the Philippines: the
first in October, the second and third in November, and the fourth in December, 1947.
Coconut trees throughout the country suffered extensive damage. Copra production
decreased. Prices spiralled. Warehouses were destroyed. Cash requirements
doubled. Deprivation of export facilities increased the time necessary to accumulate
shiploads of copra. Quick turnovers became impossible, financing a problem.
When it became clear that the contracts would be unprofitable, Kalaw submitted them
to the board for approval. It was not until December 22, 1947 when the membership
was completed. Defendant Moll took her oath on that date. A meeting was then held.
Kalaw made a full disclosure of the situation, apprised the board of the impending
heavy losses. No action was taken on the contracts. Neither did the board vote
thereon at the meeting of January 7, 1948 following. Then, on January 11, 1948,
President Roxas made a statement that the NACOCO head did his best to avert the
losses, emphasized that government concerns faced the same risks that confronted
private companies, that NACOCO was recouping its losses, and that Kalaw was to
remain in his post. Not long thereafter, that is, on January 30, 1948, the board met
again with Kalaw, Bocar, Garcia and Moll in attendance. They unanimously approved
the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers

Tons Delivered

Undelivered

Pacific Vegetable Oil

2,386.45

4,613.55

Spencer Kellog

None

1,000

Franklin Baker

1,000

500

Louis Dreyfus

800

2,200

Louis Dreyfus (Adamson contract of July 30,

1,150
1947)

850

Louis Dreyfus (Adamson Contract of August 14,

1,755
1947)

245

T O TALS

9,408.55

7,091.45

same proportion, the claim of Dreyfus against NACOCO should

have been compromised for only P10,000.00, if at all. Now, why
should defendants be held liable for the large sum paid as
compromise by the Board of Liquidators? This is just a sample to
show how unjust it would be to hold defendants liable for the
readiness with which the Board of Liquidators disposed of the
NACOCO funds, although there was much possibility of
successfully resisting the claims, or at least settlement for nominal
sums like what happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and
directors Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with
negligence under Article 1902 of the old Civil Code (now Article 2176, new Civil
Code); and defendant board members, including Kalaw, with bad faith and/or breach
of trust for having approved the contracts. The fifth amended complaint, on which this
case was tried, was filed on July 2, 1959. Defendants resisted the action upon
defenses hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without costs as
well as defendants' counterclaims, except that plaintiff was ordered to pay the heirs of
Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the
deceased Kalaw from NACOCO.

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific
Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker
Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court
of First Instance of Manila, upon claims as follows: For the undelivered copra under
the July 30 contract (Civil Case 4459); P287,028.00; for the balance on the August 14
contract (Civil Case 4398), P75,098.63; for that per the September 12 contract
reduced to judgment (Civil Case 4322, appealed to this Court in L-2829),
P447,908.40. These cases culminated in an out-of-court amicable settlement when
the Kalaw management was already out. The corporation thereunder paid Dreyfus
P567,024.52 representing 70% of the total claims. With particular reference to the
Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were void
because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business
here; and (2) failure to deliver was due to force majeure, the typhoons. To project the
utter unreasonableness of this compromise, we reproduce in haec verba this finding
below:
x x x However, in similar cases brought by the same claimant [Louis
Dreyfus & Co. (Overseas) Ltd.] against Santiago Syjuco for nondelivery of copra also involving a claim of P345,654.68 wherein
defendant set up same defenses as above, plaintiff accepted a
promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the

Plaintiff appealed direct to this Court.

Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of
P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by,
the court below, arrest our attention. On appeal, defendants renew their bid. And this,
upon established jurisprudence that an appellate court may base its decision of
affirmance of the judgment below on a point or points ignored by the trial court or in
which said court was in error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board
of Liquidators has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its
affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded
Section 66 of the Corporation Law]7 whereby, upon voluntary dissolution of a
corporation, the court may direct "such disposition of its assets as justice requires,
and may appoint a receiver to collect such assets and pay the debts of the
corporation;" (2) under Section 77 of the Corporation Law, whereby a corporation
whose corporate existence is terminated, "shall nevertheless be continued as a body
corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to

divide its capital stock, but not for the purpose of continuing the business for which it
was established;" and (3) under Section 78 of the Corporation Law, by virtue of which
the corporation, within the three year period just mentioned, "is authorized and
empowered to convey all of its property to trustees for the benefit of members,
stockholders, creditors, and others interested."8
It is defendants' pose that their case comes within the coverage of the second
method. They reason out that suit was commenced in February, 1949; that by
Executive Order 372, dated November 24, 1950, NACOCO, together with other
government-owned corporations, was abolished, and the Board of Liquidators was
entrusted with the function of settling and closing its affairs; and that, since the three
year period has elapsed, the Board of Liquidators may not now continue with, and
prosecute, the present case to its conclusion, because Executive Order 372 provides
in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the
National Coconut Corporation, the National Tobacco Corporation,
the National Food Producer Corporation and the former enemyowned or controlled corporations or associations, . . . are hereby
abolished. The said corporations shall be liquidated in accordance
with law, the provisions of this Order, and/or in such manner as the
President of the Philippines may direct; Provided, however, That
each of the said corporations shall nevertheless be continued as a
body corporate for a period of three (3) years from the effective
date of this Executive Order for the purpose of prosecuting and
defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of
and, convey its property in the manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be
found impossible within the 3 year period to reduce disputed claims to judgment,
nonetheless, "suits by or against a corporation abate when it ceases to be an entity
capable of suing or being sued" (Fisher, The Philippine Law of Stock Corporations,
pp. 390-391). Corpus Juris Secundum likewise is authority for the statement that
"[t]he dissolution of a corporation ends its existence so that there must be statutory
authority for prolongation of its life even for purposes of pending litigation"9 and that
suit "cannot be continued or revived; nor can a valid judgment be rendered therein,
and a judgment, if rendered, is not only erroneous, but void and subject to collateral
attack." 10 So it is, that abatement of pending actions follows as a matter of course
upon the expiration of the legal period for liquidation, 11 unless the statute merely
requires a commencement of suit within the added time. 12 For, the court cannot
extend the time alloted by statute. 13
We, however, express the view that the executive order abolishing NACOCO and
creating the Board of Liquidators should be examined in context. The proviso in
Section 1 of Executive Order 372, whereby the corporate existence of NACOCO was
continued for a period of three years from the effectivity of the order for "the purpose
of prosecuting and defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of and convey its
property in the manner hereinafter provided", is to be read not as an isolated
provision but in conjunction with the whole. So reading, it will be readily observed that

no time limit has been tacked to the existence of the Board of Liquidators and its
function of closing the affairs of the various government owned corporations,
including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various
corporations were abolished, their powers and functions and duties under existing
laws were to be assumed and exercised by the Board of Liquidators. The President
thought it best to do away with the boards of directors of the defunct corporations; at
the same time, however, the President had chosen to see to it that the Board of
Liquidators step into the vacuum. And nowhere in the executive order was there any
mention of the lifespan of the Board of Liquidators. A glance at the other provisions of
the executive order buttresses our conclusion. Thus, liquidation by the Board of
Liquidators may, under section 1, proceed in accordance with law, the provisions of
the executive order, "and/or in such manner as the President of the Philippines may
direct." By Section 4, when any property, fund, or project is transferred to any
governmental instrumentality "for administration or continuance of any project," the
necessary funds therefor shall be taken from the corresponding special fund created
in Section 5. Section 5, in turn, talks of special funds established from the "net
proceeds of the liquidation" of the various corporations abolished. And by Section, 7,
fifty per centum of the fees collected from the copra standardization and inspection
service shall accrue "to the special fund created in section 5 hereof for the
rehabilitation and development of the coconut industry." Implicit in all these, is that the
term of life of the Board of Liquidators is without time limit. Contemporary history
gives us the fact that the Board of Liquidators still exists as an office with officials and
numerous employees continuing the job of liquidation and prosecution of several
court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final
determination of the present case is without jurisprudential support. The first judicial
test before this Court is National Abaca and Other Fibers Corporation vs. Pore, L16779, August 16, 1961. In that case, the corporation, already dissolved, commenced
suit within the three-year extended period for liquidation. That suit was for recovery of
money advanced to defendant for the purchase of hemp in behalf of the corporation.
She failed to account for that money. Defendant moved to dismiss, questioned the
corporation's capacity to sue. The lower court ordered plaintiff to include as co-party
plaintiff, The Board of Liquidators, to which the corporation's liquidation was entrusted
by Executive Order 372. Plaintiff failed to effect inclusion. The lower court dismissed
the suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its
counsel prepared the amended complaint, as directed, and instructed the board's
incoming and outgoing correspondence clerk, Mrs. Receda Vda. de Ocampo, to mail
the original thereof to the court and a copy of the same to defendant's counsel. She
mailed the copy to the latter but failed to send the original to the court. This motion
was rejected below. Plaintiff came to this Court on appeal. We there said that "the rule
appears to be well settled that, in the absence of statutory provision to the contrary,
pending actions by or against a corporation are abated upon expiration of the period
allowed by law for the liquidation of its affairs." We there said that "[o]ur Corporation
Law contains no provision authorizing a corporation, after three (3) years from the
expiration of its lifetime, to continue in its corporate name actions instituted by it within
said period of three (3) years." 14 However, these precepts notwithstanding, we, in
effect, held in that case that the Board of Liquidators escapes from the operation
thereof for the reason that "[o]bviously, the complete loss of plaintiff's corporate

existence after the expiration of the period of three (3) years for the settlement of its
affairs is what impelled the President to create a Board of Liquidators, to continue the
management of such matters as may then be pending." 15 We accordingly directed
the record of said case to be returned to the lower court, with instructions to admit
plaintiff's amended complaint to include, as party plaintiff, the Board of Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished NACOCO,
and placed its assets in the hands of the Board of Liquidators. The Board of
Liquidators thus became the trustee on behalf of the government. It was an express
trust. The legal interest became vested in the trustee the Board of Liquidators. The
beneficial interest remained with the sole stockholder the government. At no time
had the government withdrawn the property, or the authority to continue the present
suit, from the Board of Liquidators. If for this reason alone, we cannot stay the hand of
the Board of Liquidators from prosecuting this case to its final conclusion. 16 The
provisions of Section 78 of the Corporation Law the third method of winding up
corporate affairs find application.
We, accordingly, rule that the Board of Liquidators has personality to proceed as:
party-plaintiff in this case.
2. Defendants' second poser is that the action is unenforceable against the heirs of
Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and
in their nineteenth special defense, that plaintiff's action is personal to the deceased
Maximo M. Kalaw, and may not be deemed to have survived after his death. 18 They
say that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court. 19
which provides that "[a]ll claims for money against the decedent, arising from
contract, express or implied", must be filed in the estate proceedings of the deceased.
We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered
into the questioned contracts without prior approval of the board of directors, to the
damage and prejudice of plaintiff; and is against Kalaw and the other directors for
having subsequently approved the said contracts in bad faith and/or breach of trust."
Clearly then, the present case is not a mere action for the recovery of money nor a
claim for money arising from contract. The suit involves alleged tortious acts. And the
action is embraced in suits filed "to recover damages for an injury to person or
property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August
30, 1962. There, plaintiffs sought to recover damages from defendant Llemos. The
complaint averred that Llemos had served plaintiff by registered mail with a copy of a
petition for a writ of possession in Civil Case 4824 of the Court of First Instance at
Catbalogan, Samar, with notice that the same would be submitted to the Samar court
on February 23, 1960 at 8:00 a.m.; that in view of the copy and notice served,
plaintiffs proceeded to the said court of Samar from their residence in Manila
accompanied by their lawyers, only to discover that no such petition had been filed;
and that defendant Llemos maliciously failed to appear in court, so that plaintiffs'

expenditure and trouble turned out to be in vain, causing them mental anguish and
undue embarrassment. Defendant died before he could answer the complaint. Upon
leave of court, plaintiffs amended their complaint to include the heirs of the deceased.
The heirs moved to dismiss. The court dismissed the complaint on the ground that the
legal representative, and not the heirs, should have been made the party defendant;
and that, anyway, the action being for recovery of money, testate or intestate
proceedings should be initiated and the claim filed therein. This Court, thru Mr. Justice
Jose B. L. Reyes, there declared:
Plaintiffs argue with considerable cogency that contrasting the
correlated provisions of the Rules of Court, those concerning claims
that are barred if not filed in the estate settlement proceedings
(Rule 87, sec. 5) and those defining actions that survive and may
be prosecuted against the executor or administrator (Rule 88, sec.
1), it is apparent that actions for damages caused by tortious
conduct of a defendant (as in the case at bar) survive the death of
the latter. Under Rule 87, section 5, the actions that are abated by
death are: (1) claims for funeral expenses and those for the last
sickness of the decedent; (2) judgments for money; and (3) "all
claims for money against the decedent, arising from contract
express or implied." None of these includes that of the plaintiffsappellants; for it is not enough that the claim against the deceased
party be for money, but it must arise from "contract express or
implied", and these words (also used by the Rules in connection
with attachments and derived from the common law) were
construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than those
which have their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that
survive against a decedent's executors or administrators, and they
are: (1) actions to recover real and personal property from the
estate; (2) actions to enforce a lien thereon; and (3) actions to
recover damages for an injury to person or property. The present
suit is one for damages under the last class, it having been held
that "injury to property" is not limited to injuries to specific property,
but extends to other wrongs by which personal estate is injured or
diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171 A.L.R.,
1395). To maliciously cause a party to incur unnecessary expenses,
as charged in this case, is certainly injury to that party's property
(Javier vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts comparable to those of
the present. No cogent reason exists why we should break away from the views just
expressed. And, the conclusion remains: Action against the Kalaw heirs and, for the
matter, against the Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the controversy.

3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly
entered into the controverted contracts without the prior approval of the corporation's
directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b),
Chapter III thereof, recites, as amongst the duties of the general manager, the
obligation: "(b) To perform or execute on behalf of the Corporation upon prior approval
of the Board, all contracts necessary and essential to the proper accomplishment for
which the Corporation was organized."
Not of de minimis importance in a proper approach to the problem at hand, is the
nature of a general manager's position in the corporate structure. A rule that has
gained acceptance through the years is that a corporate officer "intrusted with the
general management and control of its business, has implied authority to make any
contract or do any other act which is necessary or appropriate to the conduct of the
ordinary business of the corporation. 21 As such officer, "he may, without any special
authority from the Board of Directors perform all acts of an ordinary nature, which by
usage or necessity are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of the general
concept of the powers of a general manager, given the cited provision of the
NACOCO by-laws requiring prior directorate approval of NACOCO contracts.

Nothing was said by them. The aforesaid contracts stand to prove one thing:
Obviously, NACOCO board met the difficulties attendant to forward sales by leaving
the adoption of means to end, to the sound discretion of NACOCO's general manager
Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's
general manager and submitted to the board after their consummation, not before.
These agreements were not Kalaw's alone. One at least was executed by a
predecessor way back in 1940, soon after NACOCO was chartered. It was a contract
of lease executed on November 16, 1940 by the then general manager and board
chairman, Maximo Rodriguez, and A. Soriano y Cia., for the lease of a space in
Soriano Building On November 14, 1946, NACOCO, thru its general manager Kalaw,
sold 3,000 tons of copra to the Food Ministry, London, thru Sebastian Palanca. On
December 22, 1947, when the controversy over the present contract cropped up, the
board voted to approve a lease contract previously executed between Kalaw and
Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the same
date, the board gave its nod to a contract for renewal of the services of Dr. Manuel L.
Roxas. In fact, also on that date, the board requested Kalaw to report for action all
copra contracts signed by him "at the meeting immediately following the signing of
the contracts." This practice was observed in a later instance when, on January 7,
1948, the board approved two previous contracts for the sale of 1,000 tons of copra
each to a certain "SCAP" and a certain "GNAPO".

The peculiar nature of copra trading, at this point, deserves express articulation.
Ordinary in this enterprise are copra sales for future delivery. The movement of the
market requires that sales agreements be entered into, even though the goods are
not yet in the hands of the seller. Known in business parlance as forward sales, it is
concededly the practice of the trade. A certain amount of speculation is inherent in the
undertaking. NACOCO was much more conservative than the exporters with big
capital. This short-selling was inevitable at the time in the light of other factors such
as availability of vessels, the quantity required before being accepted for loading, the
labor needed to prepare and sack the copra for market. To NACOCO, forward sales
were a necessity. Copra could not stay long in its hands; it would lose weight, its
value decrease. Above all, NACOCO's limited funds necessitated a quick turnover.
Copra contracts then had to be executed on short notice at times within twentyfour hours. To be appreciated then is the difficulty of calling a formal meeting of the
board.

And more. On December 19, 1946, the board resolved to ratify the brokerage
commission of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra
to the French Government. Such ratification was necessary because, as stated by
Kalaw in that same meeting, "under an existing resolution he is authorized to give a
brokerage fee of only 1% on sales of copra made through brokers." On January 15,
1947, the brokerage fee agreements of 1-1/2% on three export contracts, and 2% on
three others, for the sale of copra were approved by the board with a proviso
authorizing the general manager to pay a commission up to the amount of 1-1/2%
"without further action by the Board." On February 5, 1947, the brokerage fee of 2%
of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by
the board. On March 19, 1947, a 2% brokerage commission was similarly approved
by the board for Pacific Trading Corporation on the sale of 2,000 tons of copra.

Such were the environmental circumstances when Kalaw went into copra trading.

It is to be noted in the foregoing cases that only the brokerage fee agreements were
passed upon by the board, not the sales contracts themselves. And even those fee
agreements were submitted only when the commission exceeded the ceiling fixed by
the board.

Long before the disputed contracts came into being, Kalaw contracted by himself
alone as general manager for forward sales of copra. For the fiscal year ending
June 30, 1947, Kalaw signed some 60 such contracts for the sale of copra to divers
parties. During that period, from those copra sales, NACOCO reaped a gross profit of
P3,631,181.48. So pleased was NACOCO's board of directors that, on December 5,
1946, in Kalaw's absence, it voted to grant him a special bonus "in recognition of the
signal achievement rendered by him in putting the Corporation's business on a selfsufficient basis within a few months after assuming office, despite numerous
handicaps and difficulties."
These previous contract it should be stressed, were signed by Kalaw without prior
authority from the board. Said contracts were known all along to the board members.

Knowledge by the
instances.1wph1.t

board

is

also

discernible

from

other

recorded

When the board met on May 10, 1947, the directors discussed the copra situation:
There was a slow downward trend but belief was entertained that the nadir might
have already been reached and an improvement in prices was expected. In view
thereof, Kalaw informed the board that "he intends to wait until he has signed
contracts to sell before starting to buy copra."23

In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions
then current: The copra market appeared to have become fairly steady; it was not
expected that copra prices would again rise very high as in the unprecedented boom
during January-April, 1947; the prices seemed to oscillate between $140 to $150 per
ton; a radical rise or decrease was not indicated by the trends. Kalaw continued to
say that "the Corporation has been closing contracts for the sale of copra generally
with a margin of P5.00 to P7.00 per hundred kilos." 24

In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and in
NACOCO's behalf without prior board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior approval on all corporate contracts.
But that board itself, by its acts and through acquiescence, practically laid aside the
by-law requirement of prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.

We now lift the following excerpts from the minutes of that same board meeting of
July 29, 1947:
521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the management to close
contracts of sale first before buying. The General Manager replied
that this practice is generally followed but that it is not always
possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires
that it should not cease buying even when it does not have actual
contracts of sale since the suspension of buying by the Nacoco will
result in middlemen taking advantage of the temporary inactivity of
the Corporation to lower the prices to the detriment of the
producers.

4. But if more were required, we need but turn to the board's ratification of the
contracts in dispute on January 30, 1948, though it is our (and the lower court's) belief
that ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of
an unauthorized act or contract by its officers or others relates back to the time of the
act or contract ratified, and is equivalent to original authority;" and that " [t]he
corporation and the other party to the transaction are in precisely the same position
as if the act or contract had been authorized at the time." 30 The language of one case
is expressive: "The adoption or ratification of a contract by a corporation is nothing
more or less than the making of an original contract. The theory of corporate
ratification is predicated on the right of a corporation to contract, and any ratification
or adoption is equivalent to a grant of prior authority." 31

(2) The movement of the market is such that it may not be practical
always to wait for the consummation of contracts of sale before
beginning to buy copra.

Indeed, our law pronounces that "[r]atification cleanses the contract from all its
defects from the moment it was constituted." 32 By corporate confirmation, the
contracts executed by Kalaw are thus purged of whatever vice or defect they may
have. 33

The General Manager explained that in this connection a certain

amount of speculation is unavoidable. However, he said that the
Nacoco is much more conservative than the other big exporters in
this respect.25

In sum, a case is here presented whereunder, even in the face of an express by-law
requirement of prior approval, the law on corporations is not to be held so rigid and
inflexible as to fail to recognize equitable considerations. And, the conclusion
inevitably is that the embattled contracts remain valid.

Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general manager
may bind the company without formal authorization of the board of directors. 26 In
varying language, existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by the knowledge which the
board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation. 27 So also,

5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith
and/or breach of trust" in the board's ratification of the contracts without prior approval
of the board. For, in reality, all that we have on the government's side of the scale is
that the board knew that the contracts so confirmed would cause heavy losses.

x x x authority to act for and bind a corporation may be presumed

from acts of recognition in other instances where the power was in
fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation,
an officer has been allowed in his official capacity to manage its
affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors to
manage its business.29

As we have earlier expressed, Kalaw had authority to execute the contracts without
need of prior approval. Everybody, including Kalaw himself, thought so, and for a long
time. Doubts were first thrown on the way only when the contracts turned out to be
unprofitable for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious
doing of wrong; it means breach of a known duty thru some motive or interest or ill
will; it partakes of the nature of fraud.34 Applying this precept to the given facts herein,
we find that there was no "dishonest purpose," or "some moral obliquity," or
"conscious doing of wrong," or "breach of a known duty," or "Some motive or interest
or ill will" that "partakes of the nature of fraud."

Nor was it even intimated here that the NACOCO directors acted for personal
reasons, or to serve their own private interests, or to pocket money at the expense of
the corporation. 35 We have had occasion to affirm that bad faith contemplates a
"state of mind affirmatively operating with furtive design or with some motive of selfinterest or ill will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148149, 35 L. ed. 662, 669, quotes with approval from Judge Sharswood (in Spering's
App., 71 Pa. 11), the following: "Upon a close examination of all the reported cases,
although there are many dicta not easily reconcilable, yet I have found no judgment or
decree which has held directors to account, except when they have themselves been
personally guilty of some fraud on the corporation, or have known and connived at
some fraud in others, or where such fraud might have been prevented had they given
ordinary attention to their duties. . . ." Plaintiff did not even dare charge its defendantdirectors with any of these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene basic
dictates of fairness. They did not think of raising their voice in protest against past
contracts which brought in enormous profits to the corporation. By the same token,
fair dealing disagrees with the idea that similar contracts, when unprofitable, should
not merit the same treatment. Profit or loss resulting from business ventures is no
justification for turning one's back on contracts entered into. The truth, then, of the
matter is that in the words of the trial court the ratification of the contracts was
"an act of simple justice and fairness to the general manager and the best interest of
the corporation whose prestige would have been seriously impaired by a rejection by
the board of those contracts which proved disadvantageous." 37
The directors are not liable." 38
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on our copraproducing regions. Result: Copra production was impaired, prices spiralled,
warehouses destroyed. Quick turnovers could not be expected. NACOCO was not
alone in this misfortune. The record discloses that private traders, old, experienced,
with bigger facilities, were not spared; also suffered tremendous losses. Roughly
estimated, eleven principal trading concerns did run losses to about P10,300,000.00.
Plaintiff's witness Sisenando Barretto, head of the copra marketing department of
NACOCO, observed that from late 1947 to early 1948 "there were many who lost
money in the trade." 39 NACOCO was not immune from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by
Louis Dreyfus & Co. by pleading in its answers force majeure as an affirmative
defense and there vehemently asserted that "as a result of the said typhoons,
extensive damage was caused to the coconut trees in the copra producing regions of
the Philippines and according to estimates of competent authorities, it will take about
one year until the coconut producing regions will be able to produce their normal
coconut yield and it will take some time until the price of copra will reach normal
levels;" and that "it had never been the intention of the contracting parties in entering
into the contract in question that, in the event of a sharp rise in the price of copra in
the Philippine market produce by force majeure or by caused beyond defendant's
control, the defendant should buy the copra contracted for at exorbitant prices far
beyond the buying price of the plaintiff under the contract." 40

A high regard for formal judicial admissions made in court pleadings would suffice to
deter us from permitting plaintiff to stray away therefrom, to charge now that the
damage suffered was because of Kalaw's negligence, or for that matter, by reason of
the board's ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its
contractual obligations. Stock accessibility was no problem. NACOCO had 90 buying
agencies spread throughout the islands. It could purchase 2,000 tons of copra a day.
The various contracts involved delivery of but 16,500 tons over a five-month period.
Despite the typhoons, NACOCO was still able to deliver a little short of 50% of the
tonnage required under the contracts.
As the trial court correctly observed, this is a case of damnum absque injuria.
Conjunction of damage and wrong is here absent. There cannot be an actionable
wrong if either one or the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which
would link Kalaw's acts ratified by the board to a matrix for defraudation of the
government. Kalaw is clear of the stigma of bad faith. Plaintiff's corporate counsel 44
concedes that Kalaw all along thought that he had authority to enter into the
contracts, that he did so in the best interests of the corporation; that he entered into
the contracts in pursuance of an overall policy to stabilize prices, to free the
producers from the clutches of the middlemen. The prices for which NACOCO
contracted in the disputed agreements, were at a level calculated to produce profits
and higher than those prevailing in the local market. Plaintiff's witness, Barretto,
categorically stated that "it would be foolish to think that one would sign (a) contract
when you are going to lose money" and that no contract was executed "at a price
unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO
envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably
consulted with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General
Manager. The dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected
to predict the coming of unpredictable typhoons. And even as typhoons supervened
Kalaw was not remissed in his duty. He exerted efforts to stave off losses. He asked
the Philippine National Bank to implement its commitment to extend a P400,000.00
loan. The bank did not release the loan, not even the sum of P200,000.00, which, in
October, 1947, was approved by the bank's board of directors. In frustration, on
December 12, 1947, Kalaw turned to the President, complained about the bank's
short-sighted policy. In the end, nothing came out of the negotiations with the bank.
NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple
negligence, would seem to be supported by the fact that even as the contracts were
being questioned in Congress and in the NACOCO board itself, President Roxas
defended the actuations of Kalaw. On December 27, 1947, President Roxas
expressed his desire "that the Board of Directors should reelect Hon. Maximo M.
Kalaw as General Manager of the National Coconut Corporation." 47 And, on January
7, 1948, at a time when the contracts had already been openly disputed, the board, at

its regular meeting, appointed Maximo M. Kalaw as acting general manager of the
corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia
Milling Co., Inc., L-15092, May 18, 1962:
"They (the directors) hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during a business depression, or closed
down at a smaller loss, is a purely business and economic problem to be determined
by the directors of the corporation, and not by the court. It is a well known rule of law
that questions of policy of management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute
its judgment for the judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49
Viewed in the light of the entire record, the judgment under review must be, as it is
hereby, affirmed.
Without costs. So ordered.

On 12 November 1982, COA issued another Memorandum Audit Memorandum

No. 2 addressed to respondent Peter Cosalan, inviting attention to the fact that the
audit of per diems and allowances received by officials and members of the Board of
Directors of Beneco showed substantial inconsistencies with the directives of the
NEA. The Audit Memorandum once again directed the taking of immediate action in
conformity with existing NEA regulations.
Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION

G.R. No. 89070 May 18, 1992

BENGUET
ELECTRlC
COOPERATIVE,
INC.,
petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, PETER COSALAN and BOARD
OF DIRECTORS OF BENGUET ELECTRIC COOPERATIVE, INC., * respondents.

On 19 May 1983, petitioner Beneco received the COA Audit Report on the financial
status and operations of Beneco for the eight (8) month period ended 30 September
1982. This Audit Report noted and enumerated irregularities in the utilization of funds
amounting to P37 Million released by NEA to Beneco, and recommended that
appropriate remedial action be taken.
Having been made aware of the serious financial condition of Beneco and what
appeared to be mismanagement, respondent Cosalan initiated implementation of the
remedial measures recommended by the COA. The respondent members of the
Board of Beneco reacted by adopting a series of resolutions during the period from 23
June to 24 July 1984. These Board Resolutions abolished the housing allowance of
respondent Cosalan; reduced his salary and his representation and commutable
allowances; directed him to hold in abeyance all pending personnel disciplinary
actions; and struck his name out as a principal signatory to transactions of petitioner
Beneco.

Raymundo W. Celino for respondent Peter Cosalan.

Reenan Orate for respondent Board of Directors of BENECO.

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

During the period from 28 July to 25 September 1984, the respondent Beneco Board
members adopted another series of resolutions which resulted in the ouster of
respondent Cosalan as General Manager of Beneco and his exclusion from
performance of his regular duties as such, as well as the withholding of his salary and
allowances. These resolutions were as follows:
1. Resolution No. 91-4 dated 28 July 1984:
. . . that the services of Peter M. Cosalan as
General Manager of BENECO is terminated upon
approval
of
the
National
Electrification
Administration;
2. Resolution No. 151-84 dated September 15, 1984;
. . . that Peter M. Cosalan is hereby suspended
from his position as General Manager of the
Benguet Electric Cooperative, Inc. (BENECO)
effective as of the start of the office hours on
September 24, 1984, until a final decision has
been reached by the NEA on his dismissal;

. . . that GM Cosalan's suspension from office

shall remain in full force and effect until such
suspension is sooner lifted, revoked or rescinded
by the Board of Directors; that all monies due him
are withheld until cleared;
3. Resolution No. 176-84 dated September 25, 1984;
. . . that Resolution No. 151-84, dated September
15, 1984 stands as preventive suspension for
GM Peter M. Cosalan. 1
Respondent Cosalan nevertheless continued to work as General Manager of Beneco,
in the belief that he could be suspended or removed only by duly authorized officials
of NEA, in accordance with provisions of P.D. No, 269, as amended by P.D. No. 1645
(the statute creating the NEA, providing for its capitalization, powers and functions
and organization), the loan agreement between NEA and petitioner Beneco 2 and the
NEA Memorandum of 2 July 1980. 3 Accordingly, on 5 October and 10 November
1984, respondent Cosalan requested petitioner Beneco to release the compensation
due him. Beneco, acting through respondent Board members, denied the written
request of respondent Cosalan.
Respondent Cosalan then filed a complaint with the National Labor Relations
Commission ("NLRC") on 5 December 1984 against respondent members of the
Beneco Board, challenging the legality of the Board resolutions which ordered his
suspension and termination from the service and demanding payment of his salaries
and allowances. On 18 February 1985, Cosalan amended his complaint to implead
petitioner Beneco and respondent Board members, the latter in their respective dual
capacities as Directors and as private individuals.
In the course of the proceedings before the Labor Arbiter, Cosalan filed a motion for
reinstatement which, although opposed by petitioner Beneco, was granted on 23
October 1987 by Labor Arbiter Amado T. Adquilen. Petitioner Beneco complied with
the Labor Arbiter's order on 28 October 1987 through Resolution No. 10-90.
On 5 April 1988, the Labor Arbiter rendered a decision (a) confirming Cosalan's
reinstatement; (b) ordering payment to Cosalan of his backwages and allowances by
petitioner Beneco and respondent Board members, jointly and severally, for a period
of three (3) years without deduction or qualification, amounting to P344,000.00; and
(3) ordering the individual Board members to pay, jointly and severally, to Cosalan
moral damages of P50,000.00 plus attorney's fees of ten percent (10%) of the wages
and allowances awarded him.

Respondent Board members appealed to the NLRC, and there filed a Memorandum
on Appeal. Petitioner Beneco did not appeal, but moved to dismiss the appeal filed by
respondent Board members and for execution of judgment. By this time, petitioner
Beneco had a new set of directors.
In a decision dated 21 November 1988, public respondent NLRC modified the award
rendered by the Labor Arbiter by declaring that petitioner Beneco alone, and not
respondent Board members, was liable for respondent Cosalan's backwages and
allowances, and by ruling that there was no legal basis for the award of moral
damages and attorney's fees made by the Labor Arbiter.
Beneco, through its new set of directors, moved for reconsideration of the NLRC
decision, but without success.
In the present Petition for Certiorari, Beneco's principal contentions are two-fold: first,
that the NLRC had acted with grave abuse of discretion in accepting and giving due
course to respondent Board members' appeal although such appeal had been filed
out of time; and second, that the NLRC had acted with grave abuse of discretion
amounting to lack of jurisdiction in holding petitioner alone liable for payment of the
backwages and allowances due to Cosalan and releasing respondent Board
members from liability therefor.
We consider that petitioner's first contention is meritorious. There is no dispute about
the fact that the respondent Beneco Board members received the decision of the
labor Arbiter on 21 April 1988. Accordingly, and because 1 May 1988 was a legal
holiday, they had only up to 2 May 1988 within which to perfect their appeal by filing
their memorandum on appeal. It is also not disputed that the respondent Board
members' memorandum on appeal was posted by registered mail on 3 May 1988 and
received by the NLRC the following day. 4 Clearly, the memorandum on appeal was
filed out of time.
Respondent Board members, however, insist that their Memorandum on Appeal was
filed on time because it was delivered for mailing on 1 May 1988 to the Garcia
Communications Company, a licensed private letter carrier. The Board members in
effect contend that the date of delivery to Garcia Communications was the date of
filing of their appeal memorandum.
Respondent Board member's contention runs counter to the established rule that
transmission through a private carrier or letter-forwarder instead of the Philippine
Post Office is not a recognized mode of filing pleadings. 5 The established rule is
that the date of delivery of pleadings to a private letter-forwarding agency is not to be
considered as the date of filing thereof in court, and that in such cases, the date of
actual receipt by the court, and not the date of delivery to the private carrier, is
deemed the date of filing of that pleading. 6

There, was, therefore, no reason grounded upon substantial justice and the
prevention of serious miscarriage of justice that might have justified the NLRC in
disregarding the ten-day reglementary period for perfection of an appeal by the
respondent Board members. Accordingly, the applicable rule was that the ten-day
reglementary period to perfect an appeal is mandatory and jurisdictional in nature,
that failure to file an appeal within the reglementary period renders the assailed
decision final and executory and no longer subject to review. 7 The respondent Board
members had thus lost their right to appeal from the decision of the Labor Arbiter and
the NLRC should have forthwith dismissed their appeal memorandum.
There is another and more compelling reason why the respondent Board members'
appeal should have been dismissed forthwith: that appeal was quite bereft of merit.
Both the Labor Arbiter and the NLRC had found that the indefinite suspension and
termination of services imposed by the respondent Board members upon petitioner
Cosalan was illegal. That illegality flowed, firstly, from the fact that the suspension of
Cosalan was continued long after expiration of the period of thirty (30) days, which is
the maximum period of preventive suspension that could be lawfully imposed under
Section 4, Rule XIV of the Omnibus Rules Implementing the Labor Code. Secondly,
Cosalan had been deprived of procedural due process by the respondent Board
members. He was never informed of the charges raised against him and was given
no opportunity to meet those charges and present his side of whatever dispute
existed; he was kept totally in the dark as to the reason or reasons why he had been
suspended and effectively dismissed from the service of Beneco Thirdly, respondent
Board members failed to adduce any cause which could reasonably be regarded as
lawful cause for the suspension and dismissal of respondent Cosalan from his
position as General Manager of Beneco. Cosalan was, in other words, denied due
process both procedural and substantive. Fourthly, respondent Board members failed
to obtain the prior approval of the NEA of their suspension now dismissal of Cosalan,
which prior approval was required, inter alia, under the subsisting loan agreement
between the NEA and Beneco. The requisite NEA approval was subsequently sought
by the respondent Board members; no NEA approval was granted.
In reversing the decision of the Labor Arbiter declaring petitioner Beneco and
respondent Board members solidarily liable for the salary, allowances, damages and
attorney's fees awarded to respondent Cosalan, the NLRC said:
. . . A perusal of the records show that the members of the Board
never acted in their individual capacities. They were acting as a
Board passing resolutions affecting their general manager. If these
resolutions and resultant acts transgressed the law, to then
BENECO for which the Board was acting in behalf should bear
responsibility. The records do not disclose that the individual Board
members were motivated by malice or bad faith, rather, it reveals
an intramural power play gone awry and misapprehension of its

own rules and regulations. For this reason, the decision holding the
individual board members jointly and severally liable with BENECO
for Cosalan's backwages is untenable. The same goes for the
award of damages which does not have the proverbial leg to stand
on.
The Labor Arbiter below should have heeded his own observation
in his decision
Respondent BENECO as an artificial person
could not have, by itself, done anything to
prevent it. But because the former have acted
while in office and in the course of their official
functions as directors of BENECO, . . .
Thus, the decision of the Labor Arbiter should be modified
conformably with all the foregoing holding BENECO solely liable for
backwages and releasing the appellant board members from any
individual liabilities. 8 (Emphasis supplied)
The applicable general rule is clear enough. The Board members and officers of a
corporation who purport to act for and in behalf of the corporation, keep within the
lawful scope of their authority in so acting, and act in good faith, do not become liable,
whether civilly or otherwise, for the consequences of their acts, Those acts, when
they are such a nature and are done under such circumstances, are properly
attributed to the corporation alone and no personal liability is incurred by such officers
and Board members. 9
The major difficulty with the conclusion reached by the NLRC is that the NLRC clearly
overlooked or disregarded the circumstances under which respondent Board
members had in fact acted in the instant case. As noted earlier, the respondent Board
members responded to the efforts of Cosalan to take seriously and implement the
Audit Memoranda issued by the COA explicitly addressed to the petitioner Beneco,
first by stripping Cosalan of the privileges and perquisites attached to his position as
General Manager, then by suspending indefinitely and finally dismissing Cosalan from
such position. As also noted earlier, respondent Board members offered no
suggestion at all of any just or lawful cause that could sustain the suspension and
dismissal of Cosalan. They obviously wanted to get rid of Cosalan and so acted, in
the words of the NLRC itself, "with indecent haste" in removing him from his position
and denying him substantive and procedural due process. Thus, the record showed
strong indications that respondent Board members had illegally suspended and
dismissed Cosalan precisely because he was trying to remedy the financial
irregularities and violations of NEA regulations which the COA had brought to the
attention of Beneco. The conclusion reached by the NLRC that "the records do not

disclose that the individual Board members were motivated by malice or bad faith"
flew in the face of the evidence of record. At the very least, a strong presumption had
arisen, which it was incumbent upon respondent Board members to disprove, that
they had acted in reprisal against respondent Cosalan and in an effort to suppress
knowledge about and remedial measures against the financial irregularities the COA
Audits had unearthed. That burden respondent Board members did not discharge.
The Solicitor General has urged that respondent Board members may be held liable
for damages under the foregoing circumstance under Section 31 of the Corporation
Code which reads as follows:
Sec. 31. Liability of directors, trustees or officers. Directors or
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty
as such directors or trustees shall be jointly liable and severally for
all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons . . . (Emphasis
supplied)
We agree with the Solicitor General, firstly, that Section 31 of the Corporation Code is
applicable in respect of Beneco and other electric cooperatives similarly situated.
Section 4 of the Corporation Code renders the provisions of that Code applicable in a
supplementary manner to all corporations, including those with special or individual
charters so long as those provisions are not inconsistent with such charters. We find
no provision in P.D. No. 269, as amended, that would exclude expressly or by
necessary implication the applicability of Section 31 of the Corporation Code in
respect of members of the boards of directors of electric cooperatives. Indeed, P.D.
No. 269 expressly describes these cooperatives as "corporations:"
Sec. 15. Organization and Purpose. Cooperative non-stock, nonprofit membership corporations may be organized, and electric
cooperative corporations heretofore formed or registered under the
Philippine non-Agricultural Co-operative Act may as hereinafter
provided be converted, under this Decree for the purpose of
supplying, and of promoting and encouraging-the fullest use of,
service on an area coverage basis at the lowest cost consistent
with sound economy and the prudent management of the business
of such corporations. 10 (Emphasis supplied)
We agree with the Solicitor General, secondly, that respondent Board members were
guilty of "gross negligence or bad faith in directing the affairs of the corporation" in
enacting the series of resolutions noted earlier indefinitely suspending and dismissing

respondent Cosalan from the position of General Manager of Beneco. Respondent

Board members, in doing so, acted belong the scope of their authority as such Board
members. The dismissal of an officer or employee in bad faith, without lawful cause
and without procedural due process, is an act that is contra legem. It cannot be
supposed that members of boards of directors derive any authority to violate the
express mandates of law or the clear legal rights of their officers and employees by
simply purporting to act for the corporation they control.
We believe and so hold, further, that not only are Beneco and respondent Board
members properly held solidarily liable for the awards made by the Labor Arbiter, but
also that petitioner Beneco which was controlled by and which could act only through
respondent Board members, has a right to be reimbursed for any amounts that
Beneco may be compelled to pay to respondent Cosalan. Such right of
reimbursement is essential if the innocent members of Beneco are not to be
penalized for the acts of respondent Board members which were both done in bad
faith and ultra vires. The liability-generating acts here are the personal and individual
acts of respondent Board members, and are not properly attributed to Beneco itself.
WHEREFORE, the Petition for Certiorari is GIVEN DUE COURSE, the comment filed
by respondent Board members is TREATED as their answer, and the decision of the
National Labor Relations Commission dated 21 November 1988 in NLRC Case No.
RAB-1-0313-84 is hereby SET ASIDE and the decision dated 5 April 1988 of Labor
Arbiter Amado T. Adquilen hereby REINSTATED in toto. In addition, respondent Board
members are hereby ORDERED to reimburse petitioner Beneco any amounts that it
may be compelled to pay to respondent Cosalan by virtue of the decision of Labor
Arbiter Amado T. Adquilen. No pronouncement as to costs.
SO ORDERED.

FIRST DIVISION
[G.R. No. 117847. October 7, 1998]
PEOPLES AIRCARGO AND WAREHOUSING CO. INC., petitioner, vs. COURT OF
APPEALS and STEFANI SAO, respondents.
DECISION
PANGANIBAN, J.:
Contracts entered into by a corporate president without express prior board
approval bind the corporation, when such officers apparent authority is established
and when these contracts are ratified by the corporation.
The Case
This principle is stressed by the Court in rejecting the Petition for Review of the
February 28, 1994 Decision and the October 28, 1994 Resolution of the Court of
Appeals in CA-GR CV No. 30670.
In a collection case filed by Stefani Sao against Peoples Aircargo and
Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110,
rendered a Decision dated October 26, 1990, the dispositive portion of which reads:
WHEREFORE, in light of all the foregoing, judgment is hereby
rendered, ordering [petitioner] to pay [private respondent] the amount of
sixty thousand (P60,000.00) pesos representing payment of [private
respondents] services in preparing the manual of operations and in the
conduct of a seminar for [petitioner]. The Counterclaim is hereby
dismissed.
Aggrieved by what he considered a minuscule award of P60,000, private
respondent appealed to the Court of Appeals (CA) which, in its Decision promulgated
February 28, 1994, granted his prayer for P400,000, as follows:
WHEREFORE, PREMISES CONSIDERED, the appealed judgment
is hereby MODIFIED in that [petitioner] is ordered to pay [private
respondent] the amount of four hundred thousand pesos (P400,000.00)
representing payment of [private respondents] services in preparing the
manual of operations and in the conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of the above-

mentioned Decision was denied in the Resolution promulgated on October 28, 1994.

Twenty-five percent (25%)..upon submission of the

specified outputs

The Facts
Petitioner is a domestic corporation, which was organized in the middle of 1986
to operate a customs bonded warehouse at the old Manila International Airport in
Pasay City.
To obtain a license for the corporation from the Bureau of Customs, Antonio
Punsalan Jr., the corporation president, solicited a proposal from private respondent
for the preparation of a feasibility study. Private respondent submitted a letterproposal dated October 17, 1986 (First Contract hereafter) to Punsalan, which is
reproduced hereunder:

The outputs will be completed and submitted within 30 days

upon confirmation of the agreement and receipt by us of the
first fifty percent payment.
-------------------------------------------------------------------------------------------Thank you.
Yours truly,

CONFORME:

Dear Mr. Punsalan:

(S)STEFANI C. SAO

(S)ANTONIO C. PUNSALAN, JR.

With reference to your request for professional engineering consultancy

services for your proposed MIA Warehousing Project may we offer the
following outputs and the corresponding rate and terms of agreement:

(T)STEFANI C. SAO

(T)ANTONIO C. PUNSALAN, JR.

Consultant for

President, PAIRCARGO

=================================
===

Industrial Engineering

Project Feasibility Study consisting of

Market Study

Initially, Cheng Yong, the majority stockholder of petitioner, objected to private

respondents offer, as another company priced a similar proposal at only P15,000.
However, Punsalan preferred private respondents services because of the latters
membership in the task force, which was supervising the transition of the Bureau of
Customs from the Marcos government to the Aquino administration.

Technical Study
Financial Feasibility Study
Preparation
of
pertinent
documentation
requirements for the application
================================================
=====
The above services will be provided for a fee of [p]esos
350,000.00 payable according to the following
schedule:
================================================
=====
Fifty percent (50%) .upon confirmation of the agreement
Twenty-five percent (25%)..15 days after the confirmation
of the agreement

On October 17, 1986, petitioner, through Punsalan, sent private respondent a

letter, confirming their agreement as follows:
Dear Mr. Sao:
With regard to the services offered by your company in your letter
dated 13 October 1986, for the preparation of the necessary study and
documentations to support our Application for Authority to Operate a public
Customs Bonded Warehouse located at the old MIA Compound in Pasay
City, please be informed that our company is willing to hire your services
and will pay the amount of THREE HUNDRED FIFTY THOUSAND PESOS
(P350,000.00) as follows:
P100,000.00 agreement;
150,000.00 -

upon

signing

of

the

on or before October 31,

1986, with the favorable
Recommendation
of
the
CBW on our application.

100,000.00 final form.

upon receipt of the study in

Very

The total service you have decided to avail xxx would be available upon
signing of the conforme below and would come [in] the amount of FOUR
HUNDRED THOUSAND PESOS (P400,000.00) payable at the schedule
defined as follows (with the balance covered by post-dated cheques):

truly yours,
Downpayment upon signing conforme . . . P80,000.00
(S)ANTONIO C.
PUNSALAN

15 January 1987 . . . . . . . . . . . . .

53,333.00

30 January 1987 . . . . . . . . . . . . .

53,333.00

15 February 1987 . . . . . . . . . . . . .

53,333.00

28 February 1987 . . . . . . . . . . . . .

53,333.00

CONFORME & RECEIVED from PAIRCARGO, the

15 March1987 . . . . . . . . . . . . .

53,333.00

amount of ONE HUNDRED THOUSAND PESOS

30 March 1987 . . . . . . . . . . . . .

53,333.00

(T)ANTONIO C.
PUNSALAN
Pre
sident

(P100,000.00), this 17th day of October,

With this package, you are assured of the highest service quality as our
performance record shows we always deliver no less.

1986 as 1st installment payment of the

Thank you very much.
service agreement dated October 13, 1986.
Yours truly,
(S)STEFANI C. SAO
(S)STEFANI C. SAO
(T)STEFANI C. SAO
(T)STEFANI C. SAO
Accordingly, private respondent prepared a feasibility study for petitioner which
eventually paid him the balance of the contract price, although not according to the
schedule agreed upon.
On December 4, 1986, upon Punsalans request, private respondent sent
petitioner another letter-proposal (Second Contract hereafter), which reads:
Peoples Air Cargo & Warehousing Co., Inc.
Old MIA Compound, Metro Manila
Attention:

Mr. ANTONIO PUN[S]ALAN, JR.

President

Dear Mr. Pun[s]alan:

This is to formalize our proposal for consultancy services to your company
the scope of which is defined in the attached service description.

Industrial Engineering Consultant

CONFORME:
(S)ANTONIO C. PUNSALAN JR.
(T)PAIRCARGO CO. INC.
During the trial, the lower court observed that the Second Contract bore, at the
lower right portion of the letter, the following notations in pencil:
1.

Operations Manual

2.

Seminar/workshop for your employees

P400,000

package deal

50% upon completion of seminar/workshop

50% upon approval by the Commissioner

The Manual has already been approved by the Commissioner but payment
has not yet been made."
The lower left corner of the letter also contained the following notations:
1st letter

4 Dec. 1986

2nd letter

15 June 1987 with

Hinanakit.

On January 10, 1987, Andy Villaceren, vice president of petitioner, received the
operations manual prepared by private respondent. Petitioner submitted said
operations manual to the Bureau of Customs in connection with the formers
application to operate a bonded warehouse; thereafter, in May 1987, the Bureau
issued to it a license to operate, enabling it to become one of the three public
customs bonded warehouses at the international airport. Private respondent also
conducted, in the third week of January 1987 in the warehouse of petitioner, a threeday training seminar for the latters employees.
On March 25, 1987, private respondent joined the Bureau of Customs as special
assistant to then Commissioner Alex Padilla, a position he held until he became
technical assistant to then Commissioner Miriam Defensor-Santiago on March 7,
1988. Meanwhile, Punsalan sold his shares in petitioner-corporation and resigned as
its president in 1987.
On February 9, 1988, private respondent filed a collection suit against petitioner.
He alleged that he had prepared an operations manual for petitioner, conducted a
seminar-workshop for its employees and delivered to it a computer program; but that,
despite demand, petitioner refused to pay him for his services.
Petitioner, in its answer, denied that private respondent had prepared an
operations manual and a computer program or conducted a seminar-workshop for its
employees. It further alleged that the letter-agreement was signed by Punsalan
without authority, in collusion with [private respondent] in order to unlawfully get some
money from [petitioner], and despite his knowledge that a group of employees of the
company had been commissioned by the board of directors to prepare an operations
manual.
The trial court declared the Second Contract unenforceable or simulated.
However, since private respondent had actually prepared the operations manual and
conducted a training seminar for petitioner and its employees, the trial court awarded
P60,000 to the former, on the ground that no one should be unjustly enriched at the
expense of another (Article 2142, Civil Code). The trial court determined the amount
in light of the evidence presented by defendant on the usual charges made by a
leading consultancy firm on similar services.
The Ruling of the Court of Appeals

To Respondent Court, the pivotal issue of private respondents appeal was the
enforceability of the Second Contract. It noted that petitioner did not appeal the
Decision of the trial court, implying that it had agreed to pay the P60,000 award. If the
contract was valid and enforceable, then petitioner should be held liable for the full
amount stated therein, not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986 contract was
simulated or unenforceable, the CA ruled in favor of its validity and enforceability.
According to the Court of Appeals, the evidence on record shows that the president of
petitioner-corporation had entered into the First Contract, which was similar to the
Second Contract. Thus, petitioner had clothed its president with apparent authority to
enter into the disputed agreement. As it had also become the practice of the
petitioner-corporation to allow its president to negotiate and execute contracts
necessary to secure its license as a customs bonded warehouse without prior board
approval, the board itself, by its acts and through acquiescence, practically laid aside
the normal requirement of prior express approval. The Second Contract was declared
valid and binding on the petitioner, which was held liable to private respondent in the
full amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before us.
The Issues
Instead of alleging reversible errors, petitioner imputes grave abuse of discretion
to the Court of Appeals, viz.:
I.
xxx [I]n ruling that the subject letter-agreement for services
was binding on the corporation simply because it was entered into by its
president[;]
II.
xxx [I]n ruling that the subject letter-agreement for services
was binding on the corporation notwithstanding the lack of any board
authority since it was the purported practice to allow the president to enter
into contracts of said nature (citing one previous instance of a similar
contract)[;] and
III.
xxx [I]n ruling that the subject letter-agreement for services
was a valid contract and not merely simulated."
The Court will overlook the lapse of petitioner in alleging grave abuse of
discretion as its ground for seeking a reversal of the assailed Decision. Although the
Rules of Court specify reversible errors as grounds for a petition for review under
Rule 45, the Court will lay aside for the nonce this procedural lapse and consider the
allegations of grave abuse as statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount of such
accountability. Hence, the resolution of this petition rests on the sole issue of the
enforceability and validity of the Second Contract, more specifically: (1) whether the
president of the petitioner-corporation had apparent authority to bind petitioner to the
Second Contract; and (2) whether the said contract was valid and not merely

simulated.
The Courts Ruling
The petition is not meritorious.
First Issue: Apparent Authority of a Corporate President
Petitioner argues that the disputed contract is unenforceable, because
Punsalan, its president, was not authorized by its board of directors to enter into said
contract.
The general rule is that, in the absence of authority from the board of directors,
no person, not even its officers, can validly bind a corporation. A corporation is a
juridical person, separate and distinct from its stockholders and members, having xxx
powers, attributes and properties expressly authorized by law or incident to its
existence.
Being a juridical entity, a corporation may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate business
policies and is responsible for the efficiency of management, as provided in Section
23 of the Corporation Code of the Philippines:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise
provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all property
of such corporations controlled and held by the board of directors or
trustees x x x.
Under this provision, the power and the responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in the
board, subject to the articles of incorporation, bylaws, or relevant provisions of law.
However, just as a natural person may authorize another to do certain acts for and on
his behalf, the board of directors may validly delegate some of its functions and
powers to officers, committees or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the
board, either expressly or impliedly by habit, custom or acquiescence in the general
course of business, viz.:
A corporate officer or agent may represent and bind the corporation
in transactions with third persons to the extent that [the] authority to do so
has been conferred upon him, and this includes powers which have been
intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers
intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as
the corporation has caused persons dealing with the officer or agent to
believe that it has conferred.
Accordingly, the appellate court ruled in this case that the authority to act for and

to bind a corporation may be presumed from acts of recognition in other instances,

wherein the power was in fact exercised without any objection from its board or
shareholders. Petitioner had previously allowed its president to enter into the First
Contract with private respondent without a board resolution expressly authorizing him;
thus, it had clothed its president with apparent authority to execute the subject
contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject
contract does not constitute corporate practice, which Webster defines as frequent or
customary action. It cites Board of Liquidators v. Kalaw, in which the practice of
NACOCO allowing its general manager to negotiate and execute contract in its copra
trading activities for and on its behalf, without prior board approval, was inferred from
sixty contracts not one, as in the present case -- previously entered into by the
corporation without such board resolution.
Petitioners argument is not persuasive. Apparent authority is derived not merely
from practice. Its existence may be ascertained through (1) the general manner in
which the corporation holds out an officer or agent as having the power to act or, in
other words, the apparent authority to act in general, with which it clothes him; or (2)
the acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his ordinary powers. It
requires presentation of evidence of similar act(s) executed either in its favor or in
favor of other parties. It is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the power to bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered
into the First Contract without first securing board approval. Despite such lack of
board approval, petitioner did not object to or repudiate said contract, thus clothing its
president with the power to bind the corporation. The grant of apparent authority to
Punsalan is evident in the testimony of Yong -- senior vice president, treasurer and
major stockholder of petitioner. Testifying on the First Contract, he said:
A:

Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very
influential with the Collector of Customs[s]. Because the Collector of
Custom[s] will be the one to approve our project study and I objected to that,
sir. And I said it [was an exorbitant] price. And Mr. Punsalan he is the
[p]resident, so he [gets] his way.

Q:

And so did the company eventually pay this P350,000.00 to Mr. Sao?

A:

Yes, sir.

The First Contract was consummated, implemented and paid without a hitch.
Hence, private respondent should not be faulted for believing that Punsalans
conformity to the contract in dispute was also binding on petitioner. It is familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent,
to act within the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from

denying the agents authority.

to wit:

Furthermore, private respondent prepared an operations manual and conducted

a seminar for the employees of petitioner in accordance with their contract. Petitioner
accepted the operations manual, submitted it to the Bureau of Customs and allowed
the seminar for its employees. As a result of its aforementioned actions, petitioner
was given by the Bureau of Customs a license to operate a bonded warehouse.
Granting arguendo then that the Second Contract was outside the usual powers of
the president, petitioners ratification of said contract and acceptance of benefits have
made it binding, nonetheless. The enforceability of contracts under Article 1403(2) is
ratified by the acceptance of benefits under them under Article 1405.

1)
Despite the fact that no [down payment] and/or
postdated checks [partial payments] (as purportedly stipulated
in the alleged contract) [was given, private respondent] went
ahead with the services[;]

Inasmuch as a corporate president is often given general supervision and

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

3)
Does not Punsalans writing allegedly in June
1987 on the alleged letter-agreement of your employees[,] when
it should have been our employees, as he was then still
connected with [petitioner], indicate that the letter-agreement
was signed by Punsalan when he was no longer connected with
[petitioner] or, as claimed by [petitioner], that Punsalan signed it
without [petitioners] authority and must have been done in
collusion with plaintiff in order to unlawfully get some money
from [petitioner]?

Hence, it has been held in other jurisdictions that the president of a corporation
possesses the power to enter into a contract for the corporation, when the conduct on
the part of both the president and the corporation [shows] that he had been in the
habit of acting in similar matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified his former and
similar actions. Furthermore, a party dealing with the president of a corporation is
entitled to assume that he has the authority to enter, on behalf of the corporation, into
contracts that are within the scope of the powers of said corporation and that do not
violate any statute or rule on public policy.
Second Issue: Alleged Simulation of the First Contract
As an alternative position, petitioner seeks to pare down its liabilities by limiting
its exposure from P400,000 to only P60,000, the amount awarded by the RTC.
Petitioner capitalizes on the badges of fraud cited by the trial court in declaring said
contract either simulated or unenforceable, viz.:
xxx The October 1986 transaction with [private respondent] involved
P350,000. The same was embodied in a letter which bore therein not only
the conformity of [petitioners] then President Punsalan but also drew a
letter-confirmation from the latter for, indeed, he was clothed with authority
to enter into the contract after the same was brought to the attention and
consideration of [petitioner]. Not only that, a [down payment] was made. In
the alleged agreement of December 4, 1986 subject of the present case,
the amount is even bigger-P400,000.00. Yet, the alleged letter-agreement
drew no letter of confirmation. And no [down payment] and postdated
checks were given. Until the filing of the present case in February 1988, no
written demand for payment was sent to [petitioner]. [Private respondents]
claim that he sent one in writing, and one was sent by his counsel who
manifested that [h]e was looking for a copy in [his] files fails in light of his
failure to present any such copy. These and the following considerations,

2)
[There was a delay in the filing of the present
suit, more than a year after [private respondent] allegedly
completed his services or eight months after the alleged last
verbal demand for payment made on Punsalan in June 1987;

4)
If, as [private respondent] claims, the letter was
returned by Punsalan after affixing thereon his conformity, how
come xxx when Punsalan allegedly visited [private respondent]
in his office at the Bureau of Customs, in June 1987, Punsalan
brought (again?) the letter (with the pencil [notation] at the left
bottom portion allegedly already written)?
5)
How come xxx [private respondent] did not
even keep a copy of the alleged service contract allegedly
attached to the letter-agreement?
6)
Was not the letter-agreement a mere draft, it
bearing the corrections made by Punsalan of his name (the
letter n is inserted before the last letter o in Antonio) and of the
spelling of his family name (Punsalan, not Punzalan)?
7)

Why was not Punsalan impleaded in the case?

The issue of whether the contract is simulated or real is factual in nature, and
the Court eschews factual examination in a petition for review under Rule 45 of the
Rules of Court. This rule, however, admits of exceptions, one of which is a conflict
between the factual findings of the lower and of the appellate courts as in the case at
bar.
After judicious deliberation, the Court agrees with the appellate court that the
alleged badges of fraud mentioned earlier have not affected in any manner the
perfection of the Second Contract or proved the alleged simulation thereof. First, the
lack of payment (whether down, partial or full payment), even after completion of

private respondents obligations, imports only a defect in the performance of the

contract on the part of petitioner. Second, the delay in the filing of action was not fatal
to private respondents cause. Despite the lapse of one year after private respondent
completed his services or eight months after the alleged last demand for payment in
June 1987, the action was still filed within the allowable period, considering that an
action based on a written contract prescribes only after ten years from the time the
right of action accrues. Third, a misspelling in the contract does not establish vitiation
of consent, cause or object of the contract. Fourth, a confirmation letter is not an
essential element of a contract; neither is it necessary to perfect one. Fifth, private
respondents failure to implead the corporate president does not establish collusion
between them. Petitioner could have easily filed a third-party claim against Punsalan
if it believed that it had recourse against the latter. Lastly, the mere fact that the
contract price was six times the alleged going rate does not invalidate it. In short,
these badges do not establish simulation of said contract.
A fictitious and simulated agreement lacks consent which is essential to a valid
and enforceable contract. A contract is simulated if the parties do not intend to be
bound at all (absolutely simulated), or if the parties conceal their true agreement
(relatively simulated). In the case at bar, petitioner received from private respondent a
letter-offer containing the terms of the former, including a stipulation of the
consideration for the latters services. Punsalans conformity, as well as the receipt and
use of the operations manual, shows petitioners consent to or, at the very least,
ratification of the contract. To repeat, petitioner even submitted the manual to the
Bureau of Customs and allowed private respondent to conduct the seminar for its
employees. Private respondent heard no objection from the petitioner, until he
claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the
determination of the will of the contracting parties. The circumstances outlined above
do not establish any intention to simulate the contract in dispute. On the contrary, the
legal presumption is always on the validity of contracts. A corporation, by accepting
benefits of a transaction entered into without authority, has ratified the agreement and
is, therefore, bound by it.
WHEREFORE, the petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.

EASYCALL COMMUNICATIONS G.R. No. 145901

PHILS., INC.,
Petitioner,
Present:
PANGANIBAN, J., Chairman,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
CARPIO MORALES and
GARCIA, JJ.
EDWARD KING,
Respondent. Promulgated:
December 15, 2005
x------------------------------------------x

DECISION
CORONA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court
assails the February 10, 2000 decision[1] and November 8, 2000 resolution of the
Court of Appeals (CA) in CA-G.R. SP No. 53510. The assailed decision nullified the
November 27, 1998 decision and April 29, 1999 resolution of the National Labor
Relations Commission (NLRC) and entered a new one declaring that the respondent
Edward King was illegally dismissed and awarding him backwages, separation pay
and attorneys fees.

Petitioner Easycall Communications Phils., Inc. was a domestic corporation

primarily engaged in the business of message handling. On May 20, 1992, petitioner,
through its general manager, Roberto B. Malonzo, hired the services of respondent as
assistant to the general manager. He was given the responsibility of ensuring that the
expansion plans outside Metro Manila and Metro Cebu were achieved at the soonest
possible time.

In an August 14, 1992 memorandum, Mr. R.T. Casas, respondents

immediate superior, recommended his promotion to assistant vice president for
nationwide expansion. On December 22, 1992, respondent was appointed to the
even higher position of vice president for nationwide expansion. Respondents
promotion was based on his performance during the six months preceding his
appointment. As vice president for nationwide expansion, he became responsible for
the sales and rentals of pager units in petitioners expansion areas. He was also in
charge of coordinating with the dealers in these areas.
Sometime in March 1993, Malonzo reviewed the sales performance of respondent.
He also scrutinized the status of petitioners Nationwide Expansion Program (NEP)
which was under respondents responsibility. He found that respondents actual sales
for the period October 1992March 1993 was 78% of his sales commitment and 70%
of his sales target.
Malonzo also checked the frequency and duration of the provincial sales
development visits made by respondent for the same period to expansion areas
under his jurisdiction. He discovered that the latter spent around 40% of the total
number of working days for that period in the field.

The management then confronted respondent regarding his sales

performance and provincial sales development visits. A series of dialogues between
petitioners management and respondent ensued.

you did not convince us that it is to the best interest of Easy Call to
retain your services. xxx [2] (Emphasis supplied)

Aggrieved, the respondent filed a complaint for illegal dismissal with the
NLRC. It was docketed as NLRC Case No. 00-04-02913-93.
In his June 24, 1997 decision, the labor arbiter found that the termination of
respondents employment on the ground of loss of confidence was valid.
Consequently, the labor arbiter dismissed the complaint for lack of merit.
On appeal, the NLRC affirmed the decision of the labor arbiter in its
November 27, 1998 decision, with the modification that petitioner was ordered to
indemnify respondent in the amount of P10,000 for violating respondents right to due
process. Respondent filed a partial motion for reconsideration praying that the NLRC
reverse its ruling insofar as it declared that he was validly dismissed for cause. The
NLRC, however, denied the motion for lack of merit in a April 29, 1999 resolution. The
NLRC also dismissed the complaint for lack of jurisdiction.
Respondent filed a petition for certiorari with the CA. The CA granted the
petition and ruled that the NLRC erred in holding that it lacked jurisdiction over the
case. The CA also ruled that the dismissal of respondent was illegal for having been
done without cause and in violation of his right to due process.
Petitioner moved for a reconsideration of the CA decision but the motion was denied
in the CAs November 8, 2000 resolution. Hence, this petition.

On April 16, 1993, Rockwell Gohu, petitioners deputy general manager,

talked to respondent to discuss his sales performance. In the course of the
conversation, Gohu informed respondent that Malonzo wanted his resignation. This
prompted respondent to write a memorandum to Malonzo. In his memorandum, he
inquired whether Malonzo really wanted him to resign. He emphasized that his work
performance had yet to be evaluated. He also stated that, based on the approved
budget for fiscal year ending in June 1993, he was within the budget and targets set
forth by petitioner. He further declared that he had no intention of resigning from his
position.

On April 19, 1993, respondent received a notice of termination signed by Malonzo.

The notice informed him of the termination of his employment with petitioner effective
April 30, 1993. In particular, the relevant portion of the notice read:

Petitioner now raises the following errors:

I.
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION WHEN IT SUBSTITUTED ITS OWN
FINDINGS TO THAT OF THE NLRC IN VIOLATION OF THE RULE
THAT REGULAR COURTS SHOULD ACCORD GREAT RESPECT
TO FINDINGS OF ADMINISTRATIVE AGENCIES CONSIDERING
THAT THERE IS SUBSTANTIAL EVIDENCE TO SUPPORT THE
SIMILAR FINDINGS OF BOTH THE LABOR ARBITER AND THE
COMMISSIONERS OF NLRC.
II.

This is to inform you that management is no longer confident that

you are the right manager for the position you are occupying. Our
series of discussions on the various aspects of your functions with

FURTHERMORE, GLARING IS THE FACT THAT THE

HONORABLE COURT OF APPEALS SIMPLY DISREGARDED
THE SUBSTANTIAL EVIDENCE ON RECORD WHICH
INDISPUTABLY SHOWED THAT RESPONDENT WAS TOTALLY

REMISS IN HIS DUTIES

NATIONWIDE EXPANSION.

AS

VICE

PRESIDENT

FOR

III.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED
WHEN IT FAILED TO CONSIDER THAT BEING A CORPORATE
OFFICER, THE NLRC HAS NO JURISDICTION OVER THE
SUBJECT UNDER PD 902-A.[3]
We shall rule first on the issue of jurisdiction as it is decisive. If the NLRC had no
jurisdiction, then it would be unnecessary to consider the validity of respondents
dismissal.
Petitioner argues that since respondent was a corporate officer, the NLRC
had no jurisdiction over the subject matter under PD 902-A. In support of its
contention, petitioner invokes Paguio v. NLRC [4] where we held that the removal of a
corporate officer, whether elected or appointed, is an intra-corporate controversy over
which the NLRC has no jurisdiction. The petitioner also cites our ruling in de Rossi v.
NLRC [5] to the effect that the SEC, not the NLRC, has original and exclusive
jurisdiction over cases involving the removal of corporate officers.
Under Section 5 of PD 902-A, the law applicable at the time this controversy
arose,[6] the SEC, not the NLRC, had original and exclusive jurisdiction over cases
involving the removal of corporate officers. Section 5(c) of PD 902-A applied to a
corporate officers dismissal for his dismissal was a corporate act and/or an intracorporate controversy.[7]
However, it had to be first established that the person removed or dismissed
was a corporate officer before the removal or dismissal could properly fall within the
jurisdiction of the SEC and not the NLRC. Here, aside from its bare allegation,
petitioner failed to show that respondent was in fact a corporate officer.
Corporate officers in the context of PD 902-A are those officers of a
corporation who are given that character either by the Corporation Code or by the
corporations by-laws.[8] Under Section 25 of the Corporation Code, the corporate
officers are the president, secretary, treasurer and such other officers as may be
provided for in the by-laws.
A careful look at de Rossi (as well as the line of cases involving the removal
of corporate officers where we held that it was the SEC and not the NLRC which had
jurisdiction[9]) will show that the person whose removal was the subject of the
controversy was a corporate officer whose position was provided for in the by-laws.
That is not by any means the case here.
The burden of proof is on the party who makes the allegation.[10] Here,
petitioner merely alleged that respondent was a corporate officer. However, it failed to
prove that its by-laws provided for the office of vice president for nationwide
expansion. Since petitioner failed to satisfy the burden of proof that was required of it,
we cannot sanction its claim that respondent was a corporate officer whose removal
was cognizable by the SEC under PD 902-A and not by the NLRC under the Labor
Code.

An office is created by the charter of the corporation and the officer is

elected by the directors or stockholders.[11] On the other hand, an employee
occupies no office and generally is employed not by the action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.[12]
In this case, respondent was appointed vice president for nationwide
expansion by Malonzo, petitioners general manager, not by the board of directors of
petitioner. It was also Malonzo who determined the compensation package of
respondent. Thus, respondent was an employee, not a corporate officer. The CA was
therefore correct in ruling that jurisdiction over the case was properly with the NLRC,
not the SEC.
We now proceed to the substantive issue of the validity of the dismissal of
respondent.
While loss of confidence is a valid ground for dismissing an employee, it
should not be simulated.[13] It must not be indiscriminately used as a shield by the
employer against a claim that the dismissal of an employee was arbitrary.[14]
To be a valid ground for an employees dismissal, loss of trust and
confidence must be based on a willful breach and founded on clearly established
facts.[15] A breach is willful if it is done intentionally, knowingly and purposely, without
justifiable excuse, as distinguished from an act done carelessly, thoughtlessly,
heedlessly or inadvertently.[16] Thus, a willful breach cannot be a breach resulting
from mere carelessness.
In this case, the labor arbiters finding, affirmed by the NLRC, was that the
sales record of respondent and the time he spent in the field were clear indications of
complainants inefficiency and/or negligence.[17] Inefficiency implies negligence,
incompetence, ignorance and carelessness.[18] Negligence is the want or lack of
care required by the circumstances.[19]
The grounds cited by petitioner, i.e., respondents alleged poor sales
performance and the allegedly excessive time he spent in the field, were not sufficient
to support a claim of loss of confidence as a ground for dismissal.
Furthermore, the alleged loss of confidence was not founded on clearly
established facts.[20] First, petitioner included the sales performance of respondent
for the period covering October 1992 to December 1992 in arriving at the conclusion
that his sales record was dismal. However, as the CA correctly pointed out, petitioner
previously recognized that respondents performance for that period was not merely
satisfactory but more than extra-ordinary that it merited his promotion not only to the
position of assistant vice president, to which he was recommended by his supervisor,
but to the even higher position of vice president.[21] This self-contradictory position of
petitioner negates its claim of loss of confidence in repondent.
Moreover, the promotion of an employee negates the employers claim that it
has lost its trust and confidence in the employee.[22] Hence, petitioners claim of loss
of confidence crumbles in the light of respondents promotion not only to assistant
vice-president but to the even higher position of vice- president.

Second, the sales record of respondent for the period October

1992December 1992 was recognized as so exemplary that it merited his promotion.
Later, however, this very same record was suddenly deemed poor and dismal to
justify loss of confidence. Thus, petitioner interpreted one and the same sales record
as proof of respondents simultaneous efficiency and inefficiency. This could only
mean that there was no sufficient standard with which to measure the performance of
respondent, an indication of the arbitrariness of petitioner.
Finally, during the hearing of this case before the labor arbiter, Malonzo
stated that the percentage of the time spent by respondent in his sales area was
actually not below par.[23] This admission of petitioners general manager only proves
all the more the lack of sufficient standard for determining respondents performance.
The lack of just cause in respondents dismissal was aggravated by the
absence of due process.
The twin requirements of notice and hearing constitute the essential
elements of due process. The law requires the employer to furnish the employee
sought to be dismissed with two written notices before termination of employment can
be legally effected: (1) a written notice apprising the employee of the particular acts or
omissions for which his dismissal is sought in order to afford him an opportunity to be
heard and to defend himself with the assistance of counsel, if he desires, and (2) a
subsequent notice informing the employee of the employers decision to dismiss him.
[24] This procedure is mandatory and its absence taints the dismissal with illegality.
[25]

SECOND DIVISION
[G.R. No. 96551. November 4, 1996]
PREMIUM MARBLE RESOURCES, INC., petitioner, vs. THE COURT OF APPEALS
and INTERNATIONAL CORPORATE BANK, respondents.
PRINTLINE CORPORATION, petitioner, vs. THE COURT OF APPEALS and
INTERNATIONAL CORPORATE BANK, respondents.
DECISION
TORRES, JR., J.:

In this case, respondent was served with one notice only the notice of his
termination. The series of dialogues between petitioners management and
respondent was not enough as it failed to show that the latter was apprised of the
cause of his dismissal.[26] These dialogues or consultations could not validly
substitute for the actual observance of notice and hearing.[27]

Assailed in the instant petition for review is the decision of the Court of Appeals in CAG.R. CV No. 16810 dated September 28, 1990 which affirmed the trial courts
dismissal of petitioners complaint for damages.

WHEREFORE, the petition is hereby DENIED. The February 10, 2000

decision and November 8, 2000 resolution of the Court of Appeals in CA-G.R. SP No.
53510 are AFFIRMED.

On July 18, 1986, Premium Marble Resources, Inc. (Premium for brevity), assisted by
Atty. Arnulfo Dumadag as counsel, filed an action for damages against International
Corporate Bank which was docketed as Civil Case No. 14413. The complaint states,
inter alia:

Costs against the petitioner.

SO ORDERED.

The antecedents:

3. Sometime in August to October 1982, Ayala Investment and Development

Corporation issued three (3) checks [Nos. 097088, 097414 & 27884] in the aggregate
amount of P31,663.88 payable to the plaintiff and drawn against Citibank;
xxx
5. On or about August to October 1982, former officers of the plaintiff corporation
headed by Saturnino G. Belen, Jr., without any authority whatsoever from the plaintiff
deposited the above-mentioned checks to the current account of his conduit
corporation, Intervest Merchant Finance (Intervest, for brevity) which the latter
maintained with the defendant bank under account No. 0200-02027-8;
6. Although the checks were clearly payable to the plaintiff corporation and crossed
on their face and for payees account only, defendant bank accepted the checks to be

deposited to the current account of Intervest and thereafter presented the same for
collection from the drawee bank which subsequently cleared the same thus allowing
Intervest to make use of the funds to the prejudice of the plaintiff;
xxx
14. The plaintiff has demanded upon the defendant to restitute the amount
representing the value of the checks but defendant refused and continue to refuse to
honor plaintiffs demands up to the present;
15. As a result of the illegal and irregular acts perpetrated by the defendant bank, the
plaintiff was damaged to the extent of the amount of P31,663.88.
Premium prayed that judgment be rendered ordering defendant bank to pay the
amount of P31,663.88 representing the value of the checks plus interest,
P100,000.00 as exemplary damages; and P30,000.00 as attorneys fees.
In its Answer International Corporate Bank alleged, inter alia, that Premium has no
capacity/personality/authority to sue in this instance and the complaint should,
therefore, be dismissed for failure to state a cause of action.
A few days after Premium filed the said case, Printline Corporation, a sister company
of Premium also filed an action for damages against International Corporate Bank
docketed as Civil Case No. 14444. Thereafter, both civil cases were consolidated.
Meantime, the same corporation, i.e., Premium, but this time represented by Siguion
Reyna, Montecillio and Ongsiako Law Office as counsel, filed a motion to dismiss on
the ground that the filing of the case was without authority from its duly constituted
board of directors as shown by the excerpt of the minutes of the Premiums board of
directors meeting.
In its opposition to the motion to dismiss, Premium thru Atty. Dumadag contended that
the persons who signed the board resolution namely Belen, Jr., Nograles & Reyes,
are not directors of the corporation and were allegedly former officers and
stockholders of Premium who were dismissed for various irregularities and fraudulent
acts; that Siguion Reyna Law office is the lawyer of Belen and Nograles and not of
Premium and that the Articles of Incorporation of Premium shows that Belen,
Nograles and Reyes are not majority stockholders.
On the other hand, Siguion Reyna Law firm as counsel of Premium in a rejoinder,
asserted that it is the general information sheet filed with the Securities and Exchange
Commission, among others, that is the best evidence that would show who are the
stockholders of a corporation and not the Articles of Incorporation since the latter
does not keep track of the many changes that take place after new stockholders
subscribe to corporate shares of stocks.
In the interim, defendant bank filed a manifestation that it is adopting in toto
Premiums motion to dismiss and, therefore, joins it in praying for the dismissal of the
present case on the ground that Premium lacks authority from its duly constituted
board of directors to institute the action.

In its Order, the lower court concluded that:

Considering that the officers (directors) of plaintiff corporation enumerated in the
Articles of Incorporation, filed on November 9, 1979, were to serve until their
successors are elected and qualified and considering further that as of March 4,
1981, the officers of the plaintiff corporation were Alberto Nograles, Fernando Hilario,
Augusto Galace, Jose L.R. Reyes, Pido Aguilar and Saturnino Belen, Jr., who
presumably are the officers represented by the Siguion Reyna Law Firm, and that
together with the defendants, they are moving for the dismissal of the above-entitled
case, the Court finds that the officers represented by Atty. Dumadag do not as yet
have the legal capacity to sue for and in behalf of the plaintiff corporation and/or the
filing of the present action (Civil Case 14413) by them before Case No. 2688 of the
SEC could be decided is a premature exercise of authority or assumption of legal
capacity for and in behalf of plaintiff corporation.
The issues raised in Civil Case No. 14444 are similar to those raised in Civil Case No.
14413. This Court is of the opinion that before SEC Case No. 2688 could be decided,
neither the set of officers represented by Atty. Dumadag nor that set represented by
the Siguion Reyna, Montecillo and Ongsiako Law Office, may prosecute cases in the
name of the plaintiff corporation.
It is clear from the pleadings filed by the parties in these two cases that the existence
of a cause of action against the defendants is dependent upon the resolution of the
case involving intra-corporate controversy still pending before the SEC.
On appeal, the Court of Appeals affirmed the trial courts Order which dismissed the
consolidated cases. Hence, this petition.
Petitioner submits the following assignment of errors:
I
The Court of Appeals erred in giving due course to the motion to dismiss filed by
the Siguion Reyna Law Office when the said motion is clearly filed not in behalf
of the petitioner but in behalf of the group of Belen who are the clients of the
said law office.
II
The Court of Appeals erred in giving due course to the motion to dismiss filed by
the Siguion Reyna Law Office in behalf of petitioner when the said law office
had already appeared in other cases wherein the petitioner is the adverse party.
III
The Court of Appeals erred when it ruled that undersigned counsel was not
authorized by the Board of Directors to file Civil Case Nos. 14413 and 14444.
IV

The Court of Appeals erred in concluding that under SEC Case No. 2688 the
incumbent directors could not act for and in behalf of the corporation.
V
The Court of Appeals is without jurisdiction to prohibit the incumbent Board of
Directors from acting and filing this case when the SEC where SEC Case No.
2688 is pending has not even made the prohibition.
We find the petition without merit.
The only issue in this case is whether or not the filing of the case for damages against
private respondent was authorized by a duly constituted Board of Directors of the
petitioner corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel
Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the Minutes
of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of
the case against private respondent was authorized by the Board. On the other hand,
the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and Jose
L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did
not authorize the filing in its behalf of any suit against the private respondent
International Corporate Bank.
Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979
with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B. Gan,
Lionel Pengson, and Jose Ma. Silva.
However, it appears from the general information sheet and the Certification issued
by the SEC on August 19, 1986 that as of March 4, 1981, the officers and members of
the board of directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director
Saturnino G. Belen, Jr. Chairman of the Board.
While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly
elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito Yujuico and
Rodolfo Millare, petitioner failed to show proof that this election was reported to the
SEC. In fact, the last entry in their General Information Sheet with the SEC, as of
1986 appears to be the set of officers elected in March 1981.

We agree with the finding of public respondent Court of Appeals, that in the absence
of any board resolution from its board of directors the [sic] authority to act for and in
behalf of the corporation, the present action must necessarily fail. The power of the
corporation to sue and be sued in any court is lodged with the board of directors that
exercises its corporate powers. Thus, the issue of authority and the invalidity of
plaintiff-appellants subscription which is still pending, is a matter that is also
addressed, considering the premises, to the sound judgment of the Securities &
Exchange Commission.
By the express mandate of the Corporation Code (Section 26), all corporations duly
organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and
residences of the directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26. Report of election of directors, trustees and officers. Within thirty (30) days
after the election of the directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall submit to the Securities and
Exchange Commission, the names, nationalities and residences of the directors,
trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26 is to give the public
information, under sanction of oath of responsible officers, of the nature of business,
financial condition and operational status of the company together with information on
its key officers or managers so that those dealing with it and those who intend to do
business with it may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et
al., are the incumbent officers of Premium has not been fully substantiated. In the
absence of an authority from the board of directors, no person, not even the officers
of the corporation, can validly bind the corporation.
We find no reversible error in the decision sought to be reviewed.
ACCORDINGLY, for lack of merit, the petition is hereby DENIED.
SO ORDERED.

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-45911 April 11, 1979
JOHN
GOKONGWEI,
JR.,
petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO,
WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL
CORPORATION, EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA,
respondents.
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.

ANTONIO, J.:

The instant petition for certiorari, mandamus and injunction, with prayer for issuance
of writ of preliminary injunction, arose out of two cases filed by petitioner with the
Securities and Exchange Commission, as follows:

election of directors; and that in amending the by-laws, respondents purposely

provided for petitioner's disqualification and deprived him of his vested right as aforementioned hence the amended by-laws are null and void. 1

SEC CASE NO 1375

As additional causes of action, it was alleged that corporations have no inherent

power to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was allowed because the
questioned amendment gave the Board itself the prerogative of determining whether
they or other persons are engaged in competitive or antagonistic business; that the
portion of the amended bylaws which states that in determining whether or not a
person is engaged in competitive business, the Board may consider such factors as
business and family relationship, is unreasonable and oppressive and, therefore,
void; and that the portion of the amended by-laws which requires that "all nominations
for election of directors ... shall be submitted in writing to the Board of Directors at
least five (5) working days before the date of the Annual Meeting" is likewise
unreasonable and oppressive.

On October 22, 1976, petitioner, as stockholder of respondent San Miguel

Corporation, filed with the Securities and Exchange Commission (SEC) a petition for
"declaration of nullity of amended by-laws, cancellation of certificate of filing of
amended by- laws, injunction and damages with prayer for a preliminary injunction"
against the majority of the members of the Board of Directors and San Miguel
Corporation as an unwilling petitioner. The petition, entitled "John Gokongwei Jr. vs.
Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas, Emeterio
Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto and San Miguel
Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on
a resolution of the stockholders adopted on March 13, 1961, when the outstanding
capital stock of respondent corporation was only P70,139.740.00, divided into
5,513,974 common shares at P10.00 per share and 150,000 preferred shares at
P100.00 per share. At the time of the amendment, the outstanding and paid up
shares totalled 30,127,047 with a total par value of P301,270,430.00. It was
contended that according to section 22 of the Corporation Law and Article VIII of the
by-laws of the corporation, the power to amend, modify, repeal or adopt new by-laws
may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on the basis of the
capitalization at the time of the amendment. Since the amendment was based on the
1961 authorization, petitioner contended that the Board acted without authority and in
usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board
ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the

It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to
pay damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and
Inspection of Documents", alleging that the Secretary of respondent corporation
refused to allow him to inspect its records despite request made by petitioner for
production of certain documents enumerated in the request, and that respondent
corporation had been attempting to suppress information from its stockholders
despite a negative reply by the SEC to its query regarding their authority to do so.
Among the documents requested to be copied were (a) minutes of the stockholder's
meeting field on March 13, 1961, (b) copy of the management contract between San
Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest balance sheet
of San Miguel International, Inc.; (d) authority of the stockholders to invest the funds
of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if any, received by Andres M. Soriano,
Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the
demand is not based on good faith; that the motion is premature since the materiality
or relevance of the evidence sought cannot be determined until the issues are joined,
that it fails to show good cause and constitutes continued harrasment, and that some

of the information sought are not part of the records of the corporation and, therefore,
privileged.
During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to
the petition, denying the substantial allegations therein and stating, by way of
affirmative defenses that "the action taken by the Board of Directors on September
18, 1976 resulting in the ... amendments is valid and legal because the power to
"amend, modify, repeal or adopt new By-laws" delegated to said Board on March 13,
1961 and long prior thereto has never been revoked of SMC"; that contrary to
petitioner's claim, "the vote requirement for a valid delegation of the power to amend,
repeal or adopt new by-laws is determined in relation to the total subscribed capital
stock at the time the delegation of said power is made, not when the Board opts to
exercise said delegated power"; that petitioner has not availed of his intra-corporate
remedy for the nullification of the amendment, which is to secure its repeal by vote of
the stockholders representing a majority of the subscribed capital stock at any regular
or special meeting, as provided in Article VIII, section I of the by-laws and section 22
of the Corporation law, hence the, petition is premature; that petitioner is estopped
from questioning the amendments on the ground of lack of authority of the Board.
since he failed, to object to other amendments made on the basis of the same 1961
authorization: that the power of the corporation to amend its by-laws is broad, subject
only to the condition that the by-laws adopted should not be respondent corporation
inconsistent with any existing law; that respondent corporation should not be
precluded from adopting protective measures to minimize or eliminate situations
where its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and
the judgment of the board should not be interfered with: That the by-laws, as
amended, are valid and binding and are intended to prevent the possibility of violation
of criminal and civil laws prohibiting combinations in restraint of trade; and that the
petition states no cause of action. It was, therefore, prayed that the petition be
dismissed and that petitioner be ordered to pay damages and attorney's fees to
respondents. The application for writ of preliminary injunction was likewise on various
grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their
affirmative defenses, that in August 1972, the Universal Robina Corporation (Robina),
a corporation engaged in business competitive to that of respondent corporation,
began acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated Foods
Corporation (CFC) likewise began acquiring shares in respondent (corporation. until
its total holdings amounted to P543,959.00 in September 1976; that on January 12,
1976, petitioner, who is president and controlling shareholder of Robina and CFC
(both closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted

malevolent and malicious publicity campaign against SMC" to generate support from
the stockholder "in his effort to secure for himself and in representation of Robina and
CFC interests, a seat in the Board of Directors of SMC", that in the stockholders'
meeting of March 18, 1976, petitioner was rejected by the stockholders in his bid to
secure a seat in the Board of Directors on the basic issue that petitioner was engaged
in a competitive business and his securing a seat would have subjected respondent
corporation to grave disadvantages; that "petitioner nevertheless vowed to secure a
seat in the Board of Directors at the next annual meeting; that thereafter the Board of
Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses
of litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production
and inspection of documents was filed by all the respondents. This was duly opposed
by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R.
Visaya were allowed to intervene as oppositors and they accordingly filed their
oppositions-intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the
motion for production and inspection of documents by issuing Order No. 26, Series of
1977, stating, in part as follows:
Considering the evidence submitted before the Commission by the
petitioner and respondents in the above-entitled case, it is hereby
ordered:
1. That respondents produce and permit the inspection, copying
and photographing, by or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the stockholders' meeting of the
respondent San Miguel Corporation held on March 13, 1961, which
are in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues
involved in the main case. Accordingly, the respondents should
allow petitioner-movant entry in the principal office of the
respondent Corporation, San Miguel Corporation on January 14,
1977, at 9:30 o'clock in the morning for purposes of enforcing the
rights herein granted; it being understood that the inspection,
copying and photographing of the said documents shall be
undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or
papers not heretofore included are not covered by this Order and
any inspection thereof shall require the prior permission of this
Commission;

2. As to the Balance Sheet of San Miguel International, Inc. as well

as the list of salaries, allowances, bonuses, compensation and/or
remuneration received by respondent Jose M. Soriano, Jr. and
Andres Soriano from San Miguel International, Inc. and/or its
successors-in- interest, the Petition to produce and inspect the
same is hereby DENIED, as petitioner-movant is not a stockholder
of San Miguel International, Inc. and has, therefore, no inherent
right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated
November 29, 1976, withdrawing his request to copy and inspect
the management contract between San Miguel Corporation and A.
Soriano Corporation and the renewal and amendments thereof for
the reason that he had already obtained the same, the Commission
takes note thereof; and
4. Finally, the Commission holds in abeyance the resolution on the
matter of production and inspection of the authority of the
stockholders of San Miguel Corporation to invest the funds of
respondent corporation in San Miguel International, Inc., until after
the hearing on the merits of the principal issues in the aboveentitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard,
respondent corporation issued a notice of special stockholders' meeting for the
purpose of "ratification and confirmation of the amendment to the By-laws", setting
such meeting for February 10, 1977. This prompted petitioner to ask respondent
Commission for a summary judgment insofar as the first cause of action is concerned,
for the alleged reason that by calling a special stockholders' meeting for the aforesaid
purpose, private respondents admitted the invalidity of the amendments of September
18, 1976. The motion for summary judgment was opposed by private respondents.
Pending action on the motion, petitioner filed an "Urgent Motion for the Issuance of a
Temporary Restraining Order", praying that pending the determination of petitioner's
application for the issuance of a preliminary injunction and/or petitioner's motion for
summary judgment, a temporary restraining order be issued, restraining respondents
from holding the special stockholder's meeting as scheduled. This motion was duly
opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion
for issuance of temporary restraining order. After receipt of the order of denial,

respondents conducted the special stockholders' meeting wherein the amendments

to the by-laws were ratified. On February 14, 1977, petitioner filed a consolidated
motion for contempt and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977.
Petitioner alleges that up to the time of the filing of the instant petition, the said motion
had not yet been scheduled for hearing. Likewise, the motion for reconsideration of
the order granting in part and denying in part petitioner's motion for production of
record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent
Commission, submitting a Resolution of the Board of Directors of respondent
corporation disqualifying and precluding petitioner from being a candidate for director
unless he could submit evidence on May 3, 1977 that he does not come within the
disqualifications specified in the amendment to the by-laws, subject matter of SEC
Case No. 1375. By reason thereof, petitioner filed a manifestation and motion to
resolve pending incidents in the case and to issue a writ of injunction, alleging that
private respondents were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's irreparable damage and
prejudice, Allegedly despite a subsequent Manifestation to prod respondent
Commission to act, petitioner was not heard prior to the date of the stockholders'
meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has
been investing corporate funds in other corporations and businesses outside of the
primary purpose clause of the corporation, in violation of section 17 1/2 of the
Corporation Law, he filed with respondent Commission, on January 20, 1977, a
petition seeking to have private respondents Andres M. Soriano, Jr. and Jose M.
Soriano, as well as the respondent corporation declared guilty of such violation, and
ordered to account for such investments and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which
a consolidated motion to strike and to declare individual respondents in default and
an opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact
that said motions were filed as early as February 4, 1977, the commission acted

thereon only on April 25, 1977, when it denied respondents' motion to dismiss and
gave them two (2) days within which to file their answer, and set the case for hearing
on April 29 and May 3, 1977.

On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the respondent
Commission served upon petitioner copies of the following orders:

Respondents issued notices of the annual stockholders' meeting, including in the

Agenda thereof, the following:

(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion
for reconsideration, with its supplement, of the order of the Commission denying in
part petitioner's motion for production of documents, petitioner's motion for
reconsideration of the order denying the issuance of a temporary restraining order
denying the issuance of a temporary restraining order, and petitioner's consolidated
motion to declare respondents in contempt and to nullify the stockholders' meeting;

6. Re-affirmation of the authorization to the Board of Directors by

the stockholders at the meeting on March 20, 1972 to invest
corporate funds in other companies or businesses or for purposes
other than the main purpose for which the Corporation has been
organized, and ratification of the investments thereafter made
pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private
respondents from taking up Item 6 of the Agenda at the annual stockholders' meeting,
requesting that the same be set for hearing on May 3, 1977, the date set for the
second hearing of the case on the merits. Respondent Commission, however,
cancelled the dates of hearing originally scheduled and reset the same to May 16 and
17, 1977, or after the scheduled annual stockholders' meeting. For the purpose of
urging the Commission to act, petitioner filed an urgent manifestation on May 3, 1977,
but this notwithstanding, no action has been taken up to the date of the filing of the
instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before
this Court that respondent Commission gravely abused its discretion when it failed to
act with deliberate dispatch on the motions of petitioner seeking to prevent illegal
and/or arbitrary impositions or limitations upon his rights as stockholder of respondent
corporation, and that respondent are acting oppressively against petitioner, in gross
derogation of petitioner's rights to property and due process. He prayed that this
Court direct respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being
voted as director of respondent corporation and from submitting for ratification or
confirmation or from causing the ratification or confirmation of Item 6 of the Agenda of
the annual stockholders' meeting on May 10, 1977, or from Making effective the
amended by-laws of respondent corporation, until further orders from this Court or
until the Securities and Ex-change Commission acts on the matters complained of in
the instant petition.

(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as
a director of respondent corporation but stating that he should not sit as such if
elected, until such time that the Commission has decided the validity of the bylaws in
dispute, and denying deferment of Item 6 of the Agenda for the annual stockholders'
meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion
for reconsideration of the order of respondent Commission denying petitioner's
motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent
Commission acted with indecent haste and without circumspection in issuing the
aforesaid orders to petitioner's irreparable damage and injury; (2) that it acted without
jurisdiction and in violation of petitioner's right to due process when it decided en
banc an issue not raised before it and still pending before one of its Commissioners,
and without hearing petitioner thereon despite petitioner's request to have the same
calendared for hearing , and (3) that the respondents acted oppressively against the
petitioner in violation of his rights as a stockholder, warranting immediate judicial
intervention.
It is prayed in the supplemental petition that the SEC orders complained of be
declared null and void and that respondent Commission be ordered to allow petitioner
to undertake discovery proceedings relative to San Miguel International. Inc. and
thereafter to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed
their comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive
and antagonistic to that of respondent San Miguel Corporation, it appearing that the
owns and controls a greater portion of his SMC stock thru the Universal Robina
Corporation and the Consolidated Foods Corporation, which corporations are
engaged in business directly and substantially competing with the allied businesses of

respondent SMC and of corporations in which SMC has substantial investments.

Further, when CFC and Robina had accumulated investments. Further, when CFC
and Robina had accumulated shares in SMC, the Board of Directors of SMC realized
the clear and present danger that competitors or antagonistic parties may be elected
directors and thereby have easy and direct access to SMC's business and trade
secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC
from the clear and present danger that business competitors, if allowed to become
directors, will illegally and unfairly utilize their direct access to its business secrets
and plans for their own private gain to the irreparable prejudice of respondent SMC,
and, ultimately, its stockholders. Further, it is asserted that membership of a
competitor in the Board of Directors is a blatant disregard of no less that the
Constitution and pertinent laws against combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and
duty to preserve and protect itself by excluding competitors and antogonistic parties,
under the law of self-preservation, and it should be allowed a wide latitude in the
selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423
was due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was
emphasized that it was only on April 29, 1977 that petitioner calendared the aforesaid
petition for suspension (preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that respondent Commission
was not given a chance to act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot
and academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging
that the petition has become moot and academic for the reason, among others that
the acts of private respondent sought to be enjoined have reference to the annual
meeting of the stockholders of respondent San Miguel Corporation, which was held
on may 10, 1977; that in said meeting, in compliance with the order of respondent
Commission, petitioner was allowed to run and be voted for as director; and that in
the same meeting, Item 6 of the Agenda was discussed, voted upon, ratified and
confirmed. Further it was averred that the questions and issues raised by petitioner
are pending in the Securities and Exchange Commission which has acquired
jurisdiction over the case, and no hearing on the merits has been had; hence the
elevation of these issues before the Supreme Court is premature.

Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant
case, is not rendered academic by the act of a majority of stockholders, such that the
discussion, ratification and confirmation of Item 6 of the Agenda of the annual
stockholders' meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from being a director is
void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate comment,
alleging that after receiving a copy of the restraining order issued by this Court and
noting that the restraining order did not foreclose action by it, the Commission en
banc issued Orders Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450
which denied deferment of Item 6 of the Agenda of the annual stockholders' meeting
of respondent corporation, took into consideration an urgent manifestation filed with
the Commission by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for denial of
deferment was that "such action is within the authority of the corporation as well as
falling within the sphere of stockholders' right to know, deliberate upon and/or to
express their wishes regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged that the main petition has,
therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to
deprive him of his right to due process, and "that all possible questions on the facts
now pending before the respondent Commission are now before this Honorable Court
which has the authority and the competence to act on them as it may see fit." (Reno,
pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are
valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel International, Inc.,
a fully owned subsidiary of San Miguel Corporation; and

(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10,
1977, and the ratification of the investment in a foreign corporation of the corporate
funds, allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public
interest requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended bylaws in compliance with the principle of exhaustion of administrative remedies",
considering that: first: "whether or not the provisions of the amended by-laws are
intrinsically valid ... is purely a legal question. There is no factual dispute as to what
the provisions are and evidence is not necessary to determine whether such
amended by-laws are valid as framed and approved ... "; second: "it is for the interest
and guidance of the public that an immediate and final ruling on the question be made
... "; third: "petitioner was denied due process by SEC" when "Commissioner de
Guzman had openly shown prejudice against petitioner ... ", and "Commissioner
Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay
rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this
Court resolve the legal issues raised by the parties in keeping with the "cherished
rules of procedure" that "a court should always strive to settle the entire controversy
in a single proceeding leaving no root or branch to bear the seeds of future ligiation",
citing Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel Corporation
that this Court resolve on the merits the validity of its amended by laws and the rights
and obligations of the parties thereunder, otherwise "the time spent and effort exerted
by the parties concerned and, more importantly, by this Honorable Court, would have
been for naught because the main question will come back to this Honorable Court
for final resolution." Respondent Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the
SEC for hearing and decision of the issues involved, invoking the latter's primary
jurisdiction to hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to
settle the entire controversy in a single proceeding, leaving nor root or branch to bear
the seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court
resolved to decide the case on the merits instead of remanding it to the trial court for
further proceedings since the ends of justice would not be subserved by the remand

of the case. In Republic v. Security Credit and Acceptance Corporation, et al., 6 this
Court, finding that the main issue is one of law, resolved to decide the case on the
merits "because public interest demands an early disposition of the case", and in
Republic v. Central Surety and Insurance Company, 7 this Court denied remand of the
third-party complaint to the trial court for further proceedings, citing precedent where
this Court, in similar situations resolved to decide the cases on the merits, instead of
remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demand an early
disposition of the case; or (c) where the trial court had already received all the
evidence presented by both parties and the Supreme Court is now in a position,
based upon said evidence, to decide the case on its merits. 8 It is settled that the
doctrine of primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a single Supreme
Court, questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the
amended by-laws were adopted by the Board of Directors of the San Miguel
Corporation in the exercise of the power delegated by the stockholders ostensibly
pursuant to section 22 of the Corporation Law; that in a special meeting on February
10, 1977 held specially for that purpose, the amended by-laws were ratified by more
than 80% of the stockholders of record; that the foreign investment in the Hongkong
Brewery and Distellery, a beer manufacturing company in Hongkong, was made by
the San Miguel Corporation in 1948; and that in the stockholders' annual meeting
held in 1972 and 1977, all foreign investments and operations of San Miguel
Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from
nomination or election to the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of law.
9
Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question
of law. 10 This rule is subject, however, to the limitation that where the reasonableness
of a by-law is a mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead
of the judgment of those who are authorized to make by-laws and who have
exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because
they were tailored to suppress the minority and prevent them from having
representation in the Board", at the same time depriving petitioner of his "vested right"
to be voted for and to vote for a person of his choice as director.

Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San
Miguel Corporation content that ex. conclusion of a competitor from the Board is
legitimate corporate purpose, considering that being a competitor, petitioner cannot
devote an unselfish and undivided Loyalty to the corporation; that it is essentially a
preventive measure to assure stockholders of San Miguel Corporation of reasonable
protective from the unrestrained self-interest of those charged with the promotion of
the corporate enterprise; that access to confidential information by a competitor may
result either in the promotion of the interest of the competitor at the expense of the
San Miguel Corporation, or the promotion of both the interests of petitioner and
respondent San Miguel Corporation, which may, therefore, result in a combination or
agreement in violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further argued that there is
not vested right of any stockholder under Philippine Law to be voted as director of a
corporation. It is alleged that petitioner, as of May 6, 1978, has exercised, personally
or thru two corporations owned or controlled by him, control over the following
shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC Corporation
658,313 shares, or a total of 1,403,285 shares. Since the outstanding capital stock of
San Miguel Corporation, as of the present date, is represented by 33,139,749 shares
with a par value of P10.00, the total shares owned or controlled by petitioner
represents 4.2344% of the total outstanding capital stock of San Miguel Corporation.
It is also contended that petitioner is the president and substantial stockholder of
Universal Robina Corporation and CFC Corporation, both of which are allegedly
controlled by petitioner and members of his family. It is also claimed that both the
Universal Robina Corporation and the CFC Corporation are engaged in businesses
directly and substantially competing with the alleged businesses of San Miguel
Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS
AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are
enumerated in its Board the areas of competition are enumerated in its Board
Resolution dated April 28, 1978, thus:
Product
Line
Estimated
1977 SMC Robina-CFC
Table
Layer
Dressed
Poultry
Ice

Eggs
Pullets
Chicken
&
Hog
Cream

Market

Share

0.6%
10.0%
33.0%
24.0%
35.0%
14.0%
Feeds
40.0%
12.0%
70.0%
13.0%

Total

10.6%
57.0%
49.0%
52.0%
83.0%

Instant
Coffee
45.0%
Woven Fabrics 17.5% 9.1% 26.6%

40.0%

85.0%

Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total
product sales of SMC. Significantly, the combined market shares of SMC and CFCRobina in layer pullets dressed chicken, poultry and hog feeds ice cream, instant
coffee and woven fabrics would result in a position of such dominance as to affect the
prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478 million.
In addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a
subsidiary of SMC, which product line represented sales for SMC amounting to more
than P275 million. The CFC-Robina group (Robitex, excluding Litton Mills recently
acquired by petitioner) is purportedly also in direct competition with Ramie Textile,
Inc., subsidiary of SMC, in product sales amounting to more than P95 million. The
areas of competition between SMC and CFC-Robina in 1977 represented, therefore,
for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18,
1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC,
or more than 90% of the total outstanding shares of SMC, rejected petitioner's
candidacy for the Board of Directors because they "realized the grave dangers to the
corporation in the event a competitor gets a board seat in SMC." On September 18,
1978, the Board of Directors of SMC, by "virtue of powers delegated to it by the
stockholders," approved the amendment to ' he by-laws in question. At the meeting of
February 10, 1977, these amendments were confirmed and ratified by 5,716
shareholders owning 24,283,945 shares, or more than 80% of the total outstanding
shares. Only 12 shareholders, representing 7,005 shares, opposed the confirmation
and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding
shares, rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual Stockholders' Meeting,
12,480 shareholders, owning more than 30 million shares, or more than 90% of the
total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE
DIRECTORS EXPRESSLY CONFERRED BY LAW

QUALIFICATIONS

OF

Private respondents contend that the disputed amended by laws were adopted by the
Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect
the corporation from the clear and present danger that the election of a business
competitor to the Board may cause upon the corporation and the other stockholders

inseparable prejudice. Submitted for resolution, therefore, is the issue whether or

not respondent San Miguel Corporation could, as a measure of self- protection,
disqualify a competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to
adopt by-laws 'for its internal government, and to regulate the conduct and prescribe
the rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. 12 At common law, the rule was "that the
power to make and adopt by-laws was inherent in every corporation as one of its
necessary and inseparable legal incidents. And it is settled throughout the United
States that in the absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its charter or in general
law, such power of self-government being essential to enable the corporation to
accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws "the qualifications, duties and compensation of directors,
officers and employees ... " This must necessarily refer to a qualification in addition to
that specified by section 30 of the Corporation Law, which provides that "every
director must own in his right at least one share of the capital stock of the stock
corporation of which he is a director ... " In Government v. El Hogar, 14 the Court
sustained the validity of a provision in the corporate by-law requiring that persons
elected to the Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground that section
21 of the Corporation Law expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors and is "highly prudent and in conformity
with good practice. "

at least two-thirds of the subscribed capital stock of the corporation If the amendment
changes, diminishes or restricts the rights of the existing shareholders then the
disenting minority has only one right, viz.: "to object thereto in writing and demand
payment for his share." Under section 22 of the same law, the owners of the majority
of the subscribed capital stock may amend or repeal any by-law or adopt new bylaws. It cannot be said, therefore, that petitioner has a vested right to be elected
director, in the face of the fact that the law at the time such right as stockholder was
acquired contained the prescription that the corporate charter and the by-law shall be
subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications of
its directors, the next question that must be considered is whether the disqualification
of a competitor from being elected to the Board of Directors is a reasonable exercise
of corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND
ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a
fiduciary insofar as the corporation and the stockholders as a body are concerned. As
agents entrusted with the management of the corporation for the collective benefit of
the stockholders, "they occupy a fiduciary relation, and in this sense the relation is
one of trust." 18 "The ordinary trust relationship of directors of a corporation and
stockholders", according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the stockholders.
Equity recognizes that stockholders are the proprietors of the corporate interests and
are ultimately the only beneficiaries thereof * * *.

NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR

Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and that he impliedly contracts
that the will of the majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by law." 15 To this extent,
therefore, the stockholder may be considered to have "parted with his personal right
or privilege to regulate the disposition of his property which he has invested in the
capital stock of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It cannot therefore be justly said that the contract, express or
implied, between the corporation and the stockholders is infringed ... by any act of the
former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its
articles of incorporation by a vote or written assent of the stockholders representing

Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary

obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He
who is in such fiduciary position cannot serve himself first and his
cestuis second. ... He cannot manipulate the affairs of his
corporation to their detriment and in disregard of the standards of
common decency. He cannot by the intervention of a corporate
entity violate the ancient precept against serving two masters ... He
cannot utilize his inside information and strategic position for his
own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so directly.
He cannot violate rules of fair play by doing indirectly though the
corporation what he could not do so directly. He cannot use his

power for his personal advantage and to the detriment of the

stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the
aggrandizement, preference or advantage of the fiduciary to the
exclusion or detriment of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is
too weak -for this. Take whatever statute provision you please
giving power to stockholders to choose directors, and in none will
you find any express prohibition against a discretion to select
directors having the company's interest at heart, and it would simply
be going far to deny by mere implication the existence of such a
salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife
and immediate member of the family of such stockholder, on account of the supposed
interest of the wife in her husband's affairs, and his suppose influence over her. It is
perhaps true that such stockholders ought not to be condemned as selfish and
dangerous to the best interest of the corporation until tried and tested. So it is also
true that we cannot condemn as selfish and dangerous and unreasonable the action
of the board in passing the by-law. The strife over the matter of control in this
corporation as in many others is perhaps carried on not altogether in the spirit of
brotherly love and affection. The only test that we can apply is as to whether or not
the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases.

23

AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A

STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A
CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT OF THE
OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... (A)n amendment
which renders ineligible, or if elected, subjects to removal, a director if he be also a
director in a corporation whose business is in competition with or is antagonistic to the

other corporation is valid." 24 This is based upon the principle that where the director
is so employed in the service of a rival company, he cannot serve both, but must
betray one or the other. Such an amendment "advances the benefit of the corporation
and is good." An exception exists in New Jersey, where the Supreme Court held that
the Corporation Law in New Jersey prescribed the only qualification, and therefore
the corporation was not empowered to add additional qualifications. 25 This is the
exact opposite of the situation in the Philippines because as stated heretofore,
section 21 of the Corporation Law expressly provides that a corporation may make
by-laws for the qualifications of directors. Thus, it has been held that an officer of a
corporation cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has received as such
officer, under "the established law that a director or officer of a corporation may not
enter into a competing enterprise which cripples or injures the business of the
corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests." 27 In a case where
directors of a corporation cancelled a contract of the corporation for exclusive sale of
a foreign firm's products, and after establishing a rival business, the directors entered
into a new contract themselves with the foreign firm for exclusive sale of its products,
the court held that equity would regard the new contract as an offshoot of the old
contract and, therefore, for the benefit of the corporation, as a "faultless fiduciary may
not reap the fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that
the fiduciary standards could not be upheld where the fiduciary was acting for two
entities with competing interests. This doctrine rests fundamentally on the unfairness,
in particular circumstances, of an officer or director taking advantage of an
opportunity for his own personal profit when the interest of the corporation justly calls
for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation
has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly,
where two corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to discharge effectively his

duty, to satisfy his loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.

(5) No person who is an attorney against the corporation in a law

suit is eligible for service on the board. (At p. 7.)

Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained
as valid and reasonable an amendment to the by-laws of a bank, requiring that its
directors should not be directors, officers, employees, agents, nominees or attorneys
of any other banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in
McKee, explained the reasons of the court, thus:

These are not based on theorical abstractions but on human experience that a
person cannot serve two hostile masters without detriment to one of them.

... A bank director has access to a great deal of information

concerning the business and plans of a bank which would likely be
injurious to the bank if known to another bank, and it was
reasonable and prudent to enlarge this minimum disqualification to
include any director, officer, employee, agent, nominee, or attorney
of any other bank in California. The Ashkins case, supra,
specifically recognizes protection against rivals and others who
might acquire information which might be used against the interests
of the corporation as a legitimate object of by-law protection. With
respect to attorneys or persons associated with a firm which is
attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office
discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity for
conflicting loyalties and potential misuse and leakage of confidential
information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as
follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which
competes with the subject corporation.
(2) A director shall not be the immediate member of the family of
any stockholder in any other firm, company, or association which
competes with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or
trustee in any other firm, company, or association which compete
with the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.

The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent
himself from meetings at which confidential matters would be discussed, would not
detract from the validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it would be
inconsistent with petitioner's primary motive in running for board membership
which is to protect his investments in San Miguel Corporation. More important, such a
proposed norm of conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law is to encourage
and enforce responsible corporate management. As explained by Oleck: 31 "The law
win not tolerate the passive attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As directors, it is their duty
to control and supervise the day to day business activities of the company or to
promulgate definite policies and rules of guidance with a vigilant eye toward seeing to
it that these policies are carried out. It is only then that directors may be said to have
fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that he
disclose this information to a competitive arrival. These dangers are enhanced
considerably where the common director such as the petitioner is a controlling
stockholder of two of the competing corporations. It would seem manifest that in such
situations, the director has an economic incentive to appropriate for the benefit of his
own corporation the corporate plans and policies of the corporation where he sits as
director.
Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the latter to a
competitive disadvantage and unjustly enrich the competitor, for advance knowledge
by the competitor of the strategies for the development of existing or new markets of
existing or new products could enable said competitor to utilize such knowledge to his
advantage. 32
There is another important consideration in determining whether or not the amended
by-laws are reasonable. The Constitution and the law prohibit combinations in
restraint of trade or unfair competition. Thus, section 2 of Article XIV of the
Constitution provides: "The State shall regulate or prohibit private monopolies when

the public interest so requires. No combinations in restraint of trade or unfair

competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The
penalty of prision correccional in its minimum period or a fine
ranging from two hundred to six thousand pesos, or both, shall be
imposed upon:
1. Any person who shall enter into any contract or agreement or
shall take part in any conspiracy or combination in the form of a
trust or otherwise, in restraint of trade or commerce or to prevent by
artificial means free competition in the market.
2. Any person who shag monopolize any merchandise or object of
trade or commerce, or shall combine with any other person or
persons to monopolize said merchandise or object in order to alter
the price thereof by spreading false rumors or making use of any
other artifice to restrain free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of
any merchandise or object of commerce or an importer of any
merchandise or object of commerce from any foreign country, either
as principal or agent, wholesale or retailer, shall combine, conspire
or agree in any manner with any person likewise engaged in the
manufacture, production, processing, assembling or importation of
such merchandise or object of commerce or with any other persons
not so similarly engaged for the purpose of making transactions
prejudicial to lawful commerce, or of increasing the market price in
any part of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in or
imported into the Philippines, or of any article in the manufacture of
which such manufactured, produced, processed, or imported
merchandise or object of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint
of trade are aimed at raising levels of competition by improving the consumers'
effectiveness as the final arbiter in free markets. These laws are designed to preserve
free and unfettered competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our

economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by
reason of the inherent nature of the contemplated acts, prejudice the public interest
by unduly restraining competition or unduly obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition"
appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces
any combination the tendency of which is to prevent competition in the broad and
general sense, or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material consideration in
determining its existence is not that prices are raised and competition actually
excluded, but that power exists to raise prices or exclude competition when desired. 38
Further, it must be considered that the Idea of monopoly is now understood to include
a condition produced by the mere act of individuals. Its dominant thought is the notion
of exclusiveness or unity, or the suppression of competition by the qualification of
interest or management, or it may be thru agreement and concert of action. It is, in
brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are not
in accord with reality. The election of petitioner to the Board of respondent
Corporation can bring about an illegal situation. This is because an express
agreement is not necessary for the existence of a combination or conspiracy in
restraint of trade. 40 It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be considered is what
the parties actually did and not the words they used. For instance, the Clayton Act
prohibits a person from serving at the same time as a director in any two or more
corporations, if such corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition between them would
constitute violation of any provision of the anti-trust laws. 42 There is here a statutory
recognition of the anti-competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing corporations. A common
director of two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing
even one director is that the interlock permits the coordination of
policies between nominally independent firms to an extent that
competition between them may be completely eliminated. Indeed, if
a director, for example, is to be faithful to both corporations, some
accommodation must result. Suppose X is a director of both
Corporation A and Corporation B. X could hardly vote for a policy by

A that would injure B without violating his duty of loyalty to B at the

same time he could hardly abstain from voting without depriving A
of his best judgment. If the firms really do compete in the sense
of vying for economic advantage at the expense of the other
there can hardly be any reason for an interlock between
competitors other than the suppression of competition. 43
(Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on
section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a great
number of corporations ... to the detriment of the small ones dependent upon them
and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for
the purpose of serving the lowest priced goods to the consuming public would be
frustrated, The competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most out of the
consumers. Where the two competing firms control a substantial segment of the
market this could lead to collusion and combination in restraint of trade. Reason and
experience point to the inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other as competitors is to
blunt the edge of rivalry between the corporations, to seek out ways of compromising
opposing interests, and thus eliminate competition. As respondent SMC aptly
observes, knowledge by CFC-Robina of SMC's costs in various industries and
regions in the country win enable the former to practice price discrimination. CFCRobina can segment the entire consuming population by geographical areas or
income groups and change varying prices in order to maximize profits from every
market segment. CFC-Robina could determine the most profitable volume at which it
could produce for every product line in which it competes with SMC. Access to SMC
pricing policy by CFC-Robina would in effect destroy free competition and deprive the
consuming public of opportunity to buy goods of the highest possible quality at the
lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a
violation of the prohibition contained in section 13(5) of the Corporation Law. Said
section provides in part that "any stockholder of more than one corporation organized
for the purpose of engaging in agriculture may hold his stock in such corporations

solely for investment and not for the purpose of bringing about or attempting to bring
about a combination to exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in
the case of one stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a discriminatory manner.
However, the by law, by its terms, applies to all stockholders. The equal protection
clause of the Constitution requires only that the by-law operate equally upon all
persons of a class. Besides, before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be submitted to bring his case
within the ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a
competition from election to the Board of Directors of another corporation is valid and
reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may
be accorded to the corporation in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment,
and upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers
to perpetua themselves in power such fears appear to be misplaced. This power, but
is very nature, is subject to certain well established limitations. One of these is
inherent in the very convert and definition of the terms "competition" and "competitor".
"Competition" implies a struggle for advantage between two or more forces, each
possessing, in substantially similar if not Identical degree, certain characteristics
essential to the business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more advantageous
terms as an inducement to secure trade. 46 The test must be whether the business
does in fact compete, not whether it is capable of an indirect and highly unsubstantial
duplication of an isolated or non-characteristics activity. 47 It is, therefore, obvious that
not every person or entity engaged in business of the same kind is a competitor. Such
factors as quantum and place of business, Identity of products and area of
competition should be taken into consideration. It is, therefore, necessary to show
that petitioner's business covers a substantial portion of the same markets for similar
products to the extent of not less than 10% of respondent corporation's market for
competing products. While We here sustain the validity of the amended by-laws, it
does not follow as a necessary consequence that petitioner is ipso facto disqualified.
Consonant with the requirement of due process, there must be due hearing at which
the petitioner must be given the fullest opportunity to show that he is not covered by
the disqualification. As trustees of the corporation and of the stockholders, it is the

responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this

obligation and to remove any suspicion that this power may be utilized by the
incumbent members of the Board to perpetuate themselves in power, any decision of
the Board to disqualify a candidate for the Board of Directors should be reviewed by
the Securities behind Exchange Commission en banc and its decision shall be final
unless reversed by this Court on certiorari. 49 Indeed, it is a settled principle that
where the action of a Board of Directors is an abuse of discretion, or forbidden by
statute, or is against public policy, or is ultra vires, or is a fraud upon minority
stockholders or creditors, or will result in waste, dissipation or misapplication of the
corporation assets, a court of equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully
owned subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim
that he was denied inspection rights as stockholder of SMC "was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the
annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the
stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December 31, 1975;
(5) a listing of the salaries, allowances, bonuses and other compensation or
remunerations received by the directors and corporate officers of SMC; (6) a copy of
the US $100 million Euro-Dollar Loan Agreement of SMC; and (7) copies of the
minutes of all meetings of the Board of Directors from January 1975 to May 1976,
with deletions of sensitive data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was
SMC's first venture abroad, having started in 1948 with an initial outlay of ?
500,000.00, augmented by a loan of Hongkong $6 million from a foreign bank under
the personal guaranty of SMC's former President, the late Col. Andres Soriano; (2)
that as of December 31, 1975, the estimated value of SMI would amount to almost
P400 million (3) that the total cash dividends received by SMC from SMI since 1953
has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare
cash or stock dividends, all earnings having been used in line with a program for the
setting up of breweries by SMI

These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record
of all business transactions of the corporation and minutes of any meeting shall be
open to the inspection of any director, member or stockholder of the corporation at
reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the stockholder, it is given to him
as such and must be exercised by him with respect to his interest as a stockholder
and for some purpose germane thereto or in the interest of the corporation. 53 In other
words, the inspection has to be germane to the petitioner's interest as a stockholder,
and has to be proper and lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine
the books of the corporation must be exercised in good faith, for specific and honest
purpose, and not to gratify curiosity, or for specific and honest purpose, and not to
gratify curiosity, or for speculative or vexatious purposes. The weight of judicial
opinion appears to be, that on application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholder's good faith and his
purpose and motives in seeking inspection. 56 Thus, it was held that "the right given
by statute is not absolute and may be refused when the information is not sought in
good faith or is used to the detriment of the corporation." 57 But the "impropriety of
purpose such as will defeat enforcement must be set up the corporation defensively if
the Court is to take cognizance of it as a qualification. In other words, the specific
provisions take from the stockholder the burden of showing propriety of purpose and
place upon the corporation the burden of showing impropriety of purpose or motive. 58
It appears to be the general rule that stockholders are entitled to full information as to
the management of the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears that the company is
being mismanaged or that it is being managed for the personal benefit of officers or
directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for
a lawful purpose is a matter of law, the right of such stockholder to examine the books
and records of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing.
Some state courts recognize the right under certain conditions, while others do not.
Thus, it has been held that where a corporation owns approximately no property

except the shares of stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company, the legal fiction of distinct corporate entities
may be disregarded and the books, papers and documents of all the corporations
may be required to be produced for examination, 60 and that a writ of mandamus, may
be granted, as the records of the subsidiary were, to all incontents and purposes, the
records of the parent even though subsidiary was not named as a party. 61 mandamus
was likewise held proper to inspect both the subsidiary's and the parent corporation's
books upon proof of sufficient control or dominion by the parent showing the relation
of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its
books and records in another jurisdiction, and is not legally subject to the control of
the parent company, although it owned a vast majority of the stock of the subsidiary. 63
Likewise, inspection of the books of an allied corporation by stockholder of the parent
company which owns all the stock of the subsidiary has been refused on the ground
that the stockholder was not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of
former stockholders to inspect books and records of the corporation included the right
to inspect corporation's subsidiaries' books and records which were in corporation's
possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the
records of a controlled subsidiary corporation which used the same offices and had
Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent
SEC, petitioner contended that respondent corporation "had been attempting to
suppress information for the stockholders" and that petitioner, "as stockholder of
respondent corporation, is entitled to copies of some documents which for some
reason or another, respondent corporation is very reluctant in revealing to the
petitioner notwithstanding the fact that no harm would be caused thereby to the
corporation." 67 There is no question that stockholders are entitled to inspect the
books and records of a corporation in order to investigate the conduct of the
management, determine the financial condition of the corporation, and generally take
an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be more
in accord with equity, good faith and fair dealing to construe the statutory right of
petitioner as stockholder to inspect the books and records of the corporation as
extending to books and records of such wholly subsidiary which are in respondent
corporation's possession and control.

IV
Whether or not respondent SEC gravely abused its discretion in allowing the
stockholders of respondent corporation to ratify the investment of corporate funds in a
foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus
violating section 17-1/2 of the Corporation Law, and alleges that respondent SEC
should have investigated the charge, being a statutory offense, instead of allowing
ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders
for ratification is a sound corporate practice and should not be thwarted but
encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for
which it was organized" provided that its Board of Directors has been so authorized
by the affirmative vote of stockholders holding shares entitling them to exercise at
least two-thirds of the voting power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the stockholders. It is only when
the purchase of shares is done solely for investment and not to accomplish the
purpose of its incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting power is necessary.
69

As stated by respondent corporation, the purchase of beer manufacturing facilities by

SMC was an investment in the same business stated as its main purpose in its
Articles of Incorporation, which is to manufacture and market beer. It appears that the
original investment was made in 1947-1948, when SMC, then San Miguel Brewery,
Inc., purchased a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for
the manufacture and marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in Bermuda as a tax
free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co.,
Inc., supra, appears relevant. In said case, one of the issues was the legality of an
investment made by Manao Sugar Central Co., Inc., without prior resolution approved
by the affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of sugar bags. The
lower court said that "there is more logic in the stand that if the investment is made in
a corporation whose business is important to the investing corporation and would aid
it in its purpose, to require authority of the stockholders would be to unduly curtail the

power of the Board of Directors." This Court affirmed the ruling of the court a quo on
the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private
corporation, in order to accomplish is purpose as stated in its
articles of incorporation, and subject to the limitations imposed by
the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidence
of indebtedness of any domestic or foreign corporation. Such an
act, if done in pursuance of the corporate purpose, does not need
the approval of stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of
the stockholders is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations established
by the Corporations law; namely, (a) that no agricultural or mining
corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that
such holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law
by Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has
the power to invest its corporate funds "in any other corporation or
business, or for any purpose other than the main purpose for which
it was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a propose at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in
any other agricultural or mining corporation. When the investment
is necessary to accomplish its purpose or purposes as stated in its
articles of incorporation the approval of the stockholders is not
necessary."" (Id., p. 108) (Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may
ratify and thereby render binding upon it the originally unauthorized acts of its officers
or other agents. 70 This is true because the questioned investment is neither contrary
to law, morals, public order or public policy. It is a corporate transaction or contract
which is within the corporate powers, but which is defective from a supported failure
to observe in its execution the. requirement of the law that the investment must be

authorized by the affirmative vote of the stockholders holding two-thirds of the voting
power. This requirement is for the benefit of the stockholders. The stockholders for
whose benefit the requirement was enacted may, therefore, ratify the investment and
its ratification by said stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or those which are not
illegal and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an
admission that respondent corporation had committed an ultra vires act, considering
the common practice of corporations of periodically submitting for the gratification of
their stockholders the acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as
specified by him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos,
Abad Santos and De Castro, voted to sustain the validity per se of the amended bylaws in question and to dismiss the petition without prejudice to the question of the
actual disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as
director of respondent San Miguel Corporation being decided, after a new and proper
hearing by the Board of Directors of said corporation, whose decision shall be
appealable to the respondent Securities and Exchange Commission deliberating and
acting en banc and ultimately to this Court. Unless disqualified in the manner herein
provided, the prohibition in the afore-mentioned amended by-laws shall not apply to
petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to
declare the issue on the validity of the foreign investment of respondent corporation
as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended bylaws, pending hearing by this Court on the applicability of section 13(5) of the
Corporation Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the bylaws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of the
questioned amended bylaws and that this question should properly be resolved first
by the SEC as the agency of primary jurisdiction. They concur in the result that
petitioner may be allowed to run for and sit as director of respondent SMC in the
scheduled May 6, 1979 election and subsequent elections until disqualified after
proper hearing by the respondent's Board of Directors and petitioner's disqualification
shall have been sustained by respondent SEC en banc and ultimately by final
judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records of
San Miguel International, Inc. as specified in the petition. The petition, insofar as it
assails the validity of the amended by- laws and the ratification of the foreign
investment of respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID P. WHITTINGHAM and
CHARLES
CHAMSAY,
petitioners,
vs.
SANITARY WARES MANUFACTURING CORPORATOIN, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,

GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ,

respondents.
G.R. No. 75951 December 15, 1989
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO R.
LAGDAMEO, ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL A. BONCAN,
BALDWIN
YOUNG
and
AVELINO
V.
CRUX,
petitioners,
vs.
THE COURT OF APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.
WHITTINGHAM, CHARLES CHAMSAY and LUCIANO SALAZAR, respondents.
G.R. Nos. 75975-76 December 15, 1989
LUCIANO
E.
SALAZAR,
petitioner,
vs.
SANITARY WARES MANUFACTURING CORPORATION, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE R. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG, AVELINO V. CRUZ and
the COURT OF APPEALS, respondents.

In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose
of manufacturing and marketing sanitary wares. One of the incorporators, Mr. Baldwin
Young went abroad to look for foreign partners, European or American who could
help in its expansion plans. On August 15, 1962, ASI, a foreign corporation domiciled
in Delaware, United States entered into an Agreement with Saniwares and some
Filipino investors whereby ASI and the Filipino investors agreed to participate in the
ownership of an enterprise which would engage primarily in the business of
manufacturing in the Philippines and selling here and abroad vitreous china and
sanitary wares. The parties agreed that the business operations in the Philippines
shall be carried on by an incorporated enterprise and that the name of the corporation
shall initially be "Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to the issues in these cases on
the nomination and election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the Corporation shall be
substantially in the form annexed hereto as Exhibit A and, insofar
as permitted under Philippine law, shall specifically provide for
(1) Cumulative voting for directors:

Belo, Abiera & Associates for petitioners in 75875.

xxx xxx xxx

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.

5. Management
GUTIERREZ, JR., J.:
These consolidated petitions seek the review of the amended decision of the Court of
Appeals in CA-G.R. SP Nos. 05604 and 05617 which set aside the earlier decision
dated June 5, 1986, of the then Intermediate Appellate Court and directed that in all
subsequent elections for directors of Sanitary Wares Manufacturing Corporation
(Saniwares), American Standard Inc. (ASI) cannot nominate more than three (3)
directors; that the Filipino stockholders shall not interfere in ASI's choice of its three
(3) nominees; that, on the other hand, the Filipino stockholders can nominate only six
(6) candidates and in the event they cannot agree on the six (6) nominees, they shall
vote only among themselves to determine who the six (6) nominees will be, with
cumulative voting to be allowed but without interference from ASI.
The antecedent facts can be summarized as follows:

(a) The management of the Corporation shall be vested in a Board

of Directors, which shall consist of nine individuals. As long as
American-Standard shall own at least 30% of the outstanding stock
of the Corporation, three of the nine directors shall be designated
by American-Standard, and the other six shall be designated by the
other stockholders of the Corporation. (pp. 51 & 53, Rollo of 75875)
At the request of ASI, the agreement contained provisions designed to protect it as a
minority group, including the grant of veto powers over a number of corporate acts
and the right to designate certain officers, such as a member of the Executive
Committee whose vote was required for important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation was also
registered with the Board of Investments for availment of incentives with the condition
that at least 60% of the capital stock of the corporation shall be owned by Philippine
nationals.

The joint enterprise thus entered into by the Filipino investors and the American
corporation prospered. Unfortunately, with the business successes, there came a
deterioration of the initially harmonious relations between the two groups. According
to the Filipino group, a basic disagreement was due to their desire to expand the
export operations of the company to which ASI objected as it apparently had other
subsidiaries of joint joint venture groups in the countries where Philippine exports
were contemplated. On March 8, 1983, the annual stockholders' meeting was held.
The meeting was presided by Baldwin Young. The minutes were taken by the
Secretary, Avelino Cruz. After disposing of the preliminary items in the agenda, the
stockholders then proceeded to the election of the members of the board of directors.
The ASI group nominated three persons namely; Wolfgang Aurbach, John Griffin and
David P. Whittingham. The Philippine investors nominated six, namely; Ernesto
Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee, and
Baldwin Young. Mr. Eduardo R, Ceniza then nominated Mr. Luciano E. Salazar, who
in turn nominated Mr. Charles Chamsay. The chairman, Baldwin Young ruled the last
two nominations out of order on the basis of section 5 (a) of the Agreement, the
consistent practice of the parties during the past annual stockholders' meetings to
nominate only nine persons as nominees for the nine-member board of directors, and
the legal advice of Saniwares' legal counsel. The following events then, transpired:
... There were protests against the action of the Chairman and
heated arguments ensued. An appeal was made by the ASI
representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin Young,
declared the appeal out of order and no vote on the ruling was
taken. The Chairman then instructed the Corporate Secretary to
cast all the votes present and represented by proxy equally for the
6 nominees of the Philippine Investors and the 3 nominees of ASI,
thus effectively excluding the 2 additional persons nominated,
namely, Luciano E. Salazar and Charles Chamsay. The ASI
representative, Mr. Jaqua protested the decision of the Chairman
and announced that all votes accruing to ASI shares, a total of
1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were being
cumulatively voted for the three ASI nominees and Charles
Chamsay, and instructed the Secretary to so vote. Luciano E.
Salazar and other proxy holders announced that all the votes
owned by and or represented by them 467,197 shares (p. 27, Rollo,
AC-G.R. SP No. 05617) were being voted cumulatively in favor of
Luciano E. Salazar. The Chairman, Baldwin Young, nevertheless
instructed the Secretary to cast all votes equally in favor of the
three ASI nominees, namely, Wolfgang Aurbach, John Griffin and
David Whittingham and the six originally nominated by Rogelio
Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan, Ernesto
Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and Baldwin
Young. The Secretary then certified for the election of the following

Wolfgang Aurbach, John Griffin, David Whittingham Ernesto

Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique Lagdameo,
George F. Lee, Raul A. Boncan, Baldwin Young. The representative
of ASI then moved to recess the meeting which was duly seconded.
There was also a motion to adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was accepted by the Chairman,
Baldwin Young, who announced that the motion was carried and
declared the meeting adjourned. Protests against the adjournment
were registered and having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting was not adjourned but only
recessed and that the meeting would be reconvened in the next
room. The Chairman then threatened to have the stockholders who
did not agree to the decision of the Chairman on the casting of
votes bodily thrown out. The ASI Group, Luciano E. Salazar and
other stockholders, allegedly representing 53 or 54% of the shares
of Saniwares, decided to continue the meeting at the elevator lobby
of the American Standard Building. The continued meeting was
presided by Luciano E. Salazar, while Andres Gatmaitan acted as
Secretary. On the basis of the cumulative votes cast earlier in the
meeting, the ASI Group nominated its four nominees; Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay.
Luciano E. Salazar voted for himself, thus the said five directors
were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the
other six (6) nominees for the four (4) remaining positions of
directors and that the body decided not to break the tie. (pp. 37-39,
Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties with the
Securities and Exchange Commission (SEC). The first petition filed was for
preliminary injunction by Saniwares, Emesto V. Lagdameo, Baldwin Young, Raul A.
Bonean Ernesto R. Lagdameo, Jr., Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case was denominated as SEC Case
No. 2417. The second petition was for quo warranto and application for receivership
by Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar and
Charles Chamsay against the group of Young and Lagdameo (petitioners in SEC
Case No. 2417) and Avelino F. Cruz. The case was docketed as SEC Case No. 2718.
Both sets of parties except for Avelino Cruz claimed to be the legitimate directors of
the corporation.
The two petitions were consolidated and tried jointly by a hearing officer who
rendered a decision upholding the election of the Lagdameo Group and dismissing
the quo warranto petition of Salazar and Chamsay. The ASI Group and Salazar
appealed the decision to the SEC en banc which affirmed the hearing officer's
decision.

The SEC decision led to the filing of two separate appeals with the Intermediate
Appellate Court by Wolfgang Aurbach, John Griffin, David Whittingham and Charles
Chamsay (docketed as AC-G.R. SP No. 05604) and by Luciano E. Salazar (docketed
as AC-G.R. SP No. 05617). The petitions were consolidated and the appellate court in
its decision ordered the remand of the case to the Securities and Exchange
Commission with the directive that a new stockholders' meeting of Saniwares be
ordered convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees Lagdameo Group) the
appellate court (Court of Appeals) rendered the questioned amended decision.
Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and Charles
Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE
ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES
WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE STOCKHOLDERS
FROM
EXERCISING
THEIR
FULL
VOTING
RIGHTS
REPRESENTED BY THE NUMBER OF SHARES IN SANIWARES,
THUS DEPRIVING PETITIONERS AND THE CORPORATION
THEY REPRESENT OF THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS AND
READS PROVISIONS INTO THE AGREEMENT OF THE PARTIES
WHICH WERE NOT THERE, WHICH ACTION IT CANNOT
LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended decision on
the following grounds:
11.1. ThatAmendedDecisionwouldsanctiontheCA'sdisregard of
binding contractual agreements entered into by stockholders and
the replacement of the conditions of such agreements with terms
never contemplated by the stockholders but merely dictated by the
CA .
11.2. The Amended decision would likewise sanction the
deprivation of the property rights of stockholders without due
process of law in order that a favored group of stockholders may be
illegally benefitted and guaranteed a continuing monopoly of the
control of a corporation. (pp. 14-15, Rollo-75975-76)

On the other hand, the petitioners in G.R. No. 75951 contend that:
I
THE AMENDED DECISION OF THE RESPONDENT COURT,
WHILE RECOGNIZING THAT THE STOCKHOLDERS OF
SANIWARES ARE DIVIDED INTO TWO BLOCKS, FAILS TO
FULLY ENFORCE THE BASIC INTENT OF THE AGREEMENT
AND THE LAW.
II
THE AMENDED DECISION DOES NOT CATEGORICALLY RULE
THAT PRIVATE PETITIONERS HEREIN WERE THE DULY
ELECTED DIRECTORS DURING THE 8 MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF SANTWARES. (P. 24, Rollo75951)
The issues raised in the petitions are interrelated, hence, they are discussed jointly.
The main issue hinges on who were the duly elected directors of Saniwares for the
year 1983 during its annual stockholders' meeting held on March 8, 1983. To answer
this question the following factors should be determined: (1) the nature of the
business established by the parties whether it was a joint venture or a corporation
and (2) whether or not the ASI Group may vote their additional 10% equity during
elections of Saniwares' board of directors.
The rule is that whether the parties to a particular contract have thereby established
among themselves a joint venture or some other relation depends upon their actual
intention which is determined in accordance with the rules governing the
interpretation and construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and
Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press Mfg. Co.
20 Cal. 2nd 751, 128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that the actual
intention of the parties should be viewed strictly on the "Agreement" dated August
15,1962 wherein it is clearly stated that the parties' intention was to form a
corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions which states:
xxx xxx xxx

c) nothing herein contained shall be construed to constitute any of

the parties hereto partners or joint venturers in respect of any
transaction hereunder. (At P. 66, Rollo-GR No. 75875)
They object to the admission of other evidence which tends to show that the parties'
agreement was to establish a joint venture presented by the Lagdameo and Young
Group on the ground that it contravenes the parol evidence rule under section 7, Rule
130 of the Revised Rules of Court. According to them, the Lagdameo and Young
Group never pleaded in their pleading that the "Agreement" failed to express the true
intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When the terms of an agreement
have been reduced to writing, it is to be considered as containing
all such terms, and therefore, there can be, between the parties
and their successors in interest, no evidence of the terms of the
agreement other than the contents of the writing, except in the
following cases:
(a) Where a mistake or imperfection of the writing, or its failure to
express the true intent and agreement of the parties or the validity
of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in their
Reply and Answer to Counterclaim in SEC Case No. 2417 that the Agreement failed
to express the true intent of the parties, to wit:
xxx xxx xxx
4. While certain provisions of the Agreement would make it appear
that the parties thereto disclaim being partners or joint venturers
such disclaimer is directed at third parties and is not inconsistent
with, and does not preclude, the existence of two distinct groups of
stockholders in Saniwares one of which (the Philippine Investors)
shall constitute the majority, and the other ASI shall constitute the
minority stockholder. In any event, the evident intention of the
Philippine Investors and ASI in entering into the Agreement is to
enter into ajoint venture enterprise, and if some words in the
Agreement appear to be contrary to the evident intention of the
parties, the latter shall prevail over the former (Art. 1370, New Civil
Code). The various stipulations of a contract shall be interpreted

together attributing to the doubtful ones that sense which may

result from all of them taken jointly (Art. 1374, New Civil Code).
Moreover, in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally
considered. (Art. 1371, New Civil Code). (Part I, Original Records,
SEC Case No. 2417)
It has been ruled:
In an action at law, where there is evidence tending to prove that
the parties joined their efforts in furtherance of an enterprise for
their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v. Kessler v 200
App. Div. 40,192 N Y S 653; Pyroa v. Brownfield (Tex. Civ. A.) 238
SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important provisions of the Agreement as well
as the testimonial evidence presented by the Lagdameo and Young Group shows that
the parties agreed to establish a joint venture and not a corporation. The history of the
organization of Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not with an ordinary
corporation. As stated by the SEC:
According to the unrebutted testimony of Mr. Baldwin Young, he
negotiated the Agreement with ASI in behalf of the Philippine
nationals. He testified that ASI agreed to accept the role of minority
vis-a-vis the Philippine National group of investors, on the condition
that the Agreement should contain provisions to protect ASI as the
minority.
An examination of the Agreement shows that certain provisions
were included to protect the interests of ASI as the minority. For
example, the vote of 7 out of 9 directors is required in certain
enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].
ASI is contractually entitled to designate a member of the Executive
Committee and the vote of this member is required for certain
transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75% super-majority vote for the
amendment of the articles and by-laws of Saniwares [Sec. 3 (a) (iv)
and (b) (iii)]. ASI is also given the right to designate the president
and plant manager [Sec. 5 (6)]. The Agreement further provides
that the sales policy of Saniwares shall be that which is normally

followed by ASI [Sec. 13 (a)] and that Saniwares should not export
"Standard" products otherwise than through ASI's Export Marketing
Services [Sec. 13 (6)]. Under the Agreement, ASI agreed to provide
technology and know-how to Saniwares and the latter paid royalties
for the same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions of the Agreement requiring
a 7 out of 9 votes of the board of directors for certain actions, in
effect gave ASI (which designates 3 directors under the Agreement)
an effective veto power. Furthermore, the grant to ASI of the right to
designate certain officers of the corporation; the super-majority
voting requirements for amendments of the articles and by-laws;
and most significantly to the issues of tms case, the provision that
ASI shall designate 3 out of the 9 directors and the other
stockholders shall designate the other 6, clearly indicate that there
are two distinct groups in Saniwares, namely ASI, which owns 40%
of the capital stock and the Philippine National stockholders who
own the balance of 60%, and that 2) ASI is given certain protections
as the minority stockholder.
Premises considered, we believe that under the Agreement there
are two groups of stockholders who established a corporation with
provisions for a special contractual relationship between the
parties, i.e., ASI and the other stockholders. (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not "nominated" or
"elected" in the selection of the nine directors on a six to three ratio. Each group is
assured of a fixed number of directors in the board.
Moreover, ASI in its communications referred to the enterprise as joint venture.
Baldwin Young also testified that Section 16(c) of the Agreement that "Nothing herein
contained shall be construed to constitute any of the parties hereto partners or joint
venturers in respect of any transaction hereunder" was merely to obviate the
possibility of the enterprise being treated as partnership for tax purposes and
liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local firm are constrained to seek the technology and
marketing assistance of huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a minority owner of a
firm in exchange for its manufacturing expertise, use of its brand names, and other
such assistance. However, there is always a danger from such arrangements. The

foreign group may, from the start, intend to establish its own sole or monopolistic
operations and merely uses the joint venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the covetousness may come later. As the
Philippine firm enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to completely or
predominantly take over the entire company. This undermining of joint ventures is not
consistent with fair dealing to say the least. To the extent that such subversive actions
can be lawfully prevented, the courts should extend protection especially in industries
where constitutional and legal requirements reserve controlling ownership to Filipino
citizens.
The Lagdameo Group stated in their appellees' brief in the Court of Appeal
In fact, the Philippine Corporation Code itself recognizes the right of
stockholders to enter into agreements regarding the exercise of
their voting rights.
Sec. 100. Agreements by stockholders.xxx xxx xxx
2. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, may provide that in exercising
any voting rights, the shares held by them shall be voted as therein
provided, or as they may agree, or as determined in accordance
with a procedure agreed upon by them.
Appellants contend that the above provision is included in the
Corporation Code's chapter on close corporations and Saniwares
cannot be a close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders at the time of the
disputed stockholders meeting, these 95 stockholders are not
separate from each other but are divisible into groups representing
a single Identifiable interest. For example, ASI, its nominees and
lawyers count for 13 of the 95 stockholders. The YoungYutivo family
count for another 13 stockholders, the Chamsay family for 8
stockholders, the Santos family for 9 stockholders, the Dy family for
7 stockholders, etc. If the members of one family and/or business
or interest group are considered as one (which, it is respectfully
submitted, they should be for purposes of determining how closely
held Saniwares is there were as of 8 March 1983, practically only
17 stockholders of Saniwares. (Please refer to discussion in pp. 5
to 6 of appellees' Rejoinder Memorandum dated 11 December
1984 and Annex "A" thereof).

Secondly, even assuming that Saniwares is technically not a close

corporation because it has more than 20 stockholders, the
undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or
a widely held corporation.
In the United States, many courts have taken a realistic approach
to joint venture corporations and have not rigidly applied principles
of corporation law designed primarily for public issue corporations.
These courts have indicated that express arrangements between
corporate joint ventures should be construed with less emphasis on
the ordinary rules of law usually applied to corporate entities and
with more consideration given to the nature of the agreement
between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des
Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline Ry v.
Atlantic Coast Line Ry; 240 N.C. 495,.82 S.E. 2d 771; Deboy v.
Harris, 207 Md., 212,113 A 2d 903; Hathway v. Porter Royalty Pool,
Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v. Beardsley, 138
U.S. 262; "The Legal Status of Joint Venture Corporations", 11
Vand Law Rev. p. 680,1958). These American cases dealt with
legal questions as to the extent to which the requirements arising
from the corporate form of joint venture corporations should control,
and the courts ruled that substantial justice lay with those litigants
who relied on the joint venture agreement rather than the litigants
who relied on the orthodox principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint venture, in organizing the joint
venture deviate from the traditional pattern of corporation
management. A noted authority has pointed out that just as in close
corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the
following: (1) require greater than majority vote for shareholder and
director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3)
give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of
disputes by arbitration (See I O' Neal, Close Corporations, 1971
ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer, P.
16)

Thirdly paragraph 2 of Sec. 100 of the Corporation Code does not

necessarily imply that agreements regarding the exercise of voting
rights are allowed only in close corporations. As Campos and
Lopez-Campos explain:
Paragraph 2 refers to pooling and voting agreements in particular.
Does this provision necessarily imply that these agreements can be
valid only in close corporations as defined by the Code? Suppose
that a corporation has twenty five stockholders, and therefore
cannot qualify as a close corporation under section 96, can some of
them enter into an agreement to vote as a unit in the election of
directors? It is submitted that there is no reason for denying
stockholders of corporations other than close ones the right to enter
into not voting or pooling agreements to protect their interests, as
long as they do not intend to commit any wrong, or fraud on the
other stockholders not parties to the agreement. Of course, voting
or pooling agreements are perhaps more useful and more often
resorted to in close corporations. But they may also be found
necessary even in widely held corporations. Moreover, since the
Code limits the legal meaning of close corporations to those which
comply with the requisites laid down by section 96, it is entirely
possible that a corporation which is in fact a close corporation will
not come within the definition. In such case, its stockholders should
not be precluded from entering into contracts like voting
agreements if these are otherwise valid. (Campos & LopezCampos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the Agreement relating to
the designation or nomination of directors restricts the right of the
Agreement's signatories to vote for directors, such contractual
provision, as correctly held by the SEC, is valid and binding upon
the signatories thereto, which include appellants. (Rollo No. 75951,
pp. 90-94)
In regard to the question as to whether or not the ASI group may vote their additional
equity during elections of Saniwares' board of directors, the Court of Appeals correctly
stated:
As in other joint venture companies, the extent of ASI's participation
in the management of the corporation is spelled out in the
Agreement. Section 5(a) hereof says that three of the nine directors
shall be designated by ASI and the remaining six by the other
stockholders, i.e., the Filipino stockholders. This allocation of board
seats is obviously in consonance with the minority position of ASI.

Having entered into a well-defined contractual relationship, it is

imperative that the parties should honor and adhere to their
respective rights and obligations thereunder. Appellants seem to
contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may interfere
with the stockholder's rights to cumulative voting as provided in
Section 24 of the Corporation Code. This Court should not be
prepared to hold that any agreement which curtails in any way
cumulative voting should be struck down, even if such agreement
has been freely entered into by experienced businessmen and do
not prejudice those who are not parties thereto. It may well be that
it would be more cogent to hold, as the Securities and Exchange
Commission has held in the decision appealed from, that
cumulative voting rights may be voluntarily waived by stockholders
who enter into special relationships with each other to pursue and
implement specific purposes, as in joint venture relationships
between foreign and local stockholders, so long as such
agreements do not adversely affect third parties.
In any event, it is believed that we are not here called upon to make
a general rule on this question. Rather, all that needs to be done is
to give life and effect to the particular contractual rights and
obligations which the parties have assumed for themselves.

even be able to get a majority of the board seats, a result which is

clearly contrary to the contractual intent of the parties.
Such a ruling will give effect to both the allocation of the board
seats and the stockholder's right to cumulative voting. Moreover,
this ruling will also give due consideration to the issue raised by the
appellees on possible violation or circumvention of the Anti-Dummy
Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the ASI Group
has the right to vote their additional equity pursuant to Section 24 of the Corporation
Code which gives the stockholders of a corporation the right to cumulate their votes in
electing directors. Petitioner Salazar adds that this right if granted to the ASI Group
would not necessarily mean a violation of the Anti-Dummy Act (Commonwealth Act
108, as amended). He cites section 2-a thereof which provides:
And provided finally that the election of aliens as members of the
board of directors or governing body of corporations or associations
engaging in partially nationalized activities shall be allowed in
proportion to their allowable participation or share in the capital of
such entities. (amendments introduced by Presidential Decree 715,
section 1, promulgated May 28, 1975)

On the one hand, the clearly established minority position of ASI

and the contractual allocation of board seats Cannot be
disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.

The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that provision is
applicable to a joint venture with clearly defined agreements:

In our decision sought to be reconsidered, we opted to uphold the

second over the first. Upon further reflection, we feel that the proper
and just solution to give due consideration to both factors suggests
itself quite clearly. This Court should recognize and uphold the
division of the stockholders into two groups, and at the same time
uphold the right of the stockholders within each group to cumulative
voting in the process of determining who the group's nominees
would be. In practical terms, as suggested by appellant Luciano E.
Salazar himself, this means that if the Filipino stockholders cannot
agree who their six nominees will be, a vote would have to be taken
among the Filipino stockholders only. During this voting, each
Filipino stockholder can cumulate his votes. ASI, however, should
not be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may

The legal concept of ajoint venture is of common law origin. It has

no precise legal definition but it has been generally understood to
mean an organization formed for some temporary purpose. (Gates
v. Megargel, 266 Fed. 811 [1920]) It is in fact hardly distinguishable
from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual
right of control. Blackner v. Mc Dermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P. 2d., 1043 [1939]; Buckley v.
Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242 [1955]).
The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is
formed for the execution of a single transaction, and is thus of a
temporary nature. (Tufts v. Mann 116 Cal. App. 170, 2 P. 2d. 500
[1931]; Harmon v. Martin, 395 111. 595, 71 NE 2d. 74 [1947]; Gates

v. Megargel 266 Fed. 811 [1920]). This observation is not entirely

accurate in this jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. (Art.
1783, Civil Code). It would seem therefore that under Philippine
law, a joint venture is a form of partnership and should thus be
governed by the law of partnerships. The Supreme Court has
however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with
others. (At p. 12, Tuazon v. Bolanos, 95 Phil. 906 [1954]) (Campos
and Lopez-Campos Comments, Notes and Selected Cases,
Corporation Code 1981)
Moreover, the usual rules as regards the construction and operations of contracts
generally apply to a contract of joint venture. (O' Hara v. Harman 14 App. Dev. (167)
43 NYS 556).
Bearing these principles in mind, the correct view would be that the resolution of the
question of whether or not the ASI Group may vote their additional equity lies in the
agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of the parties
as regards the allocation of director seats under Section 5 (a) of the "Agreement," and
the right of each group of stockholders to cumulative voting in the process of
determining who the group's nominees would be under Section 3 (a) (1) of the
"Agreement." As pointed out by SEC, Section 5 (a) of the Agreement relates to the
manner of nominating the members of the board of directors while Section 3 (a) (1)
relates to the manner of voting for these nominees.
This is the proper interpretation of the Agreement of the parties as regards the
election of members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a Filipino
director who would be beholden to them would obliterate their minority status as
agreed upon by the parties. As aptly stated by the appellate court:
... ASI, however, should not be allowed to interfere in the voting
within the Filipino group. Otherwise, ASI would be able to designate
more than the three directors it is allowed to designate under the
Agreement, and may even be able to get a majority of the board
seats, a result which is clearly contrary to the contractual intent of
the parties.

Such a ruling will give effect to both the allocation of the board
seats and the stockholder's right to cumulative voting. Moreover,
this ruling will also give due consideration to the issue raised by the
appellees on possible violation or circumvention of the Anti-Dummy
Law (Com. Act No. 108, as amended) and the nationalization
requirements of the Constitution and the laws if ASI is allowed to
nominate more than three directors. (At p. 39, Rollo, 75875)
Equally important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors of the
enterprise in violation of the nationalization requirements enshrined in the Constitution
and circumvention of the Anti-Dummy Act. In this regard, petitioner Salazar's position
is that the Anti-Dummy Act allows the ASI group to elect board directors in proportion
to their share in the capital of the entity. It is to be noted, however, that the same law
also limits the election of aliens as members of the board of directors in proportion to
their allowance participation of said entity. In the instant case, the foreign Group ASI
was limited to designate three directors. This is the allowable participation of the ASI
Group. Hence, in future dealings, this limitation of six to three board seats should
always be maintained as long as the joint venture agreement exists considering that
in limiting 3 board seats in the 9-man board of directors there are provisions already
agreed upon and embodied in the parties' Agreement to protect the interests arising
from the minority status of the foreign investors.
With these findings, we the decisions of the SEC Hearing Officer and SEC which
were impliedly affirmed by the appellate court declaring Messrs. Wolfgang Aurbach,
John Griffin, David P Whittingham, Emesto V. Lagdameo, Baldwin young, Raul A.
Boncan, Emesto V. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee as the
duly elected directors of Saniwares at the March 8,1983 annual stockholders'
meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R. No. 75951)
object to a cumulative voting during the election of the board of directors of the
enterprise as ruled by the appellate court and submits that the six (6) directors
allotted the Filipino stockholders should be selected by consensus pursuant to section
5 (a) of the Agreement which uses the word "designate" meaning "nominate, delegate
or appoint."
They also stress the possibility that the ASI Group might take control of the enterprise
if the Filipino stockholders are allowed to select their nominees separately and not as
a common slot determined by the majority of their group.
Section 5 (a) of the Agreement which uses the word designates in the allocation of
board directors should not be interpreted in isolation. This should be construed in
relation to section 3 (a) (1) of the Agreement. As we stated earlier, section 3(a) (1)

relates to the manner of voting for these nominees which is cumulative voting while
section 5(a) relates to the manner of nominating the members of the board of
directors. The petitioners in G.R. No. 75951 agreed to this procedure, hence, they
cannot now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise under the
cumulative voting procedure cannot, however, be ignored. The validity of the
cumulative voting procedure is dependent on the directors thus elected being genuine
members of the Filipino group, not voters whose interest is to increase the ASI share
in the management of Saniwares. The joint venture character of the enterprise must
always be taken into account, so long as the company exists under its original
agreement. Cumulative voting may not be used as a device to enable ASI to achieve
stealthily or indirectly what they cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended to preserve the majority status of the
Filipino investors as well as to maintain the minority status of the foreign investors
group as earlier discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875 are
DISMISSED and the petition in G.R. No. 75951 is partly GRANTED. The amended
decision of the Court of Appeals is MODIFIED in that Messrs. Wolfgang Aurbach John
Griffin, David Whittingham Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan,
Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and George F. Lee are declared as
the duly elected directors of Saniwares at the March 8,1983 annual stockholders'
meeting. In all other respects, the questioned decision is AFFIRMED. Costs against
the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.

SECOND DIVISION

[G.R. No. 152392. May 26, 2005]

EXPERTRAVEL & TOURS, INC., petitioner, vs. COURT OF APPEALS and
KOREAN AIRLINES, respondents.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision[1] of the Court of
Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition for certiorari and
mandamus filed by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the Republic
of South Korea and licensed to do business in the Philippines. Its general manager in
the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario
Aguinaldo and his law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint [2] against
ETI with the Regional Trial Court (RTC) of Manila, for the collection of the principal
amount of P260,150.00, plus attorneys fees and exemplary damages. The verification
and certification against forum shopping was signed by Atty. Aguinaldo, who indicated
therein that he was the resident agent and legal counsel of KAL and had caused the
preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo
was not authorized to execute the verification and certificate of non-forum shopping
as required by Section 5, Rule 7 of the Rules of Court. KAL opposed the motion,
contending that Atty. Aguinaldo was its resident agent and was registered as such
with the Securities and Exchange Commission (SEC) as required by the Corporation
Code of the Philippines. It was further alleged that Atty. Aguinaldo was also the
corporate secretary of KAL. Appended to the said opposition was the identification
card of Atty. Aguinaldo, showing that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had
been authorized to file the complaint through a resolution of the KAL Board of
Directors approved during a special meeting held on June 25, 1999. Upon his motion,
KAL was given a period of 10 days within which to submit a copy of the said
resolution. The trial court granted the motion. Atty. Aguinaldo subsequently filed other
similar motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit [3] of even date, executed by
its general manager Suk Kyoo Kim, alleging that the board of directors conducted a
special teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It
was also averred that in that same teleconference, the board of directors approved a
resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping
and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation
had no written copy of the aforesaid resolution.

On April 12, 2000, the trial court issued an Order [4] denying the motion to
dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that the
KAL Board of Directors indeed conducted a teleconference on June 25, 1999, during
which it approved a resolution as quoted in the submitted affidavit.
ETI filed a motion for the reconsideration of the Order, contending that it was
inappropriate for the court to take judicial notice of the said teleconference without
any prior hearing. The trial court denied the motion in its Order[5] dated August 8,
2000.
ETI then filed a petition for certiorari and mandamus, assailing the orders of the
RTC. In its comment on the petition, KAL appended a certificate signed by Atty.
Aguinaldo dated January 10, 2000, worded as follows:
SECRETARYS/RESIDENT AGENTS CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly
elected and appointed Corporate Secretary and Resident Agent
of KOREAN AIRLINES, a foreign corporation duly organized
and existing under and by virtue of the laws of the Republic of
Korea and also duly registered and authorized to do business in
the Philippines, with office address at Ground Floor, LPL Plaza
Building, 124 Alfaro St., Salcedo Village, Makati City, HEREBY
CERTIFY that during a special meeting of the Board of
Directors of the Corporation held on June 25, 1999 at which a
quorum was present, the said Board unanimously passed,
voted upon and approved the following resolution which is now
in full force and effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his
law firm M.A. Aguinaldo& Associates or any of its
lawyers are hereby appointed and authorized to take
with whatever legal action necessary to effect the
collection of the unpaid account of Expert Travel &
Tours. They are hereby specifically authorized to
prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and
prosecution of said claim in Court, attend the PreTrial Proceedings and enter into a compromise
agreement relative to the above-mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my
signature this 10th day of January, 1999, in the City of Manila,
Philippines.
(Sgd.)

MARIO

A.

AGUINALDO
Resident
Agent
SUBSCRIBED AND SWORN to before me this 10 th day of January,
1999, Atty. Mario A. Aguinaldo exhibiting to me his Community Tax
Certificate No. 14914545, issued on January 7, 2000 at Manila,
Philippines.
(Sgd.)
Doc. No. 119; ATTY. HENRY D. ADASA
Page No. 25; Notary Public
Book No. XXIV Until December 31, 2000
Series of 2000. PTR #889583/MLA 1/3/2000[6]
On December 18, 2001, the CA rendered judgment dismissing the petition,
ruling that the verification and certificate of non-forum shopping executed by Atty.
Aguinaldo was sufficient compliance with the Rules of Court. According to the
appellate court, Atty. Aguinaldo had been duly authorized by the board resolution
approved on June 25, 1999, and was the resident agent of KAL. As such, the RTC
could not be faulted for taking judicial notice of the said teleconference of the KAL
Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA denied.
Thus, ETI, now the petitioner, comes to the Court by way of petition for review on
certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE
ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS
WHEN IT RENDERED ITS QUESTIONED DECISION AND WHEN IT
ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF THE
INSTANT PETITION?[7]
The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of
Court can be determined only from the contents of the complaint and not by
documents or pleadings outside thereof. Hence, the trial court committed grave abuse
of discretion amounting to excess of jurisdiction, and the CA erred in considering the
affidavit of the respondents general manager, as well as the Secretarys/Resident
Agents Certification and the resolution of the board of directors contained therein, as
proof of compliance with the requirements of Section 5, Rule 7 of the Rules of Court.
The petitioner also maintains that the RTC cannot take judicial notice of the said
teleconference without prior hearing, nor any motion therefor. The petitioner reiterates
its submission that the teleconference and the resolution adverted to by the
respondent was a mere fabrication.

The respondent, for its part, avers that the issue of whether modern technology
is used in the field of business is a factual issue; hence, cannot be raised in a petition
for review on certiorari under Rule 45 of the Rules of Court. On the merits of the
petition, it insists that Atty. Aguinaldo, as the resident agent and corporate secretary,
is authorized to sign and execute the certificate of non-forum shopping required by
Section 5, Rule 7 of the Rules of Court, on top of the board resolution approved
during the teleconference of June 25, 1999. The respondent insists that technological
advances in this time and age are as commonplace as daybreak. Hence, the courts
may take judicial notice that the Philippine Long Distance Telephone Company, Inc.
had provided a record of corporate conferences and meetings through FiberNet using
fiber-optic transmission technology, and that such technology facilitates voice and
image transmission with ease; this makes constant communication between a
foreign-based office and its Philippine-based branches faster and easier, allowing for
cost-cutting in terms of travel concerns. It points out that even the E-Commerce Law
has recognized this modern technology. The respondent posits that the courts are
aware of this development in technology; hence, may take judicial notice thereof
without need of hearings. Even if such hearing is required, the requirement is
nevertheless satisfied if a party is allowed to file pleadings by way of comment or
opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the matter of
teleconferencing as a means of conducting meetings of board of directors for
purposes of passing a resolution; until and after teleconferencing is recognized as a
legitimate means of gathering a quorum of board of directors, such cannot be taken
judicial notice of by the court. It asserts that safeguards must first be set up to prevent
any mischief on the public or to protect the general public from any possible fraud. It
further proposes possible amendments to the Corporation Code to give recognition to
such manner of board meetings to transact business for the corporation, or other
related corporate matters; until then, the petitioner asserts, teleconferencing cannot
be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special meeting on
June 25, 1999 through teleconferencing where Atty. Aguinaldo was supposedly given
such an authority is a farce, considering that there was no mention of where it was
held, whether in this country or elsewhere. It insists that the Corporation Code
requires board resolutions of corporations to be submitted to the SEC. Even
assuming that there was such a teleconference, it would be against the provisions of
the Corporation Code not to have any record thereof.
The petitioner insists that the teleconference and resolution adverted to by the
respondent in its pleadings were mere fabrications foisted by the
respondent and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping. The plaintiff or principal
party shall certify under oath in the complaint or other initiatory pleading
asserting a claim for relief, or in a sworn certification annexed thereto and
simultaneously filed therewith: (a) that he has not theretofore commenced

any action or filed any claim involving the same issues in any court,
tribunal or quasi-judicial agency and, to the best of his knowledge, no such
other action or claim is pending therein; (b) if there is such other pending
action or claim, a complete statement of the present status thereof; and (c)
if he should thereafter learn that the same or similar action or claim has
been filed or is pending, he shall report that fact within five (5) days
therefrom to the court wherein his aforesaid complaint or initiatory pleading
has been filed.

officer or agent of a corporation, of whatever status or rank, in respect to

his power to act for the corporation; and agents once appointed, or
members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons.

Failure to comply with the foregoing requirements shall not be

curable by mere amendment of the complaint or other initiatory pleading
but shall be cause for the dismissal of the case without prejudice, unless
otherwise provided, upon motion and after hearing. The submission of a
false certification or non-compliance with any of the undertakings therein
shall constitute indirect contempt of court, without prejudice to the
corresponding administrative and criminal actions. If the acts of the party
or his counsel clearly constitute willful and deliberate forum shopping, the
same shall be ground for summary dismissal with prejudice and shall
constitute direct contempt, as well as a cause for administrative sanctions.

Indeed, the certificate of non-forum shopping may be incorporated in the

complaint or appended thereto as an integral part of the complaint. The rule is that
compliance with the rule after the filing of the complaint, or the dismissal of a
complaint based on its non-compliance with the rule, is impermissible. However, in
exceptional circumstances, the court may allow subsequent compliance with the rule.
[12]
If the authority of a partys counsel to execute a certificate of non-forum shopping is
disputed by the adverse party, the former is required to show proof of such authority
or representation.

It is settled that the requirement to file a certificate of non-forum shopping is

mandatory[8] and that the failure to comply with this requirement cannot be excused.
The certification is a peculiar and personal responsibility of the party, an assurance
given to the court or other tribunal that there are no other pending cases involving
basically the same parties, issues and causes of action. Hence, the certification must
be accomplished by the party himself because he has actual knowledge of whether or
not he has initiated similar actions or proceedings in different courts or tribunals. Even
his counsel may be unaware of such facts. [9] Hence, the requisite certification
executed by the plaintiffs counsel will not suffice.[10]
In a case where the plaintiff is a private corporation, the certification may be
signed, for and on behalf of the said corporation, by a specifically authorized person,
including its retained counsel, who has personal knowledge of the facts required to be
established by the documents. The reason was explained by the Court in National
Steel Corporation v. Court of Appeals,[11] as follows:
Unlike natural persons, corporations may perform physical actions
only through properly delegated individuals; namely, its officers and/or
agents.
The corporation, such as the petitioner, has no powers except those
expressly conferred on it by the Corporation Code and those that are
implied by or are incidental to its existence. In turn, a corporation exercises
said powers through its board of directors and/or its duly-authorized
officers and agents. Physical acts, like the signing of documents, can be
performed only by natural persons duly-authorized for the purpose by
corporate by-laws or by specific act of the board of directors. All acts within
the powers of a corporation may be performed by agents of its selection;
and except so far as limitations or restrictions which may be imposed by
special charter, by-law, or statutory provisions, the same general principles
of law which govern the relation of agency for a natural person govern the

For who else knows of the circumstances required in the Certificate

but its own retained counsel. Its regular officers, like its board chairman
and president, may not even know the details required therein.

In this case, the petitioner, as the defendant in the RTC, assailed the authority of
Atty. Aguinaldo to execute the requisite verification and certificate of non-forum
shopping as the resident agent and counsel of the respondent. It was, thus,
incumbent upon the respondent, as the plaintiff, to allege and establish that Atty.
Aguinaldo had such authority to execute the requisite verification and certification for
and in its behalf. The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was incorporated in
the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at
Suite 210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila,
after having sworn to in accordance with law hereby deposes and say:
THAT 1. I am the Resident Agent and Legal Counsel of the
plaintiff in the above entitled case and have caused the
preparation of the above complaint;
2. I have read the complaint and that all the allegations
contained therein are true and correct based on the records on
files;
3. I hereby further certify that I have not commenced any
other action or proceeding involving the same issues in the
Supreme Court, the Court of Appeals, or different divisions
thereof, or any other tribunal or agency. If I subsequently
learned that a similar action or proceeding has been filed or is
pending before the Supreme Court, the Court of Appeals, or
different divisions thereof, or any tribunal or agency, I will notify
the court, tribunal or agency within five (5) days from such
notice/knowledge.

(Sgd.)

upon the duly-authorized officers of the foreign corporation as its home

office.[14]

MARIO A. AGUINALDO
Affiant
CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30 th day of August,
1999, affiant exhibiting to me his Community Tax Certificate No. 00671047
issued on January 7, 1999 at Manila, Philippines.
(Sgd.)
Doc. No. 1005; ATTY. HENRY D. ADASA
Page No. 198; Notary Public
Book No. XXI Until December 31, 2000

Under the law, Atty. Aguinaldo was not specifically authorized to execute a
certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of
Court. This is because while a resident agent may be aware of actions filed against
his principal (a foreign corporation doing business in the Philippines), such resident
may not be aware of actions initiated by its principal, whether in the Philippines
against a domestic corporation or private individual, or in the country where such
corporation was organized and registered, against a Philippine registered corporation
or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was
not specifically authorized to execute the said certification. It attempted to show its
compliance with the rule subsequent to the filing of its complaint by submitting, on
March 6, 2000, a resolution purporting to have been approved by its Board of
Directors during a teleconference held on June 25, 1999, allegedly with Atty.
Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt of the
respondent casts veritable doubt not only on its claim that such a teleconference was
held, but also on the approval by the Board of Directors of the resolution authorizing
Atty. Aguinaldo to execute the certificate of non-forum shopping.

Series of 1999. PTR No. 320501 Mla. 1/4/99[13]

As gleaned from the aforequoted certification, there was no allegation that Atty.
Aguinaldo had been authorized to execute the certificate of non-forum shopping by
the respondents Board of Directors; moreover, no such board resolution was
appended thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the Philippines,
this does not mean that he is authorized to execute the requisite certification against
forum shopping. Under Section 127, in relation to Section 128 of the Corporation
Code, the authority of the resident agent of a foreign corporation with license to do
business in the Philippines is to receive, for and in behalf of the foreign corporation,
services and other legal processes in all actions and other legal proceedings against
such corporation, thus:
SEC. 127. Who may be a resident agent. A resident agent may either
be an individual residing in the Philippines or a domestic corporation
lawfully transacting business in the Philippines: Provided, That in the case
of an individual, he must be of good moral character and of sound financial
standing.
SEC. 128. Resident agent; service of process. The Securities and
Exchange Commission shall require as a condition precedent to the
issuance of the license to transact business in the Philippines by any
foreign corporation that such corporation file with the Securities and
Exchange Commission a written power of attorney designating some
persons who must be a resident of the Philippines, on whom any
summons and other legal processes may be served in all actions or other
legal proceedings against such corporation, and consenting that service
upon such resident agent shall be admitted and held as valid as if served

In its April 12, 2000 Order, the RTC took judicial notice that because of the onset
of modern technology, persons in one location may confer with other persons in other
places, and, based on the said premise, concluded that Suk Kyoo Kim and Atty.
Aguinaldo had a teleconference with the respondents Board of Directors in South
Korea on June 25, 1999. The CA, likewise, gave credence to the respondents claim
that such a teleconference took place, as contained in the affidavit of Suk Kyoo Kim,
as well as Atty. Aguinaldos certification.
Generally speaking, matters of judicial notice have three material requisites: (1)
the matter must be one of common and general knowledge; (2) it must be well and
authoritatively settled and not doubtful or uncertain; and (3) it must be known to be
within the limits of the jurisdiction of the court. The principal guide in determining what
facts may be assumed to be judicially known is that of notoriety. Hence, it can be said
that judicial notice is limited to facts evidenced by public records and facts of general
notoriety.[15] Moreover, a judicially noticed fact must be one not subject to a
reasonable dispute in that it is either: (1) generally known within the territorial
jurisdiction of the trial court; or (2) capable of accurate and ready determination by
resorting to sources whose accuracy cannot reasonably be questionable.[16]
Things of common knowledge, of which courts take judicial matters coming to
the knowledge of men generally in the course of the ordinary experiences of life, or
they may be matters which are generally accepted by mankind as true and are
capable of ready and unquestioned demonstration. Thus, facts which are universally
known, and which may be found in encyclopedias, dictionaries or other publications,
are judicially noticed, provided, they are of such universal notoriety and so generally
understood that they may be regarded as forming part of the common knowledge of
every person. As the common knowledge of man ranges far and wide, a wide variety
of particular facts have been judicially noticed as being matters of common
knowledge. But a court cannot take judicial notice of any fact which, in part, is

dependent on the existence or non-existence of a fact of which the court has no

constructive knowledge.[17]

On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:

In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing.
Teleconferencing is interactive group communication (three or more people in two or
more locations) through an electronic medium. In general terms, teleconferencing can
bring people together under one roof even though they are separated by hundreds of
miles.[18] This type of group communication may be used in a number of ways, and
have three basic types: (1) video conferencing - television-like communication
augmented with sound; (2) computer conferencing - printed communication through
keyboard terminals, and (3) audio-conferencing-verbal communication via the
telephone with optional capacity for telewriting or telecopying.[19]

1. Technical failures with equipment, including connections that arent

made.

A teleconference represents a unique alternative to face-to-face (FTF) meetings.

It was first introduced in the 1960s with American Telephone and Telegraphs
Picturephone. At that time, however, no demand existed for the new technology.
Travel costs were reasonable and consumers were unwilling to pay the monthly
service charge for using the picturephone, which was regarded as more of a novelty
than as an actual means for everyday communication.[20] In time, people found it
advantageous to hold teleconferencing in the course of business and corporate
governance, because of the money saved, among other advantages include:
1. People (including outside guest speakers) who wouldnt normally
attend a distant FTF meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and
little expense.
3. Socializing is minimal compared to an FTF meeting; therefore,
meetings are shorter and more oriented to the primary purpose of the
meeting.
4. Some routine meetings are more effective since one can audioconference from any location equipped with a telephone.
5. Communication between the home office and field staffs is
maximized.
6. Severe climate and/or unreliable transportation may necessitate
teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information
exchange, and procedural tasks.
9. Group members participate more equally in well-moderated
teleconferences than an FTF meeting.[21]

2. Unsatisfactory for complex interpersonal communication, such as

negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
4. Lack of participant familiarity with the equipment, the medium
itself, and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order; frequently one
person monopolizes the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible.[22]
Indeed, teleconferencing can only facilitate the linking of people; it does not alter
the complexity of group communication. Although it may be easier to communicate
via teleconferencing, it may also be easier to miscommunicate. Teleconferencing
cannot satisfy the individual needs of every type of meeting.[23]
In the Philippines, teleconferencing and videoconferencing of members of board
of directors of private corporations is a reality, in light of Republic Act No. 8792. The
Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on
November 30, 2001, providing the guidelines to be complied with related to such
conferences.[24] Thus, the Court agrees with the RTC that persons in the Philippines
may have a teleconference with a group of persons in South Korea relating to
business transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in
a teleconference along with the respondents Board of Directors, the Court is not
convinced that one was conducted; even if there had been one, the Court is not
inclined to believe that a board resolution was duly passed specifically authorizing
Atty. Aguinaldo to file the complaint and execute the required certification against
forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint on
the ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of
Court. The respondent opposed the motion on December 1, 1999, on its contention
that Atty. Aguinaldo, its resident agent, was duly authorized to sue in its behalf. The
respondent, however, failed to establish its claim that Atty. Aguinaldo was its resident
agent in the Philippines. Even the identification card[25] of Atty. Aguinaldo which the

respondent appended to its pleading merely showed that he is the company lawyer of
the respondents Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of the
teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo then
prayed for ten days, or until February 8, 2000, within which to submit the board
resolution purportedly authorizing him to file the complaint and execute the required
certification against forum shopping. The court granted the motion. [26] The respondent,
however, failed to comply, and instead prayed for 15 more days to submit the said
resolution, contending that it was with its main office in Korea. The court granted the
motion per its Order[27] dated February 11, 2000. The respondent again prayed for an
extension within which to submit the said resolution, until March 6, 2000. [28] It was on
the said date that the respondent submitted an affidavit of its general manager Suk
Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the said
teleconference on June 25, 1999, where the Board of Directors supposedly approved
the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A.
Aguinaldo& Associates or any of its lawyers are hereby appointed and
authorized to take with whatever legal action necessary to effect the
collection of the unpaid account of Expert Travel & Tours. They are hereby
specifically authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim in
Court, attend the Pre-trial Proceedings and enter into a compromise
agreement relative to the above-mentioned claim.[29]
But then, in the same affidavit, Suk Kyoo Kim declared that the respondent
do[es] not keep a written copy of the aforesaid Resolution because no records of
board resolutions approved during teleconferences were kept. This belied the
respondents earlier allegation in its February 10, 2000 motion for extension of time to
submit the questioned resolution that it was in the custody of its main office in Korea.
The respondent gave the trial court the impression that it needed time to secure a
copy of the resolution kept in Korea, only to allege later (via the affidavit of Suk Kyoo
Kim) that it had no such written copy. Moreover, Suk Kyoo Kim stated in his affidavit
that the resolution was embodied in the Secretarys/Resident Agents Certificate
signed by Atty. Aguinaldo. However, no such resolution was appended to the said
certificate.
The respondents allegation that its board of directors conducted a
teleconference on June 25, 1999 and approved the said resolution (with Atty.
Aguinaldo in attendance) is incredible, given the additional fact that no such allegation
was made in the complaint. If the resolution had indeed been approved on June 25,
1999, long before the complaint was filed, the respondent should have incorporated it
in its complaint, or at least appended a copy thereof. The respondent failed to do so.
It was only on January 28, 2000 that the respondent claimed, for the first time, that
there was such a meeting of the Board of Directors held on June 25, 1999; it even
represented to the Court that a copy of its resolution was with its main office in Korea,
only to allege later that no written copy existed. It was only on March 6, 2000 that the
respondent alleged, for the first time, that the meeting of the Board of Directors where
the resolution was approved was held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had
signed a Secretarys/Resident Agents Certificate alleging that the board of directors
held a teleconference on June 25, 1999. No such certificate was appended to the
complaint, which was filed on September 6, 1999. More importantly, the respondent
did not explain why the said certificate was signed by Atty. Aguinaldo as early as
January 9, 1999, and yet was notarized one year later (on January 10, 2000); it also
did not explain its failure to append the said certificate to the complaint, as well as to
its Compliance dated March 6, 2000. It was only on January 26, 2001 when the
respondent filed its comment in the CA that it submitted the Secretarys/Resident
Agents Certificate[30] dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged teleconference on
June 25, 1999 never took place, and that the resolution allegedly approved by the
respondents Board of Directors during the said teleconference was a mere
concoction purposefully foisted on the RTC, the CA and this Court, to avert the
dismissal of its complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision
of the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE.
The Regional Trial Court of Manila is hereby ORDERED to dismiss, without prejudice,
the complaint of the respondent.
SO ORDERED.

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 rights shall 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 under Rule 45 of the Rules of
Court seeks the reversal of the January 23 and May 7, 2002, 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 Non-Forum Shopping were
signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution denied
reconsideration.

The Facts
FIRST DIVISION

PAUL LEE TAN, ANDREW

G.R. No. 153468
LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN,
Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO,
PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO
YNARES-SANTIAGO,
PADILLA JR., EDUARDO P.
AUSTRIA-MARTINEZ,
LIZARES and GRACE
CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus -

PAUL SYCIP and MERRITTO

LIM,
Promulgated:
Respondents. August 17, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit

educational corporation with fifteen (15) regular members, who also constitute the
board of trustees. During the annual members meeting held on April 6, 1998, there
were only eleven (11) living member-trustees, as four (4) had already died. Out of the
eleven, seven (7) 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. In the meeting, Petitioners
Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the
four deceased member-trustees.
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 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. She explained that the
qualifying phrase entitled to vote in Section 24 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.
The hearing officer also opined that Article III (2) 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 of the Corporation Code. The SEC en banc
denied the appeal of petitioners and affirmed the Decision of the hearing officer in
toto. It found to be untenable their contention that the word members, as used in
Section 52 of the Corporation Code, referred only to the living members of a nonstock
corporation.
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.
Hence, this Petition.

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
The present Petition is partly meritorious.

Procedural Issue:
Verification and Certification

Issues
Petitioners state the issues as follows:

of Non-Forum Shopping

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.
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.

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.
In the interest of substantial justice, this initial procedural lapse may be
excused. There appears to be no intention to circumvent the need for proper
verification and certification, which are aimed at assuring the truthfulness and
correctness of the allegations in the Petition for Review and at discouraging forum
shopping. More important, the substantial merits of petitioners case and the purely
legal question involved in the Petition should be considered special circumstances or
compelling reasons that justify an exception to the strict requirements of the
verification and the certification of non-forum shopping.

Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of

electing directors or trustees and transacting some other business calling for or
requiring the action or consent of the shareholders or members, such 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.

corporate meetings. Conversely, those who are not stockholders or members have no
right to vote. Voting may be expressed personally, or through proxies who vote in their
representative capacities. Generally, the right to be present and to vote in a meeting
is determined by the time in which the meeting is held.

Section 52 of the Corporation Code states:

Under the Corporation Code, stockholders or members periodically elect the

board of directors or trustees, who are charged with the management of the
corporation. 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.

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.

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. 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.

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:

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. The
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. 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

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. 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. 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 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. 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.

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,
indebtedness;

5.

xxx
xxx

xxx

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:

or

increasing

bonded

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

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.

creating

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.

The Right to Vote in

Nonstock Corporations

In nonstock corporations, the voting rights attach to membership. 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. 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.

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.

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.

The March 3, 1986 SEC Opinion 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.
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.

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. 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. 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 members present,
was valid.

Effect of the Death

of a Member or Shareholder

Vacancy in the

Board of Trustees

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.

As regards the filling of vacancies in the board of trustees, Section 29 of the

Corporation Code provides:
SO ORDERED.
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. 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.
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.
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.

FIRST DIVISION
[G.R. No. 123553. July 13, 1998]
NORA A. BITONG, petitioner, vs. COURT OF APPEALS (FIFTH DIVISION),
EUGENIA D. APOSTOL, JOSE A. APOSTOL, MR. & MS. PUBLISHING
CO., LETTY J. MAGSANOC, AND ADORACION G. NUYDA, respondents.
NORA A. BITONG, petitioner, vs. COURT OF APPEALS (FIFTH
DIVISION) and EDGARDO B. ESPIRITU, respondents.
DECISION
BELLOSILLO, J.:

These twin cases originated from a derivative suit filed by petitioner Nora A.
Bitong before the Securities and Exchange Commission (SEC hereafter) allegedly for
the benefit of private respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter),
among others, to hold respondent spouses Eugenia D. Apostol and Jose A. Apostol
liable for fraud, misrepresentation, disloyalty, evident bad faith, conflict of interest and
mismanagement in directing the affairs of Mr. & Ms. to the damage and prejudice of
Mr. & Ms. and its stockholders, including petitioner.
Alleging before the SEC that she had been the Treasurer and a Member of the
Board of Directors of Mr.& Ms. from the time it was incorporated on 29 October 1976
to 11 April 1989, and was the registered owner of 1,000 shares of stock out of the
4,088 total outstanding shares, petitioner complained of irregularities committed from
1983 to 1987 by Eugenia D. Apostol, President and Chairperson of the Board of
Directors. Petitioner claimed that except for the sale of the name Philippine Inquirer to
Philippine Daily Inquirer (PDI hereafter) all other transactions and agreements
entered into by Mr. & Ms. with PDI were not supported by any bond and/or
stockholders resolution. And, upon instructions of Eugenia D. Apostol, Mr. & Ms.
made several cash advances to PDI on various occasions amounting to P3.276
million. On some of these borrowings PDI paid no interest whatsoever. Despite the
fact that the advances made by Mr. & Ms. to PDI were booked as advances to an
affiliate, there existed no board or stockholders resolution, contract nor any other
document which could legally authorize the creation of and support to an affiliate.
Petitioner further alleged that respondents Eugenia and Jose Apostol were
stockholders, directors and officers in both Mr. & Ms.and PDI. In fact on 2 May 1986
respondents Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G. Nuyda
subscribed to PDI shares of stock at P50,000.00 each or a total of P150,000.00. The
stock subscriptions were paid for by Mr. & Ms. and initially treated as receivables from
officers and employees. But, no payments were ever received from respondents,
Magsanoc and Nuyda.
The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and
Jose A. Apostol from further acting as president-director and director, respectively, of
Mr. & Ms. and disbursing any money or funds except for the payment of salaries and
similar expenses in the ordinary course of business, and from disposing of their Mr. &
Ms. shares; (b) enjoin respondents Apostol spouses, Magsanoc and Nuyda from
disposing of the PDI shares of stock registered in their names; (c) compel
respondents Eugenia and Jose Apostol to account for and reconvey all profits and
benefits accruing to them as a result of their improper and fraudulent acts; (d) compel
respondents Magsanoc and Nuyda to account for and reconvey to Mr.& Ms. all
shares of stock paid from cash advances from it and all accessions or fruits thereof;
(e) hold respondents Eugenia and Jose Apostol liable for damages suffered by Mr. &
Ms. and the other stockholders, including petitioner, by reason of their improper and
fraudulent acts; (f) appoint a management committee for Mr. & Ms. during the
pendency of the suit to prevent further dissipation and loss of its assets and funds as
well as paralyzation of business operations; and, (g) direct the management
committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI
and other third parties.
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the
other hand, refuted the allegations of petitioner by starting with a narration of the

beginnings of Mr.& Ms. They recounted that on 9 March 1976 Ex Libris Publishing
Co., Inc. (Ex Libris hereafter) was incorporated for the purpose of publishing a weekly
magazine. Its original principal stockholders were spouses Senator Juan Ponce Enrile
(then Minister of National Defense) and Cristina Ponce Enrile through Jaka
Investments Corporation (JAKA hereafter), and respondents Eugenia and Jose
Apostol. When Ex Libris suffered financial difficulties, JAKA and the Apostols,
together with new investors Luis Villafuerte and Ramon Siy, restructured Ex Libris by
organizing a new corporation known as Mr. & Ms.
The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy,
the Apostols and Ex Libris continued to be virtually the same up to 1989. Thereafter it
was agreed among them that, they being close friends, Mr.& Ms. would be operated
as a partnership or a close corporation; respondent Eugenia D. Apostol would
manage the affairs of Mr. & Ms.; and, no shares of stock would be sold to third parties
without first offering the shares to the other stockholders so that transfers would be
limited to and only among the original stockholders.
Private respondents also asserted that respondent Eugenia D. Apostol had been
informing her business partners of her actions as manager, and obtaining their advice
and consent. Consequently the other stockholders consented, either expressly or
impliedly, to her management. They offered no objections. As a result, the business
prospered. Thus, as shown in a statement prepared by the accounting firm
Punongbayan and Araullo, there were increases from 1976 to 1988 in the total assets
of Mr.& Ms. from P457,569.00 to P10,143,046.00; in the total stockholders equity
from P203,378.00 to P2,324,954.00; and, in the net sales, from P301,489.00 to
P16,325,610.00. Likewise, cash dividends were distributed and received by the
stockholders.
Private respondents further contended that petitioner, being merely a holder-intrust of JAKA shares, only represented and continued to represent JAKA in the board.
In the beginning, petitioner cooperated with and assisted the management until mid1986 when relations between her and her principals on one hand, and respondent
Eugenia D. Apostol on the other, became strained due to political differences. Hence
from mid-1986 to mid-1988 petitioner refused to speak with respondent Eugenia D.
Apostol, and in 1988 the former became openly critical of the management of the
latter. Nevertheless, respondent Eugenia D. Apostol always made available to
petitioner and her representatives all the books of the corporation.
Private respondents averred that all the PDI shares owned by respondents
Eugenia and Jose Apostol were acquired through their own private funds and that the
loan of P750,000.00 by PDI from Mr. & Ms. had been fully paid with 20% interest per
annum. And, it was PDI, not Mr. & Ms., which loaned off P250,000.00 each to
respondents Magsanoc and Nuyda. Private respondents further argued that petitioner
was not the true party to this case, the real party being JAKA which continued to be
the true stockholder of Mr. & Ms.; hence, petitioner did not have the personality to
initiate and prosecute the derivative suit which, consequently, must be dismissed.
On 6 December 1990, the SEC Hearing Panel issued a writ of preliminary
injunction enjoining private respondents from disbursing any money except for the
payment of salaries and other similar expenses in the regular course of business. The
Hearing Panel also enjoined respondent Apostol spouses, Nuyda and Magsanoc from

disposing of their PDI shares, and further ruled x x x respondents contention that petitioner is not entitled to the
provisional reliefs prayed for because she is not the real party in interest x
x x x is bereft of any merit. No less than respondents Amended Answer,
specifically paragraph V, No. 8 on Affirmative Allegations/Defenses states
that `The petitioner being herself a minor stockholder and holder-in-trust of
JAKA shares represented and continues to represent JAKA in the Board.
This statement refers to petitioner sitting in the board of directors of Mr. &
Ms. in two capacities, one as a minor stockholder and the other as the
holder in trust of the shares of JAKA in Mr. & Ms. Such reference alluded
to by the respondents indicates an admission on respondents part of the
petitioners legal personality to file a derivative suit for the benefit of the
respondent Mr. & Ms. Publishing Co., Inc.
The Hearing Panel however denied petitioners prayer for the constitution of a
management committee.

barring private respondents from disposing of their PDI shares and any of Mr. & Ms.
assets. The Hearing Panel ruled that there was no serious mismanagement of Mr.&
Ms. which would warrant drastic corrective measures. It gave credence to the
assertion of respondent Eugenia D. Apostol that Mr.& Ms. was operated like a close
corporation where important matters were discussed and approved through informal
consultations at breakfast conferences. The Hearing Panel also concluded that while
the evidence presented tended to show that the real party-in-interest indeed was
JAKA and/or Senator Enrile, it viewed the real issue to be the alleged
mismanagement, fraud and conflict of interest on the part of respondent Eugenia D.
Apostol, and allowed petitioner to prosecute the derivative suit if only to resolve the
real issues. Hence, for this purpose, the Hearing Panel considered petitioner to be the
real party-in-interest.
On 19 August 1993 respondent Apostol spouses sold the PDI shares registered
in the name of their holding company, JAED Management Corporation, to Edgardo B.
Espiritu. On 25 August 1993 petitioner Bitong appealed to the SEC En Banc.

On 25 March 1991 private respondents filed a Motion to Amend Pleadings to

Conform to Evidence alleging that the issue of whether petitioner is the real party-ininterest had been tried by express or implied consent of the parties through the
admission of documentary exhibits presented by private respondents proving that the
real party-in-interest was JAKA, not petitioner Bitong. As such, No. 8, par. V
(Affirmative Allegations/Defenses), Answer to the Amended Petition, was stipulated
due to inadvertence and excusable mistake and should be amended. On 10 October
1991 the Hearing Panel denied the motion for amendment.

On 24 January 1994 the SEC En Banc reversed the decision of the Hearing
Panel and, among others, ordered private respondents to account for, return and
deliver to Mr. & Ms. any and all funds and assets that they disbursed from the coffers
of the corporation including shares of stock, profits, dividends and/or fruits that they
might have received as a result of their investment in PDI, including those arising
from the P150,000.00 advanced to respondents Eugenia D. Apostol, Leticia J.
Magsanoc and Adoracion G. Nuyda; account for and return any profits and fruits of all
amounts irregularly or unlawfully advanced to PDI and other third persons; and,
cease and desist from managing the affairs of Mr.& Ms. for reasons of fraud,
mismanagement, disloyalty and conflict of interest.

Petitioner testified at the trial that she became the registered and beneficial
owner of 997 shares of stock of Mr. & Ms. out of the 4,088 total outstanding shares
after she acquired them from JAKA through a deed of sale executed on 25 July 1983
and recorded in the Stock and Transfer Book of Mr.& Ms. under Certificate of Shares
of Stock No. 008. She pointed out that Senator Enrile decided that JAKA should
completely divest itself of its holdings in Mr. & Ms. and this resulted in the sale to her
of JAKAs interest and holdings in that publishing firm.

The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of
JAED Management Corporation to Edgardo B. Espiritu to be tainted with fraud,
hence, null and void, and considered Mr. & Ms. as the true and lawful owner of all the
PDI shares acquired by respondents Eugenia D. Apostol, Magsanoc and Nuyda. It
also declared all subsequent transferees of such shares as trustees for the benefit of
Mr. & Ms. and ordered them to forthwith deliver said shares to Mr. & Ms.

Private respondents refuted the statement of petitioner that she was a

stockholder of Mr. & Ms. since 25 July 1983 as respondent Eugenia D. Apostol signed
Certificate of Stock No. 008 only on 17 March 1989, and not on 25 July 1983.
Respondent Eugenia D. Apostol explained that she stopped using her long signature
(Eugenia D. Apostol) in 1987 and changed it to E.D. Apostol, the signature which
appeared on the face of Certificate of Stock No. 008 bearing the date 25 July 1983.
And, since the Stock and Transfer Book which petitioner presented in evidence was
not registered with the SEC, the entries therein including Certificate of Stock No. 008
were fraudulent. Respondent Eugenia D. Apostol claimed that she had not seen the
Stock and Transfer Book at any time until 21 March 1989 when it was delivered by
petitioner herself to the office of Mr. & Ms., and that petitioner repeatedly referred to
Senator Enrile as "my principal" during the Mr. & Ms. board meeting of 22 September
1988, seven (7) times no less.
On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed
the derivative suit filed by petitioner and dissolved the writ of preliminary injunction

Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms.
filed a petition for review before respondent Court of Appeals, docketed as CA-GR
No. SP 33291, while respondent Edgardo B. Espiritu filed a petition for certiorari and
prohibition also before respondent Court of Appeals, docketed as CA-GR No. SP
33873. On 8 December 1994 the two (2) petitions were consolidated.
On 31 August 1995 respondent appellate court rendered a decision reversing
the SEC En Banc and held that from the evidence on record petitioner was not the
owner of any share of stock in Mr.& Ms. and therefore not the real party-in-interest to
prosecute the complaint she had instituted against private respondents. Accordingly,
petitioner alone and by herself as an agent could not file a derivative suit in behalf of
her principal. For not being the real party-in-interest, petitioners complaint did not
state a cause of action, a defense which was never waived; hence, her petition
should have been dismissed. Respondent appellate court ruled that the assailed
orders of the SEC were issued in excess of jurisdiction, or want of it, and thus were
null and void. On 18 January 1996, petitioner's motion for reconsideration was denied

for lack of merit.

Before this Court, petitioner submits that in paragraph 1 under the caption "I.
The Parties" of her Amended Petition before the SEC, she stated that she was a
stockholder and director of Mr. & Ms. In par. 1 under the caption "II. The Facts" she
declared that she "is the registered owner of 1,000 shares of stock of Mr. & Ms. out of
the latters 4,088 total outstanding shares" and that she was a member of the Board of
Directors of Mr. & Ms. and treasurer from its inception until 11 April 1989. Petitioner
contends that private respondents did not deny the above allegations in their answer
and therefore they are conclusively bound by this judicial admission. Consequently,
private respondents admission that petitioner has 1,000 shares of stock registered in
her name in the books of Mr. & Ms. forecloses any question on her status and right to
bring a derivative suit on behalf of Mr. & Ms.
Not necessarily. A party whose pleading is admitted as an admission against
interest is entitled to overcome by evidence the apparent inconsistency, and it is
competent for the party against whom the pleading is offered to show that the
statements were inadvertently made or were made under a mistake of fact. In
addition, a party against whom a single clause or paragraph of a pleading is offered
may have the right to introduce other paragraphs which tend to destroy the admission
in the paragraph offered by the adversary.
The Amended Petition before the SEC alleges I. THE PARTIES
1. Petitioner is a stockholder and director of Mr. & Ms. x x x x
II. THE FACTS
1. Petitioner is the registered owner of 1,000 shares of stock of Mr. &
Ms. out of the latters 4,088 total outstanding shares. Petitioner, at all times
material to this petition, is a member of the Board of Directors of Mr. & Ms.
and from the inception of Mr. & Ms. until 11 April 1989 was its treasurer x x
xx
On the other hand, the Amended Answer to the Amended Petition
states I. PARTIES
1. Respondents admit the allegations contained in Caption I, pars. 1
to 4 of the Petition referring to the personality, addresses and capacity of
the parties to the petition except x x x x but qualify said admission insofar
as they are limited, qualified and/or expanded by allegations in the
Affirmative Allegations/Defenses x x x x
II. THE FACTS
1. Respondents admit paragraph 1 of the Petition, but qualify said

admission as to the beneficial ownership of the shares of stock registered

in the name of the petitioner, the truth being as stated in the Affirmative
Allegations/Defenses of this Answer x x x x
V. AFFIRMATIVE ALLEGATIONS/DEFENSES
Respondents respectfully
Allegations/Defenses, that x x x x

allege

by

way

of

Affirmative

3. Fortunately, respondent Apostol was able to convince Mr. Luis

Villafuerte to take interest in the business and he, together with the original
investors, restructured the Ex Libris Publishing Company by organizing a
new corporation known as Mr. & Ms. Publishing Co., Inc.x x x x Mr. Luis
Villafuerte contributed his own P100,000.00. JAKA and respondent Jose Z.
Apostol, original investors of Ex Libris contributed P100,000.00 each; Ex
Libris Publishing Company was paid 800 shares for the name of Mr. & Ms.
magazine and goodwill. Thus, the original stockholders of respondent Mr.
& Ms. were:
Cert./No./Date
Shares%

Name of Stockholder

No.

001-9-15-76
21%

JAKA Investments Corp.

1,000

002-9-15-76
21%

Luis Villafuerte

1,000

003-9-15-76
1,000

Ramon L. Siy
21%

004-9-15-76
21%

Jose Z. Apostol

1,000

005-9-15-76
16%

Ex Libris Publishing Co.

800

of

4,800
96%
4. The above-named original stockholders of respondent Mr. & Ms.
continue to be virtually the same stockholders up to this date x x x x
8. The petitioner being herself a minor stockholder and holder-in-trust
of JAKA shares, represented and continues to represent JAKA in the
Board x x x x
21. Petitioner Nora A. Bitong is not the true party to this case, the true
party being JAKA Investments Corporation which continues to be the true
stockholder of respondent Mr. & Ms. Publishing Co., Inc., consequently,

she does not have the personality to initiate and prosecute this derivative
suit, and should therefore be dismissed x x x x
The answer of private respondents shows that there was no judicial admission
that petitioner was a stockholder of Mr. & Ms. to entitle her to file a derivative suit on
behalf of the corporation. Where the statements of the private respondents were
qualified with phrases such as, "insofar as they are limited, qualified and/or expanded
by," "the truth being as stated in the Affirmative Allegations/Defenses of this Answer"
they cannot be considered definite and certain enough, cannot be construed as
judicial admissions.
More so, the affirmative defenses of private respondents directly refute the
representation of petitioner that she is a true and genuine stockholder of Mr.& Ms. by
stating unequivocally that petitioner is not the true party to the case but JAKA which
continues to be the true stockholder of Mr. & Ms. In fact, one of the reliefs which
private respondents prayed for was the dismissal of the petition on the ground that
petitioner did not have the legal interest to initiate and prosecute the same.
When taken in its totality, the Amended Answer to the Amended Petition, or
even the Answer to the Amended Petition alone, clearly raises an issue as to the
legal personality of petitioner to file the complaint. Every alleged admission is taken
as an entirety of the fact which makes for the one side with the qualifications which
limit, modify or destroy its effect on the other side. The reason for this is, where part of
a statement of a party is used against him as an admission, the court should weigh
any other portion connected with the statement, which tends to neutralize or explain
the portion which is against interest.
In other words, while the admission is admissible in evidence, its probative value
is to be determined from the whole statement and others intimately related or
connected therewith as an integrated unit. Although acts or facts admitted do not
require proof and cannot be contradicted, however, evidence aliunde can be
presented to show that the admission was made through palpable mistake. The rule
is always in favor of liberality in construction of pleadings so that the real matter in
dispute may be submitted to the judgment of the court.
Petitioner also argues that since private respondents failed to appeal the 6 December
1990 Order and the 3 August 1993 Decision of the SEC Hearing Panel declaring that
she was the real party-in-interest and had legal personality to sue, they are now
estopped from questioning her personality.
Not quite. The 6 December 1990 Order is clearly an interlocutory order which
cannot be considered as having finally resolved on the merits the issue of legal
capacity of petitioner. The SEC Hearing Panel discussed the issue of legal capacity
solely for the purpose of ruling on the application for writ of preliminary injunction as
an incident to the main issues raised in the complaint. Being a mere interlocutory
order, it is not appealable.
For, an interlocutory order refers to something between the commencement and
end of the suit which decides some point or matter but it is not the final decision of the
whole controversy. Thus, even though the 6 December 1990 Order was adverse to
private respondents, they had the legal right and option not to elevate the same to the

SEC En Banc but rather to await the decision which resolves all the issues raised by
the parties and to appeal therefrom by assigning all errors that might have been
committed by the Hearing Panel.
On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing
the derivative suit for failure to prove the charges of mismanagement, fraud, disloyalty
and conflict of interest and dissolving the writ of preliminary injunction, was favorable
to private respondents. Hence, they were not expected to appeal therefrom.
In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated
that the evidence presented showed that the real party-in-interest was not petitioner
Bitong but JAKA and/or Senator Enrile. Petitioner was merely allowed to prosecute
her complaint so as not to sidetrack "the real issue to be resolved (which) was the
allegation of mismanagement, fraud and conflict of interest allegedly committed by
respondent Eugenia D. Apostol." It was only for this reason that petitioner was
considered to be capacitated and competent to file the petition.
Accordingly, with the dismissal of the complaint of petitioner against private
respondents, there was no compelling reason for the latter to appeal to the SEC En
Banc. It was in fact petitioners turn as the aggrieved party to exercise her right to
appeal from the decision. It is worthy to note that even during the appeal of petitioner
before the SEC En Banc private respondents maintained their vigorous objection to
the appeal and reiterated petitioners lack of legal capacity to sue before the SEC.
Petitioner then contends that she was a holder of the proper certificates of
shares of stock and that the transfer was recorded in the Stock and Transfer Book of
Mr. & Ms. She invokes Sec. 63 of The Corporation Code which provides that no
transfer shall be valid except as between the parties until the transfer is recorded in
the books of the corporation, and upon its recording the corporation is bound by it and
is estopped to deny the fact of transfer of said shares. Petitioner alleges that even in
the absence of a stock certificate, a stockholder solely on the strength of the
recording in the stock and transfer book can exercise all the rights as stockholder,
including the right to file a derivative suit in the name of the corporation. And, she
need not present a separate deed of sale or transfer in her favor to prove ownership
of stock.
Section 63 of The Corporation Code expressly provides Sec. 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 vice president, 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 showing 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 x x x x

This provision above quoted envisions a formal certificate of stock which can be
issued only upon compliance with certain requisites. First, the certificates must be
signed by the president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation. A mere typewritten statement
advising a stockholder of the extent of his ownership in a corporation without
qualification and/or authentication cannot be considered as a formal certificate of
stock. Second, delivery of the certificate is an essential element of its issuance.
Hence, there is no issuance of a stock certificate where it is never detached from the
stock books although blanks therein are properly filled up if the person whose name is
inserted therein has no control over the books of the company. Third, the par value,
as to par value shares, or the full subscription as to no par value shares, must first be
fully paid. Fourth, the original certificate must be surrendered where the person
requesting the issuance of a certificate is a transferee from a stockholder.
The certificate of stock itself once issued is a continuing affirmation or
representation that the stock described therein is valid and genuine and is at least
prima facie evidence that it was legally issued in the absence of evidence to the
contrary. However, this presumption may be rebutted. Similarly, books and records of
a corporation which include even the stock and transfer book are generally admissible
in evidence in favor of or against the corporation and its members to prove the
corporate acts, its financial status and other matters including ones status as a
stockholder. They are ordinarily the best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even
against the corporation but are prima facie evidence only. Parol evidence may be
admitted to supply omissions in the records, explain ambiguities, or show what
transpired where no records were kept, or in some cases where such records were
contradicted. The effect of entries in the books of the corporation which purport to be
regular records of the proceedings of its board of directors or stockholders can be
destroyed by testimony of a more conclusive character than mere suspicion that there
was an irregularity in the manner in which the books were kept.

and was fraudulently antedated by petitioner who had possession of the Certificate
Book and the Stock and Transfer Book. Private respondents stress that petitioners
counsel entered into a stipulation on record before the Hearing Panel that the
certificate was indeed signed by respondent Apostol only in 1989 and not in 1983.
In her reply, petitioner admits that while respondent Eugenia D. Apostol signed
the Certificate of Stock No. 008 in petitioners name only in 1989, it was issued by the
corporate secretary in 1983 and that the other certificates covering shares in Mr. &
Ms. had not yet been signed by respondent Eugenia D. Apostol at the time of the
filing of the complaint with the SEC although they were issued years before.
Based on the foregoing admission of petitioner, there is no truth to the statement
written in Certificate of Stock No. 008 that the same was issued and signed on 25
July 1983 by its duly authorized officers specifically the President and Corporate
Secretary because the actual date of signing thereof was 17 March 1989. Verily, a
formal certificate of stock could not be considered issued in contemplation of law
unless signed by the president or vice-president and countersigned by the secretary
or assistant secretary.
In this case, contrary to petitioners submission, the Certificate of Stock No. 008
was only legally issued on 17 March 1989 when it was actually signed by the
President of the corporation, and not before that date. While a certificate of stock is
not necessary to make one a stockholder, e.g., where he is an incorporator and listed
as stockholder in the articles of incorporation although no certificate of stock has yet
been issued, it is supposed to serve as paper representative of the stock itself and of
the owners interest therein. Hence, when Certificate of Stock No. 008 was admittedly
signed and issued only on 17 March 1989 and not on 25 July 1983, even as it
indicates that petitioner owns 997 shares of stock of Mr. & Ms., the certificate has no
evidentiary value for the purpose of proving that petitioner was a stockholder since
1983 up to 1989.

The foregoing considerations are founded on the basic principle that stock
issued without authority and in violation of law is void and confers no rights on the
person to whom it is issued and subjects him to no liabilities. Where there is an
inherent lack of power in the corporation to issue the stock, neither the corporation
nor the person to whom the stock is issued is estopped to question its validity since
an estoppel cannot operate to create stock which under the law cannot have
existence.

And even the factual antecedents of the alleged ownership by petitioner in 1983
of shares of stock of Mr. & Ms. are indistinctive if not enshrouded in inconsistencies.
In her testimony before the Hearing Panel, petitioner said that early in 1983, to relieve
Mr. & Ms. from political pressure, Senator Enrile decided to divest the family holdings
in Mr. & Ms. as he was then part of the government and Mr. & Ms. was evolving to be
an opposition newspaper. The JAKA shares numbering 1,000 covered by Certificate
of Stock No. 001 were thus transferred to respondent Eugenia D. Apostol in trust or in
blank.

As found by the Hearing Panel and affirmed by respondent Court of Appeals,

there is overwhelming evidence that despite what appears on the certificate of stock
and stock and transfer book, petitioner was not a bona fide stockholder of Mr. & Ms.
before March 1989 or at the time the complained acts were committed to qualify her
to institute a stockholders derivative suit against private respondents. Aside from
petitioners own admissions, several corporate documents disclose that the true partyin-interest is not petitioner but JAKA.

Petitioner now claims that a few days after JAKAs shares were transferred to
respondent Eugenia D. Apostol, Senator Enrile sold to petitioner 997 shares of JAKA.
For this purpose, a deed of sale was executed and antedated to 10 May 1983. This
submission of petitioner is however contradicted by the records which show that a
deed of sale was executed by JAKA transferring 1,000 shares of Mr. & Ms. to
respondent Apostol on 10 May 1983 and not to petitioner.

Thus, while petitioner asserts in her petition that Certificate of Stock No. 008
dated 25 July 1983 was issued in her name, private respondents argue that this
certificate was signed by respondent Eugenia D. Apostol as President only in 1989

Then Senator Enrile testified that in May or June 1983 he was asked at a media
interview if his family owned shares of stock in Mr. & Ms. Although he and his family
were stockholders at that time he denied it so as not to embarrass the magazine. He
called up petitioner and instructed her to work out the documentation of the transfer of

shares from JAKA to respondent Apostol to be covered by a declaration of trust. His

instruction was to transfer the shares of JAKA in Mr. & Ms. and Ex Libris to
respondent Apostol as a nominal holder. He then finally decided to transfer the
shareholdings to petitioner.
When asked if there was any document or any written evidence of that
divestment in favor of petitioner, Senator Enrile answered that there was an
endorsement of the shares of stock. He said that there was no other document
evidencing the assignment to petitioner because the stocks were personal property
that could be transferred even orally. Contrary to Senator Enriles testimony, however,
petitioner maintains that Senator Enrile executed a deed of sale in her favor.
A careful perusal of the records shows that neither the alleged endorsement of
Certificate of Stock No. 001 in the name of JAKA nor the alleged deed of sale
executed by Senator Enrile directly in favor of petitioner could have legally transferred
or assigned on 25 July 1983 the shares of stock in favor of petitioner because as of
10 May 1983 Certificate of Stock No. 001 in the name of JAKA was already cancelled
and a new one, Certificate of Stock No. 007, issued in favor of respondent Apostol by
virtue of a Declaration of Trust and Deed of Sale.
It should be emphasized that on 10 May 1983 JAKA executed a deed of sale
over 1,000 Mr. & Ms. shares in favor of respondent Eugenio D. Apostol. On the same
day, respondent Apostol signed a declaration of trust stating that she was the
registered owner of 1,000 Mr. & Ms. shares covered by Certificate of Stock No. 007.
The declaration of trust further showed that although respondent Apostol was
the registered owner, she held the shares of stock and dividends which might be paid
in connection therewith solely in trust for the benefit of JAKA, her principal. It was also
stated therein that being a trustee, respondent Apostol agreed, on written request of
the principal, to assign and transfer the shares of stock and any and all such
distributions or dividends unto the principal or such other person as the principal
would nominate or appoint.
Petitioner was well aware of this trust, being the person in charge of this
documentation and being one of the witnesses to the execution of this document.
Hence, the mere alleged endorsement of Certificate of Stock No. 001 by Senator
Enrile or by a duly authorized officer of JAKA to effect the transfer of shares of JAKA
to petitioner could not have been legally feasible because Certificate of Stock No. 001
was already canceled by virtue of the deed of sale to respondent Apostol.
And, there is nothing in the records which shows that JAKA had revoked the
trust it reposed on respondent Eugenia D. Apostol. Neither was there any evidence
that the principal had requested her to assign and transfer the shares of stock to
petitioner. If it was true that the shares of stock covered by Certificate of Stock No.
007 had been transferred to petitioner, the person who could legally endorse the
certificate was private respondent Eugenia D. Apostol, she being the registered owner
and trustee of the shares of stock covered by Certificate of Stock No. 007. It is a
settled rule that the trustee should endorse the stock certificate to validate the
cancellation of her share and to have the transfer recorded in the books of the
corporation.

In fine, the records are unclear on how petitioner allegedly acquired the shares
of stock of JAKA. Petitioner being the chief executive officer of JAKA and the sole
person in charge of all business and financial transactions and affairs of JAKA was
supposed to be in the best position to show convincing evidence on the alleged
transfer of shares to her, if indeed there was a transfer. Considering that petitioners
status is being questioned and several factual circumstances have been presented by
private respondents disproving petitioners claim, it was incumbent upon her to submit
rebuttal evidence on the manner by which she allegedly became a stockholder. Her
failure to do so taken in the light of several substantial inconsistencies in her evidence
is fatal to her case.
The rule is that the endorsement of the certificate of stock by the owner or his
attorney-in-fact or any other person legally authorized to make the transfer shall be
sufficient to effect the transfer of shares only if the same is coupled with delivery. The
delivery of the stock certificate duly endorsed by the owner is the operative act of
transfer of shares from the lawful owner to the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There
must be delivery of the stock certificate; (b) The certificate must be endorsed by the
owner or his attorney-in-fact or other persons legally authorized to make the transfer;
and, (c) to be valid against third parties, the transfer must be recorded in the books of
the corporation. At most, in the instant case, petitioner has satisfied only the third
requirement. Compliance with the first two requisites has not been clearly and
sufficiently shown.
Considering that the requirements provided under Sec. 63 of The Corporation
Code should be mandatorily complied with, the rule on presumption of regularity
cannot apply. The regularity and validity of the transfer must be proved. As it is, even
the credibility of the stock and transfer book and the entries thereon relied upon by
petitioner to show compliance with the third requisite to prove that she was a
stockholder since 1983 is highly doubtful.
The records show that the original stock and transfer book and the stock
certificate book of Mr. & Ms. were in the possession of petitioner before their custody
was transferred to the Corporate Secretary, Atty. Augusto San Pedro. On 25 May
1988, Assistant Corporate Secretary Renato Jose Unson wrote Mr. & Ms. about the
lost stock and transfer book which was also noted by the corporations external
auditors, Punongbayan and Araullo, in their audit. Atty. Unson even informed
respondent Eugenia D. Apostol as President of Mr. & Ms. that steps would be
undertaken to prepare and register a new Stock and Transfer Book with the SEC.
Incidentally, perhaps strangely, upon verification with the SEC, it was discovered that
the general file of the corporation with the SEC was missing. Hence, it was even
possible that the original Stock and Transfer Book might not have been registered at
all.
On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San
Pedro noting the changes he had made in the Stock and Transfer Book without prior
notice to the corporate officers. In the 27 October 1988 directors' meeting, respondent
Eugenia D. Apostol asked about the documentation to support the changes in the
Stock and Transfer Book with regard to the JAKA shares. Petitioner answered that
Atty. San Pedro made the changes upon her instructions conformably with

established practice.
This simply shows that as of 1988 there still existed certain issues affecting the
ownership of the JAKA shares, thus raising doubts whether the alleged transactions
recorded in the Stock and Transfer Book were proper, regular and authorized. Then,
as if to magnify and compound the uncertainties in the ownership of the shares of
stock in question, when the corporate secretary resigned, the Stock and Transfer
Book was delivered not to the corporate office where the book should be kept but to
petitioner.
That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by
its receipt of the dividends issued in December 1986. This only means, very
obviously, that Mr. & Ms. shares in question still belonged to JAKA and not to
petitioner. For, dividends are distributed to stockholders pursuant to their right to
share in corporate profits. When a dividend is declared, it belongs to the person who
is the substantial and beneficial owner of the stock at the time regardless of when the
distribution profit was earned.
Finally, this Court takes notice of the glaring and open admissions of petitioner
made, not just seven (7) but nine (9) times, during the 22 September 1988 meeting of
the board of directors that the Enriles were her principals or shareholders, as shown
by the minutes thereof which she duly signed 5. Mrs. E. Apostol explained to the Directors that through her efforts,
the asset base of the Company has improved and profits were realized. It
is for this reason that the Company has declared a 100% cash dividend in
1986. She said that it is up for the Board to decide based on this
performance whether she should continue to act as Board Chairman or
not. In this regard, Ms. N.A. Bitong expressed her recollection of how ExLibris/Mr. & Ms. were organized and her participation for and on behalf of
her principals, as follows: She recalled that her principals were invited by
Mrs. E. Apostol to invest in Ex-Libris and eventually Mr.& Ms. The
relationship between her principals and Mrs. E. Apostol made it possible
for the latter to have access to several information concerning certain
political events and issues. In many instances, her principals supplied first
hand and newsworthy information that made Mr. & Ms. a popular paper x x
xx
6. According to Ms. Bitong, her principals were instrumental in
helping Mr. & Ms. survive during those years that it was cash strapped x x
x x Ms. N.A. Bitong pointed out that the practice of using the former
Ministers influence and stature in the government is one thing which her
principals themselves are strongly against x x x x
7. x x x x At this point, Ms. N. Bitong again expressed her recollection
of the subject matter as follows: (a) Mrs. E. Apostol, she remembers,
brought up the concept of a cooperative-ran newspaper company in one of
her breakfast session with her principals sometime during the end of 1985.
Her principals when asked for an opinion, said that they recognized the
concept as something very noble and visible x x x x Then Ms. Bitong
asked a very specific question - "When you conceptualized Ex-Libris and

Mr. & Ms., did you not think of my shareholders the Ponce Enriles as
liabilities? How come you associated yourself with them then and not now?
What is the difference?" Mrs. Apostol did not answer the question.
The admissions of a party against his interest inscribed upon the record books
of a corporation are competent and persuasive evidence against him. These
admissions render nugatory any argument that petitioner is a bona fide stockholder of
Mr. & Ms. at any time before 1988 or at the time the acts complained of were
committed. There is no doubt that petitioner was an employee of JAKA as its
managing officer, as testified to by Senator Enrile himself. However, in the absence of
a special authority from the board of directors of JAKA to institute a derivative suit for
and in its behalf, petitioner is disqualified by law to sue in her own name. The power
to sue and be sued in any court by a corporation even as a stockholder is lodged in
the board of directors that exercises its corporate powers and not in the president or
officer thereof.
It is well settled in this jurisdiction that where corporate directors are guilty of a
breach of trust, not of mere error of judgment or abuse of discretion, and
intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf
of himself and other stockholders and for the benefit of the corporation, to bring about
a redress of the wrong inflicted directly upon the corporation and indirectly upon the
stockholders. The stockholders right to institute a derivative suit is not based on any
express provision of The Corporation Code but is impliedly recognized when the law
makes corporate directors or officers liable for damages suffered by the corporation
and its stockholders for violation of their fiduciary duties.
Hence, a stockholder may sue for mismanagement, waste or dissipation of
corporate assets because of a special injury to him for which he is otherwise without
redress. In effect, the suit is an action for specific performance of an obligation owed
by the corporation to the stockholders to assist its rights of action when the
corporation has been put in default by the wrongful refusal of the directors or
management to make suitable measures for its protection.
The basis of a stockholders suit is always one in equity. However, it cannot
prosper without first complying with the legal requisites for its institution. The most
important of these is the bona fide ownership by a stockholder of a stock in his own
right at the time of the transaction complained of which invests him with standing to
institute a derivative action for the benefit of the corporation.
WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the
Court of Appeals dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No.
SP 33291, and granting the petition for certiorari and prohibition filed by respondent
Edgardo B. Espiritu as well as annulling the 5 November 1993, 24 January 1994 and
18 February 1994 Orders of the SEC En Banc in CA-G.R. No. SP 33873, is
AFFIRMED. Costs against petitioner.
SO ORDERED.
Davide, Jr., (Chairman), Vitug, and Quisumbing, JJ., concur.

Panganiban, J., no part. Participated, as a former practicing lawyer, in

negotiations to buy subject shares.

Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-22399

March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc.,

plaintiff-appellant,
vs.
MIGUEL
CUADERNO,
BIENVENIDO
DIZON,
PABLO
ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY
BOARD OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiffappellant.
N. M. Balboa, F.E. Evangelista and S. Malvar for defendant-appellee Monetary
Board.
Norberto J. Quisumbing and H.V. Quisumbing for other defendants-appellees.
REYES, J.B.L., J.:
Direct appeal from an order of the Court of First Instance of Manila, in its civil case
No. 53936, dismissing the petitioner's complaint on the ground of failure to state
cause of action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine
banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of
said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the
Republic Bank, and the Monetary Board of the Central Bank of the Philippines.
Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the
following: .
6. That the relator herein filed the present derivative suit without any further
demand on the Board of Directors of the Republic Bank for the reason that
such formal demand to institute the present complaint would be a futile
formality since the members of the board are personally chosen by
defendant Pablo Roman himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained
to the Monetary Board of the Central Bank against certain frauds allegedly committed
by defendant Pablo Roman, in that being chairman of the Board of Directors of the

Republic Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave
abuse of his fiduciary duty and taking advantage of his said positions and in
connivance with other officials of the Republic Bank", Roman had fraudulently granted
or caused to be granted loans to fictitious and non-existing persons and to their close
friends, relatives and/or employees, who were in reality their dummies, on the basis of
fictitious and inflated appraised values of real estate properties; that said loans
amounted to almost 4 million pesos; that acting upon the complaint, Miguel Cuaderno
(then Governor of the Central Bank) and the Monetary Board ordered an
investigation, which was carried out by Bank Examiners; that they and the
Superintendent of Banks of the Central Bank reported that certain mortgage loans
amounting to P2,303,400.00 were granted in violation of sections 77, 78 and 88 of the
General Banking Act; that acting on said reports, the Monetary Board, of which
defendant Cuaderno was a member, ordered a new Board of Directors of the
Republic Bank to be elected, which was done, and subsequently approved by the
Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo
Roman to put up adequate security for the questioned loans made by the Republic
Bank, and such security was made a condition for the resumption of the Bank's
normal operations; that subsequently, the Central Bank through its Governor, Miguel
Cuaderno, referred to special prosecutors of the Department of Justice on July 22,
1960, the banking frauds and violations of the Banking Act, reported by the
Superintendent of Banks, for investigation and prosecution, but no information was
filed up to the time of the retirement of Cuaderno in 1961; that other similar frauds
were subsequently discovered; that to neutralize the impending action against him,
Pablo Roman engaged Miguel Cuaderno as technical consultant at a compensation
of P12,500.00 per month, and selected Bienvenido Dizon as chairman of the Board of
Directors of the Republic Bank; that the Board of Directors composed of individuals
personally selected and chosen by Roman, connived and confederated in approving
the appointment and selection of Cuaderno and Dizon; that such action was
motivated by bad faith and without intention to protect the interest of the Republic
Bank but were prompted to protect Pablo Roman from criminal prosecution; that the
appointment of Cuaderno and his acceptance of the position of technical consultant
are immoral, anomalous and illegal, and his compensation highly unconscionable,
because court actions involving the actuations of Cuaderno as Governor and Member
or Chairman of the Monetary Board are still pending in court; that as member of the
Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the
Republic Bank; that the selection of Dizon as chairman of the Board of the Republic
Bank after he was forced to resign from the presidency of the Philippine National
Bank and from membership of the Monetary Board and within one year thereafter is
in violation of option 3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act;
that both Cuaderno and Dizon were alter egos of Pablo Roman; that the Monetary
Board was about to approve the appointment of Cuaderno and Dizon and would do
so unless enjoined.
The complaint, therefore, prayed for a writ of preliminary injunction against the
Monetary Board to prevent its confirmation of the appointments of Dizon and

Cuaderno; against the Board of Directors of the Republic Bank from recognizing
Cuaderno as technical consultant and Dizon as Chairman of the Board; and against
Pablo Roman from appointing or selecting officers or directors of the Republic Bank,
and against the recognition of any such appointees until final determination of the
action. And concluded by praying that after due hearing, judgment be rendered,

branches of this court between practically the same parties", denied the petition for a
writ of preliminary injunction and dismissed the case. The court in effect suggested
that the matter at issue in the case may be presented in any of the pending eight
cases by means of amended and supplemental pleadings.
Plaintiff Damaso Perez thereupon appealed to this Court.

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical
consultant with monthly compensation of P12,500.00 unconscionable,
immoral, illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the
Board of Directors of the Republic Bank violative of Section 3, subparagraph (d) of Republic Act No. 5019, otherwise known as the Anti-Graft
and Corrupt Practices Act, and therefore, illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his criminal liability for
the fraudulent real estate mortgage loans in the Republic Bank amounting to
P4 million, has no right to select or to be allowed to select person or persons
who are his alter egos to manage the Republic Bank, and enjoining the
defendant Board of Directors of the Republic Bank from recognizing any
officers or directors appointed or selected by defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to
the Republic Bank all amounts they may have received either in the form of
compensation, remuneration or emolument, with an interest thereon at the
rate of 6%; or to order defendant Pablo Roman to refund the amounts paid
to said defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to
pay such reasonable damages to the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as attorney's
fees, including all expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative
defenses; but the other defendants filed separate motions to dismiss on practically
the same grounds: no valid cause of action against the individual movants; lack of
legal capacity of plaintiff-relator to sue; and non-exhaustion of intra-corporate
remedies. These motions were duly opposed by plaintiff Damaso Perez.1wph1.t
On October 24, 1963, the court, "taking into consideration the grounds alleged in the
motions to dismiss and the opposition for the issuance of a writ of preliminary
injunction and the affirmative defenses filed by the defendants and the arguments in
support thereof", and "that there are already eight cases pending in the different

The issue in this appeal, then, is whether or not the Court below erred in dismissing
the complaint. In this connection, it should be remembered that the defenses of the
Monetary Board of the Central Bank, being interposed in an answer and not in a
motion to dismiss, are not here at issue. Our sole concern is with the motions to
dismiss of the other defendants, Roman, Cuaderno, Dizon, and the Board of Directors
of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment and selection
of defendants Cuaderno and Dizon, which they contend to be the result of corporate
acts with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but
Philippine jurisprudence is settled that an individual stockholder is permitted to
institute a derivative or representative suit on behalf of the corporation wherein he
holds stock in order to protect or vindicate corporate rights, whenever the 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 a nominal party,
with the corporation as the real party in interest (Pascual vs. Del Saz Orozco, 19 Phil.
82, 85; Everett vs. Asia Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697;
Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action here is precisely in
conformity, with these principles. He is neither alleging nor vindicating his own
individual interest or prejudice, but the interest of the Republic Bank and the damage
caused to it. The action he has brought is a derivative one, expressly manifested to
be for and in behalf of the Republic Bank, because it was futile to demand action by
the corporation, since its Directors were nominees and creatures of defendant Pablo
Roman (Complaint, p. 6). The frauds charged by plaintiff are frauds against the Bank
that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical
consultant, and of Bienvenido Dizon to head the Board of Directors of the Republic
Bank, were made only to shield Pablo Roman from criminal prosecution and not to
further the interests of the Bank, and avers that both men are Roman's alter egos.
There is no denying that the facts thus pleaded in the complaint constitute a cause of
action for the bank: if the questioned appointments were made solely to protect
Roman from criminal prosecution, by a Board composed by Roman's creatures and
nominees, then the moneys disbursed in favor of Cuaderno and Dizon would be an
unlawful wastage or diversion of corporate funds, since the Republic Bank would
have no interest in shielding Roman, and the directors in approving the appointments
would be committing a breach of trust; the Bank, therefore, could sue to nullify the

appointments, enjoin disbursement of its funds to pay them, and recover those paid
out for the purpose, as prayed for in the complaint in this case (Angeles vs. Santos,
supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants who file
a motion to dismiss the complaint for failure to state a cause of action. This is the
cardinal principle in the matter. And, it has been ruled that the test of sufficiency of the
facts alleged is whether or not the Court could render a valid judgment as prayed for,
accepting as true the exclusive facts set forth in the complaint. 1So rigid is the norm
prescribed that if the Court should doubt the truth of the facts averred it must not
dismiss the complaint but require an answer and proceed to trial on the merits.2
Defendants urge that the action is improper because the plaintiff was not authorized
by the corporation to bring suit in its behalf. Any such authority could not be expected
as the suit is aimed to nullify the action taken by the manager and the board of
directors of the Republic Bank; and any demand for intra-corporate remedy would be
futile, as expressly pleaded in the complaint. These circumstances permit a
stockholder to bring a derivative suit (Evangelista vs. Santos, 86 Phil. 394). That no
other stockholder has chosen to make common cause with plaintiff Perez is
irrelevant, since the smallness of plaintiff's holdings is no ground for denying him relief
(Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early in the proceedings
for the absence of other stockholders to be of any significance, no issues having even
been joined.
There remains the procedural question whether the corporation itself must be made
party defendant. The English practice is to make the corporation a party plaintiff, while
in the United States, the usage leans in favor of its being joined as party defendant
(see Editorial Note, 51 LRA [NS] 123). Objections can be raised against either
method. Absence of corporate authority would seem to militate against making the
corporation a party plaintiff, while joining it as defendant places the entity in the
awkward position of resisting an action instituted for its benefit. What is important is
that the corporation' should be made a party, in order to make the Court's judgment
binding upon it, and thus bar future relitigation of the issues. On what side the
corporation appears loses importance when it is considered that it lay within the
power of the trial court to direct the making of such amendments of the pleadings, by
adding or dropping parties, as may be required in the interest of justice (Revised Rule
3, sec. 11). Misjoinder of parties is not a ground to dismiss an action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido Dizon that the
action of plaintiff amounts to a quo warranto proceeding. Plaintiff Perez is not claiming
title to Dizon's position as head of the Republic Bank's board of directors. The suit is
aimed at preventing the waste or diversion of corporate funds in paying officers
appointed solely to protect Pablo Roman from criminal prosecution, and not to carry

on the corporation's bank business. Whether the complaint's allegations to such effect
are true or not must be determined after due hearing.
Independently of the grounds advanced by the defendants in their motions to dismiss,
the Court a quo gave as a further pretext for the dismissal of the action the pendency
of eight other lawsuits between practically the same parties; reasoning that the
question at issue in the present case could be incorporated in any one of the other
actions by amended or supplemental pleading. We fail to see that this justifies the
dismissal of the case under appeal. In the first place, there is no pretense that the
cause of action here was already included in any of the other pending cases. As a
matter of fact, dismissal of the present action was not sought on the ground of
pendency of another action between the same parties. Secondly, the amendment of a
complaint after a responsive pleading is filed, would rest upon the discretion of the
party and the Court. Hence, this case cannot be dismissed simply because of the
possibility that the cause of action here can be incorporated or introduced in any of
those of the pending cases.
In view of the foregoing, the order dismissing the complaint is reversed and set aside.
The case is remanded to the court of origin with instructions to overrule the motions to
dismiss and require the defendants to answer the complaint. Thereafter, the case
shall be tried and decided on its merits. Costs against defendants-appellees. So
ordered.
Concepcion, C.J., Dizon, Regala, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ.,
concur.
Makalintal, J., took no part.

Appeals dated July 7, 1994, which reversed the separate decisions of the Regional
Trial Court of Pasig City and the Regional Trial Court of Quezon City in two cases
between petitioner Reynoso and respondent General Credit Corporation (GCC).
Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter,
CCC), a financing and investment firm, decided to organize franchise companies in
different parts of the country, wherein it shall hold thirty percent (30%) equity.
Employees of the CCC were designated as resident managers of the franchise
companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident
manager of the franchise company in Quezon City, known as the Commercial Credit
Corporation of Quezon City (hereinafter, CCC-QC).
CCC-QC entered into an exclusive management contract with CCC whereby the
latter was granted the management and full control of the business activities of the
former. Under the contract, CCC-QC shall sell, discount and/or assign its receivables
to CCC. Subsequently, however, this discounting arrangement was discontinued
pursuant to the so-called DOSRI Rule, prohibiting the lending of funds by
corporations to its directors, officers, stockholders and other persons with related
interests therein.
On account of the new restrictions imposed by the Central Bank policy by virtue
of the DOSRI Rule, CCC decided to form CCC Equity Corporation, (hereinafter, CCCEquity), a wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent
equity in CCC-QC, together with two seats in the latters Board of Directors.
Under the new set-up, several officials of Commercial Credit Corporation,
including petitioner Reynoso, became employees of CCC-Equity. While petitioner
continued to be the Resident Manager of CCC-QC, he drew his salaries and
allowances from CCC-Equity. Furthermore, although an employee of CCC-Equity,
petitioner, as well as all employees of CCC-QC, became qualified members of the
Commercial Credit Corporation Employees Pension Plan.
As Resident Manager of CCC-QC, petitioner oversaw the operations of CCCQC and supervised its employees. The business activities of CCC-QC pertain to the
acceptance of funds from depositors who are issued interest-bearing promissory
notes. The amounts deposited are then loaned out to various borrowers. Petitioner, in
order to boost the business activities of CCC-QC, deposited his personal funds in the
company. In return, CCC-QC issued to him its interest-bearing promissory notes.
FIRST DIVISION
[G.R. Nos. 116124-25. November 22, 2000]
BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and
GENERAL CREDIT CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
Assailed in this petition for review is the consolidated decision of the Court of

On August 15, 1980, a complaint for sum of money with preliminary attachment,
docketed as Civil Case No. Q-30583, was instituted in the then Court of First Instance
of Rizal by CCC-QC against petitioner, who had in the meantime been dismissed
from his employment by CCC-Equity. The complaint was subsequently amended in
order to include Hidelita Nuval, petitioners wife, as a party defendant. The complaint
alleged that petitioner embezzled the funds of CCC-QC amounting to P1,300,593.11.
Out of this amount, at least P630,000.00 was used for the purchase of a house and
lot located at No. 12 Macopa Street, Valle Verde I, Pasig City. The property was
mortgaged to CCC, and was later foreclosed.
In his amended Answer, petitioner denied having unlawfully used funds of CCCQC and asserted that the sum of P1,300,593.11 represented his money placements

in CCC-QC, as shown by twenty-three (23) checks which he issued to the said

company.
The case was subsequently transferred to the Regional Trial Court of Quezon
City, Branch 86, pursuant to the Judiciary Reorganization Act of 1980.
On January 14, 1985, the trial court rendered its decision, the decretal portion of
which states:
Premises considered, the Court finds the complaint without merit. Accordingly,
said complaint is hereby DISMISSED.
By reason of said complaint, defendant Bibiano Reynoso IV suffered
degradation, humiliation and mental anguish.
On the counterclaim, which the Court finds to be meritorious, plaintiff corporation
is hereby ordered:
a)
to pay defendant the sum of P185,000.00 plus 14% interest
per annum from October 2, 1980 until fully paid;
b)
to pay defendant P3,639,470.82 plus interest thereon at the
rate of 14% per annum from June 24, 1981, the date of filing of Amended
Answer, until fully paid; from this amount may be deducted the remaining
obligation of defendant under the promissory note of October 24, 1977, in
the sum of P9,738.00 plus penalty at the rate of 1% per month from
December 24, 1977 until fully paid;
c)

to pay defendants P200,000.00 as moral damages;

d)

to pay defendants P100,000.00 as exemplary damages;

e)
to pay defendants P25,000.00 as and for attorney's fees; plus
costs of the suit.

On November 22, 1991, the Regional Trial Court of Quezon City issued an
Order directing General Credit Corporation to file its comment on petitioners motion
for alias writ of execution. General Credit Corporation filed a Special Appearance and
Opposition on December 2, 1991, alleging that it was not a party to the case, and
therefore petitioner should direct his claim against CCC-QC and not General Credit
Corporation. Petitioner filed his reply, stating that the CCC-QC is an adjunct
instrumentality, conduit and agency of CCC. Furthermore, petitioner invoked the
decision of the Securities and Exchange Commission in SEC Case No. 2581, entitled,
Avelina G. Ramoso, et al., Petitioner versus General Credit Corp., et al.,
Respondents, where it was declared that General Credit Corporation, CCC-Equity
and other franchised companies including CCC-QC were declared as one
corporation.
On December 9, 1991, the Regional Trial Court of Quezon City ordered the
issuance of an alias writ of execution. On December 20, 1991, General Credit
Corporation filed an Omnibus Motion, alleging that SEC Case No. 2581 was still
pending appeal, and maintaining that the levy on properties of the General Credit
Corporation by the deputy sheriff of the court was erroneous.
In his Opposition to the Omnibus Motion, petitioner insisted that General Credit
Corporation is just the new name of Commercial Credit Corporation; hence, General
Credit Corporation and Commercial Credit Corporation should be treated as one and
the same entity.
On February 13, 1992, the Regional Trial Court of Quezon City denied the
Omnibus Motion. On March 5, 1992, it issued an Order directing the issuance of an
alias writ of execution.
Previously, on February 21, 1992, General Credit Corporation instituted a
complaint before the Regional Trial Court of Pasig against Bibiano Reynoso IV and
Edgardo C. Tanangco, in his capacity as Deputy Sheriff of Quezon City, docketed as
Civil Case No. 61777, praying that the levy on its parcel of land located in Pasig,
Metro Manila and covered by Transfer Certificate of Title No. 29940 be declared null
and void, and that defendant sheriff be enjoined from consolidating ownership over
the land and from further levying on other properties of General Credit Corporation to
answer for any liability under the decision in Civil Case No. Q-30583.

SO ORDERED.
Both parties appealed to the then Intermediate Appellate Court. The appeal of
Commercial Credit Corporation of Quezon City was dismissed for failure to pay
docket fees. Petitioner, on the other hand, withdrew his appeal.
Hence, the decision became final and, accordingly, a Writ of Execution was
issued on July 24, 1989. However, the judgment remained unsatisfied, prompting
petitioner to file a Motion for Alias Writ of Execution, Examination of Judgment Debtor,
and to Bring Financial Records for Examination to Court. CCC-QC filed an Opposition
to petitioners motion, alleging that the possession of its premises and records had
been taken over by CCC.
Meanwhile, in 1983, CCC became known as the General Credit Corporation.

The Regional Trial Court of Pasig, Branch 167, did not issue a temporary
restraining order. Thus, General Credit Corporation instituted two (2) petitions for
certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 27518 and CA-G.R.
SP No. 27683. These cases were later consolidated.
On July 7, 1994, the Court of Appeals rendered a decision in the two
consolidated cases, the dispositive portion of which reads:
WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's
refusal to issue a restraining order as having been rendered moot by our Resolution
of 7 April 1992 which, by way of injunctive relief, provided that "the respondents and
their representatives are hereby enjoined from conducting an auction sale (on
execution) of petitioner's properties as well as initiating similar acts of levying (upon)
and selling on execution other properties of said petitioner". The injunction thus

granted, as modified by the words in parenthesis, shall remain in force until Civil Case
No. 61777 shall have been finally terminated.
In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY
and SET ASIDE, for having been issued in excess of jurisdiction, the Order of 13
February 1992 in Civil Case No. Q-30583 as well as any other order or process
through which the petitioner is made liable under the judgment in said Civil Case No.
Q-30583.
No damages and no costs.
SO ORDERED.
Hence, this petition for review anchored on the following arguments:
1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO.
27683 WHEN IT NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER
AND OTHER ORDERS OR PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL
COURT OF QUEZON CITY THROUGH WHICH GENERAL CREDIT CORPORATION
IS MADE LIABLE UNDER THE JUDGMENT THAT WAS RENDERED IN CIVIL CASE
NO. Q-30583.

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence. It is an artificial being invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of
any other legal entity to which it may be related. It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon which big business
depends. It also has the advantage of non-dependence on the lives of those who
compose it even as it enjoys certain rights and conducts activities of natural persons.
Precisely because the corporation is such a prevalent and dominating factor in
the business life of the country, the law has to look carefully into the exercise of
powers by these artificial persons it has created.
Any piercing of the corporate veil has to be done with caution. However, the
Court will not hesitate to use its supervisory and adjudicative powers where the
corporate fiction is used as an unfair device to achieve an inequitable result, defraud
creditors, evade contracts and obligations, or to shield it from the effects of a court
decision. The corporate fiction has to be disregarded when necessary in the interest
of justice.
In First Philippine International Bank v. Court of Appeals, et al., we held:

2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO.

27518 WHEN IT ENJOINED THE AUCTION SALE ON EXECUTION OF THE
PROPERTIES OF GENERAL CREDIT CORPORATION AS WELL AS INITIATING
SIMILAR ACTS OF LEVYING UPON AND SELLING ON EXECUTION OF OTHER
PROPERTIES OF GENERAL CREDIT CORPORATION.

When the fiction is urged as a means of perpetrating a fraud or an illegal act or

as a vehicle for the evasion of an existing obligation, the circumvention of statutes,
the achievement or perfection of a monopoly or generally the perpetration of knavery
or crime, the veil with which the law covers and isolates the corporation from the
members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.

3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

GENERAL CREDIT CORPORATION IS A STRANGER TO CIVIL CASE NO. Q30583, INSTEAD OF, DECLARING THAT COMMERCIAL CREDIT CORPORATION
OF QUEZON CITY IS THE ALTER EGO, INSTRUMENTALITY, CONDUIT OR
ADJUNCT OF COMMERCIAL CREDIT CORPORATION AND ITS SUCCESSOR
GENERAL CREDIT CORPORATION.

Also in the above-cited case, we stated that this Court has pierced the veil of
corporate fiction in numerous cases where it was used, among others, to avoid a
judgment credit; to avoid inclusion of corporate assets as part of the estate of a
decedent; to avoid liability arising from debt; when made use of as a shield to
perpetrate fraud and/or confuse legitimate issues; or to promote unfair objectives or
otherwise to shield them.

At the outset, it must be stressed that there is no longer any controversy over
petitioners claims against his former employer, CCC-QC, inasmuch as the decision in
Civil Case No. Q-30583 of the Regional Trial Court of Quezon City has long become
final and executory. The only issue, therefore, to be resolved in the instant petition is
whether or not the judgment in favor of petitioner may be executed against
respondent General Credit Corporation. The latter contends that it is a corporation
separate and distinct from CCC-QC and, therefore, its properties may not be levied
upon to satisfy the monetary judgment in favor of petitioner. In short, respondent
raises corporate fiction as its defense. Hence, we are necessarily called upon to apply
the doctrine of piercing the veil of corporate entity in order to determine if General
Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-QC.

In the appealed judgment, the Court of Appeals sustained respondents

arguments of separateness and its character as a different corporation which is a
non-party or stranger to this case.

The petition is impressed with merit.

A corporation is an artificial being created by operation of law, having the right of

The defense of separateness will be disregarded where the business affairs of a

subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime.
We stated in Tomas Lao Construction v. National Labor Relations Commission,
that the legal fiction of a corporation being a judicial entity with a distinct and separate
personality was envisaged for convenience and to serve justice. Therefore, it should
not be used as a subterfuge to commit injustice and circumvent the law.

Precisely for the above reasons, we grant the instant petition.

It is obvious that the use by CCC-QC of the same name of Commercial Credit
Corporation was intended to publicly identify it as a component of the CCC group of
companies engaged in one and the same business, i.e., investment and financing.
Aside from CCC-Quezon City, other franchise companies were organized such as
CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary
corporations as what was done here is usually resorted to for the aggrupation of
capital, the ability to cover more territory and population, the decentralization of
activities best decentralized, and the securing of other legitimate advantages. But
when the mother corporation and its subsidiary cease to act in good faith and honest
business judgment, when the corporate device is used by the parent to avoid its
liability for legitimate obligations of the subsidiary, and when the corporate fiction is
used to perpetrate fraud or promote injustice, the law steps in to remedy the problem.
When that happens, the corporate character is not necessarily abrogated. It continues
for legitimate objectives. However, it is pierced in order to remedy injustice, such as
that inflicted in this case.
Factually and legally, the CCC had dominant control of the business operations
of CCC-QC. The exclusive management contract insured that CCC-QC would be
managed and controlled by CCC and would not deviate from the commands of the
mother corporation. In addition to the exclusive management contract, CCC
appointed its own employee, petitioner, as the resident manager of CCC-QC.
Petitioners designation as resident manager implies that he was placed in CCCQC by a superior authority. In fact, even after his assignment to the subsidiary
corporation, petitioner continued to receive his salaries, allowances, and benefits from
CCC, which later became respondent General Credit Corporation. Not only that.
Petitioner and the other permanent employees of CCC-QC were qualified members
and participants of the Employees Pension Plan of CCC.
There are other indications in the record which attest to the applicability of the
identity rule in this case, namely: the unity of interests, management, and control; the
transfer of funds to suit their individual corporate conveniences; and the dominance of
policy and practice by the mother corporation insure that CCC-QC was an
instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were engaged in the same
principal line of business involving a single transaction process. Under their
discounting arrangements, CCC financed the operations of CCC-QC. The subsidiary
sold, discounted, or assigned its accounts receivables to CCC.
The testimony of Joselito D. Liwanag, accountant and auditor of CCC since
1971, shows the pervasive and intensive auditing function of CCC over CCC-QC. The
two corporations also shared the same office space. CCC-QC had no office of its
own.
The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even
verified by the director-representative of CCC. The lawyers who filed the complaint
and amended complaint were all in-house lawyers of CCC.

The challenged decision of the Court of Appeals states that CCC, now General
Credit Corporation, is not a formal party in the case. The reason for this is that the
complaint was filed by CCC-QC against petitioner. The choice of parties was with
CCC-QC. The judgment award in this case arose from the counterclaim which
petitioner set up against CCC-QC.
The circumstances which led to the filing of the aforesaid complaint are quite
revealing. As narrated above, the discounting agreements through which CCC
controlled the finances of its subordinates became unlawful when Central Bank
adopted the DOSRI prohibitions. Under this rule the directors, officers, and
stockholders are prohibited from borrowing from their company. Instead of adhering to
the letter and spirit of the regulations by avoiding DOSRI loans altogether, CCC used
the corporate device to continue the prohibited practice. CCC organized still another
corporation, the CCC-Equity Corporation. However, as a wholly owned subsidiary,
CCC-Equity was in fact only another name for CCC. Key officials of CCC, including
the resident managers of subsidiary corporations, were appointed to positions in
CCC-Equity.
In order to circumvent the Central Banks disapproval of CCC-QCs mode of
reducing its DOSRI lender accounts and its directive to follow Central Bank
requirements, resident managers, including petitioner, were told to observe a pseudocompliance with the phasing out orders. For his unwillingness to satisfactorily conform
to these directives and his reluctance to resort to illegal practices, petitioner earned
the ire of his employers. Eventually, his services were terminated, and criminal and
civil cases were filed against him.
Petitioner issued twenty-three checks as money placements with CCC-QC
because of difficulties faced by the firm in implementing the required phase-out
program. Funds from his current account in the Far East Bank and Trust Company
were transferred to CCC-QC. These monies were alleged in the criminal complaints
against him as having been stolen. Complaints for qualified theft and estafa were
brought by CCC-QC against petitioner. These criminal cases were later dismissed.
Similarly, the civil complaint which was filed with the Court of First Instance of Pasig
and later transferred to the Regional Trial Court of Quezon City was dismissed, but
his counterclaims were granted.
Faced with the financial obligations which CCC-QC had to satisfy, the mother
firm closed CCC-QC, in obvious fraud of its creditors. CCC-QC, instead of opposing
its closure, cooperated in its own demise. Conveniently, CCC-QC stated in its
opposition to the motion for alias writ of execution that all its properties and assets
had been transferred and taken over by CCC.
Under the foregoing circumstances, the contention of respondent General Credit
Corporation, the new name of CCC, that the corporate fiction should be appreciated
in its favor is without merit.
Paraphrasing the ruling in Claparols v. Court of Industrial Relations, reiterated in
Concept Builders Inc. v. National Labor Relations, it is very obvious that respondent
seeks the protective shield of a corporate fiction whose veil the present case could,
and should, be pierced as it was deliberately and maliciously designed to evade its
financial obligation of its employees.

If the corporate fiction is sustained, it becomes a handy deception to avoid a

judgment debt and work an injustice. The decision raised to us for review is an
invitation to multiplicity of litigation. As we stated in Islamic Directorate vs. Court of
Appeals, the ends of justice are not served if further litigation is encouraged when the
issue is determinable based on the records.
A court judgment becomes useless and ineffective if the employer, in this case
CCC as a mother corporation, is placed beyond the legal reach of the judgment
creditor who, after protracted litigation, has been found entitled to positive relief.
Courts have been organized to put an end to controversy. This purpose should not be
negated by an inapplicable and wrong use of the fiction of the corporate veil.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and
ASIDE. The injunction against the holding of an auction sale for the execution of the
decision in Civil Case No. Q-30583 of properties of General Credit Corporation, and
the levying upon and selling on execution of other properties of General Credit
Corporation, is LIFTED.
SO ORDERED.

FELICIANO, J.:p
Sometime in February 1983, the authorized capital stock of petitioner Nestle
Philippines Inc. ("Nestle") was increased from P300 million divided into 3 million
shares with a par value of P100.00 per share, to P600 million divided into 6 million
shares with a par value of P100.00 per share. Nestle underwent the necessary
procedures involving Board and stockholders approvals and effected the necessary
filings to secure the approval of the increase of authorized capital stock by
respondent Securities and Exchange Commission ("SEC"), which approval was in
fact granted. Nestle also paid to the SEC the amount of P50,000.00 as filing fee in
accordance with the Schedule of Fees and Charges being implemented by the SEC
under the Corporation Code. 1
Nestle has only two (2) principal stockholders: San Miguel Corporation and Nestle
S.A. The other stockholders, who are individual natural persons, own only one (1)
share each, for qualifying purposes, i.e., to qualify them as members of the Board of
Directors being elected thereto on the strength of the votes of one or the other
principal shareholder.
On 16 December 1983, the Board of Directors and stockholders of Nestle approved
resolutions authorizing the issuance of 344,500 shares out of the previously
authorized but unissued capital stock of Nestle, exclusively to San Miguel Corporation
and to Nestle S.A. San Miguel Corporation subscribed to and completely paid up
168,800 shares, while Nestle S.A. subscribed to and paid up the balance of 175,700
shares of stock.
On 28 March 1985, petitioner Nestle filed a letter signed by its Corporate Secretary,
M.L. Antonio, with the SEC seeking exemption of its proposed issuance of additional
shares to its existing principal shareholders, from the registration requirement of
Section 4 of the Revised Securities Act and from payment of the fee referred to in
Section 6(c) of the same Act. In that letter, Nestle requested confirmation of the
correctness of two (2) propositions submitted by it:

G.R. No. 86738 November 13, 1991

NESTLE
PHILIPPINES,
INC.,
petitioner,
vs.
COURT OF APPEALS and SECURITIES AND EXCHANGE COMMISSION,
respondents.
Nepomuceno, Hofilena & Guingona for petitioner.

1. That there is no need to file a petition for exemption under

Section 6(b) of the Revised Securities Act with respect to the
issuance of the said 344,600 additional shares to our existing
stockholders out of our unissued capital stock; and
2. That the fee provided in Section 6(c) of [the Revised Securities]
Act is not applicable to the said issuance of additional shares. 2
The principal, indeed the only, argument presented by Nestlewas that Section 6(a) (4)
of the Revised Securities Act which provides as follows:

Sec. 6. Exempt transactions. a) The requirement of registration

under subsection (a) of Section four of this Act shall not apply to
the sale of any security in any of the following transactions:
xxx xxx xxx
(4) The distribution by a corporation, actively engaged in the
business authorized by its articles of incorporation, of securities to
its stockholders or other security holders as a stock dividend or
other distribution out of surplus; or the issuance of securities to the
security holder or other creditors of a corporation in the process of
a bona fide reorganization of such corporation made in good faith
and not for the purpose of avoiding the provisions of this Act, either
in exchange for the securities of such security holders or claims of
such creditors or partly for cash and partly in exchange for the
securities or claims of such security holders or creditors; or the
issuance of additional capital stock of a corporation sold or
distributed by it among its own stockholders exclusively, where no
commission or other remuneration is paid or given directly or
indirectly in connection with the sale or distribution of such
increased capital stock. (Emphasis supplied)
embraces "not only an increase in the authorized capital stock but also the issuance
of additional shares to existing stockholders of the unissued portion of the unissued
capital stock". 3 Nestle urged that interpretation upon the following argument.
The use of the term "increased capital stock" should be interpreted
to refer to additional capital stock or equity participation of the
existing stockholders as a consequence of either an increase of the
authorized capital stock or the issuance of unissued capital stock. If
the intention of the pertinent legal provision [were] to limit the
exemption to subscription to proposed increases in the authorized
capital stock of a corporation, we see no reason why the law
should not have been more specific or accurate about it. It certainly
should have mentioned "increase in the authorized capital stock of
the corporation" rather than merely the expression "the issuance of
additional capital stock 4 (Emphasis supplied)
Nestle expressly represented in the same letter that all the additional shares
proposed to be issued would be issued only to San Miguel Corporation and Nestle
S.A. and that no commission or other form of remuneration had been given, directly
or indirectly, in connection with the issuance or distribution of such additional shares
of stock.

In respect of its claimed exemption from the fee provided for in Section 6(c) of the
Revised Securities Act, Nestle contended that since Section 6 (a) (4) of the statute
declares (in Nestle's view) the proposed issuance of 344,500 previously authorized
but unissued shares of Nestle's capital stock to its existing shareholders as an
exempt transaction, the SEC could not collect fees for "the same transaction" twice.
Nestle adverted to its payment back in 21 February 1983 of the amount of
P50,000.00 as filing fees to the SEC when it applied for and eventually received
approval of the increase of its authorized capital stock effected by Board and
shareholder action last 16 December 1983.
In a letter dated 26 June 1986, the SEC through its then Chairman Julio A. Sulit, Jr.
responded adversely to petitioner's requests and ruled that the proposed issuance of
shares did not fall under Section 6 (a) (4) of the Revised Securities Act, since Section
6 (a) (4) is applicable only where there is an increase in the authorized capital stock
of a corporation. Chairman Sulit held, however, that the proposed transaction could
be considered by the Commission under the provisions of Section 6 (b) of the
Revised Securities Act which reads as follows:
(b) The Commission may, from time to time and subject to such
terms and conditions as it may prescribe, exempt transactions other
than those provided in the preceding paragraph, if it finds that the
enforcement of the requirements of registration under this Act with
respect to such transactions is not necessary in the public interest
and for the protection of the investors by reason of the small
amount involved or the limited character of the public offering.
The Commission then advised petitioner to file the appropriate request for exemption
and to pay the fee required under Section 6 (c) of the statute, which provides:
(c) A fee equivalent to one-tenth of one per centum of the maximum
aggregate price or issued value of the securities shall be collected
by the Commission for granting a general or particular exemption
from the registration requirements of this Act.
Petitioner moved for reconsideration of the SEC ruling, without success.
On 3 July 1987, petitioner sought review of the SEC ruling before this Court which,
however, referred the petition to the Court of Appeals.
In a decision dated 13 January 1989, the Court of Appeals sustained the ruling of the
SEC.

Dissatisfied with the Decision of the Court of Appeals, Nestle is now before this Court
on a Petition for Review, raising the very same issues that it had raised before the
SEC and the Court of Appeals.
Examining the words actually used in Section 6 (a) (4) of the Revised Securities Act,
and bearing in mind common corporate usage in this jurisdiction, it will be seen that
the statutory phrase "issuance of additional capital stock" is indeed infected with a
certain degree of ambiguity. This phrase may refer either to: a) the issuance of capital
stock as part of and in the course of increasing the authorized capital stock of a
corporation; or (b) issuance of already authorized but still unissued capital stock. By
the same token, the phrase "increased capital stock" found at the end of Section 6 (a)
(4), may refer either: 1) to newly or contemporaneously authorized capital stock
issued in the course of increasing the authorized capital stock of a corporation; or 2)
to previously authorized but unissued capital stock.
Under Section 38 of the Corporation Code, a corporation engaged in increasing its
authorized capital stock, with the required vote of its Board of Directors and of its
stockholders, must file a sworn statement of the treasurer of the corporation showing
that at least twenty-five percent (25%) of "such increased capital stock" has been
subscribed and that at least twenty-five percent (25%) of the amount subscribed has
been paid either in actual cash or in property transferred to the corporation. In other
words, the corporation must issue at least twenty-five percent (25%) of the newly or
contemporaneously authorized capital stock in the course of complying with the
requirements of the Corporation Code for increasing its authorized capital stock.
In contrast, after approval by the SEC of the increase of its authorized capital stock,
and from time to time thereafter, the corporation, by a vote of its Board of Directors,
and without need of either stockholder or SEC approval, may issue and sell shares of
its already authorized but still unissued capital stock to existing shareholders or to
members of the general public. 5
Both the SEC and the Court of Appeals resolved the ambiguity by construing Section
6 (a) (4) as referring only to the issuance of shares of stock as part of and in the
course of increasing the authorized capital stock of Nestle. In the case at bar, since
the 344,500 shares of Nestle capital stock are proposed to be issued from already
authorized but still unissued capital stock and since the present authorized capital
stock of 6,000,000 shares with a par value of P100.00 per share is not proposed to be
further increased, the SEC and the Court of Appeals rejected Nestle's petition.
We believe and so hold that the construction thus given by the SEC and the Court of
Appeals to Section 6 (a) (4) of the Revised Securities Act must be upheld.
In the first place, it is a principle too well established to require extensive
documentation that the construction given to a statute by an administrative agency

charged with the interpretation and application of that statute is entitled to great
respect and should be accorded great weight by the courts, unless such construction
is clearly shown to be in sharp conflict with the governing statute or the Constitution
and other laws. As long ago as 1903, this Court said in In re Allen 6 that
[t]he principle that the contemporaneous construction of a statute
by the executive officers of the government, whose duty is to
execute it, is entitled to great respect, and should ordinarily control
the construction of the statute by the courts, is so firmly embedded
in our jurisdiction that no authorities need be cited to support it. 7
The rationale for this rule relates not only to the emergence of the multifarious needs
of a modern or modernizing society and the establishment of diverse administrative
agencies for addressing and satisfying those needs; it also relates to accumulation of
experience and growth of specialized capabilities by the administrative agency
charged with implementing a particular statute. 8 In Asturias Sugar Central, Inc. v.
Commissioner of Customs 9 the Court stressed that executive officials are presumed
to have familiarized themselves with all the considerations pertinent to the meaning
and purpose of the law, and to have formed an independent, conscientious and
competent expert opinion thereon. The courts give much weight to contemporaneous
construction because of the respect due the government agency or officials charged
with the implementation of the law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are the drafters of the law they
interpret. 10
In the second place, and more importantly, consideration of the underlying statutory
purpose of Section 6(a) (4) compels us to sustain the view taken by the SEC and the
Court of Appeals. The reading by the SEC of the scope of application of Section 6(a)
(4) permits greater opportunity for the SEC to implement the statutory objective of
protecting the investing public by requiring proposed issuers of capital stock to inform
such public of the true financial conditions and prospects of the corporation. By
limiting the class of exempt transactions contemplated by the last clause of Section
6(a) (4) to issuances of stock done in the course of and as part of the process of
increasing the authorized capital stock of a corporation, the SEC is enabled to
examine issuances by a corporation of previously authorized but theretofore unissued
capital stock, on a case-to-case basis, under Section 6(b); and thereunder, to grant or
withhold exemption from the normal registration requirements depending upon the
perceived level of need for protection by the investing public in particular cases.
When capital stock is issued in the course of and in compliance with the requirements
of increasing its authorized capital stock under Section 38 of the Corporation Code,
the SEC as a matter of course examines the financial condition of the corporation,
and hence there is no real need for exercise of SEC authority under the Revised
Securities Act. Thus, one of the multiple documentation requirements under the

current regulations of the SEC in respect of filing a certificate of increase of

authorized capital stock, is submission of "a financial statement duly certified by an
independent Certified Public Accountant (CPA) as of the latest date possible or as of
the date of the meeting when stockholders approved the increase/decrease in capital
stock or thereabouts. 11 When all or part of the newly authorized capital stock is
proposed to be issued as stock dividends, the SEC requirements are even more
exacting; they require, in addition to the regular audited financial statements, the
submission by the corporation of a "detailed or Long Form Report of the certifying
Auditor." Moreover, since approval of an increase in authorized capital stock by the
stockholders holding two-thirds (2/3) of the outstanding capital stock is required by
Section 38 of the Corporation Code, at a stockholders meeting held for that purpose,
the directors and officers of the corporation may be expected to take pains to inform
the shareholders of the financial condition and prospects of the corporation and of the
proposed utilization of the fresh capital sought to be raised.
Upon the other hand, as already noted, issuance of previously authorized but
theretofore unissued capital stock by the corporation requires only Board of Directors
approval. Neither notice to nor approval by the shareholders or the SEC is required
for such issuance. There would, accordingly, under the view taken by petitioner
Nestle, no opportunity for the SEC to see to it that shareholders (especially the small
stockholders) have a reasonable opportunity to inform themselves about the very fact
of such issuance and about the condition of the corporation and the potential value of
the shares of stock being offered.
Under the reading urged by petitioner Nestle of the reach and scope of the third
clause of Section 6(a) (4), the issuance of previously authorized but unissued capital
stock would automatically constitute an exempt transaction, without regard to the
length of time which may have intervened between the last increase in authorized
capital stock and the proposed issuance during which time the condition of the
corporation may have substantially changed, and without regard to whether the
existing stockholders to whom the shares are proposed to be issued are only two
giant corporations as in the instant case, or are individuals numbering in the hundreds
or thousands.
In contrast, under the ruling issued by the SEC, an issuance of previously authorized
but still unissued capital stock may, in a particular instance, be held to be an exempt
transaction by the SEC under Section 6(b) so long as the SEC finds that the
requirements of registration under the Revised Securities Act are "not necessary in
the public interest and for the protection of the investors" by reason, inter alia, of the
small amount of stock that is proposed to be issued or because the potential buyers
are very limited in number and are in a position to protect themselves. In fine,
petitioner Nestle's proposed construction of Section 6(a) (4) would establish an
inflexible rule of automatic exemption of issuances of additional, previously authorized
but unissued, capital stock. We must reject an interpretation which may disable the

SEC from rendering protection to investors, in the public interest, precisely when such
protection may be most needed.
Petitioner Nestle's second claim for exemption is from payment of the fee provided for
in Section 6 (c) of the Revised Securities Act, a claim based upon petitioner's
contention that Section 6 (a) (4) covers both issuance of stock in the course of
complying with the statutory requirements of increase of authorized capital stock and
issuance of previously authorized and unissued capital stock. Petitioner claims that to
require it now to pay one-tenth of one percent (1%) of the issued value of the 344,500
shares of stock proposed to be issued, is to require it to pay a second time for the
same service on the part of the SEC. Since we have above rejected petitioner's
reading of Section 6 (a) (4), last clause, petitioner's claim about the additional fee of
one-tenth of one percent (1%) of the issue value of the proposed issuance of stock
(amounting to P34,450 plus P344.50 for other fees or a total of P37,794.50) need not
detain us for long. We think it clear that the fee collected in 21 February 1983 by the
SEC was assessed in connection with the examination and approval of the certificate
of increase of authorized capital stock then submitted by petitioner. The fee, upon the
other hand, provided for in Section 6 (c) which petitioner will be required to pay if it
does file an application for exemption under Section 6 (b), is quite different; this is a
fee specifically authorized by the Revised Securities Act, (not the Corporation Code)
in connection with the grant of an exemption from normal registration requirements
imposed by that Act. We do not find such fee either unreasonable or exorbitant.
WHEREFORE, for all the foregoing, the Petition for Review on Certiorari is hereby
DENIED for lack of merit and the Decision of the Court of Appeals dated 13 January
1989 in C.A.-G.R. No. SP-13522, is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.

FIRST DIVISION
[G.R. No. 109491. February 28, 2001]
ATRIUM MANAGEMENT CORPORATION, petitioner, vs. COURT OF APPEALS,
E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE
LEON, JR., AND HI-CEMENT CORPORATION, respondents.
[G.R. No. 121794. February 28, 2001]

LOURDES M. DE LEON, petitioner, vs. COURT OF APPEALS, ATRIUM

MANAGEMENT CORPORATION, AND HI-CEMENT CORPORATION,
respondents.

such she was familiar with the four RCBC checks as the postdated checks issued by
Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T.
Henry offered to give Hi-Cement a loan which the subject checks would secure as
collateral.

DECISION
PARDO, J.:
What is before the Court are separate appeals from the decision of the Court of
Appeals, ruling that Hi-Cement Corporation is not liable for four checks amounting to
P2 million issued to E.T. Henry and Co. and discounted to Atrium Management
Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional
Trial Court, Manila an action for collection of the proceeds of four postdated checks in
the total amount of P2 million. Hi-Cement Corporation through its corporate
signatories, petitioner Lourdes M. de Leon, treasurer, and the late Antonio de las Alas,
Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry
and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management
Corporation for valuable consideration. Upon presentment for payment, the drawee
bank dishonored all four checks for the common reason payment stopped. Atrium,
thus, instituted this action after its demand for payment of the value of the checks was
denied.
After due proceedings, on July 20, 1989, the trial court rendered a decision
ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc.
and Hi-Cement Corporation to pay petitioner Atrium, jointly and severally, the amount
of P2 million corresponding to the value of the four checks, plus interest and attorneys
fees.
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals
promulgated its decision modifying the decision of the trial court, absolving Hi-Cement
Corporation from liability and dismissing the complaint as against it. The appellate
court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject
checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes
M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The
subject checks were not issued for valuable consideration.
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in
February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance,
offering to discount four RCBC checks in the total amount of P2 million, issued by HiCement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be
allowed to confirm with Hi-Cement the fact that the checks represented payment for
petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia
identified two letters, dated February 6, 1981 and February 9, 1981 issued by HiCement through Lourdes M. de Leon, as treasurer, confirming the issuance of the
four checks in favor of E.T. Henry in payment for petroleum products.
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that
she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a
decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing considerations, and plaintiff having
proved its cause of action by preponderance of evidence, judgment is hereby
rendered ordering all the defendants except defendant Antonio de las Alas to pay
plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS
with the legal rate of interest from the filling of the complaint until fully paid, plus the
sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorneys fees and
the cost of suit.
All other claims are, for lack of merit dismissed.
SO ORDERED.
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of
Appeals.
Lourdes M. de Leon submitted that the trial court erred in ruling that she was
solidarilly liable with Hi-Cement for the amount of the check. Also, that the trial court
erred in ruling that Atrium was an ordinary holder, not a holder in due course of the
rediscounted checks.
Hi-Cement on its part submitted that the trial court erred in ruling that even if HiCement did not authorize the issuance of the checks, it could still be held liable for the
checks. And assuming that the checks were issued with its authorization, the same
was without any consideration, which is a defense against a holder in due course and
that the liability shall be borne alone by E.T. Henry.
On March 17, 1993, the Court of Appeals promulgated its decision modifying the
ruling of the trial court, the dispositive portion of which reads:
Judgement is hereby rendered:
(1) dismissing the plaintiffs complaint as against defendants Hi-Cement
Corporation and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de
Leon, jointly and severally to pay the plaintiff the sum of TWO MILLION
PESOS (P2,000,000.00) with interest at the legal rate from the filling of
the complaint until fully paid, plus P20,000.00 for attorneys fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and
Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement
Corporation, the sum of P20,000.00 as and for attorneys fees.

With cost in this instance against the appellee Atrium Management

Corporation and appellant Lourdes Victoria M. de Leon.

It is, however, our view that there is basis to rule that the act of issuing the
checks was well within the ambit of a valid corporate act, for it was for securing a loan
to finance the activities of the corporation, hence, not an ultra vires act.

So ordered.
Hence, the recourse to this Court.
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against HiCement and ordering it to pay P20,000.00 as attorneys fees.
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally
liable for the Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in
due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M.
de Leon as signatory of the checks was personally liable for the value
of the checks, which were declared to be issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay HiCement attorneys fees and costs.
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra
vires act. The record reveals that Hi-Cement Corporation issued the four (4) checks to
extend financial assistance to E.T. Henry, not as payment of the balance of the P30
million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would
petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in
payment for hydro oil delivered by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for
consideration and that Lourdes and E.T. Henry engaged in a kiting operation to raise
funds for E.T. Henry, who admittedly was in need of financial assistance. The Court
finds that there was no sufficient evidence to show that such is the case. Lourdes M.
de Leon is the treasurer of the corporation and is authorized to sign checks for the
corporation. At the time of the issuance of the checks, there were sufficient funds in
the bank to cover payment of the amount of P2 million pesos.

An ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the power
conferred upon it by law The term ultra vires is distinguished from an illegal act for the
former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.
The next question to determine is whether Lourdes M. de Leon and Antonio de
las Alas were personally liable for the checks issued as corporate officers and
authorized signatories of the check.
"Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when:
1. He assents (a) to a patently unlawful act of the corporation, or (b) for
bad faith or gross negligence in directing its affairs, or (c) for conflict of
interest, resulting in damages to the corporation, its stockholders or
other persons;
2. He consents to the issuance of watered down stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary
his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by a specific provision of law, to personally answer for his
corporate action.
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and
Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon
was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium
and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in
favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit
only to the payees account and not to be further negotiated. What is more, the
confirmation letter contained a clause that was not true, that is, that the checks issued
to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry. Her
negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held
personally liable therefor.
The next issue is whether or not petitioner Atrium was a holder of the checks in
due course. The Negotiable Instruments Law, Section 52 defines a holder in due
course, thus:
A holder in due course is a holder who has taken the instrument under the
following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating
it.
In the instant case, the checks were crossed checks and specifically indorsed
for deposit to payees account only. From the beginning, Atrium was aware of the fact
that the checks were all for deposit only to payees account, meaning E.T. Henry.
Clearly, then, Atrium could not be considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner
Atrium was not a holder in due course for having taken the instruments in question
with notice that the same was for deposit only to the account of payee E.T. Henry that
it was altogether precluded from recovering on the instrument. The Negotiable
Instruments Law does not provide that a holder not in due course can not recover on
the instrument.
The disadvantage of Atrium in not being a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. One such
defense is absence or failure of consideration. We need not rule on the other issues
raised, as they merely follow as a consequence of the foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of
the Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.
No costs.
SO ORDERED.

Republic
SUPREME
Manila
EN BANC

of

the

Philippines
COURT

G.R. No. L-60502 July 16, 1991

3. That the issuance of the shares of stocks will be for a period of

one year from the date hereof, "after which no further issues will be
made without previous authority from this Board."

PEDRO
LOPEZ
DEE,
petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL
SISON, NAGA TELEPHONE CO., INC., COMMUNICATION SERVICES, INC.,
LUCIANO MAGGAY, AUGUSTO FEDERIS, NILDA RAMOS, FELIPA JAVALERA,
DESIDERIO SAAVEDRA, respondents.

Pursuant to the approval given by the then Board of Communications, Natelco filed its
Amended Articles of Incorporation with the Securities and Exchange Commission
(SEC for short). When the amended articles were filed with the SEC, the original
authorized capital of P100,000.00 was already paid. Of the increased capital of
P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was
fully paid.

G.R. No. L-63922 July 16, 1991

The capital stock of Natelco was divided into 213,000 common shares and 87,000
preferred shares, both at a par value of P10.00 per shares.

JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ DEE, and
VICENTE
TORDILLA,
JR.,
petitioners,
vs.
INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, NILDA I. RAMOS,
DESIDERIO
SAAVEDRA,
AUGUSTO
FEDERIS,
ERNESTO
MIGUEL,
COMMUNICATION SERVICES, INC., and NAGA TELEPHONE COMPANY, INC.,
respondents.

PARAS, J.:p
These are petitions for certiorari with preliminary injunction and/or restraining order
which seek to annul and set aside in: (1) G.R. No. 60502, the order * of the hearing
officer dated May 4, 1982, setting the date for the election of the directors to be held
by the stockholders on May 22, 1982, in SEC Case No. 1748 entitled "Pedro Lopez
Dee v. Naga Telephone Co., Inc. et al."; and (2) G.R. No. 63922, the decision ** of the
Intermediate Appellate Court dated April 14, 1983 which annulled the judgment of the
trial court on the contempt charge against the private respondents in G.R. No. SP14846-R, entitled "Luciano Maggay, et al. v. Hon. Delfin Vir Sunga, et al."
As gathered from the records, the facts of these cases are as follows:
Naga Telephone Company, Inc. was organized in 1954, the authorized capital was
P100,000.00. In 1974 Naga Telephone Co., Inc. (Natelco for short) decided to
increase its authorized capital to P3,000,000.00. As required by the Public Service
Act, Natelco filed an application for the approval of the increased authorized capital
with the then Board of Communications under BOC Case No. 74-84. On January 8,
1975, a decision was rendered in said case, approving the said application subject to
certain conditions, among which was:

On April 12, 1977, Natelco entered into a contract with Communication Services, Inc.
(CSI for short) for the "manufacture, supply, delivery and installation" of telephone
equipment. In accordance with this contract, Natelco issued 24,000 shares of
common stocks to CSI on the same date as part of the downpayment. On May 5,
1979, another 12,000 shares of common stocks were issued to CSI. In both
instances, no prior authorization from the Board of Communications, now the National
Telecommunications Commission, was secured pursuant to the conditions imposed
by the decision in BOC Case NO. 74-84 aforecited (Rollo, Vol. III, Memorandum for
private respondent Natelco, pp. 814-816).
On May 19, 1979, the stockholders of the Natelco held their annual stockholders'
meeting to elect their seven directors to their Board of Directors, for the year 19791980. In this election Pedro Lopez Dee (Dee for short) was unseated as Chairman of
the Board and President of the Corporation, but was elected as one of the directors,
together with his wife, Amelia Lopez Dee (Rollo, Vol. III, Memorandum for private
respondents, p. 985; p. 2).
In the election CSI was able to gain control of Natelco when the latter's legal counsel,
Atty. Luciano Maggay (Maggay for short) won a seat in the Board with the help of
CSI. In the reorganization Atty. Maggay became president (Ibid., Memorandum for
Private Respondent Natelco, p. 811).
The following were elected in the May 19, 1979 election: Atty. Luciano Maggay, Mr.
Augusto Federis, Mrs. Nilda Ramos, Ms. Felipa Javalera, Mr. Justino de Jesus, Sr.,
Mr. Pedro Lopez Dee and Mrs Amelia C. Lopez Dee. The last three named directors
never attended the meetings of the Maggay Board. The members of the Maggay
Board who attended its meetings were Maggay. Federis, Ramos and Javalera. The
last two were and are CSI representatives (Ibid., p. 812).

Petitioner Dee having been unseated in the election, filed a petition in the SEC
docketed as SEC Case No. 1748, questioning the validity of the elections of May 19,
1979 upon the main ground that there was no valid list of stockholders through which
the right to vote could be determined (Rollo, Vol. I, pp. 254-262-A). As prayed for in
the petition (Ibid., p. 262), a restraining order was issued by the SEC placing
petitioner and the other officers of the 1978-1979 Natelco Board in hold-over capacity
(Rollo, Vol. II, Reply, p. 667).
The SEC restraining order was elevated to the Supreme Court in G.R. No. 50885
where the enforcement of the SEC restraining order was restrained. Private
respondents therefore, replaced the hold-over officers (Rollo, Vol. 11, p. 897).
During the tenure of the Maggay Board, from June 22, 1979 to March 10, 1980, it did
not reform the contract of April 12, 1977, and entered into another contract with CSI
for the supply and installation of additional equipment but also issued to CSI 113,800
shares of common stock (Ibid., p. 812).
The shares of common stock issued to CSI are as follows:
NO. OF SHARES DATE ISSUED
24,000 shares April 12, 1977
12,000 shares May 5, 1979
28,000 shares October 2, 1979

In the course of the proceedings in SEC Case No. 1748, respondent hearing officer
issued an order on June 23, 1981, declaring: (1) that CSI is a stockholder of Natelco
and, therefore, entitled to vote; (2) that unexplained 16,858 shares of Natelco appear
to have been issued in excess to CSI which should not be allowed to vote; (3) that 82
shareholders with their corresponding number of shares shall be allowed to vote; and
(4) consequently, ordering the holding of special stockholder' meeting to elect the new
members of the Board of Directors for Natelco based on the findings made in the
order as to who are entitled to vote (Rollo, Vol. 1, pp. 288-299).
From the foregoing order dated June 23, 1981, petitioner Dee filed a petition for
certiorari/appeal with the SEC en banc. The petition/appeal was docketed as SEC-AC
NO. 036. Thereafter, the Commission en banc rendered a decision on April 5, 1982,
the dispositive part of which leads:
Now therefore, the Commission en banc resolves to sustain the
order of the Hearing Officer; to dismiss the petition/appeal for lack
of merit; and order new elections as the Hearing Officer shall set
after consultations with Natelco officers. For the protection of
minority stockholders and in the interest of fair play and justice, the
Hearing Officer shall order the formation of a special committee of
three, one from the respondents (other than Natelco), one from
petitioner, and the Hearing Officer as Chairman to supervise the
election.
It remains to state that the Commission en banc cannot pass upon
motions belatedly filed by petitioner and respondent Natelco to
introduce newly discovered evidence any such evidence may be
introduced at hearings on the merits of SEC Case No. 1748.

28,500 shares November 5, 1979

SO ORDERED. (Rollo, Vol. I, p. 24).
20,000 shares November 14, 1979
20,000 shares January 7, 1980

On April 21, 1982, petitioner filed a motion for reconsideration (Rollo, Vol. I, pp. 2530). Likewise, private respondent Natelco filed its motion for reconsideration dated
April 21, 1982 (Ibid., pp. 32-51).

16,500 shares January 26, 1980

149,000 shares (Ibid., pp. 816-817).
Subsequently, the Supreme Court dismissed the petition in G.R. No. 50885 upon the
ground that the same was premature and the Commission should be allowed to
conduct its hearing on the controversy. The dismissal of the petition resulted in the
unseating of the Maggay group from the board of directors of Natelco in a "hold-over"
capacity (Rollo, Vol. II, p. 533).

Pending resolution of the motions for reconsideration, on May 4, 1982, respondent

healing officer without waiting for the decision of the commission en banc to become
final and executory rendered an order stating that the election for directors would be
held on May 22, 1982 (Ibid., pp. 300-301).
On May 20, 1982, the SEC en banc denied the motions for reconsideration (Rollo,
Vol. II, pp. 763-765).

Meanwhile on May 20, 1982 (G.R. No. 63922), petitioner Antonio Villasenor (as
plaintiff) filed Civil Case No. 1507 with the Court of First Instance of Camarines Sur,
Naga City, against private respondents and co-petitioners, de Jesus, Tordilla and the
Dee's all defendants therein, which was raffled to Branch I, presided over by Judge
Delfin Vir Sunga (Rollo, G.R. No. 63922; pp. 25-30). Villasenor claimed that he was
an assignee of an option to repurchase 36,000 shares of common stocks of Natelco
under a Deed of Assignment executed in his favor (Rollo, p. 31). The defendants
therein (now private respondents), principally the Maggay group, allegedly refused to
allow the repurchase of said stocks when petitioner Villasenor offered to defendant
CSI the repurchase of said stocks by tendering payment of its price (Rollo, p. 26 and
p. 78). The complaint therefore, prayed for the allowance to repurchase the aforesaid
stocks and that the holding of the May 22, 1982 election of directors and officers of
Natelco be enjoined (Rollo, pp. 28-29).
A restraining order dated May 21, 1982 was issued by the lower court commanding
desistance from the scheduled election until further orders (Rollo, p. 32).
Nevertheless, on May 22, 1982, as scheduled, the controlling majority of the
stockholders of the Natelco defied the restraining order, and proceeded with the
elections, under the supervision of the SEC representatives (Rollo, Vol. III, p. 985); p.
10; G.R. No. 60502).
On May 25, 1982, the SEC recognized the fact that elections were duly held, and
proclaimed that the following are the "duly elected directors" of the Natelco for the
term 1982-1983:
1. Felipa T. Javalera
2. Nilda I. Ramos
3. Luciano Maggay
4. Augusto Federis

2. Vice-President Nilda I. Ramos

3. Secretary Desiderio Saavedra
4. Treasurer Felipa Javalera
5. Auditor Daniel Ilano
(Rollo, Vol. 1, pp. 302-303)
Despite service of the order of May 25, 1982, the Lopez Dee group headed by
Messrs. Justino De Jesus and Julio Lopez Dee kept insisting no elections were held
and refused to vacate their positions (Rollo, Vol. III, p. 985; p. 11).
On May 28, 1982, the SEC issued another order directing the hold-over directors and
officers to turn over their respective posts to the newly elected directors and officers
and directing the Sheriff of Naga City, with the assistance of PC and INP of Naga City,
and other law enforcement agencies of the City or of the Province of Camarines Sur,
to enforce the aforesaid order (Rollo, Vol. 11, pp. 577-578).
On May 29, 1982, the Sheriff of Naga City, assisted by law enforcement agencies,
installed the newly elected directors and officers of the Natelco, and the hold-over
officers peacefully vacated their respective offices and turned-over their functions to
the new officers (Rollo, Vol. III, p. 985; pp. 12-13).
On June 2, 1982, a charge for contempt was filed by petitioner Villasenor alleging that
private respondents have been claiming in press conferences and over the radio
airlanes that they actually held and conducted elections on May 22, 1982 in the City
of Naga and that they have a new set of officers, and that such acts of herein private
respondents constitute contempt of court (G.R. 63922; Rollo, pp. 35-37).
On September 7, 1982, the lower court rendered judgment on the contempt charge,
the dispositive portion of which reads:

5. Daniel J. Ilano

WHEREFORE, judgment is hereby rendered:

6. Nelin J. Ilano Sr.

1. Declaring respondents, CSI Nilda Ramos, Luciano Maggay,

Desiderio Saavedra, Augusto Federis and Ernesto Miguel, guilty of
contempt of court, and accordingly punished with imprisonment of
six (6) months and to pay fine of P1,000.00 each; and

7. Ernesto A. Miguel
And, the following are the recognized officers to wit:
1. President Luciano Maggay

2. Ordering respondents, CSI Nilda Ramos, Luciano Maggay,

Desiderio Saavedra, Augusto Federis and Ernesto Miguel, and

those now occupying the positions of directors and officers of

NATELCO to vacate their respective positions therein, and ordering
them to reinstate the hold-over directors and officers of NATELCO,
such as Pedro Lopez Dee as President, Justino de Jesus, Sr., as
Vice President, Julio Lopez Dee as Treasurer and Vicente Tordilla,
Jr. as Secretary, and others referred to as hold-over directors and
officers of NATELCO in the order dated May 28, 1982 of SEC
Hearing Officer Emmanuel Sison, in SEC Case No. 1748 (Exh. 6),
by way of RESTITUTION, and consequently, ordering said
respondents to turn over all records, property and assets of
NATELCO to said hold-over directors and officers. (Ibid., Rollo, p.
49).
The trial judge issued an order dated September 10, 1982 directing the respondents
in the contempt charge to "comply strictly, under pain of being subjected to
imprisonment until they do so" (Ibid., p. 50). The order also commanded the Deputy
Provincial Sheriff, with the aid of the PC Provincial Commander of Camarines Sur and
the INP Station Commander of Naga City to "physically remove or oust from the
offices or positions of directors and officers of NATELCO, the aforesaid respondents
(herein private respondents) . . . and to reinstate and maintain, the hold-over directors
and officers of NATELCO referred to in the order dated May 28, 1982 of SEC Hearing
Officer Emmanuel Sison." (Ibid.).
Private respondents filed on September 17, 1982, a petition for certiorari and
prohibition with preliminary injunction or restraining order against the CFI Judge of
Camarines Sur, Naga City and herein petitioners, with the then Intermediate Appellate
Court which issued a resolution ordering herein petitioners to comment on the
petition, which was complied with, and at the same time temporarily refrained from
implementing and/or enforcing the questioned judgment and order of the lower court
(Rollo, p. 77), Decision of CA, p. 2).
On April 14, 1983, the then Intermediate Appellate Court, rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Annuling the judgment dated September 7, 1982 rendered by
respondent judge on the contempt charge, and his order dated
September 10, 1982, implementing said judgment;
2. Ordering the "hold-over" directors and officers of NATELCO to
vacate their respective offices;

3. Directing respondents to restore or re-establish petitioners

(private respondents in this case) who were ejected on May 22,
1982 to their respective offices in the NATELCO, . . .;
4. Prohibiting whoever may be the successor of respondent Judge
from interfering with the proceedings of the Securities and
Exchange Commission in SE-CAC No. 036;
xxx xxx xxx
(Rollo, p. 88).
The order of re-implementation was issued, and, finally, the Maggay group has been
restored as the officers of the Natelco (Rollo, G.R. No. 60502, p. 985; p. 37).
Hence, these petitions involve the same parties and practically the same issues.
Consequently, in the resolution of the Court En Banc dated August 23, 1983, G.R. No.
63922 was consolidated with G.R. No. 60502.
In G.R. No. 60502 In a resolution issued by the Court En Banc dated March 22,
1983, the Court gave due course to the petition and required the parties to submit
their respective memoranda (Rollo, Resolution, p. 638-A; Vol. II).
In G.R. No. 60502
The main issues in this case are:
(1) Whether or not the Securities and Exchange Commission has the power and
jurisdiction to declare null and void shares of stock issued by NATELCO to CSI for
violation of Sec. 20 (h) of the Public Service Act;
(2) Whether or not the issuance of 113,800 shares of Natelco to CSI made during the
pendency of SEC Case No. 1748 in the Securities and Exchange Commission was
valid;
(3) Whether or not Natelco stockholders have a right of preemption to the 113,800
shares in question; and
(4) Whether or not the private respondents were duly elected to the Board of
Directors of Natelco at an election held on May 22, 1982.
In G.R. No. 63922

The crucial issue to be resolved is whether or not the trial judge has jurisdiction to
restrain the holding of an election of officers and directors of a corporation. The
petitions are devoid of merit.

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 sufficient
property to cover all its debts but foresees the impossibility of
meeting them when 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 of a Rehabilitation
Receiver or Management Committee created pursuant to this
Decree, (As added by PD 1758)

In G.R. No. 60502

I
It is the contention of petitioner that the Securities and Exchange Commission En
Banc committed grave abuse of discretion when, in its decision dated April 5, 1982, in
SEC-AC No. 036, it refused to declare void the shares of stock issued by Natelco to
CSI allegedly in violation of Sec. 20 (h) of the Public Service Act. This section
requires prior administrative approval of any transfer or sale of shares of stock of any
public service which vest in the transferee more than forty percentum of the
subscribed capital of the said public service.
Section 5 of P.D. No. 902-A, as amended, enumerates the jurisdiction of the
Securities and Exchange Commission:
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 the 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;
c) Controversies in the election or appointments of directors,
trustees, officers or managers of such corporations, partnerships or
associations.

In other words, in order that the SEC can take cognizance of a case, the controversy
must pertain to any of the following relationships: (a) between 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 insofar as its franchise, permit or
license to operate is concerned; and (d) among the stockholders, partners, or
associates themselves (Union Glass & Container Corp. vs. SEC, 126 SCRA 31
[1983]).
The jurisdiction of the SEC is limited to matters intrinsically connected with the
regulation of corporations, partnerships and associations and those dealing with
internal affairs of such entities; P.D. 902-A does not confer jurisdiction to SEC over all
matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990]; Sales vs.
SEC, 169 SCRA 121 [1989]).
The jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the
controversy in the election of the directors and officers of Natelco. Thus, the SEC was
correct when it refused to rule on whether the issuance of the shares of Natelco
stocks to CSI violated Sec. 20 (h) of the Public Service Act.
The SEC ruling as to the issue involving the Public Service Act, Section 20 (h),
asserts that the Commission En Banc is not empowered to grant much less cancel
franchise for telephone and communications, and therefore has no authority to rule
that the issuance and sale of shares would in effect constitute a violation of Natelco's
secondary franchise. It would be in excess of jurisdiction on our part to decide that a
violation of our public service laws has been committed. The matter is better brought
to the attention of the appropriate body for determination. Neither can the SEC
provisionally decide the issue because it is only vested with the power to grant or
revoke the primary corporate franchise. The SEC is empowered by P.D. 902-A to
decide intra-corporate controversies and that is precisely the only issue in this case.
II

The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of
SEC Case No. 1748 in the Securities and Exchange Commission was valid. The
findings of the SEC En Banc as to the issuance of the 113,800 shares of stock was
stated as follows:
But the issuance of 113,800 shares were (sic) pursuant to a Board
Resolution and stockholders' approval prior to May 19, 1979 when
CSI was not yet in control of the Board or of the voting shares.
There is distinction between an order to issue shares on or before
May 19, 1979 and actual issuance of the shares after May 19,
1979. The actual issuance, it is true, came during the period when
CSI was in control of voting shares and the Board (if they were in
fact in control but only pursuant to the original Board and
stockholders' orders, not on the initiative to the new Board, elected
May 19, 1979, which petitioners are questioning. The Commission
en banc finds it difficult to see how the one who gave the orders
can turn around and impugn the implementation of the orders lie
had previously given. The reformation of the contract is
understandable for Natelco lacked the corporate funds to purchase
the CSI equipment.

pre-emption over the unissued shares. However, the general rule is

that pre-emptive right is recognized only with respect to new issues
of shares, and not with respect to additional issues of originally
authorized shares. This is on the theory that when a corporation at
its inception offers its first shares, it is presumed to have offered all
of those which it is authorized to issue. An original subscriber is
deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares. When
the shares left unsubscribed are later re-offered, he cannot
therefore (sic) claim a dilution of interest (Benito vs. SEC, et al.,
123 SCRA 722).
The questioned issuance of the 113,800 stocks is not invalid even assuming that it
was made without notice to the stockholders as claimed by the petitioner. The power
to issue shares of stocks in a corporation is lodged in the board of directors and no
stockholders meeting is required to consider it because additional issuance of shares
of stocks does not need approval of the stockholders. Consequently, no pre-emptive
right of Natelco stockholders was violated by the issuance of the 113,800 shares to
CSI.
IV

xxx xxx xxx

Appellant had raise the issue whether the issuance of 113,800
shares of stock during the incumbency of the Maggay Board which
was allegedly CSI controlled, and while the case was sub judice,
amounted to unfair and undue advantage. This does not merit
consideration in the absence of additional evidence to support the
proposition.
In effect, therefore, the stockholders of Natelco approved the issuance of stock to CSI
III
While the group of Luciano Maggay was in control of Natelco by virtue of the
restraining order issued in G.R. No. 50885, the Maggay Board issued 113,800 shares
of stock to CSI Petitioner said that the Maggay Board, in issuing said shares without
notifying Natelco stockholders, violated their right of pre-emption to the unissued
shares.
This Court in Benito vs. SEC, et al., has ruled that:
Petitioner bewails the fact that in view of the lack of notice to him of
such subsequent issuance, he was not able to exercise his right of

Petitioner insists that no meeting and election were held in Naga City on May 22,
1982 as directed by respondent Hearing Officer. This fact is shown by the Sheriffs
return of a restraining order issued by the Court of First Instance of Camarines Sur in
Case No. 1505 entitled "Antonio Villasenor v. Communications Service Inc, et al."
(Rollo, Vol. 1, p. 309).
There is evidence of the fact that the Natelco special stockholders' meeting and
election of members of the Board of Directors of the corporation were held at its office
in Naga City on May 22, 1982 as shown when the Hearing Officer issued an order on
May 25, 1982, declaring the stockholders named therein as corporate officers duly
elected for the term 1982-1983.
More than that, private respondents were in fact charged with contempt of court and
found guilty for holding the election on May 22, 1982, in defiance of the restraining
order issued by Judge Sunga (Rollo, Vol. II, p. 750).
It is, therefore, very clear from the records that an election was held on May 22, 1982
at the Natelco Offices in Naga City and its officers were duly elected, thereby
rendering the issue of election moot and academic, not to mention the fact that the
election of the Board of Directors/Officers has been held annually, while this case was
dragging for almost a decade.

The contempt charge against herein private respondents was predicated on their
failure to comply with the restraining order issued by the lower court on May 21, 1982,
enjoining them from holding the election of officers and directors of Natelco scheduled
on May 22, 1982. The SEC en banc, in its decision of April 5, 1982, directed the
holding of a new election which, through a conference attended by the hold-over
directors of Natelco accompanied by their lawyers and presided by a SEC hearing
officer, was scheduled on May 22, 1982 (Rollo, p. 59). Contrary to the claim of
petitioners that the case is within the jurisdiction of the lower court as it does not
involve an intra-corporate matter but merely a claim of a private party of the right to
repurchase common shares of stock of Natelco and that the restraining order was not
meant to stop the election duly called for by the SEC, it is undisputed that the main
objective of the lower court's order of May 21, 1982 was precisely to restrain or stop
the holding of said election of officers and directors of Natelco, a matter purely within
the exclusive jurisdiction of the SEC (P.D. No. 902-A, Section 5). The said restraining
order reads in part:
. . . A temporary restraining order is hereby issued, directing
defendants (herein respondents), their agents, attorneys as well as
any and all persons, whether public officers or private individuals to
desist from conducting and holding, in any manner whatsoever, an
election of the directors and officers of the Naga Telephone Co.
(Natelco). . . . (Rollo, P. 32).
Indubitably, the aforesaid restraining order, aimed not only to prevent the stockholders
of Natelco from conducting the election of its directors and officers, but it also
amounted to an injunctive relief against the SEC, since it is clear that even "public
officers" (such as the Hearing Officer of the SEC) are commanded to desist from
conducting or holding the election "under pain of punishment of contempt of court"
(Ibid.) The fact that the SEC or any of its officers has not been cited for contempt,
along with the stockholders of Natelco, who chose to heed the lawful order of the
SEC to go on with the election as scheduled by the latter, is of no moment, since it
was precisely the acts of herein private respondents done pursuant to an order
lawfully issued by an administrative body that have been considered as
contemptuous by the lower court prompting the latter to cite and punish them for
contempt (Rollo, p. 48).

Finally, in the case of Philippine Pacific Fishing Co., Inc. vs. Luna, 12 SCRA 604, 613
[1983], this Tribunal stated clearly the following rule:
Nowhere does the law (P.D. No. 902-A) empower any Court of First
Instance to interfere with the orders of the Commission (SEC). Not
even on grounds of due process or jurisdiction. The Commission is,
conceding arguendo a possible claim of respondents, at the very
least, a co-equal body with the Courts of First Instance. Even as
such co-equal, one would have no power to control the other. But
the truth of the matter is that only the Supreme Court can enjoin
and correct any actuation of the Commission.
Accordingly, it is clear that since the trial judge in the lower court (CFI of Camarines
Sur) did not have jurisdiction in issuing the questioned restraining order, disobedience
thereto did not constitute contempt, as it is necessary that the order be a valid and
legal one. It is an established rule that the court has no authority to punish for
disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil. 356;
Angel Jose Realty Corp. v. Galao, et al., 76 Phil. 201).
Finally, it is well-settled that the power to punish for contempt of court should be
exercised on the preservative and not on the vindictive principle. Only occasionally
should the court invoke its inherent power in order to retain that respect without which
the administration of justice must falter or fail (Rivera v. Florendo, 144 SCRA 643,
662-663 [1986]; Lipata v. Tutaan, 124 SCRA 880 [1983]).
PREMISES CONSIDERED, both petitioners are hereby DISMISSED for lack of merit.
SO ORDERED.
Republic
SUPREME
Manila

of

the

Philippines
COURT

EN BANC
G.R. No. L-21601

December 17, 1966

Noteworthy is the pertinent portion of the judgment of the lower court which states:
Certainly, this Court will not tolerate, or much less countenance, a
mere Hearing Officer of the Securities and Exchange Commission,
to render a restraining order issued by it (said Court) within its
jurisdiction, nugatory and ineffectual and abet disobedience and
even defiance by individuals and entities of the same. . . . (Rollo, p.
48).

NIELSON
&
COMPANY,
INC.,
plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
W.
H.
Quasha
and
Associates
for
plaintiff-appellant.
Ponce Enrile, Siguion-Reyna, Montecillo and Belo for defendant-appellee.
ZALDIVAR, J.:

On February 6, 1958, plaintiff brought this action against defendant before the Court
of First Instance of Manila to recover certain sums of money representing damages
allegedly suffered by the former in view of the refusal of the latter to comply with the
terms of a management contract entered into between them on January 30, 1937,
including attorney's fees and costs.
Defendant in its answer denied the material allegations of the complaint and set up
certain special defenses, among them, prescription and laches, as bars against the
institution of the present action.
After trial, during which the parties presented testimonial and numerous documentary
evidence, the court a quo rendered a decision dismissing the complaint with costs.
The court stated that it did not find sufficient evidence to establish defendant's
counterclaim and so it likewise dismissed the same.
The present appeal was taken to this Court directly by the plaintiff in view of the
amount involved in the case.
The facts of this case, as stated in the decision appealed from, are hereunder quoted
for purposes of this decision:
It appears that the suit involves an operating agreement executed
before World War II between the plaintiff and the defendant
whereby the former operated and managed the mining properties
owned by the latter for a management fee of P2,500.00 a month
and a 10% participation in the net profits resulting from the
operation of the mining properties. For brevity and convenience,
hereafter the plaintiff shall be referred to as NIELSON and the
defendant, LEPANTO.
The antecedents of the case are: The contract in question (Exhibit
`C') was made by the parties on January 30, 1937 for a period of
five (5) years. In the latter part of 1941, the parties agreed to renew
the contract for another period of five (5) years, but in the
meantime, the Pacific War broke out in December, 1941.
In January, 1942 operation of the mining properties was disrupted
on account of the war. In February of 1942, the mill, power plant,
supplies on hand, equipment, concentrates on hand and mines,
were destroyed upon orders of the United States Army, to prevent
their utilization by the invading Japanese Army. The Japanese
forces thereafter occupied the mining properties, operated the
mines during the continuance of the war, and who were ousted
from the mining properties only in August of 1945.
After the mining properties were liberated from the Japanese
forces, LEPANTO took possession thereof and embarked in
rebuilding and reconstructing the mines and mill; setting up new
organization; clearing the mill site; repairing the mines; erecting
staff quarters and bodegas and repairing existing structures;

installing new machinery and equipment; repairing roads and

maintaining the same; salvaging equipment and storing the same
within the bodegas; doing police work necessary to take care of the
materials and equipment recovered; repairing and renewing the
water system; and remembering (Exhibits "D" and "E"). The
rehabilitation and reconstruction of the mine and mill was not
completed until 1948 (Exhibit "F"). On June 26, 1948 the mines
resumed operation under the exclusive management of LEPANTO
(Exhibit "F-l").
Shortly after the mines were liberated from the Japanese invaders
in 1945, a disagreement arose between NIELSON and LEPANTO
over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the
management contract shall remain in suspense in case fortuitous
event or force majeure, such as war or civil commotion, adversely
affects the work of mining and milling.
"In the event of inundations, floodings of mine, typhoon,
earthquake or any other force majeure, war, insurrection,
civil commotion, organized strike, riot, injury to the
machinery or other event or cause reasonably beyond the
control of NIELSON and which adversely affects the work
of mining and milling; NIELSON shall report such fact to
LEPANTO and without liability or breach of the terms of
this Agreement, the same shall remain in suspense, wholly
or partially during the terms of such inability." (Clause II of
Exhibit "C").
NIELSON held the view that, on account of the war, the contract
was suspended during the war; hence the life of the contract should
be considered extended for such time of the period of suspension.
On the other hand, LEPANTO contended that the contract should
expire in 1947 as originally agreed upon because the period of
suspension accorded by virtue of the war did not operate to extend
further the life of the contract.
No understanding appeared from the record to have been bad by
the parties to resolve the disagreement. In the meantime,
LEPANTO rebuilt and reconstructed the mines and was able to
bring the property into operation only in June of 1948, . . . .
Appellant in its brief makes an alternative assignment of errors depending on whether
or not the management contract basis of the action has been extended for a period
equivalent to the period of suspension. If the agreement is suspended our attention
should be focused on the first set of errors claimed to have been committed by the
court a quo; but if the contrary is true, the discussion will then be switched to the
alternative set that is claimed to have been committed. We will first take up the
question whether the management agreement has been extended as a result of the
supervening war, and after this question shall have been determined in the sense

sustained by appellant, then the discussion of the defense of laches and prescription
will follow as a consequence.
The pertinent portion of the management contract (Exh. C) which refers to
suspension should any event constituting force majeure happen appears in Clause II
thereof which we quote hereunder:
In the event of inundations, floodings of the mine, typhoon,
earthquake or any other force majeure, war, insurrection, civil
commotion, organized strike, riot, injury to the machinery or other
event or cause reasonably beyond the control of NIELSON and
which adversely affects the work of mining and milling; NIELSON
shall report such fact to LEPANTO and without liability or breach of
the terms of this Agreement, the same shall remain in suspense,
wholly or partially during the terms of such inability.
A careful scrutiny of the clause above-quoted will at once reveal that in order that the
management contract may be deemed suspended two events must take place which
must be brought in a satisfactory manner to the attention of defendant within a
reasonable time, to wit: (1) the event constituting the force majeure must be
reasonably beyond the control of Nielson, and (2) it must adversely affect the work of
mining and milling the company is called upon to undertake. As long as these two
condition exist the agreement is deem suspended.
Does the evidence on record show that these two conditions had existed which may
justify the conclusion that the management agreement had been suspended in the
sense entertained by appellant? Let us go to the evidence.
It is a matter that this Court can take judicial notice of that war supervened in our
country and that the mines in the Philippines were either destroyed or taken over by
the occupation forces with a view to their operation. The Lepanto mines were no
exception for not was the mine itself destroyed but the mill, power plant, supplies on
hand, equipment and the like that were being used there were destroyed as well.
Thus, the following is what appears in the Lepanto Company Mining Report dated
March 13, 1946 submitted by its President C. A. DeWitt to the defendant: 1 "In
February of 1942, our mill, power plant, supplies on hand, equipment, concentrates
on hand, and mine, were destroyed upon orders of the U.S. Army to prevent their
utilization by the enemy." The report also mentions the report submitted by Mr.
Blessing, an official of Nielson, that "the original mill was destroyed in 1942" and "the
original power plant and all the installed equipment were destroyed in 1942." It is then
undeniable that beginning February, 1942 the operation of the Lepanto mines
stopped or became suspended as a result of the destruction of the mill, power plant
and other important equipment necessary for such operation in view of a cause which
was clearly beyond the control of Nielson and that as a consequence such
destruction adversely affected the work of mining and milling which the latter was
called upon to undertake under the management contract. Consequently, by virtue of
the very terms of said contract the same may be deemed suspended from February,
1942 and as of that month the contract still had 60 months to go.
On the other hand, the record shows that the defendant admitted that the occupation
forces operated its mining properties subject of the management contract, 2 and from

the very report submitted by President DeWitt it appears that the date of the liberation
of the mine was August 1, 1945 although at the time there were still many booby
traps.3 Similarly, in a report submitted by the defendant to its stockholders dated
August 25, 1948, the following appears: "Your Directors take pleasure in reporting
that June 26, 1948 marked the official return to operations of this Company of its
properties in Mankayan, Mountain Province, Philippines."4
It is, therefore, clear from the foregoing that the Lepanto mines were liberated on
August 1, 1945, but because of the period of rehabilitation and reconstruction that
had to be made as a result of the destruction of the mill, power plant and other
necessary equipment for its operation it cannot be said that the suspension of the
contract ended on that date. Hence, the contract must still be deemed suspended
during the succeeding years of reconstruction and rehabilitation, and this period can
only be said to have ended on June 26, 1948 when, as reported by the defendant, the
company officially resumed the mining operations of the Lepanto. It should here be
stated that this period of suspension from February, 1942 to June 26, 1948 is the one
urged by plaintiff.5
It having been shown that the operation of the Lepanto mines on the part of Nielson
had been suspended during the period set out above within the purview of the
management contract, the next question that needs to be determined is the effect of
such suspension. Stated in another way, the question now to be determined is
whether such suspension had the effect of extending the period of the management
contract for the period of said suspension. To elucidate this matter, we again need to
resort to the evidence.
For appellant Nielson two witnesses testified, declaring that the suspension had the
effect of extending the period of the contract, namely, George T. Scholey and Mark
Nestle. Scholey was a mining engineer since 1929, an incorporator, general manager
and director of Nielson and Company; and for some time he was also the vicepresident and director of the Lepanto Company during the pre-war days and, as such,
he was an officer of both appellant and appellee companies. As vice-president of
Lepanto and general manager of Nielson, Scholey participated in the negotiation of
the management contract to the extent that he initialed the same both as witness and
as an officer of both corporations. This witness testified in this case to the effect that
the standard force majeure clause embodied in the management contract was taken
from similar mining contracts regarding mining operations and the understanding
regarding the nature and effect of said clause was that when there is suspension of
the operation that suspension meant the extension of the contract. Thus, to the
question, "Before the war, what was the understanding of the people in the particular
trend of business with respect to the force majeure clause?", Scholey answered:
"That was our understanding that the suspension meant the extension of time lost."6
Mark Nestle, the other witness, testified along similar line. He had been connected
with Nielson since 1937 until the time he took the witness stand and had been a
director, manager, and president of the same company. When he was propounded
the question: "Do you know what was the custom or usage at that time in connection
with force majeure clause?", Nestle answered, "In the mining world the force majeure
clause is generally considered. When a calamity comes up and stops the work like in
war, flood, inundation or fire, etc., the work is suspended for the duration of the
calamity, and the period of the contract is extended after the calamity is over to

enable the person to do the big work or recover his money which he has invested, or
accomplish what his obligation is to a third person ."7

as a rule, is supposed to contain all the terms and conditions by which the parties
intended to be bound.

And the above testimonial evidence finds support in the very minutes of the special
meeting of the Board of Directors of the Lepanto Company issued on March 10, 1945
which was then chairmaned by Atty. C. A. DeWitt. We read the following from said
report:

It is here necessary to analyze the contradictory evidence which the parties have
presented regarding the interpretation of the force majeure clause in the management
contract.

The Chairman also stated that the contract with Nielson and
Company would soon expire if the obligations were not suspended,
in which case we should have to pay them the retaining fee of
P2,500.00 a month. He believes however, that there is a provision
in the contract suspending the effects thereof in cases like the
present, and that even if it were not there, the law itself would
suspend the operations of the contract on account of the war.
Anyhow, he stated, we shall have no difficulty in solving
satisfactorily any problem we may have with Nielson and
Company.8
Thus, we can see from the above that even in the opinion of Mr. DeWitt himself, who
at the time was the chairman of the Board of Directors of the Lepanto Company, the
management contract would then expire unless the period therein rated is suspended
but that, however, he expressed the belief that the period was extended because of
the provision contained therein suspending the effects thereof should any of the case
of force majeure happen like in the present case, and that even if such provision did
not exist the law would have the effect of suspending it on account of the war. In
substance, Atty. DeWitt expressed the opinion that as a result of the suspension of
the mining operation because of the effects of the war the period of the contract had
been extended.
Contrary to what appellant's evidence reflects insofar as the interpretation of the force
majeure clause is concerned, however, appellee gives Us an opposite interpretation
invoking in support thereof not only a letter Atty. DeWitt sent to Nielson on October
20, 1945,9 wherein he expressed for the first time an opinion contrary to what he
reported to the Board of Directors of Lepanto Company as stated in the portion of the
minutes of its Board of Directors as quoted above, but also the ruling laid down by our
Supreme Court in some cases decided sometime ago, to the effect that the war does
not have the effect of extending the term of a contract that the parties may enter into
regarding a particular transaction, citing in this connection the cases of Victorias
Planters Association v. Victorias Milling Company, 51 O.G. 4010; Rosario S. Vda. de
Lacson, et al. v. Abelardo G. Diaz, 87 Phil. 150; and Lo Ching y So Young Chong Co.
v. Court of Appeals, et al., 81 Phil. 601.
To bolster up its theory, appellee also contends that the evidence regarding the
alleged custom or usage in mining contract that appellant's witnesses tried to
introduce was incompetent because (a) said custom was not specifically pleaded; (b)
Lepanto made timely and repeated objections to the introduction of said evidence; (c)
Nielson failed to show the essential elements of usage which must be shown to exist
before any proof thereof can be given to affect the contract; and (d) the testimony of
its witnesses cannot prevail over the very terms of the management contract which,

At the outset, it should be stated that, as a rule, in the construction and interpretation
of a document the intention of the parties must be sought (Rule 130, Section 10,
Rules of Court). This is the basic rule in the interpretation of contracts because all
other rules are but ancilliary to the ascertainment of the meaning intended by the
parties. And once this intention has been ascertained it becomes an integral part of
the contract as though it had been originally expressed therein in unequivocal terms
(Shoreline Oil Corp. v. Guy, App. 189, So., 348, cited in 17A C.J.S., p. 47). How is this
intention determined?
One pattern is to ascertain the contemporaneous and subsequent acts of the
contracting parties in relation to the transaction under consideration (Article 1371,
Civil Code). In this particular case, it is worthy of note what Atty. C. A. DeWitt has
stated in the special meeting of the Board of Directors of Lepanto in the portion of the
minutes already quoted above wherein, as already stated, he expressed the opinion
that the life of the contract, if not extended, would last only until January, 1947 and yet
he said that there is a provision in the contract that the war had the effect of
suspending the agreement and that the effect of that suspension was that the
agreement would have to continue with the result that Lepanto would have to pay the
monthly retaining fee of P2,500.00. And this belief that the war suspended the
agreement and that the suspension meant its extension was so firm that he went to
the extent that even if there was no provision for suspension in the agreement the law
itself would suspend it.
It is true that Mr. DeWitt later sent a letter to Nielson dated October 20, 1945 wherein
apparently he changed his mind because there he stated that the contract was merely
suspended, but not extended, by reason of the war, contrary to the opinion he
expressed in the meeting of the Board of Directors already adverted to, but between
the two opinions of Atty. DeWitt We are inclined to give more weight and validity to the
former not only because such was given by him against his own interest but also
because it was given before the Board of Directors of Lepanto and in the presence, of
some Nielson officials 10 who, on that occasion were naturally led to believe that that
was the true meaning of the suspension clause, while the second opinion was merely
self-serving and was given as a mere afterthought.
Appellee also claims that the issue of true intent of the parties was not brought out in
the complaint, but anent this matter suffice it to state that in paragraph No. 19 of the
complaint appellant pleaded that the contract was extended. 11 This is a sufficient
allegation considering that the rules on pleadings must as a rule be liberally
construed.
It is likewise noteworthy that in this issue of the intention of the parties regarding the
meaning and usage concerning the force majeure clause, the testimony adduced by
appellant is uncontradicted. If such were not true, appellee should have at least

attempted to offer contradictory evidence. This it did not do. Not even Lepanto's
President, Mr. V. E. Lednicky who took the witness stand, contradicted said evidence.
In holding that the suspension of the agreement meant the extension of the same for
a period equivalent to the suspension, We do not have the least intention of
overruling the cases cited by appellee. We simply want to say that the ruling laid
down in said cases does not apply here because the material facts involved therein
are not the same as those obtaining in the present. The rule of stare decisis cannot
be invoked where there is no analogy between the material facts of the decision relied
upon and those of the instant case.
Thus, in Victorias Planters Association vs. Victorias Milling Company, 51 O.G. 4010,
there was no evidence at all regarding the intention of the parties to extend the
contract equivalent to the period of suspension caused by the war. Neither was there
evidence that the parties understood the suspension to mean extension; nor was
there evidence of usage and custom in the industry that the suspension meant the
extension of the agreement. All these matters, however, obtain in the instant case.
Again, in the case of Rosario S. Vda. de Lacson vs. Abelardo G. Diaz, 87 Phil. 150,
the issue referred to the interpretation of a pre-war contract of lease of sugar cane
lands and the liability of the lessee to pay rent during and immediately following the
Japanese occupation and where the defendant claimed the right of an extension of
the lease to make up for the time when no cane was planted. This Court, in holding
that the years which the lessee could not use the land because of the war could not
be discounted from the period agreed upon, held that "Nowhere is there any
insinuation that the defendant-lessee was to have possession of lands for seven
years excluding years on which he could not harvest sugar." Clearly, this ratio
decidendi is not applicable to the case at bar wherein there is evidence that the
parties understood the "suspension clause by force majeure" to mean the extension
of the period of agreement.
Lastly, in the case of Lo Ching y So Young Chong Co. vs. Court of Appeals, et al., 81
Phil. 601, appellant leased a building from appellee beginning September 13, 1940
for three years, renewable for two years. The lessee's possession was interrupted in
February, 1942 when he was ousted by the Japanese who turned the same over to
German Otto Schulze, the latter occupying the same until January, 1945 upon the
arrival of the liberation forces. Appellant contended that the period during which he
did not enjoy the leased premises because of his dispossession by the Japanese had
to be deducted from the period of the lease, but this was overruled by this Court,
reasoning that such dispossession was merely a simple "perturbacion de merohecho
y de la cual no responde el arrendador" under Article 1560 of the old Civil Code Art.
1664). This ruling is also not applicable in the instant case because in that case there
was no evidence of the intention of the parties that any suspension of the lease by
force majeure would be understood to extend the period of the agreement.
In resume, there is sufficient justification for Us to conclude that the cases cited by
appellee are inapplicable because the facts therein involved do not run parallel to
those obtaining in the present case.
We shall now consider appellee's defense of laches. Appellee is correct in its
contention that the defense of laches applies independently of prescription. Laches is

different from the statute of limitations. Prescription is concerned with the fact of
delay, whereas laches is concerned with the effect of delay. Prescription is a matter of
time; laches is principally a question of inequity of permitting a claim to be enforced,
this inequity being founded on some change in the condition of the property or the
relation of the parties. Prescription is statutory; laches is not. Laches applies in equity,
whereas prescription applies at law. Prescription is based on fixed time, laches is not.
(30 C.J.S., p. 522; See also Pomeroy's Equity Jurisprudence, Vol. 2, 5th ed., p. 177).
The question to determine is whether appellant Nielson is guilty of laches within the
meaning contemplated by the authorities on the matter. In the leading case of Go Chi
Gun, et al. vs. Go Cho, et al., 96 Phil. 622, this Court enumerated the essential
elements of laches as follows:
(1) conduct on the part of the defendant, or of one under whom he
claims, giving rise to the situation of which complaint is made and
for which the complaint seeks a remedy; (2) delay in asserting the
complainant's rights, the complainant having had knowledge or
notice of the defendant's conduct and having been afforded an
opportunity to institute a suit; (3) lack of knowledge or notice on the
part of the defendant that the complainant would assert the right on
which he bases his suit; and (4) injury or prejudice to the defendant
in the event relief is accorded to the complainant, or the suit is not
held barred.
Are these requisites present in the case at bar?
The first element is conceded by appellant Nielson when it claimed that defendant
refused to pay its management fees, its percentage of profits and refused to allow it to
resume the management operation.
Anent the second element, while it is true that appellant Nielson knew since 1945 that
appellee Lepanto has refused to permit it to resume management and that since 1948
appellee has resumed operation of the mines and it filed its complaint only on
February 6, 1958, there being apparent delay in filing the present action, We find the
delay justified and as such cannot constitute laches. It appears that appellant had not
abandoned its right to operate the mines for even before the termination of the
suspension of the agreement as early as January 20, 1946 12 and even before March
10, 1945, it already claimed its right to the extension of the contract, 13 and it pressed
its claim for the balance of its share in the profits from the 1941 operation 14 by reason
of which negotiations had taken place for the settlement of the claim 15 and it was only
on June 25, 1957 that appellee finally denied the claim. There is, therefore, only a
period of less than one year that had elapsed from the date of the final denial of the
claim to the date of the filing of the complaint, which certainly cannot be considered
as unreasonable delay.
The third element of laches is absent in this case. It cannot be said that appellee
Lepanto did not know that appellant would assert its rights on which it based suit. The
evidence shows that Nielson had been claiming for some time its rights under the
contract, as already shown above.

Neither is the fourth element present, for if there has been some delay in bringing the
case to court it was mainly due to the attempts at arbitration and negotiation made by
both parties. If Lepanto's documents were lost, it was not caused by the delay of the
filing of the suit but because of the war.

Lepanto claims that this new basis of computation should be rejected (1) because the
contract was clear on the point of the 10% share and it was so alleged by Nielson in
its complaint, and (2) the minutes of the special meeting held on August 21, 1940 was
not signed.

Another reason why appellant Nielson cannot be held guilty of laches is that the delay
in the filing of the complaint in the present case was the inevitable of the protracted
negotiations between the parties concerning the settlement of their differences. It
appears that Nielson asked for arbitration16 which was granted. A committee
consisting of Messrs. DeWitt, Farnell and Blessing was appointed to act on said
differences but Mr. DeWitt always tried to evade the issue 17 until he was taken ill and
died. Mr. Farnell offered to Nielson the sum of P13,000.58 by way of compromise of
all its claim arising from the management contract18 but apparently the offer was
refused. Negotiations continued with the exchange of letters between the parties but
with no satisfactory result.19 It can be said that the delay due to protracted
negotiations was caused by both parties. Lepanto, therefore, cannot be permitted to
take advantage of such delay or to question the propriety of the action taken by
Nielson. The defense of laches is an equitable one and equity should be applied with
an even hand. A person will not be permitted to take advantage of, or to question the
validity, or propriety of, any act or omission of another which was committed or
omitted upon his own request or was caused by his conduct (R. H. Stearns Co. vs.
United States, 291 U.S. 54, 78 L. Ed. 647, 54 S. Ct., 325; United States vs. Henry
Prentiss & Co., 288 U.S. 73, 77 L. Ed., 626, 53 S. Ct., 283).

It appearing that the issue concerning the sharing of the profits had been raised in
appellant's complaint and evidence on the matter was introduced 23 the same can be
taken into account even if no amendment of the pleading to make it conform to the
evidence has been made, for the same is authorized by Section 4, Rule 17, of the old
Rules of Court (now Section 5, Rule 10, of the new Rules of Court).

Had the action of Nielson prescribed? The court a quo held that the action of Nielson
is already barred by the statute of limitations, and that ruling is now assailed by the
appellant in this appeal. In urging that the court a quo erred in reaching that
conclusion the appellant has discussed the issue with reference to particular claims.
The first claim is with regard to the 10% share in profits of 1941 operations. Inasmuch
as appellee Lepanto alleges that the correct basis of the computation of the sharing in
the net profits shall be as provided for in Clause V of the Management Contract, while
appellant Nielson maintains that the basis should be what is contained in the minutes
of the special meeting of the Board of Directors of Lepanto on August 21, 1940, this
question must first be elucidated before the main issue is discussed.
The facts relative to the matter of profit sharing follow: In the management contract
entered into between the parties on January 30, 1937, which was renewed for
another five years, it was stipulated that Nielson would receive a compensation of
P2,500.00 a month plus 10% of the net profits from the operation of the properties for
the preceding month. In 1940, a dispute arose regarding the computation of the 10%
share of Nielson in the profits. The Board of Directors of Lepanto, realizing that the
mechanics of the contract was unfair to Nielson, authorized its President to enter into
an agreement with Nielson modifying the pertinent provision of the contract effective
January 1, 1940 in such a way that Nielson shall receive (1) 10% of the dividends
declared and paid, when and as paid, during the period of the contract and at the end
of each year, (2) 10% of any depletion reserve that may be set up, and (3) 10% of any
amount expended during the year out of surplus earnings for capital account. 20
Counsel for the appellee admitted during the trial that the extract of the minutes as
found in Exhibit B is a faithful copy from the original. 21 Mr. George Scholey testified
that the foregoing modification was agreed upon. 22

Coming now to the question of prescription raised by defendant Lepanto, it is

contended by the latter that the period to be considered for the prescription of the
claim regarding participation in the profits is only four years, because the modification
of the sharing embodied in the management contract is merely verbal, no written
document to that effect having been presented. This contention is untenable. The
modification appears in the minutes of the special meeting of the Board of Directors of
Lepanto held on August 21, 1940, it having been made upon the authority of its
President, and in said minutes the terms of the modification had been specified. This
is sufficient to have the agreement considered, for the purpose of applying the statute
of limitations, as a written contract even if the minutes were not signed by the parties
(3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a contract
if adopted by two persons may constitute a contract in writing even if the same is not
signed by either of the parties (3 A.L.R., 2d, pp. 812-813). Another authority says that
an unsigned agreement the terms of which are embodied in a document
unconditionally accepted by both parties is a written contract (Corbin on Contracts,
Vol. 1, p. 85)
The modification, therefore, made in the management contract relative to the
participation in the profits by appellant, as contained in the minutes of the special
meeting of the Board of Directors of Lepanto held on August 21, 1940, should be
considered as a written contract insofar as the application of the statutes of limitations
is concerned. Hence, the action thereon prescribes within ten (10) years pursuant to
Section 43 of Act 190.
Coming now to the facts, We find that the right of Nielson to its 10% participation in
the 1941 operations accrued on December 21, 1941 and the right to commence an
action thereon began on January 1, 1942 so that the action must be brought within
ten (10) years from the latter date. It is true that the complaint was filed only on
February 6, 1958, that is sixteen (16) years, one (1) month and five (5) days after the
right of action accrued, but the action has not yet prescribed for various reasons
which We will hereafter discuss.
The first reason is the operation of the Moratorium Law, for appellant's claim is
undeniably a claim for money. Said claim accrued on December 31, 1941, and
Lepanto is a war sufferer. Hence the claim was covered by Executive Order No. 32 of
March 10, 1945. It is well settled that the operation of the Moratorium Law suspends
the running of the statue of limitations (Pacific Commercial Co. vs. Aquino, G.R. No.
L-10274, February 27, 1957).

This Court has held that the Moratorium Law had been enforced for eight (8) years,
two (2) months and eight (8) days (Tioseco vs. Day, et al., L-9944, April 30, 1957;
Levy Hermanos, Inc. vs. Perez, L-14487, April 29, 1960), and deducting this period
from the time that had elapsed since the accrual of the right of action to the date of
the filing of the complaint, the extent of which is sixteen (16) years, one (1) month and
five (5) days, we would have less than eight (8) years to be counted for purposes of
prescription. Hence appellant's action on its claim of 10% on the 1941 profits had not
yet prescribed.
Another reason that may be taken into account in support of the no-bar theory of
appellant is the arbitration clause embodied in the management contract which
requires that any disagreement as to any amount of profits before an action may be
taken to court shall be subject to arbitration. 24 This agreement to arbitrate is valid and
binding. 25 It cannot be ignored by Lepanto. Hence Nielson could not bring an action
on its participation in the 1941 operations-profits until the condition relative to
arbitration had been first complied with. 26 The evidence shows that an arbitration
committee was constituted but it failed to accomplish its purpose on June 25, 1957. 27
From this date to the filing of the complaint the required period for prescription has not
yet elapsed.
Nielson claims the following: (1) 10% share in the dividends declared in 1941,
exclusive of interest, amounting to P17,500.00; (2) 10% in the depletion reserves for
1941; and (3) 10% in the profits for years prior to 1948 amounting to P19,764.70.
With regard to the first claim, the Lepanto's report for the calendar year of 1954 28
shows that it declared a 10% cash dividend in December, 1941, the amount of which
is P175,000.00. The evidence in this connection (Exhibits L and O) was admitted
without objection by counsel for Lepanto. 29 Nielson claims 10% share in said amount
with interest thereon at 6% per annum. The document (Exhibit L) was even
recognized by Lepanto's President V. L. Lednicky, 30 and this claim is predicated on
the provision of paragraph V of the management contract as modified pursuant to the
proposal of Lepanto at the special meeting of the Board of Directors on August 21,
1940 (Exh. B), whereby it was provided that Nielson would be entitled to 10% of any
dividends to be declared and paid during the period of the contract.
With regard to the second claim, Nielson admits that there is no evidence regarding
the amount set aside by Lepanto for depletion reserve for 1941 31 and so the 10%
participation claimed thereon cannot be assessed.
Anent the third claim relative to the 10% participation of Nielson on the sum of
P197,647.08, which appears in Lepanto's annual report for 1948 32 and entered as
profit for prior years in the statement of income and surplus, which amount consisted
"almost in its entirety of proceeds of copper concentrates shipped to the United
States during 1947," this claim should to denied because the amount is not "dividend
declared and paid" within the purview of the management contract.
The fifth assignment of error of appellant refers to the failure of the lower court to
order Lepanto to pay its management fees for January, 1942, and for the full period of
extension amounting to P150,000.00, or P2,500.00 a month for sixty (60) months,
a total of P152,500.00 with interest thereon from the date of judicial demand.

It is true that the claim of management fee for January, 1942 was not among the
causes of action in the complaint, but inasmuch as the contract was suspended in
February, 1942 and the management fees asked for included that of January, 1942,
the fact that such claim was not included in a specific manner in the complaint is of no
moment because an appellate court may treat the pleading as amended to conform to
the evidence where the facts show that the plaintiff is entitled to relief other than what
is asked for in the complaint (Alonzo vs. Villamor, 16 Phil. 315). The evidence shows
that the last payment made by Lepanto for management fee was for November and
December, 1941. 33 If, as We have declared, the management contract was
suspended beginning February 1942, it follows that Nielson is entitled to the
management fee for January, 1942.
Let us now come to the management fees claimed by Nielson for the period of
extension. In this respect, it has been shown that the management contract was
extended from June 27, 1948 to June 26, 1953, or for a period of sixty (60) months.
During this period Nielson had a right to continue in the management of the mining
properties of Lepanto and Lepanto was under obligation to let Nielson do it and to pay
the corresponding management fees. Appellant Nielson insisted in performing its part
of the contract but Lepanto prevented it from doing so. Hence, by virtue of Article
1186 of the Civil Code, there was a constructive fulfillment an the part of Nielson of its
obligation to manage said mining properties in accordance with the contract and
Lepanto had the reciprocal obligation to pay the corresponding management fees and
other benefits that would have accrued to Nielson if Lepanto allowed it (Nielson) to
continue in the management of the mines during the extended period of five (5) years.
We find that the preponderance of evidence is to the effect that Nielson had insisted
in managing the mining properties soon after liberation. In the report 34 of Lepanto,
submitted to its stockholders for the period from 1941 to March 13, 1946, are stated
the activities of Nielson's officials in relation to Nielson's insistence in continuing the
management. This report was admitted in evidence without objection. We find the
following in the report:
Mr. Blessing, in May, 1945, accompanied Clark and Stanford to San Fernando (La
Union) to await the liberation of the mines. (Mr. Blessing was the Treasurer and
Metallurgist of Nielson). Blessing with Clark and Stanford went to the property on July
16 and found that while the mill site had been cleared of the enemy the latter was still
holding the area around the staff houses and putting up a strong defense. As a result,
they returned to San Fernando and later went back to the mines on July 26. Mr.
Blessing made the report, dated August 6, recommending a program of operation. Mr.
Nielson himself spent a day in the mine early in December, 1945 and reiterated the
program which Mr. Blessing had outlined. Two or three weeks before the date of the
report, Mr. Coldren of the Nielson organization also visited the mine and told
President C. A. DeWitt of Lepanto that he thought that the mine could be put in
condition for the delivery of the ore within ten (10) days. And according to Mark
Nestle, a witness of appellant, Nielson had several men including engineers to do the
job in the mines and to resume the work. These engineers were in fact sent to the
mine site and submitted reports of what they had done. 35
On the other hand, appellee claims that Nielson was not ready and able to resume
the work in the mines, relying mainly on the testimony of Dr. Juan Nabong, former
secretary of both Nielson and Lepanto, given in the separate case of Nancy Irving

Romero vs. Lepanto Consolidated Mining Company (Civil Case No. 652, CFI,
Baguio), to the effect that as far as he knew "Nielson and Company had not
attempted to operate the Lepanto Consolidated Mining Company because Mr.
Nielson was not here in the Philippines after the last war. He came back later," and
that Nielson and Company had no money nor stocks with which to start the operation.
He was asked by counsel for the appellee if he had testified that way in Civil Case
No. 652 of the Court of First Instance of Baguio, and he answered that he did not
confirm it fully. When this witness was asked by the same counsel whether he
confirmed that testimony, he said that when he testified in that case he was not fully
aware of what happened and that after he learned more about the officials of the
corporation it was only then that he became aware that Nielson had really sent his
men to the mines along with Mr. Blessing and that he was aware of this fact
personally. He further said that Mr. Nielson was here in 1945 and "he was going out
and contacting his people." 36
Lepanto admits, in its own brief, that Nielson had really insisted in taking over the
management and operation of the mines but that it (Lepanto) unequivocally refuse to
allow it. The following is what appears in the brief of the appellee:
It was while defendant was in the midst of the rehabilitation work
which was fully described earlier, still reeling under the terrible
devastation and destruction wrought by war on its mine that Nielson
insisted in taking over the management and operation of the mine.
Nielson thus put Lepanto in a position where defendant, under the
circumstances, had to refuse, as in fact it did, Nielson's insistence
in taking over the management and operation because, as was
obvious, it was impossible, as a result of the destruction of the
mine, for the plaintiff to manage and operate the same and
because, as provided in the agreement, the contract was
suspended by reason of the war. The stand of Lepanto in
disallowing Nielson to assume again the management of the mine
in 1945 was unequivocal and cannot be misinterpreted, infra.37
Based on the foregoing facts and circumstances, and Our conclusion that the
management contract was extended, We believe that Nielson is entitled to the
management fees for the period of extension. Nielson should be awarded on this
claim sixty times its monthly pay of P2,500.00, or a total of P150,000.00.
In its sixth assignment of error Nielson contends that the lower court erred in not
ordering Lepanto to pay it (Nielson) the 10% share in the profits of operation realized
during the period of five (5) years from the resumption of its post-war operations of
the Mankayan mines, in the total sum of P2,403,053.20 with interest thereon at the
rate of 6% per annum from February 6, 1958 until full payment. 38
The above claim of Nielson refers to four categories, namely: (1) cash dividends; (2)
stock dividends; (3) depletion reserves; and (4) amount expended on capital
investment.
Anent the first category, Lepanto's report for the calendar year 1954 39 contains a
record of the cash dividends it paid up to the date of said report, and the post-war

dividends paid by it corresponding to the years included in the period of extension of

the management contract are as follows:
POST-WAR
8

10%

November

1949

P 200,000.00

10%

July

1950

300,000.00

10

10%

October

1950

500,000.00

11

20%

December

1950

1,000,000.00

12

20%

March

1951

1,000,000.00

13

20%

June

1951

1,000,000.00

14

20%

September

1951

1,000,000.00

15

40%

December

1951

2,000,000.00

16

20%

March

1952

1,000,000.00

17

20%

May

1952

1,000,000.00

18

20%

July

1952

1,000,000.00

19

20%

September

1952

1,000,000.00

20

20%

December

1952

1,000,000.00

21

20%

March

1953

1,000,000.00

22

20%

June

1953

1,000,000.00

TOTAL

P14,000,000.00

According to the terms of the management contract as modified, appellant is entitled

to 10% of the P14,000,000.00 cash dividends that had been distributed, as stated in
the above-mentioned report, or the sum of P1,400,000.00.
With regard to the second category, the stock dividends declared by Lepanto during
the period of extension of the contract are: On November 28, 1949, the stock dividend
declared was 50% of the outstanding authorized capital of P2,000,000.00 of the
company, or stock dividends worth P1,000,000.00; and on August 22, 1950, the stock
dividends declared was 66-2/3% of the standing authorized capital of P3,000,000.00
of the company, or stock dividends worth P2,000,000.00. 40
Appellant's claim that it should be given 10% of the cash value of said stock dividends
with interest thereon at 6% from February 6, 1958 cannot be granted for that would
not be in accordance with the management contract which entitles Nielson to 10% of
any dividends declared paid, when and as paid. Nielson, therefore, is entitled to 10%
of the stock dividends and to the fruits that may have accrued to said stock dividends
pursuant to Article 1164 of the Civil Code. Hence to Nielson is due shares of stock
worth P100,000.00, as per stock dividends declared on November 28, 1949 and all
the fruits accruing to said shares after said date; and also shares of stock worth
P200,000.00 as per stock dividends declared on August 20, 1950 and all fruits
accruing thereto after said date.
Anent the third category, the depletion reserve appearing in the statement of income
and surplus submitted by Lepanto corresponding to the years covered by the period
of extension of the contract, may be itemized as follows:
In 1948, as per Exh. F, p. 36 and Exh. Q, p. 5, the depletion reserve
set up was P11,602.80.
In 1949, as per Exh. G, p. 49 and Exh. Q, p. 5, the depletion
reserve set up was P33,556.07.
In 1950, as per Exh. H, p. 37, Exh. Q, p. 6 and Exh. I, p. 37, the
depletion reserve set up was P84,963.30.
In 1951, as per Exh. I, p. 45, Exh. Q, p. 6, and Exh. J, p. 45, the
depletion reserve set up was P129,089.88.
In 1952, as per Exh. J, p. 45, Exh. Q, p. 6 and Exh. K p. 41, the
depletion reserve was P147,141.54.
In 1953, as per Exh. K, p. 41, and Exh. Q, p. 6, the depletion
reserve set up as P277,493.25.
Regarding the depletion reserve set up in 1948 it should be noted that the amount
given was for the whole year. Inasmuch as the contract was extended only for the last

half of the year 1948, said amount of P11,602.80 should be divided by two, and so
Nielson is only entitled to 10% of the half amounting to P5,801.40.
Likewise, the amount of depletion reserve for the year 1953 was for the whole year
and since the contract was extended only until the first half of the year, said amount of
P277,493.25 should be divided by two, and so Nielson is only entitled to 10% of the
half amounting to P138,746.62. Summing up the entire depletion reserves, from the
middle of 1948 to the middle of 1953, we would have a total of P539,298.81, of which
Nielson is entitled to 10%, or to the sum of P53,928.88.
Finally, with regard to the fourth category, there is no figure in the record representing
the value of the fixed assets as of the beginning of the period of extension on June
27, 1948. It is possible, however, to arrive at the amount needed by adding to the
value of the fixed assets as of December 31, 1947 one-half of the amount spent for
capital account in the year 1948. As of December 31, 1947, the value of the fixed
assets was P1,061,878.88 41 and as of December 31, 1948, the value of the fixed
assets was P3,270,408.07. 42 Hence, the increase in the value of the fixed assets for
the year 1948 was P2,208,529.19, one-half of which is P1,104,264.59, which amount
represents the expenses for capital account for the first half of the year 1948. If to this
amount we add the fixed assets as of December 31, 1947 amounting to
P1,061,878.88, we would have a total of P2,166,143.47 which represents the fixed
assets at the beginning of the second half of the year 1948.
There is also no figure representing the value of the fixed assets when the contract,
as extended, ended on June 26, 1953; but this may be computed by getting one-half
of the expenses for capital account made in 1953 and adding the same to the value of
the fixed assets as of December 31, 1953 is P9,755,840.41 43 which the value of the
fixed assets as of December 31, 1952 is P8,463,741.82, the difference being
P1,292,098.69. One-half of this amount is P646,049.34 which would represent the
expenses for capital account up to June, 1953. This amount added to the value of the
fixed assets as of December 31, 1952 would give a total of P9,109,791.16 which
would be the value of fixed assets at the end of June, 1953.
The increase, therefore, of the value of the fixed assets of Lepanto from June, 1948
to June, 1953 is P6,943,647.69, which amount represents the difference between the
value of the fixed assets of Lepanto in the year 1948 and in the year 1953, as stated
above. On this amount Nielson is entitled to a share of 10% or to the amount of
P694,364.76.
Considering that most of the claims of appellant have been entertained, as pointed
out in this decision, We believe that appellant is entitled to be awarded attorney's
fees, especially when, according to the undisputed testimony of Mr. Mark Nestle,
Nielson obliged himself to pay attorney's fees in connection with the institution of the
present case. In this respect, We believe, considering the intricate nature of the case,
an award of fifty thousand (P50,000.00) pesos for attorney's fees would be
reasonable.
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision
of the court a quo and enter in lieu thereof another, ordering the appellee Lepanto to
pay appellant Nielson the different amounts as specified hereinbelow:

(1) 10% share of cash dividends of December, 1941 in the amount of P17,500.00,
with legal interest thereon from the date of the filing of the complaint;
(2) management fee for January, 1942 in the amount of P2,500.00, with legal interest
thereon from the date of the filing of the complaint;
(3) management fees for the sixty-month period of extension of the management
contract, amounting to P150,000.00, with legal interest from the date of the filing of
the complaint;
(4) 10% share in the cash dividends during the period of extension of the
management contract, amounting to P1,400,000.00, with legal interest thereon from
the date of the filing of the complaint;
(5) 10% of the depletion reserve set up during the period of extension, amounting to
P53,928.88, with legal interest thereon from the date of the filing of the complaint;
(6) 10% of the expenses for capital account during the period of extension, amounting
to P694,364.76, with legal interest thereon from the date of the filing of the complaint;
(7) to issue and deliver to Nielson and Co., Inc. shares of stock of Lepanto
Consolidated Mining Co. at par value equivalent to the total of Nielson's l0% share in
the stock dividends declared on November 28, 1949 and August 22, 1950, together
with all cash and stock dividends, if any, as may have been declared and issued
subsequent to November 28, 1949 and August 22, 1950, as fruits that accrued to said
shares;
If sufficient shares of stock of Lepanto's are not available to satisfy this judgment,
defendant-appellee shall pay plaintiff-appellant an amount in cash equivalent to the
market value of said shares at the time of default (12 C.J.S., p. 130), that is, all
shares of the stock that should have been delivered to Nielson before the filing of the
complaint must be paid at their market value as of the date of the filing of the
complaint; and all shares, if any, that should have been delivered after the filing of the
complaint at the market value of the shares at the time Lepanto disposed of all its
available shares, for it is only then that Lepanto placed itself in condition of not being
able to perform its obligation (Article 1160, Civil Code);
(8) the sum of P50,000.00 as attorney's fees; and
(9) the costs. It is so ordered.
Concepcion, C.J., Regala, Makalintal, Bengzon, J.P., Sanchez and Castro, JJ.,
concur.
Reyes, J.B.L. and Barrera, JJ., took no part.

Republic
SUPREME
Manila

of

EN BANC
G.R. No. 48231

p June 30, 1947

the

Philippines
COURT

WISE
&
CO.,
INC.,
ET
AL.,
plaintiffs-appellants,
vs.
BIBIANO L. MEER, Collector of Internal Revenue, defendant-appellee.
Ross,
Selph,
Carrascoso
and
Office of the Solicitor General for appellee.

Janda

for

VII. That the deficiency assessment was properly collected.

VIII. That the refunds claimed by plaintiffs were not in order, and in
rendering judgment absolving the Collector of Internal Revenue
from making such refunds.

appellants.

The facts have been stipulated in writing, as quoted verbatim in the decision of the
trial court thus:

HILADO, J.:
This is an appeal by Wise & Co., Inc. and its co-plaintiff from the judgment of the
Court of First Instance of Manila in civil case No. 56200 of said court, absolving the
defendant Collector of Internal Revenue from the complaint without costs. The
complaint was for recovery of certain amounts therein specified, which had been paid
by said plaintiffs under written protest to said defendant, who had previously
assessed said amounts against the respective plaintiffs by way of deficiency income
taxes for the year 1937, as detailed under paragraph 6 of defendant's special defense
(Record of Appeal, pp. 7-10). Appellants made eight assignments of error, to wit:

I
That the allegations of paragraphs I and II of the complaint are true
and correct.
II
That during the year 1937, plaintiffs, except Mr. E.M.G. Strickland
(who, as husband of the plaintiff Mrs. E.M.G. Strickland, is only a
nominal party herein), were stockholders of Manila Wine
Merchants, Ltd., a foreign corporation duly authorized to do
business in the Philippines.

The trial court erred in finding:

I. That the Manila Wine Merchants, Ltd., a Hongkong corporation,
was in liquidation beginning June 1, 1937, and that all dividends
declared and paid thereafter were distributions of all its assets in
complete liquidation.

III
That on May 27, 1937, the Board of Directors of Manila Wine
Merchants, Ltd., (hereinafter referred to as the Hongkong
Company), recommended to the stockholders of the company that
they adopt the resolutions necessary to enable the company to sell
its business and assets to Manila Wine Merchants, Inc., a
Philippine corporation formed on May 27, 1937, (hereinafter
referred to as the Manila Company), for the sum of P400,000
Philippine currency; that this sale was duly authorized by the
stockholders of the Hongkong Company at a meeting held on July
22, 1937; that the contract of sale between the two companies was
executed on the same date, a copy of the contract being attached
hereto as Schedule "A"; and that the final resolutions completing
the said sale and transferring the business and assets of the
Hongkong Company to the Manila Company were adopted on
August 3, 1937, on which date the Manila Company were adopted
on August 3, 1937, on which date the Manila Company paid the
Hongkong company the P400,000 purchase price.

II. That all distributions made by the Hongkong corporation after

June 1, 1937, were subject to both normal tax and surtax.
III. That income received by one corporation from another was
taxable under the Income Tax Law, and that Wise & Co., Inc., was
taxable on the distribution of its share of the same net profits on
which the Hongkong Company had already paid Philippine tax,
despite the clear provisions of section 10 of the Income Tax Law
then in effect.
IV. That the non-resident individual stockholder appellants were
subject to both normal and additional tax on the distributions
received despite the clear provisions of section 5 (b) of the Income
Tax Law then in effect.
V. That section 25 (a) of the Income Tax Law makes distributions in
liquidation of a foreign corporation, dissolution proceedings of
which were conducted in a foreign country, taxable income to a
non-resident individual stockholder.
VI. That section 199 of the Income Tax regulations, providing that in
a distribution by a corporation in complete liquidation of its assets
the gain realized by a stockholder, whether individual or corporate,
is taxable as a dividend, is ineffective.

IV
That pursuant to a resolution by its Board of Directors purporting to
declare a dividend, the Hongkong Company made a distribution
from its earnings for the year 1937 to its stockholders, plaintiffs
receiving the following:
Declared

and

paid

That Philippine income tax had been paid by the Hongkong

Company on the said surplus from which the said distributions were
made.

June 8, 1937
Wise & Co., Inc.

P7,677.82

Mr. J.F. MacGregor

2,554.86

Mr. N.C. MacGregor

2,369.48

Mr. C.J. Lafrentz

529.51

Mrs. E.M.G. Strickland

2,369.48

Mrs. M.J.G. Mullins

2,369.48

VI
That on August 19, 1937, at a special general meeting of the
shareholders of the Hongkong Company, the stockholders by
proper resolution directed that the company be voluntarily
liquidated and its capital distributed among the stockholders; that
the stockholders at such meeting appointed a liquidator duly paid
off the remaining debts of the Hongkong Company and distributed
its capital among the stockholders including plaintiffs; that the
liquidator duly filed his accounting on January 12, 1938, and in
accordance with the provisions of Hongkong Law, the Hongkong
Company was duly dissolved at the expiration of three moths from
that date.

P17,870.63
That the Hongkong Company has paid Philippine income tax on the
entire earnings from which the said distributions were paid.
V
That after deducting the said dividend of June 8, 1937, the surplus
of the Hongkong Company resulting from the active conduct of its
business was P74,182.12. That as a result of the sale of its
business and assets to the Manila Company, the surplus of the
Hongkong Company was increased to a total of P270,116.59.
That pursuant to resolutions of its Board of Directors, and of its
shareholders, purporting to declare dividends, copies of which are
attached hereto as Schedules "B" and "B-1", the Hongkong
Company distributed this surplus to its stockholders, plaintiffs
receiving the following sums on the following dates:
Declared
Declared
July 22, 1937 July 22, 1937
Paid
Paid
August 4, 1937 October
28,
1937
Wise & Co., Inc.
P113,851.85
P 2,198.24
Mr. J.F. MacGregor
37,885.20
731.48
Mr. N.C. MacGregor
35,137.03
678.42
Mr. C.J. Lafrentz
7,851.86
151.61
Mrs. E.M.G. Strickland
35,137.03
678.42
Mrs. M.J.G. Mullins
35,137.03
678.42
P265,000.00
P 5,116.59

VII
That plaintiffs duly filed Philippine income tax returns. That
defendant subsequently made the following deficiency
assessments against plaintiffs:
WISE & COMPANY, INC.
Net income as per return
Add: Deductions disallowed Loss on shares of
pstock in the Manila Wine Merchants, Ltd.
presulting from the liquidation of said firm
Income
not
declared:
Return
of
capital P51,185.00
Share of surplus
123,727.88
Total liquidating dividends received P174,912.88
Less value of shares as per books
95,700.00
Profits realized on shares of stock in the
Manila Wine Merchants Ltd. resulting
from the liquidation of the said firm
Accrued income tax as per return
Total
Deduct accrued income tax
Net income as per investigation
6 per cent Normal tax
Less amount already paid
Balance still due and collectible
J. F. MACGREGOR
Net income as per return

P87,

44,51

P79,
5,2
P216
12,26
204,3

12,26
6,307
7,003

P47,

Deduct: Ordinary dividends

Net income as per investigation subject to
normal
tax:
Return
of
capital
Share of surplus
Total liquidating dividends received
Less cost of shares
Profit realized on shares of stock
in the Manila Wine Merchants., Ltd.
Resulting from the liquidation of said firm
Normal tax at 3 per cent
Additional tax due
Total normal and additional taxes
Less: Amount already paid
Balance still due and collectible
N. C. MACGREGOR
Net income as per return
Deduct: Ordinary dividends
Net income as per investigation subject to
normal tax:
Return
of
capital
Share of surplus
Total liquidating dividends received.
Less cost of shares
Profit realized on shares of stock in the
Manila Wine Merchants, Ltd. Resulting
from the liquidation of the said firm
Normal tax at 3 per cent
Additional tax due
Total normal and additional taxes
Less amount already paid
Balance still due and collectible
C. J. LAFRENTZ
Net income as per return
Deduct: Ordinary dividends
Net income as per investigation subject to
normal tax:
Return
of
capital
Share of surplus
Total liquidating dividends received
Less cost of shares
Profit realized on shares of stock in the

Manila Wine Merchants, Ltd. Resulting

from the liquidation of the said firm
3 per cent normal tax due and collectible
MRS. E. M. G. STRICKLAND
Net income as per return
Deduct: Ordinary dividends
Net income as per investigation subject to
normal tax:
Return
of
capital
Share of surplus
Total liquidating dividends received
Less cost of shares
Profit realized on shares of stock in the
Manila Wine Merchants, Ltd. Resulting
from the liquidation of the said firm
Normal tax at 3 per cent
Additional tax due
Total normal and additional taxes
Balance still due and collectible
MRS. M. J. G. MULLINS
Net income per return
Deduct: Ordinary dividends
Net income as per investigation subject to
normal tax:
Return
of
capital
Share of surplus
Total liquidating dividends received
Less cost of shares
Profit realized on shares of stock in the
Manila Wine Merchants, Ltd. Resulting
from the liquidation of the said firm
Normal tax at 3 per cent
Additional tax due
Total normal and additional taxes
Less amount already paid
Balance still due and collectible

P17,032,25
41,171.52
P58,203.77
17,032.25

P15,796.75
38,184.95
P53,981.70
15,796.75

P3,530.00
8,532.98
P12,062.98
3,530.00

255.9

P44,
5,8

P15,796.75
38,184.95
P53,981.70
15,796.75

P38,
1,145
48
1,626
1,145

P44,
5,872

P15,796.75
38,184.95
P53,981.70
15,796.75

VIII
That said plaintiffs duly paid the said amounts demanded by
defendant under written protest, which was overruled in due
course; that the plaintiffs have since July 1, 1939 requested from
defendant a refund of the said amounts which defendant has
refused and still refuses to refund.

P38,
1,145
48
1,626
48
P1,1

IX
That this stipulation is equally the work of both parties and shall be
fairly interpreted to give effect to their intention that this case shall
be decided solely upon points of law.
X
The parties incorporate the Corporation Law and Companies Act of
Hongkong and the applicable decisions made thereunder, into this
stipulation by reference, and either party may at any stage in the
proceedings in this case cite applicable sections of the law and the
authorities decided thereunder as though the same had been duly
proved in evidence.
XI
That the parties hereto reserve the right to submit other and further
evidence at the trial of this case. (Record on Appeal, pp. 19-26.)
1. The first assignment of error. Appellants maintain that the amounts received by
them and on which the taxes in question were assessed and collected were ordinary
dividends; while upon the other hand, appellee contends that they were liquidating
dividends. If the first proposition is correct, this assignment would be well-taken,
otherwise, the decision of the court upon the point must be upheld.
It appears that on May 27, 1937, the Board of Directors of the Manila Wine
Merchants, Ltd. (hereafter called the Hongkong Co.), recommended to the
stockholders of said company "that the Company should be wound up voluntarily by
the members and the business sold as a going concern to a new company
incorporated under the laws of the Philippine Islands under the style of "The Manila
Wine Merchants, Inc." (Annex A defendant's answer, Record on Appeal, p. 12), and
that they adopt the resolutions necessary to enable the company to sell its business
and assets to said new company (hereafter called the Manila Company), organized
on that same date, for the price of P400,000, Philippine currency; that the sale was
duly authorized by the stockholders of the Hongkong Co. at a meeting held on July
22, 1937; and that the contract of sale between the two companies was executed on
the same day, as appears from the copy of the contract, Schedule A of the Stipulation
of Facts (par. III, Stipulation of Facts, Record on Appeal, pp. 19-20). It will be noted
that the Board of Directors of the Hongkong Co., in recommending the sale,
specifically mentioned "a new Company incorporated under the laws of the Philippine
Islands under the style of "The Manila Wine Merchants, Inc." as the purchaser, which
fact shows that at the time of the recommendation the Manila Company had already
been formed, although on the very same day; and this and the further fact that it was
really the latter corporation that became the purchaser should clearly point to the
conclusion that the Manila Company was organized for the express purpose of
succeeding the Hongkong Co. The stipulated facts would admit of no saner
interpretation.

While it is true that the contract of sale was signed on July 22, 1937, it contains in its
paragraph 4 of the express provision that the transfer "will take effect as on and from
the first day of June, One thousand nine hundred and thirty-seven, and until
completion thereof, the Company shall stand possessed of the property hereby
agreed to be transferred and shall carry on its business in trust for the Corporation"
(Schedule A of Stipulation of Facts, Record on Appeal, p. 15). "The Company" was
the Hongkong Company and "the Corporation" was the Manila Company. For "the
Company" to carry on business in trust for the "Corporation," it was necessary for the
latter to be the owner of the business. It is plain that the parties considered the sale
as made as on and from June 1, 1937 for the purposes of said sale and transfer,
both parties agreed that the deed of July 22, 1937, was to retroact to the first day of
the preceding month.
The cited provision could not have served any other purpose than to consider the sale
as made as of June 1, 1937. If it had not been for this purpose, if the intention had
been that the sale was to be effective upon the date of the written contract or
subsequently, said provision would certainly never have been written, for how could
the transfer or sale take effect as of June 1, 1937, if it were to be considered as made
at a later date?
The first distribution made after June 1, 1937, of what plaintiffs call ordinary dividends
but what defendant denominates liquidating dividends was declared and paid on June
8, 1937 (Stipulation, Paragraph IV, Record on Appeal, p. 20). It will be recalled that
the recommendation of the Board of Directors of the Hongkong Company, at their
meeting on May 27, 1937, was first of all "that the company should be wound up
voluntarily by the members"(Record on Appeal, p.12), and in pursuance of that
purpose, it was further recommended that the Company's business be sold as a
going concern to the Manila Company (ibid). Complying with the Companies
Ordinance 1932 for companies registered in Hongkong for the voluntary winding up
by members, a Declaration of Solvency was drawn up duly signed before the British
Consul-General in Manila by the same directors, and said declaration was returned to
Hongkong for filing with the Registrar of Companies (ibid.) Both recommendations
were in due course approved and ratified. The later execution of the formal deed of
sale and the successive distributions of the amounts in question among the
stockholders of the Hongkong Company were obviously other steps in its complete
liquidation. And they leave no room for doubt in the mind of the court that said
distributions were not in the ordinary course of business and with intent to maintain
the corporation as a going concern in which case they would have been
distributions of ordinary dividends but after the liquidation of the business had been
decided upon, which makes them payments for the surrender and relinquishment of
the stockholders' interest in the corporation, or so-called liquidating dividends.
More than with the distribution of June 8, 1937, is this true with those declared on July
22, 1937, and paid on August 4 and October 28, 1937, respectively (Stipulation of
Facts, par. 5, Record on Appeal, p. 21). The distributions thus declared on July 22,
1937, and paid on August 4 and October 28, 1937, were from the surplus of the
Hongkong Company resulting from the active conduct of its business and amounting
to P74,182.12, which surplus was augmented to a total of P270,116.59 as a result of
the sale of its business and assets to the Manila Company (ibid.). In both Schedules
B and B-1 of the Stipulation of Facts (Record on appeal, pp. 16-18), being minutes of
directors' meetings of the Hongkong Co., where authorization and instruction were

given to declare and pay in the form of "dividends" to the shareholders the amounts in
question, it was specifically provided that the surplus to be so distributed be that
resulting after providing for return of capital and necessary or various expenses, as
shown in the balance sheet prepared as of June 1, 1937, and in the reconstructed
balance sheet of the same date presented by the company's auditors, it having been
resolved in Schedule B-1 that "any balance remaining to be distributed when final
liquidator's account has been rendered and paid" (Record on Appeal, p. 18; emphasis
supplied). It thus becomes more evident that those distributions were to be made in
the course or as a result of the Hongkong Company's liquidation and that said
liquidation was to be complete and final. And although the various resolutions abovementioned speak of distributions of dividends when referring to those already alluded
to, "a distribution does not necessarily become a dividend by reason of the fact that it
is called a dividend by the distributing corporation." (Holmes Federal Taxes, 6th
edition, 774.)
The ordinary connotation of liquidating dividend involves the
distribution of assets by a corporation to its stockholders upon
dissolution. (Klein, Federal Income Taxation, 253-254.)
But it is contended by plaintiffs that as of August 4, 1937, the Hongkong Company
"had taken no steps toward dissolution or liquidation and still retained on hand liquid
assets in excess of its capitalization." They also assert that it was only on August 19,
1937, that said company took the first corporate steps toward liquidation (Appellant's
Brief, pp. 9-10). The fact, however, is that since July 22, 1937, when the formal deed
of sale of all the properties, assets, and business of the Hongkong Company to the
Manila Company was made, it was expressly stipulated that the sale or transfer shall
take effect as of June 1, 1937. As already indicated, the transfer of what was sold,
like the sale itself, was, by the mutual agreement of the parties, considered as made
on and from that date, and that, if thereafter and until final completion of the transfer,
the Hongkong Company continued to run the business, it did so in trust for the new
owner, the Manila Company. In the case of Canal-Commercial T. & S. Bk. vs. Comm'r
(63 Fed. [2d], 619, 620) it was held that:
. . . The determining element therefore is whether the distribution
was in the ordinary course of business and with intent to maintain
the corporation as a going concern, or after deciding to quit with
intent to liquidate the business. Proceedings actually begun to
dissolve the corporation or formal action taken to liquidate it are but
evidentiary and not indispensable. Tootle vs. Commissioner (C.C.A.
58 F. [2d, 576.) The fact that the distribution is wholly from surplus
and not from capital, and therefore lawful as a dividend is only
evidence. In Hellmich vs. Hellman, and Tootle vs. Commissioner,
supra, the distribution was wholly from profits yet held to be one in
liquidation . . . (Emphasis Supplied.)
In the case at bar, when in the deed of July 22, 1937, by authority of its stockholders,
the Hongkong Company thru its authorized representative declared and agreed that
the aforesaid sale and transfer shall take effect as of June 1, 1937, and distribution
from its assets to those same stockholders made after June 1, 1937, altho before July
22, 1937, must have been considered by them as liquidating dividends; for how could
they consistently deem all the business and assets of the corporation sold as of June

1, 1937, and still say that said corporation, as a going concern, distributed ordinary
dividends to them thereafter?
In Holmby Corporation vs. Comm'r (83 Fed. [2d], 548-550), the court said:
. . . the fact that the distributions were called "dividends" and were
made, in part, from earnings and profits, and that some of them
were made before liquidation or dissolution proceedings were
commenced, is not controlling. . . . The determining element is
whether the distributions were in the ordinary course of business
and with intent to maintain the corporation as a going concern, or
after deciding to quit and with intent to liquidate the business . . ..
(Emphasis supplied.)
The directors or representatives of the Hongkong Company or the Manila Company,
or both, could of course not convert into ordinary dividends what in law and in reality
were not such. As aptly stated by Chief Justice Shaw in Comm. vs. Hunt (38 Am.
Dec., 354-355),
The law is not to be hoodwinked by colorable pretenses. It looks at
truth and reality through whatever disguise they may assume.
The amounts thus distributed among the plaintiffs were not in the nature of a recurring
return on stock in fact, they surrendered and relinquished their stock in return for
said distributions, thus ceasing to be stockholders of the Hongkong Company, which
in turn ceased to exist in its own right as a going concern during its more or less brief
administration of the business as trustee for the Manila Company, and finally
disappeared even as such trustee.
The distinction between a distribution in liquidation and an ordinary
dividend is factual; the result in each case depending on the
particular circumstances of the case and the intent of the parties. If
the distribution is in the nature of a recurring return on stock it is an
ordinary dividend. However, if the corporation is really winding up
its business or recapitalizing and narrowing its activities, the
distribution may properly be treated as in complete or partial
liquidation and as payment by the corporation to the stockholder for
his stock. The corporation is, in the latter instances, wiping out all
parts of the stockholders' interest in the company . . ..
(Montgomery, Federal Income Tax Handbook [1938-1939], 258;
emphasis supplied.)
It is our considered opinion that we are not dealing here with "the legal right of a
taxpayer to decrease the amount of what otherwise will be his taxes, or altogether
avoid them, by means which the law permits" (St. Louis Union Co. vs. U.S., 82 Fed.
[2d], 61), but with a situation where we have to apply in favor of the government the
principle that the "liability for taxes cannot be evaded by a transaction constituting a
colorable subterfuge" (61 C.J., 173), it being clear that the distributions under
consideration were not ordinary dividends and were taxable in the manner, form and
amounts decreed by the court below.

2. The second assignment of error. In disposing of the first assignment of error, we

held that the distributions in the instant case were not ordinary dividends but
payments for surrendered or relinquished stock in a corporation in complete
liquidation, sometimes called liquidating dividends. The question is whether such
amounts were taxable income. The Income Tax Law, Act No. 2833 section 25 (a), as
amended by section 4 of Act. No. 3761, inter alia stipulated:
Where a corporation, partnership, association, joint-account, or
insurance company distributes all of its assets in complete
liquidation or dissolution, the gain realized or loss sustained by the
stockholder, whether individual or corporation, is a taxable income
or a deductible loss as the case may be. (Emphasis supplied.)
Partial source of the foregoing provision was section 201 (c) of the U.S. Revenue Act
of 1918, approved February 24, 1919, providing:
Amounts distributed in the liquidation of a corporation shall be
treated as payments in exchange for the stock or share, and any
gain or profit realized thereby shall be taxed to the distributee as
other gains or profits.
It is a familiar rule of statutory construction that the judicial construction attached to
the sources of statutes adopted in a jurisdiction are of authoritative value in the
interpretation of such local laws. The Supreme Court of the United States has had
occasion to construe certain pertinent parts of the Federal Revenue Act abovementioned on February 20, 1928, when it decided the case of Hellmich vs. Hellman
(276 U.S., 233; 72 Law. ed., 544). The case involved the recovery of additional
income taxes assessed against the plaintiffs under protest. And its determination
hinged around the construction of parts of said act after which those of our own law
now under discussion were patterned. Justice Sanford said:
The question here is whether the gains realized by stockholders
from the amounts distributed in the liquidation of the assets of a
dissolved corporation, out of its earnings or profits accumulated
since February 28, 1913, were taxable to them as other "gains or
profits", or whether the amounts so distributed were "dividends"
exempt from the normal tax.
Section 201 (a) of the act defined the term "dividend" as "any
distribution made by a corporation . . . to its shareholders . . .
whether in cash or in other property .. out of its earnings or profits
accumulated since February 28, 1913 . . .." Section 201 (c)
provided that "amounts distributed in the liquidation of a corporation
shall be treated as payments in exchange for stock or shares, and
any gain or profit realized thereby shall be taxed to the distributee
as other gains or profits."
Our law at the time of the transactions in question, in providing that where a
corporation, etc. distributes all its assets in complete liquidation or dissolution, the
gain realized or loss sustained by the stockholder is a taxable income or a deductible
loss as the case may be, in effect treated such distributions as payments in exchange

for the stock or share. Thus, in making the deficiency assessments under
consideration, the Collector, among other items, made proper deduction of the "value
of shares" or "cost of shares" in the case of each individual plaintiff, assessing the tax
only on the resulting "profit realized" (Stipulation, par. VII, Record on Appeal, pp. 2225); and of course in case the value or cost of the shares should exceed the
distribution received by the stockholder, the resulting difference will be treated as a
"deductible loss."
In the same case the Supreme Court of the United States made the following
quotation, which is here relevant, from Treasury Regulations 45, article 1548:
. . . So-called liquidation or dissolution dividends are not dividends
within the meaning of the statute, and amounts so distributed,
whether or not including any surplus earned since February 28,
1913, are to be regarded as payments for the stock of the dissolved
corporation. Any excess so received over the cost of his stock to
the stockholder, or over its fair market value as of March 1, 1913, if
acquired prior thereto, is a taxable profit. A distribution in liquidation
of the assets and business of a corporation, which is a return to the
stockholders of the value of his stock upon a surrender of his
interest in the corporation, is distinguishable from a dividend paid
by a going corporation out of current earnings or accumulated
surplus when declared by the directors in their discretion, which is
in the nature of a recurrent return upon the stock. (72 Law. ed.,
546.)
The Income Tax Law of the Philippines in force at the time defined the term "dividend"
in section 25 (a), as amended, as "any distribution made by a corporation . . . out of
its earnings or profits accumulated since March 1, 1913, and payable to its
shareholders whether in cash or other property." This definition is substantially the
same as that given to the same term by the U.S. Revenue Act of 1918 quoted by
Justice Sanford in the passage above inserted.
Plaintiffs contend that defendant's position would result in double taxation. A similar
contention has been adversely disposed of against the taxpayer in the Hellmich case
in these words:
The gains realized by the stockholders from the distribution of the
assets in liquidation were subject to the normal tax in like manner
as if they had sold their stock to third persons. The objection that
this results in double taxation of the accumulated earnings and
profits is no more available in the one case than it would have been
in the other. See Merchants' Loan & T. Co. vs. Smietanki, 255 U.S.,
509; 65 Law. ed., 751; 15 A.L.R., 1305; 41 Sup. Ct. Rep., 386;
Goodrich vs. Edwards, 255 U.S. 527; 65 Law. ed., 758; 41 Sup. Ct.
Rep., 390. When, as here, Congress clearly expressed its intention,
the statute must be sustained even though double taxation results.
See Patton vs. Brady , 184 U.S., 608; 46 Law ed., 713; 22 Sup. Ct.
Rep., 493; Cream of Wheat Co. vs. Grand Forks County, 253 U.S.,
325, 330; 64 Law. ed., 931, 934; 40 Sup. Ct. Rep., 558. (Hellmich
vs. Hellman, supra; 72 Law. ed., 547.)

It should be borne in mind that plaintiffs received the distributions in question in

exchange for the surrender and relinquishment by them of their stock in the
Hongkong Company which was dissolved and in process of complete liquidation.
That money in the hands of the corporation formed a part of its income and was
properly taxable to it under the then existing Income Tax Law. When the corporation
was dissolved and in process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to them in exchange, a
transaction took place, which was no different in its essence from a sale of the same
stock to a third party who paid therefor. In either case the shareholder who received
the consideration for the stock earned that much money as income of his own, which
again was properly taxable to him under the same Income Tax Law. In the case of the
sale to a third person, it is not perceived how the objection of double taxation could
have been successfully raised. Neither can we conceive how it could be available
where, as in this case, the stock was transferred back to the dissolved corporation.
3. The third assignment of error. In view of what has been said in our consideration
of the second assignment of error, the third can be briefly disposed of. Having held
that the distributions involved herein were not ordinary dividends but payments for
stock surrendered and relinquished by the shareholders to the dissolved corporation,
or so-called liquidating dividends, we have the road clear to declaring that under
section 25 (a) of the former Income Tax Law, as amended, said distributions were
taxable alike to Wise and Co., Inc. and to the other plaintiffs. We hold that both the
proviso of section 10 (a) of said Income Tax Law and section 198 of Regulations No.
81 refer to ordinary dividends, not to distributions made in complete liquidation or
dissolution of a corporation which result in the realization of a gain as specifically
contemplated in section 25 (a) of the same law, as amended, which as aforesaid
expressly provides for the taxability of such gain as income, whether the stockholder
happens to be an individual or a corporation. By analogy, we can cite the following
additional passages from the Hellmich case:
The controlling question is whether the amounts distributed to the
stockholders out of the earnings and profits accumulated by the
corporation since February 28, 1913, were to be treated under
section 201 (a) as "dividends," which were exempt from the normal
tax; or under section 201 (c) as payments made by the corporation
in exchange for its stock, which were taxable "as other gains or
profits.
It is true that if section 201 (a) stood alone its broad definition of the term "dividend"
would apparently include distributions made to stockholders in the liquidation of a
corporation although this term, as generally understood and used, refers to the
recurrent return upon stock paid to stockholders by a going corporation in the ordinary
course of business, which does not reduce their stockholdings and leaves them in a
position to enjoy future returns upon the same stock. (See Lynch vs. Hornby, 247
U.S., 339, 344-346; and Langstaff vs. Lucas [D. C.], 9 Fed. [2d], 691, 694.)
However, when section 201 (a) and section 201 (c) are read
together, under the long-established rule that the intention of the
lawmakers is to be deduced from a view of every material part of
the statute (Kohlsaat vs. Murphy, 96 U.S., 153, 159; 24 Law. ed.,
846), we think it clear that the general definition of a dividend in

section 201 (a) was not intended to apply to distributions made to

stockholders in the liquidation of a corporation, but that it was
intended that such distributions should be governed by section 201
(c), which, dealing specifically with such liquidation, provided that
the amounts distributed should "be treated as payments in
exchange for stock," and that any gain realized thereby should be
taxed to the stockholders "as other gains or profits." This brings the
two sections into entire harmony and gives to each its natural
meaning and due effect. . . . (Hellmich vs. Hellman, supra;
emphasis supplied.)
4. The fourth assignment of error. Under this assignment it is contended by the
non-resident individual stockholder appellants that they were not subject to the
normal tax as regards the distributions received by them and involved in the instant
case. They "reported these distributions as dividends from profits on which Philippine
income tax had been paid . . .." (Appellants' brief, p. 21.) They assert that the
distributions were subject only to the additional tax; whereas the Collector contends
that they were subject to both the normal and the additional tax. After what has been
said above, it hardly needs stating that the manner and form of reporting these
distributions employed by said appellants could not, under the Law, change their real
nature as payments for surrendered stock, or so-called liquidating dividends, provided
for in section 25 (a) of the then Income Tax Law. Such distributions under the law
were subject to both the normal and the additional tax provided for.
. . . Loosely speaking, the distribution to the stockholders of a
corporation's assets, upon liquidation, might be termed a dividend;
but this is not what is generally meant and understood by that word.
As generally understood and used, a dividend is a return upon the
stock of its stockholders, paid to them by a going corporation
without reducing their stockholdings, leaving them in a position to
enjoy future returns upon the same stock . . .. In other words, it is
earnings paid to him by the corporation upon his invested capital
therein, without wiping out his capital. On the other hand, when a
solvent corporation dissolves and liquidates, it distributes to its
stockholders not only any earnings it may have on hand, but it also
pays to them their invested capital, namely, the amount which they
had paid in for their stocks, thus wiping out their interest in the
company . . .. (Langstaff vs. Lucas, 9 Fed. [2d], 691, 694.)
5. The fifth assignment of error. This assignment is made in behalf of those
appellants who were non-resident alien individuals, and for them it is in effect said
that if the distributions received by them were to be considered as a sale of their stock
to the Hongkong Company, the profit realized by them does not constitute income
from Philippine sources and is not subject to Philippine taxes, "since all steps in the
carrying out of this so-called sale took place outside the Philippines." (Appellants'
brief, p. 26.) We do not think this contention is tenable under the facts and
circumstances of record. The Hongkong Company was at the time of the sale of its
business in the Philippines, and the Manila Company was a domestic corporation
domiciled and doing business also in the Philippines. Schedule A of the Stipulation of
Facts (Record on Appeal, p. 13) declares, among other things, that the Hongkong
Company was incorporated for the purpose of carrying on in the Philippine Islands the

business of wine, beer, and spirit merchants and the other objects set out in its
memorandum of association. Hence, its earnings, profits, and assets, including those
from whose proceeds the distributions in question were made, the major part of which
consisted in the purchase price of the business, had been earned and acquired in the
Philippines. From aught that appears in the record it is clear that said distributions
were income "from Philippine sources."

Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones, Hontiveros, Padilla,
and Tuason, JJ., concur.

6. The sixth assignment of error. Section 199 of Regulations No. 81, deleting
immaterial parts, reads:

July 28, 1947

SEC. 199. Distributions in liquidation. In all cases where a

corporation . . . distributes all of its property or assets in complete
liquidation or dissolution, the gain realized from the transaction by
the stockholder . . . is taxable as a dividend to the extent that it is
paid out of earnings or profits of the corporation . . .. If the amount
received by the stockholder in liquidation is less than the cost or
other basis of the stock, a deductible loss is sustained.
This regulation would seem to support the contention that the distributions in
question, at least those proceeding from sources other than the earnings or profits of
the dissolved corporation, were not taxable. Placing the above-quoted section of
Regulations No. 81 side by side with section 25 (a) of the amended Income Tax Law
then in force, we notice that while the regulation limits the taxability of the gain
realized by the stockholder "to the extent that it is paid out of earnings or profits of the
corporation, "section 25 (a) of the law, far from so limiting its taxability, provides that
the gain thus realized, is a "taxable income" under the law so long as a gain is
realized, it will be taxable income whether the distribution comes from the earnings or
profits of the corporation or from the sale of all of its assets in general, so long as the
distribution is made "in complete liquidation or dissolution". The regulation makes the
gain taxable as a dividend, while the law makes it a taxable income. An inevitable
conflict between the two provisions seems to exist, and in such a case, of course, the
law prevails.
Treasury Department cannot impose or exempt from income taxes,
and regulations purporting to exempt from taxation income
specifically taxes would be void.
xxx

xxx

xxx

Any erroneous interpretation of revenue act by regulation of

Treasury Department would not estop government from asserting
tax on income, though taxpayer had been misled by such
interpretation, and by it induced to expose property to taxation.
(Langstaff vs. Lucas, 9 Fed. [2d], 691.)
7 and 8. The seventh and eight assignments of error. In view of what has been
said above, these two assignments need no separate treatment.
For the foregoing consideration, the judgment appealed from will be affirmed with the
costs of both instances against the appellants. So ordered.

RESOLUTION ON MOTION FOR RECONSIDERATION

HILADO, J.:
Plaintiffs and appellants have filed a motion for reconsideration dated July 10, 1947.
After carefully considering said motion, which makes particular reference to
appellants' fifth assignment of error, the Court does not consider the arguments
therein adduced tenable. Stripped to their bare essentials, the movants' contentions
are summarized in the following propositions found on pages 3-4 of their motto, to wit:
Since appellants J.F. MacGregor, N.C. MacGregor, C.J. Lafrentz,
E.M.G. Strickland, and Mrs. M.J.G. Mullins were all non-resident
aliens and since the court has held that the transaction in this case
amounted to a sale or exchange of their shares in a foreign
corporation, which sale or exchange took place entirely outside of
the Philippine Islands, it follows that they have not derived income
from the Philippine sources and are not subject to the taxes which
have been collected from them by defendant.
xxx

xxx

xxx

. . . On the other hand if the income results from the sale or

exchange of the shares in question then the non-resident alien
stockholders who converted their shares abroad have received no
income from Philippine sources and are not subject to any tax
whatsoever on their profits from the transaction.
Leaving aside the other portions of the above-quoted propositions as sufficiently
covered in the court's decision, let us direct attention to those parts thereof wherein it
is pretended that the transaction took place "entirely outside the Philippine Islands" or
"abroad."
In the minutes, Schedule B of the stipulation of facts (Rec. on Appeal, pp. 16-17), it
appears that on July 22, 1937, an extraordinary meeting of shareholders of the Manila
Wine Merchants, Ltd. was held and in said meeting, among other things, it was
resolved that the Directors of said company "be authorized and instructed to declare
and pay in the form of dividend to the shareholders the amount of any surplus existing
after the above-referred to sale has been consummated. This surplus, after providing
for return of capital and necessary expense, as shown in the Balance Sheet prepared
as of June 1, 1937, after giving effect to the sale transaction above-referred to,
amounts to approximately P270,000." While Schedule B does not state the place
where the meeting was held, Schedule B-1 of the same stipulation of facts (Record

on Appeal, pp. 17-18) furnishes us the information that it was held in Manila.
Schedule B-1 in this connection says:

on Appeal, p. 13). It seems clear, therefore, that the dividends in question were
declared in the Philippine Islands.

Sale of Company: In accordance with resolution passed at an

Extraordinary Meeting of Shareholders held in Manila (underscoring
supplied) on July 22, 1937, at 3 o'clock, the Directors of the Manila
Wine Merchants Ltd., were authorized to sell the Company as a
going concern in accordance with sale agreement presented at the
Meeting.

What was the legal effect of that declaration? Paragraph V of the stipulation of facts
(Rec. on Appeal, pp. 20-21) states that, pursuant to these resolutions, "the Hongkong
Company (the same Manila Wine Merchants, Ltd.) distributed this surplus to its
stockholders, plaintiffs receiving (underscoring supplied) the following sums on the
following dates" (then follow plaintiffs' names with the respective amounts in
Philippine pesos received by them on the dates stated). It is not stated that they
received their dividends in Hongkong or other foreign money. And in their own brief
(p. 25) they say that the payments or distributions thus received by them, as a result
of the liquidation and sale of said company, "were included as gross income in their
Philippine income tax returns". This fact further tends to show that those payments or
distributions were received in the Philippine Islands, either by plaintiffs personally or
through their proxies or agents. Besides, in paragraph V of the stipulation of facts
(Rec. on Appeal, p. 21) it appears that the dividends or distributions pertaining to
these individual plaintiffs as well as that pertaining to their co-plaintiff Wise and Co.,
Inc., were paid on the same dates, namely, August 24, 1937, and October 28, 1937;
and it being undisputed that Wise and Co., Inc. was domiciled and had its principal
office in Manila (complaint, par. I, Rec. on Appeal, p.2), in which city it was
presumably paid, it would seem obvious that the concomitant payments thus made to
the other plaintiffs were likewise effected in the same place, whether the individual
plaintiffs acted personally or through proxies or agents. It should also be remembered
that while the "registered office" of the Manila Wine Merchants, Ltd. was situated in
the colony of Hongkong (Schedule A, Rec. on Appeal, p. 13), the fact is that the only
business for which it was incorporated was the wine, beer, and spirit business, which
had been and was being conducted exclusively within the Philippine Islands, and from
the record we deduce that it had also office in Manila where, so far as the record
discloses, the payments were made. Finally, the fact that payment was made in
Philippine pesos would strongly corroborate the conclusion that it was made in this
country if it had been made in Hongkong or elsewhere abroad, the reasonable
assumption is that it would have been made in Hongkong dollars or in the currency of
such other place abroad.

Later in the same Schedule B-1 we find that the declaration of dividends authorized in
the previous meeting, as stated in the minutes Schedule B, was made by the Board of
Directors of the same Manila Wine Merchants, Ltd., of whose meeting on that same
date, July 22, 1937, Schedule B-1 constitutes the minutes. The pertinent parts to the
minutes of said meeting read as follows:
Dividend: The second matter before the Meeting was the question
of declaring a dividend to enable a distribution in cash to be made,
the dividend to be the entire amount standing at surplus after
providing for return of capital and various expenses in accordance
with reconstructed balance sheet as at June 1, 1937 presented by
our auditors.
xxx

xxx

xxx

Resolved that as after the Manila Wine Merchants Ltd. has been
sold for the stipulated sum of P400,000 and money received, there
will be after providing for return of capital, payment of income tax
and other charges, a sum of approximately P270,000 standing at
surplus account, a dividend is now hereby declared in amount
covering the entire balance remaining at surplus account after the
concern has been wound up, and we hereby authorize the
distribution of P265,000 as and when funds are available, any
balance remaining to be distributed when final Liquidator's account
has been rendered and paid."
Again, while the minutes Schedule B-1 do not reveal the place where that board
meeting was held, the fact stated therein that it was held on July 22,1937, the selfsame date of the extraordinary meeting of shareholders referred to in the minutes
Schedule B, at 3 o'clock (presumably p.m.), as recorded in Schedule B-1, clearly
shows that the said board meeting was held also in Manila, and not in Hongkong or
elsewhere abroad, for J.F. Macgregor and E. Heybrook, both of whom appear in both
Schedules B and B-1 to have participated in both meetings, could not, so far as the
record discloses, very well be in Manila and Hongkong or elsewhere abroad on that
same date. There is no showing, nor is it even pretended that these two gentlemen
after the meeting held in Manila on July 22, 1937, at 3 o'clock, took an airplane or
other mode of conveyance, as fast or faster, and hurried to Hongkong or elsewhere
abroad and attended the other meeting that very same day. Indeed, that both
meetings must have been held in Manila would seem to be the only natural and
logical supposition from the fact that the Manila Wine Merchants, Ltd., was admittedly
conducting its business in said city and the Philippines in general (Schedule A, Rec.

. . . However, where a corporation has not only declared a dividend

but has specifically appropriated and set apart from its other assets
a fund out of which the dividend is to be paid, such action
constitutes the assets to set apart a trust fund in the hands of the
corporation for the payment of the stockholders to the exclusion of
other creditors. . . . (18 C.J.S., p. 1115; emphasis supplied.)
As between successive owners of shares of stock in a corporation,
the general rule is that dividends belong to the persons who are the
owners of the stock at the time they are declared, without regard to
the time during which the dividends were earned, and this is true
although the dividends are made payable at a future date. (18
C.J.S., 119, sec. 470 [a]; emphasis supplied.)
There is no controversy about the legal proposition that dividends
declared belong to the owner of the stock at the time the dividend

is declared. (Livingstone County Bank vs. First State Bank, 136 Ky.,
546, 554, cited in footnote 36, p. 818, 14 C.J.; emphasis supplied.)
The moment the dividend is declared, it becomes then separate
and distinct from the stock and the dividend falls to him who is
proprietor of the stock of which it was theretofore incident.
The doctrine is that a dividend is considered parcel of the mass of
corporate property until declared and therefore incident to and
parcel of the stock up to the time it is declared; and before its
declaration, will pass with the sale or devise of the stock.
Whosoever owns the stock prior to the declaration of a dividend,
owns the dividend also. (McLaren vs. Crescent Planning Mill Co.,
117 Mo. A., 40, 47, cited in note 36, p. 818, 14 C.J.; emphasis
supplied.)
In De Koven vs. Alsop (205 Ill., 309; 63 L.R.A., 587), the court said:
A dividend is defined as "a corporate profit set aside, declared, and
ordered by the directors to be paid to the stockholders on demand
or at a fixed time. Until the dividend is declared, these corporate
profits belong to the corporation, not to the stockholders, and are
liable for corporate indebtedness." (Emphasis supplied.)
We are fully satisfied from the facts and data furnished here by the parties
themselves that the dividends in question were paid to plaintiffs, personally or thru
their proxies or agents, in the Philippines. But aside from this, from the moment they
were declared and a definite fund specified for their payment (all surplus remaining
"after providing for return of capital and various expenses") and all of this was
done in the Philippines to all legal intents and purposes they earned those
dividends in this country. From the record we deduce that the funds and assets of the
Manila Wine Merchants, Ltd., from which those dividends proceeded, were in the
Philippines where its business was located. So far as the record discloses, its
liquidation was effected in terms of Philippine pesos, indicating that it was made here.
And this in turn would lead to the deduction that the funds and assets liquidated were
here.
Motion denied. So ordered.

SECOND DIVISION

WOODCHILD HOLDINGS, INC.,

G.R. No. 140667

Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to
the Sumulong Highway, Antipolo, Rizal.

Petitioner,

At a special meeting on May 17, 1991, the respondents Board of Directors

approved a resolution authorizing the corporation, through its president, Roberto B.
Roxas, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213
square meters, at a price and under such terms and conditions which he deemed
most reasonable and advantageous to the corporation; and to execute, sign and
deliver the pertinent sales documents and receive the proceeds of the sale for and on
behalf of the company.

- versus -

ROXAS ELECTRIC AND

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B2 covered by TCT No. 78086 on which it planned to construct its warehouse building,
and a portion of the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container
van would be able to readily enter or leave the property. In a Letter to Roxas dated
June 21, 1991, WHI President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2
under stated terms and conditions for P1,000 per square meter or at the price of
P7,213,000. One of the terms incorporated in Dys offer was the following provision:

Promulgated:

CONSTRUCTION COMPANY, INC.,

Respondent.

August 12, 2004

x--------------------------------------------------x

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision of the Court of

Appeals in CA-G.R. CV No. 56125 reversing the Decision of the Regional Trial Court
of Makati, Branch 57, which ruled in favor of the petitioner.
The Antecedents
The respondent Roxas Electric and Construction Company, Inc. (RECCI),
formerly the Roxas Electric and Construction Company, was the owner of two parcels
of land, identified as Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title
(TCT) No. 78085 and Lot No. 491-A-3-B-2 covered by TCT No. 78086. A portion of

5.
This Offer to Purchase is made on the representation and warranty
of the OWNER/SELLER, that he holds a good and registrable title to the property,
which shall be conveyed CLEAR and FREE of all liens and encumbrances, and that
the area of 7,213 square meters of the subject property already includes the area on
which the right of way traverses from the main lot (area) towards the exit to the
Sumulong Highway as shown in the location plan furnished by the Owner/Seller to the
buyer. Furthermore, in the event that the right of way is insufficient for the buyers
purposes (example: entry of a 45-foot container), the seller agrees to sell additional
square meter from his current adjacent property to allow the buyer to full access and
full use of the property.
Roxas indicated his acceptance of the offer on page 2 of the deed. Less
than a month later or on July 1, 1991, Roxas, as President of RECCI, as vendor, and
Dy, as President of WHI, as vendee, executed a contract to sell in which RECCI
bound and obliged itself to sell to Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086
for P7,213,000. On September 5, 1991, a Deed of Absolute Sale in favor of WHI was
issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086 was sold for
P5,000,000, receipt of which was acknowledged by Roxas under the following terms
and conditions:
The Vendor agree (sic), as it hereby agrees and binds
itself to give Vendee the beneficial use of and a right of way from
Sumulong Highway to the property herein conveyed consists of 25
square meters wide to be used as the latters egress from and
ingress to and an additional 25 square meters in the corner of Lot
No. 491-A-3-B-1, as turning and/or maneuvering area for Vendees
vehicles.
The Vendor agrees that in the event that the right of way is
insufficient for the Vendees use (ex entry of a 45-foot container) the
Vendor agrees to sell additional square meters from its current
adjacent property to allow the Vendee full access and full use of the
property.

sale, and complained about the latters failure to eject the squatters within the threemonth period agreed upon in the said deed.
The Vendor hereby undertakes and agrees, at its account,
to defend the title of the Vendee to the parcel of land and
improvements herein conveyed, against all claims of any and all
persons or entities, and that the Vendor hereby warrants the right of
the Vendee to possess and own the said parcel of land and
improvements thereon and will defend the Vendee against all
present and future claims and/or action in relation thereto, judicial
and/or administrative. In particular, the Vendor shall eject all
existing squatters and occupants of the premises within two (2)
weeks from the signing hereof. In case of failure on the part of the
Vendor to eject all occupants and squatters within the two-week
period or breach of any of the stipulations, covenants and terms
and conditions herein provided and that of contract to sell dated 1
July 1991, the Vendee shall have the right to cancel the sale and
demand reimbursement for all payments made to the Vendor with
interest thereon at 36% per annum.
On September 10, 1991, the Wimbeco Builders, Inc. (WBI) submitted its
quotation for P8,649,000 to WHI for the construction of the warehouse building on a
portion of the property with an area of 5,088 square meters. WBI proposed to start the
project on October 1, 1991 and to turn over the building to WHI on February 29, 1992.
In a Letter dated September 16, 1991, Ponderosa Leather Goods Company,
Inc. confirmed its lease agreement with WHI of a 5,000-square-meter portion of the
warehouse yet to be constructed at the rental rate of P65 per square meter.
Ponderosa emphasized the need for the warehouse to be ready for occupancy before
April 1, 1992. WHI accepted the offer. However, WBI failed to commence the
construction of the warehouse in October 1, 1991 as planned because of the
presence of squatters in the property and suggested a renegotiation of the contract
after the squatters shall have been evicted. Subsequently, the squatters were evicted
from the property.
On March 31, 1992, WHI and WBI executed a Letter-Contract for the
construction of the warehouse building for P11,804,160. The contractor started
construction in April 1992 even before the building officials of Antipolo City issued a
building permit on May 28, 1992. After the warehouse was finished, WHI issued on
March 21, 1993 a certificate of occupancy by the building official. Earlier, or on March
18, 1993, WHI, as lessor, and Ponderosa, as lessee, executed a contract of lease
over a portion of the property for a monthly rental of P300,000 for a period of three
years from March 1, 1993 up to February 28, 1996.
In the meantime, WHI complained to Roberto Roxas that the vehicles of
RECCI were parked on a portion of the property over which WHI had been granted a
right of way. Roxas promised to look into the matter. Dy and Roxas discussed the
need of the WHI to buy a 500-square-meter portion of Lot No. 491-A-3-B-1 covered
by TCT No. 78085 as provided for in the deed of absolute sale. However, Roxas died
soon thereafter. On April 15, 1992, the WHI wrote the RECCI, reiterating its verbal
requests to purchase a portion of the said lot as provided for in the deed of absolute

The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085 for its beneficial use within 72 hours from notice thereof,
otherwise the appropriate action would be filed against it. RECCI rejected the demand
of WHI. WHI reiterated its demand in a Letter dated May 29, 1992. There was no
response from RECCI.
On June 17, 1992, the WHI filed a complaint against the RECCI with the
Regional Trial Court of Makati, for specific performance and damages, and alleged,
inter alia, the following in its complaint:
5.
The current adjacent property referred to in the
aforequoted paragraph of the Deed of Absolute Sale pertains to the
property covered by Transfer Certificate of Title No. N-78085 of the
Registry of Deeds of Antipolo, Rizal, registered in the name of
herein defendant Roxas Electric.
6.
Defendant Roxas Electric in patent violation of
the express and valid terms of the Deed of Absolute Sale
unjustifiably refused to deliver to Woodchild Holdings the stipulated
beneficial use and right of way consisting of 25 square meters and
55 square meters to the prejudice of the plaintiff.
7.
Similarly, in as much as the 25 square meters
and 55 square meters alloted to Woodchild Holdings for its
beneficial use is inadequate as turning and/or maneuvering area of
its 45-foot container van, Woodchild Holdings manifested its
intention pursuant to para. 5 of the Deed of Sale to purchase
additional square meters from Roxas Electric to allow it full access
and use of the purchased property, however, Roxas Electric
refused and failed to merit Woodchild Holdings request contrary to
defendant Roxas Electrics obligation under the Deed of Absolute
Sale (Annex A).
8.
Moreover, defendant, likewise, failed to eject all
existing squatters and occupants of the premises within the
stipulated time frame and as a consequence thereof, plaintiffs
planned construction has been considerably delayed for seven (7)
months due to the squatters who continue to trespass and obstruct
the subject property, thereby Woodchild Holdings incurred
substantial losses amounting to P3,560,000.00 occasioned by the
increased cost of construction materials and labor.
9.
Owing further to Roxas Electrics deliberate
refusal to comply with its obligation under Annex A, Woodchild
Holdings suffered unrealized income of P300,000.00 a month or
P2,100,000.00 supposed income from rentals of the subject
property for seven (7) months.

10.
On April 15, 1992, Woodchild Holdings made a
final demand to Roxas Electric to comply with its obligations and
warranties under the Deed of Absolute Sale but notwithstanding
such demand, defendant Roxas Electric refused and failed and
continue to refuse and fail to heed plaintiffs demand for compliance.

e)

to pay attorneys fees in the amount of

P100,000.00; and

f)

to pay the costs of suit.

Other reliefs just and equitable are prayed for.

Copy of the demand letter dated April 15, 1992 is hereto
attached as Annex B and made an integral part hereof.
11.
Finally, on 29 May 1991, Woodchild Holdings
made a letter request addressed to Roxas Electric to particularly
annotate on Transfer Certificate of Title No. N-78085 the agreement
under Annex A with respect to the beneficial use and right of way,
however, Roxas Electric unjustifiably ignored and disregarded the
same.
Copy of the letter request dated 29 May 1992 is hereto
attached as Annex C and made an integral part hereof.
12.
By reason of Roxas Electrics continuous refusal
and failure to comply with Woodchild Holdings valid demand for
compliance under Annex A, the latter was constrained to litigate,
thereby incurring damages as and by way of attorneys fees in the
amount of P100,000.00 plus costs of suit and expenses of litigation.
The WHI prayed that, after due proceedings, judgment be rendered in its
favor, thus:
WHEREFORE, it is respectfully prayed that judgment be
rendered in favor of Woodchild Holdings and ordering Roxas
Electric the following:
a)

to deliver to Woodchild Holdings the

beneficial use of the stipulated 25 square
meters and 55 square meters;

b)

to sell to Woodchild Holdings additional 25

and 100 square meters to allow it full
access and use of the purchased property
pursuant to para. 5 of the Deed of Absolute
Sale;

c)

d)

to cause annotation on Transfer Certificate

of Title No. N-78085 the beneficial use and
right of way granted to Woodchild Holdings
under the Deed of Absolute Sale;
to pay Woodchild Holdings the amount of
P5,660,000.00,
representing
actual
damages and unrealized income;

In its answer to the complaint, the RECCI alleged that it never authorized its
former president, Roberto Roxas, to grant the beneficial use of any portion of Lot No.
491-A-3-B-1, nor agreed to sell any portion thereof or create a lien or burden thereon.
It alleged that, under the Resolution approved on May 17, 1991, it merely authorized
Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086. As such, the grant of a
right of way and the agreement to sell a portion of Lot No. 491-A-3-B-1 covered by
TCT No. 78085 in the said deed are ultra vires. The RECCI further alleged that the
provision therein that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI lacked
the essential elements of a binding contract.
In its amended answer to the complaint, the RECCI alleged that the delay in
the construction of its warehouse building was due to the failure of the WHIs
contractor to secure a building permit thereon.
During the trial, Dy testified that he told Roxas that the petitioner was buying
a portion of Lot No. 491-A-3-B-1 consisting of an area of 500 square meters, for the
price of P1,000 per square meter.
On November 11, 1996, the trial court rendered judgment in favor of the
WHI, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered directing
defendant:
(1)
To allow plaintiff the beneficial use of the existing
right of way plus the stipulated 25 sq. m. and 55 sq. m.;
(2)
To sell to plaintiff an additional area of 500 sq. m.
priced at P1,000 per sq. m. to allow said plaintiff full access and
use of the purchased property pursuant to Par. 5 of their Deed of
Absolute Sale;
(3)
To cause annotation on TCT No. N-78085 the
beneficial use and right of way granted by their Deed of Absolute
Sale;
(4)
To pay plaintiff the amount of P5,568,000
representing actual damages and plaintiffs unrealized income;
(5)
fees; and

To pay plaintiff P100,000 representing attorneys

To pay the costs of suit.

SO ORDERED.
The trial court ruled that the RECCI was estopped from disowning the
apparent authority of Roxas under the May 17, 1991 Resolution of its Board of
Directors. The court reasoned that to do so would prejudice the WHI which transacted
with Roxas in good faith, believing that he had the authority to bind the WHI relating
to the easement of right of way, as well as the right to purchase a portion of Lot No.
491-A-3-B-1 covered by TCT No. 78085.
The RECCI appealed the decision to the CA, which rendered a decision on
November 9, 1999 reversing that of the trial court, and ordering the dismissal of the
complaint. The CA ruled that, under the resolution of the Board of Directors of the
RECCI, Roxas was merely authorized to sell Lot No. 491-A-3-B-2 covered by TCT
No. 78086, but not to grant right of way in favor of the WHI over a portion of Lot No.
491-A-3-B-1, or to grant an option to the petitioner to buy a portion thereof. The
appellate court also ruled that the grant of a right of way and an option to the
respondent were so lopsided in favor of the respondent because the latter was
authorized to fix the location as well as the price of the portion of its property to be
sold to the respondent. Hence, such provisions contained in the deed of absolute sale
were not binding on the RECCI. The appellate court ruled that the delay in the
construction of WHIs warehouse was due to its fault.
The Present Petition
The petitioner now comes to this Court asserting that:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
DEED OF ABSOLUTE SALE (EXH. C) IS ULTRA VIRES.
II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING
THE RULING OF THE COURT A QUO ALLOWING THE
PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING
RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE METERS
AND 55 SQUARE METERS BECAUSE THESE ARE VALID
STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED OF
ABSOLUTE SALE (EXH. C).
III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE
COURT OF APPEALS TO RULE THAT THE STIPULATIONS OF
THE DEED OF ABSOLUTE SALE (EXH. C) WERE
DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE
DEPRIVED OF ITS PROPERTY WITHOUT DUE PROCESS.
IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF
PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED
DECISION.

V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE
FAILURE OF THE APPELLANT TO EVICT THE SQUATTERS ON
THE LAND AS AGREED IN THE DEED OF ABSOLUTE SALE
(EXH. C).
VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING
THE RULING OF THE COURT A QUO DIRECTING THE
DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF
P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND
PLAINTIFFS UNREALIZED INCOME AS WELL AS ATTORNEYS
FEES.
The threshold issues for resolution are the following: (a) whether the
respondent is bound by the provisions in the deed of absolute sale granting to the
petitioner beneficial use and a right of way over a portion of Lot No. 491-A-3-B-1
accessing to the Sumulong Highway and granting the option to the petitioner to buy a
portion thereof, and, if so, whether such agreement is enforceable against the
respondent; (b) whether the respondent failed to eject the squatters on its property
within two weeks from the execution of the deed of absolute sale; and, (c) whether
the respondent is liable to the petitioner for damages.
On the first issue, the petitioner avers that, under its Resolution of May 17,
1991, the respondent authorized Roxas, then its president, to grant a right of way
over a portion of Lot No. 491-A-3-B-1 in favor of the petitioner, and an option for the
respondent to buy a portion of the said property. The petitioner contends that when
the respondent sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it (respondent)
was well aware of its obligation to provide the petitioner with a means of ingress to or
egress from the property to the Sumulong Highway, since the latter had no adequate
outlet to the public highway. The petitioner asserts that it agreed to buy the property
covered by TCT No. 78085 because of the grant by the respondent of a right of way
and an option in its favor to buy a portion of the property covered by TCT No. 78085.
It contends that the respondent never objected to Roxas acceptance of its offer to
purchase the property and the terms and conditions therein; the respondent even
allowed Roxas to execute the deed of absolute sale in its behalf. The petitioner
asserts that the respondent even received the purchase price of the property without
any objection to the terms and conditions of the said deed of sale. The petitioner
claims that it acted in good faith, and contends that after having been benefited by the
said sale, the respondent is estopped from assailing its terms and conditions. The
petitioner notes that the respondents Board of Directors never approved any
resolution rejecting the deed of absolute sale executed by Roxas for and in its behalf.
As such, the respondent is obliged to sell a portion of Lot No. 491-A-3-B-1 covered by
TCT No. 78085 with an area of 500 square meters at the price of P1,000 per square
meter, based on its evidence and Articles 649 and 651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so authorized under
the May 17, 1991 Resolution of its Board of Directors to impose a burden or to grant a
right of way in favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a
portion thereof to the petitioner. Hence, the respondent was not bound by such
provisions contained in the deed of absolute sale. Besides, the respondent contends,

the petitioner cannot enforce its right to buy a portion of the said property since there
was no agreement in the deed of absolute sale on the price thereof as well as the
specific portion and area to be purchased by the petitioner.
We agree with the respondent.
In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals, we
held that:
A corporation is a juridical person separate and distinct
from its stockholders or members. Accordingly, the property of the
corporation is not the property of its stockholders or members and
may not be sold by the stockholders or members without express
authorization from the corporations board of directors. Section 23 of
BP 68, otherwise known as the Corporation Code of the
Philippines, provides:
SEC. 23. The Board of Directors or
Trustees. Unless otherwise provided in this Code,
the corporate powers of all corporations formed
under this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders of
stocks, or where there is no stock, from among
the members of the corporation, who shall hold
office for one (1) year and until their successors
are elected and qualified.
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its by-laws or by its board
resolution, through its officers or agents in the normal course of
business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the
articles of incorporation, by-laws, or relevant provisions of law.
Generally, the acts of the corporate officers within the scope of their authority
are binding on the corporation. However, under Article 1910 of the New Civil Code,
acts done by such officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly, or is estopped from
denying them:
Art. 1910. The principal must comply with all the
obligations which the agent may have contracted within the scope
of his authority.
As for any obligation wherein the agent has exceeded his
power, the principal is not bound except when he ratifies it
expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the scope of
authority are unenforceable against the corporation unless ratified by the corporation.

In BA Finance Corporation v. Court of Appeals, we also ruled that persons

dealing with an assumed agency, whether the assumed agency be a general or
special one, are bound at their peril, if they would hold the principal liable, to ascertain
not only the fact of agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to establish it.
In this case, the respondent denied authorizing its then president Roberto B.
Roxas to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to
create a lien or burden thereon. The petitioner was thus burdened to prove that the
respondent so authorized Roxas to sell the same and to create a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of the Board of
Directors of the respondent, which is worded as follows:
RESOLVED, as it is hereby resolved, that the corporation,
thru the President, sell to any interested buyer, its 7,213-sq.-meter
property at the Sumulong Highway, Antipolo, Rizal, covered by
Transfer Certificate of Title No. N-78086, at a price and on terms
and conditions which he deems most reasonable and
advantageous to the corporation;
FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS,
President of the corporation, be, as he is hereby authorized to
execute, sign and deliver the pertinent sales documents and
receive the proceeds of sale for and on behalf of the company.
Evidently, Roxas was not specifically authorized under the said resolution to
grant a right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to
agree to sell to the petitioner a portion thereof. The authority of Roxas, under the
resolution, to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the
authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or to create or
convey real rights thereon. Neither may such authority be implied from the authority
granted to Roxas to sell Lot No. 491-A-3-B-2 to the petitioner on such terms and
conditions which he deems most reasonable and advantageous. Under paragraph 12,
Article 1878 of the New Civil Code, a special power of attorney is required to convey
real rights over immovable property. Article 1358 of the New Civil Code requires that
contracts which have for their object the creation of real rights over immovable
property must appear in a public document. The petitioner cannot feign ignorance of
the need for Roxas to have been specifically authorized in writing by the Board of
Directors to be able to validly grant a right of way and agree to sell a portion of Lot
No. 491-A-3-B-1. The rule is that if the act of the agent is one which requires authority
in writing, those dealing with him are charged with notice of that fact.
Powers of attorney are generally construed strictly and courts will not infer or
presume broad powers from deeds which do not sufficiently include property or
subject under which the agent is to deal. The general rule is that the power of
attorney must be pursued within legal strictures, and the agent can neither go beyond
it; nor beside it. The act done must be legally identical with that authorized to be
done. In sum, then, the consent of the respondent to the assailed provisions in the

deed of absolute sale was not obtained; hence, the assailed provisions are not
binding on it.

by the respondents retention of the amount, it cannot thereby be implied that it had
ratified the unauthorized acts of its agent, Roberto Roxas.

We reject the petitioners submission that, in allowing Roxas to execute the

contract to sell and the deed of absolute sale and failing to reject or disapprove the
same, the respondent thereby gave him apparent authority to grant a right of way
over Lot No. 491-A-3-B-1 and to grant an option for the respondent to sell a portion
thereof to the petitioner. Absent estoppel or ratification, apparent authority cannot
remedy the lack of the written power required under the statement of frauds. In
addition, the petitioners fallacy is its wrong assumption of the unproved premise that
the respondent had full knowledge of all the terms and conditions contained in the
deed of absolute sale when Roxas executed it.

On the last issue, the petitioner contends that the CA erred in dismissing its
complaint for damages against the respondent on its finding that the delay in the
construction of its warehouse was due to its (petitioners) fault. The petitioner asserts
that the CA should have affirmed the ruling of the trial court that the respondent failed
to cause the eviction of the squatters from the property on or before September 29,
1991; hence, was liable for P5,660,000. The respondent, for its part, asserts that the
delay in the construction of the petitioners warehouse was due to its late filing of an
application for a building permit, only on May 28, 1992.

It bears stressing that apparent authority is based on estoppel and can arise
from two instances: first, the principal may knowingly permit the agent to so hold
himself out as having such authority, and in this way, the principal becomes estopped
to claim that the agent does not have such authority; second, the principal may so
clothe the agent with the indicia of authority as to lead a reasonably prudent person to
believe that he actually has such authority. There can be no apparent authority of an
agent without acts or conduct on the part of the principal and such acts or conduct of
the principal must have been known and relied upon in good faith and as a result of
the exercise of reasonable prudence by a third person as claimant and such must
have produced a change of position to its detriment. The apparent power of an agent
is to be determined by the acts of the principal and not by the acts of the agent.
For the principle of apparent authority to apply, the petitioner was burdened
to prove the following: (a) the acts of the respondent justifying belief in the agency by
the petitioner; (b) knowledge thereof by the respondent which is sought to be held;
and, (c) reliance thereon by the petitioner consistent with ordinary care and prudence.
In this case, there is no evidence on record of specific acts made by the respondent
showing or indicating that it had full knowledge of any representations made by
Roxas to the petitioner that the respondent had authorized him to grant to the
respondent an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No.
78085, or to create a burden or lien thereon, or that the respondent allowed him to do
so.
The petitioners contention that by receiving and retaining the P5,000,000
purchase price of Lot No. 491-A-3-B-2, the respondent effectively and impliedly
ratified the grant of a right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to
grant to the petitioner an option to sell a portion thereof, is barren of merit. It bears
stressing that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and the latter
had taken possession of the property. As such, the respondent had the right to retain
the P5,000,000, the purchase price of the property it had sold to the petitioner. For an
act of the principal to be considered as an implied ratification of an unauthorized act
of an agent, such act must be inconsistent with any other hypothesis than that he
approved and intended to adopt what had been done in his name. Ratification is
based on waiver the intentional relinquishment of a known right. Ratification cannot
be inferred from acts that a principal has a right to do independently of the
unauthorized act of the agent. Moreover, if a writing is required to grant an authority to
do a particular act, ratification of that act must also be in writing. Since the respondent
had not ratified the unauthorized acts of Roxas, the same are unenforceable. Hence,

The petitioners contention is meritorious. The respondent does not deny that
it failed to cause the eviction of the squatters on or before September 29, 1991.
Indeed, the respondent does not deny the fact that when the petitioner wrote the
respondent demanding that the latter cause the eviction of the squatters on April 15,
1992, the latter were still in the premises. It was only after receiving the said letter in
April 1992 that the respondent caused the eviction of the squatters, which thus
cleared the way for the petitioners contractor to commence the construction of its
warehouse and secure the appropriate building permit therefor.
The petitioner could not be expected to file its application for a building
permit before April 1992 because the squatters were still occupying the property.
Because of the respondents failure to cause their eviction as agreed upon, the
petitioners contractor failed to commence the construction of the warehouse in
October 1991 for the agreed price of P8,649,000. In the meantime, costs of
construction materials spiraled. Under the construction contract entered into between
the petitioner and the contractor, the petitioner was obliged to pay P11,804,160,
including the additional work costing P1,441,500, or a net increase of P1,712,980.
The respondent is liable for the difference between the original cost of construction
and the increase thereon, conformably to Article 1170 of the New Civil Code, which
reads:
Art. 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay and those who
in any manner contravene the tenor thereof, are liable for damages.
The petitioner, likewise, lost the amount of P3,900,000 by way of unearned
income from the lease of the property to the Ponderosa Leather Goods Company.
The respondent is, thus, liable to the petitioner for the said amount, under Articles
2200 and 2201 of the New Civil Code:
Art. 2200. Indemnification for damages shall comprehend
not only the value of the loss suffered, but also that of the profits
which the obligee failed to obtain.
Art. 2201. In contracts and quasi-contracts, the damages
for which the obligor who acted in good faith is liable shall be those
that are the natural and probable consequences of the breach of
the obligation, and which the parties have foreseen or could have
reasonably foreseen at the time the obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the

obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the obligation.
In sum, we affirm the trial courts award of damages and attorneys fees to the
petitioner.
IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered
AFFIRMING the assailed Decision of the Court of Appeals WITH MODIFICATION.
The respondent is ordered to pay to the petitioner the amount of P5,612,980 by way
of actual damages and P100,000 by way of attorneys fees. No costs.
SO ORDERED.

Republic
SUPREME
Manila

The trial court resolved all the issues raised by the parties in favor of the plaintiffs
and, after considering the evidence, both oral and documentary, arrived at the
following conclusions:
First. That the contract executed between the plaintiffs and the defendant
is a renumerative donation.

of

the

Philippines
COURT

EN BANC
G.R. No. L-5377

resolutions adopted by the Board of Directors and stockholders of the defendant

company giving to said minor children of the proceeds of the insurance policies taken
on the life of their deceased father Enrico Pirovano with the company as beneficiary.
Defendant's main defense is: that said resolutions and the contract executed
pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given is
not yet due and demandable.

December 29, 1954

MARIA
CLARA
PIROVANA
ET
AL.,
plaintiffs-appellees,
vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.
Del
Rosario
and
Vicente J. Francisco for appellees.

Garcia

for

Second. That said contract or donation is not ultra vires, but an act
executed within the powers of the defendant corporation in accordance with
its articles of incorporation and by laws, sanctioned and approved by its
Board of Directors and stockholders; and subsequently ratified by other
subsequent acts of the defendant company.
Third. That the said donation is in accordance with the trend of modern
and more enlightened legislation in its treatment of questions between labor
and capital.
Fourth. That the condition mentioned in the donation is null and void
because it depends on the provisions of Article 1115 of the old Civil Code.

appellant.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Rizal declaring the
donation made by the defendant in favor of the minor children of the late Enrico
Pirovano of the proceeds of the insurance policies taken on his life valid and binding,
and ordering said defendant to pay to said minor children the sum of P583,813.59,
with interest thereon at the rate of per cent from the date of filing of the complaint,
plus an additional amount equivalent to 20 per cent of said sum of P538,813.59 as
damages by way of attorney's fees and the costs of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their
mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain

Fifth. That if the condition is valid, its non-fulfillment is due to the

desistance of the defendant company from obeying and doing the wishes
and mandates of the majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National
Development Company is not due to the lack of funds, nor to lack of
authority, but the desire of the President of the corporation to preserve and
continue the Government participation in the company.
Seventh. That due demands were made by the plaintiffs and their
attorneys and these demands were rejected for no justifiable or legal
grounds.
The important facts which need to be considered for purposes of this appeal may be
briefly stated as follows: Defendant is a corporation duly organized in accordance with
law with an authorized capital of P500,000, divided into 5,000 shares, with a par value

of P100 each share. The stockholders were: Esteban de la Rama, 1,800 shares,
Leonor de la Rama, 100 shares, Estefania de la Rama, 100 shares, and Eliseo
Hervas, Tomas Concepcion, Antonio G. Juanco, and Gaudencio Volasote with 5
shares each. Leonor and Estefania are daughters of Don Esteban, while the rest his
employees. Estefania de la Rama was married to the late Enrico Pirovano and to
them four children were born who are the plaintiffs in this case.
Enrico Pirovano became the president of the defendant company and under his
management the company grew and progressed until it became a multi-million
corporation by the time Pirovano was executed by the Japanese during the
occupation. On May 13, 1941, the capital stock of the corporation was increased to
P2,000,000, after which a 100 per cent stock dividend was declared. Subsequently, or
before the outbreak of the war , new stock dividends of 200 per cent and 33 1/3 per
cent were again declared. On December 4, 1941, the capital stock was once more
increased to P5,000,000. Under Pirovano's management, the assets of the company
grew and increased from an original paid up capital of around P240,000 to
P15,538,024.37 by September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically owned and controlled the
stock of the defendant corporation, distributed his shareholding among his five
daughters, namely, Leonor, Estefania, Lourdes, Lolita and Conchita and his wife
Natividad Aguilar so that, at that time, or on July 10, 1946, the stockholding of the
corporation stood as follows: Esteban de la Rama, 869 shares, Leonor de la Rama,
3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de la Rama, 3,368
shares, Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, and
Natividad Aguilar, 2,136 shares. The other stockholders , namely, Eliseo Hervas,
Tomas Concepcion, Antonio Juanco, and Jose Aguilar, who were merely employees
of Don Esteban, were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco
and Rafael Roces, one share each, because they merely represented the National
Development Company. This Company was given representation in the Board Of
Directors of the corporation because at that time the latter had an outstanding bonded
indebtedness to the National Development Company.
This bonded indebtedness was incurred on February 26, 1940 and was in the amount
of P7,500.00. The bond held by the National Development Company was redeemable
within a period of 20 years from March 1, 1940,. bearing interest at the rate of 5 per
cent per annum. To secure said bonded indebtedness, all the assets of the De la
Rama Steamship Co., Inc., and properties of Don Esteban de la Rama, as well as
those of the Hijos de I. de la Rama and Co., Inc., a sister corporation owned by Don
Esteban and his family, were mortgaged to the National Development Company
(Annexes A, B, C, D of Exhibit 3, Deed of Trust). Payments made by the corporation
under the management of Pirovano reduced this bonded indebtedness to
P3,260,855.77.

Upon arrangement made with the National Development Company, the outstanding
bonded indebtedness was converted into non-voting preferred shares of stock of the
De la Rama company under the express condition that they would bear affixed
cumulative dividend of 6 per cent per annum and would be redeemable within 15
years (Exhibits 5 and 7). This conversion was carried out on September 23, 1949,
when the National Development Company executed a "Deed of Termination of Trust
and Release of Mortgage" in favor of the De la Rama company (Exhibit 6.) The
immediate effect of this conversion was the released from incumbrance of all the
properties Of Don Esteban and of the Hijos de I. de la Rama and Co., Inc., which was
apparently favorable to the interests of the De la Rama company, but, on the other
hand, it resulted in the inconvenience that, as holder of the preferred stock, the
National Development Company, was given to the right to 40 per cent of the
membership of the Board of Directors of the De la Rama company, which meant an
increase in the representation of the National Development Company from 2 to 4 of
the 9 members of said Board of Directors.
The first resolution granting to the Pirovano children the proceeds of the insurance
policies taken on his life by the defendant company was adopted by the Board of
Directors at a meeting held on July 10, 1946, (Exhibit B). This grant was called in the
resolution as "Special Payment to Minor Heirs of the late Enrico Pirovano". Because
of its direct hearing on the issues involved in this case, said resolution is hereunder
reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO
PIROVANO
The President stated that the principal purpose for which the meeting had
been called was to discuss the advisability of making some form of
compensation to the minor heirs of the late Enrico Pirovano, former
President and General Manager of the Company. As every member of the
Board knows, said the President, the late Enrico Pirovano who was largely
responsible for the very successful development of the activities of the
Company prior to war was killed by the Japanese in Manila sometime in
1944 leaving as his only heirs four minor children, Maria Carla, Esteban,
Enrico and John Albert. Early in 1941, explained the President, the Company
had insured the life of Mr. Pirovano for a million pesos. Following the
occupation of the Philippines by Japanese forces the Company was unable
to pay the premiums on those policies issued by Filipino companies and
these policies had lapsed. But with regards to the York Office of the De la
Rama Steamship Co., Inc. had kept up payment of the premiums from year
to year. The payments made on account of these premiums, however, are
very small compared to the amount which the Company will now receive as
a result of Mr. Pirovano's death. The President proposed therefore that out of
the proceeds of these policies the sum of P400,000 be set aside for the

minor children of the deceased, said sum of money to be convertible into

4,000 shares of the stock of the Company, at par, or 1,000 shares for each
child. This proposal, explained the President as being made by him upon
suggestion of President Roxas, but, he added, that he himself was very
much in favor of it also. On motion of Miss Leonor de la Rama duly
seconded by Mrs. Lourdes de la Rama de Osmea, the following resolution
was, thereupon, unanimously approved:
Whereas, the late Enrico Pirovano, President and General Manager of the
De la Rama Steamship Company, died in Manila sometime in November,
1944:
Whereas, the said Enrico Pirovano was largely responsible for the rapid and
very successful development of the activities of thus company;
Whereas, early in 1941 this company insured the life of said Enrico Pirovano
in various Philippine and American Life Insurance companies for the total
sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow, Estefania
Pirovano and four minor children, to wit: Esteban, Maria Carla, Enrico and
John Albert, all surnamed Pirovano;lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his heirs and it is
but fit proper that this company which owes so much to the deceased should
make some provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life insurance
policies for a period of only 4 years so that it will receive from the insurance
companies sums of money greatly in excess of the premiums paid by this
company.
Be it resolved, That out of the proceeds to be collected from the life
insurance policies on the life of the late Enrico Pirovano, the sum of
P400,000 be set aside for equal division among the 4 minor children of the
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, which sum of money shall be convertible into shares of
stock of the De la Rama Steamship Company, at par and, for that purpose,
that the present registered stockholders of the corporation be requested to
waive their preemptive right to 4,000 shares of the unissued stock of the
company in order to enable each of the 4 minor heirs of the deceased, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, to
obtain 1,000 shares at par;

Resolved, further, that in view of the fact that under the provisions of the
indenture with the National Development Company, it is necessary that
action herein proposed to be confirmed by the Board of Directors of that
company, the Secretary is hereby instructed to send a copy of this resolution
to the proper officers of the National Development Company for appropriate
action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was submitted to the
stockholders of the De la Rama company at a meeting properly convened, and on
that same date, July 10, 1946, the same was duly approved.
It appears that, although Don Esteban and the Members of his family were agreeable
to giving to the Pirovano children the amount of P400,000 out of the proceeds of the
insurance policies taken on the life of Enrico Pirovano, they did not realize that when
they provided in the above referred two resolutions that said Amount should be paid
in the form of shares of stock, they would be actually giving to the Pirovano children
more than what they intended to give. This came about when Lourdes de la Rama,
wife of Sergio Osmea, Jr., showed to the latter copies of said resolutions and asked
him to explain their import and meaning, and it was value then that Osmea
explained that because the value then of the shares of stock was actually 3.6 times
their par value, the donation their value, the donation, although purporting to be only
P400,00, would actually amount to a total of P1,440,000. He further explained that if
the Pirovano children would given shares of stock in lieu of the amount to be donated,
the voting strength of the five daughters of Don Esteban in the company would be
adversely affected in the sense that Mrs. Pirovano would be adversely affected in the
sense that Mrs. Pirovano would have a voting power twice as much as that of her
sisters. This caused Lourdes de la Rama to write to the secretary of the corporation,
Atty. Marcial Lichauco, asking him to cancel the waiver she supposedly gave of her
pre-emptive rights. Osmea elaborated on this matter at the annual meeting of the
stockholders held on December 12, 1946 but at said meeting it was decided to leave
the matter in abeyance pending further action on the part of the members of the De la
Rama family.
Osmea, in the meantime, took up the matter with Don Esteban and, as
consequence, the latter, on December 30, 1946, addressed to Marcial Lichauco a
letter stating, among other things, that "in view of the total lack of understanding by
me and my daughters of the two Resolutions abovementioned, namely, Directors' and
Stockholders' dated July 10, 1946, as finally resolved by the majority of the
Stockholders and Directors present yesterday, that you consider the abovementioned
resolutions nullified." (Exhibit CC).
On January 6, 1947, the Board of Directors of the De la Rama company, as a
consequence of the change of attitude of Don Esteban, adopted a resolution
changing the form of the donation to the Pirovano children from a donation of 4,000

shares of stock as originally planned into a renunciation in favor of the children of all
the company's "right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies", subject to the express condition that said
proceeds should be retained by the company as a loan drawing interest at the rate of
5 per cent per annum and payable to the Pirovano children after the company "shall
have first settled in full the balance of its present remaining bonded indebtedness in
the sum of approximately P5,000,000" (Exhibit C). This resolution was concurred in
by the representatives of the National Development Company. The pertinent portion
of the resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, all of his right, title, and interest as
beneficiary in and to the proceeds of the abovementioned life insurance
policies in favor of Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano, subject to the terms and conditions herein after
provided;
That the proceeds of said insurance policies shall be retained by the
Company in the nature of a loan drawing interest at the rate of 5 per cent
annum from the date of receipt of payment by the Company from the various
insurance companies above-mentioned until the time the time the same
amounts are paid to the minor heirs of Enrico Pirovano previously
mentioned;
That all amounts received from the above-mentioned policies shall be
divided equally among the minors heirs of said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said insurance
policies plus interests that may have accrued to each of the heirs of the said
Enrico Pirovano or their duly appointed representatives after the Company
shall have first settled in full the balance of its present remaining bonded
indebtedness in the sum of the approximately P5,000,000.
The above resolution was carried out by the company and Mrs. Estefania R.
Pirovano, the latter acting as guardian of her children, by executing a Memorandum
Agreement on January 10, 1947 and June 17, 1947, respectively, stating therein that
the De la Rama Steamship Co., Inc., shall enter in its books as a loan the proceeds of
the life insurance policies taken on the life of Pirovano totalling S321,500, which loan
would earn interest at the rate of 5 per cent per annum. Mrs. Pirovano, in executing
the agreement, acted with the express authority granted to her by the court in an
order dated March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution providing therein that
instead of the interest on the loan being payable, together with the principal, only after

the company shall have first settled in full its bonded indebtedness, said interest may
be paid to the Pirovano children "whenever the company is in a position to met said
obligation" (Exhibit D), and on February 26, 1948, Mrs. Pirovano executed a public
document in which she formally accepted the donation (Exhibit H). The Dela Rama
company took "official notice" of this formal acceptance at a meeting held by its Board
of Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at its
meeting on July 25, 1949, the proposition of Mrs. Pirovano to buy the house at New
Rochelle, New York, owned by the Demwood Realty, a subsidiary of the De la Rama
company at its original costs of $75,000, which would be paid from the funds held in
trust belonging to her minor children. After a brief discussion relative to the matter, the
proposition was approved in a resolution adopted on the same date.
The formal transfer was made in an agreement signed on September 5, 1949 by Mrs.
Pirovano, as guardian of her children, and by the De la Rama company, represented
by its new General Manager, Sergio Osmea, Jr. The transfer of this property was
approved by the court in its order of September 20, 1949.lawphil.net
On September 13, 1949, or two years and 3 months after the donation had been
approved in the various resolutions herein above mentioned, the stockholders of the
De la Rama company formally ratified the donation (Exhibit E), with certain clarifying
modifications, including the resolution approving the transfer of the Demwood
property to the Pirovano children. The clarifying modifications are quoted hereunder:
1. That the payment of the above-mentioned donation shall not be affected
until such time as the Company shall have first duly liquidated its present
bonded indebtedness in the amount of P3,260,855.77 with The National
Development Company, or fully redeemed the preferred shares of stock in
the amount which shall be issued to the National Development Company in
lieu thereof;
2. That any and all taxes, legal fees, and expenses in any way connected
with the above transaction shall be chargeable and deducted from the
proceeds of the life insurance policies mentioned in the resolutions of the
Board of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio Osmea, Jr.,
addressed an inquiry to the Securities and Exchange Commission asking for opinion
regarding the validity of the donation of the proceeds of the insurance policies to the
Pirovano children. On June 20, 1950 that office rendered its opinion that the donation
was void because the corporation could not dispose of its assets by gift and therefore
the corporation acted beyond the scope of its corporate powers. This opinion was
submitted to the Board of Directors at its meting on July 12, 1950, on which occasion

the president recommend that other legal ways be studied whereby the donation
could be carried out. On September 14, 1950, another meeting was held to discuss
the propriety of the donation. At this meeting the president expressed the view that,
since the corporation was not authorized by its charter to make the donation to the
Pirovano children and the majority of the stockholders was in favor of making
provision for said children, the manner he believed this could be done would be to
declare a cash dividend in favor of the stockholders in the exact amount of the
insurance proceeds and thereafter have the stockholders make the donation to the
children in their individual capacity. Notwithstanding this proposal of the president, the
board took no action on the matter, and on March 8, 1951, at a stockholders' meeting
convened on that date the majority of the stockholders' voted to revoke the resolution
approving the donation to the Pirovano children. The pertinent portion of the
resolution reads as follows:
Be it resolved, as it is hereby resolved, that in view of the failure of
compliance with the above conditions to which the above donation was
made subject, and in view of the opinion of the Securities and Exchange
Commissioner, the stockholders revoke, rescind and annul, as they do
thereby revoke, rescind and annul, its ratification and approval on
September 13, 1949 of the aforementioned resolution of the Board of
Directors of January 6, 1947, as amended on June 24, 1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to comply with the
condition set for the effectivity of the donation and revoking at the same time the
approval given to it by the corporation, and considering that the corporation can no
longer set aside said donation because it had no longer set aside said donation
because it had long been perfected and consummated, the minor children of the late
Enrico Pirovano, represented by their mother and guardian, Estefania R. de Pirovano,
demanded the payment of the credit due them as of December 31, 1951, amounting
to P564,980.89, and this payment having been refused, they instituted the present
action in the Court of First Instance of Rizal wherein they prayed that the be granted
an alternative relief of the following tenor: (1) sentencing defendant to pay to the
plaintiff the sum of P564,980.89 as of December 31, 1951, with the corresponding
interest thereon; (2) as an alternative relief, sentencing defendant to pay to the
plaintiffs the interests on said sum of P564,980.89 at the rate of 5 per cent per
annum, and the sum of P564,980.89 after the redemption of the preferred shares of
the corporation held by the National Development Company; and (3) in any event,
sentencing defendant to pay the plaintiffs damages in the amount of not less than 20
per cent of the sum that may be adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be determined in order to
reach a decision in this appeal are: (1) Is the grant of the proceeds of the insurance
policies taken on the life of the late Enrico Pirovano as embodied in the resolution of
the Board of Directors of defendant corporation adopted on January 6, 1947 and June

24, 1947 a remunerative donation as found by the lower court?; (2) IN the affirmative
case, has that donation been perfected before its rescission or nullification by the
stockholders of the corporation on March 8, 1951?; (3) Can defendant corporation
give by way of donation the proceeds of said insurance policies to the minor children
of the late Enrico Pirovano under the law or its articles of corporation, or is that
donation an ultra vires act?; and (4) has the defendant corporation, by the acts it
performed subsequent to the granting of the donation, deliberately prevented the
fulfillment of the condition precedent to the payment of said donation such that it can
be said it has forfeited its right to demand its fulfillment and has made the donation
entirely due and demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the defendant corporation to the
minor children of the late Enrico Pirovano, we do not need to go far nor dig into the
voluminous record that lies at the bottom of this case. We do not even need to inquire
into the interest which has allegedly been shown by President Roxas in the welfare of
the children of his good friend Enrico Pirovano. Whether President Roxas has taken
the initiative in the move to give something to said children which later culminated in
the donation now in dispute, is of no moment for the fact is that, from the mass of
evidence on hand, such a donation has been given the full indorsement and
encouraging support by Don Esteban de la Rama who was practically the owner of
the corporation. We only need to fall back to accomplish this purpose on the several
resolutions of the Board of Directors of the corporations containing said grant for they
clearly state the reasons and purposes why the donation has been given.
Before we proceed further, it is convenient to state here in passing that, before the
Board of Directors had approved its resolution of January 6, 1947, as later amended
by another resolution adopted on June 24, 1947, the corporation had already decided
to give to the minor children of the late Enrico Pirovano the sum of P400,000 out of
the proceeds of the insurance policies taken on his life in the form of shares, and that
when this form was considered objectionable because its result and effect would be
to give to said children a much greater amount considering the value then of the stock
of the corporation, the Board of Directors decided to amend the donation in the form
and under the terms stated in the aforesaid resolutions. Thus, in the original
resolution approved by the Board of Directors on July 10, 1946, wherein the reasons
for granting the donation to the minor children of the late Enrico Pirovano were
clearly, we find out the following revealing statements:
Whereas, the late Enrico Pirovano President and General Manager of the
De la Rama Steamship Company, died in Manila sometime in November,
1944;

Whereas, the said Enrico Pirovano was largely responsible for the rapid and
very successful development of the activities of this company;

Be it resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, . . . .

Whereas, early in 1941 this company insured the life of said Enrico Pirovano
in various Philippine and American Life Insurance companies for the total
sum of P1,000,000;

From the above it clearly appears that the corporation thought of giving the donation
to the children of the late Enrico Pirovano because he "was to a large extent
responsible for the rapid and very successful development and expansion of the
activities of this company"; and also because he "left practically nothing to his heirs
and it is but fit and proper that this company which owes so much to the deceased
should make some provision to his children", and so, the donation was given "out of
gratitude to the late Enrico Pirovano." We do not need to stretch our imagination to
see that a grant or donation given under these circumstances is remunerative in
nature in contemplation of law.

Whereas, the said Enrico Pirovano is survived by his widow, Estefania

Pirovano and 4 minor children, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it
is but fit and proper that this company which owes so much to the deceased
should make some provisions for his children;
Whereas, this company paid premiums on Mr. Pirovano's life insurance
policies for a period of only 4 years so that it will receive from the insurance
companies sums of money greatly in excess of the premiums paid by the
company,
Again, in the resolution approved by the Board of Directors on January 6, 1947, we
also find the following expressive statements which are but a reiteration of those
already expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General Manager of the
De la Rama Steamship Co., Inc., died in Manila sometime during the latter
part of the year 1944;
Whereas, the said Enrico Pirovano was to a large extent responsible for the
rapid and very successful development and expansion of the activities of this
company;
Whereas, early in 1941, the life of the said Enrico Pirovano was insured in
various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it
is but fit and proper that this Company which owes so much to the deceased
should make some provision for his children;

That which is made to a person in consideration of his merits or for services

rendered to the donor, provided they do not constitute recoverable debts, or
that in which a burden less than the value of the thing given is imposed upon
the donee, is also a donation." (Art. 619, old Civil Code.)
In donations made to a person for services rendered to the donor, the
donor's will is moved by acts which directly benefit him. The motivating
cause is gratitude, acknowledgment of a favor, a desire to compensate. A
donation made to one who saved the donor's life, or a lawyer who
renounced his fees for services rendered to the donor, would fall under this
class of donations. These donations are called remunerative donations .
(Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th ed., pp.
72-73.)
2. The next question to be determined is whether the donation has been perfected
such that the corporation can no longer rescind it even if it wanted to. The answer to
this question cannot but be in the affirmative considering that the same has not only
been granted in several resolutions duly adopted by the Board of Directors of the
defendant corporation, and in all these corporate acts the concurrence of the
representatives of the National Development Company, the only creditor whose
interest may be affected by the donation, has been expressly given. The corporation
has even gone further. It actually transferred the ownership of the credit subject of
donation to the Pirovano children with the express understanding that the money
would be retained by the corporation subject to the condition that the latter would pay
interest thereon at the rate of 5 per cent per annum payable whenever said
corporation may be in a financial position to do so. Thus, the following acts of the
corporation as reflected from the evidence bear this out:
(a) The donation was embodied in a resolution duly approved by the Board of
Directors on January 6, 19437. In this resolution, the representatives of the National
Development Company, have given their concurrence. This is the only creditor which

can be considered as being adversely affected by the donation. The resolution of

June 24, 1947 did not modify the substance of the former resolution for it merely
provided that instead of the interest on the loan being payable, together with the
principal, only after the corporation had first settled in full its bonded indebtedness,
said interest would be paid "whenever the company is in a position to meet said
obligation."
(b) The resolution of January 6, 1947 was actually carried out when the company and
Mrs. Estefania R. Pirovano, executed a memorandum agreement stating therein hat
the proceeds of the insurance policies would be entered in the books of the
corporation as a loan which would bear an interest at the rate of 5 per cent per
annum, and said agreement was signed by Mrs. Pirovano as judicial guardian of her
children after she had been expressly authorized by the court to accept the donation
in behalf of her children.
(c) While the donation can be considered as duly executed by the execution of the
document stated in the preceding paragraph, and by the entry in the books of the
corporation of the donation as a loan, a further record of said execution was made
when Mrs. Pirovano executed a public document on February 26, 1948 making
similar acceptance of the donation. And this acceptance was officially recorded by the
corporation when on the same date its Board of Directors approved a resolution
taking "official notice" of said acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano
to buy the house at New Rochelle, New York, owned by a subsidiary of the
corporation at the costs of S75,000 which would be paid from the sum held in trust
belonging to her minor children. And this agreement was actually carried out in a
document signed by the general manager of the corporation and by Mrs. Pirovano,
who acted on the matter with the express authority of the court.
(e) And on September 30, 1949, or two years and 3 months after the donation had
been executed, the stockholders of the defendant corporation formally ratified and
gave approval to the donation as embodied in the resolutions above referred to,
subject to certain modifications which did not materially affect the nature of the
donation.
There can be no doubt from the foregoing relation of facts the donation was a
corporate act carried out by the corporation not only with the sanction of its Board of
Directors but also of its stockholders. It is evident that the donation has reached the
stage of perfection which is valid and binding upon the corporation and as such
cannot be rescinded unless there is exists legal grounds for doing so. In this case, we
see none. The two reasons given for the rescission of said donation in the resolution
of the corporation adopted on March 8, 1951, to wit: that the corporation failed to
comply with the conditions to which the above donation was made subject, and that in

the opinion of the Securities and Exchange Commission said donation is ultra vires,
are not, in our opinion, valid and legal as to justify the rescission of a perfected
donation. These reasons, as we will discuss in the latter part of this decision, cannot
be invoked by the corporation to rescind or set at naught the donation, and the only
way by which this can be done is to show that the donee has been in default, or that
the donation has not been validly executed, or is illegal or ultra vires, and such is not
the case as we will see hereafter. We therefore declare that the resolution approved
by the stockholders of the defendant corporation on March 8, 1951 did not and cannot
have the effect of nullifying the donation in question.
3. The third question to be determined is: Can defendant corporation give by way of
donation the proceeds of said insurance policies to the minor children of the late
Enrico Pirovano under the law or its articles of corporation, or is that donation an ultra
vires act? To answer this question it is important for us to examine the articles of
incorporation of the De la Rama company to see this question it is important for us to
examine the articles of incorporation of the De la Rama company to see if the act or
donation is outside of their scope. Paragraph second of said articles provides:
Second. The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire steam or other
ships or vessels, together with equipments and furniture therefor, and to
employ the same in conveyance and carriage of goods, wares and
merchandise of every description, and of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels or other
property of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores, lighters, barges
and other things which the company may deem necessary or advisable to be
purchased or leased for the necessary and proper purposes of the business
of the company, and from time to time to sell the dispose of the same.
(f) To promote any company or companies for the purposes of acquiring all
or any of the property or liabilities of this company, or both, or for any other
purpose which may seem directly or indirectly calculated to benefit the
company.

(g) To invest and deal with the moneys of the company and immediately
required, in such manner as from time to time may be determined.
(h) To borrow, or raise, or secure the payment of money in such manner as
the company shall think fit.
(i) Generally, to do all such other thing and to transact all business as may
be directly or indirectly incidental or conducive to the attainment of the above
object, or any of them respectively.
(j) Without in any particular limiting or restricting any of the objects and
powers of the corporation, it is hereby expressly declared and provided that
the corporation shall have power to issue bonds and provided that the
corporation shall have power to issue bonds and other obligations, to
mortgage or pledge any stocks, bonds or other obligations or any property
which may be required by said corporations; to secure any bonds,
guarantees or other obligations by it issued or incurred; to lend money or
credit to and to aid in any other manner any person, association, or
corporation of which any obligation or in which any interest is held by this
corporation or in the affairs or prosperity of which this corporation or in the
affairs or prosperity of which this corporation has a lawful interest, and to do
such acts and things as may be necessary to protect, preserve, improve, or
enhance the value of any such obligation or interest; and, in general, to do
such other acts in connection with the purposes for which this corporation
has been formed which is calculated to promote the interest of the
corporation or to enhance the value of its property and to exercise all the
rights, powers and privileges which are now or may hereafter be conferred
by the laws of the Philippines upon corporations formed under the Philippine
Corporation Act; to execute from time to time general or special powers of
attorney to persons, firms, associations or corporations either in the
Philippines, in the United States, or in any other country and to revoke the
same as and when the Directors may determine and to do any and or all of
the things hereinafter set forth and to the same extent as natural persons
might or could do.
After a careful perusal of the provisions above quoted we find that the corporation
was given broad and almost unlimited powers to carry out the purposes for which it
was organized among them, (1) "To invest and deal with the moneys of the company
not immediately required, in such manner as from time to time may be determined"
and, (2) "to aid in any other manner any person, association, or corporation of which
any obligation or in which any interest is held by this corporation or in the affairs or
prosperity of which this corporation has a lawful interest." The world deal is broad
enough to include any manner of disposition, and refers to moneys not immediately
required by the corporation, and such disposition may be made in such manner as

from time to time may be determined by the corporations. The donation in question
undoubtedly comes within the scope of this broad power for it is a fact appearing in
the evidence that the insurance proceeds were not immediately required when they
were given away. In fact, the evidence shows that the corporation declared a 100 per
cent cash dividend, or P2,000,000, and later on another 30 per cent cash dividend.
This is clear proof of the solvency of the corporation. It may be that, as insinuated,
Don Esteban wanted to make use of the insurance money to rehabilitate the central
owned by a sister corporation, known as Hijos de I. de la Rama and Co., Inc., situated
in Bago, Negros Occidental, but this, far from reflecting against the solvency of the De
la Rama company, only shows that the funds were not needed by the corporation.
Under the second broad power we have the above stated, that is, to aid in any other
manner any person in the affairs and prosperity of whom the corporation has a lawful
interest, the record of this case is replete with instances which clearly show that the
corporation knew well its scope and meaning so much so that, with the exception of
the instant case, no one has lifted a finger to dispute their validity. Thus, under this
broad grant of power, this corporation paid to the heirs of one Florentino Nonato, an
engineer of one of the ships of the company who died in Japan, a gratuity of P7,000,
equivalent to one month salary for each year of service. It also gave to Ramon Pons,
a captain of one of its ships , a retirement gratuity equivalent to one month salary for
every year of service, the same to be based upon his highest salary. And it
contributed P2,000 to the fund raised by the Associated Steamship Lines for the
widow of the late Francis Gispert, secretary of said Association, of which the De la
Rama Steamship Co., Inc., was a member along with about 30 other steamship
companies. In this instance, Gispert was not even an employee of the corporation.
And invoking this vast power, the corporation even went to the extent of contributing
P100,000 to the Liberal Party campaign funds, apparently in the hope that by
conserving its cordial relations with that party it might continue to retain the patronage
of the administration. All these acts executed before and after the donation in
question have never been questioned and were willingly and actually carried out.
We don't see much distinction between these acts of generosity or benevolence
extended to some employees of the corporation, and even to some in whom the
corporation was merely interested because of certain moral or political
considerations, and the donation which the corporation has seen fit to give to the
children of the late Enrico Pirovano from the point of view of the power of the
corporation as expressed in its articles of incorporation. And if the former had been
sanctioned and had been considered valid and intra vires, we see no plausible
reasons why the latter should now be deemed ultra vires. It may perhaps be argued
that the donation given to the children of the late Enrico Pirovano is so large and
disproportionate that it can hardly be considered a pension of gratuity that can be
placed on a par with the instances above mentioned, but this argument overlooks one
consideration: the gratuity here given was not merely motivated by pure liberality or
act of generosity, but by a deep sense of recognition of the valuable services
rendered by the late Enrico Pirovano which had immensely contributed to the growth

of the corporation to the extent that from its humble capitalization it blossomed into a
multi-million corporation that it is today. In other words of the very resolutions granting
the donation or gratuity, said donation was given not only because the company was
so indebted to him that it saw fit and proper to make provisions for his children, but it
did so out of a sense of gratitude. Another factor that we should bear in mind is that
Enrico Pirovano was not only a high official of the company but was at the same time
a member of the De la Rama family, and the recipient of the donation are the
grandchildren of Don Esteban de la Rama. This we, may say, is the motivating root
cause behind the grant of this bounty.
It may be contended that a donation is different from a gratuity. While technically this
may be so in substance they are the same. They are even similar to a pension. Thus,
it was granted for services previously rendered, and which at the time they were
rendered gave rise to no legal obligation. " (Words and Phrases, Permanent Edition,
p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or stated in another way, a
"Gratuity is mere bounty given by the Government in consideration or recognition or
meritorious services and springs from the appreciation an d graciousness of the
Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuity is
something given freely, or without recompense, a gift, something voluntarily given in
return for a favor or services; a bounty; a tip." Wood Mercantile Co. vs. Cole, 209
S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not see
much difference between this definition of gratuity and a remunerative donation
contemplated in the Civil Code. In essence they are the same. Such being the case, it
may be said that this donation is gratuity in a large sense for it was given for valuable
services rendered an ultra vires act in the light of the following authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity to
directors is ultra vires of corporation, so that it could not be legalized even if
the approval of the shareholders; but this position has no sound reason to
support it, and is opposed to the weight of authority (Suffaker vs. Kierger's
Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46 L.R.A. 384).
But although business corporations cannot contribute to charity or
benevolence, yet they are not required always to insist on the full extent of
their legal rights. They are not forbidden for the recognizing moral obligation
of which strict law takes no cognizance. They are not prohibited from
establishing a reputation for board, liberal, equitable dealing which may
stand them in good stead in competition with less fair rivals. Thus, an
incorporated fire insurance company which policies except losses from
explosions may nevertheless pay a loss from that cause when other
companies are accustomed to do so, such liberal dealing being deemed
conducive to the prosperity of the corporation." (Modern Law of
Corporations, Machen, Vol. 1, p. 81).

So, a bank may grant a five years pension to the family at one of its officers.
In all cases in this sorts, the amount of the gratuity rests entirely within the
discretion of the company, unless indeed it be all together out of the reason
and fitness. But where the company has ceased to be going concerned, this
power to make gifts or present it at the end. (Modern Law of Corporations,
Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital. There seems on principle no reason
to doubt that gifts or gratuities wherever they are lawful may be paid out of
capital as well as out of profits. (Modern Law of corporations, Machen, Vol. 1
p. 83.).
Whether desirable to supplement implied powers of this kind by express
provisions. Enough has been said to show that the implied powers of a
corporation to give gratuities to its servants and officers, as well as to
strangers, are ample, so that there is therefore no need to supplement them
by express provisions." (modern Law of Corporations, Machen, Vol. 1, p.
83.) 1
Granting arguendo that the donation given by Pirovano children is outside the scope
of the powers of the defendant corporation, or the scope of the powers that it may
exercise under the law, or it is an ultra vires act, still it may said that the same can not
be invalidated, or declared legally ineffective for the reason alone, it appearing that
the donation represents not only the act of the Board of Directors but of the
stockholders themselves as shown by the fact that the same has been expressly
ratified in a resolution duly approved by the latter. By this ratification, the infirmity of
the corporate act, it may has been obliterated thereby making the cat perfectly valid
and enforceable. This is specially so if the donation is not merely executory but
executed and consummated and no creditors are prejudice, or if there are creditors
affected, the latter has expressly given their confirmity.
In making this pronouncement, advertence should made of the nature of the ultra
vires act that is in question. A little digression needs be made on this matter to show
the different legal effect that may result consequent upon the performance of a
particular ultra vires act on the part of the corporation. may authorities may be cited
interpreting or defining, extent, and scope of an ultra vires act, but all of them are
uniform and unanimous that the same may be either an act performed merely outside
the scope of the powers granted to it by it articles of incorporation, or one which is
contrary to law or violative of any principle which will void any contract whether done
individually or collectively. In other words, a distinction should be made between
corporate acts or contracts which are illegal and those which are merely ultra vires.
The former contemplates the doing of an act which is contrary to law, morals, or
public policy or public duty, and are, like similar transactions between the individuals
void. They cannot serve as basis of a court action, nor require validity ultra vires acts

on the other hand, or those which are not illegal and void ab initio, but are merely
within are not illegal and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Strictly speaking, an ultra vires act is one outside the scope of the power
conferred by the legislature, and although the term has been used
indiscriminately, it is properly distinguishable from acts which are illegal, in
excess or abuse of power, or executed in an unauthorized manner, or acts
within corporate powers but outside the authority of particular officers or
agents (19 C. J. S. 419).
Corporate transactions which are illegal because prohibited by statute or
against public policy are ordinarily void and unenforceable regardless of the
part performance, ratification, or estoppel; but general prohibitions against
exceeding corporate powers and prohibitions intended to protect a particular
class or specifying the consequences of violation may not preclude
enforcement of the transaction and an action may be had for the part
unaffected by the illegality or for equitable restitution. (19 C.J.S. 421.)
Generally, a transaction within corporate powers but executed in an irregular
or unauthorized manner is voidable only, and may become enforceable by
reason of ratification or express or implied assent by the stockholders or by
reason of estoppel of the corporation or the other party to the transaction to
raise the objection, particularly where the benefits are retained
As appears in paragraphs 960-964 supra, the general rule is that a
corporation must act in the manner and with the formalities, if any,
prescribed by its character or by the general law. However, a corporation
transaction or contract which is within the corporation powers, which is
neither wrong in itself nor against public policy, but which is defective from a
failure to observe in its execution a requirement of law enacted for the
benefit or protection of a certain class, is voidable and is valid until avoided,
not void until validated; the parties for whose benefit the requirement was
enacted may ratify it or be estoppel to assert its invalidity, and third persons
acting in good faith are not usually affected by an irregularity on the part of
the corporation in the exercise of its granted powers. (19 C.J.S., 423-24.)
It is true that there are authorities which told that ultra vires acts, or those performed
beyond the powers conferred upon the corporation either by law or by its articles of
incorporation, are not only voidable, but wholly void and of no legal effect, and that
such acts cannot be validated by ratification or be the basis of any action in court; but
such ruling does not constitute the weight of authority, the reason being that they fail
to make the important distinction we have above adverted to. Because rule has been

rejected by most of the state courts and even by the modern treaties or corporations
(7 Flethcer, Cyc. Corps., 563-564). And now it can be said that the majority of the
cases hold that acts which are merely ultra vires, or acts which are not illegal, may be
ratified by the stockholders of a corporation (Brooklyn Heights R. Co. vs. Brooklyn
City R. Co., 135 N.Y. Supp. 1001).
Strictly speaking, an act of a corporation outside of its character powers is
just as such ultra vires where all the stockholders consent thereto as in a
case where none of the stockholders expressly or cannot be ratified so as to
make it valid, even though all the stockholders consent thereto; but
inasmuch as the stockholders in reality constitute the corporation, it should ,
it would seem, be estopped to allege ultra vires, and it is generally so held
where there are no creditors, or the creditors are not injured thereby, and
where the rights of the state or the public are not involved, unless the act is
not only ultra vires but in addition illegal and void. of course, such consent of
all the stockholders cannot adversely affect creditors of the corporation nor
preclude a proper attack by the state because of such ultra vires act. (7
Fletcher Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under consideration is illegal, or contrary to
any of the express provision of the articles of incorporation, nor prejudicial to the
creditors of the defendant corporation, we cannot but logically conclude, on the
strength of the authorities we have quoted above, that said donation, even if ultra
vires in the supposition we have adverted to, is not void, and if voidable its infirmity
has been cured by ratification and subsequent acts of the defendant corporation. The
defendant corporation, therefore, is now prevented or estopped from contesting the
validity of the donation. This is specially so in this case when the very directors who
conceived the idea of granting said donation are practically the stockholders
themselves, with few nominal exception. This applies to the new stockholder Jose
Cojuangco who acquired his interest after the donation has been made because of
the rule that a "purchaser of shares of stock cannot avoid ultra vires acts of the
corporation authorized by its vendor, except those done after the purchase" (7
Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19 Phil., 82.)
Indeed, how can the stockholders now pretend to revoke the donation which has
been partly consummated? How can the corporation now set at naught the transfer
made to Mrs. Pirovano of the property in New York, U.S.A., the price of which was
paid by her but of the proceeds of the insurance policies given as donation. To allow
the corporation to undo what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra vires cannot be set up or
availed of in completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19
C.J.S., 431).

4. We now come to the fourth and last question that the defendant corporation, by the
acts it has performed subsequent to the granting of the donation, deliberately
prevented the fulfillment of the condition precedent to the payment of said donation
such that it can be said it has forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board of Directors adopted on
July 10, 1946 which provided for the donation of P400,000 out of the proceeds which
the De la Rama company would collect on the insurance policies taken on the life of
the late Enrico Pirovano was, as already stated above, amended on January 6, 1947
to include, among the conditions therein provided, that the corporation shall proceed
to pay said amount, as well as the interest due thereon, after it shall have settled in
full balance of its bonded indebtedness in the sum of P5,000,000. It should be
recalled that on September 13, 1949, or more than 2 years after the last amendment
referred too above, the stockholders adopted another resolution whereby they
formally ratified said donation but subject to the following clarifications: (1) that the
amount of the donation shall not be effected until such time as the company shall
have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 to the National Development Company, or shall have first fully
redeemed the preferred shares of stock in the amount to be issued to said company
in lieu thereof, and (2) that any and all taxes, legal fees, and expenses connected
with the transaction shall be chargeable from the proceeds of said insurance policies.
The trial court, in considering these conditions in the light of the acts subsequently
performed by the corporation in connection with the proceeds of the insurance
policies, considered said conditions null and void, or at most not written because in its
pinion their non-fulfillment was due to a deliberate desistance of the corporation and
not to lack of funds to redeem the preferred shares of the National Development
Company. The conclusions arrived at by the trial court on this point are as follows:
Fourth. that the condition mentioned in the donation is null and void
because it depends on the exclusive will of the donor, in accordance with the
provisions of Article 1115 of the Old Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due to the
desistance of the defendant company from obeying and doing the wishes
and mandate of the majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National
Development Company is due to the lack of funds, nor to lack of authority,
but to the desire of the President of the corporation to preserve and continue
the Government participation in the company.
To this views of the trial court, we fail to agree. There are many factors we can
consider why the failure to immediately redeem the preferred shares issued to the

National Development Company as desired by the minor children of the late Enrico
Pirovano cannot or should not be attributed to a mere desire on the part of the
corporation to delay the redemption, or to prejudice the interest of the minors, but
rather to protect the interest of the corporation itself. One of them is the text of the
very resolution approved by the National Development Company on February 18,
1949 which prescribed the terms and conditions under which it expressed its
conformity to the conversion of the bonded indebtedness into preferred shares of
stock. The text of the resolution above mentioned reads:
Resolved: That the outstanding bonded indebtedness of the Dela Rama
Steamship Co., Inc., in the approximate amount of P3,260,855.77 be
converted into non-voting preferred shares of stock of said company, said
shares to bear a fixed dividend of 6 percent per annum which shall be
cumulative and redeemable within 15 years. Said shares shall be preferred
as to assets in the event of liquidation or dissolution of said company but
shall be non-participating.
It is plain from the text of the above resolution that the defendant corporation had 15
years from February 18, 1949, or until 1964, within which to effect the redemption of
the preferred shares issued to the National Development Company. This condition
cannot but be binding and obligatory upon the donees, if they desire to maintain the
validity of the donation, for it is not only the basis upon which the stockholders of the
defendant corporation expressed their willingness to ratify the donation, but it is also
by way which its creditor, the National Development Company, would want it to be. If
the defendant corporation is given 15 years within which to redeem the preferred
shares, and that period would expire in 1964, one cannot blame the corporation for
availing itself of this period if in its opinion it would redound to its best interest. It
cannot therefore be said that the fulfillment of the condition for the payment of the
donation is one that wholly depends on the exclusive will of the donor, as the lower
court has concluded, simply because it failed to meet the redemption of said shares in
her manner desired by the donees. While it may be admitted that because of the
disposition of the assets of the corporation upon the suggestion of its general
manager more than enough funds had been raised to effect the immediate
redemption of the above shares, it is not correct to say that the management has
completely failed in its duty to pay its obligations for, according to the evidence, a
substantial portion of the indebtedness has been paid and only a balance of about
P1,805,169.98 was outstanding when the stockholders of the corporation decided to
revoke or cancel the donation. (Exhibit P.)
But there are other good reasons why all the available funds have not been actually
applied to the redemption of the preferred shares, one of them being the "desire of
the president of the corporation to preserve and continue the government
participation in the company" which even the lower court found it to be meritorious,
which is one way by which it could continue receiving the patronage and protection of

the government. Another reason is that the redemption of the shares does not depend
on the will of the corporation alone but to a great extent on the will of a third party, the
National Development Company. In fact, as the evidence shows, this Company had
pledged these shares to the Philippine National Bank and the Rehabilitation Finance
Corporation as a security to obtain certain loans to finance the purchase of certain
ships to be built for the use of the company under management contract entered into
between the corporation and the National Development Company, and this was what
prevented the corporation from carrying out its offer to pay the sum P1,956,513.07 on
April 5, 1951. Had this offer been accepted, or favorably acted upon by the National
Development Company, the indebtedness would have been practically liquidated,
leaving outstanding only one certificate worth P217,390.45. Of course, the
corporation could have insisted in redeeming the shares if it wanted to even to the
extent of taking a court action if necessary to force its creditor to relinquish the shares
that may be necessary to accomplish the redemption, but such would be a drastic
step which would have not been advisable considering the policy right along
maintained by the corporation to preserve its cordial and smooth relation with the
government. At any rate, whether such attitude be considered as a mere excuse to
justify the delay in effecting the redemption of the shares, or a mere desire on the part
of the corporation to retain in its possession more funds available to attend to other
pressing need as demanded by the interest of the corporation, we fail to see in such
an attitude an improper motive to circumvent the early realization of the desire of the
minors to obtain the immediate payment of the donation which was made dependent
upon the redemption of said shares there being no clear evidence that may justify
such design. Anyway, a great portion of the funds went to the stockholders
themselves by way of dividends to offset, so it appears, the huge advances that the
corporation had made to them which were entered in the books of the corporation as
loans and, therefore, they were invested for their own benefit. As General Manager
Osmea said, "we were first confronted with the problem of the withdrawals of the
family which had to be repaid back to the National Development Company and one of
the most practical solutions to that was to declare dividends and reduce the amounts
of their withdrawals", which then totalled about P3,000,000.
All things considered, we are of the opinion that the finding of the lower court that the
failure of the defendant corporation to comply with the condition of the donation is
merely due to its desistance from obeying the mandate of the majority of the
stockholders and not to lack of funds, or to lack of authority, has no foundation in law
or in fact, and, therefore, its conclusion that because of such desistance that condition
should be deemed as fulfilled and the payment of the donation due and demandable,
is not justified. In this respect, the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it unnecessary to discuss the
other issues raised by the parties in their briefs.

The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent
of the amount claimed as damages by way of attorney's fees, and in our opinion, this
award can be justified under Article 2208, paragraph 2, of the new Civil Code, which
provides: "When the defendant's act or omission has compelled the plaintiff to litigate
with third persons or to incur expenses to protect his interest", attorney's fees nay be
awarded as damages. However, the majority believes that this award should be
reduced to 10 per cent.
Wherefore, the decision appealed from should be modified as follows: (a) that the
donation made in favor of the children of the late Enrico Pirovano of the proceeds of
the insurance policies taken on his life is valid and binding on the defendant
corporation, (b) that said donation, which amounts to a total of P583,813.59, including
interest, as it appears in the books of the corporation as of August 31, 1951, plus
interest thereon at the rate of 5 per cent per annum from the filing of the complaint,
should be paid to the plaintiffs after the defendant corporation shall have fully
redeemed the preferred shares issued to the National Development Company under
the terms and conditions stated in the resolutions of the Board of Directors of January
6, 1947 and June 24, 1947, as amended by the resolution of the stockholders
adopted on September 13,1949; and (c) defendant shall pay to plaintiffs an additional
amount equivalent to 10 per cent of said amount of P583,813.59 as damages by way
of attorney's fees, and to pay the costs of action.
Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion, and Reyes, J.
B.
L.,
concur.
Reyes, A., concurs in the result.

Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 150350 August 22, 2006
KOJI
YASUMA,
vs.
HEIRS OF CECILIO S. DE VILLA and
CORPORATION, Respondents.
DECISION
CORONA, J.:

Petitioner,
EAST

CORDILLERA

MINING

This is a petition for review on certiorari 1 of a decision2 of the Court of Appeals (CA)
dated October 18, 2001 in CA-G.R. CV No. 61755.
The antecedent facts follow.
On September 15, 1988, October 21, 1988 and December 5, 1988, Cecilio S. de Villa
obtained loans from petitioner Koji Yasuma in the amounts of P1,100,000, P100,000
and P100,000, respectively, for the total amount of P1.3 million. These loans were
evidenced by three promissory notes signed by de Villa as borrower. The last
promissory note in the amount of P1,300,000 cancelled the first two notes.
The loans were initially secured by three separate real estate mortgages on a parcel
of land with Transfer Certificate of Title No. 176575 in the name of respondent East
Cordillera Mining Corporation. The deeds of mortgage were executed on the dates
the loans were obtained, signed by de Villa as president of respondent corporation.
The third real estate mortgage later cancelled the first two.3
For failure of de Villa to pay, petitioner filed a collection suit in the Regional Trial Court
of Makati City, Branch 148 (RTC-Br. 148) against de Villa and respondent
corporation.4 The RTC-Br. 148 declared de Villa and respondent corporation in default
and resolved the case in favor of petitioner. On appeal, however, the judgment of
RTC-Br. 148 was annulled on the ground of improper service of summons. 5 Thus, the
case was remanded for retrial.
During the pendency of the case in the RTC-Br. 148, de Villa died. Petitioner
consequently amended the complaint and impleaded the heirs of de Villa as
defendants.6
After the case was re-heard, the RTC of Makati City, Branch 139 (RTC-Br. 139)
rendered judgment on November 13, 1998 in favor of petitioner and against
respondent corporation. It ordered respondent corporation to pay petitioner P1.3
million plus legal interest, attorneys fees, liquidated damages and costs of suit. The
complaint was dismissed against respondent heirs.7
On appeal, the CA reversed and set aside the decision of RTC-Br. 139. It held that
the loan was personal to de Villa and that the mortgage was null and void for lack of
authority from the corporation.
Petitioner is now before this Court with the following assignment of errors:

1. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND

REVERSIBLE ERROR OF LAW WHEN IT DECLARED THAT THE CORPORATION
DID NOT RATIFY THE ACT OF ITS PRESIDENT IN OBTAINING LOANS FROM
PETITIONER DESPITE ITS ADMISSION THAT IT RECEIVED THE MONEY OF THE
PETITIONER.
2. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND
REVERSIBLE ERROR OF LAW WHEN IT TOTALLY DISREGARDED THE
ADMITTED FACTS AND ISSUES AGREED UPON BY THE PARTIES AND
APPROVED BY THE TRIAL COURT DURING THE PRE-TRIAL.
3. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND
REVERSIBLE ERROR OF LAW WHEN IT SET ASIDE THE REAL ESTATE
MORTGAGE AND THE AWARD OF ATTORNEYS FEES, 10% LIQUIDATED
DAMAGES AND THE COSTS OF SUIT.
4. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND
REVERSIBLE ERROR OF LAW WHEN IT SET ASIDE THE AWARD OF INTEREST
BY WAY OF DAMAGES IN FAVOR OF PETITIONER.8
The issues to be resolved are the following:
1) whether the loans were personal liabilities of de Villa or debts of respondent
corporation and
2) whether the mortgage on respondent corporations property was null and void for
having been executed without its authority.
We begin with a brief study of some well-settled legal doctrines relevant to the
disposition of this case.
Personal or Corporate Liability?
A corporation is a juridical person, separate and distinct from its stockholders. Being a
juridical entity, a corporation may act through its board of directors, as provided in
Section 23 of the Corporation Code of the Philippines:9
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees
xxx xxx xxx

The corporation can also act through its corporate officers who may be authorized
either expressly by the by-laws or board resolutions or impliedly such as by general
practice or policy or as are implied from express powers. 10 The general principles of
agency govern the relation between the corporation and its officers or agents.11 When
authorized, their acts can bind the corporation. Conversely, when unauthorized, their
acts cannot bind it.
However, the corporation may ratify the unauthorized act of its corporate officer. 12
Ratification means that the principal voluntarily adopts, confirms and gives sanction to
some unauthorized act of its agent on its behalf. It is this voluntary choice, knowingly
made, which amounts to a ratification of what was theretofore unauthorized and
becomes the authorized act of the party so making the ratification.13 The substance of
the doctrine is confirmation after conduct, amounting to a substitute for a prior
authority.14 Ratification can be made either expressly or impliedly. Implied ratification
may take various forms like silence or acquiescence, acts showing approval or
adoption of the act, or acceptance and retention of benefits flowing therefrom.15
The power to borrow money is one of those cases where corporate officers as agents
of the corporation need a special power of attorney.16 In the case at bar, no special
power of attorney conferring authority on de Villa was ever presented. The promissory
notes evidencing the loans were signed by de Villa (who was the president of
respondent corporation) as borrower without indicating in what capacity he was
signing them. In fact, there was no mention at all of respondent corporation. On their
face, they appeared to be personal loans of de Villa.
Petitioner, however, contends that respondent corporations admission that it received
the total amount of P1.3 million was effectively a ratification of the act of its former
president.17 It appears that, in the pre-trial order dated March 4, 1997 issued by RTCBr. 139, respondent corporation indeed admitted the following:

site during the latter part of 1988, and the killer earthquake of 1990 which destroyed
the mining area. As investment to a losing business venture, he is not entitled to claim
payment neither could he treat it as a loan.19
The CA held that this admission was not tantamount to ratification because what
respondent corporation admitted was that the money was in fact received as an
investment. It concluded that:
even if the [respondent corporation] received the money, it cannot be held
responsible for not knowing the preceding transaction between the [p]resident and the
[petitioner] as in fact there was a misrepresentation made to the [respondent
corporation], to the effect that the money was an investment and not a loan. The
alleged investment is actually a personal loan of Cecilio de Villa.20
Petitioners contention has no merit. There was no showing that respondent
corporation ever authorized de Villa to obtain the loans on its behalf. The notes did
not show that de Villa acted on behalf of the corporation. Actually, the corporation
would not have figured in the transaction at all had it not been for its admission that it
received the amount of P1.3 million. As could be gleaned from the promissory notes,
it was a stranger to the transaction.
Thus, we conclude that petitioner himself did not consider the corporation to be his
debtor for if he really knew that de Villa was obtaining the loan on behalf of the
corporation, then why did he allow the notes to reflect only the personal liability of de
Villa?21 Even the demand letters of petitioner were personally addressed to de Villa
and not to respondent corporation.22 Undoubtedly, petitioner dealt with de Villa purely
in his personal capacity.

xxx xxx xxx

Respondent corporation could not have ratified the act of de Villa because there was
no proof that it knew that he took out a loan on its behalf. As stated earlier, ratification
is a voluntary choice that is knowingly made. The corporation could not have ratified
an act it had no knowledge of:

3. Defendants ADMIT that the total amount of P1.3 Million subject matter of the
Promissory Notes was RECEIVED by the Defendant-Corporation; 18 (emphasis
supplied)

xxx xxx xxx

In its answer, respondent corporation stated:

Ordinarily, the principal must have full knowledge at the time of ratification of all the
material facts and circumstances relating to the unauthorized act of the person who
assumed to act as agent. Thus, if material facts were suppressed or unknown, there
can be no valid ratification . 23

7. The sum of money which [petitioner] sought to recover form herein [respondents] is
not really a loan but his investment to the mining project of [respondent] corporation
which unfortunately did not succeed due to the delays caused by typhoons and bad
rainy season in the Benguet mountains causing landslides in the mining and milling

The fact that the corporation admitted receiving the proceeds of the loan did not
amount to ratification of the loan. It accepted the amount from de Villa, its president at
that time, in good faith. Good faith is always presumed. 24 Petitioner did not show that
the corporation acted in bad faith.

xxx xxx xxx

It follows that respondent corporation was not liable for the subsequent loss of the
money which it accepted as an investment. It could not be faulted for not knowing that
it was the proceeds of a loan obtained by de Villa. It was under no obligation to check
the source of the investments which went into its coffers. As long as the investment
was used for legitimate corporate purposes, the investor bore the risk of loss.
Therefore, on the first issue, the loan was personal to de Villa. There was no basis to
hold the corporation liable since there was no authority, express, implied or apparent,
given to de Villa to borrow money from petitioner. Neither was there any subsequent
ratification of his act.
Was the Mortgage Valid or Void?
Petitioner insists that the mortgage executed by de Villa, as president of the
corporation, was ratified by the latter since the mortgage was an accessory contract
of the loan.25 We disagree.
A special power of attorney is necessary to create or convey real rights over
immovable property.26 Furthermore, the special power of attorney must appear in a
public document.27 In the absence of a special power of attorney in favor of de Villa as
president of the corporation, no valid mortgage could have been executed by him.28
Since the mortgage was void, it could not be ratified.
Petitioner cannot blame anyone but himself. He did not check if the person he was
dealing with had the authority to mortgage the property being offered as collateral.
Given that the loan and mortgage were not binding on respondent corporation, the
latter cannot be held liable for interest, attorneys fees and liquidated damages arising
from the loan.
Personal Liability of De Villa
The liability arising from the loan was the sole indebtedness of de Villa (or of his
estate after his death). Petitioner vigorously sought to make respondent corporation
liable but exerted no effort at all to argue for the liability of respondent heirs. The trial
court correctly dismissed the case against the latter. Petitioners remedy now is to file
a money claim in the settlement proceedings of de Villas estate, if not too late, as
indicated in
Rule 8629 of the Rules of Court.
WHEREFORE, the petition is hereby DENIED. The October 18, 2001 decision of the
Court of Appeals in CA-G.R. CV No. 61755 is AFFIRMED.

Costs against petitioner.

SO ORDERED.

Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They
failed to do so. To the officers consternation, they discovered that there were two
other organizations within the subdivision the North Association and the South
Association. According to private respondents, a non-resident and Soliven himself,
respectively headed these associations. They also discovered that these associations
had five (5) registered homeowners each who were also the incorporators, directors
and officers thereof. None of the members of the LGVHAI was listed as member of
the North Association while three (3) members of LGVHAI were listed as members of
the South Association. The North Association was registered with the HIGC on
February 13, 1989 under Certificate of Registration No. 04-1160 covering Phases
West II, East III, West III and East IV. It submitted its by-laws on December 20, 1988.

SECOND DIVISION
[G.R. No. 117188. August 7, 1997]
LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC.,
petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO
AYCARDO, respondents.
DECISION
ROMERO, J.:
May the failure of a corporation to file its by-laws within one month from the date
of its incorporation, as mandated by Section 46 of the Corporation Code, result in its
automatic dissolution?
This is the issue raised in this petition for review on certiorari of the Decision of
the Court of Appeals affirming the decision of the Home Insurance and Guaranty
Corporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas
Homeowners Association (LGVHA) as the sole homeowners association in Loyola
Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was
owned and developed by Solid Homes, Inc. It revoked the certificates of registration
issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the
North Association for brevity) and Loyola Grand Villas Homeowners (South)
Association Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the association of homeowners
and residents of the Loyola Grand Villas. It was registered with the Home Financing
Corporation, the predecessor of herein respondent HIGC, as the sole homeowners
organization in the said subdivision under Certificate of Registration No. 04-197. It
was organized by the developer of the subdivision and its first president was Victorio
V. Soliven, himself the owner of the developer. For unknown reasons, however,
LGVHAI did not file its corporate by-laws.

In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin
A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI
had been automatically dissolved for two reasons. First, it did not submit its by-laws
within the period required by the Corporation Code and, second, there was non-user
of corporate charter because HIGC had not received any report on the associations
activities. Apparently, this information resulted in the registration of the South
Association with the HIGC on July 27, 1989 covering Phases West I, East I and East
11. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint
with the HIGC. They questioned the revocation of LGVHAIs certificate of registration
without due notice and hearing and concomitantly prayed for the cancellation of the
certificates of registration of the North and South Associations by reason of the earlier
issuance of a certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents
obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who disposed
of HIGC Case No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola
Grand Villas Homeowners Association, Inc., under Certificate of
Registration No. 04-197 as the duly registered and existing homeowners
association for Loyola Grand Villas homeowners, and declaring the
Certificates of Registration of Loyola Grand Villas Homeowners (North)
Association, Inc. and Loyola Grand Villas Homeowners (South)
Association, Inc. as hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an accounting
and turn-over to Loyola Grand Villas Homeowners Association, Inc., all
assets and records of the Association now under his custody and
possession.
The South Association appealed to the Appeals Board of the HIGC. In its
Resolution of September 8, 1993, the Board dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals,
raising two issues. First, whether or not LGVHAIs failure to file its by-laws within the
period prescribed by Section 46 of the Corporation Code resulted in the automatic
dissolution of LGVHAI. Second, whether or not two homeowners associations may be
authorized by the HIGC in one sprawling subdivision. However, in the Decision of

August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of
the HIGC Appeals Board.
In resolving the first issue, the Court of Appeals held that under the Corporation
Code, a private corporation commences to have corporate existence and juridical
personality from the date the Securities and Exchange Commission (SEC) issues a
certificate of incorporation under its official seal. The requirement for the filing of bylaws under Section 46 of the Corporation Code within one month from official notice
of the issuance of the certificate of incorporation presupposes that it is already
incorporated, although it may file its by-laws with its articles of incorporation.
Elucidating on the effect of a delayed filing of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e.,
Sections 46 and 22, Corporation Code, or in any other provision of the
Code and other laws which provide or at least imply that failure to file the
by-laws results in an automatic dissolution of the corporation. While
Section 46, in prescribing that by-laws must be adopted within the period
prescribed therein, may be interpreted as a mandatory provision,
particularly because of the use of the word must, its meaning cannot be
stretched to support the argument that automatic dissolution results from
non-compliance.
We realize that Section 46 or other provisions of the Corporation
Code are silent on the result of the failure to adopt and file the by-laws
within the required period. Thus, Section 46 and other related provisions of
the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A.
This section empowers the SEC to suspend or revoke certificates of
registration on the grounds listed therein. Among the grounds stated is the
failure to file by-laws (see also II Campos: The Corporation Code, 1990
ed., pp. 124-125). Such suspension or revocation, the same section
provides, should be made upon proper notice and hearing. Although P.D.
902-A refers to the SEC, the same principles and procedures apply to the
public respondent HIGC as it exercises its power to revoke or suspend the
certificates of registration or homeowners associations. (Section 2 [a], E.O.
535, series 1979, transferred the powers and authorities of the SEC over
homeowners associations to the HIGC.)
We also do not agree with the petitioners interpretation that Section
46, Corporation Code prevails over Section 6, P.D. 902-A and that the
latter is invalid because it contravenes the former. There is no basis for
such interpretation considering that these two provisions are not
inconsistent with each other. They are, in fact, complementary to each
other so that one cannot be considered as invalidating the other.
The Court of Appeals added that, as there was no showing that the registration
of LGVHAI had been validly revoked, it continued to be the duly registered
homeowners association in the Loyola Grand Villas. More importantly, the South
Association did not dispute the fact that LGVHAI had been organized and that,
thereafter, it transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling that the

HIGC has the authority to order the holding of a referendum to determine which of
two contending associations should represent the entire community, village or
subdivision.
Undaunted, the South Association filed the instant petition for review on
certiorari. It elevates as sole issue for resolution the first issue it had raised before the
Court of Appeals, i.e., whether or not the LGVHAIs failure to file its by-laws within the
period prescribed by Section 46 of the Corporation Code had the effect of
automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word must with respect to
the filing of by-laws, noncompliance therewith would result in self-extinction either due
to non-occurrence of a suspensive condition or the occurrence of a resolutory
condition under the hypothesis that (by) the issuance of the certificate of registration
alone the corporate personality is deemed already formed. It asserts that the
Corporation Code provides for a gradation of violations of requirements. Hence,
Section 22 mandates that the corporation must be formally organized and should
commence transactions within two years from date of incorporation. Otherwise, the
corporation would be deemed dissolved. On the other hand, if the corporation
commences operations but becomes continuously inoperative for five years, then it
may be suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation
Code do not provide for sanctions for non-filing of the by-laws. However, it insists that
no sanction need be provided because the mandatory nature of the provision is so
clear that there can be no doubt about its being an essential attribute of corporate
birth. To petitioner, its submission is buttressed by the facts that the period for
compliance is spelled out distinctly; that the certification of the SEC/HIGC must show
that the by-laws are not inconsistent with the Code, and that a copy of the by-laws
has to be attached to the articles of incorporation. Moreover, no sanction is provided
for because in the first place, no corporate identity has been completed. Petitioner
asserts that non-provision for remedy or sanction is itself the tacit proclamation that
non-compliance is fatal and no corporate existence had yet evolved, and therefore,
there was no need to proclaim its demise. In a bid to convince the Court of its
arguments, petitioner stresses that:
x x x the word MUST is used in Sec. 46 in its universal literal
meaning and corollary human implication its compulsion is integrated in its
very essence MUST is always enforceable by the inevitable consequence
that is, OR ELSE. The use of the word MUST in Sec. 46 is no exception it
means file the by-laws within one month after notice of issuance of
certificate of registration OR ELSE. The OR ELSE, though not specified, is
inextricably a part of MUST. Do this or if you do not you are Kaput. The
importance of the by-laws to corporate existence compels such meaning
for as decreed the by-laws is `the government of the corporation. Indeed,
how can the corporation do any lawful act as such without by-laws. Surely,
no law is intended to create chaos.
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of
the Corporation Code which itself does not provide sanctions for non-filing of by-laws.
For the petitioner, it is not proper to assess the true meaning of Sec. 46 x x x on an

unauthorized provision on such matter contained in the said decree.

In their comment on the petition, private respondents counter that the
requirement of adoption of by-laws is not mandatory. They point to P.D. No. 902-A as
having resolved the issue of whether said requirement is mandatory or merely
directory. Citing Chung Ka Bio v. Intermediate Appellate Court, private respondents
contend that Section 6(I) of that decree provides that non-filing of by-laws is only a
ground for suspension or revocation of the certificate of registration of corporations
and, therefore, it may not result in automatic dissolution of the corporation. Moreover,
the adoption and filing of by-laws is a condition subsequent which does not affect the
corporate personality of a corporation like the LGVHAI. This is so because Section 9
of the Corporation Code provides that the corporate existence and juridical
personality of a corporation begins from the date the SEC issues a certificate of
incorporation under its official seal. Consequently, even if the by-laws have not yet
been filed, a corporation may be considered a de facto corporation. To emphasize the
fact the LGVHAI was registered as the sole homeowners association in the Loyola
Grand Villas, private respondents point out that membership in the LGVHAI was an
unconditional restriction in the deeds of sale signed by lot buyers.
In its reply to private respondents comment on the petition, petitioner reiterates
its argument that the word must in Section 46 of the Corporation Code is mandatory.
It adds that, before the ruling in Chung Ka Bio v. Intermediate Appellate Court
could be applied to this case, this Court must first resolve the issue of whether or not
the provisions of P.D. No. 902-A prescribing the rules and regulations to implement
the Corporation Code can rise above and change the substantive provisions of the
Code.
The pertinent provision of the Corporation Code that is the focal point of
controversy in this case states:
Sec. 46. Adoption of by-laws. Every corporation formed under this
Code, must within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and Exchange
Commission, adopt a code of by-laws for its government not inconsistent
with this Code. For the adoption of by-laws by the corporation, the
affirmative vote of the stockholders representing at least a majority of the
outstanding capital stock, or of at least a majority of the members, in the
case of non-stock corporations, shall be necessary. The by-laws shall be
signed by the stockholders or members voting for them and shall be kept
in the principal office of the corporation, subject to the stockholders or
members voting for them and shall be kept in the principal office of the
corporation, subject to inspection of the stockholders or members during
office hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed prior to incorporation; in such case, such by-laws
shall be approved and signed by all the incorporators and submitted to the
Securities and Exchange Commission, together with the articles of
incorporation.

In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws are
not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company, public
utility, educational institution or other special corporations governed by
special laws, unless accompanied by a certificate of the appropriate
government agency to the effect that such by-laws or amendments are in
accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law
begins with the determination of the meaning and import of the word must in this
section. Ordinarily, the word must connotes an imperative act or operates to impose a
duty which may be enforced. It is synonymous with ought which connotes compulsion
or mandatoriness. However, the word must in a statute, like shall, is not always
imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret shall as the context or a reasonable construction of
the statute in which it is used demands or requires. This is equally true as regards the
word must. Thus, if the language of a statute considered as a whole and with due
regard to its nature and object reveals that the legislature intended to use the words
shall and must to be directory, they should be given that meaning.
In this respect, the following portions of the deliberations of the Batasang
Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to
understand here, Mr. Speaker, that by-laws must immediately be filed
within one month after the issuance? In other words, would this be
mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what
would be the effect of the failure of the corporation to file these bylaws within one month?
MR. MENDOZA. There is a provision in the latter part of the
Code which identifies and describes the consequences of violations
of any provision of this Code. One such consequence is the
dissolution of the corporation for its inability, or perhaps, incurring
certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a
dissolution of the corporation by merely failing to file the by-laws
within one month. Supposing the corporation was late, say, five days,
what would be the mandatory penalty?

MR. MENDOZA. I do not think it will necessarily result in the

automatic or ipso facto dissolution of the corporation. Perhaps, as in
the case, as you suggested, in the case of El Hogar Filipino where a
quo warranto action is brought, one takes into account the gravity of
the violation committed. If the by-laws were late the filing of the bylaws were late by, perhaps, a day or two, I would suppose that might
be a tolerable delay, but if they are delayed over a period of months
as is happening now because of the absence of a clear requirement
that by-laws must be completed within a specified period of time, the
corporation must suffer certain consequences.
This exchange of views demonstrates clearly that automatic corporate
dissolution for failure to file the by-laws on time was never the intention of the
legislature. Moreover, even without resorting to the records of deliberations of the
Batasang Pambansa, the law itself provides the answer to the issue propounded by
petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is
the statute itself (optima statuli interpretatix est ipsum statutum), Section 46
aforequoted reveals the legislative intent to attach a directory, and not mandatory,
meaning for the word must in the first sentence thereof. Note should be taken of the
second paragraph of the law which allows the filing of the by-laws even prior to
incorporation. This provision in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws within one (1) month after
receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission. It necessarily follows that failure to file the bylaws within that period does not imply the demise of the corporation. By-laws may be
necessary for the government of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code and related statutes.
There are in fact cases where by-laws are unnecessary to corporate existence or to
the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, bylaws are not necessary either to the existence of a corporation or to the
valid exercise of the powers conferred upon it, certainly in all cases where
the charter sufficiently provides for the government of the body; and even
where the governing statute in express terms confers upon the corporation
the power to adopt by-laws, the failure to exercise the power will be
ascribed to mere nonaction which will not render void any acts of the
corporation which would otherwise be valid. (Italics supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its
life, and that until by-laws have been adopted the corporation may not be
able to act for the purposes of its creation, and that the first and most
important duty of the members is to adopt them. This would seem to follow
as a matter of principle from the office and functions of by-laws. Viewed in
this light, the adoption of by-laws is a matter of practical, if not one of legal,
necessity. Moreover, the peculiar circumstances attending the formation of
a corporation may impose the obligation to adopt certain by-laws, as in the

case of a close corporation organized for specific purposes. And the

statute or general laws from which the corporation derives its corporate
existence may expressly require it to make and adopt by-laws and specify
to some extent what they shall contain and the manner of their adoption.
The mere fact, however, of the existence of power in the corporation
to adopt by-laws does not ordinarily and of necessity make the
exercise of such power essential to its corporate life, or to the
validity of any of its acts.
Although the Corporation Code requires the filing of by-laws, it does not
expressly provide for the consequences of the non-filing of the same within the period
provided for in Section 46. However, such omission has been rectified by Presidential
Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which
state:
SEC. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx

xxx

xxx

(l) To suspend, or revoke, after proper notice and hearing, the

franchise or certificate of registration of corporations, partnerships or
associations, upon any of the grounds provided by law, including the
following:
xxx xxx

xxx

xxx

5. Failure to file by-laws within the required period;

xxx xxx

xxx

xxx

In the exercise of the foregoing authority and jurisdiction of the

Commissions or by a Commissioner or by such other bodies, boards,
committees and/or any officer as may be created or designated by the
Commission for the purpose. The decision, ruling or order of any such
Commissioner, bodies, boards, committees and/or officer may be appealed
to the Commission sitting en banc within thirty (30) days after receipt by
the appellant of notice of such decision, ruling or order. The Commission
shall promulgate rules of procedures to govern the proceedings, hearings
and appeals of cases falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the
Commission sitting en banc to the Supreme Court by petition for review in
accordance with the pertinent provisions of the Rules of Court.
Even under the foregoing express grant of power and authority, there can be no
automatic corporate dissolution simply because the incorporators failed to abide by
the required filing of by-laws embodied in Section 46 of the Corporation Code. There
is no outright demise of corporate existence. Proper notice and hearing are cardinal
components of due process in any democratic institution, agency or society. In other

words, the incorporators must be given the chance to explain their neglect or
omission and remedy the same.
That the failure to file by-laws is not provided for by the Corporation Code but in
another law is of no moment. P.D. No. 902-A, which took effect immediately after its
promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the
provisions abovequoted supply the law governing the situation in the case at bar,
inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia.
Interpretare et concordare legibus est optimus interpretandi. Every statute must
be so construed and harmonized with other statutes as to form a uniform system of
jurisprudence.
As the rules and regulations or private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its stockholders
or members and directors and officers with relation thereto and among themselves in
their relation to it, by-laws are indispensable to corporations in this jurisdiction. These
may not be essential to corporate birth but certainly, these are required by law for an
orderly governance and management of corporations. Nonetheless, failure to file
them within the period required by law by no means tolls the automatic dissolution of
a corporation.
In this regard, private respondents are correct in relying on the pronouncements
of this Court in Chung Ka Bio v. Intermediate Appellate Court, as follows:
x x x. Moreover, failure to file the by-laws does not automatically
operate to dissolve a corporation but is now considered only a ground for
such dissolution.
Section 19 of the Corporation Law, part of which is now Section 22 of
the Corporation Code, provided that the powers of the corporation would
cease if it did not formally organize and commence the transaction of its
business or the continuation of its works within two years from date of its
incorporation. Section 20, which has been reproduced with some
modifications in Section 46 of the Corporation Code, expressly declared
that every corporation formed under this Act, must within one month after
the filing of the articles of incorporation with the Securities and Exchange
Commission, adopt a code of by-laws. Whether this provision should be
given mandatory or only directory effect remained a controversial question
until it became academic with the adoption of PD 902-A. Under this
decree, it is now clear that the failure to file by-laws within the required
period is only a ground for suspension or revocation of the certificate of
registration of corporations.
Non-filing of the by-laws will not result in automatic dissolution of the
corporation. Under Section 6(I) of PD 902-A, the SEC is empowered to
suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation on the ground inter alia of failure
to file by-laws within the required period. It is clear from this provision that
there must first of all be a hearing to determine the existence of the
ground, and secondly, assuming such finding, the penalty is not
necessarily revocation but may be only suspension of the charter. In fact,

under the rules and regulations of the SEC, failure to file the by-laws on
time may be penalized merely with the imposition of an administrative fine
without affecting the corporate existence of the erring firm.
It should be stressed in this connection that substantial compliance
with conditions subsequent will suffice to perfect corporate personality.
Organization and commencement of transaction of corporate business are
but conditions subsequent and not prerequisites for acquisition of
corporate personality. The adoption and filing of by-laws is also a condition
subsequent. Under Section 19 of the Corporation Code, a corporation
commences its corporate existence and juridical personality and is
deemed incorporated from the date the Securities and Exchange
Commission issues certificate of incorporation under its official seal. This
may be done even before the filing of the by-laws, which under Section 46
of the Corporation Code, must be adopted within one month after receipt
of official notice of the issuance of its certificate of incorporation.
That the corporation involved herein is under the supervision of the HIGC does
not alter the result of this case. The HIGC has taken over the specialized functions of
the former Home Financing Corporation by virtue of Executive Order No. 90 dated
December 17, 1986. With respect to homeowners associations, the HIGC shall
exercise all the powers, authorities and responsibilities that are vested on the
Securities and Exchange Commission x x x, the provision of Act 1459, as amended
by P.D. 902-A, to the contrary notwithstanding.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED
and the questioned Decision of the Court of Appeals AFFIRMED. This Decision is
immediately executory. Costs against petitioner.
SO ORDERED.

SECOND DIVISION
[G.R. No. 152356. August 16, 2005]
SAN MIGUEL CORPORATION (MANDAUE PACKAGING PRODUCTS PLANTS),
petitioner, vs. MANDAUE PACKING PRODUCTS PLANTS-SAN
PACKAGING PRODUCTS SAN MIGUEL CORPORATION MONTHLIES
RANK-AND-FILE
UNION
FFW
(MPPP-SMPP-SMAMRFU-FFW),
respondent.

On 15 June 1998, respondent, identifying itself as an affiliate of Federation of

Free Workers (FFW), filed a petition for certification election with the DOLE Regional
Office No. VII. In the petition, respondent stated that it sought to be certified and to
represent the permanent rank-and-file monthly paid employees of the petitioner.[2] The
following documents were attached to the petition: (1) a Charter Certificate issued by
FFW on 5 June 1998 certifying that respondent as of that date was duly certified as a
local or chapter of FFW; (2) a copy of the constitution of respondent prepared by its
Secretary, Noel T. Bathan and attested by its President, Wilfred V. Sagun; (3) a list of
respondents officers and their respective addresses, again prepared by Bathan and
attested by Sagun; (4) a certification signifying that respondent had just been
organized and no amount had yet been collected from its members, signed by
respondents treasurer Chita D. Rodriguez and attested by Sagun; and (5) a list of all
the rank-and-file monthly paid employees of the Mandaue Packaging Products Plants
and Mandaue Glass Plant prepared by Bathan and attested by Sagun.[3]
The petition was assigned to Mediator-Arbiter Achilles V. Manit of the DOLE
Regional Office No. VII, and docketed as Case No. R0700-9806-RU-013.[4]
On 27 July 1998, petitioner filed a motion to dismiss the petition for certification
election on the sole ground that herein respondent is not listed or included in the
roster of legitimate labor organizations based on the certification issued by the
Officer-In-Charge, Regional Director of the DOLE Regional Office No. VII, Atty. Jesus
B. Gabor, on 24 July 1998.

DECISION
TINGA, J.:
The central question in this Petition for Review is on what date did respondent
Mandaue Packing Products Plants-San Miguel Packaging ProductsSan Miguel
Corporation Monthlies Rank-And-File UnionFFW acquire legal personality in
accordance with the Implementing Rules of the Labor Code. The matter is crucial
since respondent filed a petition for certification election at a date when, it is argued, it
had yet to acquire the requisite legal personality. The Department of Labor and
Employment (DOLE) and the Court of Appeals both ruled that respondent had
acquired legal personality on the same day it filed the petition for certification election.
The procedure employed by the respondent did not strictly conform with the relevant
provisions of law. But rather than insist on an overly literal reading of the law that
senselessly suffocates the constitutionally guaranteed right to self-organization, we
uphold the assailed decisions and the liberal spirit that animates them.
Antecedent Facts
The present petition assailed the Decision dated 7 June 2001 rendered by the
Court of Appeals Eighth Division[1] which in turn affirmed a Decision dated 22
Feburary 1999 by the DOLE Undersecretary for Labor Relations, Rosalinda
Dimapilis-Baldoz, ordering the immediate conduct of a certification election among
the petitioners rank-and-file employees, as prayed for by respondent. The following
facts are culled from the records.

On 29 July 1998, respondent submitted to the Bureau of Labor Relations the

same documents earlier attached to its petition for certification. The accompanying
letter, signed by respondents president Sagun, stated that such documents were
submitted in compliance with the requirements for the creation of a local/chapter
pursuant to the Labor Code and its Implementing Rules; and it was hoped that the
submissions would facilitate the listing of respondent under the roster of legitimate
labor organizations.[5] On 3 August 1998, the Chief of Labor Relations Division of
DOLE Regional Office No. VII issued a Certificate of Creation of Local/Chapter No.
ITD. I-ARFBT-058/98, certifying that from 30 July 1998, respondent has acquired
legal personality as a labor organization/workers association, it having submitted all
the required documents.[6]
Opting not to file a comment on the Motion to Dismiss,[7] respondent instead filed
a Position Paper wherein it asserted that it had complied with all the necessary
requirements for the conduct of a certification election, and that the ground relied
upon in the Motion to Dismiss was a mere technicality.[8]
In turn, petitioner filed a Comment, wherein it reiterated that respondent was not
a legitimate labor organization at the time of the filing of the petition. Petitioner also
propounded that contrary to respondents objectives of establishing an organization
representing rank-and-file employees, two of respondents officers, namely VicePresident Emannuel L. Rosell and Secretary Bathan, were actually supervisory
employees. In support of this allegation, petitioner attached various documents
evidencing the designation of these two officers in supervisory roles, as well as their
exercise of various supervisory functions.[9] Petitioner cited Article 245 of the Labor
Code, which provides that supervisory employees shall not be eligible for
membership in a labor organization of the rank-and-file employees.[10]

On 20 August 1998, petitioner filed a petition to cancel the union registration of

respondent. However, this petition was denied, and such denial was subsequently
affirmed by the Court of Appeals in a decision that has since become final.[11]

Legal Personality by Respondent

In the meantime, on 15 September 1998, Med-Arbiter Manit issued an Order

dismissing respondents petition for certification election. The sole ground relied upon
for the dismissal was the Med-Arbiters Opinion that as of the date of filing of the
petition on 15 June 1998, respondent did not have the legal personality to file the said
petition for certification election.[12] No discussion was adduced on petitioners claims
that some of respondents officers were actually supervisory employees.

Local/Chapter of Federation or National Union

Respondent promptly appealed the 15 September 1998 Order to the DOLE. On

22 February 1999, DOLE Undersecretary Rosalinda Dimapilis-Baldoz rendered a
Decision reversing the Order. Undersecretary Baldoz concluded that respondent
acquired legal personality as early as 15 June 1998, the date it submitted the required
documents, citing Section 3, Rule VI of the New Rules Implementing the Labor Code
(Implementing Rules) which deems that a local/chapter acquires legal personality
from the date of filing of the complete documentary requirements as mandated in the
Implementing Rules. The DOLE also ruled that the contention that two of respondents
officers were actually supervisors can be threshed out in the pre-election conferences
where the list of qualified voters is to be determined. The dispositive portion of the
DOLE Decision stated:
WHEREFORE, the appeal is GRANTED. The order dated 15 September 1999 of the
Med-Arbiter is REVERSED and SET ASIDE. Accordingly, let the records of the case
be remanded to the office of origin for the immediate conduct of certification election,
subject to the usual pre-election conference, among the monthly-paid rank-and-file
employees of the Mandaue Packaging Products Plant San Miguel Corporation, with
the following choices:
1. MANDAUE PACKAGING PRODUCT PLANT SAN MIGUEL
PACKAGING PRODUCTS SAN MIGUEL CORPORATION
MONTHLIES RANK AND FILE UNIONFFW (MPPP-SMPPSMCMRFUFFW),
2. NO UNION.
Pursuant to Rule XI, Section 11.1 of the New Implementing Rules, the company is
hereby directed to submit to the office of origin the certified list of current employees
in the bargaining unit, along with the payrolls covering the members of the
bargaining unit for the last three months prior to the issuance of this decision.
SO DECIDED.[13]
These two conclusions of the DOLE were affirmed in the assailed Decision of
the Court of Appeals. It is now our task to review whether these conclusions are
warranted under law and jurisprudence. First, we shall discuss the aspect of
respondents legal personality in filing the petition for certification election.
First Issue: On the Acquisition of

Statutory Provisions for Registration Of

Before we proceed to evaluate the particular facts of this case, it would be

useful to review the statutory paradigm that governs the establishment and
acquisition of legal personality by a local/chapter of a labor organization. The
applicable rules have undergone significant amendments in the last decade, thus a
recapitulation of the framework is in order.
The Labor Code defines a labor organization as any union or association of
employees which exists in whole or in part for the purpose of collective bargaining or
of dealing with employers concerning terms and conditions of employment,[14] and a
legitimate labor organization as any labor organization duly registered with the DOLE,
including any branch or local thereof.[15] Only legitimate labor organizations may file a
petition for certification election.[16]
Article 234 of the Labor Code enumerates the requirements for registration of an
applicant labor organization, association, or group of unions or workers in order that
such entity could acquire legal personality and entitlement to the rights and privileges
granted by law to legitimate labor organizations. These include a registration fee of
fifty pesos (P50.00); a list of the names of the members and officers, and copies of
the constitution and by-laws of the applicant union.[17]
However, the Labor Code itself does not lay down the procedure for the
registration of a local or chapter of a labor organization. Such has been traditionally
provided instead in the Implementing Rules, particularly in Book V thereof. However,
in the last decade or so, significant amendments have been introduced to Book V,
first by Department Order No. 9 which took effect on 21 June 1997, and again by
Department Order No. 40 dated 17 February 2003. The differences in the procedures
laid down in these various versions are significant. However, since the instant petition
for certification was filed in 1998, the Implementing Rules, as amended by
Department Order No. 9, should govern the resolution of this petition.[18]
Preliminarily, we should note that a less stringent procedure obtains in the
registration of a local or chapter than that of a labor organization. Undoubtedly, the
intent of the law in imposing lesser requirements in the case of a branch or local of a
registered federation or national union is to encourage the affiliation of a local union
with a federation or national union in order to increase the local union's bargaining
powers respecting terms and conditions of labor.[19] This policy has remained
consistent despite the succeeding amendments to Book V of the Omnibus
Implementing Rules, as contained in Department Orders Nos. 9 and 40.
The case of Progressive Development Corp. v. Secretary of Labor,[20] applying
Section 3, Rule II, Book V of the Implementing Rules, in force before 1997, ruled that
"a local or chapter therefore becomes a legitimate labor organization only upon
submission of the following to the BLR: (1) a charter certificate, within thirty (30) days
from its issuance by the labor federation or national union; and (2) The constitution

and by-laws, a statement of the set of officers, and the books of accounts all of which
are certified under oath by the secretary or treasurer, as the case may be, of such
local or chapter, and attested to by its president.[21] The submission by the
local/chapter of duly certified books of accounts as a prerequisite for registration of
the local/chapter was dropped in Department Order No. 9, [22] a development noted by
the Court in Pagpalain Haulers v. Hon. Trajano,[23] wherein it was held that the
previous doctrines requiring the submission of books of accounts as a prerequisite for
the registration of a local/chapter are already pass and therefore, no longer
applicable.[24]
Department Order No. 40, now in effect, has eased the requirements by which a
local/chapter may acquire legal personality. Interestingly, Department Order No. 40 no
longer uses the term local/chapter, utilizing instead chartered local, which is defined
as a labor organization in the private sector operating at the enterprise level that
acquired legal personality through the issuance of a charter certificate by a duly
registered federation or national union, and reported to the Regional Office. [25] Clearly
under the present rules, the first step to be undertaken in the creation of a chartered
local is the issuance of a charter certificate by the duly registered federation or
national union. Said federation or national union is then obligated to report to the
Regional Office the creation of such chartered local, attaching thereto the charter
certificate it had earlier issued.[26]
But as stated earlier, it is Department Order No. 9 that governs in this case.
Section 1, Rule VI thereof prescribes the documentary requirements for the creation
of a local/chapter. It states:
Section 1. Chartering and creation of a local chapter A duly registered federation or
national union may directly create a local/chapter by submitting to the Regional
Office or to the Bureau two (2) copies of the following:
a) A charter certificate issued by the federation or national union
indicating the creation or establishment of the local/chapter;
(b) The names of the local/chapter's officers, their addresses, and the
principal office of the local/chapter;
(c) The local/chapter's constitution and by-laws; provided that where
the local/chapter's constitution and by-laws is the same as that
of the federation or national union, this fact shall be indicated
accordingly.
All the foregoing supporting requirements shall be certified under oath by the
Secretary or Treasurer of the local/chapter and attested by its President.
In contrast, an independent union seeking registration is further required under
Dept. Order No. 90 to submit the number and names of the members, and annual
financial reports.[27]
Section 3, Rule VI of Department Order No. 9 provides when the local/chapter
acquires legal personality.

Section 3. Acquisition of legal personality by local chapter. A local/chapter constituted

in accordance with Section 1 of this Rule shall acquire legal personality from the date
of filing of the complete documents enumerated therein. Upon compliance with all
the documentary requirements, the Regional Office or Bureau shall issue in favor of
the local/chapter a certificate indicating that it is included in the roster of legitimate
labor organizations.
It is evident based on this rule that the local/chapter acquires legal personality
from the date of the filing of the complete documentary requirements, and not from
the issuance of a certification to such effect by the Regional Office or Bureau. On the
other hand, a labor organization is deemed to have acquired legal personality only on
the date of issuance of its certificate of registration, [28] which takes place only after the
Bureau of Labor Relations or its Regional Offices has undertaken an evaluation
process lasting up until thirty (30) days, within which period it approves or denies the
application.[29] In contrast, no such period of evaluation is provided in Department
Order No. 9 for the application of a local/chapter, and more importantly, under it such
local/chapter is deemed to acquire legal personality from the date of filing of the
documents enumerated under Section 1, Rule VI, Book V.
Apart from promoting a policy of affiliation of local unions with national unions, [30]
there is a practical reason for sanctioning a less onerous procedure for the
registration of a local/chapter, as compared to the national union. The local/chapter
relies in part on the legal personality of the federation or national union, which in turn,
had already undergone evaluation and approval from the Bureau of Legal Relations
or Regional Office. In fact, a federation or national union is required, upon
registration, to establish proof of affiliation of at least ten (10) locals or chapters which
are duly recognized as the collective bargaining agent in the establishment or industry
in which they operate; and the names and addresses of the companies where the
locals or chapters operate and the list of all the members in each of the companies. [31]
Once the national union or federation acquires legal personality upon the issuance of
its certificate or registration,[32] its legal personality cannot be subject to collateral
attack.[33]
The fact that the local/chapter acquires legal personality from the moment the
complete documentary requirements are submitted seems to imply that the duty of
the Bureau or Regional Office to register the local/chapter is merely ministerial.
However, in Progressive Development Corporation v. Laguesma,[34] the Court, in
ruling against a petition for certification filed by a chapter, held that the mere
submission of the documentary requirements does not render ministerial the function
of the Bureau of Labor Relations in according due recognition to the labor
organization.[35] Still, that case was decided before the enactment of Department
Order No. 9, including the aforestated Section 3. Should we consider the said 1997
amendments as having obviated our characterization in Progressive of the Bureaus
duty as non-ministerial?
Notwithstanding the amendments, it still is good policy to maintain that per
Department Order No. 9, the duty of the Bureau of Labor Relations to recognize the
local/chapter upon the submission of the documentary requirements is not ministerial,
insofar as the Bureau is obliged to adjudge the authenticity of the documents required
to be submitted. For example, the Bureau is not mandated to accept just any
purported charter certificate matter how spurious it is in appearance. It is empowered

to ascertain whether the submitted charter certificate is genuine, and if finding that
said certificate is fake, deny recognition to the local/chapter.
However, in ascertaining whether or not to recognize and register the
local/chapter, the Bureau or Regional Office should not look beyond the authenticity
and due execution of the documentary requirements for the creation of the
local/chapter as enumerated under Section 1, Rule VI, Book V of Department Order
No. 9. Since the proper submission of these documentary requirements is all that is
necessary to recognize a local/chapter, it is beyond the province of the Bureau or
Regional Offices to resort to other grounds as basis for denying legal recognition of
the local/chapter. For example, Department Order No. 9 does not require the
local/chapter to submit the names of its members as a condition precedent to its
registration.[36] It therefore would be improper to deny legal recognition to a
local/chapter owing to questions pertaining to its individual members since the
local/chapter is not even obliged to submit the names of its individual members prior
to registration.
Certainly, when a local/chapter applies for registration, matters raised against
the personality of the federation or national union itself should not be acted upon by
the Bureau or Regional Office, owing to the preclusion of collateral attack. Instead,
the proper matter for evaluation by the Bureau or Regional Office should be limited to
whether the local/chapter is indeed a duly created affiliate of the national union or
federation.
Parenthetically, under the present Implementing Rules as amended by
Department Order No. 40, it appears that the local/chapter (or now, chartered local)
acquires legal personality upon the issuance of the charter certificate by the duly
registered federation or national union.[37] This might signify that the creation of the
chartered local is within the sole discretion of the federation or national union and
thus beyond the review or interference of the Bureau of Labor Relations or its
Regional Offices. However, Department Order No. 40 also requires that the federation
or national union report the creation of the chartered local to the Regional Office.
Acquisition by Respondent of Legal Personality
We now proceed to determine if and when the respondent acquired legal
personality under the procedure laid down by the rules then in effect, Department
Order No. 9, that is.
At the onset, the arguments raised by petitioner on this point are plainly
erroneous. Petitioner cites the case of Toyota Motor Philippines v. Toyota Motor
Philippines Corporation Labor Union,[38] and the purported holding therein that [if] it is
true that at the time of the filing of the petition, the said registration certificate has not
been approved yet, then, petitioner lacks the legal personality to file the petition. [39]
However, an examination of the case actually reveals that the cited portion was lifted
from one of the antecedent rulings of the Med-Arbiter in that case which had not even
been affirmed or reinstated by the Court on review.[40] Moreover, such pronouncement
made prior to the enactment of Department Order No. 9 squarely contradicts Section
3, Rule VI thereof, which provides that legal personality of the local/chapter is vested
upon the submission of the complete documentary requirements.

It is also worth noting that petitioner union in Toyota was an independent labor
union, and not a local/chapter, and under Department Order No. 9, independent labor
unions, unlike local/chapters, acquire legal personality only upon issuance of the
certificate of registration by the Bureau or Regional Office. Still, petitioner cites in its
favor Section 5, Rule V of Dept. Order No. 9, which states that the labor organization
or workers association shall be deemed registered and vested with legal personality
on the date of issuance of its certificate of registration. Again, the citation is obviously
misplaced, as respondent herein is a local/chapter, the acquisition of its legal
personality being governed instead by Section 3, Rule VI.
It is thus very clear that the issuance of the certificate of registration by the
Bureau or Regional Office is not the operative act that vests legal personality upon a
local/chapter under Department Order No. 9. Such legal personality is acquired from
the filing of the complete documentary requirements enumerated in Section 1, Rule
VI. Admittedly, the manner by which respondent was deemed to have acquired legal
personality by the DOLE and the Court of Appeals was not in strict conformity with the
provisions of Department Order No. 9. Nonetheless, are the deviations significant
enough for the Court to achieve a different conclusion from that made by the DOLE
and the Court of Appeals?
In regular order, it is the federation or national union, already in possession of
legal personality, which initiates the creation of the local/chapter. It issues a charter
certificate indicating the creation or establishment of the local/chapter. It then submits
this charter certificate, along with the names of the local/chapters officers, constitution
and by-laws to the Regional Office or Bureau. It is the submission of these
documents, certified under oath by the Secretary or Treasurer of the local/chapter and
attested by the President, which vests legal personality in the local/chapter, which is
then free to file on its own a petition for certification election.
In this case, the federation in question, the FFW, did not submit any of these
documentary requirements to the Regional Office or Bureau. It did however issue a
charter certificate to the putative local/chapter (herein respondent). Respondent then
submitted the charter certificate along with the other documentary requirements to the
Regional Office, but not for the specific purpose of creating the local/chapter, but for
filing the petition for certification election.
It could be properly said that at the exact moment respondent was filing the
petition for certification, it did not yet possess any legal personality, since the
requisites for acquisition of legal personality under Section 3, Rule VI of Department
Order No. 9 had not yet been complied with. It could also be discerned that the
intention of the Labor Code and its Implementing Rules that only those labor
organizations that have acquired legal personality are capacitated to file petitions for
certification elections. Such is the general rule.
Yet there are peculiar circumstances in this case that allow the Court to rule that
respondent acquired the requisite legal personality at the same time it filed the
petition for certification election. In doing so, the Court acknowledges that the strict
letter of the procedural rule was not complied with. However, labor laws are generally
construed liberally in favor of labor, especially if doing so affirms the constitutionally
guaranteed right to self-organization.

True enough, there was no attempt made by the national federation, or the
local/chapter for that matter, to submit the enumerated documentary requirements to
the Regional Office or Bureau for the specific purpose of creating the local/chapter.
However, these same documents were submitted by the local/chapter to the Regional
Office as attachments to its petition for certification election. Under Section 3, Rule VI
of Department Order No. 9, it is the submission of these same documents to the
Regional Office or Bureau that operates to vest legal personality on the local/chapter.

appointed. Article VIII lays down the rules for meetings of the union, including the
notice and quorum requirements thereof. Article X enumerates with particularity the
rules for union dues, special assessments, fines, and other payments. Article XII
provides the general rule for quorum in meetings of the Board of Directors and of the
members of the local/chapter, and cites the applicability of the Roberts Rules of
Order[43] in its meetings. And finally, Article XVI governs and institutes the requisites
for the amendment of the constitution.

Thus, in order to ascertain when respondent acquired legal personality, we only

need to determine on what date the Regional Office or Bureau received the complete
documentary requirements enumerated under Section 1, Rule VI of Department
Order No. 9. There is no doubt that on 15 June 1998, or the date respondent filed its
petition for certification election, attached thereto were respondents constitution, the
names and addresses of its officers, and the charter certificate issued by the national
union FFW. The first two of these documents were duly certified under oath by
respondents secretary Bathan and attested to by president Sagun.[41]

Indeed, it is difficult to see in this case what a set of by-laws separate from the
constitution for respondent could provide that is not already provided for by the
Constitution. These premises considered, there is clearly no need for a separate set
of by-laws to be submitted by respondent.

It may be noted though that respondent never submitted a separate by-laws, nor
does it appear that respondent ever intended to prepare a set thereof. Section 1(c),
Rule VI, Book V of Department Order No. 9 provides that the submission of both a
constitution and a set of by-laws is required, or at least an indication that the
local/chapter is adopting the constitution and by-laws of the federation or national
union. A literal reading of the provision might indicate that the failure to submit a
specific set of by-laws is fatal to the recognition of the local/chapter. A more critical
analysis of this requirement though is in order, especially as it should apply to this
petition.
By-laws has traditionally been defined as regulations, ordinances, rules or laws
adopted by an association or corporation or the like for its internal governance,
including rules for routine matters such as calling meetings and the like. [42] The
importance of by-laws to a labor organization cannot be gainsaid. Without such
provisions governing the internal governance of the organization, such as rules on
meetings and quorum requirements, there would be no apparent basis on how the
union could operate. Without a set of by-laws which provides how the local/chapter
arrives at its decisions or otherwise wields its attributes of legal personality, then
every action of the local/chapter may be put into legal controversy.
However, if those key by-law provisions on matters such as quorum
requirements, meetings, or on the internal governance of the local/chapter are
themselves already provided for in the constitution, then it would be feasible to
overlook the requirement for by-laws. Indeed in such an event, to insist on the
submission of a separate document denominated as By-Laws would be an undue
technicality, as well as a redundancy.
An examination of respondents constitution reveals it sufficiently comprehensive
in establishing the necessary rules for its operation. Article IV establishes the
requisites for membership in the local/chapter. Articles V and VI name the various
officers and what their respective functions are. The procedure for election of these
officers, including the necessary vote requirements, is provided for in Article IX, while
Article XV delineates the procedure for the impeachment of these officers. Article VII
establishes the standing committees of the local/chapter and how their members are

The Court likewise sees no impediment in deeming respondent as having

acquired legal personality as of 15 June 1998, the fact that it was the local/chapter
itself, and not the FFW, which submitted the documents required under Section 1,
Rule VI of Department Order No. 9. The evident rationale why the rule states that it is
the federation or national union that submits said documents to the Bureau or
Regional Office is that the creation of the local/chapter is the sole prerogative of the
federation or national union, and not of any other entity. Certainly, a putative
local/chapter cannot, without the imprimatur of the federation or national union, claim
affiliation with the larger unit or source its legal personality therefrom.
In the ordinary course, it should have been FFW, and not respondent, which
should have submitted the subject documents to the Regional Office. Nonetheless,
there is no good reason to deny legal personality or defer its conferral to the
local/chapter if it is evident at the onset that the federation or national union itself has
already through its own means established the local/chapter. In this case, such is
evidenced by the Charter Certificate dated 9 June 1998, issued by FFW, and
attached to the petition for certification election. The Charter Certificate expressly
states that respondent has been issued the said certificate to operate as a local or
chapter of the [FFW]. The Charter Certificate expressly acknowledges FFWs intent to
establish respondent as of 9 June 1998.[44] This being the case, we consider it
permissible for respondent to have submitted the required documents itself to the
Regional Office, and proper that respondents legal personality be deemed existent as
of 15 June 1998, the date the complete documents were submitted.
Second Issue: On the Alleged Presence Of Supervisory Employees as
Officers of the Respondent
The second issue hinges on a point of some controversy and frequent
discussion in recent years. Petitioner claims error in the common pronouncement in
the assailed decisions that the matter concerning the two officers who are allegedly
supervisory employees may be threshed out during pre-election conferences.
Petitioner cites the cases of Toyota Motors and Progressive Development
Corporation-Pizza Hut v. Ledesma[45] wherein the Court ruled that the question of
prohibited membership of both supervisory and rank-and-file employees in the same
union must be inquired into anterior to the granting of an order allowing a certification
election; and that a union composed of both of these kinds of employees does not
possess the requisite personality to file for recognition as a legitimate labor

organization. It should be noted though that in the more recent case of Tagaytay
Highlands International Golf Club v. Tagaytay Highlands Employees Union,[46] the
Court, notwithstanding Toyota and Progressive, ruled that after a certificate of
registration is issued to a union, its legal personality cannot be subject to collateral
attack, but questioned only in an independent petition for cancellation.[47]
There is no need to apply any of the above cases at present because the
question raised by petitioner on this point is already settled law, as a result of the
denial of the independent petition for cancellation filed by petitioner against
respondent on 20 August 1998. The ground relied upon therein was the alleged fraud,
misrepresentation and false statement in describing itself as a union of rank and file
employees when in fact, two of its officers, Emmanuel Rosell and Noel Bathan, were
occupying supervisory positions.[48] Said petition was denied by the Regional Director,
this action was affirmed by the DOLE, the Court of Appeals, and the Supreme Court.
[49]
The denial made by the Court of Appeals and the Supreme Court may have been
based on procedural grounds,[50] but the prior decisions of the Regional Director and
the DOLE ruled squarely on the same issue now raised by the petitioner. We quote
from the Resolution of the DOLE dated 29 December 1998:
. . . . [The] substantive issue that is now before us is whether or not the inclusion of
the two alleged supervisory employees in appellee unions membership amounts to
fraud, misrepresentation, or false statement within the meaning of Article 239(a) and
(c) of the Labor Code.
We rule in the negative.
Under the law, a managerial employee is one who is vested with powers or
prerogatives to lay down and execute management policies and/or to hire, transfer,
suspend, layoff, recall, discharge, assign or discipline employees. A supervisory
employee is one who, in the interest of the employer, effectively recommends
managerial actions if the exercise of such recommendatory authority is not merely
routinary or clerical in nature but requires the use of independent judgment. Finally,
all employees not falling within the definition of managerial or supervisory employee
are considered rank-and-file employees. It is also well-settled that the actual
functions of an employee, not merely his job title, are determinative in classifying
such employee as managerial, supervisory or rank and file.
In the case of Emmanuel Rossell, appellants evidence shows that he undertakes the
filling out of evaluation reports on the performance of mechanics, which in turn are
used as basis for reclassification. Given a ready and standard form to accomplish,
coupled with the nature of the evaluation, it would appear that his functions are more
routinary than recommendatory and hardly leave room for independent judgment. In
the case of Noel Bathan, appellants evidence does not show his job title although it
shows that his recommendations on disciplinary actions appear to have carried
some weight on higher management. On this limited point, he may qualify as a
supervisory employee within the meaning of the law. This may, however, be
outweighed by his other functions which are not specified in the evidence.
Assuming that Bathan is a supervisory employee, this does not prove the existence
of fraud, false statement or misrepresentation. Because good faith is presumed in all
representations, an essential element of fraud, false statement and

misrepresentation in order for these to be actionable is intent to mislead by the party

making the representation. In this case, there is no proof to show that Bathan, or
appellee union for that matter, intended to mislead anyone. If this was appellee
unions intention, it would have refrained from using a more precise description of the
organization instead of declaring that the organization is composed of rank and file
monthlies. Hence, the charge of fraud, false statement or misrepresentation cannot
be sustained.
Appellants reliance on the Toyota case must be tempered by the peculiar
circumstances of the case. Even assuming that Bathan, or Rossel for that matter, are
supervisory employees, the Toyota case cannot certainly be given an interpretation
that emasculates the right to self-organization and the promotion of free trade
unionism. We take administrative notice of the realities in union organizing, during
which the organizers must take their chances, oftentimes unaware of the fine
distinctions between managerial, supervisory and rank and file employees. The
grounds for cancellation of union registration are not meant to be applied
automatically, but indeed with utmost discretion. Where a remedy short of
cancellation is available, that remedy should be preferred. In this case, no party will
be prejudiced if Bathan were to be excluded from membership in the union. The
vacancy he will thus create can then be easily filled up through the succession
provision of appellee unions constitution and by-laws. What is important is that there
is an unmistakeable intent of the members of appellee union to exercise their right to
organize. We cannot impose rigorous restraints on such right if we are to give
meaning to the protection to labor and social justice clauses of the Constitution.[51]
The above-cited pronouncement by Bureau of Labor Relations Director
Benedicto Ernesto R. Bitonio, Jr. in BLR-A-C-41-11-11-98 was affirmed by the Court
of Appeals and the Supreme Court. Hence, its pronouncement affirming,
notwithstanding the questions on the employment status of Rossell and Bathan, the
legitimacy of the respondent, stands as a final ruling beyond the ambit of review, thus
warranting the Courts respect. There may be a difference between this case, which
involves a petition for certification election, and the other case, which concerns a
petition for cancellation. However, petitioner opposes the petition for certification
election on the ground of the illegitimacy of respondent, owing to the alleged
supervisory nature of the duties of Rossell and Bathan. That matter has already been
settled in the final disposition of the petition for cancellation, and thus cannot be
unsettled by reason of this present petition.
Effect of Respondents Manifestation
Of Subsequent Developments
A final note. In its Memorandum, petitioner alleges that the bargaining unit that
respondent sought to represent is no longer the same because of the dynamic nature
of petitioners business, a lot of changes having occurred in the work environment,
and that four of respondents officers are no longer connected with petitioner.[52]
Assuming that these manifestations are true, they have no effect on the Courts ruling
that a certification election should be immediately conducted with respondent as one
of the available choices. Petitioners bare manifestations adduce no reason why the
certification election should not be conducted forthwith. If there are matters that have
arisen since the filing of the petition that serve to delay or cancel the election, these

can be threshed out during the pre-election conferences. Neither is the fact that some
of respondents officers have since resigned from petitioner of any moment. The
local/chapter retains a separate legal personality from that of its officers or members
that remains viable notwithstanding any turnover in its officers or members.

On 14 May 1985, petitioner informed VGCCI of the above-mentioned

foreclosure proceedings and requested that the pledged stock be transferred to its
(petitioner's) name and the same be recorded in the corporate books. However, on 15
July 1985, VGCCI wrote petitioner expressing its inability to accede to petitioner's
request in view of Calapatia's unsettled accounts with the club.

WHEREFORE, the Petition is DENIED. Costs against petitioner.

SO ORDERED.
FIRST DIVISION
[G.R. No. 117604. March 26, 1997]
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and
VALLEY GOLF and COUNTRY CLUB, INC., respondents.
DECISION
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioner China Banking Corporation seeks the reversal of the decision of the
Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange
Commission's order and resolution dated 4 June 1993 and 7 December 1993,
respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's motion for
reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder
of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged
his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for
brevity).
On 16 September 1974, petitioner wrote VGCCI requesting that the
aforementioned pledge agreement be recorded in its books.
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge
executed by Calapatia in petitioner's favor was duly noted in its corporate books.
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner,
payment of which was secured by the aforestated pledge agreement still existing
between Calapatia and petitioner.
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed
a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of
Manila, requesting the latter to conduct a public auction sale of the pledged stock.

Despite the foregoing, Notary Public de Vera held a public auction on 17

September 1985 and petitioner emerged as the highest bidder at P20,000.00 for the
pledged stock. Consequently, petitioner was issued the corresponding certificate of
sale.
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment
of his overdue account in the amount of P18,783.24. Said notice was followed by a
demand letter dated 12 December 1985 for the same amount and another notice
dated 22 November 1986 for P23,483.24.
On 4 December 1986, VGCCI caused to be published in the newspaper Daily
Express a notice of auction sale of a number of its stock certificates, to be held on 10
December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock
(Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the
termination of his membership due to the sale of his share of stock in the 10
December 1986 auction.
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's
Stock Certificate No. 1219 by virtue of being the highest bidder in the 17 September
1985 auction and requested that a new certificate of stock be issued in its name.
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's
stock was sold at the public auction held on 10 December 1986 for P25,000.00.
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of
stock and thereafter filed a case with the Regional Trial Court of Makati for the
nullification of the 10 December 1986 auction and for the issuance of a new stock
certificate in its name.
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for
lack of jurisdiction over the subject matter on the theory that it involves an intracorporate dispute and on 27 August 1990 denied petitioner's motion for
reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and
Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by
VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the
issuance of a new certificate in petitioner's name; and for damages, attorney's fees
and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision
in favor of VGCCI, stating in the main that "(c)onsidering that the said share is

delinquent, (VGCCI) had valid reason not to transfer the share in the name of the
petitioner in the books of (VGCCI) until liquidation of delinquency." Consequently, the
case was dismissed.

191 SCRA 308, 322-323).

Indeed, the controversy between petitioner and respondent bank
which involves ownership of the stock that used to belong to Calapatia, Jr.
is not within the competence of respondent Commission to decide. It is not
any of those mentioned in the aforecited case.

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for

reconsideration.
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission
issued an order reversing the decision of its hearing officer. It declared thus:

WHEREFORE, the decision dated June 4, 1993, and order dated

December 7, 1993 of respondent Securities and Exchange Commission
(Annexes Y and BB, petition) and of its hearing officer dated January 3,
1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and
set aside for lack of jurisdiction over the subject matter of the case.
Accordingly, the complaint of respondent China Banking Corporation
(Annex Q, petition) is DISMISSED. No pronouncement as to costs in this
instance.

The Commission en banc believes that appellant-petitioner has a

prior right over the pledged share and because of pledgor's failure to pay
the principal debt upon maturity, appellant-petitioner can proceed with the
foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992
and April 14, 1992 are hereby SET ASIDE. The auction sale conducted by
appellee-respondent Club on December 10, 1986 is declared NULL and
VOID. Finally, appellee-respondent Club is ordered to issue another
membership certificate in the name of appellant-petitioner bank.

SO ORDERED.
Petitioner moved for reconsideration but the same was denied by the Court of
Appeals in its resolution dated 5 October 1994.

SO ORDERED.
VGCCI sought reconsideration of the abovecited order. However, the SEC
denied the same in its resolution dated 7 December 1993.

Hence, this petition wherein the following issues were raised:

II
ISSUES

The sudden turn of events sent VGCCI to seek redress from the Court of
Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and
setting aside the orders of the SEC and its hearing officer on ground of lack of
jurisdiction over the subject matter and, consequently, dismissed petitioner's original
complaint. The Court of Appeals declared that the controversy between CBC and
VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a
case, the controversy must pertain to any of the following relationships: (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 in so far as its franchise, permit or license to
operate is concerned, and (d) among the stockholders, partners or
associates themselves (Union Glass and Container Corporation vs. SEC,
November 28, 1983, 126 SCRA 31). The establishment of any of the
relationship mentioned will not necessarily always confer jurisdiction over
the dispute on the Securities and Exchange Commission to the exclusion
of the regular courts. The statement made in Philex Mining Corp. vs.
Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions
is not that absolute. The better policy in determining which body has
jurisdiction over a case would be to consider not only the status or
relationship of the parties but also the nature of the question that is the
subject of their controversy (Viray vs. Court of Appeals, November 9, 1990,

WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former

Eighth Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04,
1993 AND ORDER DATED DECEMBER 07, 1993 OF THE
SECURITIES AND EXCHANGE COMMISSION EN BANC, AND
WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION
OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND
EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993
DESPITE
PREPONDERANT
EVIDENCE
SHOWING
THAT
PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the
controversy, the regular courts or the SEC.
P.D. No. 902-A conferred upon the SEC the following pertinent powers:

SECTION 3. The Commission shall have absolute jurisdiction,

supervision and control over all corporations, partnerships or associations,
who are the grantees of primary franchises and/or a license or permit
issued by the government to operate in the Philippines, and in the exercise
of its authority, it shall have the power to enlist the aid and support of and
to deputize any and all enforcement agencies of the government, civil or
military as well as any private institution, corporation, firm, association or
person.

. . . The better policy in determining which body has jurisdiction over

a case would be to consider not only the status or relationship of the
parties but also the nature of the question that is the subject of their
controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal
has jurisdiction we have to determine therefore whether or not petitioner is a
stockholder of VGCCI and whether or not the nature of the controversy between
petitioner and private respondent corporation is intra-corporate.

xxx
SECTION 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:
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;
c)
Controversies in the election or appointment of
directors, trustees, officers, or managers of such corporations,
partnerships or associations.
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 of its debts but
foresees the impossibility of meeting them when 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.
The aforecited law was expounded upon in Viray v. CA and in the recent cases
of Mainland Construction Co., Inc. v. Movilla and Bernardo v. CA, thus:

As to the first query, there is no question that the purchase of the subject share
or membership certificate at public auction by petitioner (and the issuance to it of the
corresponding Certificate of Sale) transferred ownership of the same to the latter and
thus entitled petitioner to have the said share registered in its name as a member of
VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has
in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner and has even noted
said agreement in its corporate books. In addition, Calapatia, the original owner of the
subject share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder
of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly
exemplies an intra-corporate controversy between a corporation and its stockholder
under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between
petitioner and private respondent corporation. VGCCI claims a prior right over the
subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that
"after a member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the Club . . ." It is pursuant to this
provision that VGCCI also sold the subject share at public auction, of which it was the
highest bidder. VGCCI caps its argument by asserting that its corporate by-laws
should prevail. The bone of contention, thus, is the proper interpretation and
application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the
special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo
v. De la Cruz:
6.
In the fifties, the Court taking cognizance of the move to vest
jurisdiction in administrative commissions and boards the power to resolve
specialized disputes in the field of labor (as in corporations, public
transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management
controversies likely to cause strikes or lockouts meant such jurisdiction to
be exclusive, although it did not so expressly state in the law. The Court
held that under the "sense-making and expeditious doctrine of primary
jurisdiction . . . the courts cannot or will not determine a controversy
involving a question which is within the jurisdiction of an administrative
tribunal, where the question demands the exercise of sound administrative
discretion requiring the special knowledge, experience, and services of the

administrative tribunal to determine technical and intricate matters of fact,

and a uniformity of ruling is essential to comply with the purposes of the
regulatory statute administered."

Having resolved the issue on jurisdiction, instead of remanding the whole case
to the Court of Appeals, this Court likewise deems it procedurally sound to proceed
and rule on its merits in the same proceedings.

In this era of clogged court dockets, the need for specialized

administrative boards or commissions with the special knowledge,
experience and capability to hear and determine promptly disputes on
technical matters or essentially factual matters, subject to judicial review in
case of grave abuse of discretion, has become well nigh indispensable.
Thus, in 1984, the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has been to refer
it to the former. 'Increasingly, this Court has been committed to the view
that unless the law speaks clearly and unequivocably, the choice should
fall on [an administrative agency.]'" The Court in the earlier case of Ebon v.
De Guzman, noted that the lawmaking authority, in restoring to the labor
arbiters and the NLRC their jurisdiction to award all kinds of damages in
labor cases, as against the previous P.D. amendment splitting their
jurisdiction with the regular courts, "evidently,. . . had second thoughts
about depriving the Labor Arbiters and the NLRC of the jurisdiction to
award damages in labor cases because that setup would mean duplicity of
suits, splitting the cause of action and possible conflicting findings and
conclusions by two tribunals on one and the same claim."

It must be underscored that petitioner did not confine the instant petition for
review on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner
specifically raised questions on the merits of the case. In turn, in its responsive
pleadings, private respondent duly answered and countered all the issues raised by
petitioner.

In this case, the need for the SEC's technical expertise cannot be
over-emphasized involving as it does the meticulous analysis and correct
interpretation of a corporation's by-laws as well as the applicable
provisions of the Corporation Code in order to determine the validity of
VGCCI's claims. The SEC, therefore, took proper cognizance of the instant
case.
VGCCI further contends that petitioner is estopped from denying its earlier
position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112)
that there is no intra-corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani A. Cruz,
declared that:
It follows that as a rule the filing of a complaint with one court which
has no jurisdiction over it does not prevent the plaintiff from filing the same
complaint later with the competent court. The plaintiff is not estopped from
doing so simply because it made a mistake before in the choice of the
proper forum . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it
categorically stated (in its motion to dismiss) that the case between itself and
petitioner is intra-corporate and insisted that it is the SEC and not the regular courts
which has jurisdiction. This is precisely the reason why the said court dismissed
petitioner's complaint and led to petitioner's recourse to the SEC.

Applicable to this case is the principle succinctly enunciated in the case of Heirs
of Crisanta Gabriel-Almoradie v. Court of Appeals, citing Escudero v. Dulay and The
Roman Catholic Archbishop of Manila v. Court of Appeals:
In the interest of the public and for the expeditious administration of
justice the issue on infringement shall be resolved by the court considering
that this case has dragged on for years and has gone from one forum to
another.
It is a rule of procedure for the Supreme Court to strive to settle the
entire controversy in a single proceeding leaving no root or branch to bear
the seeds of future litigation. No useful purpose will be served if a case or
the determination of an issue in a case is remanded to the trial court only
to have its decision raised again to the Court of Appeals and from there to
the Supreme Court.
We have laid down the rule that the remand of the case or of an issue
to the lower court for further reception of evidence is not necessary where
the Court is in position to resolve the dispute based on the records before
it and particularly where the ends of justice would not be subserved by the
remand thereof. Moreover, the Supreme Court is clothed with ample
authority to review matters, even those not raised on appeal if it finds that
their consideration is necessary in arriving at a just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., this
Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that that since
the filing of this suit before the trial court, none of the substantial issues
have been resolved. To avoid and gloss over the issues raised by the
parties, as what the trial court and respondent Court of Appeals did, would
unduly prolong this litigation involving a rather simple case of foreclosure
of mortgage. Undoubtedly, this will run counter to the avowed purpose of
the rules, i.e., to assist the parties in obtaining just, speedy and
inexpensive determination of every action or proceeding. The Court,
therefore, feels that the central issues of the case, albeit unresolved by the
courts below, should now be settled specially as they involved pure
questions of law. Furthermore, the pleadings of the respective parties on
file have amply ventilated their various positions and arguments on the
matter necessitating prompt adjudication.

In the case at bar, since we already have the records of the case (from the
proceedings before the SEC) sufficient to enable us to render a sound judgment and
since only questions of law were raised (the proper jurisdiction for Supreme Court
review), we can, therefore, unerringly take cognizance of and rule on the merits of the
case.
The procedural niceties settled, we proceed to the merits.

VGCCI had officially recognized as the pledgee of Calapatia's share, was neither
informed nor furnished copies of these letters of overdue accounts until VGCCI itself
sold the pledged share at another public auction. By doing so, VGCCI completely
disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of
said auction sale. Such actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its
by-laws. It argues in this wise:

VGCCI assails the validity of the pledge agreement executed by Calapatia in

petitioner's favor. It contends that the same was null and void for lack of consideration
because the pledge agreement was entered into on 21 August 1974 but the loan or
promissory note which it secured was obtained by Calapatia much later or only on 3
August 1983.

The general rule really is that third persons are not bound by the bylaws of a corporation since they are not privy thereto (Fleischer v. Botica
Nolasco, 47 Phil. 584). The exception to this is when third persons have
actual or constructive knowledge of the same. In the case at bar, petitioner
had actual knowledge of the by-laws of private respondent when petitioner
foreclosed the pledge made by Calapatia and when petitioner purchased
the share foreclosed on September 17, 1985. This is proven by the fact
that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of
private respondent's by-laws which is material to the issue herein in a letter
it wrote to private respondent. Because of this actual knowledge of such
by-laws then the same bound the petitioner as of the time when petitioner
purchased the share. Since the by-laws was already binding upon
petitioner when the latter purchased the share of Calapatia on September
17, 1985 then the petitioner purchased the said share subject to the right
of the private respondent to sell the said share for reasons of delinquency
and the right of private respondent to have a first lien on said shares as
these rights are provided for in the by-laws very very clearly.

VGCCI's contention is unmeritorious.

A careful perusal of the pledge agreement will readily reveal that the contracting
parties explicitly stipulated therein that the said pledge will also stand as security for
any future advancements (or renewals thereof) that Calapatia (the pledgor) may
procure from petitioner:
xxx
This pledge is given as security for the prompt payment when due of
all loans, overdrafts, promissory notes, drafts, bills or exchange, discounts,
and all other obligations of every kind which have heretofore been
contracted, or which may hereafter be contracted, by the PLEDGOR(S)
and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE,
including discounts of Chinese drafts, bills of exchange, promissory notes,
etc., without any further endorsement by the PLEDGOR(S) and/or
Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS,
together with the accrued interest thereon, as hereinafter provided, plus
the costs, losses, damages and expenses (including attorney's fees) which
PLEDGEE may incur in connection with the collection thereof. (Emphasis
ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot
thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory
note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first
promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent
accounts, it had the right to sell the share in question in accordance with the express
provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that
VGCCI began sending notices of delinquency to Calapatia after it was informed by
petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings
initiated against Calapatia's pledged share, although Calapatia has been delinquent
in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco

Co.:
And moreover, the by-law 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 Gonzales 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 & 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.) (Underscoring ours.)
In order to be bound, the third party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said third party
and the shareholder was entered into, in this case, at the time the pledge agreement
was executed. VGCCI could have easily informed petitioner of its by-laws when it
sent notice formally recognizing petitioner as pledgee of one of its shares registered
in Calapatia's name. Petitioner's belated notice of said by-laws at the time of
foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by
the corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers with
relation thereto and among themselves in their relation to it. In other
words, by-laws are the relatively permanent and continuing rules of action
adopted by the corporation for its own government and that of the
individuals composing it and having the direction, management and control
of its affairs, in whole or in part, in the management and control of its
affairs and activities. (9 Fletcher 4166. 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among themselves.
They are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not
bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. In the case of Fleisher v. Botica Nolasco,
47 Phil. 584, the Supreme Court held that the by-law restricting the transfer
of shares cannot have any effect on the the transferee of the shares in
question as 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 the by-law
between the shareholder x x x and the Botica Nolasco, Inc. Said by-law
cannot operate to defeat his right as a purchaser." (Underscoring
supplied.)
By analogy of the above-cited case, the Commission en banc is of
the opinion that said case is applicable to the present controversy.
Appellant-petitioner bank as a third party can not be bound by appelleerespondent's by-laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the pledge agreement was
duly noted in the club's books there was no mention of the shareholder-

pledgor's unpaid accounts. The transcript of stenographic notes of the

June 25, 1991 Hearing reveals that the pledgor became delinquent only in
1975. Thus, appellant-petitioner was in good faith when the pledge
agreement was contracted.
The Commission en banc also believes that for the exception to the
general accepted rule that third persons are not bound by by-laws to be
applicable and binding upon the pledgee, knowledge of the provisions of
the VGCCI By-laws must be acquired at the time the pledge agreement
was contracted. Knowledge of said provisions, either actual or
constructive, at the time of foreclosure will not affect pledgee's right over
the pledged share. Art. 2087 of the Civil Code provides that it is also of the
essence of these contracts that when the principal obligation becomes
due, the things in which the pledge or mortgage consists maybe alienated
for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc.,
the Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the certificate,
their cancellation, and the issuance to him of new ones, and
when done, the pledgee will be fully protected against a
subsequent purchaser who would be charged with constructive
notice that the certificate is covered by the pledge. (12-A
Fletcher 502)
The pledgee is entitled to retain possession of the stock
until the pledgor pays or tenders to him the amount due on the
debt secured. In other words, the pledgee has the right to resort
to its collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance
of new certificate to a third person who purchased the same
certificate covered by the pledge, will certainly defeat the right
of the pledgee to resort to its collateral for the payment of the
debt. The pledgor or his representative or registered
stockholders has no right to require a return of the pledged
stock until the debt for which it was given as security is paid and
satisfied, regardless of the length of time which have elapsed
since debt was created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or
liens in favor either of the corporation or of third persons, if he has no
notice thereof, but not otherwise. He also takes it free of liens or claims
that may subsequently arise in favor of the corporation if it has notice of
the pledge, although no demand for a transfer of the stock to the pledgee
on the corporate books has been made. (12-A Fletcher 5634, 1982 ed.,
citing Snyder v. Eagle Fruit Co., 75 F2d739)
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws

because of Art. 2099 of the Civil Code which stipulates that the creditor must take
care of the thing pledged with the diligence of a good father of a family, fails to
convince. The case of Cruz & Serrano v. Chua A. H . Lee, is clearly not applicable:
In applying this provision to the situation before us it must be borne in
mind that the ordinary pawn ticket is a document by virtue of which the
property in the thing pledged passes from hand to hand by mere delivery
of the ticket; and the contract of the pledge is, therefore, absolvable to
bearer. It results that one who takes a pawn ticket in pledge acquires
domination over the pledge; and it is the holder who must renew the
pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite
different in character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's bylaws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers
to "any unpaid claim arising from unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the corporation arising from any other
transaction." In the case at bar, the subscription for the share in question has been
fully paid as evidenced by the issuance of Membership Certificate No. 1219. What
Calapatia owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of
Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is
hereby AFFIRMED.
SO ORDERED.

for salaries earned from the following: (1) basic seaman course Classes 41 and 42 for
the period covering October 1991 to September 1992; (2) shipyard and plant visits
and on-the-job training of Classes 41 and 42 for the period covering October 1991 to
September 1992 on board M/V Sweet Glory vessel; and (3) as Acting Director of
Seaman Training Course for 3-1/2 months.
In support of the abovementioned claims, private respondent submitted
documentary evidence which were annexed to his complaint, such as the detailed
load and schedule of classes with number of class hours and rate per hour (Annex A);
PMI Colleges Basic Seaman Training Course (Annex B); the aforementioned letterrequest for payment of salaries by the Acting Director of PMI Colleges (Annex C);
unpaid load of private respondent (Annex D); and vouchers prepared by the
accounting department of petitioner but whose amounts indicated therein were
actually never paid to private respondent (Exhibit E).

SECOND DIVISION
[G.R. No. 121466. August 15, 1997]
PMI

COLLEGES, petitioner, vs. THE NATIONAL LABOR

COMMISSION and ALEJANDRO GALVAN, respondents.

RELATIONS

DECISION
ROMERO, J.:
Subject of the instant petition for certiorari under Rule 65 of the Rules of Court is
the resolution of public respondent National Labor Relations Commission rendered on
August 4, 1995, affirming in toto the December 7, 1994 decision of Labor Arbiter
Pablo C. Espiritu declaring petitioner PMI Colleges liable to pay private respondent
Alejandro Galvan P405,000.00 in unpaid wages and P40,532.00 as attorneys fees.
A chronicle of the pertinent events on record leading to the filing of the instant
petition is as follows:
On July 7, 1991, petitioner, an educational institution offering courses on basic
seamans training and other marine-related courses, hired private respondent as
contractual instructor with an agreement that the latter shall be paid at an hourly rate
of P30.00 to P50.00, depending on the description of load subjects and on the
schedule for teaching the same. Pursuant to this engagement, private respondent
then organized classes in marine engineering.
Initially, private respondent and other instructors were compensated for services
rendered during the first three periods of the abovementioned contract. However, for
reasons unknown to private respondent, he stopped receiving payment for the
succeeding rendition of services. This claim of non-payment was embodied in a letter
dated March 3, 1992, written by petitioners Acting Director, Casimiro A. Aguinaldo,
addressed to its President, Atty. Santiago Pastor, calling attention to and appealing for
the early approval and release of the salaries of its instructors including that of private
respondent. It appeared further in said letter that the salary of private respondent
corresponding to the shipyard and plant visits and the ongoing on-the-job training of
Class 41 on board MV Sweet Glory of Sweet Lines, Inc. was not yet included. This
request of the Acting Director apparently went unheeded. Repeated demands having
likewise failed, private respondent was soon constrained to file a complaint before the
National Capital Region Arbitration Branch on September 14, 1993 seeking payment

Private respondents claims, as expected, were resisted by petitioner. It alleged

that classes in the courses offered which complainant claimed to have remained
unpaid were not held or conducted in the school premises of PMI Colleges. Only
private respondent, it was argued, knew whether classes were indeed conducted. In
the same vein, petitioner maintained that it exercised no appropriate and proper
supervision of the said classes which activities allegedly violated certain rules and
regulations of the Department of Education, Culture and Sports (DECS). Furthermore,
the claims, according to petitioner, were all exaggerated and that, at any rate, private
respondent abandoned his work at the time he should have commenced the same.
In reply, private respondent belied petitioners allegations contending, among
others, that he conducted lectures within the premises of petitioners rented space
located at 5th Floor, Manufacturers Bldg., Sta. Cruz, Manila; that his students duly
enrolled with the Registrars Office of petitioner; that shipyard and plant visits were
conducted at Fort San Felipe, Cavite Naval Base; that petitioner was fully aware of
said shipyard and plant visits because it even wrote a letter for that purpose; and that
basic seaman courses 41 and 42 were sanctioned by the DECS as shown by the
records of the Registrars Office.
Later in the proceedings below, petitioner manifested that Mr. Tomas G. Cloma,
Jr., a member of the petitioners Board of Trustees wrote a letter to the Chairman of
the Board on May 23, 1994, clarifying the case of private respondent and stating
therein, inter alia, that under petitioners by-laws only the Chairman is authorized to
sign any contract and that private respondent, in any event, failed to submit
documents on the alleged shipyard and plant visits in Cavite Naval Base.
Attempts at amicable settlement having failed, the parties were required to
submit their respective position papers. Thereafter, on June 16, 1994, the Labor
Arbiter issued an order declaring the case submitted for decision on the basis of the
position papers which the parties filed. Petitioner, however, vigorously opposed this
order insisting that there should be a formal trial on the merits in view of the important
factual issues raised. In another order dated July 22, 1994, the Labor Arbiter impliedly
denied petitioners opposition, reiterating that the case was already submitted for
decision. Hence, a decision was subsequently rendered by the Labor Arbiter on
December 7, 1994 finding for the private respondent. On appeal, the NLRC affirmed
the same in toto in its decision of August 4, 1995.

Aggrieved, petitioner now pleads for the Court to resolve the following issues in
its favor, to wit:

public respondents had acted without or in excess of its jurisdiction or with

grave abuse of discretion. (Emphasis supplied).

I. Whether the money claims of private respondent representing

salaries/wages as contractual instructor for class instruction, on-thejob training and shipboard and plant visits have valid legal and
factual bases;

To be sure, this does not mean that the Court would disregard altogether the
evidence presented. We merely declare that the extent of review of evidence we
ordinarily provide in other cases is different when it is a special civil action of
certiorari. The latter commands us to merely determine whether there is basis
established on record to support the findings of a tribunal and such findings meet the
required quantum of proof, which in this instance, is substantial evidence. Our
deference to the expertise acquired by quasi-judicial agencies and the limited scope
granted to us in the exercise of certiorari jurisdiction restrain us from going so far as
to probe into the correctness of a tribunals evaluation of evidence, unless there is
palpable mistake and complete disregard thereof in which case certiorari would be
proper. In plain terms, in certiorari proceedings, we are concerned with mere errors of
jurisdiction and not errors of judgment. Thus:

II. Whether claims for salaries/wages for services relative to on-the-job

training and shipboard and plant visits by instructors, assuming the
same were really conducted, have valid bases;
III. Whether the petitioner was denied its right to procedural due process;
and
IV. Whether the NLRC findings in its questioned resolution have sound
legal and factual support.

At once, a mere perusal of the issues raised by petitioner already invites

dismissal for demonstrated ignorance and disregard of settled rules on certiorari.
Except perhaps for the third issue, the rest glaringly call for a re-examination,
evaluation and appreciation of the weight and sufficiency of factual evidence
presented before the Labor Arbiter. This, of course, the Court cannot do in the
exercise of its certiorari jurisdiction without transgressing the well-defined limits
thereof. The corrective power of the Court in this regard is confined only to
jurisdictional issues and a determination of whether there is such grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of a tribunal or
agency. So unyielding and consistent are the decisional rules thereon that it is indeed
surprising why petitioners counsel failed to accord them the observance they deserve.

The rule is settled that the original and exclusive jurisdiction of this
Court to review a decision of respondent NLRC (or Executive Labor Arbiter
as in this case) in a petition for certiorari under Rule 65 does not normally
include an inquiry into the correctness of its evaluation of the evidence.
Errors of judgment, as distinguished from errors of jurisdiction, are not
within the province of a special civil action for certiorari, which is merely
confined to issues of jurisdiction or grave abuse of discretion. It is thus
incumbent upon petitioner to satisfactorily establish that respondent
Commission or executive labor arbiter acted capriciously and whimsically
in total disregard of evidence material to or even decisive of the
controversy, in order that the extraordinary writ of certiorari will lie. By
grave abuse of discretion is meant such capricious and whimsical exercise
of judgment as is equivalent to lack of jurisdiction, and it must be shown
that the discretion was exercised arbitrarily or despotically. For certiorari to
lie there must be capricious, arbitrary and whimsical exercise of power, the
very antithesis of the judicial prerogative in accordance with centuries of
both civil law and common law traditions.

Thus, in San Miguel Foods, Inc. Cebu B-Meg Feed Plant v. Hon. Bienvenido
Laguesma, we were emphatic in declaring that:

The Court entertains no doubt that the foregoing doctrines apply with equal
force in the case at bar.

This Court is definitely not the proper venue to consider this matter
for it is not a trier of facts. x x x Certiorari is a remedy narrow in its scope
and inflexible in character. It is not a general utility tool in the legal
workshop. Factual issues are not a proper subject for certiorari, as the
power of the Supreme Court to review labor cases is limited to the issue of
jurisdiction and grave abuse of discretion. x x x (Emphasis supplied).

In any event, granting that we may have to delve into the facts and evidence of
the parties, we still find no puissant justification for us to adjudge both the Labor
Arbiters and NLRCs appreciation of such evidence as indicative of any grave abuse
of discretion.

We see no compelling reason to grant petitioners plea; the same must,

therefore, be dismissed.

Of the same tenor was our disquisition in Ilocos Sur Electric Cooperative, Inc. v.
NLRC where we made plain that:
In certiorari proceedings under Rule 65 of the Rules of Court, judicial
review by this Court does not go so far as to evaluate the sufficiency of
evidence upon which the Labor Arbiter and the NLRC based their
determinations, the inquiry being limited essentially to whether or not said

First. Petitioner places so much emphasis on its argument that private

respondent did not produce a copy of the contract pursuant to which he rendered
services. This argument is, of course, puerile. The absence of such copy does not in
any manner negate the existence of a contract of employment since (C)ontracts shall
be obligatory, in whatever form they have been entered into, provided all the essential
requisites for their validity are present. The only exception to this rule is when the law
requires that a contract be in some form in order that it may be valid or enforceable,
or that a contract be proved in a certain way. However, there is no requirement under
the law that the contract of employment of the kind entered into by petitioner with

private respondent should be in any particular form. While it may have been desirable
for private respondent to have produced a copy of his contract if one really exists, but
the absence thereof, in any case, does not militate against his claims inasmuch as:

services; the fact that he was indeed engaged as a contractual instructor by

petitioner; and that part of his services was not yet remunerated. These evidence, to
reiterate, have never been effectively refuted by petitioner.

No particular form of evidence is required to prove the existence of

an employer-employee relationship. Any competent and relevant evidence
to prove the relationship may be admitted. For, if only documentary
evidence would be required to show that relationship, no scheming
employer would ever be brought before the bar of justice, as no employer
would wish to come out with any trace of the illegality he has authored
considering that it should take much weightier proof to invalidate a written
instrument. x x x

Third. As regards the amounts demanded by private respondent, we can only

rely upon the evidence presented which, in this case, consists of the computation of
private respondent as well as the findings of both the Labor Arbiter and the NLRC.
Petitioner, it must be stressed, presented no satisfactory proof to the contrary. Absent
such proof, we are constrained to rely upon private respondents otherwise
straightforward explanation of his claims.

At any rate, the vouchers prepared by petitioners own accounting department

and the letter-request of its Acting Director asking for payment of private respondents
services suffice to support a reasonable conclusion that private respondent was
employed with petitioner. How else could one explain the fact that private respondent
was supposed to be paid the amounts mentioned in those documents if he were not
employed? Petitioners evidence is wanting in this respect while private respondent
affirmatively stated that the same arose out of his employment with petitioner. As
between the two, the latter is weightier inasmuch as we accord affirmative testimony
greater value than a negative one. For the foregoing reasons, we find it difficult to
agree with petitioners assertion that the absence of a copy of the alleged contract
should nullify private respondents claims.
Neither can we concede that such contract would be invalid just because the
signatory thereon was not the Chairman of the Board which allegedly violated
petitioners by-laws. Since by-laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same. No proof appears on record
that private respondent ever knew anything about the provisions of said by-laws. In
fact, petitioner itself merely asserts the same without even bothering to attach a copy
or excerpt thereof to show that there is such a provision. How can it now expect the
Labor Arbiter and the NLRC to believe it? That this allegation has never been denied
by private respondent does not necessarily signify admission of its existence because
technicalities of law and procedure and the rules obtaining in the courts of law do not
strictly apply to proceedings of this nature.
Second. Petitioner bewails the fact that both the Labor Arbiter and the NLRC
accorded due weight to the documents prepared by private respondent since they are
said to be self-serving. Self-serving evidence is not to be literally taken as evidence
that serves ones selfish interest. The fact alone that most of the documents submitted
in evidence by private respondent were prepared by him does not make them selfserving since they have been offered in the proceedings before the Labor Arbiter and
that ample opportunity was given to petitioner to rebut their veracity and authenticity.
Petitioner, however, opted to merely deny them which denial, ironically, is actually
what is considered self-serving evidence and, therefore, deserves scant
consideration. In any event, any denial made by petitioner cannot stand against the
affirmative and fairly detailed manner by which private respondent supported his
claims, such as the places where he conducted his classes, on-the-job training and
shipyard and plant visits; the rate he applied and the duration of said rendition of

Fourth. The absence of a formal hearing or trial before the Labor Arbiter is no
cause for petitioner to impute grave abuse of discretion. Whether to conduct one or
not depends on the sole discretion of the Labor Arbiter, taking into account the
position papers and supporting documents submitted by the parties on every issue
presented. If the Labor Arbiter, in his judgment, is confident that he can rely on the
documents before him, he cannot be faulted for not conducting a formal trial anymore,
unless it would appear that, in view of the particular circumstances of a case, the
documents, without more, are really insufficient.
As applied to the instant case, we can understand why the Labor Arbiter has
opted not to proceed to trial, considering that private respondent, through annexes to
his position paper, has adequately established that, first of all, he was an employee of
petitioner; second, the nature and character of his services, and finally, the amounts
due him in consideration of his services. Petitioner, it should be reiterated, failed to
controvert them. Actually, it offered only four documents later in the course of the
proceedings. It has only itself to blame if it did not attach its supporting evidence with
its position paper. It cannot now insist that there be a trial to give it an opportunity to
ventilate what it should have done earlier. Section 3, Rule V of the New Rules of
Procedure of the NLRC is very clear on the matter:
Section 3. x x x
These verified position papers x x x shall be accompanied by all
supporting documents including the affidavits of their respective witnesses
which shall take the place of the latters direct testimony. The parties shall
thereafter not be allowed to allege facts, or present evidence to prove
facts, not referred to and any cause or causes of action not included in the
complaint or position papers, affidavits and other documents. x x x
(Emphasis supplied).
Thus, given the mandate of said rule, petitioner should have foreseen that the
Labor Arbiter, in view of the non-litigious nature of the proceedings before it, might not
proceed at all to trial. Petitioner cannot now be heard to complain of lack of due
process. The following is apropos:
The petitioners should not have assumed that after they submitted
their position papers, the Labor Arbiter would call for a formal trial or
hearing. The holding of a trial is discretionary on the Labor Arbiter, it is not
a matter of right of the parties, especially in this case, where the private
respondents had already presented their documentary evidence.

xxx
The petitioners did ask in their position paper for a hearing to thresh
out some factual matters pertinent to their case. However, they had no
right or reason to assume that their request would be granted. The
petitioners should have attached to their position paper all the documents
that would prove their claim in case it was decided that no hearing should
be conducted or was necessary. In fact, the rules require that position
papers shall be accompanied by all supporting documents, including
affidavits of witnesses in lieu of their direct testimony.
It must be noted that adequate opportunity was given to petitioner in the
presentation of its evidence, such as when the Labor Arbiter granted petitioners
Manifestation and Motion dated July 22, 1994 allowing it to submit four more
documents. This opportunity notwithstanding, petitioner still failed to fully proffer all its
evidence which might help the Labor Arbiter in resolving the issues. What it desired
instead, as stated in its petition, was to require presentation of witnesses buttressed
by relevant documents in support thereof. But this is precisely the opportunity given to
petitioner when the Labor Arbiter granted its Motion and Manifestation. It should have
presented the documents it was proposing to submit. The affidavits of its witnesses
would have sufficed in lieu of their direct testimony to clarify what it perceives to be
complex factual issues. We rule that the Labor Arbiter and the NLRC were not remiss
in their duty to afford petitioner due process. The essence of due process is merely
that a party be afforded a reasonable opportunity to be heard and to submit any
evidence he may have in support of his defense.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED for lack of merit while the resolution of the National Labor Relations
Commission dated August 4, 1995 is hereby AFFIRMED.
SO ORDERED.

The issue squarely presented by the petitioners is whether or not the Presidential
Commission on Good Government (PCGG) may vote the sequestered shares of
stock of San Miguel Corporation (SMC) and elect its members of the board of
directors.
In G.R. No. 91925 the facts alleged are undisputed. Petitioners are stockholders of
record of SMC as follows

Republic
SUPREME
Manila

of

the

Philippines
COURT

No. of Shares

Eduardo M. Cojuangco, Jr.

13,225

Manuel M. Cojuangco

5,750

Rafael G. Abello

5,750

On April 18, 1989, the annual meeting of shareholders of SMC was held. Among the
matters taken up was the election of fifteen (15) members of the board of directors for
the ensuing year. Petitioners were among the twenty four (24) nominees to the board,
namely

EN BANC
G.R. No. 91925

Stockholders

April 16, 1991

1 Mr. Rafael G. Abello

EDUARDO M. COJUANGCO, JR., MANUEL M. COJUANGCO and RAFAEL G.

ABELLO,
petitioners,
vs.
ANTONIO J. ROXAS, JOSE L. CUISIA, JR., OSCAR HILADO, Presidential
Commission on Good Government (PCGG), SAN MIGUEL CORPORATION
(SMC) and SANDIGANBAYAN (First Division), respondents.
G.R. No. 93005

April 16, 1991

EDUARDO M. COJUANGCO, JR., ENRIQUE M. COJUANGCO and MANUEL M.

COJUANGCO,
petitioners,
vs.
ADOLFO AZCUNA, EDISON COSETENG, PATRICIO PINEDA, Presidential
Commission on Good Government (PCGG), and SAN MIGUEL CORPORATION
(SMC), respondents.
Estelito P. Mendoza and Villareal Law Offices for petitioners.

2 Mr. Eduardo M. Cojuangco, Jr.

3 Mr. Enrique M. Cojuangco
4 Mr. Manuel M. Cojuangco
5 Mr. Marcos O. Cojuangco
6 Mr. Jose C. Concepcion
7 Mr. Amado C. Mamuric
8 Mr. Rodolfo M. Tinsay
9 Mr. Danilo S. Ursua
10 Mr. Eduardo De Los Angeles

GANCAYCO, J.:

11 Mr. Feliciano Belmonte, Jr.

12 Mr. Teodoro L. Locsin

PASTORAL FARMS, INC.

3,587,695

13 Mr. Domingo Lee

MEADOW LARK PLANTATION, INC.

2,690,771

SILVER LEAF PLANTATION, INC.

2,690,771

LUCENA OIL FACTORY, INC.

169,174

PCY OIL FACTORY, INC.

167,867

METROPLEX COMMODITIES, INC.

167,777

KAUNLARAN AGRICULTURAL CORP.

145,475

REDDEE DEVELOPERS, INC.

169,071

AGR'L CONSULTANCY SERV., INC.

167,907

FIRST UNITED TRANSPORT, INC.

168,963

VERDANT PLANTATIONS, INC.

145,475

CHRISTENSEN PLANTATIONS, INC.

168,920

NORTHERN CARRIERS CORPORATION

167,891

VESTA AGRICULTURAL CORP.

145,475

OCEAN SIDE MARITIME ENT., INC.

132,250

14 Mr. Philip Ella Juico

15 Mr. Patrick Pineda
16 Mr. Adolfo Azcuna
17 Mr. Edison Coseteng
18 Mr. Jose L. Cuisia, Jr.
19 Mr. Oscar Hilado
20 Mr. Andres Soriano III
21 Mr. Eduardo J. Soriano
22 Mr. Francisco C. Eizmendi, Jr.

PURA ELECTRIC COMPANY, INC.

99,587

23 Mr. Benigno P. Toda, Jr.

UNEXPLORED LAND DEVELOPERS, INC.

102,823

24 Mr. Antonio J. Roxas

PUNONG-BAYAN HOUSING DEVT. CORP.

132,250

HABAGAT REALTY DEVELOPMENT, INC.

145,822

SPADE ONE RESORTS CORP.

147,040

WINGS RESORTS CORPORATION

104,885

KALAWAKAN RESORTS, INC.

132,250

LABAYUG AIR TERMINALS, INC.

159,106

LANDAIR INT'L MARKETING CORP.

168,965

SAN ESTEBAN DEVELOPMENT CORP.

167,679

PHILIPPINE TECHNOLOGIES, INC.

132,250

On the date of the annual meeting, there were 140,849,970 shares outstanding, of
which 133,224,130 shares, or 94.58%, were present at the meeting, either in person
or by proxy. Because of PCGG's claim that the shares of stock were under
sequestration, PCGG was allowed to represent and vote the shares of stocks of the
following shareholders.

STOCKHOLDER

NO. OF SHARES

BALETE RANCH, INC.

166,395

PRIMAVERA FARMS, INC.

5,381,543

DISCOVERY REALTY CORP.

169,203

BLACK STALLION RANCH, INC.

3,587,695

ARCHIPELAGO REALTY CORP.

167,761

MISTY MOUNTAINS AGRI'L CORP.

3,587,695

SOUTHERN SERVICE TRADERS, INC.

120,480

ORO VERDE SERVICES, INC.

132,250

9. Mr. Andres Soriano III

132,182,000

NORTHEAST CONTRACT TRADERS, INC.

159,536

10. Mr. Eduardo Soriano

132,173,943

DREAM PASTURES, INC.

169,237

11. Mr. Francisco C. Eizmendi, Jr.

132,164,470

LHL CATTLE CORPORATION

169,216

12. Mr. Benigno P. Toda, Jr.

132,147,319

RANCHO GRANDE, INC.

167,614

13. Mr. Antonio J. Roxas

132,146,107

ECHO RANCH, INC.

167,897

14. Mr. Jose L. Cuisia, Jr.

132,141,775

FAR EAST RANCH, INC.

169,227

15. Mr. Oscar Hilado

132,110,402

16. Mr. Eduardo M. Cojuangco, Jr.

2,280,618

17. Mr. Enrique M. Cojuangco

2,279,729

18. Mr. Manuel M. Cojuangco

2,279,719

19. Mr. Rafael G. Abello

2,278,863

20. Mr. Jose C. Concepcion

1,596

21. Mr. Marcos O. Cojuangco

875

22. Mr. Danilo S. Ursua

650

23. Mr. Rodolfo M. Tinsay

23

24. Mr. Amado C. Mamuric

SOUTHERN
STAR
CATTLE
RADIO AUDIENCE DEVELOPERS

CORP. 169,095

INTEGRATED ORGANIZATION, INC

167,787

RADYO PILIPINO CORPORATION

167,777

EDUARDO M. COJUANGCO, JR.

13,225

TOTAL

27,211,770
==============

The above shares are collectively referred to as "corporate shares" in the petition.
Representatives of the corporate shares present at the meeting claimed that the
shares are not under sequestration; or that if they are under sequestration, the PCGG
had no right to vote the same. They were overruled.
With PCGG voting the corporate shares, the following was the result of the election
for members of the SMC board of directors:
Stockholder

No. of Votes

1. Mr. Eduardo De Los Angeles

135,115,521

2. Mr. Feliciano Belmonte, Jr.

135,312,254

3. Mr. Teodoro L. Locsin

132,309,520

4. Mr. Domingo lee

132,308,355

The fifteen individuals who received the highest number of votes were declared
elected.
The PCGG claimed it represented 85,756,279 shares at the meeting including the
corporate shares which corresponded to 1,286,744,185 votes which in turn were
distributed equally among the fifteen (15) candidates who were declared elected.
Petitioners allege that the 27,211,770 shares or a total of 408,176,550 votes
representing the corporate shares, were illegally cast by PCGG and should be
counted in favor of petitioners so that the results of the election would be as follows

Add:
408,176,550
divided by 3 Resulting
(136,058,850)
Votes

5. Mr. Philip Ella Juico

132,301,569

6. Mr. Patrick Pineda

132,284,365

Stockholder

Votes
Originally
Credited

7. Mr. Adolfo Azcuna

132,284,364

1. Mr. Eduardo M. Cojuangco, Jr.

2,280,618

136,058,850

138,339,468

8. Mr. Edison Coseteng

132,284,364

2. Mr. Manuel M. Cojuangco

2,279,719

136,058,850

138,338,569

138,337,713

Hilado whose election will be affected by the claim of petitioners if the same were
upheld.

3. Mr. Rafael G. Abello

2,278,863

136,058,850

Stockholder

Votes
Originally
Credited

Less:
408,176,550
divided by 15 Resulting
(27,211,770)
Votes

4. Mr. Eduardo De Los Angeles

135,115,521

27,211,770

107,903,751

5. Mr. Feliciano Belmonte, Jr.

132,312,254

27,211,770

105,100,484

6. Mr. Teodoro L. Locsin

132,309,520

27,211,770

105,097,750

7. Mr. Domingo Lee

132,308,355

27,211,770

105,096,585

8. Mr. Philip Ella Juico

132,301,569

27,211,770

105,089,799

9. Mr. Patrick Pineda

132,284,365

27,211,770

105,072,595

10. Mr. Adolfo Azcuna

132,284,364

27,211,770

105,072,594

11. Mr. Edison Coseteng

132,284,364

27,211,770

105,072,594

12. Mr. Andres Soriano III

132,182,000

27,211,770

104,970,230

STOCKHOLDER

NO. OF SHARES

13. Mr. Eduardo Soriano

132,173,943

27,211,770

104,962,173

EDUARDO M. COJUANGCO, JR.

52,900

14. Mr. Francisco C. Eizmendi, Jr. 132,164,470

27,211,770

104,952,700

ENRIQUE M. COJUANGCO

23,000

15. Mr. Benigno P. Toda, Jr.

132,147,319

27,211,770

104,935,549

MANUEL M. COJUANGCO

23,000

16. Mr. Antonio J. Roxas

132,146,107

27,211,770

104,934,337

17. Mr. Jose L. Cuisia, Jr.

132,141,775

27,211,770

104,930,005

18. Mr. Oscar Hilado

132,110,402

27,211,770

104,898,632

19. Mr. Enrique M. Cojuangco

2,279,729

20. Mr. Jose C. Concepcion

1,596

21. Mr. Marcos O. Cojuangco

875

22. Mr. Danilo S. Ursua

650

23. Mr. Rodolfo M. Tinsay

23

24. Mr. Amado C. Mamuric

The petitioners assert that is they were allowed to vote their corresponding shares
accordingly, then they would obtain enough votes to be elected.
On May 31, 1989, petitioners filed with the Sandiganbayan a petition for quo warranto
impleading as respondents the fifteen (15) candidates who were declared elected
members of the board of directors of SMC for the year 1989-1990. Summons was
issued only as to respondents Antonio J. Roxas, Jose L. Cuisia, Jr. and Oscar T.

In due course, a resolution was rendered by the Sandiganbayan on November 16,

1989, affirming its jurisdiction over the petition but dismissing it for lack of cause of
action on the ground that the PCGG has the right to vote sequestered shares.
Hence, this petition for certiorari, the main thrust of which is that the right to vote
sequestered shares of stock is vested in the actual shareholders not in the PCGG.
Respondents were required to comment on the petition while petitioners were
required to comment on the motion to dismiss filed by respondent SMC. The required
comments and consolidated reply thereto have all now been submitted.
In G.R. No. 93005, the facts alleged are substantially similar in nature. Petitioners are
stockholders of SMC as follows

On April 17, 1990, the annual meeting of the SMC shareholders was held. Among the
matters taken up was the election of the fifteen (15) members of the board of
directors of SMC for the ensuing year. Petitioners were among the twenty (20)
nominees to the board, namely
1. Mr. Andres Soriano III
2. Mr. Francisco C. Eizmendi, Jr.
3. Mr. Eduardo J. Soriano
4. Mr. Antonio J. Roxas
5. Mr. Benigno P. Toda, Jr.
6. Mr. Eduardo De Los Angeles
7. Mr. Feliciano Belmonte, Jr.

8. Mr. Renato Valencia

PHILIPPINE TECHNOLOGIES, INC.

529,000

9. Mr. Domingo Lee

SOUTHERN SERVICE TRADERS, INC.

481,916

WINGS RESORTS CORPORATION

419,536

UNEXPLORED LAND DEVELOPERS, INC.

411,288

PURA ELECTRIC COMPANY, INC.

398,336

PRIMAVERA FARMS, INC.

21,526,164

BLACK STALLION RANCH, INC.

14,350,772

MISTY MOUNTAIN AGR'L. CORP.

14,350,772

PASTORAL FARMS, INC.

14,350,772

MEADOW LARK PLANTATION, INC.

10,763,080

SILVER LEAF PLANTATION, INC

10,763,080

PCY OIL MANUFACTURING CORP.

671,464

METROPLEX COMMODITIES, INC.

671,104

LUCENA OIL FACTORY, INC.

676,696

DISCOVERY REALTY CORP.

676,808

10. Mr. Teodoro L. Locsin

11. Mr. Oscar Hilado
12. Mr. Philip Ella Juico
13. Mr. Adolfo Azcuna
14. Mr. Edison Coseteng
15. Mr. Patricio Pineda
16. Mr. Eduardo M. Cojuangco, Jr.
17. Mr. Marcos O. Cojuangco
18. Mr. Rafael G. Abello

DREAM PASTURES, INC.

676,948

19. Mr. Enrique M. Cojuangco

FAR EAST RANCH, INC.

676,908

20. Mr. Manuel M. Cojuangco

LHL CATTLE CORPORATION

676,860

ARCHIPELAGO REALTY CORP.

671,040

SOUTHERN STAR CATTLE CORP.

676,376

REDDEE DEVELOPERS, INC.

676,280

LANDAIR INT'L. MARKETING CORP.

675,856

FIRST UNITED TRANSPORT, INC.

675,848

CHRISTENSEN PLANTATION COMPANY

675,680

AGR'L. CONSULTANCY SERV. INC.

671,624

ECHO RANCH, INC.

671,584

NORTHERN CARRIERS CORPORATION

671,560

RADIO
AUDIENCE
INTEGRATED ORGANIZATION, INC

671,148

On the date of the meeting, there were 565,916,550 shares outstanding, of which
531,598,051 shares, or 93.58%, were present at the meeting, either in person or by
proxy.1 The PCGG was allowed to represent and vote the following shares of stock
under sequestration:
STOCKHOLDER

NO. OF SHARES

NORTHEAST CONTRACT TRADERS, INC.

638,144

LABAYUG AIR TERMINALS, INC.

636,416

SPADE ONE RESORTS CORP.

588,280

HABAGAT REALTY DEVELOPMENT, INC.

583,280

PUNONG-BAYAN HOUSING DEV'T CORP.

529,000

OCEAN SIDE MARITIME ENT., INC.

529,000

RADYO PILIPINO CORPORATION

DEVELOPERS
671,104

SAN ESTEBAN DEVELOPMENT CORP.

670,452

15. Patricio Pineda

515,990,250

BALETE RANCH, INC.

665,576

16. Eduardo M. Cojuangco, Jr.

37,335,365

VERDANT PLANTATIONS, INC.

581,900

17. Marcos O Cojuangco

73,404

KAUNLARAN AGRICULTURAL CORP.

581,900

18. Rafael G. Abello

40,404

VESTA AGRICULTURAL CORP.

581,900

19. Enrique M. Cojuangco

34,950

ORO VERDE SERVICES, INC.

529,000

20. Manuel M. Cojuangco

30,955

KALAWAKAN RESORTS, INC.

529,000

EDUARDO M. COJUANGCO, JR.

52,900

Uncast votes

3,150,231

Invalid votes

381,865

TOTAL

7,956,960,120
================

TOTAL

108,846,948
==============

The above shares are once again referred to as "corporate shares" in the petition. At
the meeting, a representative of the corporate share maintained that they are not
under sequestration, or if they are under sequestration, the PCGG had no authority to
vote them. Nevertheless, the PCGG was allowed to vote the corporate shares and
the result of the election was as follows
Stockholder

No. of Votes

1. Andres Soriano III

549,648,661

2. Francisco C. Eizmendi,Jr.

549,105,318

3. Eduardo J. Soriano

548,864,733

4. Antonio J. Roxas

548,809,271

5. Benigno Toda, Jr.

548,751,713

6. Eduardo De Los Angeles

522,678,527

7. Feliciano Belmonte

517,170,373

8. Renato Valencia

517,048,521

9. Domingo Lee

517,014,895

10. Teodoro L. Locsin, Jr.

516,361,120

11. Oscar Hilado

516,197,450

12. Philip Ella Juico

516,118,723

13. Adolfo S. Azcuna

516,105,147

14. Edison Coseteng

516,047,825

The fifteen individuals who received the highest number of votes were declared
elected.
Representatives of the corporate shares manifested that if they were allowed to vote
their shares, the votes corresponding to their shares, a total of 108,846,948 shares,
amounting to 1,632,704,220 votes, would have been cast equally, or 544,234, 740
votes each for petitioners Eduardo Cojuangco, Jr., Enrique M. Cojuangco and Manuel
M. Cojuangco, all of whom would have been among those who received 15 highest
number of votes, and that respondents Adolfo S. Azcuna, Edison Coseteng and
Patricio Pineda would not be included therein, and should thus be ousted from the
board of directors.
As the petition under G.R. No. 91925 which was decided adversely by the
Sandiganbayan is now before this Court, and since time is of the essence as
petitioners have been denied the right to vote since 1986, instead of seeking relief
from the Sandiganbayan, the petitioners filed this petition for quo warranto (G.R. No.
93005), the issues in which are the same as those raised in G.R. No. 91925.
The petitions are impressed with merit.
Nothing is more settled than the ruling of this Court in BASECO VS. PCGG,2 that the
PCGG cannot exercise acts of dominion over property sequestered. It may not vote
sequestered shares of stock or elect the members of the board of directors of the
corporation concerned
a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot
exercise acts of dominion over property sequestered, frozen or provisionally
taken over. As already earlier stressed with no little insistence, the act of
sequestration, freezing or provisional takeover of property does not import or
bring about a divestment of title over said property; does not make the
PCGG the owner thereof. In relation to the property sequestered, frozen or
provisionally taken over, the PCGG is a conservator, not an owner.
Therefore, it can not perform acts of strict ownership; and this is specially
true in the situations contemplated by the sequestration rules where, unlike
cases of receivership, for example, no court exercises effective supervision
or can upon due application and hearing, grant authority for the performance
of acts of dominion.
Equally evident is that the resort to the provisional remedies in question
should entail the least possible interference with business operations or
activities so that, in the event that the accusation of the business enterprise
being "ill-gotten" be not proven, it may be returned to its rightful owner as far
as possible in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the
property or business sequestered or provisionally taken over, much like a
court-appointed receiver, such as to bring and defend actions in its own
name; receive rents; collect debts due; pay outstanding debts; and generally
do such other acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition enjoin or
restrain any actual or threatened commission of acts by any person or entity
that may render moot and academic, or frustrate or otherwise make
ineffectual its efforts to carry out its task; punish for direct or indirect
contempt in accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the government. In the
case of sequestered businesses generally, (i.e., going concerns, businesses
in current operation), as in the case of sequestered objects, its essential
role, as already discussed, is that of conservator, caretaker, "watchdog" or
overseer, it is not that of manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or
Persons Close to him, Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to
have been "taken over by the government of the Marcos Administration or
by entities or persons close to former President Marcos," the PCGG is given
power and authority, as already adverted to, to "provisionally take (it) over in

the public interest or to prevent . . . (its) disposal or dissipation" and since

the term is obviously employed in reference to going concerns, or business
enterprises in operation, something more than mere physical custody is
connoted; the PCGG may in this case exercise some measure of control in
the operation, running, or management of the business itself. But even in
this special situation, the intrusion into management should be restricted to
the minimum degree necessary to accomplish the legislative will, which is
"to prevent the disposal or dissipation" of the business enterprise. There
should be no hasty, indiscriminate, unreasoned replacement or substitution
of management officials, or change of policies, particularly in respect of
viable establishments. In fact, such a replacement or substitution should be
avoided if at all possible, and undertaken only when justified by
demonstrably tenable grounds and in line with the stated objectives of the
PCGG. And it goes without saying that where replacement of management
officers may be called for, the greatest prudence, circumspection, care and
attention should accompany that undertaking to the end that truly competent,
experienced and honest managers may be recruited. There should be no
role to be played in this area by rank amateurs, no matter how well meaning.
The road to hell, it has been said, is paved with good intentions. The
business is not to be experimented or played around with, not run into the
ground, not driven to the bankruptcy, not fleeced not ruined. Sight should
never be lost sight of the ultimate objective of the whole exercise, which is to
turn over the business to the Republic, once judicially established to be "illgotten." Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business
enterprises provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances
that the PCGG may properly exercise the prerogative to vote sequestered
stock of corporations, granted to it by the President of the Philippines
through a memorandum dated June 26, 1986. That memorandum authorizes
the PCGG "pending the outcome of proceedings to determine the ownership
of . . . (sequestered) shares of stock," "to vote such shares of stock as it may
have sequestered in corporations at all stockholders" meetings called for the
election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a
manner as to be consistent with, and not contradictory of the Executive
Orders earlier promulgated on the same matter. There should be no exercise
of the right to vote simply because the right exists, or because the stocks
sequestered constitute the controlling or a substantial part of the corporate
voting power. The stock is not to be voted to replace directors, or revise the
articles or by-laws, or otherwise bring about substantial changes in policy,
program of practice of the corporation except for demonstrably weighty and

defensible grounds, and always in the context of the stated purposes of

sequestration or provisional takeover, i.e., to prevent the dispersion or undue
disposal of the corporate assets. Directors are not to be voted out simply
because the power to do so exists. Substitution of directors is not to be done
without reason or rhyme, should indeed be shunned if at all possible, and
undertaken only when essential to prevent disappearance or wastage of
corporate property, and always under such circumstances as to assure that
the replacements are truly possessed of competence, experience and
probity
In the case at bar, there was adequate justification to vote the incumbent
directors out of office and elect others in their stead because the evidence
showed prima facie that the former were just tools of President Marcos and
were no longer owners of any stock in the firm, if they ever were at all. This
is why, in its Resolution of October 28, 1986; this Court declared that
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders meeting for
the election of directors as authorized by the Memorandum of the President .
. . (to the PCGG) dated June 26, 1986, particularly, where as in this case,
the government can, through its designated directors, properly exercise
control and management over what appear to be properties and assets
owned and belonging to the government itself and over which the persons
who appear in this case on behalf of BASECO have failed to show any right
or even any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in
the BASECO Board in the management of the company's affairs should
henceforth be guided and governed by the norms herein laid down. They
should never for a moment allow themselves to forget that they are
conservators, not owners of the business; they are fiduciaries trustees, of
whom the highest degree of diligence and rectitude is, in the premises,
required.3
In BASECO, Mr. Justice Padilla, in his concurring opinion4 asserted that the removal
and election of members of the board of directors are clear acts of ownership on the
part of the shareholders of the corporation, a right that should be denied the PCGG
under ordinary circumstances. Of course, in BASECO, wherein it appears that Mr.
Marcos took possession and control of 95% of the total ownership thereof which he
could not have acquired out of his lawfully gotten wealth, the PCGG was allowed by
the Court to vote the sequestered shares.
Madame Justice Melencio-Herrera in a concurring opinion which in turn was
concurred in by Justice Feliciano, stated that she has no objection to according the

right to vote sequestered stock in case of a take-over of business actually belonging

to the government and whose capitalization comes from public funds but which,
somehow, landed in the hands of private persons, as in the case of BASECO. She
advised caution and prudence in the case of sequestered shares of an on-going
private business enterprise, specially the sensitive ones, since the true and real
ownership of said shares is yet to be determined and proved more conclusively
before the courts.5
Mr. Justice Gutierrez, in a concurring and dissenting opinion, reiterated that the
election of the board of directors is distinctly and unqualifiedly an act of ownership. He
would disallow the voting of shares by the PCGG on the ground that the same is
authoritarian and ultra vires.6
Mr. Justice Cruz also dissented, He asserted that the acts of voting the shares and
reorganizing the board of directors are acts of ownership which clash with the
implacable principles of a free society, foremost of which is due process.7
The Solicitor General, however, contends in these two cases that if the purpose of
sequestration is to "help prevent the dissipation of the corporation's assets" or to
"preserve" the said assets, the PCGG may resort to "acts of strict ownership," such as
voting the sequestered shares.8
There is no proof or indications showing that the petitioners seek to exercise their
right as stockholders to dissipate, dispose, conceal, destroy, transfer or encumber
their sequestered shares. On the other hand, there is no doubt that petitioners have
the right to vote their shares at the shareholders meeting even if they are sequestered
and that they as stockholders have a right to be voted for as members of the board of
directors of SMC.9
Besides, there are other means by which the said shares may be preserved and their
dissipation prevented. The PCGG may restrain their sale, encumbrance, assignment
or any other disposition during the period of sequestration. It may monitor the
business operations of petitioners as to said shares. It need not vote the shares in
order to accomplish its role as conservator.
The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the
shares in a corporation and elect the members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but which landed in
private hands as in BASECO.
The constitutional right against deprivation of life, liberty and property without due
process of law is so well-known and too precious so that the hand of the PCGG must

be stayed in its indiscriminate takeover of and voting of shares allegedly ill-gotten in

these cases. It is only after appropriate judicial proceedings when a clear
determination is made that said shares are truly ill-gotten when such a takeover and
exercise of acts of strict ownership by the PCGG are justified.
It is true that in G.R. No. 91925 the term of office of the term of office of the assailed
members of the board of directors, private respondents therein, for 1989-1990 had
expired. To this extent said petition may be considered moot and academic. However,
the issue of whether public respondent Sandiganbayan committed a grave abuse of
discretion in rendering the resolution dated November 16, 1989, which affects all
subsequent shareholders' meetings and elections of the members of the board of
directors of SMC, is a justiciable controversy that must be resolved.
As to G.R. No. 93005 the term of office of private respondents as members of the
SMC board of directors will expire on or after another election is held in April 1991.
Thus, the issue raised in G.R. No. 93005 relating to the election of the members of
the board for 1990-1991 pursuant to sequestered shares of stock is a justiciable issue
which should be determined once and for all.
In the light of the foregoing discussion, the Court finds and so holds that the PCGG
has no right to vote the sequestered shares of petitioners including the sequestered
corporate shares. Only their owners, duly authorized representatives or proxies may
vote the said shares. Consequently, the election of private respondents Adolfo
Azcuna, Edison Coseteng and Patricio Pineda as members of the board of directors
of SMC for 1990-1991 should be set aside.
However, petitioners cannot be declared duly elected members of the board of
directors thereby. An election for the purpose should be held where the questioned
shares may be voted by their owners and/or their proxies. Such election may be held
at the next shareholders' meeting in April 1991 or at such date as may be set under
the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto officers who in
good faith assumed their duties and responsibilities as duly elected members of the
board of directors of the SMC. They are thereby legally entitled to the emoluments of
the office including salary, fees and other compensation attached to the office until
they vacate the same.10
Nevertheless, the right of the Government, represented by the PCGG, as conservator
of sequestered assets must be adequately protected.
The important rights of stockholders are the following:

a) the right to vote;

b) the right to receive dividends;
c) the right to receive distributions upon liquidation of the corporation; and
d) the right to inspect the books of the corporation.
It is through the right to vote that the stockholder participates in the management of
the corporation. The right to vote, unlike the rights to receive dividends and liquidating
distributions, is not a passive thing because management or administration is, under
the Corporation Code, vested in the board of directors, with certain reserved powers
residing in the stockholders directly. The board of directors and executive committee
(or management committee) and the corporate officers selected by the board may
make it very difficult if not impossible for the PCGG to carry out its duties as
conservator if the Board or officers do not cooperate, are hostile or antagonistic to the
conservator's objectives.
Thus, it is necessary to achieve a balancing of or reconciliation between the
stockholder's right to vote and the conservator's statutory duty to recover and in the
process thereof, to conserve assets, thought to be ill-gotten wealth, until final judicial
determination of the character of such assets or until a final compromise agreement
between the parties is reached.
There are, in the main, two (2) types of situations that need to be addressed. The first
situation arises where the sequestered shares of stock constitute a distinct minority of
the voting shares of the corporation involved, such that the registered owners of such
sequestered shares would in any case be able to vote in only a minority of the Board
of Directors of the corporation. The second situation arises where the sequestered
shares of stock constitute a majority of the voting shares of the corporation
concerned, such that the registered owners of such shares of stock would in any case
be entitled to elect a majority of the Board of Directors of the corporation involved.
Turning to the first situation, the Court considers and so holds that in order to enable
the PCGG to perform its functions as conservator of the sequestered shares of stock
pending final determination by the courts as to whether or not the same constitute illgotten wealth or a final compromise agreement between the parties, the PCGG must
be represented in the Board of Directors of the corporation and of its majority-owned
subsidiaries or affiliates and in the Executive Committee (or its equivalent) and the
Audit Committee thereof, in at least an ex officio (i.e., non-voting) capacity. The
PCGG representative must have a right of full access to and inspection of (including
the right to obtain copies of) the books, records and all other papers of the
corporation relating to its business, as well as a right to receive copies of reports to
the Board of Directors, its Executive (or equivalent) and Audit Committees. By such

representation and rights of full access, the PCGG must be able so to observe and
monitor the carrying out of the business of the corporation as to discover in a timely
manner any move or effort on the part of the registered owners of the sequestered
stock, alone or in concert with other shareholders, to conceal, waste and dissipate the
assets of the corporation, or the sequestered shares themselves, and seasonably to
bring such move or effort to the attention of the Sandiganbayan for appropriate action.
In the second situation above referred to, the Court considers and so holds that the
following minimum safeguards must be set in place and carefully maintained until final
judicial resolution of the question of whether or not the sequestered shares of stock
(or, in a proper case, the underlying assets of the corporation concerned) constitute
ill-gotten wealth or until a final compromise agreement between the parties is
reached:
a. An independent comptroller must be appointed by the Board of Directors
upon nomination of the PCGG as conservator.1wphi1 The comptroller shall
not be removable (nor shall his position be abolished or his compensation
changed) without the consent of the conservator. The comptroller shall, in
addition to his other functions as Such, have charge of internal audit.
b. The corporate secretary must be acceptable to the conservator. If the
corporate secretary ceases to be acceptable to the conservator, a new one
must be appointed by the Board of Directors upon nomination of the
conservator.
c. The external auditors of the corporation must be independent and must be
acceptable to the conservator.1wphi1 The independent external auditors
shall not be changed without the consent of the conservator.
d. The conservator must be represented in the Board of Directors and in the
Executive (or equivalent) and Audit Committees of the corporation involved
and of its majority-owned subsidiaries or affiliates. The representative of the
conservator must be a full director (not merely an honorary or ex oficio
director) with the right to vote and all other rights and duties of a member of
the Board of Directors under the Corporation Code. The conservator's
representative shall not be removed from the Board of Directors (or the
mentioned Committees) without the consent of the conservator. The
conservator shall, however, have the right to remove and change its
representative at any time, and the new representative shall be promptly
elected to the Board and its mentioned Committees.
e. All transactions involving the disbursement of corporate funds in excess of
P5 million must have the prior approval of the director representing the
conservator, in order to be valid and effective.

f. The incurring of debt by the corporation, whether in the form of bonds,

debentures commercial paper or any other form, in excess of P5 million,
must have the prior approval of the director representing the conservator, in
order to be valid and effective.
g. The disposition of a substantial part of assets of the corporation
(substantial meaning in excess of P5 million) shall require the prior approval
of the director representing the conservator, in order to be valid and
effective.
h. The above safeguards must be written into the articles of incorporation
and by-laws of the company involved. In other words, the articles of
incorporation and by-laws of the company must be amended so as to
incorporate the above safeguards.
i. Any amendment of the articles of incorporation or by-laws of the company
that will modify in any way any of the above safeguards, shall need the prior
approval of the director representing the conservator.
The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g) above is
intended merely to be indicative. The precise amount may differ depending upon the
size of the corporation involved and the reasonable operating requirements of its
business.
Whether a particular case falls within the first or the second type of situation
described above, the following safeguards are indispensably necessary:
1. The sequestered shares and any stock dividends pertaining to such
shares, may not be sold, transferred, alienated, mortgaged, or otherwise
disposed of and no such sale, transfer or other disposition shall be
registered in the books of the corporation, pending final judicial resolution of
the question of ill-gotten wealth or a final compromise agreement between
the parties; and
2. Dividend and liquidating distributions shall not be delivered to the
registered stockholders of the sequestered shares, including stock dividends
pertaining to such shares, but shall instead be deposited in an escrow,
interest-bearing, account in a first class bank or banks, acceptable to the
Sandiganbayan, to be held by such banks for the benefit of whoever is held
by final judicial decision or final compromise agreement, to be entitled to the
shares involved.
The Court is aware that implementation of some of the above safeguards may require
agreement between the registered stockholders and the PCGG as well as action on

the part of the Securities and Exchange Commission. The Court, therefore, directs
petitioners and the PCGG to effect the implementation of this decision under the
supervision and control of the Sandiganbayan so that the right to vote the
sequestered shares and the installation and operation of the safeguards abovespecified may be exercised and effected in a substantially contemporaneous manner
and with all deliberate dispatch.
WHEREFORE, the Petitions are GIVEN DUE COURSE and GRANTED. Private
respondents Adolfo Azcuna, Edison Coseteng and Patricio Pineda are hereby
DIRECTED to vacate their respective offices as members of the Board of Directors of
the SMC as soon as this decision is implemented. Contemporaneously with the
installation of the safeguards above-required to enable the PCGG to perform its
statutory role as conservator of the sequestered shares of stock or assets, the
respondent SMC is hereby ORDERED to allow the petitioners to vote their shares in
person or by proxy and to be voted for as members of the Board of Directors of the
SMC and otherwise to enjoy the rights and privileges of shareholders; and the PCGG
is hereby ENJOINED from voting the sequestered shares of stock except as
otherwise authorized in the safeguards above-required. The questioned order of the
Sandiganbayan dated 16 November 1989 is hereby SET ASIDE; however, the
implementation of this decision shall be carried out under the supervision and control
of the Sandiganbayan. The Court makes no pronouncement as to costs.
SO ORDERED.

Republic
SUPREME
Manila

of

the

Philippines
COURT

THIRD DIVISION

G.R. No. 93695 February 4, 1992

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 for certiorari 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 July 18, 1988, the petitioners filed their answer to the third party complaint.
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.
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 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 vice-president
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.
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.

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 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]. (CA Rollo, 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).
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:

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 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 citing Tankersly v.
Albright, 374 F. Supp. 538)
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.

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.

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.

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:

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
Lopez-Campos, 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 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)

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)

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:

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.

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

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] citing People 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 of all 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 to the TRUSTEE the
certificate of the shares of the stocks owned by them respectively
and shall do all things necessary for the transfer of their respective
shares to the TRUSTEE on the books of ALFA.
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;
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;
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;
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)

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)
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:
. . . 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 . . .
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.
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.

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, 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;

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.

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.
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)
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.

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

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.

DARLENE EDSA MARIE

GONZALES 2 200 200
JENNIFER Y. DEE 2 200 200
ROBERTO C. YUMUL 1 100 100
JERRY ANGPING 10,000 1,000,000 500,000
-------------- -------------------- ------------------100,000 P10,000,000 P5,000,000
On December 19, 1994, respondent Roberto C. Yumul was appointed Chief
Operating Officer/General Manager of Nautica with a monthly compensation of
P85,000 and an additional compensation equal to 5% of the companys operating
profit for the calendar year.[4] On the same date, First Dominion Prime Holdings, Inc.,
Nauticas parent company, through its Chairman Alvin Y. Dee, granted Yumul an
Option to Purchase[5] up to 15% of the total stocks it subscribed from Nautica.
On June 22, 1995, a Deed of Trust and Assignment[6] was executed
between First Dominion Prime Holdings, Inc. and Yumul whereby the former assigned
14,999 of its subscribed shares in Nautica to the latter. The deed stated that the
14,999 shares were acquired and paid for in the name of the ASSIGNOR only for
convenience, but actually executed in behalf of and in trust for the ASSIGNEE.

NAUTICA CANNING G.R. No. 164588

CORPORATION, FIRST
DOMINION PRIME HOLDINGS,
INC. and FERNANDO R.
ARGUELLES, JR.,
Petitioners, Present:
Davide, Jr., C.J. (Chairman),
- versus - Quisumbing,
Ynares-Santiago,

In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000

of which was paid to Yumul representing his 15% share.

Carpio, and
Azcuna, JJ.
ROBERTO C. YUMUL,
Respondent. Promulgated:
October 19, 2005
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
Petitioners assail the September 26, 2001 Decision[1] of the Court of Appeals in CAG.R. SP No. 61919, affirming in toto the Decision of the Securities and Exchange
Commission (SEC) En Banc in SEC Case No. 10-96-5455, as well as the July 16,
2004 Resolution[2] denying the motion for reconsideration.
The facts of the case show that Nautica Canning Corporation (Nautica) was
organized and incorporated on May 11, 1994 with an authorized capital stock of
P40,000,000 divided into 400,000 shares with a par value of P100.00 per share. It
had a subscribed capital stock of P10,000,000 with paid-in subscriptions from its
incorporators as follows:[3]
Name No. of Shares Amount Subscribed Amount Paid
ALVIN Y. DEE 89,991 P8,999,100 P4,499,100
JONATHAN Y. DEE 2 200 200
JOANNA D. LAUREL 2 200 200

After Yumuls resignation from Nautica on August 5, 1996, he wrote a letter[7]

to Dee requesting the latter to formalize his offer to buy Yumuls 15% share in Nautica
on or before August 20, 1996; and demanding the issuance of the corresponding
certificate of shares in his name should Dee refuse to buy the same. Dee, through
Atty. Fernando R. Arguelles, Jr., Nauticas corporate secretary, denied the request
claiming that Yumul was not a stockholder of Nautica.
On September 6, 1996[8] and September 9, 1996,[9] Yumul requested that
the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of
Nautica, and that he, as a stockholder, be allowed to inspect its books and records.
Yumuls requests were denied allegedly because he neither exercised the
option to purchase the shares nor paid for the acquisition price of the 14,999 shares.
Atty. Arguelles maintained that the cash dividend received by Yumul is held by him
only in trust for First Dominion Prime Holdings, Inc.
Thus, Yumul filed on October 3, 1996, before the SEC a petition for
mandamus with damages, with prayer that the Deed of Trust and Assignment be
recorded in the Stock and Transfer Book of Nautica and that the certificate of stocks
corresponding thereto be issued in his name.[10]
On October 12, 2000, the SEC En Banc rendered the Decision,[11] the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the
respondents, as follows:

1.

Declaring petitioner as a stockholder of

respondent Nautica;

2.

Declaring petitioner as beneficial owner of

14,999 shares of Nautica under the Deed of Trust
and Assignment dated June 22, 1995

3.

Declaring petitioner to be entitled to the right

of inspection of the books of the corporation
pursuant to the pertinent provisions of the
Corporation Code; and

4.

Directing the Corporate Secretary of Nautica

to recognize and register the Deed of Trust and
Assignment dated June 22, 1995.

SO ORDERED.[12]
On appeal, the Court of Appeals affirmed the decision of the SEC En Banc.
Petitioners motion for reconsideration was denied in a Resolution dated July 16,
2004.
Hence, this petition.

At the outset, we note that petitioners recourse to this Court via a combined
petition under Rule 65 and an appeal under Rule 45 of the Rules of Court is irregular.
A petition for review under Rule 45 is the proper remedy of a party aggrieved by a
decision of the Court of Appeals, which is not identical to a petition for certiorari under
Rule 65. Under Rule 45, decisions, final orders or resolutions of the Court of Appeals
is appealed by filing a petition for review, which is a continuation of the appellate
process over the original case.[13] On the other hand, the writ of certiorari under Rule
65 is filed when petitioner has no plain, speedy and adequate remedy in the ordinary
course of law against its perceived grievance. A remedy is considered plain, speedy
and adequate if it will promptly relieve the petitioner from the injurious effects of the
judgment and the acts of the lower court or agency.

In this case, petitioners speedy, available and adequate remedy is appeal

via Rule 45, and not certiorari under Rule 65. Notwithstanding petitioners procedural
lapse, we shall treat the petition as one filed under Rule 45.

The petition is partly meritorious.

Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a
nominal owner of one share as the beneficial ownership belonged to Dee who paid
for said share when Nautica was incorporated. They presented China Banking
Corporation Check No. A2620636 and Citibank Check No. B82642 as proof of
payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate
secretary of Nautica to issue a certificate of stock in Yumuls name but in trust for Dee;
and Stock Certificate No. 6 with annotation ITF Alvin Y. Dee which means that
respondent held said stock In Trust For Alvin Y. Dee.
We are not persuaded.
Indeed, it is possible for a business to be wholly owned by one individual.
The validity of its incorporation is not affected when such individual gives nominal
ownership of only one share of stock to each of the other four incorporators. This is
not necessarily illegal.[14] But, this is valid only between or among the incorporators
privy to the agreement. It does bind the corporation which, at the time the agreement
is made, was non-existent. Thus, incorporators continue to be stockholders of a
corporation unless, subsequent to the incorporation, they have validly transferred
their subscriptions to the real parties in interest. As between the corporation on the
one hand, and its shareholders and third persons on the other, the corporation looks
only to its books for the purpose of determining who its shareholders are.[15]
In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a
stockholder of Nautica, of one share of stock recorded in Yumuls name, although
allegedly held in trust for Dee. Nauticas Articles of Incorporation and By-laws, as well
as the General Information Sheet filed with the SEC indicated that Yumul was an
incorporator and subscriber of one share.[16] Even granting that there was an
agreement between Yumul and Dee whereby the former is holding the share in trust
for Dee, the same is binding only as between them. From the corporations vantage
point, Yumul is its stockholder with one share, considering that there is no showing
that Yumul transferred his subscription to Dee, the alleged real owner of the share,
after Nauticas incorporation.
We held in Ponce v. Alsons Cement Corp.[17] that:

... [A] transfer of shares of stock not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is concerned. As between the
corporation on one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its
shareholders are. It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of the corporation
to recognize such rights as it is mandated by law to recognize arises.

Hence, without such recording, the transferee may not be regarded by the corporation
as one among its stockholders and the corporation may legally refuse the issuance of
stock certificates[.]

Moreover, the contents of the articles of incorporation bind the corporation

and its stockholders. Its contents cannot be disregarded considering that it was the
basic document which legally triggered the creation of the corporation.[18]
The Court of Appeals, in affirming the factual findings of SEC, held that:
The evidence submitted by petitioners to establish trust is palpably
incompetent, consisting mainly of the self-serving allegations by the
petitioners and the China Banking Corporation checks issued as
payment for the shares of stock of Nautica. Dee did not testify on
the supposed trust relationship between him and Yumul. While Atty.
Arguelles testified, his testimony is barren of probative value since
he had no first-hand knowledge of the relationship in question. The
isolated fact that Dee might have paid for the share in the name of
Yumul did not by itself make the latter a man of straw. Such act of
payment is so nebulous and equivocal that it can not yield the
meaning which the petitioners would want to squeeze from it
without the clarificatory testimony of Dee.[19]
We see no cogent reason to set aside the factual findings of the SEC, as
upheld by the Court of Appeals. Findings of fact of quasi-judicial agencies, like the
SEC, are generally accorded respect and even finality by the Supreme Court, if
supported by substantial evidence, in recognition of their expertise on the specific
matters under their consideration,[20] moreso if the same has been upheld by the
appellate court, as in this case.

Besides, other than petitioners self-serving assertion that the beneficial

ownership belongs to Dee, they failed to show that the subscription was transferred to
Dee after Nauticas incorporation. The conduct of the parties also constitute sufficient
proof of Yumuls status as a stockholder. On April 4, 1995, Yumul was elected during
the regular annual stockholders meeting as a Director of Nauticas Board of Directors.
[21] Thereafter, he was elected as president of Nautica.[22] Thus, Nautica and its
stockholders knowingly held respondent out to the public as an officer and a
stockholder of the corporation.
Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the
Philippines requires that every director must own at least one share of the capital
stock of the corporation of which he is a director. Before one may be elected
president of the corporation, he must be a director.[23] Since Yumul was elected as
Nauticas Director and as President thereof, it follows that he must have owned at
least one share of the corporations capital stock.

Thus, from the point of view of the corporation, Yumul was the owner of one
share of stock. As such, the SEC correctly ruled that he has the right to inspect the
books and records of Nautica,[24] pursuant to Section 74 of BP Blg. 68 which states
that the records of all business transactions of the corporation and the minutes of any
meetings shall be open to inspection by 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.
As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of
Nautica, petitioners allege that Yumul was given the option to purchase shares of
stocks in Nautica under the Option to Purchase dated December 19, 1994. However,
he failed to exercise the option, thus there was no cause or consideration for the
Deed of Trust and Assignment, which makes it void for being simulated or fictitious.
[25]
Anent this issue, the SEC did not make a categorical finding on whether
Yumul exercised his option and also on the validity of the Deed of Trust and
Assignment. Instead, it held that:
... Although unsubstantiated, the apparent objective of the
respondents allegation was to refute petitioners claim over the
shares covered by the Deed of Trust and Assignment. This must
therefore be deemed as nothing but a ploy to deprive petitioner of
his right over the shares in question, which to us should not be
countenanced.[26]
Neither did the Court of Appeals rule on the issue as it only held that:
Petitioners also contend that the Deed is a simulated
contract.
Simulation is the declaration of a fictitious will, deliberately
made by agreement of the parties, in order to produce, for the
purposes of deception, the appearances of a judicial act which
does not exist or is different with that which was really executed.
The characteristic of simulation is that the apparent contract is not
really desired or intended to produce legal effect or in any way alter
the juridical situation of the parties.
The requisites for simulation are: (a) an outward
declaration of will different from the will of the parties; (b) the false
appearance must have been intended by mutual agreement; and
(c) the purpose is to deceive third persons. These requisites have
not been proven in this case.[27]
Thus, other than defining and enumerating the requisites of a simulated
contract or deed, the Court of Appeals did not make a determination whether the SEC
has the jurisdiction to resolve the issue and whether the questioned deed was
fictitious or simulated.
In Intestate Estate of Alexander T. Ty v. Court of Appeals,[28] we held that:

The question raised in the complaints is whether or not there was

indeed a sale in the absence of cause or consideration. The proper
forum for such a dispute is a regular trial court. The Court agrees
with the ruling of the Court of Appeals that no special corporate skill
is necessary in resolving the issue of the validity of the transfer of
shares from one stockholder to another of the same corporation.
Both actions, although involving different property, sought to
declare the nullity of the transfers of said property to the decedent
on the ground that they were not supported by any cause or
consideration, and thus, are considered void ab initio for being
absolutely simulated or fictitious. The determination whether a
contract is simulated or not is an issue that could be resolved
by applying pertinent provisions of the Civil Code, particularly
those relative to obligations and contracts. Disputes
concerning the application of the Civil Code are properly
cognizable by courts of general jurisdiction. No special skill is
necessary that would require the technical expertise of the
SEC. (Emphasis supplied)

Present:
DAVIDE, JR., C.J.,
- versus - PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
ESTATE OF HANS MENZI SANDOVAL-GUTIERREZ,
(Through its Executor, CARPIO,
MANUEL G. MONTECILLO), AUSTRIA-MARTINEZ,
EMILIO T. YAP, EDUARDO CORONA,
M. COJUANGCO, JR., CARPIO-MORALES,
ESTATE OF FERDINAND CALLEJO, SR.,
MARCOS, SR., and IMELDA AZCUNA,
R. MARCOS, TINGA,
Respondents. CHICO-NAZARIO, and GARCIA, JJ.
Promulgated:
November 23, 2005

Thus, when the controversy involves matters purely civil in character, it is

beyond the ambit of the limited jurisdiction of the SEC. As held in Viray v. Court of
Appeals,[29] the better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties, but also the
nature of the question that is the subject of their controversy. This, however, is now
moot and academic due to the passage of Republic Act No. 8799 or The Securities
Regulation Code which took effect on August 8, 2000. The Act transferred from the
SEC to the regional trial court jurisdiction over cases involving intra-corporate
disputes. Thus, whether or not the issue is intra-corporate, it is now the regional trial
court and no longer the SEC that takes cognizance of the controversy.
Considering that the issue of the validity of the Deed of Trust and Assignment is civil
in nature, thus, under the competence of the regular courts, and the failure of the
SEC and the Court of Appeals to make a determinative finding as to its validity, we
are constrained to refrain from ruling on whether or not Yumul can compel the
corporate secretary to register said deed. It is only after an appropriate case is filed
and decision rendered thereon by the proper forum can the issue be resolved.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 26,
2001 Decision of the Court of Appeals in CA-G.R. SP No. 61919, is AFFIRMED
insofar as it declares respondent Roberto C. Yumul as a subscriber and stockholder
of one share of stock of Nautica Canning Corporation. The Decision is REVERSED
and SET ASIDE insofar as it affirms the validity of the Deed of Trust and Assignment
and orders its registration in the Stock and Transfer Book of Nautica Canning
Corporation.
SO ORDERED.
EN BANC
REPUBLIC OF THE PHILIPPINES, G.R. No. 152578
Represented by the Presidential
Commission on Good Government,
Petitioner,

x----------------------------------------- x
EDUARDO M. COJUANGCO, JR., G.R. No. 154487
Petitioner,
-

versus

REPUBLIC OF THE PHILIPPINES,

Respondent.
x ------------------------------------x
ESTATE OF HANS M. MENZI G.R. No. 154518
(Through its Executor, Manuel G.
Montecillo), and HANS M. MENZI
HOLDINGS AND MANAGEMENT,
INC. (HMHMI),
Petitioners,
-

versus

REPUBLIC OF THE PHILIPPINES,

(represented by the PRESIDENTIAL
COMMISSION ON GOOD
GOVERNMENT),
Respondents.
x-------------------------------------------------------------------x
DECISION

TINGA, J.:
In the hope-filled but problem-laden aftermath of the EDSA Revolution,
President Corazon C. Aquino issued Executive Order (EO) No. 1, creating the
Presidential Commission on Good Government (PCGG) tasked with, among others,
the recovery of all ill-gotten wealth accumulated by former President Ferdinand
Marcos, his immediate family, relatives, subordinates and close associates. This was
followed by EO Nos. 2 and 14, respectively freezing all assets and properties in the
Philippines in which the former President, his wife, their close relatives, subordinates,
business associates, dummies, agents or nominees have any interest or participation,
and defining the jurisdiction over cases involving the ill-gotten wealth. Pursuant to the
executive orders, several writs of sequestration were issued by the PCGG in pursuit
of the reputedly vast Marcos fortune.

1)

Whether or not the sale of 154,470 shares of stock of

Bulletin Publishing Co., Inc., subject of this case by the late Hans M.
Menzi to the U.S. Automotive Co. Inc. is valid and legal; and

2)

Whether or not the shares of stock of Bulletin

Publishing Co. Inc. registered and/or issued in the name of defendants
Emilio T. Yap, Eduardo Cojuangco, Jr., Cesar Zalamea and the late
Hans M. Menzi (and/or his estate and/or his holding company, HM
Holding& Investment Corp.) are ill-gotten wealth of the defendants
Marcos spouses.

Following a lead that Marcos had substantial holdings in Bulletin Publishing

Corporation (Bulletin), the PCGG issued a Writ of Sequestration dated April 22, 1986,
sequestering the shares of Marcos, Emilio T. Yap (Yap), Eduardo M. Cojuangco, Jr.
(Cojuangco), and their nominees and agents in Bulletin.

Make of record the oral manifestation of Atty. Estelito Mendoza,

counsel for defendant Eduardo Cojuangco. That: (a) whether or not the said
154,470 shares of stock of Bulletin Publishing Co. Inc. legally belonged to
the late Hans Menzi before he sold the same to U.S. Automotive Co. Inc.
and (b) whether or not plaintiff Republic is entitled to the same, should also
be threshed out during the trial on the merits.[2]

This was followed by another Writ of Sequestration issued on February 12,

1987, this time sequestering the shares of stock, assets, properties, records and
documents of Hans Menzi Holdings and Management, Inc. (HMHMI).

After protracted proceedings which spawned a number of cases[3] that went

up to this Court, the Sandiganbayan rendered a Decision[4] dated March 14, 2002,[5]
the dispositive portion of which states:

The Republic then instituted before the Sandiganbayan on July 29, 1987, a
complaint for reconveyance, reversion, accounting, restitution and damages entitled
Republic of the Philippines v. Emilio T. Yap, Manuel G. Montecillo, Eduardo M.
Cojuangco, Jr., Cesar C. Zalamea, Ferdinand E. Marcos and Imelda R. Marcos and
docketed as Civil Case No. 0022. The complaint substantially averred that Yap
knowingly and willingly acted as the dummy, nominee or agent of the Marcos spouses
in appropriating shares of stock in domestic corporations such as the Bulletin, and for
the purpose of preventing disclosure and recovery of illegally obtained assets. It also
averred that Cesar Zalamea (Zalamea) acted, together with Cojuangco, as dummies,
nominees and/or agents of the Marcos spouses in acquiring substantial shares in
Bulletin in order to prevent disclosure and recovery of illegally obtained assets, and
that Zalamea established, together with third persons, HMHMI which acquired
Bulletin.
On March 10, 1988, the complaint was amended joining Cojuangco as
Zalameas co-actor instead of mere collaborator. The complaint was amended for the
second time on October 17, 1990. The amendment consisted of dropping Zalamea as
defendant in view of the Deed of Assignment dated October 15, 1987 which he
executed, assigning, transferring and ceding to the Government the 121,178 Bulletin
shares registered in his name. These shares, as will be explained forthwith, formed
part of the 214,424.5 shares (214 block) which became the subject of a case[1] that
reached this Court.
The Second Amended Complaint also included the Estate of Hans M. Menzi
(Estate of Menzi), through its executor, Atty. Manuel G. Montecillo (Atty. Montecillo),
as one of the defendants.
The issues presented for resolution as stated in the Sandiganbayans PreTrial Order dated November 11, 1991 were:

WHEREFORE, judgment is hereby rendered:

1.
Declaring that the following Bulletin shares are the ill-gotten
wealth of the defendant Marcos spouses:
A. The 46,626 Bulletin shares in the name of defendant
Eduardo M. Cojuangco, Jr., subject of the Resolution of the
Supreme Court dated April 15, 1988 in G.R. No. 79126.
Pursuant to alternative A mentioned therein, plaintiff Republic of the
Philippines through the PCGG is hereby declared the legal owner
of these shares, and is further directed to execute, in accordance
with the Agreement which is entered into with Bulletin Publishing
Corporation on June 9, 1988, the necessary documents in order to
effect transfer of ownership over these shares to the Bulletin
Publishing Corporation.
B. The 198,052.5 Bulletin shares in the names of:
No. of Shares
Jose Y. Campos 90,866.5
Eduardo M. Cojuangco, Jr. 90,877
Cesar C. Zalamea 16,309
Total 198,052.5
which they transferred to HM Holdings and Management, Inc. on
August 17, 1983, and which the latter sold to Bulletin Publishing
Corporation on February 21, 1986. The proceeds from this sale are
frozen pursuant to PCGGs Writ of Sequestration dated February

12, 1987, and this writ is the subject of the Decision of the Supreme
Court dated January 31, 2002 in G.R. No. 135789.
Accordingly, the proceeds from the sale of these 198,052.5
Bulletin shares, under Philtrust Bank Time Deposit Certificate No.
136301 dated March 3, 1986 in the amount of P19,390,156.68 plus
interest earned, in the amount of P104,967,112.62 as of February
28, 2002, per Philtrust Banks Motion for Leave to Intervene and to
consign the Proceeds of Time Deposits of HMHMI, filed on
February 28, 2002 with the Supreme Court in G.R. No. 135789, are
hereby declared forfeited in favor of the plaintiff Republic of the
Philippines.
2.
Ordering the defendant Estate of Hans M.
Menzi through its Executor, Manuel G. Montecillo, to surrender for
cancellation the original eight Bulletin certificates of stock in its
possession, which were presented in court as Exhibits ., which are
part of the 212,424.5 Bulletin shares subject of the Resolution of
the Supreme Court dated April 15, 1988 in G.R. No. 79126.

In G.R. No. 154518, on the other hand, the Estate of Menzi imputes grave
error and misinterpretation of facts and evidence against the Sandiganbayan in
declaring that the 46,626 Bulletin shares in the name of Cojuangco, and the
198,052.5 shares (198 block) in the names of Jose Campos (Campos), Cojuangco
and Zalamea are ill-gotten wealth of the Marcoses.
The three blocks of Bulletin shares of stock subject of these consolidated
petitions are:
1.

154,472 shares (154 block) sold by the late Menzi

and/or Atty. Montecillo to US Automotive on May 15, 1985 for
P24,969,200.09;

2.

198,052.50 (198 block) issued and registered in the

names of Campos, Cojuangco, and Zalamea which were transferred to
HMHMI and subsequently sold by HMHMI (through Atty. Montecillo) to
Bulletin on February 21, 1986 for P23,675,195.85; and

3.

214,424.5 shares (214 block) issued and registered in

the names of Campos, Cojuangco, and Zalamea which were the subject
of the unanimous Resolution of this Court, through Mr. Chief Justice
Claudio Teehankee, in Bulletin v. PCGG[7] (Teehankee Resolution)
dated April 15, 1988 and the Sandiganbayan Resolutions dated January
2, 1995 and April 25, 1996 in Civil Case No. 0022.

3.
Declaring that the following Bulletin shares are
not the ill-gotten wealth of the defendant Marcos spouses:
a.
The 154,472 Bulletin shares sold by the late Hans M.
Menzi to U.S. Automotive Co., Inc., the sale thereof being valid
and legal;
b. The 2,617 Bulletin shares in the name of defendant
Emilio T. Yap which he owns in his own right; and
c.
The 1 Bulletin share in the name of the Estate of
Hans M. Menzi which it owns in its own right.
4.
plaintiffs claim
counterclaims.

Dismissing, for lack of sufficient evidence,

for damages, and defendants respective

SO ORDERED.[6]
In the present consolidated petitions, the foregoing Sandiganbayan Decision
is assailed on different grounds.
The Republic, in G.R. No. 152758, assails the afore-quoted Decision insofar
as it declared as not ill-gotten wealth of the Marcos spouses the 154,472 shares (154
block) sold by Menzi to U.S. Automotive Co., Inc. (US Automotive) and dismissed the
Republics claim for damages.
In G.R. No. 154487, Cojuangco questions paragraphs 1 and 2 of the
Sandiganbayan Decision.

For clarity of presentation, the 154 block, which is the subject of the
Republics petition in G.R. No. 152578, is treated separately from the 198 and 214
blocks, which are the subjects of the petitions in G.R. No. 154487 and G.R. No.
154518.
154 Block
In 1957, Menzi purchased the entire interest in Bulletin from its founder and
owner, Mr. Carson Taylor. In 1961, Yap, owner of US Automotive, purchased Bulletin
shares from Menzi and became one of the corporations major stockholders.
On April 2, 1968, a stock option was executed by and between Menzi and
Menzi and Co. on the one hand, and Yap and US Automotive on the other, whereby
the parties gave the each other preferential right to buy the others Bulletin shares.
On April 22, 1968, the stockholders of Bulletin approved certain
amendments to Bulletins Articles of Incorporation, consisting of some restrictions on
the transfer of Bulletin shares to non-stockholders.[8] The amendments were
approved by the Board of Directors of Bulletin and by the Securities and Exchange
Commission (SEC).

Several years later, on June 5, 1984, Atty. Amorsolo V. Mendoza (Atty.

Mendoza), Vice President of US Automotive, executed a promissory note with his
personal guarantee in favor of Menzi, promising to pay the latter the sum of

P21,304,921.16 with interest at 18% per annum as consideration for Menzis sale of
his 154 block on or before December 31, 1984.
One day after Menzis death on June 27, 1984, a petition for the probate of
his last will and testament was filed in the Regional Trial Court (RTC) of Manila,
Branch 29, by the named executor, Atty. Montecillo, and docketed as Special
Proceeding No. 84-25244.
On January 10, 1985, Atty. Montecillo filed a motion praying for the
confirmation of the sale to US Automotive of Menzis 154 block. The probate court
confirmed the sale in its Order dated February 1, 1985.
Accordingly, on May 15, 1985, Atty. Montecillo received from US Automotive
two (2) checks in the amounts of P21,304,778.24 and P3,664,421.85 in full payment
of the agreed purchase price and interest for the sale of the 154 block. On the same
day, Atty. Montecillo signed a company voucher acknowledging receipt of the
payment for the shares, indicating on the dorsal portion thereof the certificate
numbers of the 12 stock certificates covering the 154 block, the number of shares
covered by each certificate and the date of issuance thereof.
Atty. Montecillo also wrote on the lower portion of the promissory note
executed by Atty. Mendoza the words Paid May 15, 1985 (signed) M.G. Montecillo,
Executor of the Estate of Hans M. Menzi.
Upon these facts, the Sandiganbayan ruled that the sale of the 154 block to
US Automotive is valid and legal. According to the Sandiganbayan, the sale was
made pursuant to the stock option executed in 1968 between the parties to the sale.
Negotiations took place and were concluded before Menzis death, and full payment
was made only after the probate court had judicially confirmed the sale.
The Sandiganbayan dismissed the Republics claim, based on the affidavit of
Mariano B. Quimson, Jr. (Quimson) dated October 9, 1986, that the sale should be
nullified because US Automotive only acted as a dummy of Marcos who was the real
buyer of the shares. According to the court, the Republic failed to overcome its
burden of proof since Quimsons affidavit was not corroborated by other evidence and
was, in fact, refuted by Atty. Montecillo.
In its Memorandum[9] dated July 7, 2003 in G.R. No. 152578, the Republic
argues that the Sandiganbayan failed to take into account the fact that despite Menzis
claim that he acquired Bulletin in 1957, he did not include any Bulletin shares in his
Last Will and Testament executed in 1977. Atty. Montecillo, the executor of Menzis
estate, likewise did not include any Bulletin share in the initial inventory of Menzis
properties filed on May 15, 1985. Neither were any Bulletin shares declared by Atty.
Montecillo even after the probate court issued an Order dated November 17, 1992 for
the submission of an updated inventory of Menzis assets.
The Republic claims that despite these circumstances, coupled with
Quimsons affidavit detailing how Marcos used his dummies to conceal his control
over Bulletin, as well as the letters and correspondence between Marcos and Menzi
indicating that Menzi consistently updated Marcos on the affairs of Bulletin, the
Sandiganbayan ruled that the 154 block was not ill-gotten wealth of the Marcoses.
The Sandiganbayans erroneous inference allegedly warrants a review of its findings.

Moreover, the Republic disputes the Sandiganbayans ruling that it heavily

leaned on the affidavit of Quimson without presenting any other corroborating
evidence.[10] It argues that in the proceedings before the PCGG, Quimson was
subjected to cross-examination by the lawyers of Bulletin which is controlled by Yap.
Further, the evidence it presented before the PCGG purportedly showing that the
transfer of Bulletin shares from Menzi to US Automotive was undertaken due to
pressure exerted by Marcos on Menzi should have been taken into account.
The Republic insists that the sale between Menzi and U.S. Automotive was a
sham because the parties failed to comply with the basic requirement of a deed of
sale in the transfer of the subject shares. Further, a number of questions were
allegedly not resolved, such as: (a) Who was the seller of the subject sharesthe late
Menzi as the alleged owner or Atty. Montecillo as then special administrator and later
executor of Menzis estate; (b) If Menzi sold the shares, was there a need to confirm
the sale? If Atty. Montecillo was the one who sold them, what was his authority to sell
the said shares?
The Republic also contends that Menzi and Yap were both dummies of the
late President Marcos, used by the latter in order to conceal his interest in Bulletin.
Hence, the 154 block should also have been declared ill-gotten wealth and forfeited in
favor the Government.
The foregoing allegedly warrants the award of damages in favor of the
Republic which the Sandiganbayan erroneously failed to do.
The Republic, therefore, prays that the Sandiganbayan Decision, insofar as
it declares the sale of the 154 block to be valid and legal, be reconsidered and
judgment accordingly rendered declaring the 154 block as ill-gotten wealth, forfeiting
the same or the proceeds thereof in favor of the Republic, and awarding actual,
temperate and nominal damages in the Courts discretion, moral damages in the
amount of 50 Billion Pesos, exemplary damages of 1 Billion Pesos, attorneys fees,
litigation expenses and treble judicial costs.
The Estate of Menzi and HMHMI filed a Memorandum[11] dated March 10,
2005, averring that the Republic failed to adduce evidence of any kind that the 154
block was ill-gotten wealth of the Marcoses. They claim that the requirements for a
valid transfer of stocks, namely: (1) there must be delivery of the stock certificate; (2)
the certificate must be indorsed by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (3) the transfer must be recorded in the
books of the corporation in order to be valid against third parties, have all been met.
The parties to the sale allegedly confirm the indorsement and delivery of the
Bulletin shares of stock representing the 154 block. The requirement that the transfer
be recorded in the books of the corporation was also met because US Automotive
exercised its rights as shareholder.
It is also allegedly immaterial whether it was Menzi or Atty. Montecillo who
indorsed the stock certificates. If it was Menzi, then his indorsement was an act of
ownership; if it was Montecillo, then the indorsement was pursuant to the duly
executed General Power of Attorney filed with the SEC and, subsequently, on the
basis of his authority as Special Administrator and Executor of Menzis estate.

In his Memorandum[12] dated May 10, 2005, Yap also maintains that the
sale of the 154 block was valid and legal. The non-inclusion of the said block of
shares in the inventory of Menzis estate was purportedly due to the fact that the same
had, by then, been sold to US Automotive. Yap also claims that Atty. Montecillo was
duly authorized to effect the sale by virtue of the General Power of Authority and the
Last Will and Testament executed by Menzi.
The absence of a deed of sale evidencing the sale is allegedly not irregular
because the law itself does not require any deed for the validity of the transfer of
shares of stock, it being sufficient that such transfer be effected by delivery of the
stock certificates duly indorsed. At any rate, a duly notarized Receipt covering the
sale was executed.[13]
Moreover, the BIR certified that the Estate of Menzi paid the final tax on
capital gains derived from the sale of the 154 block and authorized the Corporate
Secretary to register the transfer of the said shares in the name of US Automotive.
Further, a stock certificate covering the 154 block was issued to US Automotive by
Quimson himself as Corporate Secretary.

Sec. 63 of the Corporation Code provides the requisites for a valid transfer
of shares:
Sec. 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 vice-president,
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 showing 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.
No shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of the
corporation. [Emphasis supplied]
The Corporation Code acknowledges that the delivery of a duly indorsed
stock certificate is sufficient to transfer ownership of shares of stock in stock
corporations. Such mode of transfer is valid between the parties. In order to bind third
persons, however, the transfer must be recorded in the books of the corporation.
Clearly then, the absence of a deed of assignment is not a fatal flaw which
renders the transfer invalid as the Republic posits. In fact, as has been held in Rural
Bank of Lipa City, Inc. v. Court of Appeals,[14] the execution of a deed of sale does
not necessarily make the transfer effective.

In that case, petitioners argued that by virtue of the deed of assignment,

private respondents had relinquished to them all their rights as stockholders of the
bank. This Court, however, ruled that the delivery of the stock certificate duly indorsed
by the owner is the operative act that transfers the shares. The absence of delivery is
a fatal defect which is not cured by mere execution of a deed of assignment.
Consequently, petitioners, as mere assignees, cannot enjoy the status of a
stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar
as the assigned shares are concerned.
There appears to be no dispute in this case that the stock certificates
covering the 154 block were duly indorsed and delivered to the buyer, US Automotive.
The parties to the sale, in fact, do not question the validity and legality of the transfer.
The objection raised by the Republic actually concerns the authority of Atty.
Montecillo, the executor of Menzis estate, to indorse the said certificates. However,
Atty. Montecillos authority to negotiate the transfer and execute the necessary
documents for the sale of the 154 block is found in the General Power of Attorney
executed by Menzi on May 23, 1984, which specifically authorizes Atty. Montecillo
[T]o sell, assign, transfer, convey and set over upon such consideration and under
such terms and conditions as he may deem proper, any and all stocks or shares of
stock, now standing or which may thereafter stand in my name on the books of any
and all company or corporation, and for that purpose to make, sign and execute all
necessary instruments, contracts, documents or acts of assignment or transfer.[15]
Atty. Montecillos authority to accept payment of the purchase price for the
154 block sold to US Automotive after Menzis death springs from the latters Last Will
and Testament and the Order of the probate court confirming the sale and authorizing
Atty. Montecillo to accept payment therefor. Hence, before and after Menzis death,
Atty. Montecillo was vested with ample authority to effect the sale of the 154 block to
US Automotive.
That the 154 block was not included in the inventory is plausibly explained
by the fact that at the time the inventory of the assets of Menzis estate was taken, the
sale of the 154 block had already been consummated. Besides, the non-inclusion of
the proceeds of the sale in the inventory does not affect the validity and legality of the
sale itself.
At any rate, the Sandiganbayans factual findings that the 154 block was sold
to US Automotive while Menzi was still alive, and that Atty. Montecillo merely
accepted payment by virtue of the authority conferred upon him by Menzi himself are
conclusive upon this Court, supported, as they are, by the evidence on record.[16] As
held by the Sandiganbayan:
The sale was made pursuant to the Stock Option executed in 1968
between the parties to the sale, considering the restrictions
contained in Bulletins Articles of Incorporation as amended in 1968
limiting the transferability of its shares. Negotiations for the sale
took place and were concluded before the death of Menzi. After his
death, full payment of the entire consideration of the sale, principal
and interest, was made only after judicial confirmation thereof in the
Probate Case. The transaction was duly supported by the

corresponding receipt, voucher, cancelled checks, cancelled

promissory note, and BIR certification of payment of the
corresponding taxes due thereon.[17]
The Supreme Court is not a trier of facts. It is not our function to examine
and weigh all over again the evidence presented by the parties in the proceedings
before the Sandiganbayan.[18]
It is also significant that even Quimsons affidavit does not state, in a
categorical manner, that Yap was a Marcos dummy used by the latter to conceal his
Bulletin shareholdings. In contrast, Quimson unqualifiedly declared that Campos,
Cojuangco and Zalamea were the former dictators nominees to Bulletin.[19]
We, therefore, agree with the Sandiganbayan that the sale of the 154 block
to US Automotive was valid and legal.
198 and 214 blocks
HMHMI was incorporated on May 20, 1982 by Menzi, Campos, Cojuangco, Rolando
C. Gapud (Gapud) and Zalamea, with an authorized capital stock of P1,000,000.00
divided into 100,000 shares with par value of P10.00 each.
A Deed of Transfer and Conveyance was executed by Menzi, Campos,
Cojuangco and Zalamea on August 17, 1983, transferring the shares of stock
registered in their names in various corporations to HMHMI in exchange for 6,000,000
shares of the latters capital stock, subject to the approval by the SEC of HMHMIs
Certificate of Increase of Capital Stock. The shares of stock transferred included the
198 block of Bulletin shares, 90,866.5 of which were registered in the name of
Campos; 90,877 in the name of Cojuangco; and 16,309 in the name of Zalamea.
On February 14, 1984, HMHMI amended its Articles of Incorporation by
increasing its authorized capital stock to P100,000,000.00 divided into 10,000,000
shares with par value of P10.00 per share.
On January 15, 1986, the law firm of Siguion Reyna, Montecillo & Ongsiako
wrote a letter to Bulletins corporate secretary, Atty. Mendoza, requesting that three (3)
certificates of stock representing 90,866.5, 90,877, and 16,309 Bulletin shares be
issued in favor of HMHMI in exchange for 21 certificates of stock in HMHMI.
Atty. Mendoza acknowledged receipt of the 21 certificates of stock but
replied that the transfer by Campos, Cojuangco and Zalamea of their Bulletin shares
to HMHMI cannot be recorded in the books of Bulletin because it was made in
violation of Bulletins Articles of Incorporation which provides restrictions and
limitations on the transferability of the shares of the company by its stockholders.
Bulletin, however, offered to buy the shares at the price fixed in the Articles of
Incorporation. The offer appears to have been accepted by HMHMI through its
President, Atty. Montecillo.
Thus, on January 30, 1986, HMHMIs Board of Directors passed a resolution
approving the sale to Bulletin of the 198 block and authorizing its President or
Corporate Secretary to sign and execute the corresponding deed of sale. Accordingly,

a Deed of Sale was executed on February 21, 1986 by Atty. Montecillo whereby
HMHMI sold the 198 block to Bulletin for the amount of P23,675,195.85.
On April 22, 1986, the shares of Marcos, Yap, Cojuangco and their nominees
or agents in the Bulletin were sequestered by virtue of a Sequestration Order issued
by the PCGG.
The SEC issued a certification to the effect that as of February 21, 1986, the
total subscribed shares of Bulletin was 756,861. Of these, 198,052.5 were treasury
shares, leaving the total outstanding shares at 567,808.5. The stockholders of Bulletin
and the shares of stock held by each of them were listed as follows:
Name
Emilio T. Yap
Menzi Trust Fund
Estate of Hans M. Menzi
U.S. Automotive Co. Inc.
xxx
Cesar Zalamea
Jose Campos
Eduardo Cojuangco
Xxx
Total

No. of Shares
2,617
28,977
1
318,084
xxx
121,178
46,620.5
46,626
xxx
567,808.5

On February 12, 1987, another Writ of Sequestration was issued by the

PCGG, sequestering all the shares of stock, as well as the assets, properties, records
and documents of HMHMI. Because of this Sequestration Order, the proceeds from
the sale of the 198 block which were deposited with Philtrust Bank were frozen.[20]
On March 16, 1987, the sequestration of the 2,617 Bulletin shares of Yap
was lifted upon the latters motion.
On April 14, 1987, the PCGG wrote a letter/order to the Corporate Secretary
of Bulletin, asking for the schedule of the annual stockholders meeting of the
corporation because the sequestered shares consisting of the 214 block will be voted
by the Commission. This letter became the subject of a petition[21] filed by Bulletin
with this Court questioning the validity of the PCGGs letter/order and seeking to
compel PCGG to accept Bulletins offer of a cash deposit in the amount of
P34,592,903.34 representing the value of the 214 block of sequestered Bulletin
shares. The Court issued a temporary restraining order.
On July 31, 1987, the PCGG received from Bulletin the amount of
P8,173,506.06 as full payment of 46,620.5 Bulletin shares registered in the name of
Campos. The receipt stated that Mr. Jose Y. Campos has waived the ownership of
said shares in favor of the Republic of the Philippines through the Presidential
Commission on Good Government.
A Deed of Assignment was likewise executed by Zalamea on October 15,
1987, assigning and waiving in favor of the Republic his rights to 121,178 Bulletin
shares registered in his name. On the same day, Bulletin issued in favor of PCGG a
check in the amount of P21,244,926.96 as full payment of Zalameas shares.

This Court, on April 15, 1988, issued the Teehankee Resolution, the
dispositive portion of which pertinently states:

Zalamea could not have been a nominee of Menzi, as the latters estate claims, but of
Marcos.

2. Directing the Commission to accept the cash deposit of

P8,174,470.32 offered by petitioner for the 46,626 sequestered
shares in the name of Mr. Eduardo M. Cojuangco, Jr. expressly
subject to the alternative conditions (A and B) hereinabove set
forth, and likewise directing the Commission to accept the cash
deposit, if it has not actually sold the Cesar C. Zalamea Bulletin
shares to petitioner (supra, p. 13, par [2]) of P21,244,926.96 for the
sequestered shares of Bulletin in the name of Mr. Cesar Zalamea
under the same alternatives already mentioned; and

The Sandiganbayan likewise rejected Cojuangcos contention that the

Bulletin and HMHMI shares registered in his name were not acquired and held by him
as dummy, nominee and/or agent of defendants Ferdinand E. Marcos and Imelda
Romualdez Marcos, but upon the request, and as nominee, of the late Hans Menzi
who owned and delivered to him said shares. According to the Sandiganbayan,
Cojuangco failed to present evidence necessary to establish his affirmative defense.
As regards the 214 block, the Sandiganbayan ruled that there is no longer
any dispute concerning the ownership of the 46,620.5 shares held by Campos and
the 121,178 shares held by Zalamea in view of the Teehankee Resolution and the
fact that these shares have been waived and assigned to PCGG.
The Sandiganbayan went on to declare that the only remaining issue
pertaining to Cojuangcos claim to his alleged portion of the 214 block should be
resolved in favor of the Republic because of Cojuangcos consistent disavowal of any
proprietary interest in the shares which are the subject matter of the instant case and
his claim that he held the shares as nominee of Menzi.

3. Remanding the case regarding the issue of ownership of the said

sequestered Bulletin shares for determination and adjudication to
the Sandiganbayan.[22]
An agreement was thereafter executed between PCGG and Bulletin on June
9, 1988 regarding the 46,626 Bulletin shares of Cojuangco whereby PCGG accepted
Bulletins deposit in the amount of P8,174,470.32, subject to the alternatives set forth
in the Teehankee Resolution, as follows:
Alternative ATo standby as full payment plus whatever
interest earnings thereon upon final judgment of the Court declaring
the Republic of the Philippines as owners of the 46,626 shares,
accompanied by the corresponding original stock certificates,
issued in the name of the government, duly endorsed in favor of the
Bulletin Publishing Corporation, free from liens and encumbrances;
or
Alternative BTo immediately return to Bulletin Publishing
Corporation the cash deposit in the amount of P8,174,470.32 plus
whatever interest earnings thereon upon final judgment by the
Court declaring that Mr. Eduardo Cojuangco, Jr. is the true owner of
the 46,626 shares.[23]
With this factual backdrop, the Sandiganbayan ruled that Campos,
Cojuangco and Zalamea were nominees and dummies of Marcos. Hence, the 198
block which these nominees transferred to HMHMI and which, in turn, were sold to
Bulletin are ill-gotten wealth.
The Sandiganbayan anchored its finding on the Deposition of Campos taken
on November 25, 1994 before the Philippine Consulate General in Vancouver, British
Columbia, Canada, that he held shares in Bulletin and HMHMI per instruction of
President Marcos; that the beneficial owner of these shares must be President
Marcos; and that he received three (3) dividend checks from Bulletin for the benefit of
President Marcos.
Based on the Deed of Assignment executed by Zalamea on October 15,
1987, wherein he manifested that he does not claim true and beneficial ownership of
the 121,178 Bulletin shares registered in his name and that he voluntarily waived and
assigned these shares in favor of PCGG, the Sandiganbayan concluded that

The Sandiganbayan further ruled that Yaps shares, which were acquired by
him in 1961 before Marcos became President, are not ill-gotten wealth of the
Marcoses. Moreover, the one (1) Bulletin share for which dividend checks were
issued to and received by the Estate of Menzi was deemed to belong to the latter.
In G.R. No. 154487, petitioner Cojuangco assails paragraphs 1 and 2 of the
Sandiganbayan Decision. Allegedly, the Government does not claim that in acquiring
the Bulletin shares registered in Cojuangcos name, the late President Marcos used
government funds or resources. Cojuangco raises several issues, namely: (a) Were
the Bulletin shares, at any time, of government ownership? (b) Were the Bulletin
shares acquired by Marcos and, if so, did he use government funds to acquire them?
(c) Did petitioner Cojuangco act as the dummy or nominee of Marcos to acquire, or to
conceal the acquisition of the shares by the latter?
In the Memorandum for Eduardo M. Cojuangco, Jr.[24] dated May 6, 2005,
Cojuangco argues that the Republic neither alleged nor presented evidence to prove
that that the Bulletin shares registered in his name were owned by the Republic but
were taken by the Marcoses by taking advantage of their public office and/or using
their powers, authority, influence, connections or relationship or that they were
acquired by the Marcoses from Menzi with the use of government or public funds.
Hence, the conclusion should be sustained that the shares were owned by Menzi and
never by the Republic, and no public funds were used in their acquisition.
Cojuangco attacks the Sandiganbayans reliance on Quimsons affidavit
saying that it is hearsay because Quimson was not presented in court to affirm the
contents of his affidavit and was not subjected to cross-examination as he had
already passed away when Civil Case No. 0022 was tried. Quimsons affidavit is
allegedly double hearsay insofar as it alleges that Marcos owned the Bulletin shares
and that Cojuangco was merely Marcos nominee because Quimson had no contact
with Marcos and his knowledge of the latters purported ownership of the Bulletin
shares was merely relayed to him by Menzi.

Even the supposed corroborating evidence, consisting of the affidavits of

Pedro Teodoro, Evelyn S. Singson, Gapud, and Angelita Reyes, have allegedly been
declared as having no probative value inasmuch as the affiants did not take the
witness stand and could not be cross-examined.
The Republic likewise allegedly failed to prove its contention that Bulletin
issued checks in favor of Campos, Cojuangco and Zalamea which were deposited
into numbered accounts in Security Bank & Trust Company owned by the Marcoses.
Moreover, the dividend checks supposedly indorsed by Cojuangco in blank do not
conclusively demonstrate that they were indorsed in favor of the Marcoses.
On the other hand, there is allegedly sufficient evidence on record to prove
that Cojuangco was a nominee of Menzi. These documents consist of the testimony
of Atty. Montecillo to the effect that, as far as he knew, Cojuangco really acted as
nominee for the General, and the originals of the stock certificates covering the
Bulletin shares registered in Cojuangcos name.
Cojuangco further avers that the allegation that the Bulletin shares were
registered in his name upon the request, and as nominee, of Menzi is a specific
denial and not an affirmative defense as the Sandiganbayan declared. As a specific
denial, the allegation need not be proven unless the Republic presents adequate
evidence proving the allegations in its complaint which, Cojuangco insists, the
Republic failed to do.
He likewise argues that the Republic is not entitled to damages of any kind
because it failed to establish that it has any proprietary interest in the Bulletin shares
registered in his name; that the said shares are owned by the Marcoses; and that it
suffered any pecuniary loss by reason of such ownership.
Based on these allegations, Cojuangco prays that he be declared the owner
of the 46,626 Bulletin shares registered in his name, together with all cash and stock
dividends which have accrued in favor of said shares from October 15, 1987, and
ordering the PCGG to return the cash deposit of P8,174,470.32 plus interest to
Bulletin.
In its Memorandum[25] dated March 17, 2005, the Republic maintains that
Cojuangco has consistently denied any proprietary interest in the Bulletin shares.
Hence, he cannot claim ownership of the Bulletin shares registered in his name. His
allegation that that he was a nominee of Menzi was pleaded by way of defense. Thus,
he has the burden of proving this material allegation, set up as new matter, that the
shares were not his but Menzis.
Since the Bulletin shares were not included in the inventory of Menzis
assets, it allegedly follows that Cojuangco could not have been a nominee of Menzi
who did not own the subject Bulletin shares.
As regards the contention that the Republic failed to show that the shares
belong to the Government or were acquired using public funds, the Republic
maintains that Marcos acquired the Bulletin shares using his political clout. His very
act of participating in a business enterprise using nominees to conceal his ownership
of Bulletin shares is already a violation of the Constitution.

Furthermore, Campos and Zalamea, who, like Cojuangco, held shares in the
198 and 214 blocks, have already surrendered and assigned their respective shares
to the Government and acknowledged the right of the Government over the Bulletin
registered in their names. Such is allegedly a clear indication that they acted as
dummies of Marcos. The admission of Campos and Zalamea that their shares in the
214 block belonged to Marcos may allegedly be used to prove that the 198 block was
likewise held by them as dummies of the former dictator.
The Sandiganbayan also allegedly did not rely on the Teehankee Resolution
to support its conclusion that the 198 and 214 blocks are ill-gotten wealth but made its
own finding after a full-blown trial at which all the parties, except Cojuangco,
presented their respective evidence.
Moreover, the evidence presented by the Republic allegedly preponderates
in favor of its theory that the Bulletin shares in the names of Campos, Cojuangco and
Zalamea were actually held in trust for the benefit of the Marcoses. Notably, the
PCGG Resolution dated May 22, 1987, presented by the Republic as its Exhibit I
declares that Quimson and Teodoro, close associates of Menzi, stated under oath
that when Marcos allowed the Bulletin to reopen during Martial Law, Menzi was
allowed only 20% participation, and that Marcos put his shares in the names of
Campos, Cojuangco and Zalamea.
Besides, Menzi did not execute any deed of trust in his favor as trustor and
Campos, Cojuangco and Zalamea as trustees. Neither did the Estate of Menzi claim
that Campos, Cojuangco and Zalamea were nominees of Menzi as no cross-claim
was filed by the Estate of Menzi even as it claimed ownership of the 198 and 214
blocks.
In their Memorandum[26] dated March 10, 2005 in G.R. Nos. 154487 and
154518, the Estate of Menzi and HMHMI argue that the Sandiganbayan erred in not
resolving the issue of the ownership of the 198 and 214 blocks. The Sandiganbayan
instead allegedly relied on its misinterpretation of the Teehankee Resolution to the
effect that there is no longer any controversy as regards the ownership of the portion
of the 214 block held by Zalamea. According to said respondents, the Teehankee
Resolution clearly directed the Sandiganbayan to resolve the issue of ownership of
both the Zalamea and Cojuangco portions of the 214 block.
Respondents Estate of Menzi and HMHMI also contend that the Quimson
affidavit should have been treated as having no probative value with respect to the
154 block and the 198 and 214 blocks alike. The affidavit was allegedly not at all
corroborated by the other documents presented by the Republic and cited in the
assailed Decision.
They insist that Campos, Cojuangco and Zalamea were nominees of Menzi,
not dummies of Marcos, because, as allegedly established during trial, the stock
certificates covering the contested blocks of shares were indorsed in blank and
remained in Menzis possession. Even Campos allegedly testified that he was never in
possession of the stock certificates.
Assuming that Campos was indeed a Marcos dummy, his admission should
apply solely to the Bulletin shares registered in his name. Likewise, Zalamea
allegedly never declared himself to be a Marcos nominee, only that he does not claim

true and beneficial ownership of the Bulletin shares recorded in his name. The
dividend checks for Zalameas shareholdings, in fact, allegedly indicate the Estate of
Menzi as the payee, proving that Zalamea was Menzis nominee.
Respondents Estate of Menzi and HMHMI further claim that the 198 and 214
blocks were not mentioned in Menzis Last Will and Testament because Menzi knew
of the impending promulgation of a decree which would limit to only 20% the
ownership of media enterprises by one person or family. Allegedly, in order to get
around this restriction, Menzi devised the nominee structure whereby he used three
(3) nominees to enable him to retain his 80% stake in Bulletin. Besides, there was
allegedly a legal question as to whether sequestered shares need to be declared for
estate tax purposes in the meantime that a case involving these shares was pending.
Said respondents finally posit that assuming that the 198 and 214 blocks are
ill-gotten, the shares themselves, and not merely the proceeds, should be forfeited in
favor of the Government.
Yap, on the other hand, claims in his Memorandum[27] dated May 10, 2005
filed in G.R. Nos. 154487 and 154518 that Cojuangco may not raise in his petition a
new specific relief consisting of the prayer that he be declared the owner of the
46,626 Bulletin shares registered in his name which Cojuangco never asked for
during the proceedings before the Sandiganbayan. Cojuangco is allegedly bound by
his judicial admission that he has no proprietary interest over the said Bulletin shares.
Purportedly, because of this judicial admission, Alternative B mentioned in
the Teehankee Resolution was eliminated. The only option which remained was, as
held by the Sandiganbayan, to declare that the Government is the legal owner of the
shares and direct the PCGG to execute the necessary documents to effect the
transfer thereof in accordance with Alternative A.
As regards the prayer that the shares themselves be forfeited in favor of the
Government, Yap contends that this cannot be done because the Government is
barred by the Constitution from acquiring ownership of private mass media.

The Estate of Menzi and HMHMI should also not be allowed to claim the
portion of the 214 block held by Campos and Zalamea whose ownership has
allegedly been settled by this Court in the Teehankee Resolution.
Yap also claims that the Estate of Menzi and HMHMI have unlawfully
concealed the stock certificates representing a portion of the shares held by Campos
and Zalamea. Their lawyers, specifically Atty. Montecillo, have also allegedly staked
an unfounded claim on the Bulletin shares in violation of their duty, as lawyers of
Bulletin for several years, to protect the latters interests.
Cojuangco filed a Reply Memorandum[28] dated October 17, 2005,
substantially reiterating his argument that the Sandiganbayan failed to make a finding
that the Bulletin shares are ill-gotten as defined by the pertinent executive orders and
that they were owned by the Marcoses. Consequently, he insists that there is no basis
for the Sandiganbayans conclusion that the Republic is the legal owner of the said
shares.

The Republic also filed a Memorandum[29] dated March 17, 2005 in G.R.
No. 154518, averring that the petition raises factual issues not proper in a petition for
review under Rule 45 of the Rules of Court.
The Republic insists that the Decision of the Sandiganbayan relative to the
198 and 214 blocks was not based on Quimsons affidavit alone but on the totality of
the evidence presented to support the complaint. Quimsons affidavit was allegedly
given prominence because it related in detail how Campos, Cojuangco and Zalamea
came to be nominees of Marcos. The allegations in Quimsons affidavit were allegedly
confirmed by Menzis Last Will and Testament, the initial inventory of his assets, the
letters and correspondence between Marcos and Menzi, Campos deposition, and the
dividend checks issued to Campos, Cojuangco and Zalamea even after they have
supposedly transferred their Bulletin shares to HMHMI.
Moreover, Atty. Montecillo did not institute any action against Campos,
Cojuangco and Zalamea to recover the shares. This allegedly indicates that the
shares were not owned by Menzi and that Campos, Cojuangco and Zalamea did not
act as Menzis nominees.
As regards the claim that Menzi owned the shares registered in the names
of Campos, Cojuangco and Zalamea because the stock certificates covering them
were in Menzis possession, the Republic maintains that mere possession of the stock
certificates does not operate to vest ownership on Menzi considering that Campos
already declared that Marcos owned those shares and Zalamea surrendered his
shares to the Government.
Furthermore, the Republic alleges that the Sandiganbayan had already ruled
with finality that the Estate of Menzi and HMHMI cannot recover the Campos and
Zalamea portions of the 214 block. Specifically, in the Resolution dated January 2,
1995, the Sandiganbayan declared that the Estate of Menzi cannot recover the
Campos shares because the latter, who was not a co-defendant in the case, had
already voluntarily surrendered the same to the PCGG. Zalameas shares could
likewise not be recovered because he was also not a party, either as defendant,
cross-defendant or third-party defendant. Moreover, in another Resolution dated July
10, 1993, the Sandiganbayan held that the Estate of Menzi has not pleaded any claim
of ownership over the Bulletin shares in the names of Campos, Cojuangco and
Zalamea, much less has it intervened to express any prejudice to it should any
judgment be rendered for or against Campos, Cojuangco and Zalamea.
We again affirm the ruling of the Sandiganbayan.
It should be noted at the outset that there is no more dispute as regards the
Bulletin shares registered in the name of Campos. In fact, Campos was not included
as a defendant in Civil Case No. 0022. The Bulletin shares registered in his name
have been voluntarily surrendered to the PCGG and the proceeds thereof have
accordingly been forfeited in favor of the Government.
The Pre-Trial Order of the Sandiganbayan dated November 11, 1991
likewise does not mention as an issue the ownership of the Campos-held Bulletin
shares.

The same cannot be said, however, of the Bulletin shares registered in the
name of Zalamea. Although he was dropped as a party-defendant in the Second
Amended Complaint dated October 17, 1990 purportedly by reason of the Deed of
Assignment he executed on October 15, 1987, the Zalamea-held shares are clearly
still covered by the Teehankee Resolution remanding the issue on the ownership of
the sequestered Cojuangco and Zalamea shares for determination and adjudication
by the Sandiganbayan.
Having said that, we now proceed to determine whether the Sandiganbayan
committed reversible error in rendering the assailed Decision.
As with the 154 block, the issues raised by the petitioners assailing the
Sandiganbayans disposition of the 198 and 214 blocks are largely factual and,
therefore, generally beyond the scope of our review under Rule 45 of the Rules of
Court. Nonetheless, as will be shown in the following disquisition, there is no cause
for this Court to reverse the Sandiganbayan because the evidence on record amply
supports its findings and conclusions.
The 46,626 shares registered in the name of Cojuangco which formed part
of the 214 block were declared to be ill-gotten wealth based on the evidence
presented by the Republic to show that Cojuangco acted as a nominee of Marcos and
on Cojuangcos unsubstantiated allegation that he acted as a nominee not of Marcos
but of Menzi.
Cojuangco counters, however, that the allegation that he acted as Menzis
nominee is a specific denial which he does not have the burden of proving.
Notably, in the Answer of Defendant Eduardo M. Cojuangco, Jr. dated March
16, 1989, Cojuangco claimed as part of his denial that whatever shares of stock he
may have in Bulletin Publishing Corporation and/or H.M. Holdings and Management,
Inc. were not acquired and held by him as dummy, nominee and/or agent of
defendants Ferdinand E. Marcos and Imelda Romualdez Marcos, but upon the
request, and as nominee, of the late Hans Menzi who owned and delivered to him
said shares.[30]
Likewise, in his Pre-Trial Brief dated January 15, 1992, Cojuangco stated
that [I]n regard shares of stock in the name of defendant Cojuangco in Bulletin
Publishing Corporation and/or HM Holdings & Management, Inc., he was never, and
is not, a nominee of any other person but the late Brig. Gen. Hans M. Menzi.
Defendant Cojuangco therefore reiterates that he has no proprietary interest in the
shares which are the subject matter of the instant case. They properly belong to the
estate of the late Hans Menzi.[31]
It is procedurally required for each party in a case to prove his own
affirmative allegations by the degree of evidence required by law. In civil cases such
as this one, the degree of evidence required of a party in order to support his claim is
preponderance of evidence, or that evidence adduced by one party which is more
conclusive and credible than that of the other party. It is therefore incumbent upon the
plaintiff who is claiming a right to prove his case. Corollarily, the defendant must
likewise prove its own allegations to buttress its claim that it is not liable.[32]

The party who alleges a fact has the burden of proving it. The burden of
proof[33] may be on the plaintiff or the defendant. It is on the defendant if he alleges
an affirmative defense which is not a denial of an essential ingredient in the plaintiffs
cause of action, but is one which, if established, will be a good defense i.e., an
avoidance of the claim.[34]
In the instant case, Cojuangcos allegations are in the nature of affirmative
defenses which should be adequately substantiated. He did not deny that Bulletin
shares were registered in his name but alleged that he held these shares not as
nominee of Marcos, as the Republic claimed, but as nominee of Menzi. He did not,
however, present any evidence to support his claim and, in fact, filed a Manifestation
dated July 20, 1999 stating that he sees no need to present any evidence in his
behalf.[35]
In contrast to Cojuangcos consistent, albeit unsupported, disclaimer, the
Sandiganbayan found the Republics evidence to be preponderant. These pieces of
evidence consist of: the affidavit of Quimson detailing how Campos, Cojuangco and
Zalamea became Marcos nominees in Bulletin; the affidavit Teodoro relative to the
circumstances surrounding the sale of Menzis substantial shares in Bulletin to Marcos
nominees and Menzis retention of only 20% of the corporation; the sworn statement
of Gapud describing the business interests and associates of Marcos and stating that
Bulletin checks were periodically issued to Campos, Cojuangco and Zalamea but
were deposited after indorsement to Security Bank numbered accounts owned by the
Marcoses dividend checks issued to Campos, Cojuangco and Zalamea even after
their shares have been transferred to HMHMI; the Certificate of Incorporation, Articles
of Incorporation and Amended Articles of Incorporation of HMHMI showing that
Bulletin shares held by Campos, Cojuangco and Zalamea were used to set up
HMHMI; Deed of Transfer and Conveyance showing that Campos, Cojuangco,
Zalamea and Menzi transferred several shares, including Bulletin shares, to HMHMI
in exchange for shares of stock in the latter which shares were not issued; the
Inventory of Menzis assets as of May 15, 1985 which does not include Bulletin
shares; notes written by Marcos regarding Menzis resignation as aide-de-camp to
devote his time to run Bulletins operations and the reduction of his shares in the
corporation to 12%; and letters and correspondence between Marcos and Menzi
regarding the affairs of Bulletin.
These pieces of uncontradicted evidence suffice to establish that the 198
and 214 blocks are indeed ill-gotten wealth as defined under the Rules and
Regulations of the PCGG, viz:
Sec. 1. Definition.(A) Ill-gotten wealth is hereby defined as
any asset, property, business enterprise or material possession of
persons within the purview of Executive Orders Nos. 1 and 2,
acquired by them directly, or indirectly thru dummies, nominees,
agents, subordinates and/or business associates by any of the
following means or similar schemes:
(1)

Through misappropriation, conversion,

misuse or malversation of public funds or raids on the public
treasury;

(2)

(3)

Through the receipt, directly or indirectly, of

any commission, gift, share, percentage, kickbacks or any
other form of pecuniary benefit from any person and/or entity in
connection with any government contract or project or by
reason of the office or position of the official concerned;
By the illegal or fraudulent conveyance or
disposition of assets belonging to the government or any of its
subdivisions, agencies or instrumentalities or governmentowned or controlled corporations;

(4)

By obtaining, receiving or accepting directly

or indirectly any shares of stock, equity or any other form of
interest or participation in any business enterprise or
undertaking;

(5)

Through the establishment of agricultural,

industrial or commercial monopolies or other combination
and/or by the issuance, promulgation and/or implementation of
decrees and orders intended to benefit particular persons or
special interests; and

(6)

By taking undue advantage of official

position, authority, relationship or influence for personal gain or
benefit.

Cojuangcos disavowal of any proprietary interest in the Bulletin shares is

conclusive upon him. His prayer that he be declared the owner of the said shares,
together with all the cash and stock dividends which have accrued thereto since
October 15, 1987, and that the PCGG be ordered to return the cash deposit of
P8,174,470.32 to Bulletin, therefore, has no legal basis and should perforce be
denied.
In this connection, it should be said that Cojuangco apparently desisted from
presenting evidence and chose instead to stake his claim with the Estate of Menzi
and HMHMI. As found by the Sandiganbayan, however, the Estate of Menzi and
HMHMI failed to prove their allegation that Campos, Cojuangco and Zalamea were
Menzis nominees. Neither did the Estate of Menzi and HMHMI institute an action to
recover the shares from Menzis nominees.
Significantly, even as they claimed ownership of the Bulletin shares in their
Answer to the Republics Second Amended Complaint, the Estate of Menzi and
HMHMI did not file any cross-claim against the purported Menzi nominees.
Quite revealing, too, is the fact that Campos, in his Answers to Direct
Interrogatories[36] taken before the Consul General at the Philippine Consulate
General in Vancouver, British Columbia, Canada on November 25, 1994, repeatedly
declared that he owned a portion of the 198 block per instruction of President
Marcos[37] and that he became the shareholder, per instruction of President Marcos.
[38]
Likewise, in his Deed of Assignment dated October 15, 1987, Zalamea
manifested that he does not claim true and beneficial ownership of the Bulletin shares

registered in his name and that he voluntarily waived and assigned the same in favor
of the PCGG.
These declarations should have alerted the Estate of Menzi and HMHMI to
file cross-claims against Campos and Zalamea. The fact that they did not enfeebles
their claim of ownership.
It is also important to note that the Estate of Menzi did not include the 198 and 214
blocks in the inventory of the estates assets dated May 15, 1985. If, as it claims, the
Bulletin shares of Campos, Cojuangco and Zalamea were held by them as nominees
of Menzi, then these shares should have been included in the inventory. The
justification advanced for the said non-inclusion, which is that the stock certificates
covering them were not in the possession of Atty. Montecillo, is nothing but a hollow
pretext given the fact that even after the certificates came to Atty. Montecillos
possession in 1987, an updated inventory declaring the said shares as part of Menzis
estate was not filed pursuant to the Order of the probate court dated November 17,
1992.
Further, the claim that Menzi would need dummies because of the
impending promulgation of a decree which would limit to 20% the ownership of media
enterprises by one person or family is incredulous since no such decree was ever
issued.
Parenthetically, the fact that the stock certificates covering the shares registered
under the names of Campos, Cojuangco and Zalamea were found in Menzis
possession does not necessarily prove that the latter owned the shares. A stock
certificate is merely a tangible evidence of ownership of shares of stock.[39] Its
presence or absence does not affect the right of the registered owner to dispose of
the shares covered by the stock certificate. Hence, as registered owners, Campos
and Zalamea validly ceded their shares in favor of the Government. This assignment
is now a fait accompli for the benefit of the entire nation.
The contention that the sale of the 214 block to the Bulletin was null and void
as the PCGG failed to obtain approval from the Sandiganbayan is likewise
unmeritorious. While it is true that the PCGG is not empowered to sell sequestered
assets without prior Sandiganbayan approval,[40] this case presents a clear
exception because this Court itself, in the Teehankee Resolution, directed the PCGG
to accept the cash deposit offered by Bulletin in payment for the Cojuangco and
Zalamea sequestered shares subject to the alternatives mentioned therein and the
outcome of the remand to the Sandiganbayan on the question of ownership of these
sequestered shares.
In light of the foregoing, we are not inclined to disturb the Sandiganbayans
evaluation of the weight and sufficiency of the evidence presented by the Republic
and its finding that the evidence adduced by the Estate of Menzi and HMHMI do not
prove their allegation that Campos, Cojuangco and Zalamea are Menzis nominees,
taking into account the express admission of Campos that he owned the shares upon
Marcos instruction, the declaration of Zalamea that he does not claim true and
beneficial ownership of the shares, and the absolute dearth of evidence regarding
Cojuangcos assertion that he is Menzis nominee.

With regard to the Republics prayer for damages, we find the same not
supported by sufficient evidence.
An award of actual or compensatory damages requires proof of pecuniary
loss. In this case, the Republic has not proven with a reasonable degree of certainty,
premised on competent proof and the best evidence obtainable, that it has suffered
any actual pecuniary loss by reason of the acts of the defendants. Hence, actual or
compensatory damages may not be awarded.[41]
On the other hand, while no proof of pecuniary loss is necessary in order
that moral, temperate, nominal and exemplary damages may be adjudicated, proof of
damage or injury should nonetheless be adduced. As found by the Sandiganbayan,
however, the Republic failed to show the factual basis for the award of moral
damages and its causal connection to defendants acts. Thus, moral damages, which
are designed to compensate the claimant for actual injury suffered and not to impose
a penalty on the wrongdoer,[42] may not be awarded. Temperate, nominal, and
exemplary damages, attorneys fees, litigation expenses and judicial costs may
likewise not be adjudicated for failure to present sufficient evidence to establish
entitlement to these awards.
WHEREFORE, the petitions in G.R. No. 152578, G.R. No. 154487 and G.R.
No. 154518 are DENIED. The Decision of the Sandiganbayan dated March 14, 2002
is AFFIRMED.
SO ORDERED.

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS,
BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK,
FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL
BANK OF LIPA CITY, INC., petitioners, vs. HONORABLE COURT OF
APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND
EXCHANGE COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in
his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR.,
AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES
GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES,
ALEJANDRA TONOGAN and ELENA USI, respondents.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review on certiorari assailing the Decision of the Court
of Appeals dated February 27, 1996, as well as the Resolution dated March 29, 1996,
in CA-G.R. SP No. 38861.
The instant controversy arose from a dispute between the Rural Bank of Lipa
City, Incorporated (hereinafter referred to as the Bank), represented by its officers and
members of its Board of Directors, and certain stockholders of the said bank. The
records reveal the following antecedent facts:
Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of
Lipa City, executed a Deed of Assignment, wherein he assigned his shares, as well
as those of eight (8) other shareholders under his control with a total of 10,467
shares, in favor of the stockholders of the Bank represented by its directors Bernardo
Bautista, Jaime Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo
Villanueva, Sr. and his wife, Avelina, executed an Agreement wherein they
acknowledged their indebtedness to the Bank in the amount of Four Million Pesos
(P4,000,000.00), and stipulated that said debt will be paid out of the proceeds of the
sale of their real property described in the Agreement.
At a meeting of the Board of Directors of the Bank on November 15, 1993, the
Villanueva spouses assured the Board that their debt would be paid on or before
December 31 of that same year; otherwise, the Bank would be entitled to liquidate
their shareholdings, including those under their control. In such an event, should the
proceeds of the sale of said shares fail to satisfy in full the obligation, the unpaid
balance shall be secured by other collateral sufficient therefor.

FIRST DIVISION
[G.R. No. 124535. September 28, 2001]

When the Villanueva spouses failed to settle their obligation to the Bank on the
due date, the Board sent them a letter demanding: (1) the surrender of all the stock
certificates issued to them; and (2) the delivery of sufficient collateral to secure the
balance of their debt amounting to P3,346,898.54. The Villanuevas ignored the banks
demands, whereupon their shares of stock were converted into Treasury Stocks.
Later, the Villanuevas, through their counsel, questioned the legality of the conversion
of their shares.
On January 15, 1994, the stockholders of the Bank met to elect the new

directors and set of officers for the year 1994. The Villanuevas were not notified of
said meeting. In a letter dated January 19, 1994, Atty. Amado Ignacio, counsel for the
Villanueva spouses, questioned the legality of the said stockholders meeting and the
validity of all the proceedings therein. In reply, the new set of officers of the Bank
informed Atty. Ignacio that the Villanuevas were no longer entitled to notice of the said
meeting since they had relinquished their rights as stockholders in favor of the Bank.
Consequently, the Villanueva spouses filed with the Securities and Exchange
Commission (SEC), a petition for annulment of the stockholders meeting and election
of directors and officers on January 15, 1994, with damages and prayer for
preliminary injunction, docketed as SEC Case No. 02-94-4683. Joining them as copetitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo,
Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named respondents were the
newly-elected officers and directors of the Rural Bank, namely: Bernardo Bautista,
Jaime Custodio, Octavio Katigbak, Francisco Custodio and Juanita Bautista.
The Villanuevas main contention was that the stockholders meeting and election
of officers and directors held on January 15, 1994 were invalid because: (1) they were
conducted in violation of the by-laws of the Rural Bank; (2) they were not given due
notice of said meeting and election notwithstanding the fact that they had not waived
their right to notice; (3) they were deprived of their right to vote despite their being
holders of common stock with corresponding voting rights; (4) their names were
irregularly excluded from the list of stockholders; and (5) the candidacy of petitioner
Avelina Villanueva for directorship was arbitrarily disregarded by respondent
Bernardo Bautista and company during the said meeting.
On February 16, 1994, the SEC issued a temporary restraining order enjoining
the respondents, petitioners herein, from acting as directors and officers of the Bank,
and from performing their duties and functions as such.
In their joint Answer, the respondents therein raised the following defenses:
1) The petitioners have no legal capacity to sue;
2) The petition states no cause of action;
3) The complaint is insufficient;

On April 6, 1994, the Villanuevas application for the issuance of a writ of

preliminary injunction was denied by the SEC Hearing Officer on the ground of lack of
sufficient basis for the issuance thereof. However, a motion for reconsideration was
granted on December 16, 1994, upon finding that since the Villanuevas have not
disposed of their shares, whether voluntarily or involuntarily, they were still
stockholders entitled to notice of the annual stockholders meeting was sustained by
the SEC. Accordingly, a writ of preliminary injunction was issued enjoining the
petitioners from acting as directors and officers of the bank.
Thereafter, petitioners filed an urgent motion to quash the writ of preliminary
injunction, challenging the propriety of the said writ considering that they had not yet
received a copy of the order granting the application for the writ of preliminary
injunction.
With the impending 1995 annual stockholders meeting only nine (9) days away,
the Villanuevas filed an Omnibus Motion praying that the said meeting and election of
officers scheduled on January 14, 1995 be suspended or held in abeyance, and that
the 1993 Board of Directors be allowed, in the meantime, to act as such. One (1) day
before the scheduled stockholders meeting, the SEC Hearing Officer granted the
Omnibus Motion by issuing a temporary restraining order preventing petitioners from
holding the stockholders meeting and electing the board of directors and officers of
the Bank.
A petition for Certiorari and Annulment with Damages was filed by the Rural
Bank, its directors and officers before the SEC en banc, naming as respondents
therein SEC Hearing Officer Enrique L. Flores, Jr., and the Villanuevas, erstwhile
petitioners in SEC Case No. 02-94-4683. The said petition alleged that the orders
dated December 16, 1994 and January 13, 1995, which allowed the issuance of the
writ of preliminary injunction and prevented the bank from holding its 1995 annual
stockholders meeting, respectively, were issued by the SEC Hearing Officer with
grave abuse of discretion amounting to lack or excess of jurisdiction. Corollarily, the
Bank, its directors and its officers questioned the SEC Hearing Officers right to
restrain the stockholders meeting and election of officers and directors considering
that the Villanueva spouses and the other petitioners in SEC Case No. 02-94-4683
were no longer stockholders with voting rights, having already assigned all their
shares to the Bank.

4) The petitioners claims had already been paid, waived, abandoned, or

otherwise extinguished;

In their Comment/Opposition, the Villanuevas and other private respondents

argued that the filing of the petition for certiorari was premature and there was no
grave abuse of discretion on the part of the SEC Hearing Officer, nor did he act
without or in excess of his jurisdiction.

5) The petitioners are estopped from challenging the conversion of their

shares.

On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order,
which stated:

Petitioners, respondents therein, thus moved for the lifting of the temporary
restraining order and the dismissal of the petition for lack of merit, and for the
upholding of the validity of the stockholders meeting and election of directors and
officers held on January 15, 1994. By way of counterclaim, petitioners prayed for
actual, moral and exemplary damages.

In the case now before us, petitioners could not show any proof of despotic or
arbitrary exercise of discretion committed by the hearing officer in issuing the assailed
orders save and except the allegation that the private respondents have already
transferred their stockholdings in favor of the stockholders of the Bank. This, however,
is the very issue of the controversy in the case a quo and which, to our mind, should
rightfully be litigated and proven before the hearing officer. This is so because of the

undisputed fact the (sic) private respondents are still in possession of the stock
certificates evidencing their stockholdings and as held by the Supreme Court in
Embassy Farms, Inc. v. Court of Appeals, et al., 188 SCRA 492, citing Nava v. Peers
Marketing Corp., the non-delivery of the stock certificate does not make the transfer
of the shares of stock effective. For an effective transfer of stock, the mode of transfer
as prescribed by law must be followed.
We likewise find that the provision of the Corporation Code cited by the herein
petitioner, particularly Section 83 thereof, to support the claim that the private
respondents are no longer stockholders of the Bank is misplaced. The said law
applies to acquisition of shares of stock by the corporation in the exercise of a
stockholders right of appraisal or when the said stockholder opts to dissent on a
specific corporate act in those instances provided by law and demands the payment
of the fair value of his shares. It does not contemplate a transfer whereby the
stockholder, in the exercise of his right to dispose of his shares (jus disponendi) sells
or assigns his stockholdings in favor of another person where the provisions of
Section 63 of the same Code should be complied with.
The hearing officer, therefore, had a basis in issuing the questioned orders since
the private respondents rights as stockholders may be prejudiced should the writ of
injunction not be issued. The private respondents are presumably stockholders of the
Bank in view of the fact that they have in their possession the stock certificates
evidencing their stockholdings. Until proven otherwise, they remain to be such and
the hearing officer, being the one directly confronted with the facts and pieces of
evidence in the case, may issue such orders and resolutions which may be necessary
or reasonable relative thereto to protect their rights and interest in the meantime that
the said case is still pending trial on the merits.
A subsequent motion for reconsideration was likewise denied by the SEC en
banc in a Resolution dated September 29, 1995.
A petition for review was thus filed before the Court of Appeals, which was
docketed as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 and the
Resolution dated September 29, 1995 of the SEC en banc in SEC EB No. 440. The
ultimate issue raised before the Court of Appeals was whether or not the SEC en
banc erred in finding:
1. That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit
any grave abuse of discretion that would warrant the filing of a petition for certiorari;
2. That the private respondents are still stockholders of the subject bank and
further stated that it does not contemplate a transfer whereby the stockholders, in the
exercise of his right to dispose of his shares (Jus Disponendi) sells or assigns his
stockholdings in favor of another person where the provisions of Sec. 63 of the same
Code should be complied with; and
3. That the private respondents are presumably stockholders of the bank in
view of the fact that they have in their possession the stock certificates evidencing
their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision
dismissing the petition for review for lack of merit. The appellate court found that:
The public respondent is correct in holding that the Hearing Officer did not
commit grave abuse of discretion. The officer, in exercising his judicial functions, did
not exercise his judgment in a capricious, whimsical, arbitrary or despotic manner.
The questioned Orders issued by the Hearing Officer were based on pertinent law
and the facts of the case.
Section 63 of the Corporation Code states: x x x Shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner x x x. 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.
In the case at bench, when private respondents executed a deed of assignment
of their shares of stocks in favor of the Stockholders of the Rural Bank of Lipa City,
represented by Bernardo Bautista, Jaime Custodio and Octavio Katigbak, title to such
shares will not be effective unless the duly indorsed certificate of stock is delivered to
them. For an effective transfer of shares of stock, the mode and manner of transfer as
prescribed by law should be followed. Private respondents are still presumed to be
the owners of the shares and to be stockholders of the Rural Bank.
We find no reversible error in the questioned orders.
Petitioners motion for reconsideration was likewise denied by the Court of
Appeals in an Order dated March 29, 1996.
Hence, the instant petition for review seeking to annul the Court of Appeals
decision dated February 27, 1996 and the resolution dated March 29, 1996. In
particular, the decision is challenged for its ruling that notwithstanding the execution
of the deed of assignment in favor of the petitioners, transfer of title to such shares is
ineffective until and unless the duly indorsed certificate of stock is delivered to them.
Moreover, petitioners faulted the Court of Appeals for not taking into consideration the
acts of disloyalty committed by the Villanueva spouses against the Bank.
We find no merit in the instant petition.
The Court of Appeals did not err or abuse its discretion in affirming the order of
the SEC en banc, which in turn upheld the order of the SEC Hearing Officer, for the
said rulings were in accordance with law and jurisprudence.
The Corporation Code specifically 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 vice president, 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 stocks 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.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation. (Underscoring ours)
Petitioners argue that by virtue of the Deed of Assignment, private respondents
had relinquished to them any and all rights they may have had as stockholders of the
Bank. While it may be true that there was an assignment of private respondents
shares to the petitioners, said assignment was not sufficient to effect the transfer of
shares since there was no endorsement of the certificates of stock by the owners,
their attorneys-in-fact or any other person legally authorized to make the transfer.
Moreover, petitioners admit that the assignment of shares was not coupled with
delivery, the absence of which is a fatal defect. The rule is that the delivery of the
stock certificate duly endorsed by the owner is the operative act of transfer of shares
from the lawful owner to the transferee. Thus, title may be vested in the transferee
only by delivery of the duly indorsed certificate of stock.
We have uniformly held that for a valid transfer of stocks, there must be strict
compliance with the mode of transfer prescribed by law. The requirements are: (a)
There must be delivery of the stock certificate; (b) The certificate must be endorsed
by the owner or his attorney-in-fact or other persons legally authorized to make the
transfer; and (c) To be valid against third parties, the transfer must be recorded in the
books of the corporation. As it is, compliance with any of these requisites has not
been clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite endorsement
and delivery, the assignment was valid between the parties, meaning the private
respondents as assignors and the petitioners as assignees. While the assignment
may be valid and binding on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the petitioners, as mere
assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and
will not be entitled to dividends, insofar as the assigned shares are concerned.
Parenthetically, the private respondents cannot, as yet, be deprived of their rights as
stockholders, until and unless the issue of ownership and transfer of the shares in
question is resolved with finality.
There being no showing that any of the requisites mandated by law was
complied with, the SEC Hearing Officer did not abuse his discretion in granting the
issuance of the preliminary injunction prayed for by petitioners in SEC Case No. 0294-4683 (herein private respondents). Accordingly, the order of the SEC en banc
affirming the ruling of the SEC Hearing Officer, and the Court of Appeals decision
upholding the SEC en banc order, are valid and in accordance with law and
jurisprudence, thus warranting the denial of the instant petition for review.
To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect
their directors, the temporary restraining order issued by the SEC Hearing Officer on

January 13, 1995 must be lifted. However, private respondents shall be notified of the
meeting and be allowed to exercise their rights as stockholders thereat.
While this case was pending, Republic Act No. 8799 was enacted, transferring
to the courts of general jurisdiction or the appropriate Regional Trial Court the SECs
jurisdiction over all cases enumerated under Section 5 of Presidential Decree No.
902-A. One of those cases enumerated is any controversy arising out of intracorporate or partnership relations, between and among stockholders, members, or
associates, between any and/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. The instant
controversy clearly falls under this category of cases which are now cognizable by the
Regional Trial Court.
Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific
branches of the Regional Trial Courts to try and decide cases formerly cognizable by
the SEC. For the Fourth Judicial Region, specifically in the Province of Batangas, the
RTC of Batangas City, Branch 32 is the designated court.
WHEREFORE, in view of all the foregoing, the instant petition for review on
certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R.
SP No. 38861 are hereby AFFIRMED. The case is ordered REMANDED to the
Regional Trial Court of Batangas City, Branch 32, for proper disposition. The
temporary restraining order issued by the SEC Hearing Officer dated January 13,
1995 is ordered LIFTED.
SO ORDERED.

Republic
SUPREME
Manila

of

the

Philippines
COURT

SECOND DIVISION
G.R. No. 167041

June 17, 2008

PROVIDENT INTERNATIONAL RESOURCES CORPORATION, represented by

Edward T. Marcelo, Constancio D. Francisco, Anna Melinda Marcelo-Revilla,
Lydia J. Chuanico, Daniel T. Pascual, Linda J. Marcelo, John Marcelo, Celia C.
Caburnay and Celedonio P. Escao, Jr., and CELEDONIO ESCAO, JR.,
petitioners,
vs.
JOAQUIN T. VENUS, JOSE MA. CARLOS L. ZUMEL, ALFREDO D. ROA III,
LAZARO L. MADARA and SANTIAGO ALVAREZ, JR., respondents.
DECISION
QUISUMBING, J.:
For review on certiorari are the Decision1 dated December 13, 2004 and Resolution2
dated February 3, 2005 of the Court of Appeals in CA-G.R. SP No. 77672, which set
aside the Order3 dated May 27, 2003, of the Securities and Exchange Commission
(SEC) En Banc in CRMD-AA-Case No. 04-03-22.
The pertinent facts are as follows:
Petitioner Provident International Resources Corporation (PIRC) is a corporation duly
organized under Philippine law. It was registered with the SEC on September 20,
1979. Edward T. Marcelo, Constancio D. Francisco, Lydia J. Chuanico, Daniel T.
Pascual, and Jose A. Lazaro, collectively known as the Marcelo group, were its
incorporators, original stockholders, and directors.4
Another group, known as the Asistio group, composed of Luis A. Asistio, Lazaro L.
Madara, Alfredo D. Roa III, Joaquin T. Venus, and Jose Ma. Carlos L. Zumel, claimed
that the Marcelo group acquired shares in PIRC as mere trustees for the Asistio
group. The Marcelo group allegedly executed a waiver of pre-emptive right, blank
deeds of assignment, and blank deeds of transfer; endorsed in blank their respective
stock certificates over all of the outstanding capital stock registered in their names;
and completed the blank deeds in 2002 to effect transfers to the Asistio group.

On August 6, 2002, the Company Registration and Monitoring Department (CRMD) of

the SEC issued a certification5 stating that verification made on the available records
of PIRC showed failure to register its stock and transfer book (STB). It also appears
that on April 21, 1998, the Supervision and Monitoring Department of the SEC had
issued a show cause letter6 to PIRC for its supposed failure to register its STB.
On August 7, 2002, the Asistio group registered PIRC's STB. Upon learning of this,
PIRC's assistant corporate secretary, Celedonio Escao, Jr., requested the SEC for a
certification of the registration in 1979 of PIRC's STB. Escao presented the 1979registered STB bearing the SEC stamp and the signature of the officer in charge of
book registration.
Meanwhile, on October 17, 2002, the Asistio group filed in the Regional Trial Court
(RTC) of Muntinlupa City, a complaint7 docketed as Civil Case No. 02-238 against the
Marcelo group. The Asistio group prayed that the Marcelo group be enjoined from
acting as directors of PIRC, from physically holding office at PIRC's office, and from
taking custody of PIRC's corporate records.
Then, on October 30, 2002, the CRMD of the SEC issued a letter 8 recalling the
certification it had issued on August 6, 2002 and canceling the 2002-registered STB.
However, one Kennedy B. Sarmiento requested the SEC not to cancel the 2002registered STB. The SEC thus scheduled a conference to determine which of the two
STBs is valid. The parties were ordered to file their respective position papers. On
February 12, 2003, the hearing officer ruled:
WHEREFORE, premises considered and finding the 1979 stock and transfer
book authentic and duly executed, the Commission hereby recall the
certification issued on 6 August 2002 and cancel the stock and transfer book
registered on October 2002. Accordingly, the stock and transfer book
registered on 25 September 1979 shall remain valid.
SO ORDERED.9
The Asistio group appealed to the SEC Board of Commissioners. They claimed that
the issue of which of the two STBs is valid is intra-corporate in nature; hence, the
RTC, not the SEC, has jurisdiction.
The SEC, in its assailed order, denied the appeal. The SEC ratiocinated that the
determination of which of the two STBs is valid calls for regulatory, not judicial power
and is therefore within its exclusive jurisdiction.

The Asistio group elevated the case to the Court of Appeals, which ruled in their favor.
The Court of Appeals held that the issue of which of the two STBs is valid is intracorporate and thus subject to the jurisdiction of the RTC. The appellate court reversed
the SEC ruling, to wit:
WHEREFORE, premises considered, the instant petition is hereby
GRANTED. The Order of the Commission en banc dated May 27, 2003, is
hereby ANNULLED and SET ASIDE.
SO ORDERED.10
The motion for reconsideration of the aforequoted decision was denied for lack of
merit. Aggrieved, the Marcelo group filed the instant petition for review on certiorari
raising the sole issue
WHETHER OR NOT THE SEC HAS THE JURISDICTION TO RECALL AND
CANCEL A STOCK AND TRANSFER BOOK WHICH IT ISSUED IN 2002
BECAUSE OF ITS MISTAKEN ASSUMPTION THAT NO STOCK AND
TRANSFER BOOK HAD BEEN PREVIOUSLY ISSUED IN 1979.11
Petitioners, consisting of the Marcelo group, contend that the Court of Appeals erred
in ruling that the SEC has no jurisdiction over the case. Petitioners insist the issue in
this case is not an intra-corporate dispute, but one that calls for the exercise of the
SEC's regulatory power over corporations. Petitioners maintain that the recall and
cancellation of the 2002-registered STB does not conflict with the proceedings in the
civil case so as to violate the sub judice rule. Petitioners point out that a judgment
has, in fact, been promulgated in the said civil case.
Respondents, composed of the Asistio group, counter that in resolving the question of
which of the two STBs is valid, the issues of (1) falsification by corporate officers of
corporate records and (2) the acquisition of shares by the Asistio group, must first be
settled. Respondents thus claim that the real issue is intra-corporate and that whether
the 2002-registered STB should be recalled is a mere consequence of the real
controversies that should be heard by a regular court.
To resolve the issue of jurisdiction, it would be good to look at the powers and
functions of the SEC.
The Securities Regulation Code (Republic Act No. 8799) provides:
Sec. 5. Powers and Functions of the Commission.- 5.1. The Commission
shall act with transparency and shall have the powers and functions
provided by this Code, Presidential Decree No. 902-A, the Corporation

Code, . . . . Pursuant thereto the Commission shall have, among others, the
following powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnerships or
associations who are the grantees of primary franchises and /or a license or
permit issued by the Government;
(b) Formulate policies and recommendations in issues concerning the
securities market, advise Congress and other government agencies on all
aspects of the securities market and propose legislation and amendments
thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration
statements, and registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure
compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges,
clearing agencies and other SROs;
(f) Impose sanctions for the violation of laws and the rules, regulations and
orders issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and
issue opinions and provide guidance on and supervise compliance with such
rules, regulations and order;
(h) Enlist the aid and support of and/or deputize any and all enforcement
agencies of the Government, civil or military as well as any private
institution, corporation, firm, association or person in the implementation of
its powers and functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing
public;
(j) Punish for contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of and penalties prescribed by the
Rules of Court;
(k) Compel the officers of any registered corporation or association to call
meetings of stockholders or members thereof under its supervision;

(l) Issue subpoena duces tecum and summon witnesses to appear in any
proceedings of the Commission and in appropriate cases, order the
examination, search and seizure of all documents, papers, files and records,
tax returns, and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases
before it, subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnerships or associations, upon
any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws. (Italics supplied.)
From the above, it can be said that the SEC's regulatory authority over private
corporations encompasses a wide margin of areas, touching nearly all of a
corporation's concerns.12 This authority more vividly springs from the fact that a
corporation owes its existence to the concession of its corporate franchise from the
state.13 Under its regulatory responsibilities, the SEC may pass upon applications for,
or may suspend or revoke (after due notice and hearing), certificates of registration of
corporations, partnerships and associations (excluding cooperatives, homeowners'
association, and labor unions); compel legal and regulatory compliances; conduct
inspections; and impose fines or other penalties for violations of the Revised
Securities Act, as well as implementing rules and directives of the SEC, such as may
be warranted.14
Considering that the SEC, after due notice and hearing, has the regulatory power to
revoke the corporate franchise -- from which a corporation owes its legal existence -the SEC must likewise have the lesser power of merely recalling and canceling a STB
that was erroneously registered.
Going to the particular facts of the instant case, we find that the SEC has the primary
competence and means to determine and verify whether the subject 1979 STB
presented by the incumbent assistant corporate secretary was indeed authentic, and
duly registered by the SEC as early as September 1979. As the administrative agency
responsible for the registration and monitoring of STBs, it is the body cognizant of the
STB registration procedures, and in possession of the pertinent files, records and
specimen signatures of authorized officers relating to the registration of STBs. The
evaluation of whether a STB was authorized by the SEC primarily requires an
examination of the STB itself and the SEC files. This function necessarily belongs to
the SEC as part of its regulatory jurisdiction. Contrary to the allegations of

respondents, the issues involved in this case can be resolved without going into the
intra-corporate controversies brought up by respondents.
As the regulatory body, it is the SEC's duty to ensure that there is only one set of STB
for each corporation. The determination of whether or not the 1979-registered STB is
valid and of whether to cancel and revoke the August 6, 2002 certification and the
registration of the 2002 STB on the ground that there already is an existing STB is
impliedly and necessarily within the regulatory jurisdiction of the SEC.

WHEREFORE, the petition is GRANTED. The assailed Decision dated December 13,
2004 and Resolution dated February 3, 2005 of the Court of Appeals in CA-G.R. SP
No. 77672, are REVERSED and SET ASIDE; the Order dated May 27, 2003, of the
Securities and Exchange Commission (SEC) En Banc in CRMD-AA-Case No. 04-0322 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

Under the circumstances of the instant case, we find no error in the exercise of
jurisdiction by the SEC. All that the SEC was tasked to do, and which it actually did,
was to evaluate the 1979 STB presented to it. In ruling that the 1979 STB was validly
registered the SEC Hearing Officer explained and ruled thus:
After careful examination of the 1979 stock and transfer book, it has been
observed that subject book was properly presented and stamped received
by the then SEC employee in charge of registration. It is worthy to note that
the signature of Ms. Nelly C. Gabriel appears to be genuine and validly
executed on 25 September 1979 after comparing with Ms. Gabriel's
signature on the available records on file with the Commission, existing
stock and transfer books and other public documents.
This fact was further certified and attested by Ms. Angeli G. Villanueva,
daughter of Ms. Nelly C. Gabriel, who is currently working with the
Commission that the signature appearing in the 1979 stock and transfer
book is unquestionably the signature of Ms. Gabriel.
xxxx
WHEREFORE, premises considered and finding the 1979 stock and transfer
book authentic and duly executed, the Commission hereby recall the
certification issued on 6 August 2002 and cancel the stock and transfer book
registered on October 2002. Accordingly, the stock and transfer book
registered on 25 September 1979 shall remain valid.
SO ORDERED.15
We find the above ruling proper and within the SEC's jurisdiction to make.
Noteworthy, during the pendency of the instant petition, a decision 16 in the civil case
was rendered by the RTC. On April 23, 2005, the RTC of Muntinlupa City, Branch
276, dismissed the claim of the Asistio group and declared the Marcelo group the duly
constituted officers of PIRC, thus upholding the validity of the 1979-registered STB.

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. L-39889 November 12, 1981
UNION
OF
SUPERVISORS
(R.B.)

NATU,
petitioner,
vs.
THE SECRETARY OF LABOR and REPUBLIC BANK, respondents.

MAKASIAR, J.:
This is a petition for review on certiorari of the order dated December 6, 1974 of
respondent Secretary of Labor, the dispositive portion of which reads as follows:
WHEREFORE, the Commission's Decision in so far as that portion
of the decision of the Arbitrator dated September 6, 1974, granting
clearance to terminate the services of complainant Norberto Luna
and dismissing the unfair labor practice are concerned, is hereby
affirmed; whereas, that portion awarding separation pay in
accordance with the Termination Pay Law is hereby modified, and
in lieu thereof said complainant should be granted the sum of TEN
THOUSAND PESOS P10,000.00 by way of financial assistance.
(pp. 67-68, rec.)
It appears that on April 2, 1974, petitioner filed with the National Labor Relations
Commission a complaint against respondent Bank, charging it with unfair labor
practice committed against its president Mr. Norberto Luna, for harassment, unjust
suspension from his employment as Manager of respondent's San Juan branch and
as member of the Board of Trustees of the RB Provident Fund, as well as his unlawful
dismissal as Administrator and Secretary of the said fund, all due to his militant
espousal and defense of workers' rights (p. 16, rec.).
On April 15, 1974, a supplemental complaint was filed by the same petitioner with the
allegation that after filing of the original complaint, the respondent Bank followed up
its harassment of Mr. Luna by terminating his employment as Branch Manager and as
trustee, administrator and secretary of the RB Provident Fund purportedly due to his
libelous remarks against the bank management (pp. 18-19, rec.). Such termination
was effected through a letter dated April 5, 1974 of the Bank President, Mr. Pablo

Roman to the said Mr. Luna, citing as basis thereof (1) grave misconduct for making
derogatory and libelous remarks against the bank management as a whole and
against the assistant vice-president in particular, and (2) insubordination for refusal to
obey the lawful order of his superior, the Chairman of the RB Provident Fund (pp.
206-207, NLRC rec.). The termination was to take effect upon receipt by the bank of
the necessary clearance from the Secretary of Labor pursuant to Section 11, PD 21,
and Section 25 of the Rules and Regulations of the NLRC dated October 18, 1972
(pp. 180-181, NLRC rec.).
On May 20, 1974, respondent bank filed its answer, denying the allegations in both
the original as well as the supplemental complaint and contending that Mr. Luna's
suspension and subsequent dismissal from his various positions were for cause and
had nothing to do with his alleged espousal and defense of workers' rights (pp. 20-21,
rec.).
On October 6, 1974, a decision (pp. 58-65, rec.) was rendered by Flavio P. Aguas,
NLRC Arbitrator, with the conclusion that Luna actually made the derogatory remarks
against the officers of the bank. The said decision has the following pronouncements:
In the interest of justice and equity, however, complaint's dismissal
should be considered as without sufficient just cause.
Conformably to the foregoing, let clearance to terminate the
services of Norberto Luna be granted to Republic Bank which is
hereby ordered to pay the complainant separation pay in
accordance with the Termination Pay Law.
The charges of unfair labor practice against the employer is hereby
dismissed.
From this decision, petitioner appealed to the National Labor Relations Commission,
which affirmed en toto the said decision on October 17, 1974 (p. 39, rec.).
On October 29, 1974, petitioner appealed to respondent Secretary of Labor (pp. 4048, rec.), and on December 6, 1974, the latter issued an order the dispositive portion
of which has been quoted above, affirming the decision insofar as it granted
clearance for the termination of employment of Mr. Norberto Luna and dismissing the
unfair labor practice charge, and modifying the portion granting him separation pay,
and in lieu thereof, ordering the payment to him of P10,000.00 as financial
assistance. The said order of the Secretary of Labor is the subject of the present
petition.
The antecedent facts of this case are as follows:

The Republic Bank Provident Fund was established pursuant to the collective
bargaining agreement between the employees and respondent bank, and became
operational in 1970 for the benefit of the officers and employees of the Republic
Bank. Membership therein was open to an fun-time officers and employees of the
bank on a regular salary basis. The sources of its fund include contributions from
members equivalent to 2% of their basic monthly salary and of the bank equivalent to
6% of the basic monthly salary of the members, annual donations of the bank, fines
and penalties (please see Sections 1 and 3, Rules and Regulations of the RB
Provident Fund, p. 270-A, NLRC rec.). The fund is supposed to be managed by a
Board of Trustees composed of five (5) members, of which three (3), including the
chairman, are supposed to be designated by the bank president, and the other two
are the presidents of the Republic Bank Union of Supervisors and of the Republic
Bank Employees' Union (Sec. 7, supra).
Shortly after the fund became operational, Mr. Norberto Luna, president of the
petitioner union and ex-oficio member of the fund's Board of Trustees, became the
fund's administrator and secretary. During the three (3) years of his incumbency as
administrator, the resources of the fund grew from P278,445.27 to P1,779,159.85 (p.
5 of petition and p. 4 of respondent's brief, pages 7 and 149 of the records,
respectively).
In February 1974, the respondent bank decided to establish a money market
department (p. 5 of petition and p. 5 of appellees' brief, supra). This was pursuant to
the authority granted by the Central Bank to operate a quasi-banking operation on
December 17, 1973 (p. 296, NLRC rec.).
Prior to the February meeting of the Provident Fund Board of Trustees, or on January
22, 1974, Mr. Restituto C. de Vera, an assistant vice-president of respondent bank,
was designated to replace Mr. Jose C. Lugod during the latter's leave of absence as
member of the Board of Trustees (p. 316, NLRC rec.).
On February 12, 1974, at the meeting of the Board of Trustees of the RB Provident
Fund, Mr. de Vera proposed a reorganization of the fund in order to carry out the
instruction of the (respondent's) Board of Directors, which wants to have control of the
fund so as to tie it up with the Investment Money Market Operations of the bank (p.
296, NLRC rec.). Mr. Luna vehemently objected to this, saying that the Provident
Fund does not belong to the respondent bank but to the officers and employees. A
heated discussion followed. The reorganization move was carried by a 3 to 2 vote,
with all management-appointed trustees voting for it. To protect the interests of the
fund, Mr. Luna moved that a trust agreement be executed between the trustees on
the one hand and the members of the provident fund on the other, and that the
trustees should execute a bond. It was during the ensuing discussion that Mr. Luna
allegedly uttered the libelous remarks as follows:

The basis of my apprehension is that if management wig run the

RB I feel that the management of the RB are experts in distressing
the RB and it's a known fact that for the past 10 years the RB has
been in distress for which there is no reason why the RB should be
controlled by management. Furthermore, the latest that Mr. de Vera
is harping on is that he has good intentions. The present Board of
Trustees decided against giving out a loan to Mr. de Vera who was
considered a poor credit risk. Now how can we expect a person
who cannot be given a loan and who will now have a say in the PF I
don't think the PF will allow that.
xxx xxx xxx
As I have said before the personal standing of a trustee is very
important so that if a man has a very poor standing and crooked
(sic) at that he will be very bad for the interest of the PF. I repeat
that the trustees had in the past denied a loan application of Mr. de
Vera for the reason that his salary is under garnishment and for a
man to be appointed as trustee when his records show that his
salary was under garnishment, definitely, the intention of the RB is
to appoint unscrupulous people (pp. 300-301, NLRC rec.).
After more discussion, Mr. Luna's motion was ruled as without merit by the chairman
who proceeded to consider the appointment of a new administrator. At this point, Mr.
Luna and Mr. Antonio Canizares the trustee representing the RB Employees' Union
walked out of the meeting. When they were gone, Mr. Mario Galicia, a managementappointed trustee, was unanimously elected new administrator by the three (3)
remaining trustees.
On February 21, 1974, Mr. Armando Abad, chairman of the RB Provident Fund, wrote
a memorandum to Mr. Luna, asking him to turn over as soon as possible to the new
administrator, Mr. Galicia, all his records, papers and documents relative to the
operations of the Provident Fund.
Mr. Luna answered him in the following manner:
To: Mr. Armando Abad Sr. Date: 2/22/74
From: Mr. Norberto Luna, Administrator
Subject: TURNOVER OF RECORDS RE:
PROVIDENT FUND

This is with reference to your letter of February 21, 1974. You being
a lawyer and therefore relies on facts, should know that I am
without doubt whatsoever the Administrator of the Provident Fund.
What are these facts?

personal remarks made against me be stricken

off the records, my personal affairs have nothing
to do as to my being a trustee. I can sue Mr. Luna
for slander in court.

1. The Rules and Regulations of the Republic Bank - Provident

Fund govern the actions of the Provident Fund, its Board of
Trustees and its officers and staff.

ABAD Deleting of the remarks made by Mr. Luna

demeaning Mr. de Vera be carried.

Sec. 7, 3rd to the last paragraph of these "Rules and Regulations"

states: "The Board of Trustees shall hold regular meetings on the
second Tuesday of every month at the hour and place designated
by them. If the second Tuesday falls on a holiday, the regular
meeting will be held on the first working day following. Any three (3)
members of the Board of Trustees shall constitute a quorum to do
business, Provided, that at least one of such three (3) members is
a trustee representing the Union'"
2. The transcript of stenographic notes made by Mrs. Evelyn Unson
states in page I under "Other Matters"
DE VERA I would like to move
reorganization of this Fund be effected.

that a

After this, discussion followed and then on page

3, the transcript states:
ABAD Let us better put this into votation. Those
who are in favor of reorganization 3 voted for
and 2 against.
Then on page 7 of the transcript it states:
ABAD You are free to do that as a member of the Board of Trustees
and as President of the Supervisor's Union, but we have to go
ahead with the motion of Mr. de Vera to appoint a new
Administrator.
MESSRS. NORBERTO LUNA, ANTONIO CANIZARES AND FELIX
VILLAFUERTE WALKED OUT AT THIS POINT.
DE VERA Before I make the motion for a new
administrator, I would like to move that all the

DE VERA I move that a reorganization of the

Provident Fund be made and a new administrator
be named. I move that Mr. Mario Galicia be the
new administrator.
ABAD It was moved and seconded that Mr.
Galicia be elected the new administrator of the
Provident Fund in lieu of Mr. Luna. Unanimous
decision.
GALICIA I would like to make it known that I will
temporarily accept this position as administrator
pending the final replacement of management's
choice of a permanent trustee who will be the
administrator of the Provident Fund.
THE MEETING ADJOURNED AT 3:00 P.M.
From the above motions and sequence of discussion you will note
the following.
1. No motion was ever made to declare the position of
Administrator vacant nor was there ever a motion to retire,
separate, lay off, consider resigned or dismissed the administrator.
Therefore I am still administrator.
2. BY the time Mr. de Vera move (sic) that a new ad- administrator
be named there was no longer a quorum. Any motion or action of a
group of people pretending or holding themselves out as a Board,
when there actually was no quorum is illegal.
Considering that the minutes of this meeting has not yet been
confirmed for you to act on this matter based on your interpretation
of what happened, or what you were planning to happen, or what
you wished happened is rather dangerous.

In view of the foregoing, it is requested:

1. That all loans or any matter that needs the action of the
administrator be forwarded to me for appropriate action.
2. That you stop hindering or delaying the action of the Provident
Fund and myself as administrator.

On March 4, 1974, the Committee on Personnel headed by Sabino de Leon, Jr. sent
Mr. Luna a copy of Resolution No. 261974 and of the memorandum-complaint of Mr.
Abad dated February 28, 1974, informing him of the charges against him for:
1) Dereliction of duties both as trustee of the Republic Bank
Provident Fund and as an employee of the bank; and

In this connection I would like to reiterate my request that you as

legal officer of the Provident Fund prepare a "Trust Agreement"
between the members of the Provident Fund and the Trustees so
this can be discussed and signed in our next meeting.

2) Making utterly derogatory and libelous remarks against the entire

management of the Republic Bank during the meeting of the Board
of Trustees of the Provident Fund held on February 12, 1974 (pp.
198-199, NLRC rec.), and directing him to submit his written
answer or explanation to the charges.

I believe that any man who claims to be a trustee but who refuses
to sign a trust agreement is committing moral estafa, and is
preparing to commit actual estafa. (SGD) NORBERTO LUNA

On March 5, 1974, Mr. Luna answered Mr. de Leon's letter expressing his belief that
his actuations as trustee of the Provident Fund are beyond the authority of the
Republic Bank because of the following reasons:

On the same date (February 22, 1974) Mr. Abad caused a notice to be sent to all
members of the Board of Trustees for a special meeting on February 26, 1974, to
take up the following.

1) The PF is a different entity from the RB having its own Rules and
Regulations, its own name, its own source of income and files a
separate income tax returns with the BIR;

1) Confirmation of the election of the new administrator,

2) His appointment as trustee was not made by the Republic Bank

but by the Union of Supervisors; and

2) Loan applications;
3) Maturing Bankers' Acceptances' and
4) Other matters (p. 304, NLRC rec.).
Mr. Luna failed to attend the said meeting.
On February 28, 1974 Mr. Abad submitted to the Board of Directors a report on the
February 12th incident and its aftermath, and recommended disciplinary action
against Luna.
On the same date, a memorandum was sent to Mr. Luna by Antonio P. Roman, Jr.,
corporate secretary, informing him of Resolution No. 26-1974 of the Board of
Directors which suspends him as Branch Manager of the San Juan Branch pending
the investigation of the charges contained in Mr. Abad's memorandum, and directing
the Committee on Personnel to immediately convene and investigate the said
charges (pp. 196197, NLRC rec.).

3) He receives his honoraria from the Provident Fund and not the
Republic Bank. Nevertheless, he answered the charges in the
following manner:
However, I am concerned that if I do not answer your charges
rumors may float that I am indeed guilty of the same. In order to
avoid this, and also to clarify matters and soothe hurt feelings, I
make the following point-by-point reply:
1. In view of the unsystematic way that the charges and its
enclosures were made I have to guess what it is that I am accused
of in Dereliction of duties. My guess are (1) I did not attend the
special meeting caned by the Chairman (2) 1 walked out of the
meeting (3) 1 did not turn over the records, papers, etc. to the new
administrator.
My answer to these are (1) Mr. Armando Abad, Sr.'s claim that I
was duly notified on February 24, 1974 of a special meeting is not
true, because February 24 was a Sunday and I was in the province

at that time. I could not have been notified on February 25, I was on
union leave. I received the notification at 2:00 p.m. on February 26
by telephone from Mrs. Unson. It was then too late for me to attend
if I wanted to. Besides I have the right not to attend a meeting if I so
desire, just like the other trustees who have absented themselves
on various dates.
2. I walked out of the meeting because I felt disgusted by the rather
high-handed attitude of management trustees. Besides it is the right
of a trustee to walk out of any meeting, this has been done before
by Mr. Abad on the meeting of September 11, 1973.
3. I did not turn over the records, papers, etc., for reasons that I
stated in my letter addressed to Mr. Abad dated February 22,
received by him February 26, 1974. Since he did not pursue the
matter further I concluded that he agreed to the contents of my
letter.

accurate record of the discussions, I made other remarks which do

not appear at all in her transcript. Messrs. Canizares and Galicia
also made remarks that Cannot be found in this transcript. All the
trustees can attest to this. In this transcript also, you will find many
inconsistencies, hanging sentences, statements attributed to a
trustee that were made by another trustee. Statements or motions
of trustees that were mangled beyond recognition or understanding.
The other persons attending this meeting I am sure can attest to
this.
In other words this transcript is not an exact account of what was
said, but is merely an interpretation by Mrs. Unson of what she
understood was said.
In this connection I would like to point out the great disservice that
Mr. Abad would be doing to management by pursuing these
charges. Had Mr. Abad waited until the natural course of events
had happened one of two things would happen. These are:

xxx xxx xxx

2. Mr. Luna objected to the motion and said "The basis of my
apprehension is that if management will run the Provident Fund, I
feel that the management of the RB are experts in distressing the
RB and it is a known fact that for the past 10 years, the RB has
been in distress for which there is no reason why the Provident
Fund should be controlled by management" (t.s.n., p. 6, copy
attached).
On said page 6, I cannot find any such remarks and I never said
that statement. What I said was "The basis of my apprehension is
that if management will run the Provident Fund, I feel that the
management of the Republic Bank are not experts and it is a
known fact that for the past 10 years, the Republic Bank has been
in distress for which reason the Provident Fund should not be
controlled by management." Let me state very clearly that Mrs.
Unson is not a court stenographer. Besides, the trustees at this
point were talking at the same time making it very hard for Mrs.
Unson to take down everything accurately. If you will examine word
for word this alleged statement I could not have possibly made
such a statement because my position was that management
should not run the Provident Fund while this alleged remarks gave
reason why management should control it. I quote: "there is no
reason why the Provident Fund should be controlled by
management." To prove further that Mrs. Unson failed to take an

1. The minutes of the meeting would come out

signed by me without any unbecoming remarks,
as what has happened in the past when there
had been heated discussion also but nothing
derogatory has even come out in the minutes and
therefore everybody would be happy since only
Mrs. Unson and I would have seen this
inaccurate transcript; or
2. The minutes would come out signed by me
with derogatory remarks, in which case my goose
is cooked. But unfortunately Mr. Abad jumped the
gun. Now it is the transcript that is on trial as to
its accuracy, and all sorts of rumors are going on
in the Republic Bank that the Union President is
being harassed for articulating things that
everybody has all along known for the past ten
years.
In view of the foregoing it is requested that this investigation be
terminated now and that the case against me be dropped
immediately.

The investigation of the charges against Mr. Luna was held ex-parte on March 6, 18,
21 and 25, 1974. Meanwhile, Mr. Luna was prevented from attending the regular
meeting of the PF Board of Trustees on March 12, 1974.
The Investigating Committee submitted its report of investigation (pp. 215-235, NLRC
rec.) on March 27, 1974 which became the basis of Resolution No. 40-1974 of the
Board of Directors dated March 28, 1974 (p. 186, NLRC rec.), dismissing Mr. Luna for
cause, effective upon receipt of the written clearance therefor from the Secretary of
Labor pursuant to Section 11 of Presidential Decree No. 21 in conjunction with
Section 25 of the Rules and Regulations of the National Labor Relations Commission
dated October 18, 1972.
Upon the foregoing premises, it is the contention of the petitioner that:
1. The respondent Secretary of Labor erred in not considering the
utterances of Norberto Luna as falling within the purview of
protected labor activity;
2. Respondent Secretary of Labor erred in authorizing the dismissal
of Norberto Luna despite finding that same is without sufficient just
cause;
3. Respondent Secretary of Labor erred in failing to secure the
employment tenure of Norberto Luna in consonance with express
constitutional mandate;
4. Respondent Secretary of Labor erred in not finding respondent
bank's management guilty of unfair labor practice for the unjustified
harassment and dismissal of Norberto Luna on account of his union
activities; and
5. Respondent Secretary of Labor erred in not ordering the
reinstatement of Norberto Luna to his various posts, with full back
wages from the date of his removal therefrom to the date of his
actual reinstatement thereto.
The foregoing assignments of error may be consolidated into the following issues:
1. Whether or not Mr. Luna's utterances and alleged acts of insubordination constitute
just cause for his dismissal;
2. Whether or not the dismissal of said Mr. Luna constitutes unfair labor practice.

There are two different versions of the statement made by Mr. Luna in the meeting of
the Board of Trustees of the RB Provident Fund on February 12, 1974. The
management version is that which is quoted on page 4 thereof, and purportedly
appearing in the stenographic notes of Mrs. Evelyn Unson, the clerk who took down
notes of the meeting Mr. Luna, however, alleges that the transcript of stenographic
notes was not an accurate record of the proceedings, considering that Mrs. Unson
was not a court stenographer. Besides, at the time of the alleged utterances, the
trustees were talking at the same time.
Mr. Luna contends that what he said was the following:
The basis of my apprehension is that if management will run the
Providend Fund, I feel that the management of the Republic Bank
are not experts, and it is a known fact that for the past 10 years the
Republic Bank has been in distress for which reason the Provident
Fund should not be controlled by Management (p. 202, NLRC rec.).
Mr. Luna further alleges that his utterances were made in his capacity as trustee
representing the Union of Supervisors. it was by reason of his presidency of the said
union that he became a trustee, and is therefore supposed to guard the interests of its
members. It was precisely in acting out that role that he vehemently opposed the
management-inspired proposal to transfer the funds of the Provident Fund to the
bank's newly-opened money market department that a heated argument ensued, in
the course of which he made the supposedly libelous statements. Luna now argues
that his statement should be regarded as falling under protected labor activity and
therefore privileged.
There is merit in this contention. A review of the events prior to the ouster of Luna
from his position as branch manager of respondent bank and as trustee, administrator
and secretary of the Provident Fund will show the following:
1. February 1, 1974: Luna filed with the NLRC an unfair labor practice case against
the management, docketed as Case No. LR-2673.
2. February 12, 1974.
a) A meeting of the PF Board of Trustees was
held, attended by Mr. Restituto de Vera, a bank
Assistant Vice-President who had then just been
designated to sit in the board in substitution of a
trustee who was on leave.
b) De Vera opened the meeting with the following
statement:

I received word from the Board

of Directors, specifically from
Mr. Pery that the Provident
Fund PF is an entity of the
Republic Bank because the
main bulk of contributions is
put up by the RB into the PF so
that they would like to have
control of the funds of the PF
and for that matter the
administration of the Fund.
Along that line of instruction
and in consonance with the
creation of the Investment
Money Market of the RB the
management would like to
have
control
of
the
administration so that the
operation of the PF could be
tied up with the operation of the
Investment Money Market of
the RB. The Central Bank has
given us an authority to
operate
a
quasi-banking
operation on December 17,
1973. To effect the instruction, I
would like to move that a
reorganization of this board be
effected" (p. 245, NLRC rec.).
c) Mr. Luna, the erstwhile administrator and
Secretary of the Fund, vigorously objected.
d) Messrs. Armando Abad (chairman) and Mario
Galicia, the two other management-appointed
trustees took up the cudgels for de Vera, and
forced the issue of reorganization. The same was
carried by a vote of 3 to 2, with all the
management appointed trustees voting for it, and
the two labor representatives voting against (p.
245, LRC rec.).

members to protect the interests of the PF

Messrs. Abad, de Vera and Galicia counter
argued against the proposal. Lina remarked. "As
long as we are supported by the members of the
union, RB must follow. We will fight to protect the
interests of the PF If you insist, there will be labor
trouble. " (p. 248, NLRC rec.).
f ) De Vera questioned Luna's apprehensions. In
answer, Luna made the allegedly derogatory
statements (p. 249, NLRC rec.).
g) Luna's motion was declared without merit by
the chairman, Mr. Abad (p. 250, NLRC rec.).
h) Luna and Antonio Canizares the other labor
representative walked out of the meeting.
i) The remaining three [31 trustees unanimously
elected Galicia as the new administrator (p. 251,
NLRC rec.).
3. February 21, 1974. A memorandum was sent by Chairman Abad
to Luna. Subject: Request to turn over records re Provident Fund
(p. 191, NLRC rec.).
4. February 22, 1974: Reply of Luna to Abad informing of his belief
that he is still the administrator because: a] the position of
administrator was never declared vacant; b] Mr. Galicia's election
was illegal for having been made without the requisite quorum; and
c] the minutes of the February 12th meeting has not yet been
confirmed (pp. 192-194, NLRC rec.).
A notice of special meeting on February 26, 1974 was released on
February 22, 1974, with the copy for Luna being delivered to Mr.
Canizares (p. 304, NLRC rec.).
5. February 26, 1974. A special meeting of the Board of Trustees
was held. Both Luna and Canizares were absent.
6. February 28, 1974:

e) Mr. Luna moved that all the trustees execute a

trust agreement and a bond in favor of the PF

a) Report of Mr. Abad to the respondent's Board

of Directors, recommending administrative action
against Luna for having uttered defamatory
words against the bank management and against
one of its vice-presidents; for walking out of the
meeting on February 12, 1974; for refusing to
turn over the records of the Provident Fund to the
new administrator; and for failure to attend the
special meeting for no apparent reason (pp. 236237, NLRC rec.).
b) Office Memorandum suspending Luna, per
Resolution No. 26-1974 of the Board of Directors
(pp. 196- 197, NLRC rec.).
7. March 4, 1974: Letter of the Chairman, -Committee on Personnel
of respondent bank, informing Luna of the charges against him for
dereliction of duty and for making utterly derogatory and libelous
remarks against the bank management (pp. 198-199, NLRC rec.).
8. March 5, 1974: Answer of Luna to the charges (pp. 200-203,
NLRC rec.).

13. March 21, 1974: Continuation of the administrative investigation

of Luna, with Antonio Canizares (trustee) and Carlos Mora (PF
auditor) testifying in the morning [pp. 283- 288, NLRC rec.].
As stated in his notice, Luna appeared at the investigation at 3:00
p.m. with his counsel, and it was explained to him that the purpose
of inviting him was to find out if he wanted to add anything more to
his written explanation (p. 289, NLRC rec.). Luna's counsel
questioned the authority of the committee to conduct the
investigation, which the committee noted; after which the testimony
of Felix Villafuerte (credit investigator) was taken [pp. 291-293,
NLRC rec.].
14. March 27, 1974: Report of the Investigating Committee to the
Board of Directors, finding Luna guilty of grave misconduct for his
derogatory and libelous remarks against the bank management,
and of insubordination, for his refusal to turn over the records of the
PF to the new administrator. The report contains a recommendation
for Luna's dismissal to take effect upon receipt of the clearance
from the Secretary of Labor pursuant to PD 21 (pp. 232- 235,
NLRC rec.).
15. April 15,1974:

9. March 6, 1974: Administrative investigation of Luna, with

witnesses Armando Abad PF Chairman) and Maximo Galicia
(trustee) testifying (pp. 272-275, NLRC rec.). No apparent notice to
Luna.
10. March 12, 1974. Regular meeting of the PF Board of Trustees,
wherein Luna was prevented from attending because of his
suspension.
11. March 18, 1974.- Continuation of the administrative
investigation of Luna, with witnesses Restituto de Vera (trustee)
and Evelyn Unson (stenographer) testifying (pp. 276-281, NLRC
rec). No apparent notice to Luna.
12. March 19, 1974: Letter of the chairman of the investigating
committee (Personnel), inviting Luna to appear if he so desires at
the continuation of investigation to be held on March 20, 1974 [P.
204, NLRC rec], at 3:00 p.m.

a) Request of respondent bank for clearance to

terminate Luna's services (pp. 208-214, NLRC
rec.).
b) Advice to Luna re termination of his
employment effective upon receipt of the
clearance from the Secretary of Labor (pp. 180181, NLRC rec.).
These series of events unmistakably show that respondent bank had wanted to do
away with Luna even before that eventful February 12th meeting of the PF Board of
Trustees, when one of its Assistant Vice-Presidents, de Vera, who had just been
appointed to fill the temporary vacancy therein was instructed by the bank's Board of
Directors to press for the reorganization of the PF Board of Trustees. This is evident
from the words of de Vera when he said, "the management proposed a reorganization
because it thinks that a new administration can serve the PF better. You have been
tried. Why can we not appoint a new administrator and give us a chance to do things
in our way or fashion x x x?" (p. 248, NLRC rec.). The angry reaction and statements
that Luna made in the face of this became a convenient tool for the management to
use in its desire for Luna's ouster - and its eventual control of PF funds.

But the evidence presented in this case does not support the findings.
Luna challenged the accuracy of the stenographic notes of the said meeting on the
ground that Mrs. Unson was not a court stenographer and her notes do not truly
reflect all that transpired during the meeting. He also stated that had the usual
procedure been followed the minutes should have been submitted to him first for
whatever corrections he might make before being finalized and signed by him (pp.
202-203, NLRC rec.). He further alleged that although he was given a copy of the
transcribed notes, and he informed Mrs. Unson that there were errors he would like to
correct, he was not able to make such corrections because Mrs. Unson did not want
to take orders from him anymore (p. 291, NLRC rec.).
These allegations were never refuted. In fact, Mrs. Unson herself admitted that she
was a clerk, "just a mere clerk" (p. 278, NLRC rec.) although it was part of her duties
to take down stenographic notes of the discussions in board meetings; that it was
likewise routinary for her to submit her transcribed notes to Luna as secretary; and
that when she did the same after transcribing her notes of the February 12th meeting,
Luna informed her that there were errors, but such errors were never corrected. Since
there is nothing in the records to indicate that Luna has been changed as secretary,
the minutes should have been signed by him before being officially released. Without
such signature, neither probative value nor credibility could be accorded to such
minutes; for the one who signed, Abad, is also the accuser of, and therefore biased
against Luna.
This leaves only the testimonial evidence to clinch the case against Luna. It appears,
however, that of the seven (7) witnesses presented, namely, Abad, Galicia, de Vera,
Unson, Canizares Mora and Vallesteros, only the first three (3) positively testified as
to the alleged derogatory statements. This is understandable, considering that Abad
is the accuser, Galicia is the successor, and de Vera was the prime mover of Luna's
ouster. Thus, the weakness of the evidence for respondent bank is easily discernible.
Even if it were not so, and had the alleged derogatory or libelous statements been
substantially established, still the same will not justify Luna's dismissal.
For one thing, his allegations were never controverted. On the contrary, the said
allegations were confirmed by the takeover by the Central Bank of the distressed
respondent bank which was of public knowledge.
Moreover, Luna's remarks at the meeting of an official board are privileged in nature
as a valid. exercise of his constitutional freedom of expression. He addressed his
remarks to the body that has jurisdiction over the question of management of the
assets of the Provident Fund. Luna's remarks were intended to protect the interests of
the members of the Provident Fund from what he honestly believed was a risky
venture on the part of the management. His protests could even be treated as union

activity by the Industrial Peace Act, which assures the employees' right "to selforganization and to form, join or assist labor organizations of their own choosing and
to engage in concerted activities for the purpose of collective bargaining and other
mutual aid and protection ... " (Sec. 3, Rep. Act 875). This is so because Luna's
membership in the PF Board of Trustees was by virtue of his being president of the
RB Union of Supervisors. The Provident Fund was itself created as a result of the
union's collective bargaining agreement with the bank. Luna was therefore acting out
his role as protector of his constituents when he voiced out his apprehension and
protests over the plan of management. It matters not that he acted singly or
individually. What is important is that he had been selected by the supervisors of
respondent bank to be their president and representative in the PF Board of Trustees.
His actuations as such should therefore be considered as legitimate exercise of the
employees' right to self-organization and as an activity for their mutual aid and
protection, aside from being privileged communication protected by the constitutional
guarantee on free speech. His remarks were in defense of the interest of the
Provident Fund, part of which comes from the contribution of the rank and file
employees. Moreover, his remarks had factual basis. As heretofore stated, the
Central Bank took over the management of the respondent Republic Bank because it
became distressed due to mismanagement. And his remarks were addressed to the
Board of Trustee which has jurisdiction over the matter.
In Republic Savings Bank vs. C.I.R. (21 SCRA 226 [1967] cited with approval in
Philippine Blooming Mills Employees Organization vs. Philippine Blooming Mills, Inc.,
51 SCRA 189 [1973], involving the same bank where eight (8) union officials were
dismissed for having written and published a patently libelous letter against the bank
President, WE held:
It will avail the Bank none to gloat over this admission of the
respondents. Assuming that the latter acted in their individual
capacities when they wrote the letter-charge they were nonetheless
protected for they were engaged in concerted activity, in the
exercise of their right of self- organization that includes concerted
activity for mutual aid and protection (Section 3 of the Industrial
Peace Act ... ). This is the view of some members of this Court. For,
as has been aptly stated, the joining in protests or demands, even
by a small group of employees, if in furtherance of their interests as
such, is a concerted activity protected by the Industrial Peace Act. It
is not necessary that union activity be involved or that collective
bargaining be contemplated (Annot., 6 A.L.R. 2d 416 [1949]).
xxx xxx xxx
Instead of stifling criticism, the Bank should have allowed the
respondents to air their grievances.

xxx xxx xxx

The Bank defends its action by invoking its right to discipline for
what it calls the respondents' libel in giving undue publicity to their
letter-charge. To be sure, the right of self-organization of employees
is not unlimited (Republic Aviation Corp. vs. NLRB 324 U.S. 793
[1945]), as the right of the employer to discharge for cause
(Philippine Education Co. vs. Union of Philippine Education
Employees, L-13773, April 29, 1960) is undenied. The Industrial
Peace Act does not touch the normal exercise of the right of the
employer to select his employees or to discharge them. It is
directed solely against the abuse of that right by interfering with the
countervailing right of self organization (Phelps Dodge Corp. vs.
NLRB 313 U.S. 177 [1941]). ... .
xxx xxx xxx
In the final sum and substance, this Court is in unanimity that the
Bank's conduct, Identified as an interference with the employees'
right of self-organization, or as a retaliatory action and/or as a
refusal to bargain collectively, constituted an unfair labor practice
within the meaning and intendment of section 4(e) of the Industrial
Peace Act.
The other basis for dismissal insubordination appears to be likewise without
justifiable ground. Such charge arose out of the alleged refusal of Luna to obey the
order of his superior, to turn over the records of the Provident Fund to the new
administrator. The "order" referred to was not an order but a letter-request dated
February 21, 1974 of Provident Fund Chairman Abad as it was in fact entitled
"Request to Turn Over Records re Provident Fund" (p. 191, NLRC rec.). Upon receipt
thereof, Luna immediately answered in writing (p. 192, NLRC, rec.), explaining why
he feels justified to keep them. And in his answer to the charges, Luna averred that
when no follow-up was made thereon, he assumed that his explanation had been
satisfactory (p. 201, NLRC rec.). Indeed, the Board of Trustees, upon receipt of such
written explanation, should have referred the matter to the grievance machinery under
the collective bargaining agreement.
But no, this was not done. Instead, management preferred as many charges as it
could frame against Luna, obviously to make sure that if one charge could not suffice
to bring about his ouster, the other charges might produce the desired result. Thus,
even his having walked out of the meeting on February 12, 1974, and his absence
from the special meeting on February 26, 1974, were included under the heading
dereliction of duty". It was to the credit of the Investigating Committee that the latter
charges were ruled out.

All the foregoing shows that Luna's dismissal had no legal justification. In the words of
the arbitrator, Flavio P. Aguas, " ... complainant's dismissal should be considered as
without sufficient just cause" (p. 64, rec.).
WE therefore find the respondent then Secretary (now Minister) of Labor to have
acted with grave abuse of discretion when he affirmed the grant of clearance to
terminate Luna's services with respondent bank on the ground of loss of confidence,
despite the fact that the charges against him were not substantiated.
In the case of Bonifacio de Leon vs. NLRC, et al. (G.R. No. L-52056, October 30,
1980), WE held:
While a managerial employee may be dismissed merely on the
ground of loss of confidence, the matter of determining whether the
cause for dismissing an employee is justified on grounds of loss of
confidence cannot be kept entirely to the employer. Impartial
tribunals do not rely only on the statement made by the employer
that there is loss of confidence unless duly proved or sufficiently
substantiated. ... .
After having served the company for more than 22 years, dismissal
would be too severe a penalty for petitioner who was not even
afforded an opportunity to be heard. He was just a victim of the
whims and malicious maneuver of private respondents.
That the respondent bank tried to maneuver Luna's ouster is evident from the way the
investigation was conducted by its Committee on Personnel. As shown in the above
narration of events, the testimonies of witnesses who were not even under oath
were taken without notice to Luna and without giving him a chance to cross-examine
them. And corporate actions through the Board of Directors, such as filing of charges,
suspension and termination, were taken against Luna just as soon as, and on the
very same dates the reports are made. Were it not for the filing of this complaint with
the NLRC Luna could have been booted out of office without due process.
In the case of Central Textile Mills, Inc. vs. NLRC, et al. (L-50150, 90 SCRA 9 [1979]).
Chief Justice Enrique M. Fernando, speaking for the Court, ruled:
The weakness of the petition, to repeat, is thus indisputable
Petitioner, however, would try to impart a substance of plausibility
by alleging that even on the assumption that no theft was
committed, still there was loss of confidence, sufficient to cause his
dismissal. In the Philippine Air Lines decisions referred to, the
accusation that theft was committed by the employee was likewise
not borne out by the evidence. To justify a dismissal, management

relied on the allegation that there was breach of trust, a ground

analogous to loss of confidence. The Court of Industrial Relations
did not agree. Neither did this Court, Reinstatement was ordered.
So it must be in this case. Such a vague, an-encompassing pretext
as loss of confidence, if given the seal of approval by this Court,
could easily be utilized to reduce to a barren form of words the
constitutional guarantee of security of tenure. Precisely, the
employee is afforded that protection so that his means of livelihood
is not placed at the mercy of management. He is just as much a
participant in the industrial process. He is entitled to be considered
as such. Constitutional provisions protecting labor are in line with
the predominant thinking all over the world safeguarding human
dignity. It would then be to ignore not only a mandate of the
fundamental law but also a counsel of wisdom and fair play to
impart the concept of loss of confidence such a latitudinarian
scope.
... The constitutional provision is not to be so easily brushed aside.
If it were otherwise, there would be failure, in the language of the
Philippine Air Lines' opinion 'to conform to the Ideal of the New
Society, the establishment of which was so felicitously referred to
by the First Lady as the compassionate Society.
And in the cited case of Philippine Air Lines vs. PALEA (L-24626, 57 SCRA 489
[1974]), the Court held:
The futility of this appeal becomes even more apparent considering
the express provision in the Constitution already noted, requiring
the State to assure workers "security of tenure." It was not that
specific in the 1935 charter. The mandate was limited to the State
affording 'protection to labor, especially to working women and
minors, ... . If by virtue of the above, it would not be legally
justifiable to reverse the order of reinstatement, it becomes even
more readily apparent that such a conclusion is even more
unwarranted now. To reach it would be to show lack of fealty to a
constitutional command. This is not to say that dismissal for cause
is now outlawed. No such thing is intimated in this opinion. It is
merely to stress that where respondent Court of Industrial
Relations, in the light of all the circumstances disclosed particularly
that it was a first offense after seventeen years of service, reached
the conclusion neither arbitrary nor oppressive, that dismissal was
too severe a penalty, this Court should not view the matter
differently. That is to conform to the Ideal of the New Society, the

establishment of which was so felicitously referred to by the First

Lady as the Compassionate Society.
In the case at bar, Luna, the complaining witness had more than 21 years of service
with respondent bank, starting on April 2, 1953. The record is not clear as to what
position he first held; but it is undisputed that he was the Branch Manager of
respondent bank's San Juan Branch and for eleven (11) years the president of the RB
Union of Supervisors. It is likewise not denied that the Union of Supervisors had, prior
to this case, caused the filing of several cases against the bank with the NLRC.
According to Arbitrator Aguas, some of these cases had been decided or were settled
by the parties. NLRC Case No. LR-729 was decided by the compulsory arbitrator and
the parties entered into an agreement as to how to implement the decision. NLRC
Case No. 2673 was withdrawn by the unions and submitted the issue to voluntary
arbitration (p. 60, rec.). It is evident, therefore, that the respondent bank's predilection
to oust Luna was because of his union activities.
The respondent bank, however, argues that Luna's union activities had nothing to do
with his dismissal, and that the same was for cause. If Luna's union activism indeed
caused his separation, the bank contends, how come it never took action against
Antonio Canizares the president of the RB Employee's Union, nor against Villafuerte
and Mora who were likewise officers of the Union of Supervisors, and who were the
credit investigator and appraiser, respectively, of the Provident Fund?
To this, WE may ask the following: Why was not Caizares cited for dereliction of duty
when he also walked out of the meeting on February 12, 1974; failed to attend the
special meeting on February 26, 1974 despite notice; and walked out of the meeting
on March 12, 1974 after Luna was physically ejected therefrom by security guards?
The answers to these questions are obvious: Canizares and the other union officers
were not as active and militant in their defense of union rights, much less did they
pose any threat against the respondent bank's plan to control the funds of the
Provident Fund which was established as a result of the collective bargaining
agreement. Only Luna posed such threat. Understandably therefore, management
wanted him out. Forgotten were his almost 22 years of service to the respondent
bank without any showing of any irregularity in the performance of his duties during
those long years.
All these circumstances taken together indubitably show that Luna's discharge was
discriminatory and constituted unfair labor practice under paragraph (5) Section 4 of
the Industrial Peace Act. He is therefore entitled to reinstatement with back wages
pursuant to the policy to decree back wages not exceeding three (3) years without
requiring the parties to submit proof of compensation received from other sources at
the time of illegal dismissal until actual reinstatement, in order that judgment in favor
of an employee or laborer can be executed without delay (Luzon Stevedoring Corp.
vs. C.I.R., 61 SCRA 162).

WHEREFORE, THE ASSAILED ORDER DATED DECEMBER 6,1974 OF

RESPONDENT SECRETARY OF LABOR IS HEREBY SET ASIDE AND THE
RESPONDENT REPUBLIC BANK IS HEREBY DIRECTED TO IMMEDIATELY
REINSTATE COMPLAINANT NORBERTO LUNA TO HIS FORMER POSITION
WITHOUT LOSS OF SENIORITY RIGHTS AND OTHER BENEFITS AND
INCREASES RECOGNIZED BY LAW OR GRANTED BY PRIVATE RESPONDENT
DURING THE PERIOD OF HIS ILLEGAL DISMISSAL, WITH BACK WAGES
EQUIVALENT TO THREE (3) YEARS WITHOUT QUALIFICATION.

DECISION

THIS DECISION IS HEREBY MADE IMMEDIATELY EXECUTORY.

The Case

SO ORDERED.

PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their acts.
That the terms of a contract turn out to be financially disadvantageous to them will not
relieve them of their obligations therein. The lack of an inventory of real property will
not ipso facto release the contracting partners from their respective obligations to
each other arising from acts executed in accordance with their agreement.

The Petition for Review on Certiorari before us assails the March 5, 1998
Decision Second Division of the Court of Appeals (CA) in CA-GR CV No. 42378 and
its June 25, 1998 Resolution denying reconsideration. The assailed Decision affirmed
the ruling of the Regional Trial Court (RTC) of Cebu City in Civil Case No. R-21208,
which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the
defendant and against the plaintiffs, orders the dismissal of the plaintiffs complaint.
The counterclaims of the defendant are likewise ordered dismissed. No
pronouncement as to costs.
The Facts

Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a
"joint venture agreement" with Respondent Manuel Torres for the development of a
parcel of land into a subdivision. Pursuant to the contract, they executed a Deed of
Sale covering the said parcel of land in favor of respondent, who then had it
registered in his name. By mortgaging the property, respondent obtained from
Equitable Bank a loan of P40,000 which, under the Joint Venture Agreement, was to
be used for the development of the subdivision. All three of them also agreed to share
the proceeds from the sale of the subdivided lots.
The project did not push through, and the land was subsequently foreclosed by
the bank.
According to petitioners, the project failed because of respondents lack of funds
or means and skills. They add that respondent used the loan not for the development
of the subdivision, but in furtherance of his own company, Universal Umbrella
Company.

[G.R. No. 134559. December 9, 1999]

ANTONIA TORRES, assisted by her husband, ANGELO TORRES; and
EMETERIA BARING, petitioners, vs. COURT OF APPEALS and
MANUEL TORRES, respondents.

On the other hand, respondent alleged that he used the loan to implement the
Agreement. With the said amount, he was able to effect the survey and the
subdivision of the lots. He secured the Lapu Lapu City Councils approval of the
subdivision project which he advertised in a local newspaper. He also caused the
construction of roads, curbs and gutters. Likewise, he entered into a contract with an
engineering firm for the building of sixty low-cost housing units and actually even set
up a model house on one of the subdivision lots. He did all of these for a total
expense of P85,000.

Respondent claimed that the subdivision project failed, however, because

petitioners and their relatives had separately caused the annotations of adverse
claims on the title to the land, which eventually scared away prospective buyers.
Despite his requests, petitioners refused to cause the clearing of the claims, thereby
forcing him to give up on the project.

Main Issue: Existence of a Partnership

Subsequently, petitioners filed a criminal case for estafa against respondent and
his wife, who were however acquitted. Thereafter, they filed the present civil case
which, upon respondent's motion, was later dismissed by the trial court in an Order
dated September 6, 1982. On appeal, however, the appellate court remanded the
case for further proceedings. Thereafter, the RTC issued its assailed Decision, which,
as earlier stated, was affirmed by the CA.

In the same breath, however, they assert that under those very same contracts,
respondent is liable for his failure to implement the project. Because the agreement
entitled them to receive 60 percent of the proceeds from the sale of the subdivision
lots, they pray that respondent pay them damages equivalent to 60 percent of the
value of the property.

Hence, this Petition.

Ruling of the Court of Appeals

In affirming the trial court, the Court of Appeals held that petitioners and
respondent had formed a partnership for the development of the subdivision. Thus,
they must bear the loss suffered by the partnership in the same proportion as their
share in the profits stipulated in the contract. Disagreeing with the trial courts
pronouncement that losses as well as profits in a joint venture should be distributed
equally, the CA invoked Article 1797 of the Civil Code which provides:
Article 1797 - The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and losses
shall be in proportion to what he may have contributed, but the industrial partner shall
not be liable for the losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If besides his services
he has contributed capital, he shall also receive a share in the profits in proportion to
his capital.
The Issue

Petitioners impute to the Court of Appeals the following error:

x x x [The] Court of Appeals erred in concluding that the transaction x x x
between the petitioners and respondent was that of a joint venture/partnership,
ignoring outright the provision of Article 1769, and other related provisions of the Civil
Code of the Philippines.
The Courts Ruling

Petitioners deny having formed a partnership with respondent. They contend

that the Joint Venture Agreement and the earlier Deed of Sale, both of which were the
bases of the appellate courts finding of a partnership, were void.

The pertinent portions of the Joint Venture Agreement read as follows:

KNOW ALL MEN BY THESE PRESENTS:
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th
day of March, 1969, by and between MR. MANUEL R. TORRES, x x x the FIRST
PARTY, likewise, MRS. ANTONIA B. TORRES, and MISS EMETERIA BARING, x x x
the SECOND PARTY:
W I T N E S S E T H:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this
property located at Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering
TCT No. T-0184 with a total area of 17,009 square meters, to be sub-divided by the
FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of:
TWENTY THOUSAND (P20,000.00) Pesos, Philippine Currency, upon the execution
of this contract for the property entrusted by the SECOND PARTY, for sub-division
projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and
promises herein contained the respective parties hereto do hereby stipulate and
agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale x x x dated
March 5, 1969, in the amount of TWENTY FIVE THOUSAND FIVE HUNDRED
THIRTEEN & FIFTY CTVS. (P25,513.50) Philippine Currency, for 1,700 square
meters at ONE [PESO] & FIFTY CTVS. (P1.50) Philippine Currency, in favor of the
FIRST PARTY, but the SECOND PARTY did not actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the
necessary amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency,
for their personal obligations and this particular amount will serve as an advance
payment from the FIRST PARTY for the property mentioned to be sub-divided and to
be deducted from the sales.

The Petition is bereft of merit.

THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the

interest and the principal amount involving the amount of TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency, until the sub-division project is terminated
and ready for sale to any interested parties, and the amount of TWENTY THOUSAND
(P20,000.00) pesos, Philippine currency, will be deducted accordingly.

contribution to the partnership. Under Article 1767 of the Civil Code, a partner may
contribute not only money or property, but also industry.

FOURTH: That all general expense[s] and all cost[s] involved in the sub-division
project should be paid by the FIRST PARTY, exclusively and all the expenses will not
be deducted from the sales after the development of the sub-division project.

Under Article 1315 of the Civil Code, contracts bind the parties not only to what
has been expressly stipulated, but also to all necessary consequences thereof, as
follows:

FIFTH: That the sales of the sub-divided lots will be divided into SIXTY
PERCENTUM 60% for the SECOND PARTY and FORTY PERCENTUM 40% for the
FIRST PARTY, and additional profits or whatever income deriving from the sales will
be divided equally according to the x x x percentage [agreed upon] by both parties.

ART. 1315. Contracts are perfected by mere consent, and from that moment the
parties are bound not only to the fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their nature, may be in keeping with
good faith, usage and law.

SIXTH: That the intended sub-division project of the property involved will start
the work and all improvements upon the adjacent lots will be negotiated in both
parties['] favor and all sales shall [be] decided by both parties.

It is undisputed that petitioners are educated and are thus presumed to have
understood the terms of the contract they voluntarily signed. If it was not in
consonance with their expectations, they should have objected to it and insisted on
the provisions they wanted.

SEVENTH: That the SECOND PARTIES, should be given an option to get back
the property mentioned provided the amount of TWENTY THOUSAND (P20,000.00)
Pesos, Philippine Currency, borrowed by the SECOND PARTY, will be paid in full to
the FIRST PARTY, including all necessary improvements spent by the FIRST PARTY,
and the FIRST PARTY will be given a grace period to turnover the property
mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who
executed same freely and voluntarily for the uses and purposes therein stated.
A reading of the terms embodied in the Agreement indubitably shows the
existence of a partnership pursuant to Article 1767 of the Civil Code, which provides:
ART. 1767. By the contract of partnership two or more persons bind themselves
to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Under the above-quoted Agreement, petitioners would contribute property to the
partnership in the form of land which was to be developed into a subdivision; while
respondent would give, in addition to his industry, the amount needed for general
expenses and other costs. Furthermore, the income from the said project would be
divided according to the stipulated percentage. Clearly, the contract manifested the
intention of the parties to form a partnership.
It should be stressed that the parties implemented the contract. Thus, petitioners
transferred the title to the land to facilitate its use in the name of the respondent. On
the other hand, respondent caused the subject land to be mortgaged, the proceeds of
which were used for the survey and the subdivision of the land. As noted earlier, he
developed the roads, the curbs and the gutters of the subdivision and entered into a
contract to construct low-cost housing units on the property.
Respondents actions clearly belie petitioners contention that he made no

Petitioners Bound by Terms of Contract

Courts are not authorized to extricate parties from the necessary consequences
of their acts, and the fact that the contractual stipulations may turn out to be
financially disadvantageous will not relieve parties thereto of their obligations. They
cannot now disavow the relationship formed from such agreement due to their
supposed misunderstanding of its terms.
Alleged Nullity of the Partnership Agreement

Petitioners argue that the Joint Venture Agreement is void under Article 1773 of
the Civil Code, which provides:
ART. 1773. A contract of partnership is void, whenever immovable property is
contributed thereto, if an inventory of said property is not made, signed by the parties,
and attached to the public instrument.
They contend that since the parties did not make, sign or attach to the public
instrument an inventory of the real property contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons.
Thus, the eminent Arturo M. Tolentino states that under the aforecited provision which
is a complement of Article 1771, the execution of a public instrument would be
useless if there is no inventory of the property contributed, because without its
designation and description, they cannot be subject to inscription in the Registry of
Property, and their contribution cannot prejudice third persons. This will result in fraud
to those who contract with the partnership in the belief [in] the efficacy of the guaranty
in which the immovables may consist. Thus, the contract is declared void by the law
when no such inventory is made. The case at bar does not involve third parties who
may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for
their claim that respondent should pay them 60 percent of the value of the property.

They cannot in one breath deny the contract and in another recognize it, depending
on what momentarily suits their purpose. Parties cannot adopt inconsistent positions
in regard to a contract and courts will not tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from
considering the Joint Venture Agreement an ordinary contract from which the parties
rights and obligations to each other may be inferred and enforced.

G.R. No. L-15568

November 8, 1919

W.
G.
PHILPOTTS,
petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY, respondents.
Lawrence
and
Ross
Crossfield and O'Brien for defendants.

Partnership Agreement Not the Result of an Earlier Illegal Contract

for

petitioner.

Petitioners also contend that the Joint Venture Agreement is void under Article
1422 of the Civil Code, because it is the direct result of an earlier illegal contract,
which was for the sale of the land without valid consideration.
STREET, J.:
This argument is puerile. The Joint Venture Agreement clearly states that the
consideration for the sale was the expectation of profits from the subdivision project.
Its first stipulation states that petitioners did not actually receive payment for the
parcel of land sold to respondent. Consideration, more properly denominated as
cause, can take different forms, such as the prestation or promise of a thing or
service by another.
In this case, the cause of the contract of sale consisted not in the stated peso
value of the land, but in the expectation of profits from the subdivision project, for
which the land was intended to be used. As explained by the trial court, the land was
in effect given to the partnership as [petitioners] participation therein. x x x There was
therefore a consideration for the sale, the [petitioners] acting in the expectation that,
should the venture come into fruition, they [would] get sixty percent of the net profits.

The petitioner, W. G. Philpotts, a stockholder in the Philippine Manufacturing

Company, one of the respondents herein, seeks by this proceeding to obtain a writ of
mandamus to compel the respondents to permit the plaintiff, in person or by some
authorized agent or attorney, to inspect and examine the records of the business
transacted by said company since January 1, 1918. The petition is filed originally in
this court under the authority of section 515 of the Code of Civil Procedure, which
gives to this tribunal concurrent jurisdiction with the Court of First Instance in cases,
among others, where any corporation or person unlawfully excludes the plaintiff from
the use and enjoyment of some right to which he is entitled. The respondents
interposed a demurrer, and the controversy is now before us for the determination of
the questions thus presented.

Liability of the Parties

Claiming that respondent was solely responsible for the failure of the subdivision
project, petitioners maintain that he should be made to pay damages equivalent to 60
percent of the value of the property, which was their share in the profits under the
Joint Venture Agreement.

The first point made has reference to a supposed defect of parties, and it is said that
the action can not be maintained jointly against the corporation and its secretary
without the addition of the allegation that the latter is the custodian of the business
records of the respondent company.

We are not persuaded. True, the Court of Appeals held that petitioners acts
were not the cause of the failure of the project. But it also ruled that neither was
respondent responsible therefor. In imputing the blame solely to him, petitioners failed
to give any reason why we should disregard the factual findings of the appellate court
relieving him of fault. Verily, factual issues cannot be resolved in a petition for review
under Rule 45, as in this case. Petitioners have not alleged, not to say shown, that
their Petition constitutes one of the exceptions to this doctrine. Accordingly, we find no
reversible error in the CA's ruling that petitioners are not entitled to damages.

By the plain language of sections 515 and 222 of our Code of Civil Procedure, the
right of action in such a proceeding as this is given against the corporation; and the
respondent corporation in this case was the only absolutely necessary party. In the
Ohio case of Cincinnati Volksblatt Co. vs. Hoffmister (61 Ohio St., 432; 48 L. R. A.,
735), only the corporation was named as defendant, while the complaint, in language
almost identical with that in the case at bar, alleged a demand upon and refusal by
the corporation.

Republic
SUPREME
Manila

Nevertheless the propriety of naming the secretary of the corporation as a

codefendant cannot be questioned, since such official is customarily charged with the
custody of all documents, correspondence, and records of a corporation, and he is
presumably the person against whom the personal orders of the court would be made
effective in case the relief sought should be granted. Certainly there is nothing in the
complaint to indicate that the secretary is an improper person to be joined. The

EN BANC

of

the

Philippines
COURT

petitioner might have named the president of the corporation as a respondent also;
and this official might be brought in later, even after judgment rendered, if necessary
to the effectuation of the order of the court.
Section 222 of our Code of Civil Procedure is taken from the California Code, and a
decision of the California Supreme Court Barber vs. Mulford (117 Cal., 356) is
quite clear upon the point that both the corporation and its officers may be joined as
defendants.
The real controversy which has brought these litigants into court is upon the question
argued in connection with the second ground of demurrer, namely, whether the right
which the law concedes to a stockholder to inspect the records can be exercised by a
proper agent or attorney of the stockholder as well as by the stockholder in person.
There is no pretense that the respondent corporation or any of its officials has refused
to allow the petitioner himself to examine anything relating to the affairs of the
company, and the petition prays for a peremptory order commanding the respondents
to place the records of all business transactions of the company, during a specified
period, at the disposal of the plaintiff or his duly authorized agent or attorney, it being
evident that the petitioner desires to exercise said right through an agent or attorney.
In the argument in support of the demurrer it is conceded by counsel for the
respondents that there is a right of examination in the stockholder granted under
section 51 of the Corporation Law, but it is insisted that this right must be exercised in
person.
The pertinent provision of our law is found in the second paragraph of section 51 of
Act No. 1459, which reads as follows: "The record of all business transactions of the
corporation and the minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."
This provision is to be read of course in connecting with the related provisions of
sections 51 and 52, defining the duty of the corporation in respect to the keeping of its
records.
Now it is our opinion, and we accordingly hold, that the right of inspection given to a
stockholder in the provision above quoted can be exercised either by himself or by
any proper representative or attorney in fact, and either with or without the attendance
of the stockholder. This is in conformity with the general rule that what a man may do
in person he may do through another; and we find nothing in the statute that would
justify us in qualifying the right in the manner suggested by the respondents.
This conclusion is supported by the undoubted weight of authority in the United
States, where it is generally held that the provisions of law conceding the right of
inspection to stockholders of corporations are to be liberally construed and that said
right may be exercised through any other properly authorized person. As was said in

Foster vs. White (86 Ala., 467), "The right may be regarded as personal, in the sense
that only a stockholder may enjoy it; but the inspection and examination may be made
by another. Otherwise it would be unavailing in many instances." An observation to
the same effect is contained in Martin vs. Bienville Oil Works Co. (28 La., 204), where
it is said: "The possession of the right in question would be futile if the possessor of it,
through lack of knowledge necessary to exercise it, were debarred the right of
procuring in his behalf the services of one who could exercise it." In Deadreck vs.
Wilson (8 Baxt. [Tenn.], 108), the court said: "That stockholders have the right to
inspect the books of the corporation, taking minutes from the same, at all reasonable
times, and may be aided in this by experts and counsel, so as to make the inspection
valuable to them, is a principle too well settled to need discussion." Authorities on this
point could be accumulated in great abundance, but as they may be found cited in
any legal encyclopedia or treaties devoted to the subject of corporations, it is
unnecessary here to refer to other cases announcing the same rule.
In order that the rule above stated may not be taken in too sweeping a sense, we
deem it advisable to say that there are some things which a corporation may
undoubtedly keep secret, notwithstanding the right of inspection given by law to the
stockholder; as for instance, where a corporation, engaged in the business of
manufacture, has acquired a formula or process, not generally known, which has
proved of utility to it in the manufacture of its products. It is not our intention to declare
that the authorities of the corporation, and more particularly the Board of Directors,
might not adopt measures for the protection of such process form publicity. There is,
however, nothing in the petition which would indicate that the petitioner in this case is
seeking to discover anything which the corporation is entitled to keep secret; and if
anything of the sort is involved in the case it may be brought out at a more advanced
stage of the proceedings.lawphil.net
The demurrer is overruled; and it is ordered that the writ of mandamus shall issue as
prayed, unless within 5 days from notification hereof the respondents answer to the
merits. So ordered.

Republic
SUPREME
Manila

of

the

Philippines
COURT

FIRST DIVISION
G.R. No. L-33320 May 30, 1983
RAMON
A.
GONZALES,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.

petitioner,

Ramon A. Gonzales in his own behalf.

Juan Diaz for respondent.

VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of
Manila a special civil action for mandamus against the herein respondent praying that
the latter be ordered to allow him to look into the books and records of the respondent
bank in order to satisfy himself as to the truth of the published reports that the

respondent has guaranteed the obligation of Southern Negros Development

Corporation in the purchase of a US$ 23 million sugar-mill to be financed by
Japanese suppliers and financiers; that the respondent is financing the construction
of the P 21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the
construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to
inquire into the validity of Id transactions. The petitioner has alleged hat his written
request for such examination was denied by the respondent. The trial court having
dismissed the petition for mandamus, the instant appeal to review the said dismissal
was filed.
The facts that gave rise to the subject controversy have been set forth by the trial
court in the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of
the parties served as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several
cases in this Court questioning different transactions entered into
by the Bark with other parties. First among them is Civil Case No.
69345 filed on April 27, 1967, by petitioner as a taxpayer versus
Sec. Antonio Raquiza of Public Works and Communications, the
Commissioner of Public Highways, the Bank, Continental Ore Phil.,
Inc., Continental Ore, Huber Corporation, Allis Chalmers and
General Motors Corporation In the course of the hearing of said
case on August 3, 1967, the personality of herein petitioner to sue
the bank and question the letters of credit it has extended for the
importation by the Republic of the Philippines of public works
equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made
known his intention to acquire one share of stock from
Congressman Justiniano Montano which, on the following day,
August 30, 1967, was transferred in his name in the books of the
Bank.
Subsequent to his aforementioned acquisition of one share of stock
of the Bank, petitioner, in his dual capacity as a taxpayer and
stockholder, filed the following cases involving the bank or the
members of its Board of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of
Directors of the Bank; the National Investment and Development
Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;

2. On May 11, 1968, Civil Case No. 72936 versus Roberto

Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar
Central, Inc., Calinog-Lambunao Sugar Mill Integrated Farming,
Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo
Montelibano and the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the
President of the Bank (Annex A, Pet.), requesting submission to
look into the records of its transactions covering the purchase of a
sugar central by the Southern Negros Development Corp. to be
financed by Japanese suppliers and financiers; its financing of the
Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the
construction of the Passi Sugar Mills in Iloilo. On January 23, 1969,
the Asst. Vice-President and Legal Counsel of the Bank answered
petitioner's letter denying his request for being not germane to his
interest as a one-share stockholder and for the cloud of doubt as to
his real intention and purpose in acquiring said share. (Annex B,
Pet.) In view of the Bank's refusal the petitioner instituted this
action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its
brief which he characterized as having been "correctly stated." (Petitioner-Appellant"s
Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be allowed to examine and
inspect the books and records of the respondent bank regarding the transactions
mentioned on the grounds that the right of a stockholder to inspect the record of the
business transactions of a corporation granted under Section 51 of the former
Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to
purposes reasonably related to the interest of the stockholder, must be asked for in
good faith for a specific and honest purpose and not gratify curiosity or for speculative
or vicious purposes; that such examination would violate the confidentiality of the
records of the respondent bank as provided in Section 16 of its charter, Republic Act
No. 1300, as amended; and that the petitioner has not exhausted his administrative
remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single
error to the lower court of having ruled that his alleged improper motive in asking for
an examination of the books and records of the respondent bank disqualifies him to
exercise the right of a stockholder to such inspection under Section 51 of Act No.
1459, as amended. Said provision reads in part as follows:

Sec. 51. ... The record of all business transactions of the

corporation and the minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation
at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the qualification
made by the lower court that the inspection of corporate records may be denied on
the ground that it is intended for an improper motive or purpose, the law having
granted such right to a stockholder in clear and unconditional terms. He further
argues that, assuming that a proper motive or purpose for the desired examination is
necessary for its exercise, there is nothing improper in his purpose for asking for the
examination and inspection herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as
amended, regarding the right of a stockholder to inspect and examine the books and
records of a corporation. The former Corporation Law (Act No. 1459, as amended)
has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation
Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has
been retained, but with some modifications. The second and third paragraphs of
Section 74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and the
minutes of any meeting shag be open to inspection by 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.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such
director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable
under Section 144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board of directors or
trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal;
and Provided, further, That it shall be a defense to any action under
this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation,

or was not acting in good faith or for a legitimate purpose in making

his demand.
As may be noted from the above-quoted provisions, among the changes introduced in
the new Code with respect to the right of inspection granted to a stockholder are the
following the records must be kept at the principal office of the corporation; the
inspection must be made on business days; the stockholder may demand a copy of
the excerpts of the records or minutes; and the refusal to allow such inspection shall
subject the erring officer or agent of the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the new Code has
prescribed limitations to the same. It is now expressly required as a condition for such
examination that the one requesting it must not have been guilty of using improperly
any information through a prior examination, and that the person asking for such
examination must be "acting in good faith and for a legitimate purpose in making his
demand."
The unqualified provision on the right of inspection previously contained in Section
51, Act No. 1459, as amended, no longer holds true under the provisions of the
present law. The argument of the petitioner that the right granted to him under Section
51 of the former Corporation Law should not be dependent on the propriety of his
motive or purpose in asking for the inspection of the books of the respondent bank
loses whatever validity it might have had before the amendment of the law. If there is
any doubt in the correctness of the ruling of the trial court that the right of inspection
granted under Section 51 of the old Corporation Law must be dependent on a
showing of proper motive on the part of the stockholder demanding the same, it is
now dissipated by the clear language of the pertinent provision contained in Section
74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons and
the purposes for which he desires such inspection, except to satisfy himself as to the
truth of published reports regarding certain transactions entered into by the
respondent bank and to inquire into their validity. The circumstances under which he
acquired one share of stock in the respondent bank purposely to exercise the right of
inspection do not argue in favor of his good faith and proper motivation. Admittedly he
sought to be a stockholder in order to pry into transactions entered into by the
respondent bank even before he became a stockholder. His obvious purpose was to
arm himself with materials which he can use against the respondent bank for acts
done by the latter when the petitioner was a total stranger to the same. He could have
been impelled by a laudable sense of civic consciousness, but it could not be said
that his purpose is germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank that the inspection sought
to be exercised by the petitioner would be violative of the provisions of its charter.

(Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter
provide respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination
of the Central Bank. The National Bank shall be subject to
inspection by the Department of Supervision and Examination of
the Central Bank'
Sec. 16. Confidential information. The Superintendent of Banks
and the Auditor General, or other officers designated by law to
inspect or investigate the condition of the National Bank, shall not
reveal to any person other than the President of the Philippines, the
Secretary of Finance, and the Board of Directors the details of the
inspection or investigation, nor shall they give any information
relative to the funds in its custody, its current accounts or deposits
belonging to private individuals, corporations, or any other entity,
except by order of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act. Any
director, officer, employee, or agent of the Bank, who violates or
permits the violation of any of the provisions of this Act, or any
person aiding or abetting the violations of any of the provisions of
this Act, shall be punished by a fine not to exceed ten thousand
pesos or by imprisonment of not more than five years, or both such
fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter of its
own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section
4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters.
Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating
them or applicable to them. supplemented by the provisions of this
Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code
with respect to the right of a stockholder to demand an inspection or examination of
the books of the corporation may not be reconciled with the abovequoted provisions
of the charter of the respondent bank. It is not correct to claim, therefore, that the right
of inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.

GALLEON totaling US$3,317,747.32.[2] At that time, GALLEON, a domestic

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

To finance the acquisition of the vessels, GALLEON obtained loans from

Japanese lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd. and Marubeni
Benelux. On October 10, 1979, GALLEON, through Cuenca, and DBP executed a
Deed of Undertaking[3] whereby DBP guaranteed the prompt and punctual payment of
GALLEONs borrowings from the Japanese lenders. To secure DBPs guarantee under
the Deed of Undertaking, GALLEON promised, among others, to secure a first
mortgage on the five new vessels and on the second-hand vessels. Thus, GALLEON
executed on January 25, 1982 a mortgage contract over five of its vessels namely,
M/V Galleon Honor, M/V Galleon Integrity, M/V Galleon Dignity, M/V Galleon Pride,
and M/V Galleon Trust in favor of DBP.[4]
Meanwhile, on January 21, 1981, President Ferdinand Marcos issued Letter of
Instruction (LOI) No. 1155, directing NDC to acquire the entire shareholdings of
GALLEON for the amount originally contributed by its shareholders payable in five (5)
years without interest cost to the government. In the same LOI, DBP was to advance
to GALLEON within three years from its effectivity the principal amount and the
interest thereon of GALLEONs maturing obligations.
On August 10, 1981, GALLEON, represented by its president, Cuenca, and
NDC, represented by Minister of Trade Roberto Ongpin, forged a Memorandum of
Agreement,[5] whereby NDC and GALLEON agreed to execute a share purchase
agreement within sixty days for the transfer of GALLEONs shareholdings. Thereafter,
NDC assumed the management and operations of GALLEON although Cuenca
remained president until May 9, 1982. [6] Using its own funds, NDC paid Asian
Hardwood on January 15, 1982 the amount of US$1,000,000.00 as partial settlement
of GALLEONs obligations.[7]
On February 10, 1982, LOI No. 1195 was issued directing the foreclosure of the
mortgage on the five vessels. For failure of GALLEON to pay its debt despite
repeated demands from DBP, the vessels were extrajudicially foreclosed on various
dates and acquired by DBP for the total amount of P539,000,000.00. DBP
subsequently sold the vessels to NDC for the same amount.[8]
On April 22, 1982, the Board of Directors of GALLEON amended the Articles of
Incorporation changing the corporate name from Galleon Shipping Corporation to
National Galleon Shipping Corporation and increasing the number of directors from
seven to nine.[9]
Asian Hardwood assigned its rights over the outstanding obligation of
GALLEON of US$2,315,747.32 to World Universal Trading and Investment Company,
S.A. (World Universal), embodied in a Deed of Assignment executed on April 29,
1989.[10] World Universal, in turn, assigned the credit to petitioner POLIAND sometime
in July 1989.[11]

On March 24, 1988, then President Aquino issued Administrative Order No. 64,
directing NDC and Philippine Export and Foreign Loan Guarantee Corporation (now
Trade and Investment Development Corporation of the Philippines) to transfer some
of their assets to the National Government, through the Asset Privatization Trust
(APT) for disposition. Among those transferred to the APT were the five GALLEON
vessels sold at the foreclosure proceedings.
On September 24, 1991, POLIAND made written demands on GALLEON, NDC,
and DBP for the satisfaction of the outstanding balance in the amount of
US$2,315,747.32.[12] For failure to heed the demand, POLIAND instituted a collection
suit against NDC, DBP and GALLEON filed on October 10, 1991 with the Regional
Trial Court, Branch 61, Makati City. POLIAND claimed that under LOI No. 1155 and
the Memorandum of Agreement between GALLEON and NDC, defendants
GALLEON, NDC, and DBP were solidarily liable to POLIAND as assignee of the
rights of the credit advances/loan accommodations to GALLEON. POLIAND also
claimed that it had a preferred maritime lien over the proceeds of the extrajudicial
foreclosure sale of GALLEONs vessels mortgaged by NDC to DBP. The complaint
prayed for judgment ordering NDC, DBP, and GALLEON to pay POLIAND jointly and
severally the balance of the credit advances/loan accommodations in the amount of
US$2,315,747.32 and attorneys fees of P100,000.00 plus 20% of the amount
recovered. By way of an alternative cause of action, POLIAND sought reimbursement
from NDC and DBP for the preferred maritime lien of US$1,193,298.56.[13]
In its Answer with Compulsory Counterclaim and Cross-claim, DBP denied
being a party to any of the alleged loan transactions. Accordingly, DBP argued that
POLIANDs complaint stated no cause of action against DBP or was barred by the
Statute of Frauds because DBP did not sign any memorandum to act as guarantor for
the alleged credit advances/loan accommodations in favor of POLIAND. DBP also
denied any liability under LOI No. 1155, which it described as immoral and
unconstitutional, since it was rescinded by LOI No. 1195. By way of its Affirmative
Allegations and Defenses, DBP countered that it was unaware of the maritime lien on
the five vessels mortgaged in its favor and that as far as GALLEONs foreign
borrowings are concerned, DBP agreed to act as guarantor thereof only under the
conditions laid down under the Deed of Undertaking. DBP prayed for the award of
actual, moral and exemplary damages and attorneys fees against POLIAND as
compulsory counterclaim. In the event that it be adjudged liable for the payment of the
loan accommodations and the maritime liens, DBP prayed that its co-defendant
GALLEON be ordered to indemnify DBP for the full amount.[14]
For its part, NDC denied any participation in the execution of the loan
accommodations/credit advances and acquisition of ownership of GALLEON,
asserting that it acted only as manager of GALLEON. NDC specifically denied having
agreed to the assumption of GALLEONs liabilities because no purchase and sale
agreement was executed and the delivery of the required shares of stock of
GALLEON did not take place.[15]
Upon motion by POLIAND, the trial court dropped GALLEON as a defendant,
despite vigorous oppositions from NDC and DBP. At the pre-trial conference on April
29, 1993, the trial court issued an Order limiting the issues to the following: (1)
whether or not GALLEON has an outstanding obligation in the amount of
US$2,315,747.32; (2) whether or not NDC and DBP may be held solidarily liable

therefor; and (3) whether or not there exists a preferred maritime lien of
P1,000,000.00 in favor of POLIAND.[16]
After trial on the merits, the court a quo rendered a decision on August 9, 1996
in favor of POLIAND. Finding that GALLEONs loan advances/credit accommodations
were duly established by the evidence on record, the trial court concluded that under
LOI No. 1155, DBP and NDC are liable for those obligations. The trial court also found
NDC liable for GALLEONs obligations based on the Memorandum of Agreement
dated August 1981 executed between GALLEON and NDC, where it was provided
that NDC shall prioritize repayments of GALLEONs valid and subsisting liabilities
subject of a meritorious lawsuit or which have been arranged and guaranteed by
Cuenca. The trial court was of the opinion that despite the subsequent issuance of
LOI No. 1195, NDC and DBPs obligation under LOI No. 1155 subsisted because
vested rights of the parties have arisen therefrom. Accordingly, the trial court
interpreted LOI No. 1195s directive to limit and protect to mean that DBP and NDC
should not assume or incur additional exposure with respect to GALLEON.[17]
The trial court dismissed NDCs argument that the Memorandum of Agreement
was merely a preliminary agreement, noting that under paragraph nine thereof, the
only condition for the payment of GALLEONs subsisting loans by NDC was the
determination by the latter that those obligations were incurred in the ordinary course
of GALLEONs business. The trial court did not regard the non-execution of the stock
purchase agreement as fatal to POLIANDs cause since its non-happening was solely
attributable to NDC. The trial court also ruled that POLIAND had preference to the
maritime lien over the proceeds of the extrajudicial foreclosure sale of GALLEONs
vessels since the loan advances/credit accommodations utilized for the payment of
expenses on the vessels were obtained prior to the constitution of the mortgage in
favor of DBP.
In sum, NDC and DBP were ordered to pay POLIAND as follows:
WHEREFORE, premises above considered, judgment is hereby
rendered for plaintiff as against defendants DBP and NDC, who are hereby
ORDERED as follows:
1. To jointly and severally PAY plaintiff POLIAND the amount of TWO
MILLION THREE HUNDRED FIFTEEN THOUSAND SEVEN HUNDRED
FORTY SEVEN AND 21/100 [sic] United States Dollars (US$2,315,747.32)
computed at the official exchange rate at the time of payment, plus interest
at the rate of 12% per annum from 25 September 1991 until fully paid;
2. To PAY the amount of ONE MILLION (P1,000,000.) Pesos,
Philippine Currency, for and as attorneys fees; and
3. To PAY the costs of the proceedings.
SO ORDERED.[18]
Both NDC and DBP appealed the trial courts decision.

The Court of Appeals rendered a modified judgment, absolving DBP of any

liability in view of POLIANDs failure to clearly prove its action against DBP. The
appellate court also discharged NDC of any liability arising from the credit
advances/loan obligations obtained by GALLEON on the ground that NDC did not
acquire ownership of GALLEON but merely assumed control over its management
and operations. However, NDC was held liable to POLIAND for the payment of the
preferred maritime lien based on LOI No. 1195 which directed NDC to discharge such
maritime liens as may be necessary to allow the foreclosed vessels to engage on the
international shipping business, as well as attorneys fees and costs of suit. The
dispositive portion of the Decision reads:

B.
RESPONDENT COURT OF APPEALS, IN VIOLATION OF THE
CONSTITUTION AND THE RULES OF COURT, DISMISSED THE CASE
AGAINST RESPONDENT DBP WITHOUT STATING CLEARLY AND
DISTINCTLY THE REASONS FOR SUCH A DISMISSAL.
C.
CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF
APPEALS, PETITIONER POLIAND WAS ABLE TO ESTABLISH THAT
RESPONDENT DBP IS SOLIDARILY LIABLE, TOGETHER WITH
RESPONDENT NDC, WITH RESPECT TO THE NET TOTAL AMOUNT
OWING TO PETITIONER POLIAND.

WHEREFORE, the assailed decision is MODIFIED, in accordance

with the foregoing findings, as follows:
The case against defendant-appellant DBP is hereby DISMISSED.
Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee
POLIAND the amount of US$1,920,298.56 plus legal interest effective
September 12, 1984.

D.
RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN NOT
FINDING THAT RESPONDENT DBP IS JOINTLY AND SOLIDARILY
LIABLE WITH RESPONDENT NDC FOR THE PAYMENT OF MARITIME
LIENS PLUS INTEREST PURSUANT TO SECTION 17 OF
PRESIDENTIAL DECREEE 1521.[20]

The award of attorneys fees and cost of suit is addressed only

against NDC.
Costs against defendant-appellant NDC.

On August 25, 2000, NDC filed its petition, docketed as G.R. No. 143877,
imputing the following errors to the Court of Appeals:

SO ORDERED.[19]
I.
Not satisfied with the modified judgment, both POLIAND and NDC elevated it to
this Court via two separate petitions for review on certiorari. In G.R. No. 143866 filed
on August 21, 2000, petitioner POLIAND raises the following arguments:

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER

NDC IS LIABLE TO PAY GALLEONS OUTSTANDING OBLIGATION TO
RESPONDENT POLIAND IN THE AMOUNT OF US$ 1,920,298.56, TO
SATISFY THE PREFERRED MARITIME LIENS OVER THE PROCEEDS
OF THE FORECLOSURE SALE OF THE FIVE GALLEON VESSELS.

RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND

REVERSIBLE ERRORS IN ITS QUESTIONED DECISION DATED 29
JUNE 2000 AND DECIDED QUESTIONS CONTRARY TO LAW AND THE
APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
MODIFIED THE DECISION DATED 09 AUGUST 1996 RENDERED BY
THE REGIONAL TRIAL COURT (BRANCH 61) CONSIDERING THAT:

(A) PRESIDENTIAL DECREE NO. 1521 OTHERWISE

KNOWN AS THE SHIP MORTGAGE DECREE OF 1978 IS
NOT APPLICABLE IN THE CASE AT BAR.

A.
CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF
APPEALS, RESPONDENT NDC NOT ONLY TOOK OVER TOTALLY THE
MANAGEMENT AND CONTROL OF GALLEON BUT ALSO ASSUMED
OWNERSHIP OF GALLEON PURSUANT TO LOI NO. 1155 AND THE
MEMORANDUM OF AGREEMENT DATED 10 AUGUST 1981; THUS,
RESPONDENT NDCS ACQUISITION OF FULL OWNERSHIP AND
CONTROL OF GALLEON CARRIED WITH IT THE ASSUMPTION OF
THE LATTERS LIABILITIES TO THIRD PARTIES SUCH AS ASIAN
HARDWOOD, PETITIONER POLIANDS PREDECESSOR-IN-INTEREST.

(B) PETITIONER NDC DOES NOT HOLD THE

PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE (5)
GALLEON VESSELS.
(C) THE FORECLOSURE SALE OF THE FIVE (5)
GALLEON VESSELS EXTINGUISHES ALL CLAIMS AGAINST
THE VESSELS.
II.
THE COURT OF APPEALS ERRED IN AWARDING ATTORNEYS FEES
TO RESPONDENT POLIAND.[21]

The two petitions were consolidated considering that both petitions assail the
same Court of Appeals Decision, although on different fronts. In G.R. No. 143866,
POLIAND questions the appellate courts finding that neither NDC nor DBP can be
held liable for the loan accommodations to GALLEON. In G.R. No. 143877, NDC
asserts that it is not liable to POLIAND for the preferred maritime lien.
ISSUES
The bone of contention revolves around two main issues, namely: (1) Whether
NDC or DBP or both are liable to POLIAND on the loan accommodations and credit
advances incurred by GALLEON, and (2) Whether POLIAND has a maritime lien
enforceable against NDC or DBP or both.
RULING of the COURT
I. Liability on loan accommodations
and credit advances incurred by GALLEON
The Court of Appeals reversed the trial courts conclusion that NDC and DBP are
both liable to POLIAND for GALLEONs debts on the basis of LOI No. 1155 and the
Memorandum of Agreement. It ratiocinated thus:
With respect to appellant NDC, resolution of the matters raised in its
assignment of errors hinges on whether or not it acquired the
shareholdings of GALLEON as directed by LOI 1155; and if in the
negative, whether or not it is liable to pay GALLEONs outstanding
obligation.
The Court answers the issue in the negative. The MOA executed by
GALLEON and NDC following the issuance of LOI 1155 called for the
execution of a formal share purchase agreement and the transfer of all the
shareholdings of seller to Buyer. Since no such execution and consequent
transfer of shareholdings took place, NDC did not acquire ownership of
GALLEON. It merely assumed actual control over the management and
operations of GALLEON in the exercise of which it, on January 15, 1982,
after being satisfied of the existence of GALLEONs obligation to ASIAN
HARDWOOD, partially paid the latter One Million ($1,000,000.00) US
dollars.[22]
....
With respect to defendant-appellant DBP, POLIAND failed to clearly
prove its cause of action against it. This leaves it unnecessary to dwell on
DBPs other assigned errors, including that bearing on its claim for
damages and attorneys fees which does not persuade.[23]
POLIANDs cause of action against NDC is premised on the theory that when
NDC acquired all the shareholdings of GALLEON, the former also assumed the
latters liabilities, including the loan advances/credit accommodations obtained by

GALLEON from POLIANDs predecessors-in-interest. In G.R. No. 143866, POLIAND

argues that NDC acquired ownership of GALLEON pursuant to paragraphs 1 and 2 of
LOI No. 1155, which was implemented through the execution of the Memorandum of
Agreement. It believes that no conditions were required prior to the assumption by
NDC of GALLEONs ownership and subsisting loans. Even assuming that conditions
were set, POLIAND opines that the conditions were deemed fulfilled pursuant to
Article 1186 of the Civil Code because of NDCs apparent intent to prevent the
execution of the share purchase agreement.[24]
On the other hand, NDC asserts that it could not have acquired GALLEONs
equity and, consequently, its liabilities because LOI No. 1155 had been rescinded by
LOI No. 1195, and therefore, became inoperative and non-existent. Moreover, NDC,
relying on the pronouncements in Philippine Association of Service Exporters, Inc. et
al. v. Ruben D. Torres[25] and Parong, et al. v. Minister Enrile,[26] is of the opinion that
LOI No. 1155 does not have the force and effect of law and cannot be a valid source
of obligation.[27] NDC denies POLIANDs contention that it deliberately prevented the
execution of the share purchase agreement considering that Cuenca remained
GALLEONs president seven months after the signing of the Memorandum of
Agreement.[28] NDC contends that the Memorandum of Agreement was a mere
preliminary agreement between Cuenca and Ongpin for the intended purchase of
GALLEONs equity, prescribing the manner, terms and conditions of said purchase.[29]
NDC, not liable under LOI No. 1155
As a general rule, letters of instructions are simply directives of the President of
the Philippines, issued in the exercise of his administrative power of control, to heads
of departments and/or officers under the executive branch of the government for
observance by the officials and/or employees thereof.[30] Being administrative in
nature, they do not have the force and effect of a law and, thus, cannot be a valid
source of obligation. However, during the period when then President Marcos
exercised extraordinary legislative powers, he issued certain decrees, orders and
letters of instruction which the Court has declared as having the force and effect of a
statute. As pointed out by the Court in Legaspi v. Minister of Finance,[31] paramount
considerations compelled the grant of extraordinary legislative power to the President
at that time when the nation was beset with threats to public order and the purpose
for which the authority was granted was specific to meet the exigencies of that period,
thus:
True, without loss of time, President Marcos made it clear that there
was no military take-over of the government, and that much less was there
being established a revolutionary government, even as he declared that
said martial law was of a double-barrelled type, unfamiliar to traditional
constitutionalists and political scientistsfor two basic and transcendental
objectives were intended by it: (1) the quelling of nation-wide subversive
activities characteristic not only of a rebellion but of a state of war fanned
by a foreign power of a different ideology from ours, and not excluding the
stopping effectively of a brewing, if not a strong separatist movement in
Mindanao, and (2) the establishment of a New Society by the institution of
disciplinary measures designed to eradicate the deep-rooted causes of the
rebellion and elevate the standards of living, education and culture of our
people, and most of all the social amelioration of the poor and

underprivileged in the farms and in the barrios, to the end that hopefully
insurgency may not rear its head in this country again.[32]
Thus, before a letter of instruction is declared as having the force and effect of a
statute, a determination of whether or not it was issued in response to the objectives
stated in Legaspi is necessary. Parong, et al. v. Minister Enrile[33] differentiated
between LOIs in the nature of mere administrative issuances and those forming part
of the law of the land. The following conditions must be established before a letter of
instruction may be considered a law:
To form part of the law of the land, the decree, order or LOI must be
issued by the President in the exercise of his extraordinary power of
legislation as contemplated in Section 6 of the 1976 amendments to the
Constitution, whenever in his judgment, there exists a grave emergency or
threat or imminence thereof, or whenever the interim Batasan Pambansa
or the regular National Assembly fails or is unable to act adequately on any
matter for any reason that in his judgment requires immediate action.[34]
Only when issued under any of the two circumstances will a decree, order, or
letter be qualified as having the force and effect of law. The decree or instruction
should have been issued either when there existed a grave emergency or threat or
imminence or when the Legislature failed or was unable to act adequately on the
matter. The qualification that there exists a grave emergency or threat or imminence
thereof must be interpreted to refer to the prevailing peace and order conditions
because the particular purpose the President was authorized to assume legislative
powers was to address the deteriorating peace and order situation during the martial
law period.
There is no doubt that LOI No. 1155 was issued on July 21, 1981 when then
President Marcos was vested with extraordinary legislative powers. LOI No. 1155 was
specifically directed to DBP, NDC and the Maritime Industry Authority to undertake the
following tasks:
LETTER OF INSTRUCTIONS NO. 1155
DEVELOPMENT BANK OF THE PHILIPPINES
NATIONAL DEVELOPMENT COMPANY
MARITIME INDUSTRY AUTHORITY
DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING
CORPORATION
....
1. NDC shall acquire 100% of the shareholdings of Galleon Shipping
Corporation from its present owners for the amount of P46.7 million which
is the amount originally contributed by the present shareholders, payable
after five years with no interest cost.

2. NDC to immediately infuse P30 million into Galleon Shipping

Corporation in lieu of is previously approved subscription to Philippine
National Lines. In addition, NDC is to provide additional equity to Galleon
as may be required.
3. DBP to advance for a period of three years from date hereof both
the principal and the interest on Galleon's obligations falling due and to
convert such advances into 12% preferred shares in Galleon Shipping
Corporation.
4. DBP and NDC to negotiate a restructuring of loans extended by
foreign creditors of Galleon.
5. MARINA to provide assistance to Galleon by mandating a rational
liner shipping schedule considering existing freight volumes and to
immediately negotiate a bilateral agreement with the United States in
accordance with UNCTAD resolutions.
....
Although LOI No. 1155 was undoubtedly issued at the time when the President
exercised legislative powers granted under Amendment No. 6 of the 1973
Constitution, the language and purpose of LOI No. 1155 precludes this Court from
declaring that said LOI had the force and effect of law in the absence of any of the
conditions set out in Parong. The subject matter of LOI No. 1155 is not connected,
directly or remotely, to a grave emergency or threat to the peace and order situation
of the nation in particular or to the public interest in general. Nothing in the language
of LOI No. 1155 suggests that it was issued to address the security of the nation.
Obviously, LOI No. 1155 was in the nature of a mere administrative issuance directed
to NDC, DBP and MARINA to undertake a policy measure, that is, to rehabilitate a
private corporation.
NDC, not liable under the Corporation Code
The Court cannot accept POLIANDs theory that with the effectivity of LOI No.
1155, NDC ipso facto acquired the interests in GALLEON without disregarding
applicable statutory requirements governing the acquisition of a corporation.
Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are
dissolved and all their rights, properties and liabilities are acquired by the surviving
corporation.[35] The merger, however, does not become effective upon the mere
agreement of the constituent corporations.[36]
As specifically provided under Section 79[37] of said Code, the merger shall only
be effective upon the issuance of a certificate of merger by the Securities and
Exchange Commission (SEC), subject to its prior determination that the merger is not
inconsistent with the Code or existing laws. Where a party to the merger is a special
corporation governed by its own charter, the Code particularly mandates that a
favorable recommendation of the appropriate government agency should first be
obtained. The issuance of the certificate of merger is crucial because not only does it

bear out SECs approval but also marks the moment whereupon the consequences of
a merger take place. By operation of law, upon the effectivity of the merger, the
absorbed corporation ceases to exist but its rights, and properties as well as liabilities
shall be taken and deemed transferred to and vested in the surviving corporation.[38]
The records do not show SEC approval of the merger. POLIAND cannot assert
that no conditions were required prior to the assumption by NDC of ownership of
GALLEON and its subsisting loans. Compliance with the statutory requirements is a
condition precedent to the effective transfer of the shareholdings in GALLEON to
NDC. In directing NDC to acquire the shareholdings in GALLEON, the President
could not have intended that the parties disregard the requirements of law. In the
absence of SEC approval, there was no effective transfer of the shareholdings in
GALLEON to NDC. Hence, NDC did not acquire the rights or interests of GALLEON,
including its liabilities.
DBP, not liable under LOI No. 1155
POLIAND argues that paragraph 3 of LOI No. 1155 unequivocally obliged DBP
to advance the obligations of GALLEON.[39] DBP argues that POLIAND has no cause
of action against it under LOI No. 1155 which is void and unconstitutional.[40]
The Court affirms the appellate courts ruling that POLIAND does not have any
cause of action against DBP under LOI No. 1155. Being a mere administrative
issuance, LOI No. 1155 cannot be a valid source of obligation because it did not
create any privity of contract between DBP and POLIAND or its predecessors-ininterest. At best, the directive in LOI No. 1155 was in the nature of a grant of authority
by the President on DBP to enter into certain transactions for the satisfaction of
GALLEONs obligations. There is, however, nothing from the records of the case to
indicate that DBP had acted as surety or guarantor, or had otherwise accommodated
GALLEONs obligations to POLIAND or its predecessors-in-interest.
II. Liability on maritime lien
On the second issue of whether or not NDC is liable to POLIAND for the
payment of maritime lien, the appellate court ruled in the affirmative, to wit:
Non-acquisition of ownership of GALLEON notwithstanding, NDC is
liable to pay ASIAN HARDWOODs successor-in-interest POLIAND the
equivalent of US$1,930,298.56 representing the proceeds of the loan from
Asian Hardwood which were spent by GALLEON for ship modification and
salaries of crew, to satisfy the preferred maritime liens over the proceeds
of the foreclosure sale of the 5 vessels.[41]
POLIAND contends that NDC can no longer raise the issue on the latters liability
for the payment of the maritime lien considering that upon appeal to the Court of
Appeals, NDC did not assign it as an error.[42] Generally, an appellate court may only
pass upon errors assigned. However, this rule is not without exceptions. In the
following instances, the Court ruled that an appellate court is accorded a broad
discretionary power to waive the lack of assignment of errors and consider errors not
assigned:

(a) Grounds not assigned as errors but affecting the jurisdiction of the court
over the subject matter;
(b) Matters not assigned as errors on appeal but are evidently plain or
clerical errors within contemplation of law;
(c) Matters not assigned as errors on appeal but consideration of which is
necessary in arriving at a just decision and complete resolution of
the case or to serve the interests of a justice or to avoid dispensing
piecemeal justice;
(d) Matters not specifically assigned as errors on appeal but raised in the
trial court and are matters of record having some bearing on the
issue submitted which the parties failed to raise or which the lower
court ignored;
(e) Matters not assigned as errors on appeal but closely related to an error
assigned;
(f) Matters not assigned as errors on appeal but upon which the
determination of a question properly assigned, is dependent.[43]
It is noteworthy that the question of NDC and DBPs liability on the maritime lien
had been raised by POLIAND as an alternative cause of action against NDC and
DBP and was passed upon by the trial court. The Court of Appeals, however,
reversed the trial courts finding that NDC and DBP are liable to POLIAND for the
payment of the credit advances and loan accommodations and instead found NDC to
be solely liable on the preferred maritime lien although NDC did not assign it as an
error.
The records, however, reveal that the issue on the liability on the preferred
maritime lien had been properly raised and argued upon before the Court of Appeals
not by NDC but by DBP who was also adjudged liable thereon by the trial court. DBPs
appellants brief[44] pointed out POLIANDs failure to present convincing evidence to
prove its alternative cause of action, which POLIAND disputed in its appellees brief. [45]
The issue on the maritime lien is a matter of record having been adequately ventilated
before and passed upon by the trial court and the appellate court. Thus, by way of
exception, NDC is not precluded from again raising the issue before this Court even if
it did not specifically assign the matter as an error before the Court of Appeals.
Besides, this Court is clothed with ample authority to review matters, even if they are
not assigned as errors in the appeal if it finds that their consideration is necessary in
arriving at a just decision of the case.[46]
Articles 578 and 580 of the Code
of Commerce, not applicable
NDC cites Articles 578[47] and 580[48] of the Code of Commerce to bolster its
argument that the foreclosure of the vessels extinguished all claims against the
vessels including POLIANDs claim.[49] Article 578 of the Code of Commerce is not

relevant to the facts of the instant case because it governs the sale of vessels in a
foreign port. Said provision outlines the formal and registration requirements in order
that a sale of a vessel on voyage or in a foreign port becomes effective as against
third persons. On the other hand, the resolution of the instant case depends on the
determination as to which creditor is entitled to the proceeds of the foreclosure sale of
the vessels. Clearly, Article 578 of the Code of Commerce is inapplicable.
Article 580, while providing for the order of payment of creditors in the event of
sale of a vessel, had been repealed by the pertinent provisions of Presidential Decree
(P.D.) No. 1521, otherwise known as the Ship Mortgage Decree of 1978. In particular,
Article 580 provides that in case of the judicial sale of a vessel for the payment of
creditors, the debts shall be satisfied in the order specified therein. On the other hand,
Section 17 of P.D. No. 1521 [50] also provides that in the judicial or extrajudicial sale of
a vessel for the enforcement of a preferred mortgage lien constituted in accordance
with Section 2 of P.D. No. 1521, such preferred mortgage lien shall have priority over
all pre-existing claims against the vessel, save for those claims enumerated under
Section 17, which have preference over the preferred mortgage lien in the order
stated therein. Since P.D. No. 1521 is a subsequent legislation and since said law in
Section 17 thereof confers on the preferred mortgage lien on the vessel superiority
over all other claims, thereby engendering an irreconcilable conflict with the order of
preference provided under Article 580 of the Code of Commerce, it follows that the
Code of Commerce provision is deemed repealed by the provision of P.D. No. 1521,
as the posterior law.[51]
P.D. No. 1521 is applicable, not the
Civil Code provisions on
concurrence/preference of
credits
Whether or not the order of preference under Section 17, P.D. No. 1521 may be
properly applied in the instant case depends on the classification of the mortgage on
the GALLEON vessels, that is, if it falls within the ambit of Section 2, P.D. No. 1521,
defining how a preferred mortgage is constituted.
NDC and DBP both argue that POLIANDs claim cannot prevail over DBPs
mortgage credit over the foreclosed vessels because the mortgage executed in favor
of DBP pursuant to the October 10, 1979 Deed of Undertaking signed by GALLEON
and DBP was an ordinary ship mortgage and not a preferred one, that is, it was not
given in connection with the construction, acquisition, purchase or initial operation of
the vessels, but for the purpose of guaranteeing GALLEONs foreign borrowings.[52]
Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage on a
vessel, to wit:
SECTION 2. Who may Constitute a Ship Mortgage. Any citizen of the
Philippines, or any association or corporation organized under the laws of
the Philippines, at least sixty per cent of the capital of which is owned by

citizens of the Philippines may, for the purpose of financing the

construction, acquisition, purchase of vessels or initial operation of
vessels, freely constitute a mortgage or any other lien or encumbrance on
his or its vessels and its equipment with any bank or other financial
institutions, domestic or foreign.
If the mortgage on the vessel is constituted for the purpose stated under Section
2, the mortgage obtains a preferred status provided the formal requisites enumerated
under Section 4[53] are complied with. Upon enforcement of the preferred mortgage
and eventual foreclosure of the vessel, the proceeds of the sale shall be first applied
to the claim of the mortgage creditor unless there are superior or preferential liens, as
enumerated under Section 17, namely:
SECTION 17. Preferred Maritime Lien, Priorities, Other Liens. (a)
Upon the sale of any mortgaged vessel in any extra-judicial sale or by
order of a district court of the Philippines in any suit in rem in admiralty for
the enforcement of a preferred mortgage lien thereon, all pre-existing
claims in the vessel, including any possessory common-law lien of which a
lienor is deprived under the provisions of Section 16 of this Decree, shall
be held terminated and shall thereafter attach in like amount and in
accordance with the priorities established herein to the proceeds of the
sale. The preferred mortgage lien shall have priority over all claims against
the vessel, except the following claims in the order stated: (1) expenses
and fees allowed and costs taxed by the court and taxes due to the
Government; (2) crew's wages; (3) general average; (4) salvage
including contract salvage; (5) maritime liens arising prior in time to
the recording of the preferred mortgage; (6) damages arising out of
tort; and (7) preferred mortgage registered prior in time.
(b) If the proceeds of the sale should not be sufficient to pay all creditors
included in one number or grade, the residue shall be divided among them
pro rata. All credits not paid, whether fully or partially shall subsist as
ordinary credits enforceable by personal action against the debtor. The
record of judicial sale or sale by public auction shall be recorded in the
Record of Transfers and Encumbrances of Vessels in the port of
documentation. (Emphasis supplied.)
There is no question that the mortgage executed in favor of DBP is covered by
P.D. No. 1521. Contrary to NDCs assertion, the mortgage constituted on GALLEONs
vessels in favor of DBP may appropriately be characterized as a preferred mortgage
under Section 2, P.D. No. 1521 because GALLEON constituted the same for the
purpose of financing the construction, acquisition, purchase of vessels or initial
operation of vessels. While it is correct that GALLEON executed the mortgage in
consideration of DBPs guarantee of the prompt payment of GALLEONs obligations to
the Japanese lenders, DBPs undertaking to pay the Japanese banks was a condition
sine qua non to the acquisition of funds for the purchase of the GALLEON vessels.
Without DBPs guarantee, the Japanese lenders would not have provided the funds
utilized in the purchase of the GALLEON vessels. The mortgage in favor of DBP was
therefore constituted to facilitate the acquisition of funds necessary for the purchase
of the vessels.

NDC adds that being an ordinary ship mortgage, the Civil Code provisions on
concurrence and preference of credits and not P.D. No. 1521 should govern. NDC
contends that under Article 2246, in relation to Article 2241 of the Civil Code, the
credits guaranteed by a chattel mortgage upon the thing mortgaged shall enjoy
preference (with respect to the thing mortgaged), to the exclusion of all others to the
extent of the value of the personal property to which the preference exists. [54]
Following NDCs theory, DBPs mortgage credit, which is fourth in the order of
preference under Article 2241, is superior to POLIANDs claim, which enjoys no
preference.
NDCs argument does not persuade the Court.
The provision of P.D. No. 1521 on the order of preference in the satisfaction of
the claims against the vessel is the more applicable statute to the instant case
compared to the Civil Code provisions on the concurrence and preference of credit.
General legislation must give way to special legislation on the same subject, and
generally be so interpreted as to embrace only cases in which the special provisions
are not applicable.[55]
POLIANDs alternative cause of action for the payment of maritime liens is based
on Sections 17 and 21 of P.D. No. 1521. POLIAND also contends that by virtue of the
directive in LOI No. 1195 on NDC to discharge maritime liens to allow the vessels to
engage in international business, NDC is liable therefor.[56]
POLIANDs maritime lien is superior
to DBPs mortgage lien
Before POLIANDs claim may be classified as superior to the mortgage
constituted on the vessel, it must be shown to be one of the enumerated claims which
Section 17, P.D. No. 1521 declares as having preferential status in the event of the
sale of the vessel. One of such claims enumerated under Section 17, P.D. No. 1521
which is considered to be superior to the preferred mortgage lien is a maritime lien
arising prior in time to the recording of the preferred mortgage. Such maritime lien is
described under Section 21, P.D. No. 1521, which reads:
SECTION 21. Maritime Lien for Necessaries; persons entitled to such
lien. Any person furnishing repairs, supplies, towage, use of dry dock or
marine railway, or other necessaries to any vessel, whether foreign or
domestic, upon the order of the owner of such vessel, or of a person
authorized by the owner, shall have a maritime lien on the vessel, which
may be enforced by suit in rem, and it shall be necessary to allege or
prove that credit was given to the vessel.
Under the aforequoted provision, the expense must be incurred upon the order
of the owner of the vessel or its authorized person and prior to the recording of the
ship mortgage. Under the law, it must be established that the credit was extended to
the vessel itself.[57]

The trial court found that GALLEONs advances obtained from Asian Hardwood
were used to cover for the payment of bunker oil/fuel, unused stores and oil, bonded
stores, provisions, and repair and docking of the GALLEON vessels. [58] These
expenses clearly fall under Section 21, P.D. No. 1521.
The trial court also found that the advances from Asian Hardwood were spent
for ship modification cost and the crews salary and wages. DBP contends that a ship
modification cost is omitted under Section 17, P.D. No. 1521, hence, it does not have
a status superior to DBPs preferred mortgage lien.
As stated in Section 21, P.D. No. 1521, a maritime lien may consist in other
necessaries spent for the vessel. The ship modification cost may properly be
classified under this broad category because it was a necessary expenses for the
vessels navigation. As long as an expense on the vessel is indispensable to the
maintenance and navigation of the vessel, it may properly be treated as a maritime
lien for necessaries under Section 21, P.D. No. 1521.
With respect to the claim for salary and wages of the crew, there is no doubt that
it is also one of the enumerated claims under Section 17, P.D. No. 1521, second only
to judicial costs and taxes due the government in preference and, thus, having a
status superior to DBPs mortgage lien.
All told, the determination of the existence and the amount of POLIANDs claim
for maritime lien is a finding of fact which is within the province of the courts below.
Findings of fact of lower courts are deemed conclusive and binding upon the
Supreme Court except when the findings are grounded on speculation, surmises or
conjectures; when the inference made is manifestly mistaken, absurd or impossible;
when there is grave abuse of discretion in the appreciation of facts; when the factual
findings of the trial and appellate courts are conflicting; when the Court of Appeals, in
making its findings, has gone beyond the issues of the case and such findings are
contrary to the admissions of both appellant and appellee; when the judgment of the
appellate court is premised on a misapprehension of facts or when it has failed to
notice certain relevant facts which, if properly considered, will justify a different
conclusion; when the findings of fact are conclusions without citation of specific
evidence upon which they are based; and when findings of fact of the Court of
Appeals are premised on the absence of evidence but are contradicted by the
evidence on record.[59] The Court finds no sufficient justification to reverse the findings
of the trial court and the appellate court in respect to the existence and amount of
maritime lien.
Only NDC is liable on the maritime lien
POLIAND maintains that DBP is also solidarily liable for the payment of the
preferred maritime lien over the proceeds of the foreclosure sale by virtue of Section
17, P.D. No. 1521. It claims that since the lien was incurred prior to the constitution of
the mortgage on January 25, 1982, the preferred maritime lien attaches to the
proceeds of the sale of the vessels and has priority over all claims against the vessels
in accordance with Section 17, P.D. No. 1521.[60]
In its defense, DBP reiterates the following arguments: (1) The salary and crews
wages cannot be claimed by POLIAND or its predecessors-in-interest because none

of them is a sailor or mariner;[61] (2) Even if conceded, POLIANDs preferred maritime

lien is unenforceable pursuant to Article 1403 of the Civil Code; and (3) POLIANDs
claim is barred by prescription and laches.[62]
The first argument is absurd. Although POLIAND or its predecessors-in-interest
are not sailors entitled to wages, they can still make a claim for the advances spent
for the salary and wages of the crew under the principle of legal subrogation. As
explained in Philippine National Bank v. Court of Appeals,[63] a third person who
satisfies the obligation to an original maritime lienor may claim from the debtor
because the third person is subrogated to the rights of the maritime lienor over the
vessel. The Court explained as follows:
From the foregoing, it is clear that the amount used for the repair of
the vessel M/V Asean Liberty was advanced by Citibank and was utilized
for the purpose of paying off the original maritime lienor, Hong Kong United
Dockyards, Ltd. As a person not interested in the fulfillment of the
obligation between PISC and Hong Kong United Dockyards, Ltd., Citibank
was subrogated to the rights of Hong Kong United Dockyards, Ltd. as a
maritime lienor over the vessel, by virtue of Article 1302, par. 2 of the New
Civil Code. By definition, subrogation is the transfer of all the rights of the
creditor to a third person, who substitutes him in all his rights. Considering
that Citibank paid off the debt of PISC to Hong Kong United Dockyards,
Ltd. it became the transferee of all the rights of Hong Kong Dockyards, Ltd.
as against PISC, including the maritime lien over the vessel M/V Asian
Liberty.[64]
DBPs reliance on the Statute of Frauds is misplaced. Article 1403 (2) of the Civil
Code, which enumerates the contracts covered by the Statue of Frauds, is
inapplicable. To begin with, there is no privity of contract between POLIAND or its
predecessors-in-interest, on one hand, and DBP, on the other. POLIAND hinges its
claim on the maritime lien based on LOI No. 1195 and P.D. No. 1521, and not on any
contract or agreement.
Neither can DBP invoke prescription or laches against POLIAND. Under Article
1144 of the Civil Code, an action upon an obligation created by law must be brought
within ten years from the time the right of action accrues. The right of action arose
after January 15, 1982, when NDC partially paid off GALLEONs obligations to
POLIANDs predecessor-in-interest, Asian Hardwood. At that time, the prescriptive
period for the enforcement by action of the balance of GALLEONs outstanding
obligations had commenced. Prescription could not have set in because the
prescriptive period was tolled when POLIAND made a written demand for the
satisfaction of the obligation on September 24, 1991, or before the lapse of the tenyear prescriptive period. Laches also do not lie because there was no unreasonable
delay on the part of POLIAND in asserting its rights. Indeed, it instituted the instant
suit seasonably.
All things considered, however, the Court finds that only NDC is liable for the
payment of the maritime lien. A maritime lien is akin to a mortgage lien in that in spite
of the transfer of ownership, the lien is not extinguished. The maritime lien is
inseparable from the vessel and until discharged, it follows the vessel. Hence, the
enforcement of a maritime lien is in the nature and character of a proceeding quasi in

rem.[65] The expression action in rem is, in its narrow application, used only with
reference to certain proceedings in courts of admiralty wherein the property alone is
treated as responsible for the claim or obligation upon which the proceedings are
based.[66] Considering that DBP subsequently transferred ownership of the vessels to
NDC, the Court holds the latter liable on the maritime lien. Notwithstanding the
subsequent transfer of the vessels to NDC, the maritime lien subsists.
This is a unique situation where the extrajudicial foreclosure of the GALLEON
vessels took place without the intervention of GALLEONs other creditors including
POLIANDs predecessors-in-interest who were apparently left in the dark about the
foreclosure proceedings. At that time, GALLEON was already a failing corporation
having borrowed large sums of money from banks and financial institutions. When
GALLEON defaulted in the payment of its obligations to DBP, the latter foreclosed on
its mortgage over the GALLEON ships. The other creditors, including POLIANDs
predecessors-in-interest who apparently had earlier or superior rights over the
foreclosed vessels, could not have participated as they were unaware and were not
made parties to the case.
On this note, the Court believes and so holds that the institution of the
extrajudicial foreclosure proceedings was tainted with bad faith. It took place when
NDC had already assumed the management and operations of GALLEON. NDC
could not have pleaded ignorance over the existence of a prior or preferential lien on
the vessels subject of foreclosure. As aptly held by the Court of Appeals:
NDCs claim that even if maritime liens existed over the proceeds of
the foreclosure sale of the vessels which it subsequently purchased from
DBP, it is not liable as it was a purchaser in good faith fails, given the fact
that in its actual control over the management and operations of
GALLEON, it was put on notice of the various obligations of GALLEON
including those secured from ASIAN HARDWOOD as in fact it even paid
ASIAN HARDWOOD US$1,000,000.00 in partial settlement of GALLEONs
obligations, before it (NDC) mortgaged the 5 vessels to DBP on January
25, 1982.
Parenthetically, LOI 1195 directed NDC to discharge such maritime
liens as may be necessary to allow the foreclosed vessels to engage on
the international shipping business.
In fine, it is with respect to POLIANDs claim for payment of
US$1,930,298.56 representing part of the proceeds of GALLEONs loan
which was spent by GALLEON for ship modification and salaries of crew
that NDC is liable.[67]
Thus, NDC cannot claim that it was a subsequent purchaser in good faith
because it had knowledge that the vessels were subject to various liens. At the very
least, to evince good faith, NDC could have inquired as to the existence of other
claims against the vessels apart from DBPs mortgage lien. Considering that NDC was
also in a position to know or discover the financial condition of GALLEON when it took
over its management, the lack of notice to GALLEONs creditors suggests that the
extrajudicial foreclosure was effected to prejudice the rights of GALLEONs other
creditors.

NDC also cannot rely on Administrative Order No. 64, [68] which directed the
transfer of the vessels to the APT, on its hypothesis that such transfer extinguished
the lien. APT is a mere conduit through which the assets acquired by the National
Government are provisionally held and managed until their eventual disposal or
privatization. Administrative Order No. 64 did not divest NDC of its ownership over the
GALLEON vessels because APT merely holds the vessels in trust for NDC until the
same are disposed. Even if ownership was transferred to APT, that would not be
sufficient to discharge the maritime lien and deprive POLIAND of its recourse based
on the lien. Such denouement would smack of denial of due process and taking of
property without just compensation.
NDCs liability for attorneys fees
The lower court awarded attorneys fees to POLIAND in the amount of
P1,000,000.00 on account of the amount involved in the case and the protracted
character of the litigation.[69] The award was affirmed by the Court of Appeals as
against NDC only.[70]
This Court finds no reversible error with the award as upheld by the appellate
court. Under Article 2208[71] of the Civil Code, attorneys fees may be awarded inter
alia when the defendants act or omission has compelled the plaintiff to incur
expenses to protect his interest or in any other case where the court deems it just and
equitable that attorneys fees and expenses of litigation be recovered.
One final note. There is a discrepancy between the dispositive portion of the
Court of Appeals Decision and the body thereof with respect to the amount of the
maritime lien in favor of POLIAND. The dispositive portion ordered NDC to pay
POLIAND the amount of US$1,920,298.56 plus interest[72] despite a finding that NDCs
liability to POLIAND represents the maritime lien[73] which according to the
complaint[74] is the alternative cause of action of POLIAND in the smaller amount of
US$1,193,298.56, as prayed for by POLIAND in its complaint.
The general rule is that where there is conflict between the dispositive portion or
the fallo and the body of the decision, the fallo controls. This rule rests on the theory
that the fallo is the final order while the opinion in the body is merely a statement
ordering nothing. However, where the inevitable conclusion from the body of the
decision is so clear as to show that there was a mistake in the dispositive portion, the
body of the decision will prevail.[75] In the instant case, it is clear from the trial court
records and the Court of Appeals Rollo that the bigger amount awarded in the
dispositive portion of the Court of Appeals Decision was a typographical mistake.
Considering that the appellate courts Decision merely affirmed the trial courts finding
with respect to the amount of maritime lien, the bigger amount stated in the
dispositive portion of the Court of Appeals Decision must have been awarded through
indavertence.

WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are
DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 53257 is
MODIFIED to the extent that National Development Company is liable to Poliand
Industrial Limited for the amount of One Million One Hundred Ninety Three Thousand
Two Hundred Ninety Eight US Dollars and Fifty-Six US Cents (US$ 1,193,298.56),
plus interest of 12% per annum computed from 25 September 1991 until fully paid. In
other respects, said Decision is AFFIRMED. No pronouncement as to costs.
SO ORDERED.

WHEREAS, at least 90% of the Companys gross sales is generated by the sale
of tin-plates manufactured by Elizalde Steel Consolidated, Inc.;
WHEREAS, it is to the best interests of the Company to continue handling said
tin-plate line;
WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of
the Company in obtaining credit facilities to enable it to maintain the present level of
its tin-plate manufacturing output and the Company is willing to extend said requested
assistance;
FIRST DIVISION
[G.R. No. 99398. January 26, 2001]
CHESTER BABST, petitioner, vs. COURT OF APPEALS, BANK OF THE
PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and
PACIFIC MULTI-COMMERCIAL CORPORATION, respondents.
[G.R. No. 104625. January 26, 2001]
ELIZALDE STEEL CONSOLIDATED, INC., petitioner, vs. COURT OF APPEALS,
BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL
CORPORATION and CHESTER BABST, respondents.
DECISION
YNARES-SANTIAGO, J.:
These consolidated petitions seek the review of the Decision dated April 29,
1991 of the Court of Appeals in CA-G.R. CV No. 17282 [1] entitled, Bank of the
Philippine Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific
Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants.
The complaint was commenced principally to enforce payment of a promissory
note and three domestic letters of credit which Elizalde Steel Consolidated, Inc.
(ELISCON) executed and opened with the Commercial Bank and Trust Company
(CBTC).
On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of
P8,015,900.84, with interest at the rate of 14% per annum, evidenced by a
promissory note.[2] ELISCON defaulted in its payments, leaving an outstanding
indebtedness in the amount of P2,795,240.67 as of October 31, 1982.[3]
The letters of credit, on the other hand, were opened for ELISCON by CBTC
using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the
said bank, pursuant to the Resolution of the Board of Directors of MULTI adopted on
August 31, 1977 which reads:

NOW, THEREFORE, for and in consideration of the foregoing premises --BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT &
GENERAL MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to
allow and authorize ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use
of the Credit Line of PACIFIC MULTI-COMMERCIAL CORPORATION with the
COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati, Metro
Manila;
RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation
guarantee, as it does hereby guarantee, solidarily, the payment of the corresponding
Letters of Credit upon maturity of the same;
RESOLVED, FINALLY, That copies of this resolution be furnished the
Commercial Bank & Trust Company of the Philippines, Makati, Metro Manila, for their
information.[4]
Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G.
Babst executed a Continuing Suretyship,[5] whereby they bound themselves jointly
and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent
of P8,000,000.00 each.
Sometime in October 1978, CBTC opened for ELISCON in favor of National
Steel Corporation three (3) domestic letters of credit in the amounts of P1,946,805.73,
[6]
P1,702,869.32[7] and P200,307.72,[8] respectively, which ELISCON used to
purchase tin black plates from National Steel Corporation. ELISCON defaulted in its
obligation to pay the amounts of the letters of credit, leaving an outstanding account,
as of October 31, 1982, in the total amount of P3,963,372.08.[9]
On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC
entered into a merger, wherein BPI, as the surviving corporation, acquired all the
assets and assumed all the liabilities of CBTC.[10]
Meanwhile, ELISCON encountered financial difficulties and became heavily
indebted to the Development Bank of the Philippines (DBP). In order to settle its
obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its
fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount
of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of
Cession of Property in Payment of Debt.[11]

In June 1981, ELISCON called its creditors to a meeting to announce the takeover by DBP of its assets.

4) Ordering defendant ELISCON to pay attorneys fees equivalent to 10% of the

total amount due under the preceding paragraphs;

In October 1981, DBP formally took over the assets of ELISCON, including its
indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of
ELISCONs obligations to its creditors, but BPI expressly rejected the formula
submitted to it for not being acceptable.[12]

5) Ordering defendants Pacific Multi-Commercial Corporation and defendant

Chester Babst to pay, jointly and severally with defendant ELISCON, the total sum of
P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982
with interests and related charges on the principal amount of P3,963,372.08 at the
rates provided in said letters of credit from 30 October 1982 until fully paid, but to the
extent of not more than P8,000,000.00 in the case of defendant Chester Babst;

Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC,

instituted with the Regional Trial Court of Makati, Branch 147, a complaint [13] for sum
of money against ELISCON, MULTI and Babst, which was docketed as Civil Case
No. 49226.
ELISCON, in its Answer,[14] argued that the complaint was premature since DBP
had made serious efforts to settle its obligations with BPI.
Babst also filed his Answer alleging that he signed the Continuing Suretyship on
the understanding that it covers only obligations which MULTI incurred solely for its
benefit and not for any third party liability, and he had no knowledge or information of
any transaction between MULTI and ELISCON.[15]
MULTI, for its part, denied knowledge of the merger between BPI and CBTC,
and averred that the guaranty under its board resolution did not cover purchases
made by ELISCON in the form of trust receipts. It set up a cross-claim against
ELISCON alleging that the latter should be held liable for any judgment which the
court may render against it in favor of BPI.[16]

6) Ordering defendant Pacific Multi-Commercial Corporation and defendant

Chester Babst to pay, jointly and severally plaintiff interests at the legal rate on all
interests and related charges already accrued but unpaid on said three (3) domestic
letters of credit as of the date of the filing of this Complaint until full payment thereof;
7) Ordering defendant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally, attorneys fees of not less than 10% of the
total amount due under paragraphs 5 and 6 hereof. With costs.
SO ORDERED.
In due time, ELISCON, MULTI and Babst filed their respective notices of appeal.
[18]

On April 29, 1991, the Court of Appeals rendered the appealed Decision as
follows:

On February 20, 1987, the trial court rendered its Decision, [17] the dispositive
portion of which reads:

WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the
underlining to show the principal changes from the decision of the lower court) thus:

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment
in favor of the plaintiff and against all the defendants:

1) Ordering appellant ELISCON to pay the appellee BPI the amount of

P2,731,005.60 due on the promissory note, Annex A of the Complaint as of 31
October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters
of credit, also as of 31 October 1982;

1) Ordering defendant ELISCON to pay the plaintiff the amount of

P2,795,240.67 due on the promissory note, Annex A of the Complaint as of 31
October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters
of credit, also as of 31 October 1982;
2) Ordering defendant ELISCON to pay the plaintiff interests and related
charges on the principal of said promissory note of P2,102,232.02 at the rates
provided in said note from and after 31 October 1982 until full payment thereof, and
on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests
and related charges at the rates provided in said letters of credit, from and after 31
October 1982 until full payment;
3) Ordering defendant ELISCON to pay interests at the legal rate on all interests
and related charges but unpaid as of the filing of this complaint, until full payment
thereof;

2) Ordering appellant ELISCON to pay the appellee BPI interests and related
charges on the principal of said promissory note of P2,102,232.02 at the rates
provided in said note from and after 31 October 1982 until full payment thereof, and
on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests
and related charges at the rates provided in said letters of credit, from and after 31
October 1982 until full payment;
3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on
all interests and related charges but unpaid as of the filing of this complaint, until full
payment thereof;
4) Ordering appellant Pacific Multi-Commercial Corporation and appellant
Chester G. Babst to pay appellee BPI, jointly and severally with appellant ELISCON,
the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31
October 1982 with interest and related charges on the principal amount of

P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982
until fully paid, but to the extent of not more than P8,000,000.00 in the case of
defendant Chester Babst;
5) Ordering appellant Pacific Multi-Commercial Corporation and defendant
Chester Babst to pay, jointly and severally, appellee BPI interests at the legal rate on
all interests and related charges already accrued but unpaid on said three (3)
domestic letters of credit as of the date of the filing of this Complaint until full payment
thereof and the plaintiffs lawyers fees in the nominal amount of P200,000.00;
6) Ordering appellant ELISCON to reimburse appellants Pacific MultiCommercial Corporation and Chester Babst whatever amount they shall have paid in
said Eliscons behalf particularly referring to the three (3) letters of credit as of 31
October 1982 and other related charges.
No costs.
SO ORDERED.

[19]

BPI filed its Comment[22] raising the following arguments, to wit:

1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and
Babst the past due obligations with CBTC prior to the merger of BPI with CBTC.
2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no
valid novation has been effected.
3. Express consent of creditor to substitution should be recorded in the books.
4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily
liable to BPI for the unpaid letters of credit of ELISCON.
5. The question of the liability of ELISCON to BPI has been clearly established.
6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by
ELISCON, they may recover from the latter what they may have paid for on account
of that guaranty.

ELISCON filed a Motion for Reconsideration of the Decision of the Court of

Appeals which was, however, denied in a Resolution dated March 9, 1992. [20]
Subsequently, ELISCON filed a petition for review on certiorari, docketed as G.R. No.
104625, on the following grounds:

Chester Babst filed a Comment with Manifestation,[23] wherein he contends that

the suretyship agreement he executed with Antonio Roxas Chua was in favor of
MULTI; and that there is nothing therein which authorizes MULTI, in turn, to guarantee
the obligations of ELISCON.

A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO

RECOVER FROM PETITIONER ELISCON THE LATTERS
OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY
(CBTC)

In its Comment,[24] MULTI maintained that inasmuch as BPI had full knowledge
of the purpose of the meeting in June 1981, wherein the takeover by DBP of
ELISCON was announced, it was incumbent upon the said bank to formally
communicate its objection to the assumption of ELISCONs liabilities by DBP in
answer to the call for the meeting. Moreover, there was no showing that the availment
by ELISCON of MULTIs credit facilities with CBTC, which was supposedly
guaranteed by Antonio Roxas Chua, was indeed authorized by the latter pursuant to
the resolution of the Board of Directors of MULTI.

B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN

ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND
APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN
LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY
RELEASING ELISCON FROM ITS OBLIGATION TO BPI.
C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER
BABST CANNOT LAWFULLY RECOVER FROM ELISCON
WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS
SURETIES OF ELISCONS OBLIGATION TO BPI; THEIR CAUSE OF
ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY
SUBSTITUTED DEBTOR IN PLACE OF ELISCON.
D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN
ACT OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT
EXCULPATING ELISCON FROM FURTHER LIABILITIES TO
RESPONDENT BPI.
E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY
RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE
PORTION OF RESPONDENT COURT OF APPEALS DECISION.[21]

In compliance with this Courts Resolution dated March 17, 1993, [25] the parties
submitted their respective memoranda.
Meanwhile, in a petition for review filed with this Court, which was docketed as
G.R. No. 99398, Chester Babst alleged that the Court of Appeals acted without
jurisdiction and/or with grave abuse of discretion when:
1. IT AFFIRMED THE LOWER COURTS HOLDING THAT THERE WAS NO
NOVATION INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS
(OR BPI) HAD PRIOR CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS
DEBTOR BY THE DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE
PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON) IN THE
LATTERS OBLIGATION TO BPI.

2. IT CONFIRMED THE LOWER COURTS CONCLUSION THAT THERE WAS

NO IMPLIED CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS
TO THE SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE
ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.
3. IT AFFIRMED THE LOWER COURTS FINDING OF LACK OF MERIT OF
THE CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI,
WHO WAS PRESENT DURING THE MEETING OF ELISCONS CREDITORS IN
JUNE 1981 TO VOICE HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY
THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS LIABILITIES,
CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE
OBLIGATIONS OF ELISCON TO BPI.
4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE
ENTIRE ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A
FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY LIABILITY TO BPI.
5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI
RELIEVED ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.
6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY
WITH ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE.
7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON
ORDERING THE LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE
PORTION OF THE DECISION; AND ORDERING PETITIONER AND MULTI TO PAY
SAID AMOUNTS JOINTLY AND SEVERALLY WITH ELISCON.[26]
Petitioner Babst alleged that DBP sold all of ELISCONs assets to the National
Development Company, for the latter to take over and continue the operation of its
business. On September 11, 1981, the Board of Governors of the DBP adopted
Resolution No. 2817 which states that DBP shall enter into a contractual arrangement
with NDC for the latter to pay ELISCONs creditors, including BPI in the amount of
P4,015,534.54. This was followed by a Memorandum of Agreement executed on May
4, 1983 by and between DBP and NDC, wherein they stipulated, inter alia, that NDC
shall pay to ELISCONs creditors, through DBP, the amount of P299,524,700.00.
Among the creditors mentioned in the agreement was BPI, with a listed credit of
P4,015,534.54.
Furthermore, petitioner Babst averred that the assets of ELISCON which were
acquired by the DBP, and later transferred to the NDC, were placed under the Asset
Privatization Trust pursuant to Proclamation No. 50, issued by then President
Corazon C. Aquino on December 8, 1986.
In its Comment,[27] BPI countered that by virtue of its merger with CBTC, it
acquired all the latters rights and interest including all receivables; that in order to
effect a valid novation by substitution of debtors, the consent of the creditor must be
express; that in addition, the consent of BPI must appear in its books, it being a
private corporation; that BPI intentionally did not consent to the assumption by DBP of
the obligations of ELISCON because it wanted to preserve intact its causes of action

and legal recourse against Pacific Multi-Commercial Corporation and Babst as

sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily for
ELISCONs obligations to CBTC in its Resolution wherein it allowed the latter to use
its credit facilities; and that the suretyship agreement executed by Babst does not
exclude liabilities incurred by MULTI on behalf of third parties, such as ELISCON.
ELISCON likewise filed a Comment,[28] wherein it manifested that of the seven
errors raised by Babst in his petition, six are arguments which ELISCON itself raised
in its previous pleadings. It is only the sixth assigned error --- that the Court of
Appeals erred in finding that MULTI and Babst bound themselves solidarily with
ELISCON --- that ELISCON takes exception to. More particularly, ELISCON pointed
out the contradictory positions taken by Babst in admitting that he bound himself to
pay the indebtedness of MULTI, while at the same time completely disavowing and
denying any such obligation. It stressed that should MULTI or Babst be finally
adjudged liable under the suretyship agreement, they cannot lawfully recover from
ELISCON, but from the DBP which had been substituted as the new debtor.
MULTI filed its Comment,[29] admitting the correctness of the petition and
adopting the Comment of ELISCON insofar as it is not inconsistent with the positions
of Babst and MULTI.
At the outset, the preliminary issue of BPIs right of action must first be
addressed. ELISCON and MULTI assail BPIs legal capacity to recover their obligation
to CBTC. However, there is no question that there was a valid merger between BPI
and CBTC. It is settled that in the merger of two existing corporations, one of the
corporations survives and continues the business, while the other is dissolved and all
its rights, properties and liabilities are acquired by the surviving corporation. [30] Hence,
BPI has a right to institute the case a quo.
We now come to the primordial issue in this case whether or not BPI consented
to the assumption by DBP of the obligations of ELISCON.
Article 1293 of the Civil Code provides:
Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him the rights
mentioned in articles 1236 and 1237.
BPI contends that in order to have a valid novation, there must be an express
consent of the creditor. In the case of Testate Estate of Mota, et al. v. Serra, [31] this
Court held:
It should be noted that in order to give novation its legal effect, the law requires
that the creditor should consent to the substitution of a new debtor. This consent must
be given expressly for the reason that, since novation extinguishes the personality of
the first debtor who is to be substituted by a new one, it implies on the part of the
creditor a waiver of the right that he had before the novation, which waiver must be
express under the principle of renuntiatio non prsumitur, recognized by the law in

declaring that a waiver of right may not be performed [should read: presumed] unless
the will to waive is indisputably shown by him who holds the right.[32]
The import of the foregoing ruling, however, was explained and clarified by this
Court in the later case of Asia Banking Corporation v. Elser[33] in this wise:
The aforecited article 1205 [now 1293] of the Civil Code does not state that
the creditors consent to the substitution of the new debtor for the old be
express, or given at the time of the substitution, and the Supreme Court of Spain, in
its judgment of June 16, 1908, construing said article, laid down the doctrine that
article 1205 of the Civil Code does not mean or require that the creditors consent to
the change of debtors must be given simultaneously with the debtors consent to the
substitution, its evident purpose being to preserve the creditors full right, it is sufficient
that the latters consent be given at any time and in any form whatever, while the
agreement of the debtors subsists. The same rule is stated in the Enciclopedia
Jurdica Espaola, volume 23, page 503, which reads: The rule that this kind of
novation, like all others, must be express, is not absolute; for the existence of the
consent may well be inferred from the acts of the creditor, since volition may as
well be expressed by deeds as by words. The understanding between Henry W.
Elser and the principal director of Yangco, Rosenstock & Co., Inc., with respect to
Luis R. Yangcos stock in said corporation, and the acts of the board of directors after
Henry W. Elser had acquired said shares, in substituting the latter for Luis R. Yangco,
are a clear and unmistakable expression of its consent. When this court said in the
case of Estate of Mota vs. Serra (47 Phil., 464), that the creditors express
consent is necessary in order that there may be a novation of a contract by the
substitution of debtors, it did not wish to convey the impression that the word
express was to be given an unqualified meaning, as indicated in the authorities
or cases, both Spanish and American, cited in said decision. [34]
Subsequently, in the case of Vda. e Hijos de Pio Barretto y Ca., Inc. v. Albo &
Sevilla, Inc., et al.,[35] this Court reiterated the rule that there can be implied consent of
the creditor to the substitution of debtors.
In the case at bar, Babst, MULTI and ELISCON all maintain that due to the
failure of BPI to register its objection to the take-over by DBP of ELISCONs assets, at
the creditors meeting held in June 1981 and thereafter, it is deemed to have
consented to the substitution of DBP for ELISCON as debtor.
We find merit in the argument. Indeed, there exist clear indications that BPI was
aware of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits
that --the Development Bank of the Philippines (DBP), for a time, had proposed a
formula for the settlement of Eliscons past obligations to its creditors, including the
plaintiff [BPI], but the formula was expressly rejected by the plaintiff as not acceptable
(long before the filing of the complaint at bar).[36]
The Court of Appeals held that even if the account officer who attended the June
1981 creditors meeting had expressed consent to the assumption by DBP of
ELISCONs debts, such consent would not bind BPI for lack of a specific authority
therefor. In its petition, ELISCON counters that the mere presence of the account

officer at the meeting necessarily meant that he was authorized to represent BPI in
that creditors meeting. Moreover, BPI did not object to the substitution of debtors,
although it objected to the payment formula submitted by DBP.
Indeed, the authority granted by BPI to its account officer to attend the creditors
meeting was an authority to represent the bank, such that when he failed to object to
the substitution of debtors, he did so on behalf of and for the bank. Even granting
arguendo that the said account officer was not so empowered, BPI could have
subsequently registered its objection to the substitution, especially after it had already
learned that DBP had taken over the assets and assumed the liabilities of ELISCON.
Its failure to do so can only mean an acquiescence in the assumption by DBP of
ELISCONs obligations. As repeatedly pointed out by ELISCON and MULTI, BPIs
objection was to the proposed payment formula, not to the substitution itself.
BPI gives no cogent reason in withholding its consent to the substitution, other
than its desire to preserve its causes of action and legal recourse against the sureties
of ELISCON. It must be remembered, however, that while a surety is solidarily liable
with the principal debtor, his obligation to pay only arises upon the principal debtors
failure or refusal to pay. A contract of surety is an accessory promise by which a
person binds himself for another already bound, and agrees with the creditor to
satisfy the obligation if the debtor does not.[37] A surety is an insurer of the debt; he
promises to pay the principals debt if the principal will not pay.[38]
In the case at bar, there was no indication that the principal debtor will default in
payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable
of payment. Its authorized capital stock was increased by the government. [39] More
importantly, the National Development Company took over the business of ELISCON
and undertook to pay ELISCONs creditors, and earmarked for that purpose the
amount of P4,015,534.54 for payment to BPI.[40]
Notwithstanding the fact that a reliable institution backed by government funds
was offering to pay ELISCONs debts, not as mere surety but as substitute principal
debtor, BPI, for reasons known only to itself, insisted in going after the sureties. The
course of action chosen taxes the credulity of this Court. At the very least, suffice it to
state that BPIs actuation in this regard runs counter to the good faith covenant in
contractual relations, provided for by the Civil Code, to wit:
ART. 19. Every person must, in the exercise of his rights and in the performance
of his duties, act with justice, give everyone his due, and observe honesty and good
faith.
ART. 1159. Obligations arising from contract have the force of law between the
contracting parties and should be complied with in good faith.
BPIs conduct evinced a clear and unmistakable consent to the substitution of
DBP for ELISCON as debtor. Hence, there was a valid novation which resulted in the
release of ELISCON from its obligation to BPI, whose cause of action should be
directed against DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory. It is

extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation
subsists to the extent it remains compatible with the amendatory agreement. An
extinctive novation results either by changing the object or principal conditions
(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). Under this mode, novation
would have dual functions one to extinguish an existing obligation, the other to
substitute a new one in its place requiring a conflux of four essential requisites, (1) a
previous valid obligation; (2) an agreement of all parties concerned to a new contract;
(3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.
[41]

The original obligation having been extinguished, the contracts of suretyship

executed separately by Babst and MULTI, being accessory obligations, are likewise
extinguished.[42]
Hence, BPI should enforce its cause of action against DBP. It should be
stressed that notwithstanding the lapse of time within which these cases have
remained pending, the prescriptive period for BPI to file its action was interrupted
when it filed Civil Case No. 49226.[43]
WHEREFORE, the consolidated petitions are GRANTED. The appealed
Decision of the Court of Appeals, which held ELISCON, MULTI and Babst solidarily
liable for payment to BPI of the promissory note and letters of credit, is REVERSED
and SET ASIDE. BPIs complaint against ELISCON, MULTI and Babst is DISMISSED.
SO ORDERED.

SECOND DIVISION
IGLESIA EVANGELICA METODISTA
EN LAS ISLAS FILIPINAS (IEMELIF)
(Corporation Sole), INC., REV. NESTOR
PINEDA, REV. ROBERTO BACANI,
BENJAMIN BORLONGAN, JR.,
DANILO SAUR, RICHARD PONTI,
ALFREDO MATABANG and all the
other members of the IEMELIF
TONDO CONGREGATION of the
IEMELIF CORPORATION SOLE,
Petitioners,

In 1909, Bishop Nicolas Zamora established the petitioner Iglesia Evangelica

Metodista En Las Islas Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop
Zamora acting as its General Superintendent. Thirty-nine years later in 1948, the
IEMELIF enacted and registered a by-laws that established a Supreme Consistory of
Elders (the Consistory), made up of church ministers, who were to serve for four
years. The by-laws empowered the Consistory to elect a General Superintendent, a
General Secretary, a General Evangelist, and a Treasurer General who would
manage the affairs of the organization. For all intents and purposes, the Consistory
served as the IEMELIFs board of directors.

G.R. No. 184088

Present:
CARPIO,

Chairperson,
- versus -

BISHOP NATHANAEL LAZARO,

REVERENDS HONORIO RIVERA,
DANIEL MADUCDOC, FERDINAND
MERCADO, ARCADIO CABILDO,
DOMINGO GONZALES, ARTURO
LAPUZ, ADORABLE MANGALINDAN,
DANIEL VICTORIA and DAKILA
CRUZ, and LAY LEADER LINGKOD
MADUCDOC and CESAR DOMINGO,
acting individually and as members of
the Supreme Consistory of Elders
and those claiming under the
Corporation Aggregate,
Respondents.

J.,

NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.

Promulgated:
July 6, 2010

x --------------------------------------------------------------------------------------- x
DECISION
ABAD, J.:

The present dispute resolves the issue of whether or not a corporation may
change its character as a corporation sole into a corporation aggregate by mere
amendment of its articles of incorporation without first going through the process of
dissolution.
The Facts and the Case

Apparently, although the IEMELIF remained a corporation sole on paper

(with all corporate powers theoretically lodged in the hands of one member, the
General Superintendent), it had always acted like a corporation aggregate. The
Consistory exercised IEMELIFs decision-making powers without ever being
challenged. Subsequently, during its 1973 General Conference, the general
membership voted to put things right by changing IEMELIFs organizational structure
from a corporation sole to a corporation aggregate. On May 7, 1973 the Securities
and Exchange Commission (SEC) approved the vote. For some reasons, however,
the corporate papers of the IEMELIF remained unaltered as a corporation sole.
Only in 2001, about 28 years later, did the issue reemerge. In answer to a
query from the IEMELIF, the SEC replied on April 3, 2001 that, although the SEC
Commissioner did not in 1948 object to the conversion of the IEMELIF into a
corporation aggregate, that conversion was not properly carried out and documented.
The SEC said that the IEMELIF needed to amend its articles of incorporation for that
purpose.
Acting on this advice, the Consistory resolved to convert the IEMELIF to a
corporation aggregate. Respondent Bishop Nathanael Lazaro, its General
Superintendent, instructed all their congregations to take up the matter with their
respective members for resolution. Subsequently, the general membership approved
the conversion, prompting the IEMELIF to file amended articles of incorporation with
the SEC. Bishop Lazaro filed an affidavit-certification in support of the conversion.
Petitioners Reverend Nestor Pineda, et al., which belonged to a faction that
did not support the conversion, filed a civil case for Enforcement of Property Rights of
Corporation Sole, Declaration of Nullity of Amended Articles of Incorporation from
Corporation Sole to Corporation Aggregate with Application for Preliminary Injunction
and/or Temporary Restraining Order in IEMELIFs name against respondent members
of its Consistory before the Regional Trial Court (RTC) of Manila. Petitioners claim
that a complete shift from IEMELIFs status as a corporation sole to a corporation
aggregate required, not just an amendment of the IEMELIFs articles of incorporation,
but a complete dissolution of the existing corporation sole followed by a reincorporation.
Unimpressed, the RTC dismissed the action in its October 19, 2005
decision. It held that, while the Corporation Code on Religious Corporations (Chapter
II, Title XIII) has no provision governing the amendment of the articles of incorporation
of a corporation sole, its Section 109 provides that religious corporations shall be
governed additionally by the provisions on non-stock corporations insofar as they may
be applicable. The RTC thus held that Section 16 of the Code that governed
amendments of the articles of incorporation of non-stock corporations applied to

corporations sole as well. What IEMELIF needed to authorize the amendment was
merely the vote or written assent of at least two-thirds of the IEMELIF membership.

membership. The one member, here the General Superintendent, is but a trustee,
according to Section 110 of the Corporation Code, of its membership.

Petitioners Pineda, et al. appealed the RTC decision to the Court of Appeals
(CA). On October 31, 2007 the CA rendered a decision, affirming that of the RTC.
Petitioners moved for reconsideration, but the CA denied it by its resolution of August
1, 2008, hence, the present petition for review before this Court.

There is no point to dissolving the corporation sole of one member to enable

the corporation aggregate to emerge from it. Whether it is a non-stock corporation or
a corporation sole, the corporate being remains distinct from its members, whatever
be their number. The increase in the number of its corporate membership does not
change the complexion of its corporate responsibility to third parties. The one
member, with the concurrence of two-thirds of the membership of the organization for
whom he acts as trustee, can self-will the amendment. He can, with membership
concurrence, increase the technical number of the members of the corporation from
sole or one to the greater number authorized by its amended articles.

The Issue Presented

The only issue presented in this case is whether or not the CA erred in
affirming the RTC ruling that a corporation sole may be converted into a corporation
aggregate by mere amendment of its articles of incorporation.

The Courts Ruling

Petitioners Pineda, et al. insist that, since the Corporation Code does not
have any provision that allows a corporation sole to convert into a corporation
aggregate by mere amendment of its articles of incorporation, the conversion can
take place only by first dissolving IEMELIF, the corporation sole, and afterwards by
creating a new corporation in its place.
Religious corporations are governed by Sections 109 through 116 of the
Corporation Code. In a 2009 case involving IEMELIF, the Court distinguished a
corporation sole from a corporation aggregate. Citing Section 110 of the Corporation
Code, the Court said that a corporation sole is one formed by the chief archbishop,
bishop, priest, minister, rabbi or other presiding elder of a religious denomination,
sect, or church, for the purpose of administering or managing, as trustee, the affairs,
properties and temporalities of such religious denomination, sect or church. A
corporation aggregate formed for the same purpose, on the other hand, consists of
two or more persons.
True, the Corporation Code provides no specific mechanism for amending
the articles of incorporation of a corporation sole. But, as the RTC correctly held,
Section 109 of the Corporation Code allows the application to religious corporations
of the general provisions governing non-stock corporations.
For non-stock corporations, the power to amend its articles of incorporation
lies in its members. The code requires two-thirds of their votes for the approval of
such an amendment. So how will this requirement apply to a corporation sole that has
technically but one member (the head of the religious organization) who holds in his
hands its broad corporate powers over the properties, rights, and interests of his
religious organization?
Although a non-stock corporation has a personality that is distinct from those
of its members who established it, its articles of incorporation cannot be amended
solely through the action of its board of trustees. The amendment needs the
concurrence of at least two-thirds of its membership. If such approval mechanism is
made to operate in a corporation sole, its one member in whom all the powers of the
corporation technically belongs, needs to get the concurrence of two-thirds of its

Here, the evidence shows that the IEMELIFs General Superintendent,

respondent Bishop Lazaro, who embodied the corporation sole, had obtained, not
only the approval of the Consistory that drew up corporate policies, but also that of
the required two-thirds vote of its membership.
The amendment of the articles of incorporation, as correctly put by the CA,
requires merely that a) the amendment is not contrary to any provision or requirement
under the Corporation Code, and that b) it is for a legitimate purpose. Section 17 of
the Corporation Code provides that amendment shall be disapproved if, among
others, the prescribed form of the articles of incorporation or amendment to it is not
observed, or if the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and regulations, or if
the required percentage of ownership is not complied with. These impediments do not
appear in the case of IEMELIF.
Besides, as the CA noted, the IEMELIF worked out the amendment of its
articles of incorporation upon the initiative and advice of the SEC. The latters
interpretation and application of the Corporation Code is entitled to respect and
recognition, barring any divergence from applicable laws. Considering its experience
and specialized capabilities in the area of corporation law, the SECs prior action on
the IEMELIF issue should be accorded great weight.
WHEREFORE, the Court DENIES the petition and AFFIRMS the October
31, 2007 decision and August 1, 2008 resolution of the Court of Appeals in CA-G.R.
SP 92640.

SO ORDERED.

acts of the defendants, plaintiffs suffered damages from the dimunition of their sales
and the loss of goodwill and reputation of their product in the market.

Republic
SUPREME
Manila

of

the

Philippines
COURT

En meritos de todo lo expuesto, este Juzgado dicta sentencia:

EN BANC
G.R. No. L-47701

After a protracted trial, featured by the dismissal of the case on March 9, 1936 for
failure of plaintiff's counsel to attend, and its subsequent reinstatement on April 4,
1936, the Court of First Instance of Manila, on October 29, 1937, rendered judgment
in favor of the complainants, the dispositive part of its decision reading thus:

June 27, 1941

THE
MENTHOLATUM
CO.,
INC.,
ET
vs.
ANACLETO MANGALIMAN, ET AL., respondents.
Araneta,
Zaragoza,
Araneta
Benito Soliven for respondents.

&

Bautista

AL.,

petitioners,

for

petitioners.

LAUREL, J.:
This is a petition for a writ of certiorari to review the decision of the Court of Appeals
dated June 29, 1940, reversing the judgment of the Court of First Instance of Manila
and dismissing petitioners' complaint.
On October 1, 1935, the Mentholatum Co., Inc., and the Philippine-American Drug
Co., Inc. instituted an action in the Court of First Instance of Manila, civil case No.
48855, against Anacleto Mangaliman, Florencio Mangaliman and the Director of the
Bureau of Commerce for infringement of trade mark and unfair competition. Plaintiffs
prayed for the issuance of an order restraining Anacleto and Florencio Mangaliman
from selling their product "Mentholiman," and directing them to render an accounting
of their sales and profits and to pay damages. The complaint stated, among other
particulars, that the Mentholatum Co., Inc., is a Kansas corporation which
manufactures Mentholatum," a medicament and salve adapted for the treatment of
colds, nasal irritations, chapped skin, insect bites, rectal irritation and other external
ailments of the body; that the Philippine-American Drug co., Inc., is its exclusive
distributing agent in the Philippines authorized by it to look after and protect its
interests; that on June 26, 1919 and on January 21, 1921, the Mentholatum Co., Inc.,
registered with the Bureau of Commerce and Industry the word, "Mentholatum," as
trade mark for its products; that the Mangaliman brothers prepared a medicament and
salve named "Mentholiman" which they sold to the public packed in a container of the
same size, color and shape as "Mentholatum"; and that, as a consequence of these

(a) Haciendo que sea perpetuo y permanente el iterdicto prohibitorio

preliminar expedido contra Anacleto Mangaliman, sus agentes y empleados,
prohibiendoles vender su producto en la forma en que se vendia al incoarse
la demanda de autos, o de alguna otra manera competir injustamente contra
el producto de las demandantes, y de usar la marca industrial
"MENTHOLIMAN" en sus productos;
(b) Ordenando al demandado Anacleto Mangaliman, que rinda exacta
cuenta de sus ganancias por la venta de su producto desde el dia 10 de
marzo de 1934, hasta la fecha de esta decision, y que pague a las
demandantes, en concepto de daos y perjuicios, lo que resulte ser la
ganancia de dicho demandado;
(c) Condenando a dicho demandado, Anacleto Mangaliman, a pagar un
multa de cincuenta pesos (P50) por desacato al Juzgado, y las costas del
juicio; y
(d) Sobreseyendo la contra-reclamacion
Mangaliman, contra las demandantes.

del

demandado,

Anacleto

In the Court of Appeals, where the cause was docketed as CA-G. R. No. 46067, the
decision of the trial court was, on June 29, 1940, reversed, said tribunal holding that
the activities of the Mentholatum Co., Inc., were business transactions in the
Philippines, and that, by section 69 of the Corporation Law, it may not maintain the
present suit. Hence, this petition for certiorari.
In seeking a reversal of the decision appealed from, petitioners assign the following
errors:
1. The Court of Appeals erred in declaring that the transactions of the
Mentholatum Co., Inc., in the Philippines constitute "transacting business" in
this country as this term is used in section 69 of the Corporation Law. The

aforesaid conclusion of the Court of Appeals is a conclusion of law and not

of fact.
2. The Court of Appeals erred in not holding that whether or not the
Mentholatum Co., Inc., has transacted business in the Philippines is an issue
foreign to the case at bar.
3. The Court of Appeals erred in not considering the fact that the complaint
was filed not only by the Mentholatum Co., Inc., but also by the PhilippineAmerican Drug Co., Inc., and that even if the Mentholatum Co., Inc., has no
legal standing in this jurisdiction, the complaint filed should be decided on its
merits since the Philippine-American Drug Co., Inc., has sufficient interest
and standing to maintain the complaint.
Categorically stated, this appeal simmers down to an interpretation of section 69 of
the Corporation Law, and incidentally turns upon a substantial consideration of two
fundamental propositions, to wit: (1) whether or not the petitioners could prosecute
the instant action without having secured the license required in section 69 of the
Corporation Law; and (2) whether or not the Philippine-American Drug Co., Inc., could
by itself maintain this proceeding.
Petitioners maintain that the Mentholatum Co., Inc., has not sold personally any of its
products in the Philippines; that the Philippine-American Drug Co., Inc., like fifteen or
twenty other local entities, was merely an importer of the products of the Mentholatum
Co., Inc., and that the sales of the Philippine-American Drug Co., Inc., were its own
and not for the account of the Mentholatum Co., Inc. Upon the other hand, the
defendants contend that the Philippine-American Drug Co., Inc., is the exclusive
distributing agent in the Philippines of the Mentholatum Co., Inc., in the sale and
distribution of its product known as "Mentholatum"; that, because of this arrangement,
the acts of the latter; and that the Mentholatum Co., Inc., being thus engaged in
business in the Philippines, and not having acquired the license required by section
68 of the Corporation Law, neither it nor the Philippine-American Drug co., Inc., could
prosecute the present action.
Section 69 of Act No. 1459 reads:
SEC. 69. No foreign corporation or corporation formed, organized, or
existing under any laws other than those of the Philippine Islands shall be
permitted to transact business in the Philippine Islands or maintain by itself
or assignee any suit for the recovery of any debt, claim, or demand
whatever, unless it shall have the license prescribed in the section
immediately preceding. Any officer, or agent of the corporation or any person
transacting business for any foreign corporation not having the license
prescribed shall be punished by imprisonment for not less than six months

nor more than two years or by a fine of not less than two hundred pesos nor
more than one thousand pesos, or by both such imprisonment and fine, in
the discretion of the court.
In the present case, no dispute exists as to facts: (1) that the plaintiff, the
Mentholatum Co., Inc., is a foreign corporation; (2) that it is not licensed to do
business in the Philippines. The controversy, in reality, hinges on the question of
whether the said corporation is or is not transacting business in the Philippines.
No general rule or governing principle can be laid down as to what constitutes "doing"
or "engaging in" or "transacting" business. Indeed, each case must be judged in the
light of its peculiar environmental circumstances. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substantially retired from it and
turned it over to another. (Traction Cos. v. Collectors of Int. Revenue [C. C. A. Ohio],
223 F. 984, 987.) The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive
prosecution of, the purpose and object of its organization. (Griffin v. Implement
Dealers' Mut. Fire Ins. Co., 241 N. W. 75, 77; Pauline Oil & Gas Co. v. Mutual Tank
Line Co., 246 P. 851, 852, 118 Okl. 111; Automotive Material Co. v. American
Standard Metal Products Corp., 158 N. E. 698, 703, 327 III. 367.)
In its decision of June 29, 1940, the Court of Appeals concluded that "it is undeniable
that the Mentholatum Co., through its agent, the Philippine-American Drug Co., Inc.,
has been doing business in the Philippines by selling its products here since the year
1929, at least." This is assailed by petitioners as a pure conclusion of law. This finding
is predicated upon the testimony of Mr. Roy Springer of the Philippine-American Drug
Co., Inc., and the pleadings filed by petitioners. The complaint filed in the Court of
First Instance of Manila on October 1, 1935, clearly stated that the PhilippineAmerican Drug Co., Inc., is the exclusive distributing agent in the Philippine Islands of
the Mentholatum Co., Inc., in the sale and distribution of its product known as the
Mentholatum." The object of the pleadings being to draw the lines of battle between
litigants and to indicate fairly the nature of the claims or defenses of both parties (1
Sutherland's Code Pleading, Practice & Forms, sec. 83; Milliken v. Western Union Tel.
Co., 110 N. Y. 403, 18 N. E. 251; Eckrom v. Swenseld, 46 N. D. 561, 563, 179 N. W.
920), a party cannot subsequently take a position contradictory to, or inconsistent
with, his pleadings, as the facts therein admitted are to be taken as true for the
purpose of the action. (46 C. J., sec. 121, pp. 122-124.) It follows that whatever
transactions the Philippine-American Drug Co., Inc., had executed in view of the law,
the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co., Inc., being a foreign
corporation doing business in the Philippines without the license required by section
68 of the Corporation Law, it may not prosecute this action for violation of trade mark
and unfair competition. Neither may the Philippine-American Drug Co., Inc., maintain

the action here for the reason that the distinguishing features of the agent being his
representative character and derivative authority (Mechem on Agency, sec. 1; Sory on
Agency, sec. 3; Sternaman v. Metropolitan Life Ins. Co., 170 N. Y. 21), it cannot now,
to the advantage of its principal, claim an independent standing in court.

TOP-WELD
MANUFACTURING,
INC.,
petitioner,
vs.
ECED, S.A., IRTI, S.A., EUTECTIC CORPORATION, VICTOR C. GAERLAN, and
THE HON. COURT OF APPEALS, respondents.

The appellees below, petitioners here, invoke the case of Western Equipment and
Supply Co. vs. Reyes (51 Phil., 115). The Court of Appeals, however, properly
distinguished that case from the one at bar in that in the former "the decision
expressly says that the Western Equipment and Supply Co. was not engaged in
business in the Philippines, and significantly added that if the plaintiff had been doing
business in the Philippine Islands without first obtaining a license, 'another and a very
different question would be presented'. " It is almost unnecessary to remark in this
connection that the recognition of the legal status of a foreign corporation is a matter
affecting the policy of the forum, and the distinction drawn in our Corporation Law is
an expression of that policy. The general statement made in Western Equipment and
Supply Co. vs. Reyes regarding the character of the right involved should not be
construed in derogation of the policy-determining authority of the State.

Angara, Conception, Regula & Cruz Law Office for petitioner.

The right of the petitioner conditioned upon compliance with the requirements of
section 69 of the Corporation Law to protect its rights, is hereby reserved.

Petitioner Top-weld Manufacturing, Inc. (Top-weld) is a Philippine corporation

engaged in the business of manufacturing and selling welding supplies and
equipment.

The writ prayed for should be, as it hereby is, denied, with costs against the
petitioners.
So ordered.

Republic
SUPREME
Manila

of

FIRST DIVISION
G.R. No. L-44944 August 9, 1985

the

Philippines
COURT

Alonzo Q. Ancheta for respondents.

GUTIERREZ, JR., J.:

This is a petition to review the decision of the Court of Appeals now Intermediate
Appellate Court annulling portions of the orders issued by Judge Gregorio Pineda of
the Court of First Instance of Rizal.

In pursuance of its business, the petitioner entered into separate contracts with two
different foreign entities. One contract, entitled a "LICENSE AND TECHNICAL
ASSISTANCE AGREEMENT" and dated January 2, 1972 was entered into with IRTI,
S.A., (IRTI), a corporation organized and existing under the laws of Switzerland with
principal office at Fribourg, Switzerland. By virtue of this agreement, the petitioner
was constituted a licensee of IRTI to manufacture welding products under certain
specifications, with raw materials to be purchased by the former from suppliers
designated by IRTI, for a period of three (3) years or up to January 1, 1975. This
contract was later extended up to December 31, 1975 in a subsequent agreement.
The other contract was a "DISTRIBUTOR AGREEMENT" dated January 1, 1975
entered into with ECED, S.A., (ECED), a company organized and existing under the
laws of Panama with principal office at Apartado 1903, Panama I, City of Panama.
Under this agreement, the petitioner was designated as ECED's distributor in the
Philippines of certain welding products and equipment. By its terms, the contract was
to remain effective until terminated by either party upon giving six (6) months or 180
days written notice to the other.
Upon learning that the two foreign entities were negotiating with another group to
replace the petitioner as their licensee and distributor, the latter instituted on June 16,
1975, Civil Case No. 21409 against IRTI, ECED another corporation named
EUTECTIC Corporation, organized under the laws of the State of New York, U.S.A.,

and an individual named Victor C. Gaerlan, a Filipino citizen alleged to be the

representative and employee of these three corporations.
In its complaint, the petitioner sought the issuance of a writ of preliminary injunction to
restrain the corporations from negotiating with third persons or from actually carrying
out the transfer of its distributorship and franchising rights, It also asked the court to
prohibit the defendants from terminating their contracts with the petitioner, and if said
termination had already been accomplished, from putting into effect and carrying out
the terms and the consequences of said termination until after good faith negotiations
on existing contracts between them had been carried out and completed.
On June 17, 1975, the lower court issued a restraining order against the corporation
pending the hearing on the issuance of a writ of preliminary injunction.
On July 25,1975, IRTI and ECED wrote Top-weld separate notices about the
termination of their respective contracts.
On September 3,1975, Top-weld filed an amended complaint together with a
supplemental complaint which embodied a new application for a preliminary
mandatory injunction to compel ECED to ship and deliver various items covered by
the distributorship contract, and to prohibit the corporations from importing into the
Philippines directly or indirectly any EUTECTIC materials, supplies or equipment
except to and/or through the petitioner.
Among others, the petitioner invoked the provisions of No. 9. Section 4 of Republic
Act 5455 on alien firms doing business in the Philippines.
The corporations filed their answers setting up as affirmative defenses violations of
the contracts allegedly committed by the petitioner consisting of the following:
a) Failure to pay respondent IRTI the stipulated 3% royalties;
b) The use of other wrong materials in the manufacture of welding
products bearing the Eutectic label;
c) The use of the wrong core wire in the manufacture of Eutectic
680;
d) The use of obsolete and antiquated equipment;
e) Rebranding of other manufactured welding products or nonEutectic products with the Eutectic label;

f) The manufacture and sale of inferior and substandard quality

products bearing the Eutectic label resulting in numerous
complaints from customers such as Saulog Transit and Manila
Mining Corporation;
g) The falsification of ECED pro-forma invoices in order to procure
Eutectic goods at lower prices;
h) The illegal channeling of sales of Eutectic products through the
Que Pe Hardware Store; and
i) The sale of welding products bearing brands other than Eutectic,
such as Fujiweld, and even Eutectic products not included in its
authority and for which it has never been supplied by respondent
EUTECTIC with the raw materials for its manufacture nor with
finished products thereof.
The respondent corporation further alleged that Section 4 (9) of R.A. No. 5455 cannot
possibly apply to the instant case because:
a) With the violations of the contracts by the plaintiff and "other just
causes" earlier mentioned, the defendants IRTI and ECED are fully
justified in terminating them without being obliged to pay any
compensation nor to reimburse plaintiff of investment or other
expenses;
b) In fact, the defendants have sent written notices dated July 25,
1975 of the termination of their respective agreements with
plaintiffs; and
c) Since no written certificate was applied for nor obtained by
defendant entities from the Board of Investments, the latter cannot
legally require of them compliance with No. 9, Section 4, R.A. No,
5455.
On October 9, 1975, the trial court issued an order granting the petitioner's
application for preliminary injunction embodied in the amended complaint and its
application for a writ of mandatory preliminary injunction embodied in the
supplemental complaint,
The corporations filed with the trial court a motion for reconsideration.

On December 18, 1975, the trial court issued another order denying the said motion
for reconsideration with respect to the lifting of the writ of preliminary injunction but
granting the prayer for the lifting of the writ of preliminary mandatory injunction.
The case was elevated to the Court of Appeals on a petition for certiorari with
preliminary injunction filed by the corporations. In setting aside the questioned orders,
the appelate court held that:
The determinative question defined by the contentions of the
parties in this case is, whether or not TOP-WELD may rightfully
invoke the provisions of Sec. 4, Republic Act No. 5455 to enjoin
petitioner corporations from terminating the subject licensing and
distributorship contracts they have with TOP-WELD. The pertinent
portion of the provision reads:
Section 4. Licenses to do business.-No alien, and
no firm, association, partnership, corporation, or
any other form of business organization formed,
organized, chartered or existing under any laws
other than those of the Philippines, or which is
not a Philippine National, or more than thirty per
cent of the outstanding capital of which is owned
or controlled by aliens shall do business or
engage in any economic activity in alien the
Philippines, or be registered, licensed, or
permitted by the Securities and Exchange
Commission, or by any other bureau, office,
agency, political subdivision, or instrumentality of
the government, to do business, or engage in an
economic activity in the Philippines without first
securing a written certificate from the Board of
Investments to the effect ... .
Upon granting said certificate, the Board shall
impose the following requirements on the alien or
the firm, association, partnership, corporation, or
other form of business organization that is not
organized or existing under the laws of the
Philippines. ... .
(9) Not to terminate any franchise, licensing or
other agreement that applicant may have with a
resident of the Philippines, authorizing the latter
to assemble, manufacture or sell within the

Philippines the products of the applicant, except

for violation thereof or other just cause and upon
payment of compensation and reimbursement
and other expenses incurred by the licensee in
developing a market for the said products;
Provided. however, That in case of disagreement,
the amount of compensation or reimbursement
shall be determined by the court where the
licensee is domiciled or has its principal office
who shall require the applicant to file a bond in
such amount as, in its opinion, is sufficient for this
purpose.
By the licensing and distributorship arrangements had with
TOPWELD, there is no doubt that IRTI and ECED were doing
business and engaging in economic activity in the Philippines (see
Sections 1 and 4, R.A. No. 5455), as a prerequisite to which they
should have first secured a written certificate from the Board of
Investments. It is not disputed, however, that IRTI and ECED have
not secured such written certificate in consequence of which there
was no occasion for the Board of Investments to impose the
requirements prescribed in the aforequoted provisions of Sec. 4,
R.A. No. 5455, among which is that the grantee of the certificate
shall not terminate any franchise, licensing or other agreement it
may have with a resident of the Philippines for the assembly,
manufacture or sale within the country of the products of said
grantee, except for violation thereof or other just cause and upon
payment of compensation and reimbursement and other expenses
incurred by the resident licensee in developing a market for said
products. In this case, while the parties are in dispute as to the
existence of a violation of the contracts involved or of other just
cause, there is no quarrel over the fact that IRTI and ECED have
not paid, and do not intend to pay, such compensation or
reimbursement contemplated in the law, maintaining that
TOPWELD is not entitled to the same.
Under the particular situation obtaining in this case, this Court is of
the opinion that petitioner corporations are not bound by the
requirement on termination, and TOPWELD cannot invoke the
same against the former. The reason is not simply because IRTI
and ECED, by failing to get the required certificate from the Board
of Investment, were not made subject by the said Board to the
requirement on termination, as maintained by petitioners. To
impose such requirement on petitioners would be to perpetuate,
and force them to remain in, an unlawful business operation.

Moreover, it was incumbent upon TOPWELD to know whether or

not IRTI and ECED were properly authorized to engage into the
licensing and distributorship agreements. At the very least
TOPWELD has not come to court with clear hands, and cannot be
heard to invoke the equitable remedy of injunction to perpetuate an
illegal situation it voluntarily helped bring about.
If only for the foregoing considerations, there appears a grave
abuse of discretion on the part of respondent Judge in issuing the
orders complained of.
Petitioner, TOP-WELD filed this present petition putting in issue the following
assignments of errors:
I
Respondent Court of Appeals committed a grave error when it held
that a foreign corporation, which is admittedly 'doing business in the
Philippines' but which has failed to secure the required certificate
and license to do business in the Philippines, is not subject to the
stricture imposed by Sec. 4 (9) of Republic Act No. 5455.
II
Respondent Court of Appeals committed a grave error when it held
that the failure of petitioner to know at the outset whether or not
respondents were properly authorized to engage in business in the
Philippines stops petitioner to invoke the protection of Sec. 4 (9) of
Republic Act No. 5455.
III
Respondent Court of Appeals committed a grave error when it held
that petitioner cannot invoke the remedy of injunction against
respondents.
At the vortex of the controversy is the issue whether or not respondent corporations
can be considered as "doing business" in the Philippines and, therefore, subject to
the provisions of R.A. No. 5455. There is no dispute that respondents are foreign
corporations not licensed to do business in the Philippines. More important, however,
there is no serious objection interposed by the respondents as to their amenability to
the jurisdiction of our courts.

There is no general rule or governing principle laid down as to what constitutes

"doing" or engaging in" or "transacting" business in the Philippines. Each case must
be judged in the light of its peculiar circumstances. (Mentholatum Co. V. Mangaliman,
72 Phil. 524). Thus, a foreign corporation with a settling agent in the Philippines which
issued twelve marine policies covering different shipments to the Philippines (General
Corporation of the Philippines v. Union Insurance Society of Canton, Ltd., 87 Phil.
313) and a foreign corporation which had been collecting premiums on outstanding
policies (Manufacturing Life Insurance Co. v. Meer, 89 Phil. 351) were regarded as
doing business here. The acts of these corporations should be distinguished from a
single or isolated business transaction or occasional, incidental and casual
transactions which do not come within the meaning of the law. Where a single act or
transaction, however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said single act or
transaction constitutes "doing" or "engaging in" or "transacting" business in the
Philippines. (Far East International Import and Export Corporation v. Nankai Kogyo,
Co., 6 SCRA 725).
In the Mentholatum Co. v. Mangaliman case earlier cited, this Court held:
xxx xxx xxx
... The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or
enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another. (Traction Cos. v.
Collectors of Int. Revenue [C.C.A. Ohio], 223 F. 984, 987.) The
term implies a continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of acts or works
or the exercise of some of the functions normally incident to, and in
progressive prosecution of, the purpose and object of its
organization. (Griffin v. Implement Dealers' Mut. Fire Ins. Co., 241
N.W. 75, 77, Pauline Oil & Gas Co. v. Mutual Tank Line Co., 246 P.
851, 852, 118 Okl. 111 Automotive Material Co. v. American
Standard Metal Products Corp., 158 N.E. 698, 703, 327 111. 367.)
Judged by the foregoing standards, we agree with the Court of Appeals in considering
the respondents as "doing business" in the Philippines. When the respondents
entered into the disputed contracts with the petitioner, they were carrying out the
purposes for which they were created, i.e. to manufacture and market welding
products and equipment. The terms and conditions of the contracts as well as the
respondents' conduct indicate that they established within our country a continuous
business, and not merely one of a temporary character. This fact is even more
strengthened by the admission of the respondents that they are negotiating with

another group for the transfer of the distributorship and franchising rights from the
petitioner.

xxx xxx xxx

RESTRICTI

Respondents' acts enabled them to enter into the mainstream of our economic life in
competition with our local business interests. This necessarily brings them under the
provisions of R.A. No. 5455.
The respondents contend that they should be exempted from the requirements of
R.A. 5455 because the petitioner maintained an independent status during the
existence of the disputed contracts.
This may be true if the petitioner is an independent entity which buys and distributes
products not only of the petitioner but also of other manufacturers or transacts
business in its name and for its account and not in the name or for the account of the
foreign principal.
A perusal of the agreements between the petitioner and the respondents shows that
they are highly restrictive in nature. The agreements provide in part the following
terms:
xxx xxx xxx
10. No Sales in Territory by IRTI

VE COVENANT
6. DISTRIBUTOR shall not during the continuance of this
agreement distribute products of any other manufacturer or supplier
in the Territory assigned to him, which are similar to the Products.
Upon the termination of this agreement by either party,
DISTRIBUTOR agrees not to engage, directly or indirectly, in the
commercialization, distribution and/or manufacture of products
competing with any EUTECTIC + CASTOLIN products covered by
this agreement, or of products likely to affect the sale of any
EUTECTIC + CASTOLIN products, either as principal, agent or
employee in the Territory, this prohibition to extend for a period of
two (2) years from the date of termination, except for the explicit
purpose of selling any remaining Products still in DISTRIBUTOR's
possession on the date of termination of this agreement which
sales shall not be below the DISTRIBUTOR's pretermination selling
price for such Products unless such sale is to ECED or its nominee
in which case Clause 19 hereof shall govern.
xxx xxx xxx

IRTI shall not solicitor or cause or permit its employees, licensees

or agents to solicit or make any sales, directly or indirectly, of
WELDING PRODUCTS within or to the Philippines. IRTI agrees to
refer to LICENSEE all product inquiries received by IRTI for
WELDING PRODUCTS destined for Philippines.

We can conclude that assuming the petitioner maintains an independent status, in

essence it merely extends to the Philippines the business of the foreign corporations.

xxx xxx xxx

On the basis of the foregoing, we uphold the appellate court's finding that "IRTI AND
ECED were doing business and engaging in economic activity in the Philippines ... as
a prerequisite to which they should have first secured a written certificate from the
Board of Investments."

16. x x x x x x x x x
Restrictive Covenant
LICENSEE will not, directly or indirectly, without the written consent
of IRTI at any time during the continuance of this Agreement and
for a period of two years after the date of the termination of this
Agreement, engage either directly or indirectly in the business of
selling products similar to said WELDING PRODUCTS, either as
principal, agent, employee or through stock or proprietary interests
in a third part entity.

The respondent court, however, erred in holding that "IRTI and ECED have not
secured such written certificate in consequence of which there is no occasion for the
Board of Investments to impose the requirements prescribed in the aforequoted
provisions of Sec. 4, R.A. No. 5455 ... ." To accept this view would open the way for
an interpretation that by doing business in the country without first securing the
required written certificate from the Board of Investments, a foreign corporation may
violate or disregard the safeguards which the law, by its provisions, seeks to
establish.

We agree, however, that there is a more compelling reason behind the finding that the
"corporations are not bound by the requirement on termination, and TOP-WELD
cannot invoke the same against the former."
As between the parties themselves, R.A. No. 5455 does not declare as void or invalid
the contracts entered into without first securing a license or certificate to do business
in the Philippines. Neither does it appear to intend to prevent the courts from
enforcing contracts made in contravention of its licensing provisions. There is no
denying, though, that an "illegal situation," as the appellate court has put it, was
created when the parties voluntarily contracted without such license.
The parties are charged with knowledge of the existing law at the time they enter into
the contract and at the time it is to become operative. (Twiehaus v. Rosner, 245 SW
2d 107; Hall v. Bucher, 227 SW 2d 98). Moreover, a person is presumed to be more
knowledgeable about his own state law than his alien or foreign contemporary. In this
case, the record shows that, at least, petitioner had actual knowledge of the
applicability of R.A. No. 5455 at the time the contract was executed and at all times
thereafter. This conclusion is compelled by the fact that the same statute is now being
propounded by the petitioner to bolster its claim. We, therefore, sustain the appellate
court's view that "it was incumbent upon TOP-WELD to know whether or not IRTI and
ECED were properly authorized to engage in business in the Philippines when they
entered into the licensing and distributorship agreements." The very purpose of the
law was circumvented and evaded when the petitioner entered into said agreements
despite the prohibition of R.A. No. 5455. The parties in this case being equally guilty
of violating R.A, No. 5455, they are in pari delicto, in which case it follows as a
consequence that petitioner is not entitled to the relief prayed for in this case.
In Bough v. Cantiveros (40 Phil. 210), the principle is laid down in these words: "The
rule of pari delicto is expressed in the maxims "ex dolo malo non eritur actio" and "in
pari delicto potior est conditio defedentis." The law will not aid either party to an illegal
agreement. It leaves the parties where it finds them."
No remedy could be afforded to the parties because of their presumptive knowledge
that the transaction was tainted with illegality. (Soriano v. Ong Hoo, 103 Phil. 829).
Equity cannot lend its aid to the enforcement of an alleged right claimed by virtue of
an agreement entered into in contravention of law.
Lastly, we come to the issue of "just cause" for the termination of the contracts or the
alleged violations of the contracts made by petitioner. Though properly ventilated
below, this factual issue was not determined by both the trial court and the appellate
court.
The record shows that respondents, in opposing the injunction suit and alleging the
violations of the contracts, submitted and relied on their affidavits. The petitioner,

however, to refute these charges, submitted a "Reply to Opposition" which is neither

verified nor supported by counter-affidavits. There is no showing in the records before
us whether oral testimony was presented by any of the parties or whether the affiants
were subjected to the test of cross-examination and if any, what was stated during the
oral testimony.
The burden of overcoming the responsive effect of the answer is upon the petitioner.
He who alleges a fact has the burden of proving it and a mere allegation is not
evidence. (Legasca v. De Vera, 79 Phil. 376) Hearsay evidence alone may be
insufficient to establish a fact in an injunction suit (Parker v. Furlong, 62 P. 490) but,
when no objection is made thereto, it is, like any other evidence, to be considered and
given the importance it deserves. (Smith v. Delaware & Atlantic Telegraph &
Telephone Co., 51 A 464). Although we should warn of the undesirability of issuing
judgments solely on the basis of the affidavits submitted, where as here, said
affidavits are overwhelming, uncontroverted by competent evidence and not
inherently improbable, we are constrained to uphold the allegations of the
respondents regarding the multifarious violations of the contracts made by the
petitioner. Accordingly, we rule that there exists a just cause for respondents to move
for the termination of their contracts with the petitioner.
Moreover, the facts on record show that the "License and Technical Assistance
Agreement" between petitioner and respondent IRTI was extended only for a period
of one year or to be precise, from January 1, 1975 to December 31, 1975. The
original injunction suit was brought in the court a quo in June1975, the purpose being
to stop the respondent from terminating the contract. This purpose was realized when
the court granted the injunction. By the time respondents' appeal was decided by the
Court of Appeals, it was already past the extended period. The dispute between the
parties had been rendered moot and academic. It should be stated that the courts be
it the original trial court or the appellate court have no power to make contracts for the
parties. No court would be justified in extending the life of the contracts, subject of this
controversy, since that would do violence to the basic principle that contracts must be
the voluntary agreements of parties,
Parties can not be coerced to enter into a contract where no agreement is had
between them as to the principal terms and condition of the contract (Republic v.
Philippine Long Distance Telephone Co., 26 SCRA 620).
With the above observations, there is nothing more for this Court to do except to
dismiss the petition.
ACCORDINGLY, the petition is hereby dismissed. The appealed decision of the Court
of Appeals is AFFIRMED,
SO ORDERED.

SECOND DIVISION
[G.R. No. 97642. August 29, 1997]
AVON INSURANCE PLC, BRITISH RESERVE INSURANCE. CO. LTD., CORNHILL
INSURANCE PLC, IMPERIO REINSURANCE CO. (UK) LTD., INSTITUTE
DE RESEGURROS DO BRAZIL, INSURANCE CORPORATION OF
IRELAND PLC, LEGAL AND GENERAL ASSURANCE SOCIETY LTD.,
PROVINCIAL INSURANCE PLC, QBL INSURANCE (UK) LTD., ROYAL
INSURANCE CO. LTD., TRINITY INSURANCE CO. LTD., GENERAL
ACCIDENT FIRE AND LIFE ASSURANCE CORP. LTD., COOPERATIVE
INSURANCE SOCIETY and PEARL ASSURANCE CO. LTD., petitioners,
vs. COURT OF APPEALS, REGIONAL TRIAL COURT OF MANILA,
BRANCH 51, YUPANGCO COTTON MILLS, WORLDWIDE SURETY &
INSURANCE CO., INC., respondents.
DECISION
TORRES, JR., J.:
Just how far can our court assert jurisdiction over the persons of foreign entities
being charged with contractual liabilities by residents of the Philippines?
Appealing from the Court of Appeals October 11, 1990 Decision in CA-G.R. No.
22005, petitioners claim that the trial courts jurisdiction does not extend to them, since
they are foreign reinsurance companies that are not doing business in the Philippines.
Having entered into reinsurance contracts abroad, petitioners are beyond the
jurisdictional ambit of our courts and cannot be rendered summons through
extraterritorial service, as under Section 17, Rule 14 of the Rules of Court, nor
through the Insurance Commissioner, under Section 14. Private respondent
Yupangco Cotton Mills contend on the other hand that petitioners are within our
courts cognitive powers, having submitted voluntarily to their jurisdiction by filing
motions to dismiss the private respondents suit below.
The antecedent facts, as found by the appellate court, are as follows:
Respondent Yupangco Cotton Mills filed a complaint against several

foreign reinsurance companies (among which are petitioners) to collect

their alleged percentage liability under contract treaties between the
foreign insurance companies and the international insurance broker C.J.
Boatright, acting as agent for respondent Worldwide Surety and Insurance
Company. Inasmuch as petitioners are not engaged in business in the
Philippines with no offices, places of business or agents in the Philippines,
the reinsurance treaties having been rendered abroad, service of
summons upon motion of respondent Yupangco, was made upon
petitioners through the office of the Insurance Commissioner. Petitioners,
by counsel on special appearance, seasonably filed motions to dismiss
disputing the jurisdiction of respondent Court and the extra-territorial
service of summons. Respondent Yupangco filed its opposition to the
motion to dismiss, petitioners filed their reply, and respondent Yupangco
filed its rejoinder. In an order dated April 30, 1990 respondent Court denied
the motions to dismiss and directed petitioners to file their answer. On May
29, 1990, petitioners filed their notice of appeal. In an order dated June 4,
1990, respondent court denied due course to the appeal.
To this day, trial on the merits of the collection suit has not proceeded as in the
present petition, petitioners continue vigorously to dispute the trial courts assumption
of jurisdiction over them.
It will be remembered that in the plaintiffs complaint, it was contended that on
July 6, 1979 and on October 1, 1980, Yupangco Cotton Mills engaged to secure with
Worldwide Security and Insurance Co. Inc., several of its properties for the periods
July 6, 1979 to July 6, 1980 as under Policy No. 20719 for a coverage of
P100,000,000.00 and from October 1, 1980 to October 1, 1981, under Policy No.
25896, also for P100,000,000.00. Both contracts were covered by reinsurance
treaties between Worldwide Surety and Insurance and several foreign reinsurance
companies, including the petitioners. The reinsurance arrangements had been made
through international broker C.J. Boatright and Co. Ltd., acting as agent of Worldwide
Surety and Insurance.
As fate would have it, on December 16, 1979 and May 2, 1981, with in the
respective effectivity periods of Policies 20719 and 25896, the properties therein
insured were razed by fire , thereby giving rise to the obligation of the insurer to
indemnify the Yupangco Cotton Mills. Partial payments were made by Worldwide
Surety and Insurance and some of the reinsurance companies.
On May 2, 1983, Worldwide Surety and Insurance, in a deed of Assignment,
acknowledge a remaining balance of P19,444,447.75 still due Yupangco Cotton Mills,
and assigned to the latter all reinsurance proceeds still collectible from all the foreign
reinsurance companies. Thus, in its interest as assignee and original insured,
Yupangco Cotton Mills instituted this collection suit against the petitioners.
Service of summons upon the petitioners was made by notification to the
Insurance Commissioner, pursuant to Section 14, Rule 14 of the Rules of Court.
In a Petition for Certiorari filed with the Court of Appeals, petitioners submitted
that respondent Court has no jurisdiction over them, being all foreign corporations not
doing business in the Philippines with no office, place of business or agents in the

Philippines. The remedy of Certiorari was resorted to by petitioners on the premise

that if petitioners had filed an answer to the complaint as ordered by the respondent
court, they would risk abandoning the issue of jurisdiction. Moreover, extra-territorial
service of summons on petitioners is null and void because the complaint for
collection is not one affecting plaintiffs status and not relating to property within the
Philippines.

petitioners all not doing business in the Philippines is null and void.
The appearance of counsel for petitioners being explicitly by special
appearance without waiving objections to the jurisdiction over their persons
or the subject matter and the motions do dismiss having excluded nonjurisdictional grounds, there is no voluntary submission to the jurisdiction of
the trial court.

The Court of Appeals found the petition devoid of merit, stating that:
For its part, private respondent Yupangco counter-submits:
1. Petitioners were properly served with summons and whatever defect, if
any, in the service of summons were cured by their voluntary
appearance in court, via motion to dismiss.
2. Even assuming that petitioners have not yet voluntarily appeared as
co-defendants in the case below even after having filed the motion to
dismiss adverted to, still the situation does not deserve dismissal of the
complaint as far as they are concerned, since as held by this Court in
Linger Fisher GMBH vs. IAC, 125 SCRA 253.
A case should not be dismissed simply because an original summons
was wrongfully served. It should be difficult to conceive for example, that
when a defendant personally appears before a court complaining that he
had not been validly summoned, that the case filed against him should be
dismissed. An alias summons can be actually served on said defendant.
3. Being reinsurers of respondent Worlwide Surety and Insurance of the
risk which the latter assumed when it issued the fire insurance policies
in dispute in favor of respondent Yupangco, petitioners cannot now
validly argue that they do not do business in this country. At the very
least, petitioners must be deemed to have engaged in business in the
Philippines no matter how isolated or singular such business might be,
even on the assumption that among the local domestic insurance
corporations of this country, it is only in favor of Worldwide Surety and
Insurance that they have ever reinsured any risk arising from
reinsurance within the territory.

1.
Foreign corporations, such as petitioners, not doing business
in the Philippines, can be sued in the Philippine Courts, not withstanding
petitioners claim to the contrary.
2.
While the complaint before the Honorable Trial Court is for a
sum of money, not affecting status or relating to property, petitioners (then
defendants) can submit themselves voluntarily to the jurisdiction of
Philippine Courts, even if there is no extra-judicial (sic) service of
summons upon them.
3.
The voluntary appearance of the petitioners (then defendants)
before the Honorable Trial Court amounted, in effect, to voluntary
submission to its jurisdiction over their persons.
In the decisions of the courts below, there is much left to speculation and
conjecture as to whether or not the petitioners were determined to be doing business
in the Philippines or not.
To qualify the petitioners business of reinsurance within the Philippine forum,
resort must be made to established principles in determining what is meant by doing
business in the Philippines. In Communication Materials and Design, Inc. et. al vs.
Court of Appeals, it was observed that:

4. The issue of whether or not petitioners are doing business in the

country is a matter best reffered to a trial on the merits of the case and
so should be addressed there.

There is no exact rule of governing principle as to what constitutes

doing or engaging in or transacting business. Indeed, such case must be
judged in the light of its peculiar circumstances, upon its peculiar facts and
upon the language of the statute applicable. The true test, however, seems
to be whether the foreign corporation is continuing the body or substance
of the business or enterprise for which it was organized.

Maintaining its submission that they are beyond the jurisdiction of the Philippine
Courts, petitioners are now before us, stating:

Article 44 of the Omnibus Investments Code of 1987 defines the

phrase to include:

Petitioners, being foreign corporations, as found by the trial court, not

doing business in the Philippines with no office, place of business or
agents in the Philippines, are not subject to the jurisdiction of the Philippine
courts.

'soliciting orders, purchases, service contracts opening

offices, whether called liaison offices of branches; appointing
representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the Philippines
for a period or periods totaling one hundred eighty (180) days or
more; participating in the management, supervision or control of
any domestic business firm, entity or corporation in the

The complaint for sum of money being a personal action not affecting
status or relating to property, extraterritorial service of summons on

Philippines, and any other act or acts that imply a continuity or

commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of
some of the functions normally incident to and in progressive
prosecution of, commercial gain or of purpose and object of the
business organization.

Marshall Wells Co. vs. Elser, it was held that corporations have no legal status
beyond the bounds of sovereignty by which they are created. Nevertheless, it is
widely accepted that foreign corporations are, by reason of state comity, allowed to
transact business in other states and to sue in the courts of such fora. In the
Philippines foreign corporations are allowed such privileges, subject to certain
restrictions, arising from the states sovereign right of regulation.

The term ordinarily implies a continuity of commercial dealings and

arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of the functions normally incident to and in progressive prosecution of
the purpose and object of its organization.

Before a foreign corporation can transact business in the country, it must first
obtain a license to transact business here and secure the proper authorizations under
existing law.

A single act or transaction made in the Philippines, however, could not qualify a
foreign corporation to be doing business in the Philippines, if such singular act is not
merely incidental or casual, but indicates the foreign corporations intention to do
business in the Philippines.
There is no sufficient basis in the records which would merit the institution of this
collection suit in the Philippines. More specifically, there is nothing to substantiate the
private respondents submission that the petitioners had engaged in business
activities in this country. This is not an instance where the erroneous service of
summons upon the defendant can be cured by the issuance and service of alias
summons, as in the absence of showing that petitioners had been doing business in
the country, they cannot be summoned to answer for the charges leveled against
them.
The Court is cognizant of the doctrine is Signetics Corp. vs. Court of Appeals
that for the purpose of acquiring jurisdiction by way of summons on a defendant
foreign corporation, there is no need to prove first the fact that defendant is doing
business in the Philippines. The plaintiff only has to allege in the complaint that the
defendant has an agent in the Philippines for summons to be validly served thereto,
even without prior evidence advancing such factual allegation.
As it is, private respondent has made no allegation or demonstration of the
existence of petitioners domestic agent, but avers simply that they are doing business
not only abroad but in the Philippines as well. It does not appear at all that the
petitioners had performed any act which would give the general public the impression
that it had been engaging, or intends to engage in its ordinary and usual business
undertakings in the country. The reinsurance treaties between the petitioners and
Worldwide Surety and Insurance were made through an international insurance
brokers, and not through any entity of means remotely connected with the Philippines.
Moreover there is authority to the effect that a reinsurance company is not doing
business in a certain state merely because the property of lives which are insured by
the original insurer company are located in that state. The reason for this is that a
contract or reinsurance is generally a separate and distinct arrangement from the
original contract of insurance, whose contracted risk is insured in the reinsurance
agreement. Hence, the original insured has generally no interest in the contract of
reinsurance.
A foreign corporation, is one which owes its existence to the laws of another
state, and generally has no legal existence within the state in which it is foreign. In

If a foreign corporation engages in business activities without the necessary

requirements, it opens itself to court actions against it, but it shall not be allowed
maintain or intervene in an action, suit or proceeding for its own account in any court
or tribunal or agency in the Philippines.
The purpose of the law in requiring that foreign corporations doing business in
the country be licensed to do so, is to subject the foreign corporations doing business
in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation
illegally doing business here because of its refusal or neglect to obtain the required
license and authority to do business may successfully though unfairly plead such
neglect or illegal act so as to avoid service and thereby impugn the jurisdiction of the
local courts.
The same danger does not exist among foreign corporations that are indubitably
not doing business in the Philippines. Indeed, if a foreign corporation does not do
business here, there would be no reason for it to be subject to the States regulation.
As we observed, in so far as State is concerned, such foreign corporation has no
legal existence. Therefore, to subject such corporation to the courts jurisdiction would
violate the essence of sovereignty.
In the alternative, private respondent submits that foreign corporations not doing
business in the Philippines are not exempt from suits leveled against them in courts,
citing the case of Facilities Management Corporation vs. Leonardo Dela Osa, et. al.
where we ruled that indeed, if a foreign corporation, not engaged in business in the
Philippines, is not barred from seeking redress from Courts in the Philippines, a
fortiori, that same corporation cannot claim exemption from being sued in the
Philippines Courts for acts done against a person or persons in the Philippines.
We are not persuaded by the position taken by the private respondent. In
Facilities Management case, the principal issue presented was whether the petitioner
had been doing business in the Philippines, so that service of summons upon its
agent as under Section 14, Rule 14 of the Rules of Court can be made in order that
the Court of First Instance could assume jurisdiction over it. The court ruled that the
petitioner was doing business in the Philippines, and that by serving summons upon
its resident agent, the trial court had effectively acquired jurisdiction. In that case, the
court made no prescription as the absolute suability of foreign corporations not doing
business in the country, but merely discounts the absolute exemption of such foreign
corporations from liabilities particularly arising from acts done against a person or
persons in the Philippines.

As we have found, there is no showing that petitioners had performed any act in
the country that would place it within the sphere of the courts jurisdiction. A general
allegation standing alone, that a party is doing business in the Philippines does not
make it so. A conclusion of fact or law cannot be derived from the unsubstantiated
assertions of parties notwithstanding the demands of convenience or dispatch in legal
actions, otherwise, the Court would be guilty of sorcery; extracting substance out of
nothingness. In addition, the assertion that a resident of the Philippines will be
inconvenienced by an out-of-town suit against a foreign entity, is irrelevant and
unavailing to sustain the continuance of a local action, for jurisdiction is not
dependent upon the convenience or inconvenience of a party.
It is also argued that having filed a motion to dismiss in the proceedings before
the trial court, petitioners have thus acquiesced to the courts jurisdiction, and they
cannot maintain the contrary at this juncture.
This argument is at the most, flimsy.
In civil cases, jurisdiction over the person of the defendant is acquired either by
his voluntary appearance in court and his submission to its authority or by service of
summons.
Fundamentally, the service of summons is intended to give official notice to the
defendant or respondent that an action had been commenced against it. The
defendant or respondent is thus put on guard as to the demands of the plaintiff as
stated in the complaint. The service of summons, upon the defendant becomes an
important element in the operation of a courts jurisdiction upon a party to a suit, as
service of summons upon the defendant is the means by which the court acquires
jurisdiction over his person. Without service of summons, or when summons are
improperly made, both the trial and the judgment, being in violation of due process,
are null and void, unless the defendant waives the service of summons by voluntarily
appearing and answering the suit.
When a defendant voluntarily appears, he is deemed to have submitted himself
to the jurisdiction of the court. This is not, however, always the case. Admittedly, and
without subjecting himself to the courts jurisdiction, the defendant in an action can, by
special appearance object to the courts assumption on the ground of lack of
jurisdiction. If he so wishes to assert this defense, he must do so seasonably by
motion for the purpose of objecting to the jurisdiction of the court, otherwise, he shall
be deemed to have submitted himself to that jurisdiction. In the case of foreign
corporations, it has been held that they may seek relief against the wrongful
assumption of jurisdiction by local courts. In Time, Inc. vs. Reyes, it was held that the
action of a court in refusing to rule of deferring its ruling on a motion to dismiss for
lack or excess of jurisdiction is correctable by a writ of prohibition or certiorari sued
out in the appellate court even before trial on the merits is had. The same remedy is
available should the motion to dismiss be denied, and the court, over the foreign
corporations objections, theratens to impose its jurisdiction upon the same.
If the defendant, besides setting up in a motion to dismiss his objections to the
jurisdiction of the court, alleges at the same time any other ground for dismissing the
action, or seeks an affirmative refief in the motion, he is deemed to have submitted
himself to the jurisdiction of the court.

In this instance, however, the petitioners from the time they filed their motions to
dismiss, their submission have been consistently and unfailingly to object to the trial
courts assumption of jurisdiction, anchored on the fact that they are all foreign
corporations not doing business in the Philippines.
As we have consistently held, if the appearance of a party in a suit is precisely
to question the jurisdiction of the said tribunal over the person of the defendant, then
this appearance is not equivalent to service of summons, nor does is constitute an
acquiescence to the courts jurisdiction. Thus it cannot be argued that the petitioners
had abandoned their objections to the jurisdiction of the court, as their motions to
dismiss in the trial court, and all their subsequent posturings, were all in protest of the
private respondent's insistence on holding them so answer a charge in a forum where
they believe they are not subject to. Clearly, to continue the proceedings in a case
such as those before Us would just be useless and a waste of time.
ACCORDINGLY, the decision appealed from dated October 11, 1990, is SET
ASIDE and the instant petition is hereby GRANTED. The respondent Regional Trial
Court of Manila, Branch 51 is declared without jurisdiction to take cognizance of Civil
Case No. 86-37932, and all its orders and issuances in connection therewith are
hereby ANNULLED and SET ASIDE. The respondent court is hereby ORDERED to
DESIST from maintaining further proceeding in the case aforestated.
SO ORDERED.

promulgated on May 9, 2001, and its Resolution promulgated on July 20, 2001
denying the Motion for Reconsideration of petitioner Securities and Exchange
Commission (SEC). The Decision of the Court of Appeals reversed and set aside the
Order of the SEC dated October 5, 2000 and directed SEC to decide SEC Case No.
12-96-5505, entitled Jose T. Jalandoon v. International Broadcasting Corporation, et
al.
The antecedents[2] of the case are as follows:
On April 3, 1996, Julius Raboca, the corporate secretary of International
Broadcasting Corporation (IBC), caused the publication in the newspapers of a
Notice, which, among others, enjoined all persons having any claim against IBC to
present them to the Office of the Corporate Secretary within five days from date of
publication, after which, no claim would be entertained.
FIRST DIVISION
INTERNATIONAL BROADCASTING
CORPORATION,
Petitioner,

Respondent Jose T. Jalandoon, after reading the Notice, wrote a letter to

Raboca to make his claim of twenty percent (20%) of the shareholdings of IBC.
Raboca allegedly did nothing on the claim.
In December 1996, Jalandoon filed with SEC an Amended Petition[3] for
Accounting, Reconstitution of Records, Mandamus, Nullification of Directors Election,
Calling of Stockholders Meeting, and Damages against IBC and the members[4] of its
Board of Directors.

- versus - G.R. No. 148152

JOSE T. JALANDOON,
Respondent,
x ------------------------------------------------ x
SECURITIES AND EXCHANGE G.R. No. 149450
COMMISSION,
Petitioner, Present:
DAVIDE, JR., C.J. (Chairman),
QUISUMBING,
- versus - YNARES-SANTIAGO,
CARPIO, and
AZCUNA, JJ.
JOSE T. JALANDOON, Promulgated:
Respondent.
November 18, 2005
x----------------------------------------------------------------------------------------x
DECISION
AZCUNA, J.:
Before us are two consolidated petitions for review on certiorari of the
Decision[1] of the Court of Appeals in CA-G.R. SP No. 62027

On February 10, 1997, IBC, et al., filed its Answer with Counterclaims and,
at the same time, moved for the dismissal of the case through its counsel, Cruz
Enverga & Raboca.
On June 2, 1997, the Office of the Government Corporate Counsel (OGCC)
made a verbal manifestation that it had known of the filing of the case a few days ago
and requested for extension of time to enter into preliminary conference. Cruz
Enverga & Raboca withdrew as counsel for IBC.
During the preliminary conference on June 25, 1997, IBC, et al. were
declared in default due to the failure of the OGCCs lawyers to produce a Board
Resolution authorizing them to appear in behalf of IBC, et. al.
On July 2, 1997, the Presidential Commission on Good Government
(PCGG), filed a Special Appearance and Motion to Dismiss assailing SECs
jurisdiction over the case on the ground that it is the Sandiganbayan that has sole and
exclusive jurisdiction over the case involving IBC, as an acquired asset of the
Republic of the Philippines.
On July 3, 1997, the OGCC, in behalf of IBC, filed an Omnibus Motion,
namely, a Motion for Reconsideration and/or To Lift Order of Default; a Motion to
Nullify All Proceedings Taken after Declaration of Default; and a Motion to Dismiss.
On July 28, 1997, the SEC Hearing Officer issued an Omnibus Order lifting
the Order declaring IBC in default, denying the motion to nullify all proceedings after
declaring IBC in default, and denying the motion to dismiss for lack of merit.

On the motion to dismiss, the SEC Hearing Officer ruled:

The motion to dismiss cannot be sustained on the
allegation that IBC was ceded to the government by Roberto S.
Benedicto, over the claim of petitioner that he is owner of some
shares of stocks in IBC. Whether said shares of stock are subject to
sequestration or were sequestered shares, is best determined after
trial on the merits.
Also it cannot be argued that the real party in interest is
the PCGG.
IBC is an entity separate and distinct from the PCGG. If
ever, the PCGG (or the) government owns shares of stocks in IBC,
it does so [in] its proprietary character, stepping down from the
pedestal of its sovereign power, and engages into private
ownership and contracts like an ordinary citizen, thus shedding off
its sovereign immunity from suit.[5]
IBC, et al. filed a motion for reconsideration of the Omnibus Order insofar as
it denied their motion to dismiss and to nullify the proceedings after declaration of
default. The SEC Hearing Officer denied it in an Order dated June 22, 1998.[6]
Pre-trial and trial ensued. Thereafter, the parties presented their respective
evidence. The SEC Hearing Officer admitted the exhibits formally offered in evidence
by Jalandoon in an Order dated March 9, 2000.
In an Order dated July 25, 2000, the SEC Hearing Officer admitted the
exhibits formally offered in evidence by IBC, et al. and the case was considered
submitted for decision. The parties were directed to submit their respective
memoranda not later than 15 days from receipt of the Order.
On August 9, 2000, Republic Act No. 8799, otherwise known as the
Securities Regulation Code, took effect. The Act transferred jurisdiction over intracorporate disputes from SEC to the Regional Trial Courts.
Anticipating the Codes effectivity, the SEC earlier issued, on August 1, 2000,
the Guidelines on Intra-Corporate Cases Pending Before the SICD and the
Commission En Banc of the Securities and Exchange Commission.
On October 5, 2000, the SEC en banc issued an Order,[7] the pertinent
portions of which read:

. . . The petition failed to implead the Republic and is

therefore defective in form. Nonetheless, the substantiality being
plainly evident, such defect in form can and must be cured,
otherwise, no final determination of the case can be had. The
impleading of the Republic as party-respondent is thus in order.
And in accordance with the constitutional provisions and
jurisprudential declarations, the Republic must be accorded due
process and given its day in court.
In view of the foregoing determination by the Commission,
there is still much left to be done before the case can reach the final
disposition stage. Considering the effectivity of the new Securities
Regulation Code on August [9], 2000 and the Guidelines of the
Commission, and further considering that the case is not yet ripe for
final adjudication, the Commission no longer has any jurisdiction to
continue to hear the case, receive pertinent pleadings thereto nor
render a final judgment therein.
Despite the loss of its jurisdiction and because the
Commission cannot render a final decision based on the
foregoing discussions on the defect of non-joinder of an
indispensable party, the Commission is of the opinion that it must
issue this last order, so that the actual merits of the controversy
may speedily be determined. To do otherwise would leave the case
in limbo, a situation which the Commission, in the [interest] of
justice, cannot allow.
WHEREFORE, foregoing premises considered, and under
the circumstances of the present case, the Republic of the
Philippines, as represented by PCGG, is hereby ordered impleaded
as party-respondent, copy of this decision shall be furnished the
Office of the Solicitor General as counsel for the government. The
parties are directed to furnish the Solicitor General with copies of all
the pertinent pleadings they have filed in the instant case within
fifteen (15) days from their receipt hereof. The Solicitor General is
hereby directed to file its Comments and Answer to the petitioners
claims within fifteen (15) days from its receipt of said pleadings.
And the petitioner is given a like period of time to file his response
thereto. Any and all pleadings required to be submitted after this
Order is issued shall be filed before the court of proper jurisdiction
as may be designated by the Supreme Court.
SO ORDERED. [8]

...
The Commission now holds that the Republic, as the
registered owner of 100% of the shares of IBC -13, is a real party in
interest, because it stands to be benefited or injured by the
judgment in the suit, or the party entitled to the avails of the suit.
...

Respondent appealed the SEC Order to the Court of Appeals by filing a

Petition for Certiorari and Mandamus With Very Urgent Application for the Issuance of
a Writ of Preliminary Injunction and/or Temporary Restraining Order.
In its Decision promulgated on May 9, 2001, the Court of Appeals stated the
main issue as: Did the Securities and Exchange Commission gravely abuse its

discretion in refusing to decide the instant case and instead transferring the same to
the regular courts?

1.

Did the Court of Appeals err in ordering SEC

to decide the case filed by respondent Jalandoon,
docketed as SEC-SICD Case No. 12-96-5505?

2.

Does SEC have jurisdiction over respondents

claim of ownership or interest in IBC or is the
determination of such ownership properly lodged with the
Sandiganbayan in connection with Sandiganbayan Case
No. 0034 for reversion, reconveyance, restitution,
accounting and damages filed by the Republic/PCGG?

3.

Assuming arguendo that SEC has jurisdiction

over this case, was the case ripe for decision when
Republic Act No. 8799 took effect on August 9, 2000,
which transferred jurisdiction over intra-corporate disputes
from SEC to the Regional Trial Courts?

4.

Did SEC lose jurisdiction over the instant case

pursuant to Republic Act No. 8799?

The Court of Appeals held that SEC should decide the instant case, thus:
It is undisputed that per order dated July 28, 2000, (p. 382,
rollo), petitioners (Jalandoon) case before the Commission was
now submitted for decision. Both parties therein, per records, duly
submitted the required memorandum within fifteen (15) days from
receipt of the order. Clearly, therefore, at the time petitioners case
was being heard and up to the time the same was submitted for
decision, it was still governed by the REVISED RULES OF
PROCEDURE IN THE SECURITIES AND EXHANGE
COMMISSION adopted on August 1, 1989 as amended, on April
26, 1993.
It must also be pointed out that the GUIDELINES which
the Commission issued pursuant to par. 5.2, Sec. 5, of R.A. 8799,
specifically Sec. 2 thereof provides thus: The COMMISSION
SHALL RETAIN JURISDICTION OVER PENDING INTRACORPORATE
DISPUTES
SUBMITTED
FOR
FINAL
RESOLUTION [PRIOR TO THE EFFECTIVITY OF THE ACT]
which shall be resolved within one (1) year from July 19, 2000.
Since petitioners case was submitted for final resolution on July 28,
2000 and since R.A. 8799 took effect only on August 9, 2000,
petitioners case should have remained within the jurisdiction of
public respondent Commission and decided by it pursuant to the
August 1, 1989 Rules of the Commission, as amended . . . .[9]

Petitioner IBC, represented by the OGCC, contends that SEC has no

jurisdiction over the instant case since it involves the determination of the ownership
of its company, which is the subject of Sandiganbayan Case No. 0034 for reversion,
reconveyance, restitution, accounting and damages. IBC asserts that issues which
arise from and are incidental to said sequestration case before the Sandiganbayan
should be raised in the Sandiganbayan, citing Presidential Commission on Good
Government v. Pea[11] and Republic of the Philippines v. Sandiganbayan.[12]
We do not agree.

The dispositive portion of the Decision of the Court of Appeals reads:

Wherefore, foregoing premises considered, the petition is
hereby GIVEN DUE COURSE, and the challenged order of public
respondent Commission hereby REVERSED and SET ASIDE, and
it is hereby DIRECTED to decide the case of petitioner in
accordance with its August 1, 1989 Rules, as amended, and based
on the evidence duly offered and admitted. No costs.
SO ORDERED.

[10]

SEC filed a Motion for Reconsideration of the Decision of the Court of

Appeals, which was denied in a Resolution promulgated on July 20, 2001.
Both SEC and IBC filed before this Court their respective petitions for review
on certiorari of the Decision of the Court of Appeals. SEC also sought a review of the
Court of Appeals Resolution dated July 20, 2001, which denied its motion for
reconsideration. Respondent Jalandoon moved for the consolidation of the two
petitions, which was granted by the Court.
The relevant issues raised by petitioners are:

As stated by SEC in its Order, the sequestration proceedings over IBC are
over. The Sandiganbayan has ordered the transfer of IBCs shares of stock in the
name of the Republic of the Philippines. As ownership of IBC has been vested upon
the Republic, the subject matter of the instant suit falls within the definition of intracorporate controversy over which SEC had jurisdiction at the time this case was
initiated.
In a separate petition[13] filed with us by Jalandoon against PCGG, which
sought to enjoin PCGG from proceeding with the scheduled public bidding of the
assets of IBC on December 27, 1996, PCGG recognized the jurisdiction of SEC over
the instant case when it agreed in a Joint Motion with Jalandoon to refer the
resolution of Jalandoons claim over the 20% equity in IBC-13 to SEC. The Joint
Motion, in part, submitted:
...
3. That the claim of the petitioner over the 20% equity in IBC -13
shall be litigated in the Securities & Exchange
Commission (SEC), and the release of the said 20%
equity shall be conditioned upon the rendition of a final
and executory judgment in favor of the person entitled
thereto;

4. That in consideration for the immediate resolution of this case

and the lifting of the Temporary Restraining Order, subject
to the above paragraph No. 3, petitioner or his assigns
shall be granted the right of first refusal to acquire an
additional twenty (20%) percent of IBC equity at PCGG
established floor price; provided that this shall be subject
to the approval of the Committee on Privatization (COP).
WHEREFORE, it is most respectfully prayed that this case
be dismissed and that the Temporary Restraining Order be
immediately lifted and dissolved and the question on the claim of
the petitioner over the 20% equity in IBC be referred to the
Securities & Exchange Commission and that the parties be
granted such other reliefs to which they may be entitled to law and
equity.[14]
On July 15, 1998, we issued a Resolution (Third Division) granting the said
Joint Motion, thus:
. . . The joint motion, dated March 17, 1998, filed by the
Presidential Commission on Good Government Chairman
Magtanggol C. Gunigundo and petitioner Jose T. Jalandoon,
assisted by their counsels, praying that this case be dismissed and
that the temporary restraining order be lifted and dissolved and the
question on the claim of petitioner over the 20% equity in IBC
be referred to the Securities and Exchange Commission is
GRANTED.[15]

5.2.
The Commissions jurisdiction over all cases
enumerated under Section 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. . . .
Moreover, the Guidelines on Intra-Corporate Cases Pending Before the
SICD and the Commission En Banc of the Securities and Exchange Commission
issued by SEC on August 1, 2000 provides:
Section 3. The Commission shall retain jurisdiction over pending
intra-corporate disputes submitted for final resolution which shall be
resolved within one (1) year from July 19, 2000, the enactment of
the The Securities Regulation Code.
...
Section 5. All cases already decided by the Securities
Investigation and Clearing Department (SICD) may be elevated to
the Commission en banc on appeal provided that the appeal is
perfected on or before August 8, 2000.
No appeal shall be accepted by the Commission thereafter.

Next, petitioners contend that the Court of Appeals erred in directing SEC to
decide the case since it was not yet ripe for decision when Republic Act No. 8799
took effect. Noted was paragraph 5.2, Section 5 of Republic Act No. 8799, which, in
part, provides that [t]he 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.[16] Petitioners, however,
assert that although the SEC Hearing Officer in an Order dated July 28, 2000
considered the case submitted for decision even before the effectivity of Republic Act
No. 8799, the SEC en banc subsequently ordered on October 5, 2000 that the
Republic of the Philippines be impleaded as party-respondent as an indispensable
party in the case. Hence, petitioners submit that since the Republic is yet to be heard,
the case was not yet ripe for decision when Republic Act No. 8799 took effect;
therefore, SEC lost jurisdiction over the case.
We agree.
The pertinent provision under Republic Act No. 8799 reads:
SEC. 5. Powers and Functions of the Commission . . . .
...

Section 6. Subject to any circular that may be issued by

the Supreme Court on the matter, all cases over which the
Commission has not retained jurisdiction under the Securities
Regulation Code shall, upon its effectivity on August 9, 2000, be
transferred to the Regional Trial Courts.
Considering that SEC, in its Order dated October 5, 2000, ordered motu
proprio that the Republic of the Philippines, as the registered owner of 100% of the
shares of IBC, be impleaded as party-respondent as an indispensable party in this
case, and directed the parties to furnish the Solicitor General, as counsel of the
Government, with copies of all pertinent pleadings which they have filed within 15
days from receipt of said Order and also directed the Solicitor General to file its
Comments and Answer to the claims within 15 days from receipt of the pleadings, the
case was clearly not yet ripe for final resolution at the time Republic Act No. 8799
took effect on August 9, 2000.
The SEC Order of October 5, 2000 overruled the SEC Hearing Officers
Order of July 28, 2000 for the reason that the Republic of the Philippines, as an
indispensable party, still has to be heard, through its counsel, the Office of the
Solicitor General.

Stated otherwise, SEC Case No. 12-96-5505, as of August 9, 2000, was not
a pending case submitted for final resolution, since the same could not be decided
by SEC without including a new party and affording said party the opportunity
to be heard, thereby requiring further proceedings.
Finally, the fact that Sec. 5.2 of Republic Act No. 8799 states that the
pending cases over which SEC shall retain jurisdiction should be resolved within one
(1) year from the enactment of this Code, confirms the interpretation that it refers to
cases where no further proceedings are required for their final resolution.
WHEREFORE, the petitions are GRANTED and the Decision of the Court of
Appeals in CA-G.R. SP No. 62027 and its Resolution promulgated on July 20, 2001
are REVERSED and SET ASIDE, and the Order of the Securities and Exchange
Commission in SEC Case No. 12-96-5505 dated October 5, 2000 is REINSTATED.
The SEC

Case is hereby ordered TRANSFERRED to the Regional Trial Court of Makati City
pursuant to Republic Act No. 8799.
No costs.
SO ORDERED.