COMMERCIAL LAW REVIEW
VII. SUBSCRIPTION CONTRACT
A. Ways to become a stockholder of a corporation
Q: How do you become a SH?
A:
1. Subscription contract with the
corporation.(unissued shares)
2. Purchase or acquisition of shares from
existing stockholders.
3. Purchase of treasury shares from the
corporation.
*All of them involve shareholdings.
*Subscription is unique because it
involves unissued shares.
-in subscription, the statutes in CC
apply in provisions regarding
subscriptions.
-It’s like second hand sales.
B. Concept of subscription contract
Subscription Contract is, under Sec. 60
of the Corporation Code, “any contract for the
acquisition of unissued stock in an existing
corporation or a corporation still to be formed
shall be deemed a subscription within the
meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some
other contract.”
*This is strictly regulated by the Corporation Code.
C. Kinds of subscription (pre and post incorporation
subscription, Sec. 61, CC)
Subscription:
1. pre-incorporation – before existence.
2. post incorporation – after existence.
Pre-incorporation subscription agreement: a contract
where problems usually arise.
Q: A corporation cannot be a party because it is not yet
existing. Who are the parties?
A: By implication. Sec. 61. Proscribes revocation of
subscription agreement within a period of 6 months.
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1. Pre-incorporation subscription – one
entered into before incorporation.
Sec. 61 of the Corporation Code provides that: “A
subscription for shares of stock of a corporation still to be
formed shall be irrevocable for a period of at least 6
months from the date of subscription, unless all of the
other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize
within said period or within a longer period as may be
stipulated in the contract of subscription: Provided, That
no pre-incorporation subscription may be revoked after
the submission of the articles of incorporation to the
SEC.”
*Contracts between the subscribers.
2 Fold Characteristics:
a. It is a contract between subscribers.
b. May be regarded as continuing offer on
the part of the subscriber concerned
which the corporation may accept upon
acquisition of juridical personality.
Reason: The corporation is not yet in existence.
2. Post incorporation subscription – one
entered into after the incorporation for the
acquisition of unissued stock.
*Contracts between the subscribers and the corporation.
*Creates a creditor-debtor relationship.
D. Consideration for the issuance of shares (Sec. 62, CC)
Sec. 62 of the Corporation Code provides that: “Stocks
shall not be issued for a consideration less than the par
or issued price thereof. Consideration for the issuance of
stock may be any or a combination of any two or more of
the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by
the corporation and necessary or convenient for its use
and lawful purposes at a fair valuation equal to the par
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or issued value of the stock issued;
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3. Labor performed for or services actually rendered to
the corporation;
4. Previously incurred indebtedness of the corporation; 5.
Amounts transferred from unrestricted retained earnings
to stated capital; and
6. Outstanding shares exchanged for stocks in the event
of reclassification of conversion.
Where the consideration is other than actual cash, or
consists of intangible property such as patents of
copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of
directors, subject to the approval by the SEC.
Shares of stock shall not be issued in exchange for
promissory notes or future service. The same
considerations provided for in this section, insofar as they
may be applicable, may be used for the issuance of bonds
by the corporation. The issued price of no-par value
shares may be fixed in the articles of incorporation or by
the board of directors pursuant to authority conferred
upon it by the articles of incorporation or the by-laws, or
in the absence thereof, by the stockholders representing
at least a majority of the outstanding capital stock at a
meeting duly called for the purpose.”
Valid considerations for the subscription agreements:
1. Cash
2. Property
3. Labor or services actually rendered to the
corporation
4. Prior corporate obligations
5. Amounts transferred from unrestricted
retained earnings to stated capital
6. Outstanding shares in exchange for stocks in
the event of reclassification or conversion.
E. Payment of subscription
Q：When payment of the subscription is made?
A: Look into the subscription agreement. If subscription
agreement is silent as to when the amount of
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subscription to be paid, the board of directors may call
on all the unpaid subscribers to pay the remaining
balance of their subscription.
1. remedies to enforce payment of
subscription (Sec. 68, 69 & 70, CC)
a. By Extra-judicial sale at
public auction.
b. By judicial action.
c. Collection from cash
dividends and withholding
of stock dividends.
2. when shares are considered
delinquent (Sec. 67, CC)
Sec. 67 of the Corporation Code provides that: “Subject
to the provisions of the contract of subscription, the
board of directors of any stock corporation may at any
time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the
same or such percentage thereof, in either case with
accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage
thereof, together with the interest accrued, if any, shall
be made on the date specified in the contract of
subscription or on the date stated in the call made by the
board. Failure to pay on such date shall render the entire
balance due and payable and shall make the stockholder
liable for interest at the legal rate on such balance, unless
a different rate of interest is provided in the by-laws,
computed from such date until full payment. If within 30
days from the said date no payment is made, all stocks
covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders otherwise.”
*If there was no date as to payment of subscription
stated in the subscription agreement, the board may call
on all the unpaid subscribers to pay the remaining
balance of their subscription. Failure to pay within 30
days from the said date, all stocks covered by said
subscription shall thereupon become delinquent and
shall be subject to sale unless the board of directors
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orders otherwise.
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F. Certificate of Stock (Sec. 63, CC)
Certificate of Stock is a written evidence of the shares of
stock but it is not the share itself.
*Does not represent credit.
Q: How important is a stock certificate?
A: It is an evidence of ownership of stocks.
Q: Who issue stock certificate?
A: Stock certificates must be signed by the president or
vice-president, countersigned by the secretary or
assistant secretary.
Q: When certificate of stock may be issued?
A: Sec. 64 of the Corporation Code states that: “No
certificate of stock shall be issued to a subscriber until
the full amount of his subscription together with interest
and expenses (in case of delinquent shares), if any is due,
has been paid.”
1. doctrine of indivisibility of
subscription contract
Failure to pay any of the installments due would
necessarily affect all the other installments because the
subscription is to be treated as one, whole, entire,
indivisible contract. Upon default of payment on any of
the installment results to entire subscription due and
demandable.
*The Certificate of Stock cannot be divided into
portions.
*No certificate of stock shall be issued until the
full payment of the subscription.
*The corporation has an automatic lien over the
shares.
Q: What will happen to the payment already made by the
subscriber?
A: The payment partially made shall be applied
proportionately to all the shares covered by the
subscription.
Example:
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P10 per share; payment made is P6000 covering 1000
shares. The P6000 shall be allocated equally to all shares.
P6 per share has been paid. P4 per share is the liability.
2. certificate of stock, quasi-negotiable
Q: can the stock certificate be treated as negotiable
instrument under NIL?
A: No. The requisites are not complied with. There is no
engagement to pay in sum certain in money.
*Negotiable instrument represents credit.
Creditor-debtor relationship arises.
Q: Are certificates of stock negotiable?
A: They are negotiable in certain extent. That is why they
are quasi-negotiable.
*The title over the share can be assigned,
transferred by indorsement and delivery.
*Due course holding is not applicable.
G. Transfer of shares
If represented by a certificate, the following must be
strictly complied with:
1. Delivery of the certificate;
2. Indorsement by the owner or his agent;
3. To be valid to third parties, the transfer must
be recorded in the books of the corporation.
*If not represented by the certificate,
the shares may be transferred by means
of a deed of assignment and such is duly
recorded in the books of the
corporation.
*To make the transfer binding to the
corporation and third person, the
transfer must be recorded in the stock
and transfer book of the corporation.
Q: Who is the owner of the share?
A: The stockholder of record.
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H. Lost and destroyed certificate of stock (Sec. 73, CC) ownership of said certificate of stock which has
been lost, stolen or destroyed, the issuance of the
Sec. 73 of the Corporation Code provides that: “The
new certificate of stock in lieu thereof shall be
following procedure shall be followed for the issuance by
suspended until the final decision by the court
a corporation of new certificates of stock in lieu of those
regarding the ownership of said certificate of
which have been lost, stolen or destroyed:
stock which has been lost, stolen or destroyed.
1. The registered owner of a certificate of stock in a
Except in case of fraud, bad faith, or negligence
corporation or his legal representative shall file with the
on the part of the corporation and its officers, no
corporation an affidavit in triplicate setting forth, if
action may be brought against any corporation
possible, the circumstances as to how the certificate was
which shall have issued certificate of stock in lieu
lost, stolen or destroyed, the number of shares
of those lost, stolen or destroyed pursuant to the
represented by such certificate, the serial number of the
procedure above-described.”
certificate and the name of the corporation which issued
the same. He shall also submit such other information CORPORATE BOOKS AND RECORDS:
and evidence which he may deem necessary;
A. Books required to be kept by a Corporation
2. After verifying the affidavit and other
Sec. 74 of the Corporation Code provides that: “Every
information and evidence with the books of the
corporation shall keep and carefully preserve at its
corporation, said corporation shall publish a
principal office a record of all business transactions and
notice in a newspaper of general circulation
minutes of all meetings of stockholders or members, or
published in the place where the corporation has
of the board of directors or trustees, in which shall be set
its principal office, once a week for 3 consecutive
forth in detail the time and place of holding the meeting,
weeks at the expense of the registered owner of
how authorized, the notice given, whether the meeting
the certificate of stock which has been lost,
was regular or special, if special its object, those present
stolen or destroyed. The notice shall state the
and absent, and every act done or ordered done at the
name of said corporation, the name of the
meeting. Upon the demand of any director, trustee,
registered owner and the serial number of said
stockholder or member, the time when any director,
certificate, and the number of shares
trustee, stockholder or member entered or left the
represented by such certificate, and that after
meeting must be noted in the minutes; and on a similar
the expiration of 1 year from the date of the last
demand, the yeas and nays must be taken on any motion
publication, if no contest has been presented to
or proposition, and a record thereof carefully made. The
said corporation regarding said certificate of
protest of any director, trustee, stockholder or member
stock, the right to make such contest shall be
on any action or proposed action must be recorded in full
barred and said corporation shall cancel in its
on his demand. The records of all business transactions
books the certificate of stock which has been lost,
of the corporation and the minutes of any meetings shall
stolen or destroyed and issue in lieu thereof new
be open to inspection by any director, trustee,
certificate of stock, unless the registered owner
stockholder or member of the corporation at reasonable
files a bond or other security in lieu thereof as
hours on business days and he may demand, writing, for
may be required, effective for a period of 1 year,
a copy of excerpts from said records or minutes, at his
for such amount and in such form and with such
expense. Any officer or agent of the corporation who
sureties as may be satisfactory to the board of
shall refuse to allow any director, trustee, stockholder or
directors, in which case a new certificate may be
member of the corporation to examine and copy
issued even before the expiration of the 1 year
excerpts from its records or minutes, in accordance with
period provided herein: Provided, That if a
the provisions of this Code, shall be liable to such
contest has been presented to said corporation
director, trustee, stockholder or member for damages,
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or if an action is pending in court regarding the

and in addition, shall be guilty of an offense which shall

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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. Stock
corporations must also keep a book to be known as the
“stock and transfer book,” in which must be kept a
record of all stocks in the names of the stockholders
alphabetically arranged; the installments paid and
unpaid on all stock for which subscription has been
made, and the date of payment of any installment; a
statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made; and
such other entries as the by-laws may prescribe. The
stock and transfer book shall be kept in the principal
office of the corporation or in the office of its stock
transfer agent and shall be open for inspection by any
director or stockholder of the corporation at reasonable
hours on business days. No stock transfer agent or one
engaged principally in the business of registering
transfers of stocks in behalf of a stock corporation shall
be allowed to operate in the Philippines unless he
secures a license from the SEC and pays a fee as may be
fixed by the Commission, which shall be renewable
annually: Provided, That a stock corporation is not
precluded from performing or making transfer of its own
stocks, in which case all the rules and regulations
imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable.”
*Keeping of books and records are mandatory.
Books required to be kept:
1. Book of minutes – reflects the decisions and
actions of the Board of
Directors/Stockholders.
2. Record of all business transactions
PINEDAPCGRNMAN
3. Stock and Transfer Book/Membership Book
4. Books of Proceedings
B. Right to Inspect Corporate Books
d. Basis and Extent of the Right
of Inspection
Q: Is the keeping of these books mandatory?
A: YES. Section 144 of the Corporation Code provides
penalty for any violation of the provision of the Code.
Rationale: Right of inspection would be futile. Right of
inspection would not be exercised.
e. Limitations on the Right of
Inspection
1. The books and records shall be open to
inspection at reasonable hours on
business days.
2. The books and records shall not be
improperly used any information
secured through any prior examination
of the books or records.
3. The stockholder’s demand must be in
good faith or for a legitimate purpose.
*Inspection can be done personally or through agent.
f. Remedies to Enforce Right
of Inspection
*In case of refusal to exercise the right of inspection, the
stockholder concerned may file an action for mandamus
before the RTC.
*Can also claim damages.
CASES:
Lim Tay vs. Court of Appeals
[GR 126891, 5 August 1998]
On CONCEPT AND ATTRIBUTES OF A CORPORATION
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The Rural Bank of Lipa City Inc., etc. vs. Court of Appeals since they had relinquished their rights as stockholders
in favor of the Bank.
[GR 124535, 28 September 2001]
Issue: Whether or not there was valid transfer of the
A transfer of stocks without complying with the
shares to the Bank.
mode of transfer prescribed by Section 63 of the
Corporation Code does not make the transfer
Held: No. For a valid transfer of stocks, there must be
effective.
strict compliance with the mode of transfer prescribed
by law. The requirements are: (a) There must be
Facts: Reynaldo Villanueva, Sr., a stockholder of the
delivery of the stock certificate: (b) The certificate must
Rural Bank of Lipa City (Bank), executed a Deed of
be endorsed by the owner or his attorney-in-fact or
Assignment, wherein he assigned his shares, as well
other persons legally authorized to make the transfer;
as those of eight (8) other shareholders under his
and (c) To be valid against third parties, the transfer
control with a total of 10,467 shares, in favor of the
must be recorded in the books of the corporation. As it
stockholders of the Bank. Sometime thereafter,
is, compliance with any of these requisites has not
Reynaldo Villanueva, Sr. and his wife, Avelina,
been clearly and sufficiently shown. Still, while the
executed an Agreement wherein they acknowledged
assignment may be valid and binding on the bank, et
their indebtedness to the Bank in the amount of
al. and the Villanuevas, it does not necessarily make
P4,000,000.00, and stipulated that said debt will be
the transfer effective. Consequently, the bank et al., as
paid out of the proceeds of the sale of their real
mere assignees, cannot enjoy the status of a
property described in the Agreement. At a meeting of
stockholder, cannot vote nor be voted for, and will not
the Board of Directors of the Bank on 15 November
be entitled to dividends, insofar as the assigned shares
1993, the Villanueva spouses assured the Board that
are concerned. Parenthetically, the Villanuevas cannot,
their debt would be paid on or before December 31 of
as yet, be deprived of their rights as stockholders, until
that same year; otherwise, the Bank would be entitled
and unless the issue of ownership and transfer of the
to liquidate their shareholdings, including those under
shares in question is resolved with finality.
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. When the Villanueva
Ponce vs. Alsons Cement, Dec. 10, 2002;
spouses failed to settle their obligation to the Bank on
the due date, the Board sent them a letter demanding:  Absent an allegation that the transfer of
(1) the surrender of all the stock certificates issued to shares is recorded in the stock and transfer
them; and (2) the delivery of sufficient collateral to book of a corporation, there appears no basis
secure the balance of their debt amounting to for a clear and indisputable duty or clear
P3,346,898.54. legal obligation that can be imposed upon
the corporate secretary, so as to justify the
The Villanuevas ignored the bank's demands. issuance of the writ of mandamus to compel
Consequently, their shares of stock were converted him to perform the transfer of the shares to a
into Treasury Stocks. Later, the Villanuevas, through stockholder.
their counsel, questioned the legality of the conversion 
of their shares. On 15 January 1994, the stockholders  Facts: On 25 January 1996, Vicente C. Ponce,
of the Bank met to elect the new directors and set of
filed a complaint with the SEC for mandamus
officers for the year 1994. The Villanuevas were not
and damages against Alsons Cement
notified of said meeting. In a letter dated 19 January
Corporation and its corporate secretary
1994, Atty. Amado Ignacio, counsel for the Villanueva
Francisco M. Giron, Jr. In his complaint, Ponce
spouses, questioned the legality of the said
alleged, among others, that "the late Fausto
stockholders' meeting and the validity of all the
G. Gaid was an incorporator of Victory Cement
proceedings therein. In reply, the new set of officers of
Corporation (VCC), having subscribed to and
the Bank informed Atty. Ignacio that the Villanuevas
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fully paid 239,500 shares of said corporation;

were no longer entitled to notice of the said meeting

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that on 8 February 1968, Ponce and Fausto
Gaid executed a "Deed of Undertaking" and
"Indorsement" whereby the latter
acknowledges that the former is the owner of
said shares and he was therefore
assigning/endorsing the same to Ponce; that
on 10 April 1968, VCC was renamed Floro
Cement Corporation (FCC); that on 22 October
1990, FCC was renamed Alsons Cement
Corporation (ACC); that from the time of
incorporation of VCC up to the present, no
certificates of stock corresponding to the
239,500 subscribed and fully paid shares of
Gaid were issued in the name of Fausto G.
Gaid and/or Ponce; and that despite repeated
demands, ACC and Giron refused and
continue to refuse without any justifiable
reason to issue to Ponce the certificates of
stocks corresponding to the 239,500 shares of
Gaid, in violation of Ponce's right to secure the
corresponding certificate of stock in his name.
ACC and Giron moved to dismiss. SEC Hearing
Officer Enrique L. Flores, Jr. granted the
motion to dismiss in an Order dated 29
February 1996. Ponce appealed the Order of
dismissal.
 part of the corporation to recognize such
 On 6 January 1997, the Commission En Banc
reversed the appealed Order and directed the
Hearing Officer to proceed with the case. In
ruling that a transfer or assignment of stocks
need not be registered first before it can take
cognizance of the case to enforce Ponce's
rights as a stockholder, the Commission En
Banc cited the Supreme Court's ruling in Abejo
vs. De la Cruz, 149 SCRA 654 (1987). Their
motion for reconsideration having been
denied, ACC and Giron appealed the decision
of the SEC En Banc and the resolution denying
their motion for reconsideration to the CA. In
its decision, the CA held that in the absence of
any allegation that the transfer of the shares
between Gaid and Ponce was registered in the
stock and transfer book of ACC, Ponce failed
to state a cause of action. Thus, said the
appellate court, "the complaint for mandamus
should be dismissed for failure to state a cause
of action." Ponce's motion for reconsideration
was denied in a resolution dated 10 August
PINEDAPCGRNMAN
1999. Ponce filed the petition for review on
certiorari.

 Issue: Whether or not Ponce can require the
corporate secretary, Giron, to register Gaid’s
shares in his name.

 Held: No. Fausto Gaid was an original
subscriber of ACC's 239,500 shares. Ponce had
not made a previous request upon the
corporate secretary of ACC, Francisco M.
Giron Jr., to record the alleged transfer of
stocks. Pursuant to Section 63 of the
Corporation Code, 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 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. 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
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 in the name of
the transferee even when there has been
compliance with the requirements of Section
64 of the Corporation Code.

 Thus, absent an allegation that the transfer of
shares is recorded in the stock and transfer
book of ACC, there appears no basis for a clear
and indisputable duty or clear legal obligation
that can be imposed upon the corporate
secretary, so as to justify the issuance of the
writ of mandamus to compel him to perform
the transfer of the shares to Ponce.
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Ong Yong, et al. vs. Tiu, et al.,
G.R. Nos. 144476 & 144629, April 8, 2003
A party (stockholder) who has not taken part in the
transaction (subscription contract) cannot sue or be
sued for performance or for cancellation thereof,
unless he shows that he has a real interest affected
thereby.
Facts: In 1994, the construction of the Masagana
Citimall in Pasay City was threatened with stoppage
and incompletion when its owner, the First Landlink
Asia Development Corporation (FLADC), which was
owned by the Tius, encountered dire financial
difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off
foreclosure of the mortgage on the two lots where the
mall was being built, the Tius invited the Ongs to invest
in FLADC. Under the Pre-Subscription Agreement they
entered into, the Ongs and the Tius agreed to maintain
equal shareholdings in FLADC. The business harmony
between the Ongs and the Tius in FLADC, however,
was shortlived because the Tius rescinded the Pre-
Subscription Agreement. The controversy finally came
to a head when a case was commenced by the Tius on
27 February 1996 at the Securities and Exchange
Commission (SEC), seeking confirmation of their
rescission of the Pre-Subscription Agreement.
Issue [1]: Whether or not the pre-Subscription
Agreement executed by the Ongs is actually a
subscription contract.
Held [1]: Yes. FLADC was originally incorporated with
an authorized capital stock of 500,000 shares with the
Tius owning 450,200 shares representing the paid-up
capital. When the Tius invited the Ongs to invest in
FLADC as stockholders, an increase of the authorized
capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement. The authorized capital stock
was thus increased from 500,000 shares to 2,000,000
shares with a par value of P100 each, with the Ongs
subscribing to 1,000,000 shares and the Tius to
549,800 more shares in addition to their 450,200
shares to complete 1,000,000 shares. Thus, the
subject matter of the contract was the 1,000,000
unissued shares of FLADC stock allocated to the Ongs.
Since these were unissued shares, the parties' Pre-
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Subscription Agreement was in fact a subscription
contract as defined under Section 60, Title VII of the
Corporation Code. A subscription contract necessarily
involves the corporation as one of the contracting
parties since the subject matter of the transaction is
property owned by the corporation — its shares of
stock. Thus, the subscription contract (denominated
by the parties as a Pre-Subscription Agreement)
whereby the Ongs invested P100 million for 1,000,000
shares of stock was, from the viewpoint of the law,
one between the Ongs and FLADC, not between the
Ongs and the Tius. Otherwise stated, the Tius did not
contract in their personal capacities with the Ongs
since they were not selling any of their own shares to
them. It was FLADC that did. Considering therefore
that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil
case for rescission on the ground of breach of contract
filed by the Tius in their personal capacities will not
prosper. Assuming it had valid reasons to do so, only
FLADC (and certainly not the Tius) had the legal
personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real
party in interest therein. Article 1311 of the Civil Code
provides that "contracts take effect only between the
parties, their assigns and heirs. . ." Therefore, a party
who has not taken part in the transaction cannot sue
or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest
affected thereby.
Issue [2]: Whether or not the rescission of Pre-
Subscription Agreement would result in unauthorized
liquidation.
Held [2]: Yes. The rescission of the Pre-Subscription
Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine
and the Corporation Code, since rescission of a
subscription agreement is not one of the instances
when distribution of capital assets and property of the
corporation is allowed. Rescission will, in the final
analysis, result in the premature liquidation of the
corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the
Corporation Code.
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VIII. NON-STOCK CORPORATIONS By-laws can provide for City or municipality
a different venue as where the principal
A. Definition and purposes of a non-stock corporation
long as it is within the office is located
(Sec. 87 & 88, CC)
Philippines
Sec. 87 of the Corporation Code states that: “For the
Member may be Proxy is allowed
purposes of this Code, a non-stock is one where no part
deprived of their right
of its income is distributable as dividends to its members,
to designate proxies by
trustees, or officers, subject to the provisions of this
provisions in the
Code on dissolution: Provided, That any profit which a
articles of
non-stock corporation may obtain as an incident to its
incorporation or by-
operations shall, whenever necessary or proper, be used
laws
for the furtherance of the purpose or purposes for which
the corporation was organized, subject to the provisions Reason: To promote
of this Title. The provisions governing stock corporations, camaraderie,
when pertinent, shall be applicable to non-stock togetherness, unity
corporations, except as may be covered by specific and familiarity.
provisions of this Title.”
Generally, members Election is vested upon
*Sec. 87 should be read in harmony with Sec. 94. could directly elect Board of Directors
officers. Except unless
*A Non-stock corporation is not precluded from
AOI provides
engaging in profit-business related.
otherwise.
Sec. 88 of the Corporation Code provides that: “Non-
stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, C. Membership in a non-stock corporation
fraternal, literary, scientific, social, civic service, or
similar purposes, like trade, industry, agricultural and like Sec. 89 of the Corporation Code provides that: “The right
chambers, or any combination thereof, subject to the of the membership of any class or classes to vote may be
special provisions of this Title governing particular limited, broadened or denied to the extent specified in
classes of non-stock corporations.” the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member, regardless
*The purpose of a non-stock corporation is related to of class, shall be entitled to one vote. Unless otherwise
public welfare. provided in the articles of incorporation of the by-laws, a
member may vote by proxy in accordance with the
B. Distinguished from stock corporation
provisions of this Code. Voting by mail or other similar
Non- stock Stock Corporation means by members of non-stock corporations may be
Corporation authorized by the by-laws of non-stock corporations with
the approval of, and under such conditions which may be
Public welfare For profit
prescribed by, the SEC.”
Board of Trustees Board of directors General Rule: Sec. 58
Generally, the term of 1 year subject to hold- Sec. 58. Proxies. - Stockholders and members may vote
office of trustees is 3 over principle in person or by proxy in all meetings of stockholders or
years members. Proxies shall in writing, signed by the
stockholder or member and filed before the scheduled
Page 9

meeting with the corporate secretary. Unless otherwise

provided in the proxy, it shall be valid only for the meeting
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COMMERCIAL LAW REVIEW
for which it is intended. No proxy shall be valid and
effective for a period longer than five (5) years at any one
time. (n)
Exception: Sec. 89. This provision allows denial of proxy.
Reason: To promote camaraderie, togetherness, unity
and familiarity.
*A member is entitled to 1 vote. However, such right may
be limited, broadened or denied in the Articles of
Incorporation or By-Laws. Thus, the By-laws of a non-
stock corporation may provide for the desired voting
rights of members including the number of votes.
Sec. 89. Right to vote. - The right of the members of any
class or classes to vote may be limited, broadened or
denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class,
shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation
or the by-laws, a member may vote by proxy in
accordance with the provisions of this Code. (n)
Voting by mail or other similar means by members of
non-stock corporations may be authorized by the by-laws
of non-stock corporations with the approval of, and
under such conditions which may be prescribed by, the
Securities and Exchange Commission.
Q: Is there a conflict between 58 and 89?
A: Yes.
Q: Distinguish the conflict:
A: 58 – allows the use of proxy whether stock or non-
stock.
89 – allows the removal of proxy – in non-stock if stated
in the by-laws.
Q: How do we reconcile?
A: 89 is applicable to nonstick. If the by-laws is silent,
apply the general rule which is sec. 58.
Q: How is NS corp formed? What is the reason in
denying proxy voting?
PINEDAPCGRNMAN
A: There must be camaraderie. There must be personal
attendance in NS corp. That’s why proxy is denied.
Sec. 90 of the Corporation Code provides that:
“Membership in a non-stock corporation and all rights
arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws
otherwise provide.”
General Rule: Membership is non-transferable.
Exception: If the Articles of Incorporation or the By-laws
provide otherwise.
Sec. 91 of the Corporation Code provides that:
“Membership shall be terminated in the manner and for
the causes provided in the articles of incorporation or the
by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise provided
in the articles of incorporation or the by-laws.”
Rules on Place of Meeting:
General Rule: Sec. 51
Sec. 51. Place and time of meetings of stockholders or
members. - Stockholders' or members' meetings,
whether regular or special, shall be held in the city or
municipality where the principal office of the corporation
is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for
purposes of this section, be considered a city or
municipality.
Notice of meetings shall be in writing, and the time and
place thereof stated therein.
All proceedings had and any business transacted at any
meeting of the stockholders or members, if within the
powers or authority of the corporation, shall be valid
even if the meeting be improperly held or called, provided
all the stockholders or members of the corporation are
present or duly represented at the meeting.
Exception: Sec. 93
Sec. 93. Place of meetings. - The by-laws may provide
that the members of a non-stock corporation may hold
their regular or special meetings at any place even
Page 10
outside the place where the principal office of the
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COMMERCIAL LAW REVIEW
corporation is located: Provided, That proper notice is
sent to all members indicating the date, time and place
of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines.
Q: Is there a conflict between sec. 51 and sec. 93?
A: Yes
Q: Where?
A: Sec. 93 – special laws for non-stock corporations.
Q: is there an occasion when sec. 51 is applicable to
non-stock corporations?
A: When the law so provides.
D. Rule on distribution of assets (Sec. 94, CC)
Sec. 94. Rules of distribution. - In case dissolution of a
non-stock corporation in accordance with the provisions
of this Code, its assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the corporation shall be
paid, satisfied and discharged, or adequate provision
shall be made therefore;
2. Assets held by the corporation upon a condition
requiring return, transfer or conveyance, and which
condition occurs by reason of the dissolution, shall be
returned, transferred or conveyed in accordance with
such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable,
religious, benevolent, educational or similar purposes,
but not held upon a condition requiring return, transfer
or conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more corporations,
societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted
pursuant to this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance
PINEDAPCGRNMAN
with the provisions of the articles of incorporation or the
by-laws, to the extent that the articles of incorporation or
the by-laws, determine the distributive rights of
members, or any class or classes of members, or provide
for distribution; and
5. In any other case, assets may be distributed to such
persons, societies, organizations or corporations,
whether or not organized for profit, as may be specified
in a plan of distribution adopted pursuant to this Chapter.
Order of distribution:
1. All its creditors shall be paid;
2. Assets held subject to return on dissolution,
shall be delivered back to their givers;
3. Assets held for charitable, religious
purposes, etc., without a condition for their
return on dissolution, shall be conveyed to
one or more organizations engaged in
similar activities as dissolved corporation;
and
4. All other assets shall be distributed to
members, as provided for in the Articles or
By-Laws.
Sec. 95 of the Corporation Code provides that: “A plan
providing for the distribution of assets, not inconsistent
with the provisions of this Title, may be adopted by a non-
stock corporation in the process of dissolution in the
following manner: The board of trustees shall, by
majority vote, adopt a resolution recommending a plan
of distribution and directing the submission thereof to a
vote at a regular or special meeting of members having
voting rights. Written notice setting forth the proposed
plan of distribution or a summary thereof and the date,
time and place of such meeting shall be given to each
member entitled to vote, within the time and in the
manner provided in this Code for the giving of notice of
meetings to members. Such plan of distribution shall be
adopted upon approval of at least 2/3 of the members
having voting rights present or represented by proxy at
such meeting.”
Q: Would it be possible for a non-stock corporation to
Page 11
be converted into a stock corporation by mere
amendment of the Articles of Incorporation?
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COMMERCIAL LAW REVIEW
A: NO. Because it would violate Section 87 of the
Corporation Code which prohibits distribution of
income as dividends to members.
Reason: Fraudulent to donors
Q: Can a stock corporation be converted to a non-stock
corporation by mere amendment of the Articles of
Incorporation?
A: YES.
Requirements:
1. Approval of 2/3 of the members
2. Approval of the SEC
Q: What was relinquished?
A: Proprietary rights.
*Appraisal right is available.
CASES:
Long vs. Basa, et al., Sept. 27, 2001;
[GRs 134963-64, 27 September 2001]
Facts: In 1973, a religious group known as "The Church
In Quezon City (Church Assembly Hall), Incorporated"
(CHURCH) was organized as "an entity of the
brotherhood in Christ.'' It was registered in the same
year with the SEC as a non-stock, non-profit religious
corporation for the administration of its temporalities
or the management of its properties. The Articles of
Incorporation and By-laws of the CHURCH decree that
its affairs and operation shall be managed by a Board
of Directors consisting of 6 members, 3 who shall be
members of the CHURCH. The members of the
CHURCH vested upon the Board of Directors the
absolute power "(to preserve and protect the(ir) faith"
and to admit and expel a member of the CHURCH.
Admission for membership in the CHURCH is so
exacting. The procedure for the expulsion of an erring
or dissident member is prescribed in Article VII
(paragraph 4) of the CHURCH By-laws.
The Board of Directors observed that certain members
of the CHURCH, including Alfredo Long, Joseph Lim, Liu
PINEDAPCGRNMAN
Yek See, and Felix Almeria, exhibited "conduct which
was dishonorable, improper and injurious to the
character and interest of the (CHURCH)". The Board of
Directors, during its 30 August 1993 regular meeting
held for the purpose of reviewing and updating the
membership list of the CHURCH, removed from the
said list certain names of members, including the
names of Joseph Lim
, Liu Yek See, Alfredo Long and Felix Almeria. They
were removed for espousing doctrines inimical or
injurious to the Principles of Faith of the CHURCH. On
29 September 1993, Lim Che Boon, Tan Hon Koc,
Joseph Lim, Liu Yek See and others questioned their
expulsion by filing with the SEC Securities Investigation
and Clearing Department a petition (SEC Case 09 93-
4581, and later a supplemental petition) against
Directors Yao Chek, Leandro Basa, Lydia Basa and
Anthony Sayheeliam. It sought mainly the annulment
of the 30 August 1993 membership list and the
reinstatement of the original list on the ground that
the expulsion was made without prior notice and
hearing; and prayed for the issuance of a temporally
restraining order (TRO) and a writ of preliminary
injunction principally to enjoin the Board of Directors
from holding any election of a new set of directors
among the members named in the 30 August 1993 list
of corporate membership.
Issue: Whether or not the expulsion of Joseph Lim, Liu
Yek See, Alfredo Long and Felix Almeria from the
membership of the CHURCH by its Board of Directors
through a resolution issued on August 30, 1993 is in
accordance with law.
Held: Yes. The By-laws of the CHURCH, which the
members have expressly adhered to, does not require
the Board of Directors to give prior notice to the erring
or dissident members in cases of expulsion. In the By-
law provision, the only requirements before a member
can be expelled or removed from the membership of
the CHURCH are: (a) the Board of Directors has been
notified that a member has failed to observe any
regulations and By-laws of the CHURCH, or the
conduct of any member has been dishonorable or
improper or otherwise injurious to the character and
interest of the CHURCH, and (b) a resolution is passed
by the Board expelling the member concerned,
Page 12
without assigning any reason therefor. Thus, a
member who commits any of the causes for expulsion
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COMMERCIAL LAW REVIEW
enumerated in paragraph 4 of Article VII may be
expelled by the Board of Directors, through a
resolution, without giving that erring member any
notice prior to his expulsion.
Sta. Clara Homeowners' Association vs. Sps. Gaston,
Jan. 23, 2002;
[GR141961, 23 January 2002]
Facts: Spouses Victor Ma. Gaston and Lydia M. Gaston
were residents of San Jose Avenue, Sta. Clara
Subdivision, Mandalagan, Bacolod City. They
purchased their lots in the said subdivision sometime
in 1974, and at the time of purchase, there was no
mention or requirement of membership in any
homeowners' association. From that time on, they
have remained non-members of SCHA. They also
stated that an arrangement was made wherein
homeowners who were non-members of the
association were issued "non-member" gate pass
stickers for their vehicles for identification by the
security guards manning the subdivision's entrances
and exits. This arrangement remained undisturbed
until sometime in the middle of March 1998, when
SCHA disseminated a board resolution which decreed
that only its members in good standing were to be
issued stickers for use in their vehicles. Thereafter, on
three separate incidents, Victor M. Gaston, the son of
the spouses Gaston who lives with them, was required
by the guards on duty employed by SCHA to show his
driver's license as a prerequisite to his entrance to the
subdivision and to his residence therein despite their
knowing him personally and the exact location of his
residence. On 29 March 1998, Victor Ma. Gaston was
himself prevented from entering the subdivision and
proceeding to his residential abode when security
guards Roger Capillo and a "John Doe" lowered the
steel bar of the KAMETAL gate of the subdivision and
demanded from him his driver's license for
identification. Spouses Victor Ma. Gaston and Lydia M.
Gaston filed a complaint for damages with preliminary
PINEDAPCGRNMAN
injunction/preliminary mandatory injunction and
temporary restraining order before the RTC at Bacolod
City against Santa Clara Homeowners Association
(SCHA) thru its Board of Directors, alleging that the
acts of SCHA, et al., done in the presence of other
subdivision owners had caused the spouses Gaston to
suffer moral damage.
SCHA, et al. filed a motion to dismiss arguing that the
trial court had no jurisdiction over the case as it
involved an intra-corporate dispute between SCHA
and its members. To support their claim of intra-
corporate controversy, SCHA, et al. stated that the
Articles of Incorporation of SCHA, which was duly
approved by the Securities and Exchange Commission
(SEC) provides "that the association shall be a non-
stock corporation with all homeowners of Sta. Clara
constituting its membership"; and that its by-laws
contains a provision that "all real estate owners in Sta.
Clara Subdivision automatically become members of
the association" among others.
Issue: Whether or not the Spouses Gaston are
members of the SCHA.
Held: No. The constitutionally guaranteed freedom of
association includes the freedom not to associate. The
right to choose with whom one will associate oneself
is the very foundation and essence of that partnership.
Further, the Spouses Gaston cannot be compelled to
become members of the SCHA by the simple
expedient of including them in its Articles of
Incorporation and By-laws without their express or
implied consent. Memberships in homeowners'
associations may be acquired in various ways — often
through deeds of sale, Torrens certificates or other
forms of evidence of property ownership. Herein,
however, other than the said Articles of Incorporation
and By-laws, there is no showing that the Spouses
Gaston have agreed to be SCHA members. The
approval by the SEC of the said documents is not an
operative act which bestows membership on the
Page 13
Spouses Gaston because the right to associate
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COMMERCIAL LAW REVIEW
partakes of the nature of freedom of contract which
can be exercised by and between the homeowners
amongst themselves, the homeowners' association
and a homeowner, and the subdivision owner and a
homeowner/lot buyer. Clearly, there is no privity of
contract exists between SCHA and Spouses Gaston.
Padcom vs. Ortigas Center, May 9, 2002;
G.R. No. 146807
May 9, 2002
Ponencia: Chief Justice Davide
Doctrine: As lot owner, PADCOM is a regular member
of the Association. No application for membership is
necessary. If at all, acceptance by the Board of
Directors is a ministerial function considering that
PADCOM is deemed to be a regular member upon the
acquisition of the lot pursuant to the automatic
membership clause annotated in the Certificate of
Title of the property and the Deed of Transfer.
Facts: Petitioner Padcom Condominium Corporation
owns and manages the Padilla Office Condominium
Building. The land on which the building stands was
originally acquired from the Ortigas & Company,
Limited Partnership (OCLP), by Tierra Development
Corporation (TDC) under a Deed of Sale dated 4
September 1974. Among the terms and conditions in
the deed of sale was the requirement that the
transferee and its successor-in-interest must become
members of an association for realty owners and long-
term lessees in the area later known as the Ortigas
Center.
In 1982, respondent Ortigas Center Association, Inc.
was organized to advance the interests and promote
the general welfare of the real estate owners and long-
term lessees of lots in the Ortigas Center. It sought the
collection of membership dues in the amount of two
thousand seven hundred twenty-four pesos and forty
centavos (P2,724.40) per month from PADCOM. The
corporate books showed that PADCOM owed the
Association P639,961.47, representing membership
dues, interests and penalty charges from April 1983 to
June 1993.
PINEDAPCGRNMAN
In view of PADCOMs failure and refusal to pay its
arrears in monthly dues, including interests and
penalties thereon, the Association filed a complaint
for collection of sum of money before the trial court.
In its answer, PADCOM contended that it is a non-
stock, non-profit association, and for it to become a
special member of the Association, it should first apply
for and be accepted for membership by the latters
Board of Directors. No automatic membership was
apparently contemplated in the Associations By-laws.
PADCOM added that it could not be compelled to
become a member without violating its right to
freedom of association. And since it was not a member
of the Association, it was not liable for membership
dues, interests and penalties.
Issue: Whether PADCOM can be compelled to join the
association pursuant to the provision on automatic
membership appearing as a condition in the Deed of
Sale and the annotation thereof on the Transfer
Certificate of Title.
Held: Yes. As lot owner, PADCOM is a regular member
of the Association. No application for membership is
necessary. If at all, acceptance by the Board of
Directors is a ministerial function considering that
PADCOM is deemed to be a regular member upon the
acquisition of the lot pursuant to the automatic
membership clause annotated in the Certificate of
Title of the property and the Deed of Transfer.
In addition, under the principle of estoppel, PADCOM
is barred from disclaiming membership in the
Association. In estoppel, a person, who by his act or
conduct has induced another to act in a particular
manner, is barred from adopting an inconsistent
position, attitude or course of conduct that thereby
causes loss or injury to another.
PADCOM is therefore liable to pay its dues and arrears
to the Association.
Nota Bene: “ Neither are we convinced by PADCOMs
contention that the automatic membership clause is a
violation of its freedom of association. PADCOM was
never forced to join the association. It could have
avoided such membership by not buying the land from
TDC. Nobody forced it to buy the land when it bought
the building with the annotation of the condition or
lien on the Certificate of Title thereof and accepted the
Deed. PADCOM voluntarily agreed to be bound by and
Page 14
respect the condition, and thus to join the
Association.”
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COMMERCIAL LAW REVIEW
Tan vs. Sycip 17 August 2006
Ponencia: Chief Justice Panganiban
Doctrine: 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.
Facts: Grace Christian High School (GCHS) is a
nonstock, non-profit educational corporation w/ 15
regular members, who also constitute the board of
trustees. During the annual members’ meeting only 11
living member-trustees were present as 4 of the
members of the board had already died.
Seven members of the board 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 4 deceased member-trustees.
The SEC declared the meeting as void due to lack of
quorum stating as basis the provision in the Articles of
Incorporation of GCHS.
Issue: Whether dead members should still be counted
in the determination of the quorum, for purposes of
conducting the annual members meeting.
Held: No. 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.
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.
PINEDAPCGRNMAN
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.
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.
IX. CLOSE CORPORATIONS
A. Concept; distinguished from open corporations (Sec.
96, 97, 101, & 102, CC)
Sec. 96 of the Corporation Code states that: “A
corporation, within the meaning of this Code, is one
whose articles of incorporation provide that: (1) All the
corporation’s 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 20; (2) all
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 not be deemed a close corporation
when at least 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. Any
corporation may be incorporated as a close corporation,
except mining or oil companies, stock exchanges, banks,
insurance companies, public utilities, educational
Page 15
institutions and corporations declared to be vested with
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COMMERCIAL LAW REVIEW
public interest in accordance with the provisions of this
Code. The provisions of this Title shall primarily govern
close corporations: Provided, That the provisions of
other Titles of this Code shall apply suppletorily except
insofar as this Title otherwise provides.”
*Whether open or close corporation depends on its
charter.
Q: What are corporations that cannot be assigned as a
closed corporation?
A: except mining or oil companies, stock exchanges,
banks, insurance companies, public utilities, educational
institutions and corporations declared to be vested with
public interest.
Q: What are the provisions that need to appear in the
AI?
A:
1. limitation of memberships.
2. prohibition of trading or listing in stock
exchange.
3. there must be restriction in the transfer
of shares.
Q: What is option restriction?
A: ?
Q: What is consent restriction?
A: Shares cannot be transferred without board
approval.
CASE: San Juan Structural Steel Fabricators, 296 SCRA
632
Ponencia: Chief Justice Panganiban
Doctrine: 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.
PINEDAPCGRNMAN
Facts: Sales Corporation (Motorich) for the transfer to
it of a parcel of land containing an area of 414 square
meters
San Juan paid the down payment of P100,000, the
balance to be paid on or before March 2, 1989.
On March 1, 1989, Mr. Andres T. Co, president of San
Juan, wrote a letter course through Motorich's broker
requesting for a computation of the balance to be
paid. Linda Aduca wrote the computation of the
balance.
ON March 2, 1989, San Juan was ready with the
amount corresponding to the balance, covered by
Metrobank Cashier's Check, payable to Motorich.
The parties were supposed to meet in the office of San
Juan but Motorich's treasurer, Nenita Lee Gruenberg,
did not appear. Motorich refused to execute the
Transfer of Rights/Deed of Assignment which is
necessary to transfer the certificate of title.
On April 6, 1989, ACL and Motorich entered into a
Deed of Absolute Sale.
The Registry of Deeds of Quezon City issued a new title
in the name of Motorich Sales Corporation,
represented by Nenita Lee Gruenberg and Reynaldo L.
Gruenberg, under Transfer Certificate of Title No.
3571
As a result of Nenita Lee Gruenberg and Motorich's
bad faith in refusing to execute a formal Transfer of
Rights/Deed of Assignment, San Juan suffered moral
and nominal damages of P500,000 and exemplary
damages of P100,000.00 and P100,000 attorneys fees
San Juan lost the opportunity to construct a residential
building in the sum of P100,000.00 Pesos.
The CA affirmed the RTC's dismissal of the case.
San Juan argues that the veil of corporate fiction of
Motorich should be pierced because it 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,
San Juan argues that Gruenberg needed no
authorization from the board to enter into the subject
contract. Being solely owned by the Spouses
Gruenberg, the company can treated as a close
corporation which can be bound by the acts of its
principal stockholder who needs no specific authority.
Issue: Whether Motorich is a close corp. which does
not need to be bound by its principal stockholders.
Held: NO.A corporation is a juridical person separate
Page 16
and distinct from its stockholders or members. San
Juan failed to prove otherwise.
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COMMERCIAL LAW REVIEW PINEDAPCGRNMAN
Acts of corporate officers within the scope of their - the mere ownership of a single SH if almost all the
authority are binding on the corporation. But when shares of the corporation is not a presumption that
these officers exceed their authority, their actions the corporation is a closed corporation. The
"cannot bind the corporation, unless it has ratified determinative factor is the AI.
such acts or is estopped from disclaiming them.
The Statutorily granted privilege of a corporate veil  remember sec. 23 and sec. 97
may be used only for legitimate purposes.
Sec. 96. Definition and Applicability of Title. — A close Distinctions from Open Corporations:
corporation, within the meaning of this Code, is one Open Corporation Close Corporation
whose articles of incorporation provide that: (1) All of
the corporation's issued stock of all classes, exclusive Its articles of Its articles must
of treasury shares, shall be held of record by not more incorporation need contain the special
than a specified number of persons, not exceeding only contain the matters prescribed by
twenty (20); (2) All of the issued stock of all classes general matters Section 97 aside from
shall be subject to one or more specified restrictions enumerated in Section the general matters in
on transfer permitted by this Title; and (3) The
14 of the Corporation Section 14. Failure to
corporation shall not list in any stock exchange or
Code do so precludes a de
make any public offering of any of its stock of any
class. Notwithstanding the foregoing, a corporation jure close corporation
shall be deemed not a close corporation when at least status
two-thirds (2/3) of its voting stock or voting rights is Its status as an 2/3 of its voting stock
owned or controlled by another corporation which is
ordinary stock or voting rights must
not a close corporation within the meaning of this
corporation is not not be owned or
Code. . . . .
The articles of incorporation of Motorich Sales affected by the controlled by another
Corporation does not contain any provision stated in ownership of its voting corporation which is
Sec. 96 stock or voting rights not a close corporation
Mere ownership by a single stockholder or by another
Its articles cannot Its articles may classify
corporation of all or capital stock of a corporation is
not of itself sufficient ground for disregarding the classify its directors its directors
separate corporate personalities. A narrow Business of the Business of the
distribution of ownership does not, by itself, make a corporation is corporation may be
close corporation.
managed by the board managed by the
Even if the veil is pierced it will then be a sale of
of directors stockholders if the
conjugal property which Nenita alone could not have
effected. articles so provide, but
Gruenberg did not represent herself as authorized by they are liable as
Respondent Motorich despite the receipt issued by directors
the former specifically indicating that she was signing
The corporate officers Its articles may provide
on behalf of Motorich.
and employees are that any or all of the
The amount paid as "earnest money" was not proven
to have redounded to the benefit of Motorich. elected by a majority corporate officers or
It was deposited with the account of Aren Commercial vote of all the employees may be
c/o Motorich. members of the board elected or appointed
Andres Co being a President of San Juan for more than of directors by the stockholders
10 years cannot feign ignorance of the scope of the
authority of a corporate treasurer. However, Nenita The pre-emptive right The pre-emptive right
Gruenberg should be ordered to return to petitioner is subject to the is subject to no
Page 17

the amount she received as earnest money, as "no one exceptions found in
shall enrich himself at the expense of another.
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COMMERCIAL LAW REVIEW PINEDAPCGRNMAN
Section 39 of the exceptions unless restrictions on their transfers as may be stated therein,
Corporation Code denied in the articles subject to the provisions of the following section; 2. For
a classification of directors into one or more classes, each
The appraisal right The appraisal right may of whom may be voted for and elected solely by a
may be exercised by a be exercised and particular class of stock; and 3. For a greater quorum or
stockholder only in the compelled against the voting requirements in meetings of stockholders or
cases provided in corporation by a directors than those provided in this Code. The articles of
Sections 81 and 42 of stockholder for any incorporation of a close corporation may provide that
the Corporation Code reason the business of the corporation may provide that the
Except as regards In case of an business of the corporation shall be managed by the
redeemable shares, arbitration of an stockholders of the corporation rather than by a board
the purchase by the intracorporate of directors. So long as this provision continues in effect:
corporation of its own deadlock by the SEC, 1. No meeting of stockholders need be called to elect
stock must always be the corporation may directors; 2. Unless the context clearly requires
made from the be ordered to otherwise, the stockholders of the corporation shall be
unrestricted retained purchase its own deemed to be directors for the purpose of applying the
earnings shares from the provisions of this Code; and 3. The stockholders of the
stockholders corporation shall be subject to all liabilities of directors.
regardless of the The articles of incorporation may likewise provide that all
availability of officers or employees or that specified officers or
unrestricted retained employees shall be elected or appointed by the
earnings stockholders, instead of by the board of directors.”

Arbitration of Arbitration of
intracorporate intracorporate C. Restrictions on transfer of shares (Sec. 98 & 99 CC)
deadlock by the SEC is deadlock by the SEC is
not a remedy in case an available remedy in Sec. 98 of the Corporation Code provides that:
the directors or case the directors or “Restrictions on the right to transfer shares must appear
stockholders are so stockholders are so in the articles of incorporation and in the by-laws as well
divided respecting the divided respecting the as in the certificate of stock; otherwise, the same shall
management of the management of the not be binding on any purchaser thereof in good faith.
corporation. corporation. Said restrictions shall not be more onerous than granting
the existing stockholders or the corporation the option
to purchase the shares of the transferring stockholder
*In San Juan Structural Steel Fabricators v CA, the SC with such reasonable terms, conditions or period stated
held that the circumstance that around 99.86% of the therein. If upon the expiration of said period, the existing
total share-holding of petitioner belongs to respondent stockholders or the corporation fails to exercise the
would not justify classification of the corporation as option to purchase, the transferring stockholder may sell
close. his shares to any third person.”

B. Permissive provisions in the articles of incorporation
(Sec. 97, CC)
Sec. 97 of the Corporation Code provides that: “The
articles of incorporation of a close corporation may
provide: 1. For a classification of shares or rights and the
Option Restriction – this restriction provides that no
disposition of shares will be made unless the shares are
offered first to the corporation or the stockholders.
*Pre-emptive right is exercisable or available.
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*This restriction is valid and allowed.

qualifications for owning or holding the same and

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COMMERCIAL LAW REVIEW
Reason: it is the one contemplated by law.
*Restriction derogates private rights.
Consent Restriction – this restriction provides that no
disposition of shares will be made without the consent of
directors.
*This restriction is not valid.
Reason: It is more onerous and burdensome.
CASES: Dulay Enterprises vs. CA, 225 SCRA 678
Ponencia: Justice Nocon
Doctrine: In a close corporation a board resolution
authorizing the sale or mortgage is not necessary to
bind the corporation for the action of its president.
At any rate, corporate action taken at a board
meeting without proper call or notice in a close
corporation is deemed ratified by the absent director
unless the latter promptly files his written objection
with the secretary of the corporation after having
knowledge of the meeting.
Facts: Manuel R. Dulay Enterprises, Inc, a domestic
corporation obtained various loans for the
construction of its hotel project, Dulay Continental
Hotel (now Frederick Hotel). Manuel Dulay by virtue of
Board Resolution No 18 sold the subject property to
spouses Maria Theresa and Castrense Veloso. Maria
Veloso (buyer), without the knowledge of Manuel
Dulay, mortgaged the subject property to private
respondent Manuel A. Torres. Upon the failure of
Maria Veloso to pay Torres, the property was sold to
Torres in an extrajudicial foreclosure sale.Torres filed
an action against the corporation, Virgilio Dulay and
against the tenants of the apartment. RTC ordered the
corporation and the tenants to vacate the building.
According to the Petitioners the RTC had acted with
grave abuse of discretion when it applied the doctrine
of piercing the veil of corporate entity considering that
the sale has no binding effect on corporation as Board
Resolution No. 18 which authorized the sale of the
subject property was resolved without the approval of
all the members of the board of directors and said
Board Resolution was prepared by a person not
designated by the corporation to be its secretary.
PINEDAPCGRNMAN
Issue: Whether the sale to Veloso is valid
notwithstanding that it was resolved without the
approval of all the members of the board of directors.
Held: Yes. The sale is valid.
Section 101 of the Corporation Code of the Philippines
provides:
Sec. 101. When board meeting is unnecessary or
improperly held. Unless the by-laws provide
otherwise, any action by the directors of a close
corporation without a meeting shall nevertheless be
deemed valid if:
1. Before or after such action is taken, written consent
thereto is signed by all the directors, or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiese of all the
stockholders, or
4. All the directors have express or implied knowledge
of the action in question and none of them makes
prompt objection thereto in writing.
If a directors' meeting is held without call or notice, an
action taken therein within the corporate powers is
deemed ratified by a director who failed to attend,
unless he promptly files his written objection with the
secretary of the corporation after having knowledge
thereof.
Dulay Inc. is classified as a close corporation and
consequently a board resolution authorizing the sale
or mortgage is not necessary to bind the corporation
for the action of its president. At any rate, corporate
action taken at a board meeting without proper call or
notice in a close corporation is deemed ratified by the
absent director unless the latter promptly files his
written objection with the secretary of the
corporation after having knowledge of the meeting
which, in his case, Virgilio Dulay failed to do.
Although a corporation is an entity which has a
personality distinct and separate from its individual
stockholders or members, the veil of corporate fiction
may be pierced when it is used to defeat public
convenience justify wrong, protect fraud or defend
crime.
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X. RELIGIOUS/EDUCATIONAL
CORPORATIONS
A corporation composed entirely of spiritual persons and
which is organized for the furtherance of a religion or for
perpetuating the rights of the church or for the
administration of church or religious work or property. It
is different from an ordinary non-stock corporation
organized for religious purposes.
CASE: Iglesia Evangelica vs. Bishop Lazaro, 6 July 2010
A. Classes of Religious Corporation
a. corporation sole - A special form of
corporation, usually associated with
the clergy, consisting of one person
only and his successors, who is
incorporated by law to give some
legal capacities and advantages; and
b. religious society - A non-stock
corporation governed by a board
but with religious purposes. It is
incorporated by an aggregate of
persons, e.g. religious order,
diocese, synod, sect, etc.
B. Educational Corporation
 A stock or non-stock corporation
organized to provide
 facilities for teaching or instruction.
 A favorable recommendation of the
DECS is essential for the approval of its
articles and by-laws.
 It is primarily governed by special laws
and suppletorily by the provisions of the
Code.
NON-STOCK EDUCATIONAL
EDUCATIONAL CORPORATION
CORPORATION
A non-stock A special corporation
corporation which may a stock or
non-stock
Governed by the Governed by special
provisions on nonstock laws and by the general
corporations and provisions of the
suppletorily by the Corporation Code
provisions on stock
corporations
PINEDAPCGRNMAN
The number of board The number of the
of trustees may be board of trustees should
more than 15 not be less than 5 but not
more than 15.
The term of office of the The term of office of the
board of trustees shall be board of trustees shall be
3 years 5 years
Ponencia: Justice Abad
Doctrine: 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.
Facts: 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.
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
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things right by changing IEMELIFs organizational
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COMMERCIAL LAW REVIEW
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.
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 re-
incorporation.
Issue: Whether 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.
Held: No. Mere amendment of the Articles of
Incorporation shall suffice.
It is true that 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.
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
PINEDAPCGRNMAN
concurrence of two-thirds of its membership. The one
member, here the General Superintendent, is but a
trustee, according to Section 110 of the Corporation
Code, of its membership.
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.
Nota Bene:
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.
XI. CORPORATE
DISSOLUTION/LIQUIDATION
- extinguishment of franchise
- cessation of existence
2 main classes of dissolution:
1. voluntary
2. involuntary
 it is only the state that could give its life
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and only the state can take it away.
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COMMERCIAL LAW REVIEW
Winding Up
- mandatory for the protection of the creditors.
- Co ownership of assets according to its stocks.
Q: What is the period?
A: 3 years – mandatory
Q: Does it have a personality during the 3 year period?
A: Yes. Only for limited purposes. Those which are
related to winding up.
Q: What if the cases push thru even after winding up?
A: Gen. rule: It will be abated because the corporation
ceases to exist.
Q: What will the corporation do?
A: Appoint a trustee. He is a trustee of the beneficiary.
He must be appointed within the 3 year period.
Q: If the corporation is not inclined to appoint a trustee
and the three year period is about to expire. What is the
remedy?
A: The court will appoint a receiver. The court appoints
it unlike in a trustee where the corporation appoints.
Q: What if there was no receiver appointed? What is the
remedy?
A: Trace where the corporate assets are.
A. Methods of voluntary corporate dissolution and the
requirements therefor
Voluntary dissolution can happen whether there are
creditors or none. Some authors would consider
shortening of a term as a voluntary dissolution.
Dissolution takes effect immediately in voluntary
dissolution. In shortening of corporate term it must
wait for the term to expire.
Dissolution refers to the extinguishment of franchise or
termination of corporate existence.
PINEDAPCGRNMAN
Modes of Dissolution:
1. Voluntary dissolution
2. Involuntary dissolution
Methods of Voluntary Dissolution:
1. Voluntary dissolution where no creditors are
affected
2. Voluntary dissolution where creditors are
affected
3. Shortening of the corporate term by
amending the articles of incorporation
*Dissolution takes effect upon the coming of the
shortened term.
4. Expiration of corporate term
Voluntary dissolution where no creditors are affected
Sec. 118 of the Corporation Code provides that: “If
dissolution of a corporation does not prejudice the rights
of any creditor having a claim against it, the dissolution
may be effected by majority vote of the board of
directors or trustees, and by a resolution duly adopted
by the affirmative vote of the stockholders owning at
least 2/3 of the outstanding capital stock or of at least
2/3 of the members of a meeting to be held upon call of
the directors or trustees after publication of the notice
of time, place and object of the meeting for 3
consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located;
and if no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines, after
sending such notice to each stockholder or member
either by registered mail or by personal delivery at least
30 days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority
of the board of directors or trustees and countersigned
by the secretary of the corporation. The SEC shall
thereupon issue the certificate of dissolution.”
Requisites:
Page 22
1. A meeting must be held on the call of the
directors or trustees;
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COMMERCIAL LAW REVIEW
2. Notice of the meeting should be given to
the stockholders by personal delivery or
registered mail at least 30 days prior to
the meeting;
3. The notice of meeting should also be
published for 3 consecutive weeks in a
newspaper published in the place;
4. The resolution to dissolve must be
approved by the majority of the
directors/trustees and approved by the
stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of
members;
5. A copy of the resolution shall be certified
by the majority of the directors or
trustees and countersigned by the
secretary;
6. The signed and countersigned copy will
be filed with the SEC and the latter will
issue the certificate of dissolution
Voluntary dissolution where creditors are affected
Sec. 119 of the Corporation Code provides that: “Where
the dissolution of a corporation may prejudice the rights
of any creditor, the petition for dissolution shall be filed
with the Securities and Exchange Commission. The
petition shall be signed by a majority of its board of
directors or trustees or other officers having the
management of its affairs, verified by its president or
secretary or one of its directors or trustees, and shall set
forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of
the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-thirds
(2/3) of the members at a meeting of its stockholders or
members called for that purpose. If the petition is
sufficient in form and substance, the Commission shall,
by an order reciting the purpose of the petition, fix a date
on or before which objections thereto may be filed by
any person, which date shall not be less than thirty (30)
days nor more than sixty (60) days after the entry of the
order. Before such date, a copy of the order shall be
PINEDAPCGRNMAN
published at least once a week for three (3) consecutive
weeks in a newspaper of general circulation published in
the municipality or city where the principal office of the
corporation is situated, or if there be no such newspaper,
then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three
(3) consecutive weeks in three (3) public places in such
municipality or city. Upon five (5) day's notice, given after
the date on which the right to file objections as fixed in
the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the
objections filed; and if no such objection is sufficient, and
the material allegations of the petition are true, it shall
render judgment dissolving the corporation and
directing such disposition of its assets as justice requires,
and may appoint a receiver to collect such assets and pay
the debts of the corporation.”
Requisites:
1. Approval of the stockholders
representing at least 2/3 of the
outstanding capital stock or 2/3 of
members in a meeting called for that
purpose;
2. Filing of a Petition with the SEC
signed by majority of directors or
trustees or other officers having the
management of its affairs verified by
President or Secretary or Director.
Claims and demands must be stated
in the petition;
3. If petition is sufficient in form and
substance, the SEC shall issue an
Order fixing a hearing date for
objections;
4. A copy of the Order shall be
published at least once a week for 3
consecutive weeks in a newspaper
of general circulation or if there is no
newspaper in the municipality or
city of the principal office, posting
for 3 consecutive weeks in 3 public
places is sufficient;
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5. Objections must be filed no less than
30 days nor more than 60 days after
the entry of the order;
6. After the expiration of the time to
file objections, a hearing shall be
conducted upon prior 5 day notice
to hear the objections;
7. Judgment shall be rendered
dissolving the corporation and
directing the disposition of assets;
the judgment may include
appointment of a receiver.
Shortening of term of existence
Sec. 120 of the Corporation Code provides that: “A
voluntary dissolution may be effected by amending the
articles of incorporation to shorten the corporate term
pursuant to the provisions of this Code. A copy of the
amended articles of incorporation shall be submitted to
the Securities and Exchange Commission in accordance
with this Code. Upon approval of the amended articles of
incorporation of the expiration of the shortened term, as
the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the
provisions of this Code on liquidation.”
B. Concept of involuntary dissolution and the grounds
therefor (Sec. 121, CC)
Sec. 121 of the Corporation Code provides that: “A
corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified complaint
and after proper notice and hearing on the grounds
provided by existing laws, rules and regulations.”
*This must be done with substantive and procedural due
process.
Grounds:
a. Failure to submit by-laws within the prescribed
period
PINEDAPCGRNMAN
b. Fraud in the procurement of Certificate of
Registration
c. Misrepresentation as to the activities that the
corporation will undertake
d. Treasurer’s affidavit is false
e. Continued inoperation for 5 years
f. Failure to commence business transactions
within 2 years from issuance of certificate of
registration
g. To some cases, performance of ultra vires act
since it is a violation to the franchise but
depending on the seriousness or gravity of the
offense
h. Issuance of watered stocks
i. De facto status
j. Failure to keep corporate books and records
depending on the gravity or seriousness of the
offense
k. Violation of its charter
C. Corporate liquidation (Sec. 122, CC)
Liquidation is a process by which all the assets of the
corporation are converted into liquid assets in order to
facilitate the payment of obligations to creditors, and the
remaining balance if any is to be distributed to the
stockholders.
*Liquidation takes place after dissolution.
Sec. 122 of the Corporation Code provides that: “Every
corporation whose charter expires by its own limitation
or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a
body corporate for three (3) years after the time when it
would have been so dissolved, for the purpose of
prosecuting and defending suits by or against it and
enabling it to settle and close its affairs, to dispose of and
convey its property and to distribute its assets, but not
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for the purpose of continuing the business for which it
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was established. At any time during said three (3) years,
the corporation is authorized and empowered to convey
all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in
interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its
stockholders, members, creditors and others in interest,
all interest which the corporation had in the property
terminates, the legal interest vests in the trustees, and
the beneficial interest in the stockholders, members,
creditors or other persons in interest. Upon the winding
up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or
cannot be found shall be escheated to the city or
municipality where such assets are located. Except by
decrease of capital stock and as otherwise allowed by
this Code, no corporation shall distribute any of its assets
or property except upon lawful dissolution and after
payment of all its debts and liabilities.”
D. Methods of liquidation or winding up
I. By Board of Directors
II. Through a trustee to whom the properties are
conveyed
III. By management committee or rehabilitation
receiver
Q: Can the 3 year period be extended?
A: NO.
Reason: Beyond the 3 year period, there is no corporate
existence for all purposes subject to doctrine of relation.
Remedy: Before the expiration of the 3 year period,
appoint a trustee/receiver.
Q: During the 3 year period, does the corporation enjoy
corporate existence?
A: YES. But for limited purpose only, i.e., for liquidation
purposes only. (Limited existence)
Q: May such corporation sue during the 3 year period?
A: YES. But only when the subject matter is related to
liquidation and winding up of its remaining affairs.
PINEDAPCGRNMAN
*In case trustee/receiver is appointed, he is not bound
by the 3 year period.
*In Gelano v CA, the SC held that the lawyer of the
corporation can be considered as trustee. The term
trustee must be considered in its generic sense. Anyone
who has been designated by the corporation to act on its
behalf could be considered as trustee for purposes of
pursuing a claim for and on behalf of the corporation. A
lawyer falls within the ambit of the word “trustee.”
*Appointment of trustee can be inferred from the
conduct of the corporation. This is by Implication.
*If the corporation is the creditor appoint a trustee. If the
corporation is the debtor appoint a receiver.
Q: What if the corporate properties have already been
distributed among the shareholders without
trustee/receiver?
A: Remedy: Run after the erring directors and officers.
E. Concept of Rehabilitation; Effects of appointment of
management committee or receiver
Rehabilitation connotes a reopening or reorganization.
Contemplates a continuance of corporate existence in an
effort to restore the corporation to its former successful
operation.
*This is a remedy expressly allowed under Section 6 of
PD 902-A.
Purpose: To make the corporation financially viable
again.
Substantive Grounds:
1. When there is imminent danger of
dissipation or wastage of corporate assets
2. Serious paralyzation of business which
would work to the prejudice of the
stockholders and creditors of the
corporation
*Mere misconduct of an officer is not a ground for
corporate rehabilitation.
*A corporation cannot ask for corporate rehabilitation
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and at the same time dissolution.
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COMMERCIAL LAW REVIEW
*With the passage of RA8799, the remedy could now be
instituted with the proper RTC.
Effect: Stay Order - stops or suspends the enforcement
of all claims for money or otherwise whether
enforcement is by court or not, until rehabilitation
proceedings are terminated.
Cases: PAL v Garcia; Sobrejuanite; Lingkod
Manggagawa ng Rubberworld v Rubberworld
Philippines; RCBC v IAC
*In PAL v Garcia, the SC held that stay order suspends all
enforcement in all stages of the proceedings.
*In Lingkod Manggagawa sa Rubberworld v
Rubberworld Philippines, the SC held that labor claims
are likewise affected by the Stop order.
*In RCBC v IAC, the SC held that whether creditors are
secured or not, stay order will still affect them. The
preference still remains it is just the enforcement that is
suspended.
CASES:
Gelano vs. CA, 103 SCRA 90;
 Insular Sawmill, Inc. (ISI) is a corporation
organized on 17 September 1945 with a
corporate life of 50 years, or up to 17
September 1995, with the primary purpose of
carrying on a general lumber and sawmill
business.
 To carry on this business, ISI leased the
paraphernal property of Carlos Gelano's wife
Guillermina Mendoza-Gelano at the corner of
Canonigo and Otis, Paco, Manila for P1,200.00
a month. It was while ISI was leasing the
aforesaid property that its officers and
directors had come to know Carlos Gelano
who received from the corporation cash
advances on account of rentals to be paid by
the corporation on the land. Between 19
November 1947 to 26 December 1950 Carlos
Gelano obtained from ISI cash advances of
P25,950.00.
 The said sum was taken and received by Carlos
Gelano on the agreement that ISI could
PINEDAPCGRNMAN
deduct the same from the monthly rentals of
the leased premises until said cash advances
are fully paid.
 Out of the aforementioned cash advances in
the total sum of P25,950.00, Carlos Gelano
was able to pay only P5,950.00 thereby
leaving an unpaid balance of P20,000.00
which he refused to pay despite repeated
demands by ISI.
 Guillermina M. Gelano refused to pay on the
ground that said amount was for the personal
account of her husband asked for by, and
given to him, without her knowledge and
consent and did not benefit the family.
 On various occasions from 4 May 1948 to 11
September 1949 the Spouses Gelano also
made credit purchases of lumber materials
from ISI with a total price of P1,120.46 in
connection with the repair and improvement
of the spouses' residence.
 On 9 November 1949 partial payment was
made by the spouses in the amount of P91.00
and in view of the cash discount in favor of the
spouses in the amount of P83.00, the amount
due ISI on account of credit purchases of
lumber materials is P946.46 which the
spouses failed to pay.
 On 14 July 1952, in order to accommodate and
help the spouses renew previous loans
obtained by them from the China Banking
Corporation, ISI, through Joseph Tan Yoc Su,
executed a joint and several promissory note
with Carlos Gelano in favor of said bank in the
amount of P8,000.00 payable in 60 days.
 For failure of Carlos Gelano to pay the
promissory note upon maturity, the bank
collected from the ISI the amount of
P9,106.00 including interests, by debiting it
from the corporation's current account with
the bank. Carlos Gelano was able to pay ISI the
amount of P5,000.00 but the balance of
P4,106.00 remained unsettled.
 Guillermina M. Gelano refused to pay on the
ground that she had no knowledge about the
accommodation made by ISI in favor of her
husband.
 On 29 May 1959, ISI, thru Atty. German Lee,
filed a complaint for collection against the
Page 26
Intelligentia et Scientia Semper Mea
COMMERCIAL LAW REVIEW
spouses before the Court of First Instance of
Manila.
 Trial was held and when the case was at the
stage of submitting memorandum, Atty. Lee
retired from active law practice and Atty.
Eduardo F. Elizalde took over and prepared
memorandum.
 In the meantime, ISI amended its Articles of
Incorporation to shorten its term of existence
up to 31 December 1960 only.
 The amended Articles of Incorporation was
filed with, and approved by the Securities and
Exchange Commission, but the trial court was
not notified of the amendment shortening the
corporate existence and no substitution of
party was ever made.
 On 20 November 1964 and almost 4 years
after the dissolution of the corporation, the
trial court rendered a decision in favor of ISI
ordering Carlos Gelano to pay ISI the sum of
P19,650.00 with interest thereon at the legal
rate from the date of the filing of the
complaint on 29 May 1959 until said sum is
fully paid; and P4,106.00, with interest
thereon at the legal rate from the date of the
filing of the complaint until said sum is fully
paid; and the sum of P2,000.00 attorney's
fees. The Court also ordered the spouses to
solidarily pay ISI the sum of P946.46, with
interest thereon at the agreed rate of 12% per
annum from 6 October 1946, until said sum is
fully paid; P550.00, with interest thereon at
the legal rate from the date of the filing of the
complaint until the said sum is fully paid; and
costs of the suit. The court dismissed the
counterclaims of the spouses.
 Both parties appealed to the Court of Appeals,
with ISI ppealing because it insisted that both
Carlos Gelano and Guillermina Gelano should
be held liable for the substantial portion of the
claim. On 23 August 1973, the Court of
Appeals rendered a decision modifying the
judgment of the trial court by holding the
spouses jointly and severally liable on ISI's
claim and increasing the award of P4,106.00
to P8,160.00. After the spouses received a
copy of the decision on 24 August 1973, they
came to know that the ISI was dissolved way
back on 31 December 1960.
PINEDAPCGRNMAN
 Hence, the spouses filed a motion to dismiss
the case and or reconsideration of the
decision of the Court of Appeals on grounds
that the case was prosecuted even after
dissolution of ISI as a corporation and that a
defunct corporation cannot maintain any suit
for or against it without first complying with
the requirements of the winding up of the
affairs of the corporation and the assignment
of its property rights within the required
period.
 Incidentally, after the receipt of the spouses'
motion to dismiss and/or reconsideration or
on 28 October 1973, ISI thru its former
directors filed a Petition for Receivership
before the Court of First Instance of Manil
(Special Proceedings 92303), which petition is
still pending before said court.
 On 5 November 1973, ISI filed a comment on
the motion to dismiss and/or reconsideration
and after the parties have filed reply and
rejoinder, the Court of Appeals on 5 July 1974
issued a resolution denying the aforesaid
motion.
 The spouses filed the petition for review.
Issue: Whether a corporation, whose corporate life
had ceased by the expiration of its terms of existence,
could still continue prosecuting and defending suits
after its dissolution and beyond the period of 3 years
provided for under Act 1459, otherwise known as the
Corporation Law, to wind up its affairs, without having
undertaken any step to transfer its assets to a trustee
or assignee.
Held: YES
 When ISI was dissolved on 31 December 1960,
under Section 77 of the Corporation Law, it
still has the right until 31 December 1963 to
prosecute in its name the present case. After
the expiration of said period, the corporation
ceased to exist for all purposes and it can no
longer sue or be sued.
 However, a corporation that has a pending
action and which cannot be terminated within
the 3-year period after its dissolution is
authorized under Section 78 to convey all its
property to trustees to enable it to prosecute
and defend suits by or against the corporation
beyond the 3-year period.
Page 27
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COMMERCIAL LAW REVIEW
 Although ISI did not appoint any trustee, yet
the counsel who prosecuted and defended
the interest of the corporation in the present
case and who in fact appeared in behalf of the
corporation may be considered a trustee of
the corporation at least with respect to the
matter in litigation only.
 Said counsel had been handling the case
when the same was pending before the trial
court until it was appealed before the Court of
Appeals and finally to the Supreme Court.
 Therefore, there was a substantial compliance
with Section 78 of the Corporation Law and as
such, ISI could still continue prosecuting the
present case even beyond the period of 3
years from the time of its dissolution.
 Further, the case was instituted on 29 May
1959, during the time when the corporation
was still very much alive.
Any litigation filed by or against it instituted within the
period, but which could not be terminated, must
necessarily prolong that period until the final
termination of said litigation as otherwise
corporations in liquidation would lose what should
justly belong to them or would be exempt from the
payment of just obligations through a mere
technicality, something that courts should prevent.
Clarion Printing House, Inc. vs. NLRC, GR No. 148372,
June 27, 2005;
FACTS:
 Respondent Miclat was employed on a
probationary basis as marketing assistant by
petitioner Clarion which is owned by Yutingco.
 The EYCO Group of Companies of which
CLARION formed part filed with the SEC a
“Petition for the Declaration of Suspension of
Payment, Formation and Appointment of
Rehabilitation Receiver/ Committee, Approval
of Rehabilitation Plan with Alternative Prayer
for Liquidation and Dissolution of
Corporation.” The SEC issued an Order
approving the creation of an interim receiver
for the EYCO Group of Companies.
 The Assistant Personnel Manager of CLARION
informed Miclat by telephone that her
employment contract had been terminated.
No reason was given for the termination.
PINEDAPCGRNMAN
 In her Position Paper filed before the labor
arbiter, Miclat claimed that assuming that her
termination was necessary, the manner in
which it was carried out was illegal, no written
notice thereof having been served on her, and
she merely learned of it only a day before it
became effective.
 On the other hand, petitioners claimed that
they could not be faulted for retrenching
some of its employees including Miclat, they
drawing attention to the EYCO Group of
Companies’ being placed under receivership,
notice of which was sent to its supervisors and
rank and file employees via a Memorandum.
 The Labor arbiter found that Miclat was
illegally dismissed and directed her
reinstatement. The NLRC affirmed the labor
arbiter’s decision.
 The CA sustained the resolutions of the NLRC;
it also denied petitioner’s MR of the decision.
 Petitioners argue that when a company is
under receivership and a receiver is appointed
to take control of its management and
corporate affairs, one of the evident reasons
is to prevent further losses of said company
and protect its remaining assets from being
dissipated; and that the submission of
financial reports/statements prepared by
independent auditors had been rendered
moot and academic, the company having
shutdown its operations and having been
placed under receivership by the SEC due to
its inability to pay or comply with its
obligations.
Issue: WON all claims and proceedings against
CLARION, including labor claims, were deemed
suspended during the existence of the receivership
Held: YES
 It is well-settled that for retrenchment to be
justified, any claim of actual or potential
business losses must satisfy the following
standards: (1) the losses are substantial and
not de minimis; (2) the losses are actual or
reasonably imminent; (3) the retrenchment
is reasonably necessary and is likely to be
effective in preventing expected losses; and
(4) the alleged losses, if already incurred, or
the expected imminent losses sought to be
Page 28
forestalled, are proven by sufficient and
Intelligentia et Scientia Semper Mea
COMMERCIAL LAW REVIEW
convincing evidence.[25] And it is the employer
who has the onus of proving the presence of
these standards.
 Sections 5 and 6 of Presidential Decree No.
902-A (P.D. 902-A) (REORGANIZATION OF THE
SECURITIES AND EXCHANGE COMMISSION
WITH ADDITIONAL POWERS AND PLACING
SAID AGENCY UNDER THE ADMINISTRATIVE
SUPERVISION OF THE OFFICE OF THE
PRESIDENT),[26] as amended, read:
 SEC. 5 In addition to the regulatory and
adjudicative functions of THE SECURITIES AND
EXCHANGE COMMISSION over corporations,
partnerships and other forms of associations
registered with it as expressly granted under
existing laws and decrees, it shall have original
and exclusive jurisdiction to hear and decide
cases involving:
 xxx
 (d) Petitions of corporations, partnerships or
associations declared in the state of
suspension of payments in cases where the
corporation, partnership or association
possesses sufficient property to cover all
debts but foresees the impossibility of
meeting them when they respectively fall due
or in cases where the corporation,
partnership, 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.
 SEC. 6. In order to effectively exercise such
jurisdiction, the Commission shall possess the
following powers:
 xxx
 (c) To appoint one or more receivers of the
property, real and personal, which is the
subject of the action pending before the
Commission in accordance with the provisions
of the Rules of Court in such other cases
whenever necessary in order to preserve the
rights of the parties-litigants and/or protect
the interest of the investing public and
creditors: Provided, however, That the
Commission may in appropriate cases,
appoint a rehabilitation receiver of
corporations, partnerships or other
associations not supervised or regulated by
PINEDAPCGRNMAN
other government agencies who shall have, in
addition to powers of the regular receiver
under the provisions of the Rules of Court,
such functions and powers as are provided for
in the succeeding paragraph (d) hereof: x x x
 (d) To create and appoint a management
committee, board or body upon petition or
motu propio to undertake the management of
corporations, partnership or other
associations not supervised or regulated by
other government agencies in appropriate
cases when there is imminent danger of
dissipation, loss, wastage or destruction of
assets or other properties or paralization of
business operations of such corporations or
entities which may be prejudicial to the
interest of minority stockholders, parties-
litigants of the general public: x x x (Emphasis
and underscoring supplied).
 From the above-quoted provisions of P.D. No.
902-A, as amended, the appointment of a
receiver or management committee by the
SEC presupposes a finding that, inter alia, a
company possesses sufficient property to
cover all its debts but foresees the
impossibility of meeting them when they
respectively fall due and there is imminent
danger of dissipation, loss, wastage or
destruction of assets of other properties or
paralization of business operations.
 That the SEC, mandated by law to have
regulatory functions over corporations,
partnerships or associations,[27] appointed an
interim receiver for the EYCO Group of
Companies on its petition in light of, as quoted
above, the therein enumerated factors
beyond the control and anticipation of the
management rendering it unable to meet its
obligation as they fall due, and thus resulting
to complications and problems . . . to arise
that would impair and affect [its] operations .
. . shows that CLARION, together with the
other member-companies of the EYCO Group
of Companies, was suffering business reverses
justifying, among other things, the
retrenchment of its employees.
 With the appointment of a management
receiver in September 1997, however, all
Page 29
claims and proceedings against CLARION,
Intelligentia et Scientia Semper Mea
COMMERCIAL LAW REVIEW
including labor claims,[32] were deemed
suspended during the existence of the
receivership.[33]
 The labor arbiter, the NLRC, as well as the CA
should not have proceeded to resolve
respondents complaint for illegal dismissal
and should instead have directed respondent
to lodge her claim before the then duly-
appointed receiver of CLARION.
 To still require respondent, however, at this
time to refile her labor claim against CLARION
under the peculiar circumstances of the case
that 8 years have lapsed since her termination
and that all the arguments and defenses of
both parties were already ventilated before
the labor arbiter, NLRC and the CA; and that
CLARION is already in the course of liquidation
this Court deems it most expedient and
advantageous for both parties that CLARIONs
liability be determined with finality, instead of
still requiring respondent to lodge her claim at
this time before the liquidators of CLARION
which would just entail a mere reiteration of
what has been already argued and pleaded.
 Furthermore, it would be in the best interest
of the other creditors of CLARION that claims
against the company be finally settled and
determined so as to further expedite the
liquidation proceedings.
 For the lesser number of claims to be proved,
the sooner the claims of all creditors of
CLARION are processed and settled.
Lingkod Manggagawa sa Rubberworld vs. Rubberworld
Phils., Inc. 29 January 2007;
Facts:
 On August 26, 1994, Rubberworld filed with
the Department of Labor and Employment
(DOLE) a Notice of Temporary Partial
Shutdown due to severe financial crisis,
therein announcing the formal actual
company shutdown a copy of which was
served on the recognized labor union of
Rubberworld, the Bisig Pagkakaisa-NAFLU, the
union with which the corporation had a
collective bargaining agreement.
PINEDAPCGRNMAN
 On September 1, 1994, Bisig Pagkakaisa-
NAFLU staged a strike. It set up a picket line in
front of the premises of Rubberworld and
even welded its gate. As a result,
Rubberworld's premises closed prematurely
even before the date set for the start of its
temporary partial shutdown.
 On September 9, 1994, herein petitioner
union, the Lingkod Manggagawa Sa
Rubberworld, Adidas-Anglo (Lingkod, for
brevity), represented by its President, Sonia
Esperanza, filed a complaint against
Rubberworld and its Vice Chairperson, Mr.
Antonio Yang, for unfair labor practice (ULP),
illegal shutdown, and non-payment of salaries
and separation pay. The said complaint was
referred to Labor Arbiter Ernesto Dinopol for
appropriate action.
 On November 22, 1994, while the
aforementioned complaint was pending with
Labor Arbiter Dinopol, Rubberworld filed with
the SEC a Petition for Declaration of a State of
Suspension of Payments with Proposed
Rehabilitation Plan.
 Notwithstanding the SEC's aforementioned
suspension order and despite Rubberworld's
submission on January 10, 1995 of a Motion to
Suspend Proceedings, Labor Arbiter Dinopol
went ahead with the ULP case and rendered
his decision denying respondents motion to
suspend proceedings and declaring
respondent Rubberworld Phils., Inc. to have
committed unfair labor practice.
 Its motion for reconsideration of the same
Order having been denied by the NLRC in its
Resolution 7 of March 29, 1996, Rubberworld
directly went to the Supreme Court on a
Petition for Certiorari.
 On April 22, 1998, the SEC issued an Order
finding that the continuance in business [of
Rubberworld] would neither be
feasible/profitable nor work to the best of
interest of the stockholders, parties-litigants,
creditors, or the general public, xxx
Rubberworld Philippines, Inc. was hereby
declared as DISSOLVED under Section 6(d) of
P.D. 902-A. Accordingly, the suspension Order
is LIFTED.
Page 30
Intelligentia et Scientia Semper Mea
COMMERCIAL LAW REVIEW PINEDAPCGRNMAN
 Eventually, in the herein assailed Decision  x x x The law is clear: upon the creation of a
dated January 18, 2002, the CA granted management committee or the appointment
Rubberworld’s petition in CA–G.R. SP. No. of a rehabilitation receiver, all claims for
53356 on the finding that the Labor Arbiter actions "shall be suspended accordingly." No
had indeed committed grave abuse of exception in favor of labor claims is
discretion when it proceeded with the ULP mentioned in the law. Since the law makes no
case despite the SEC’s suspension order of distinction or exemptions, neither should this
December 28, 1994, and accordingly declared Court. Ubi lex non distinguit nec nos
the proceedings before it, including the distinguere debemos. Allowing labor cases to
subsequent orders by the NLRC dismissing proceed clearly defeats the purpose of the
Rubberworld’s appeal and the writ of automatic stay and severely encumbers the
execution, null and void. management committee's time and
 Hence, the petition was filed. resources. The said committee would need to
Issue: WON the provisions of Section 5 (d) and Section defend against these suits, to the detriment of
6 (c) of P.D. No. 902-A1, as amended is applicable its primary and urgent duty to work towards
Held: Yes rehabilitating the corporation and making it
 the Court upheld the applicability of PD 902-A viable again. To rule otherwise would open
to labor cases pursuant to Section 5(d) and the floodgates to other similarly situated
Section 6(c) thereof, with the following claimants and forestall if not defeat the rescue
pronouncements: efforts. Besides, even if the NLRC awards the
 It is plain from the foregoing provisions of the claims of private respondents, its ruling could
law that "upon the appointment [by the SEC] not be enforced as long as the petitioner is
of a management committee or a under the management committee. 30
rehabilitation receiver," all actions for claims  Petitioners argue, however, that the doctrines
against the corporation pending before any laid down in the two aforecited cases cannot
court, tribunal or board shall ipso jure be be made to apply to the instant controversy
suspended. The justification for the automatic because the SEC order therein only mandates
stay of all pending actions for claims "is to that all pending cases against Rubberworld
enable the management committee or the Philippines, Inc. should be deemed
rehabilitation receiver to effectively exercise suspended. Petitioners contend that the
its/his powers free from any judicial or extra- decision of the Labor Arbiter in the present
judicial interference that might unduly hinder case, as well the order of dismissal and writ of
or prevent the rescue of the debtor company. execution issued by NLRC, have become final
To allow such other actions to continue would and executory by reason of Rubberworld’s
only add to the burden of the management failure to perfect its appeal by not upgrading
committee or rehabilitation receiver, whose or completing the required cash or surety
time, effort and resources would be wasted in bond as ordained by the NLRC. Petitioners
defending claims against the corporation thus conclude that the doctrine of stare
instead of being directed toward its decisiscannot apply to the instant case.
restructuring and rehabilitation." 29  Petitioners are in error.
 xxx xxx xxx

1
Section 5. In addition to the regulatory 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
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
xxx xxx xxx
c) To appoint one or more receivers of the property, real or personal, which is the subject of
the action pending before the Commission in accordance with the pertinent provisions of the
Rules of Court in such other cases whenever necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of the investing public and creditors: x x
x Provided, finally, That upon appointment of a management committee, the
rehabilitation receiver, board or body, pursuant to this Decree, all actions for
claims against corporations, partnerships, or associations under management or
receivership pending before any court, tribunal, board or body shall be suspended
Page 31

sufficient assets to cover its liabilities, but is under the management of a rehabilitation receiver accordingly. [Emphasis supplied]
or management committee created pursuant to this Decree.
Section 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:

Intelligentia et Scientia Semper Mea

COMMERCIAL LAW REVIEW PINEDAPCGRNMAN
 is incontrovertible that the denial of the act of sniffing shabu inside the Toolroom
Rubberworld’s motion to suspend Section," then placed under preventive
proceedings in the principal case was suspension and required to submit their
incorporated in the decision of the Labor written explanation within ten days from
Arbiter. Obviously, then, the Labor Arbiter’s receipt of the notice.
decision of August 16, 1995 was rendered at a  Petitioners vehemently denied the allegations
time when Lingkod’s complaint against and challenged PAL to show proof that they
Rubberworld in NLRC-NCR-Case No. 00-09- were indeed "caught in the act of sniffing
06637-94 ought to have been suspended. shabu."
 In short, at the time the SEC issued its  petitioners were dismissed for violation of
suspension Order of December 28, 1994, the Chapter II, Section 6, Article 46 (Violation of
proceedings before the Labor Arbiter were Law/Government Regulations) and Chapter II,
still very much pending. As such, no final and Section 6, Article 48 (Prohibited Drugs) of the
executory decision could have validly PAL Code of Discipline.5
emanated therefrom. Like the CA, we do not  Both simultaneously filed a case for illegal
see any reason why the doctrine of stare dismissal and damages.
decisis will not apply to this case.  n the meantime, the Securities and Exchange
Commission (SEC) placed PAL under an
Interim Rehabilitation Receiver due to severe
financial losses.
Garcia, et al vs. PAL, 29 August 2007;  the Labor Arbiter rendered a decision6 in
Facts: petitioners’ favorFrom the Labor Arbiter,
respondent appealed to NLRC which reversed
 Petitioners Alberto J. Dumago and Juanito A.
Garcia were employed by respondent said decision.
Philippine Airlines, Inc. (PAL) as Aircraft  Later, a writ of execution as regards the
Furnishers Master "C" and Aircraft Inspector, reinstatement was issued by the Labor
respectively. They were assigned in the PAL Arbiter.
Technical Center.  Respondent then filed an urgent petition for
 a combined team of the PAL Security and injunction on the ground that it cannot
National Bureau of Investigation (NBI) comply with the reinstatement order due to
Narcotics Operatives raided the Toolroom its corporate rehabilitation.
Section – Plant Equipment Maintenance Issue: WON the execution of the Labor Arbiter’s order
Division (PEMD) of the PAL Technical Center. is legally possible even if PAL is under receivership.
They found petitioners, with four others, near Held: No
the said section at that time. When the PAL  We note that during the pendency of this
Security searched the section, they found case, PAL was placed by the SEC first, under an
shabu paraphernalia inside the company- Interim Rehabilitation Receiver and finally,
issued locker of Ronaldo Broas who was also under a Permanent Rehabilitation Receiver.
within the vicinity. The six employees were The pertinent law on this matter, Section 5(d)
later brought to the NBI for booking and and Sec 6 (c) of Presidential Decree (P.D.) No.
proper investigation. 902-A, as amended
 a Notice of Administrative Charge4 was served  2Worth stressing, upon appointment by the
on petitioners. They were allegedly "caught in SEC of a rehabilitation receiver, all actions for

2
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:
xxxx
sufficient assets to cover its liabilities, but is under the [management of a rehabilitation
receiver or] Management Committee created pursuant to this Decree.
The same P.D., in Section 6(c) provides that:
SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
Page 32

d) Petitions of corporations, partnerships or associations to be declared in the state of xxxx

suspension of payments in cases where the corporation, partnership or association possesses c) To appoint one or more receivers of the property, real or personal, which is the subject of
property to cover all of its debts but foresees the impossibility of meeting them when they the action pending before the Commission in accordance with the pertinent provisions of the
respectively fall due or in cases where the corporation, partnership or association has no Rules of Court in such other cases whenever necessary in order to preserve the rights of the

Intelligentia et Scientia Semper Mea

COMMERCIAL LAW REVIEW PINEDAPCGRNMAN
claims against the corporation pending before under the peculiar circumstances of the case
any court, tribunal or board shall ipso jure be – that their dismissal was eventually held valid
suspended. The purpose of the automatic stay with only the matter of reinstatement
of all pending actions for claims is to enable pending appeal being the issue – this Court
the rehabilitation receiver to effectively deems it legally expedient to suspend the
exercise its/his powers free from any judicial proceedings in this case.
or extra-judicial interference that might
unduly hinder or prevent the rescue of the
corporation.16 Sobrejuanite vs. ASB, 30 September 2005;
 More importantly, the suspension of all
Facts:
actions for claims against the corporation
 spouses Eduardo and Fidela Sobrejuanite
embraces all phases of the suit, be it before
(Sobrejuanite) filed a Complaint1 for
the trial court or any tribunal or before this
rescission of contract, refund of payments and
Court.17 No other action may be taken,
damages, against ASB Development
including the rendition of judgment during the
Corporation (ASBDC) before the Housing and
state of suspension. It must be stressed that
Land Use Regulatory Board (HLURB).
what are automatically stayed or suspended
 Sobrejuanite alleged that they entered into a
are the proceedings of a suit and not just the
Contract to Sell with ASBDC over a
payment of claims during the execution stage
condominium unit and a parking space in the
after the case had become final and
BSA Twin Tower-B Condominum located at
executory.18
Bank Drive, Ortigas Center, Mandaluyong City.
 Furthermore, the actions that are suspended
They averred that despite full payment and
cover all claims against the corporation
demands, ASBDC failed to deliver the property
whether for damages founded on a breach of
on or before December 1999 as agreed. They
contract of carriage, labor cases, collection
prayed for the rescission of the contract;
suits or any other claims of a pecuniary
refund of payments amounting to
nature.19 No exception in favor of labor claims
P2,674,637.10; payment of moral and
is mentioned in the law.201avvphi1
exemplary damages, attorney’s fees, litigation
 This Court’s adherence to the above-stated
expenses, appearance fee and costs of the
rule has been resolute and steadfast as
suit.
evidenced by its oft-repeated application in a
 ASBDC filed a motion to dismiss or suspend
plethora of cases involving PAL, the most
proceedings in view of the approval by the
recent of which is Philippine Airlines, Inc. v.
Securities and Exchange Commission (SEC) on
Zamora.21
April 26, 2001 of the rehabilitation plan of ASB
 Since petitioners’ claim against PAL is a money
Group of Companies, which includes ASBDC,
claim for their wages during the pendency of
and the appointment of a rehabilitation
PAL’s appeal to the NLRC, the same should
receiver.
have been suspended pending the
 The HLURB arbiter however denied the
rehabilitation proceedings. The Labor Arbiter,
motion and ordered the continuation of the
the NLRC, as well as the Court of Appeals
proceedings.
should have abstained from resolving
 The arbiter found that under the Contract to
petitioners’ case for illegal dismissal and
Sell, ASBDC should have delivered the
should instead have directed them to lodge
property to Sobrejuanite in December 1999;
their claim before PAL’s receiver.22
that the latter had fully paid their obligations
 However, to still require petitioners at this
except the P50,000.00 which should be paid
time to re-file their labor claim against PAL
upon completion of the construction; and that
Page 33

parties-litigants and/or protect the interest of the investing public and creditors:…Provided, associations under management or receivership pending before any court, tribunal, board or
finally, That upon appointment of a management committee, rehabilitation receiver, board or body shall be suspended accordingly.
body, pursuant to this Decree, all actions for claims against corporations, partnerships or xxxx

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COMMERCIAL LAW REVIEW
rescission of the contract with damages is
proper.
 The HLURB Board of Commissioners3 affirmed
the ruling of the arbiter that the approval of
the rehabilitation plan and the appointment
of a rehabilitation receiver by the SEC did not
have the effect of suspending the proceedings
before the HLURB. The board held that the
HLURB could properly take cognizance of the
case since whatever monetary award that
may be granted by it will be ultimately filed as
a claim before the rehabilitation receiver.
 ASBDC filed an appeal5 before the Office of
the President which was dismissed6 for lack of
merit. Hence, ASBDC filed a petition7 before
the Court of Appeals
 The Court of Appeals held that the approval by
the SEC of the rehabilitation plan and the
appointment of the receiver caused the
suspension of the HLURB proceedings. The
appellate court noted that Sobrejuanite’s
complaint for rescission and damages is
a claim under the contemplation of
Presidential Decree (PD) No. 902-A or the SEC
Reorganization Act and A.M. No. 00-8-10-SC
or the Interim Rules of Procedure on Corporate
Rehabilitation, because it sought to enforce a
pecuniary demand. Therefore, jurisdiction lies
with the SEC and not HLURB. It also ruled that
ASBDC was obliged to deliver the property in
December 1999 but its financial reverses
warranted the extension of the period
Issue: WON the approval of the corporate
rehabilitation plan and the appointment of a receiver
had the effect of suspending the proceeding in the
HLURB
Held: Yes
 Section 6(c) of PD No. 902-A empowers the
SEC:
c) To appoint one or more receivers of the property,
real and personal, which is the subject of the action
pending before the Commission … whenever
necessary in order to preserve the rights of the
parties-litigants and/or protect the interest of the
investing public and creditors: … Provided, finally, That
upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this
Decree, all actions for claims against corporations,
partnerships or associations under management or
PINEDAPCGRNMAN
receivership pending before any court, tribunal, board
or body shall be suspended accordingly. [Emphasis
added]
 The purpose for the suspension of the
proceedings is to prevent a creditor from
obtaining an advantage or preference over
another and to protect and preserve the rights
of party litigants as well as the interest of the
investing public or creditors.12 Such
suspension is intended to give enough
breathing space for the management
committee or rehabilitation receiver to make
the business viable again, without having to
divert attention and resources to litigations in
various fora.13 The suspension would enable
the management committee or rehabilitation
receiver to effectively exercise its/his powers
free from any judicial or extra-judicial
interference that might unduly hinder or
prevent the "rescue" of the debtor company.
To allow such other action to continue would
only add to the burden of the management
committee or rehabilitation receiver, whose
time, effort and resources would be wasted in
defending claims against the corporation
instead of being directed toward its
restructuring and rehabilitation.14
 Thus, in order to resolve whether the
proceedings before the HLURB should be
suspended, it is necessary to determine
whether the complaint for rescission of
contract with damages is a claim within the
contemplation of PD No. 902-A.
 n the decision of the HLURB arbiter, ASBDC
was ordered to pay P2,674,637.10 plus 12%
interest from the date of actual payment of
each amortization, representing the refund of
all the amortization payments made by
Sobrejuanite; P200,000.00 as moral damages;
P100,000.00 as exemplary damages;
P100,000.00 as attorney’s fees; and
P50,000.00 as litigation expenses.
 As such, the HLURB arbiter should have
suspended the proceedings upon the approval
by the SEC of the ASB Group of Companies’
rehabilitation plan and the appointment of its
rehabilitation receiver. By the suspension of
the proceedings, the receiver is allowed to
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fully devote his time and efforts to the
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COMMERCIAL LAW REVIEW
rehabilitation and restructuring of the
distressed corporation.
 It is well to note that even the execution of
final judgments may be held in abeyance
when a corporation is under
rehabilitation.18 Hence, there is more reason
in the instant case for the HLURB arbiter to
order the suspension of the proceedings as
the motion to suspend was filed soon after the
institution of the complaint. By allowing the
proceedings to proceed, the HLURB arbiter
unwittingly gave undue preference to
Sobrejuanite over the other creditors and
claimants of ASBDC, which is precisely the vice
sought to be prevented by Section 6(c) of PD
902-A. Thus:
 As between creditors, the key phrase is
"equality is equity." When a corporation
threatened by bankruptcy is taken over by a
receiver, all the creditors should stand on
equal footing. Not anyone of them should be
given any preference by paying one or some
of them ahead of the others. This is precisely
the reason for the suspension of all pending
claims against the corporation under
receivership. Instead of creditors vexing the
courts with suits against the distressed firm,
they are directed to file their claims with the
receiver who is a duly appointed officer of the
SEC.19
Panlilio, et al. v. Regional Trial Court, etc., People of the
Philippines and Social Security System, G.R. No. 173846,
February 2, 2011;
FACTS: Jose Marcel Panlilio, Erlinda Panlilio, Nicole
Morris and Marlo Cristobal (petitioners), as corporate
officers of Silahis International Hotel, Inc. (SIHI), filed
with the Regional Trial Court (RTC) of Manila, Branch
24, a petition for Suspension of Payments and
Rehabilitation. RTC of Manila, Branch 24, issued an
Order5 staying all claims against SIHI upon finding the
petition sufficient in form and substance. At the time,
however, of the filing of the petition for rehabilitation,
there were a number of criminal charges7pending
against petitioners in Branch 51 of the RTC of Manila.
These criminal charges were initiated by respondent
Social Security System (SSS). Consequently,
petitioners filed with the RTC of Manila, Branch 51, a
PINEDAPCGRNMAN
Manifestation and Motion to Suspend
10
Proceedings. Petitioners argued that the stay order
issued by Branch 24 should also apply to the criminal
charges pending in Branch 51.
ISSUE: WHETHER OR NOT THE STAY ORDER ISSUED BY
BRANCH 24, REGIONAL TRIAL COURT OF MANILA, IN
SEC CORP. CASE NO. 04-111180 COVERS ALSO
VIOLATION OF SSS LAW FOR NON-REMITTANCE OF
PREMIUMS AND VIOLATION OF [ARTICLE] [3] 515 OF
THE REVISED PENAL CODE.
HELD: No, the rehabilitation of SIHI and the settlement
of claims against the corporation is not a legal ground
for the extinction of petitioners’ criminal liabilities.
To begin with, corporate rehabilitation connotes the
restoration of the debtor to a position of successful
operation and solvency, if it is shown that its
continued operation is economically feasible and its
creditors can recover more, by way of the present
value of payments projected in the rehabilitation plan,
if the corporation continues as a going concern than if
it is immediately liquidated.17 It contemplates a
continuance of corporate life and activities in an effort
to restore and reinstate the corporation to its former
position of successful operation and solvency, the
purpose being to enable the company to gain a new
lease on life and allow its creditors to be paid their
claims out of its earnings.
There is no reason why criminal proceedings should be
suspended during corporate rehabilitation, more so,
since the prime purpose of the criminal action is to
punish the offender in order to deter him and others
from committing the same or similar offense, to
isolate him from society, reform and rehabilitate him
or, in general, to maintain social order. As correctly
observed in Rosario, it would be absurd for one who
has engaged in criminal conduct could escape
punishment by the mere filing of a petition for
rehabilitation by the corporation of which he is an
officer. Nonetheless, any civil indemnity awarded as a
result of their conviction would be subject to the stay
order issued by the rehabilitation court. Only to this
extent can the order of suspension be considered
obligatory upon any court, tribunal, branch or body
where there are pending actions for claims against the
Page 35
distressed corporation.
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Alfredo Villamor, Jr. vs. John Umale, G.R. No. 172843,
September 24, 2014
FACTS: MC Home Depot occupied a prime property
(Rockland area) in Pasig. The property was part of the
area owned by Mid-Pasig Development Corporation
(Mid-Pasig). On March 1, 2004, Pasig Printing
Corporation (PPC) obtained an option to lease
portions of MidPasig’s property, including the
Rockland area. On November 11, 2004, PPC’s board of
directors issued a resolution waiving all its rights,
interests, and participation in the option to lease
contract in favor of the law firm of Atty. Alfredo
Villamor, Jr. (Villamor). PPC received no consideration
for this waiver in favor of Villamor’s law firm.
On November 22, 2004, PPC, represented by Villamor,
entered into a memorandum of agreement (MOA)
with MC Home Depot. Under the MOA, MC Home
Depot would continue to occupy the area as PPC’s
sublessee for 4 years, renewable for another 4 years,
at a monthly rental of P4,500,000.00 plus goodwill of
P18,000,000.00.
In compliance with the MOA, MC Home Depot issued
20 post-dated checks representing rental payments
for one year and the goodwill money. The checks were
given to Villamor who did not turn these or the
equivalent amount over to PPC, upon encashment.
Hernando Balmores, a stockholder and director of
PPC, wrote a letter addressed to PPC’s directors on
April 4, 2005. He informed them that Villamor should
be made to deliver to PPC and account for MC Home
Depot’s checks or their equivalent value.
Due to the alleged inaction of the directors,
respondent Balmores filed with the RTC an intra-
corporate controversy complaint under Rule 1,
Section 1(a)(1) of the Interim Rules for Intra-Corporate
Controversies (Interim Rules) against petitioners for
their alleged devices or schemes amounting to fraud
or misrepresentation "detrimental to the interest of
the corporation and its stockholders."
Respondent Balmores alleged in his complaint that
because of petitioners’ actions, PPC’s assets were ". . .
not only in imminent danger, but have actually been
dissipated, lost, wasted and destroyed." Respondent
Balmores prayed that a receiver be appointed from his
list of nominees. He also prayed for petitioners’
prohibition from "selling, encumbering, transferring or
disposing in any manner any of [PPC’s] properties,
including the MC Home Depot checks and/or their
proceeds." He prayed for the accounting and
PINEDAPCGRNMAN
remittance to PPC of the MC Home Depot checks or
their proceeds and for the annulment of the board’s
resolution waiving PPC’s rights in favor of Villamor’s
law firm.
The RTC denied respondent Balmores’ prayer for the
appointment of a receiver or the creation of a
management committee. RTC held PPC’s entitlement
to the checks was doubtful. The resolution issued by
PPC’s board of directors, waiving its rights to the
option to lease contract in favor of Villamor’s law firm,
must be accorded prima facie validity. Also, there was
a pending case filed by one Leonardo Umale against
Villamor, involving the same checks. Umale was also
claiming ownership of the checks. This, according to
the trial court, weakened respondent Balmores’ claim
that the checks were properties of PPC.
Balmores filed with the CA a petition for certiorari
under Rule 65 of the Rules of Court and the same was
granted. It reversed the trial court’s decision, and
issued a new order placing PPC under receivership and
creating an interim management committee. As a
justification of said decision, the CA stated that the
board’s waiver of PPC’s rights in favor of Villamor’s law
firm without any consideration and its inaction on
Villamor’s failure to turn over the proceeds of rental
payments to PPC warrant the creation of a
management committee. The circumstances resulted
in the imminent danger of loss, waste, or dissipation
of PPC’s assets.
According to the CA, the trial court abandoned its duty
to the stockholders in a derivative suit when it refused
to appoint a receiver or create a management
committee, all during the pendency of the
proceedings.
ISSUE: WHETHER THE CA CORRECTLY CHARACTERIZED
RESPONDENT BALMORES’ ACTION AS A DERIVATIVE
SUIT.
HELD: NO. Petition is granted.
A derivative suit is an action filed by stockholders to
enforce a corporate action. It is an exception to the
general rule that the corporation’s power to sue is
exercised only by the board of directors or trustees.
Individual stockholders may be allowed to sue on
behalf of the corporation whenever the directors or
officers of the corporation refuse to sue to vindicate
the rights of the corporation or are the ones to be sued
and are in control of the corporation. In derivative
Page 36
suits, the real party in interest is the corporation, and
the suing stockholder is a mere nominal party.
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COMMERCIAL LAW REVIEW
Rule 8, Section 1 of the Interim Rules of Procedure for
Intra Corporate Controversies (Interim Rules) provides
the 5 requisites for filing derivative suits:
SECTION 1. Derivative action. – A stockholder or
member may bring an action in the name of a
corporation or association, as the case may be,
provided that:
(1) He was a stockholder or member at
the time the acts or transactions
subject of the action occurred and at
the time the action was filed;
(2) He exerted all reasonable efforts, and
alleges the same with particularity in
the complaint, to exhaust all remedies
available under the articles of
incorporation, by-laws, laws or rules
governing the corporation or
partnership to obtain the relief he
desires;
(3) No appraisal rights are available for
the act or acts complained of; and
(4) The suit is not a nuisance or
harassment suit.
In case of nuisance or harassment suit, the court shall
forthwith dismiss the case.
The fifth requisite for filing derivative suits, while not
included in the enumeration, is implied in the first
paragraph of Rule 8, Section 1 of the Interim Rules:
The action brought by the stockholder or member
must be "in the name of [the] corporation or
association. . . ." This requirement has already been
settled in jurisprudence.
It is important that the corporation be made a party to
the case. As explained in Asset Privatization Trust v.
Court of Appeals, to wit: “the corporation must be
joined as party because it is its cause of action that is
being litigated and because judgment must be a res
judicata against it.”
In the same case, this court enumerated the reasons
for disallowing a direct individual suit.
The reasons given for not allowing direct individual
suit are:
(1) . . . "the universally recognized doctrine that a
stockholder in a corporation has no title legal
or equitable to the corporate property; that
both of these are in the corporation itself for
the benefit of the stockholders." In other
words, to allow shareholders to sue
separately would conflict with the separate
corporate entity principle;
PINEDAPCGRNMAN
(2) . . . that the prior rights of the creditors may
be prejudiced. Thus, our Supreme Court held
in the case of Evangelista v. Santos, that ‘the
stockholders may not directly claim those
damages for themselves for that would result
in the appropriation by, and the distribution
among them of part of the corporate assets
before the dissolution of the corporation and
the liquidation of its debts and liabilities,
something which cannot be legally done in
view of Section 16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the
duty of the management to sue for the
protection of all concerned;
(4) it would produce wasteful multiplicity of suits;
and
(5) it would involve confusion in ascertaining the
effect of partial recovery by an individual on
the damages recoverable by the corporation
for the same act.
Respondent Balmores’ action in the trial court failed
to satisfy all the requisites of a derivative suit.
Respondent failed to exhaust all available remedies to
obtain the reliefs he prayed for. He also failed to allege
that appraisal rights were not available for the acts
complained of. This is another requisited as provided
under Rule 8, Section 1(3) of the Interim Rules. Neither
did respondent Balmores implead PPC as party in the
case nor did he allege that he was filing on behalf of
the corporation.
The non-derivative character of respondent Balmores’
action may also be gleaned from his allegations in the
trial court complaint. In the complaint, he described
the nature of his action as an action under Rule 1,
Section 1(a)(1) of the Interim Rules, and not an action
under Rule 1, Section 1(a)(4) of the Interim Rules,
which refers to derivative suits.
Rule 1, Section 1(a)(1) of the Interim Rules refers to
acts of the board, associates, and officers, amounting
to fraud or misrepresentation, which may be
detrimental to the interest of the stockholders. This is
different from a derivative suit.
While devices and schemes of the board of directors,
business associates, or officers amounting to fraud
under Rule 1, Section 1(a)(1) of the Interim Rules are
causes of a derivative suit, it is not always the case that
derivative suits are limited to such causes or that they
are necessarily derivative suits. Hence, they are
Page 37
separately enumerated in Rule 1, Section 1(a) of the
Interim Rules:
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COMMERCIAL LAW REVIEW
SECTION 1. (a) Cases covered. – These Rules shall
govern the procedure to be observed in civil cases
involving the following:
(1) Devices or schemes employed by, or any act
of, the board of directors, business associates,
officers or partners, amounting to fraud or
misrepresentation which may be detrimental
to the interest of the public and/or of the
stockholders, partners, or members of any
corporation, partnership, or association;
(2) Controversies arising out of intra-corporate,
partnership, or association relations, between
and among stockholders, members, or
associates; and between, any or all of them
and the corporation, partnership, or
association of which they are stockholders,
members, or associates, respectively;
(3) Controversies in the election or appointment
of directors, trustees, officers, or managers of
corporations, partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books.
Stockholder/s’ suits based on fraudulent or wrongful
acts of directors, associates, or officers may also be
individual suits or class suits.
Individual suits are filed when the cause of action
belongs to the individual stockholder personally, and
not to the stockholders as a group or to the
corporation.
In this case, respondent Balmores filed an individual
suit. His intent was very clear from his manner of
describing the nature of his action. He was alleging
that the acts of PPC’s directors, specifically the waiver
of rights in favor of Villamor’s law firm and their failure
to take back the MC Home Depot checks from
Villamor, were detrimental to his individual interest as
a stockholder.
XV. FOREIGN CORPORATIONS
- formed not in the laws of the Philippines; laws of
another state; whose laws permit Filipino citizens to
do business in its own country.
- It is necessary for them to secure a license.
Q: Why?
A: for monitoring and taxation purposes.
PINEDAPCGRNMAN
Q: What do we mean by doing business?
A: It is not defined in the corporation code.
Jurisprudence tells us:
1. maintainance of a body in the Philippines.
2. intent to continue such business in the
Philippines.
RA 7042  memorize
Sec. 3(d) The praise "doing business" shall include
soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the
country for a period or periods totalling one hundred
eighty (180) days or more; participating in the
management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines;
and any other act or acts that imply a continuity of
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
the purpose and object of the business organization:
Provided, however, That the phrase "doing business: shall
not be deemed to include mere investment as a
shareholder by a foreign entity in domestic corporations
duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor
appointing a representative or distributor domiciled in
the Philippines which transacts business in its own name
and for its own account;
 if business is isolated, no license is
required.
 Designation of a resident agent is
required.
Effects of being issued a license:
1. the corporation may now engage business.
2. may sue or be sued in the Philippine courts.
Page 38
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Domestication of the corporation:
- intramural issues.
- Right of inspection – law of the state of origin.
Q: If corporation has no license, can it do business in the
Philippines?
A: Yes. But you cannot sue and you may be sued.
CASE: Hope Insurance v. CA  remedy
- court explained that though at the time the
transaction entered into, the foreign company had
no capacity, if at the time it filed in court it already
secured license, it already has the right to sue. THIS
IS THE REMEDY.
CASE: Ericks v. CA
Facts: A corporation organized in Singapore; it did not
have license in the Philippines. It gave credit terms to its
customers. One of its customers did not pay. Eriks filed a
case. Respondent moved to dismiss due to Eriks’ lack of
license.
Issue: WON the action is dismissible.
Held: Yes
Rationale: Same as Home Insurance. Eriks sued again,
this time with license. Res Judicata does not set in
because the trial was not on the merits.
A. Concept of Foreign Corporation
Foreign Corporation is a corporation formed, organized
or existing under any law other than those of the
Philippines, and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
Sec. 123 of the Corporation Code provides that: “For the
purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than
those of the Philippines and whose laws allow Filipino
citizens and corporations to do business in its own
country or state. It shall have the right to transact
business in the Philippines after it shall have obtained a
license to transact business in this country in accordance
PINEDAPCGRNMAN
with this Code and a certificate of authority from the
appropriate government agency.”
Reciprocity Clause provides that the foreign laws allow
Filipino citizens and corporations to do business in its
own country or state.
B. Tests to Determine Nationality of a Corporation
1. Incorporation Test – when the corporation
is incorporated, organized under the law of
other country.
2. Control Test – for purposes of investment;
the citizenship of a particular corporation is
to be determined by the citizenship of the
controlling stockholders.
C. Concept of “Doing Business” and the License
Requirement therefor
Substance Test provides that: a foreign corporation is
doing business in the country if it is continuing the body
or substance of the enterprise of business for which it
was organized.
Continuity Test provides that: doing business implies a
continuity of commercial dealings and arrangements,
and contemplates to some extent the performance of
acts or works or the exercise of some functions normally
incident to and in progressive prosecution of, the
purpose and object of its organization.
*Foreign Corporation is required to obtain license from
the SEC to enable them to do business in the Philippines.
*The foreign corporation must appoint a resident agent
so that court may acquire jurisdiction over the foreign
corporation
*License is essential if there is an intention to maintain
main or substance of the business in the Philippines or to
continue the same.
*Lack of license does not affect the validity of the
transaction.
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*License is for regulatory purposes.
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COMMERCIAL LAW REVIEW
*License requirement does not prevent performance of
acts that are isolated from the main business of the
corporation and there is no intent to continue the same
in the Philippines.
*If the foreign corporation is not licensed to do business
in the Philippines, General Rule: they have no access in
Philippine Courts
Exceptions:
1. Isolated transactions
2. Infringement of trademark
*International offense can be sued anywhere.
Cases: Expert Travel Tours v CA; Home Insurance v
Eastern Shipping Lines
*In Expert Travel Tours v CA, the SC held that resident
agent is not with authority to execute a certification of
Forum shopping following Sec. 23 of the Corporation
Code.
*In Home Insurance v Eastern Shipping Lines, the SC
held that if at the time the suit was brought, the suing
foreign entity already have license to do business in the
Philippines, the suit will be allowed although at the time
the transaction was made it does not have the requisite
of a license to do so, the remedial defect is cured.
Cases: Japan Airlines v CA
*In Japan Airlines v CA, the SC held that the selling of
tickets though there is no aircraft landing in the
Philippines constitute doing business in the Philippines.
*In Ericks v CA, the SC held that license is necessary in
order the foreign corporation may sue. In this case, the
court considered the continuity test, they found out that
the foreign corporation has the intent to continue
business in the Philippines.
*Credit is obtained to maintain longer transactions.
D. Effects of Being Issued a License
1. They are placed under the jurisdiction of the
Philippine courts
2. They are placed under the same footing as
domestic corporations
PINEDAPCGRNMAN
3. The public is protected in dealing with
foreign corporations.
E. Revocation and Withdrawal of License
Grounds for Revocation:
1. Failure to file its annual report or pay any
fees as required by the Corporation Code
2. Failure to appoint and maintain a resident
agent in the Philippines as required by the
Corporation Code
3. Failure, after change of its resident agent or
his address, to submit to the SEC a statement
of such change as required by the
Corporation Code
4. Failure to submit to the SEC an
authenticated copy of any amendment to its
articles of incorporation or by-laws or of any
articles of merger or consolidation within
the time prescribed by the Corporation Code
5. A misrepresentation of any material matter
in any application, report affidavit or other
document submitted by such corporation
pursuant to the provisions of the
Corporation Code
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivision
7. Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license
8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly
licensed to do business in the Philippines
9. Any other ground as would render it unfit
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1. Concept of foreign corporation
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COMMERCIAL LAW REVIEW
2. Tests to determine nationality of a
corporation (Control Test and Grandfather
Rule)
3. Concept of "doing business" and the license
requirement therefor; See also Sec. 3(d), RA
7042
4. Effects of being issued a license
5. Revocation and withdrawal of license
CASES:
Facilities Management vs. De la Osa, 89 SCRA 131;
FACTS: Facilities Management Corporation and J. S.
Dreyer are domiciled in Wake Island while J. V. Catuira
is an employee of FMC stationed in Manila. Leonardo
dela Osa was employed by FMC in Manila, but
rendered work in Wake Island, with the approval of
the Department of Labor of the Philippines. De la Osa
was employed as (1) painter with an hourly rate of
$1.25 from March 1964 to November 1964, inclusive;
(2) houseboy with an hourly rate of $1.26 from
December 1964 to November 1965, inclusive; (3)
houseboy with an hourly rate of $1.33 from December
1965 to August 1966, inclusive; and (4) cashier with an
hourly rate of $1.40 from August 1966 to March 27
1967, inclusive. He further averred that from
December, 1965 to August, 1966, inclusive, he
rendered overtime services daily, and that this entire
period was divided into swing and graveyard shifts to
which he was assigned, but he was not paid both
overtime and night shift premiums despite his
repeated demands from FMC, et al. In a petition filed
on 1 July 1967, dela Osa sought his reinstatement with
full backwages, as well as the recovery of his overtime
compensation, swing shift and graveyard shift
differentials. Subsequently on 3 May 1968, FMC, et al.
filed a motion to dismiss the subject petition on the
ground that the Court has no jurisdiction over the
case, and on 24 May 1968, de la Osa interposed an
opposition thereto. Said motion was denied by the
Court in its Order issued on 12 July 1968.
Subsequently, after trial, the Court of Industrial
PINEDAPCGRNMAN
Relations, in a decision dated 14 February 1972,
ordered FMC, et al. to pay de la Osa his overtime
compensation, as well as his swing shift and graveyard
shift premiums at the rate of 50% per cent of his basic
salary. FMC, et al. filed the petition for review on
certiorari.
ISSUE [1]: WHETHER THE MERE ACT BY A NON-
RESIDENT FOREIGN CORPORATION OF RECRUITING
FILIPINO WORKERS FOR ITS OWN USE ABROAD, IN
LAW DOING BUSINESS IN THE PHILIPPINES.
HELD [1]: In its motion to dismiss, FMC admits that Mr.
Catuira represented it in the Philippines "for the
purpose of making arrangements for the approval by
the Department of Labor of the employment of
Filipinos who are recruited by the Company as its own
employees for assignment abroad." In effect, Mr.
Catuira was alleged to be a liaison officer representing
FMC in the Philippines. Under the rules and
regulations promulgated by the Board of Investments
which took effect 3 February 1969, implementing RA
5455, which took effect 30 September 1968, the
phrase "doing business" has been exemplified with
illustrations, among them being as follows: ""(1)
Soliciting orders, purchases (sales) or service
contracts. Concrete and specific solicitations by a
foreign firm, not acting independently of the foreign
firm, amounting to negotiation or fixing of the terms
and conditions of sales or service contracts, regardless
of whether the contracts are actually reduced to
writing, shall constitute doing business even if the
enterprise has no office or fixed place of business in
the Philippines; (2) appointing a representative or
distributor who is domiciled in the Philippines, unless
said representative or distributor has an independent
status, i.e., it transacts business in its name and for its
own account, and not in the name or for the account
of the principal; xxx (4) Opening offices, whether
called 'liaison' offices, agencies or branches, unless
proved otherwise. xxx (10) Any other act or acts that
imply a continuity of 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, or in the
progressive prosecution of, commercial gain or of the
purpose and objective of the business organization."
ISSUE [2]: WHETHER FMC HAS BEEN "DOING BUSINESS
IN THE PHILIPPINES" SO THAT THE SERVICE OF
SUMMONS UPON ITS AGENT IN THE PHILIPPINES
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VESTED THE COURT OF FIRST INSTANCE OF MANILA
WITH JURISDICTION.
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COMMERCIAL LAW REVIEW
HELD [2]: FMC may be considered as "doing business
in the Philippines" within the scope of Section 14
(Service upon private foreign corporations), Rule 14 of
the Rules of Court which provides that "If the
defendant is a foreign corporation, or a non-resident
joint stock company or association, doing business in
the Philippines, service may be made on its resident
agent designated in accordance with law for that
purpose or, if there be no such agent, on the
government official designated by law to that effect,
or on any of its officers or agents within the
Philippines." Indeed, FMC, in compliance with Act
2486 as implemented by Department of Labor Order
IV dated 20 May 1968 had to appoint Jaime V. Catuira,
1322 A. Mabini, Ermita, Manila "as agent for FMC with
authority to execute Employment Contracts and
receive, in behalf of that corporation, legal services
from and be bound by processes of the Philippine
Courts of Justice, for as long as he remains an
employee of FMC." It is a fact that when the summons
for FMC was served on Catuira he was still in the
employ of the FMC. Hence, if a foreign corporation,
not engaged in business in the Philippines, is not
barred from seeking redress from courts in the
Philippines (such as in earlier cases of Aetna Casualty
& Surety Company, vs. Pacific Star Line, etc. [GR L-
26809], In Mentholatum vs. Mangaliman, and
Eastboard Navigation vs. Juan Ysmael & Co.), a fortiori,
that same corporation cannot claim exemption from
being sued in Philippine courts for acts done against a
person or persons in the Philippines.
Home Insurance vs. Eastern Shipping Lines, 123 SCRA
424;
FACTS: On or about 13 January 1967, S. Kajita & Co.,
on behalf of Atlas Consolidated Mining &
Development Corporation, shipped on board the SS
Eastern Jupiter from Osaka, Japan, 2,361 coils of Black
Hot Rolled Copper Wire Rods. The said VESSEL is
owned and operated by Eastern Shipping Lines. The
shipment was covered by Bill of Lading O-MA-9, with
arrival notice to Phelps Dodge Copper Products
Corporation of the Philippines at Manila. The
shipment was insured with the Home Insurance
Company against all risks in the amount of
P1,580,105.06 under its Insurance Policy AS-73633.
The coils discharged from the VESSEL numbered
PINEDAPCGRNMAN
2,361, of which 53 were in bad order. What the Phelps
Dodge ultimately received at its warehouse was the
same number of 2,361 coils, with 73 coils loose and
partly cut, and 28 coils entangled, partly cut, and
which had to be considered as scrap. Upon weighing
at Phelps Dodge's warehouse, the 2,361 coils were
found to weight 263,940.85 kilos as against its
invoiced weight of 264,534.00 kilos or a net
loss/shortage of 593.15 kilos, or 1,209,56 lbs.,
according to the claims presented by the Phelps Dodge
against Home Insurance, the Eastern Shipping, and
Angel Jose Transportation Inc. For the loss/damage
suffered by the cargo, Home Insurance paid the Phelps
Dodge under its insurance policy the amount of
P3,260.44, by virtue of which Home Insurance became
subrogated to the rights and actions of the Phelps
Dodge. Home Insurance made demands for payment
against the Eastern Shipping and the Angel Jose
Transportation for reimbursement of the aforesaid
amount but each refused to pay the same."
[GR L-34383] On or about 22 December 1966, the
Hansa Transport Kontor shipped from Bremen,
Germany, 30 packages of Service Parts of Farm
Equipment and Implements on board the VESSEL, SS
'NEDER RIJN' owned by N. V. Nedlloyd Lijnen, and
represented in the Philippines by its local agent, the
Columbian Philippines, Inc.. The shipment was
covered by Bill of Lading No. 22 for transportation to,
and delivery at, Manila, in favor of International
Harvester Macleod, Inc. The shipment was insured
with Home Insurance company under its Cargo Policy
AS-73735 'with average terms' for P98,567.79. The
packages discharged from the VESSEL numbered 29,
of which seven packages were found to be in bad
order. What International Harvester ultimately
received at its warehouse was the same number of 29
packages with 9 packages in bad order. Out of these 9
packages, 1 package was accepted by International
Harvester in good order due to the negligible damages
sustained. Upon inspection at International
Harvester's warehouse, the contents of 3 out of the 8
cases were also found to be complete and intact,
leaving 5 cases in bad order. The contents of these 5
packages showed several items missing in the total
amount of $131.14; while the contents of the
undelivered 1 package were valued at $394.66, or a
total of $525.80 or P2,426.98. For the short-delivery of
1 package and the missing items in 5 other packages,
Page 42
Home Insurance paid International Harvester under its
Insurance Cargo Policy the amount of P2,426.98, by
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COMMERCIAL LAW REVIEW
virtue of which Home Insurance became subrogated
to the rights and actions of International Harvester.
Demands were made on N.V. Nedlloyd Lijnen and
International Harvester for reimbursement thereof
but they failed and refused to pay the same."
When the insurance contracts which formed the basis
of these cases were executed, Home Insurance had
not yet secured the necessary licenses and authority;
but when the complaints in these two cases were filed,
Home Insurance had already secured the necessary
license to conduct its insurance business in the
Philippines. In both cases, Home Insurance made the
averment regarding its capacity to sue, as that it "is a
foreign insurance company duly authorized to do
business in the Philippines through its agent, Mr.
Victor H. Bello, of legal age and with office address at
Oledan Building, Ayala Avenue, Makati, Rizal." The
Court of First Instance of Manila, Branch XVII,
however, dismissed the complaints in both cases, on
the ground that Home Insurance had failed to prove
its capacity to sue. Home Insurance filed the petitions
for review on certiorari, which were consolidated.
ISSUE: WHETHER HOME INSURANCE, A FOREIGN
CORPORATION LICENSED TO DO BUSINESS AT HE TIME
OF THE FILING OF THE CASE, HAS THE CAPACITY TO
SUE FOR CLAIMS ON CONTRACTS MADE WHEN IT HAS
NO LICENSE YET TO DO BUSINESS IN THE PHILIPPINES.
HELD: As early as 1924, the Supreme Court ruled in the
leading case of Marshall Wells Co. v. Henry W. Elser &
Co. (46 Phil. 70) that the object of Sections 68 and 69
of the Corporation Law was to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of Philippine courts. The Corporation Law
must be given a reasonable, not an unduly harsh,
interpretation which does not hamper the
development of trade relations and which fosters
friendly commercial intercourse among countries. The
objectives enunciated in the 1924 decision are even
more relevant today when we commercial relations
are viewed in terms of a world economy, when the
tendency is to re-examine the political boundaries
separating one nation from another insofar as they
define business requirements or restrict marketing
conditions. The court distinguished between the
denial of a right to take remedial action and the penal
sanction for non-registration. Insofar as transacting
business without a license is concerned, Section 69 of
the Corporation Law imposed a penal sanction —
imprisonment for not less than 6 months nor more
than 2 years or payment of a fine not less than P200.00
PINEDAPCGRNMAN
nor more than P1,000.00 or both in the discretion of
the court. There is a penalty for transacting business
without registration. And insofar as litigation is
concerned, the foreign corporation or its assignee may
not maintain any suit for the recovery of any debt,
claim, or demand whatever. The Corporation Law is
silent on whether or not the contract executed by a
foreign corporation with no capacity to sue is null and
void ab initio. Still, there is no question that the
contracts are enforceable. The requirement of
registration affects only the remedy. Significantly,
Batas Pambansa 68, the Corporation Code of the
Philippines has corrected the ambiguity caused by the
wording of Section 69 of the old Corporation Law.
Section 133 of the present Corporation Code provides
that "No foreign corporation transacting business in
the Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene in
any action, suit or proceeding in any court or
administrative agency in the Philippines; but such
corporation may be sued or proceeded against before
Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine
laws." The old Section 69 has been reworded in terms
of non-access to courts and administrative agencies in
order to maintain or intervene in any action or
proceeding. The prohibition against doing business
without first securing a license is now given penal
sanction which is also applicable to other violations of
the Corporation Code under the general provisions of
Section 144 of the Code. It is, therefore, not necessary
to declare the contract null and void even as against
the erring foreign corporation. The penal sanction for
the violation and the denial of access to Philippine
courts and administrative bodies are sufficient from
the viewpoint of legislative policy. Herein, the lack of
capacity at the time of the execution of the contracts
was cured by the subsequent registration is also
strengthened by the procedural aspects of these
cases. Home Insurance averred in its complaints that
it is a foreign insurance company, that it is authorized
to do business in the Philippines, that its agent is Mr.
Victor H. Bello, and that its office address is the Oledan
Building at Ayala Avenue, Makati. These are all the
averments required by Section 4, Rule 8 of the Rules
of Court. Home Insurance sufficiently alleged its
capacity to sue.
Page 43
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Mentholatum, Inc. vs. Mangaliman, 73 Phil 524;
FACTS: The petitioner, 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. The Philippine-American Drug
Co., Inc., is its exclusive distributing agent in the
Philippines authorized by it to look after and protect
its interests. On 26 June 1919 and on 21 January 1921,
the Mentholatum Co., Inc., registered with the Bureau
of Commerce and Industry the word, "Mentholatum",
as trade mark for its products.
Meanwhile, respondents (Mangalimans) also
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."
With these acts by the respondents, Mentholatum,
suffered from diminution of their sales and the loss of
goodwill and reputation of their product in the
market. Subsequently, petitioner Mentholatum Co.,
Inc., and the Philippine-American Drug, Co., Inc. filed
in the CFI of Manila, a suit against Anacleto
Mangaliman, Florencio Mangaliman and the Director
of the Bureau of Commerce for infringement of trade
mark and unfair competition.
Petitioner sought 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 CFI of Manila, on 29 October 1937, ruled
in favor of Mentholatum, etc. The Court of Appeals
reversed said decision and ruled that the activities of
petitioner were business transactions in the
Philippines, and that by Section 69 of the Corporation
Law, it may not maintain the suit nor have access to
Philippine courts. Mentholatum filed herein petition
for certiorari.
ISSUE: WON Mentholatum could institute a suit for
infringement of trademark and unfair competition
without securing the license required in Section 69 of
the Corporation Law
PINEDAPCGRNMAN
HELD: NO. 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
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. 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.
Petitioner, through its agent Philippine-American Drug
Co., has been doing business in the Philippines by
selling its products here since 1929. Whatever
transactions the Philippine-American Drug Co. had
executed in view of the law, petitioner, being a foreign
corporation doing business in the Philippines without
the license required by section 68 of the Corporation
Law, may not prosecute this action for violation of
trade mark and unfair competition. Neither may the
agent maintain the action here for the reason that the
distinguishing features of the agent being his
representative character and derivative authority, it
cannot now, to the advantage of its principal, claim an
independent standing in court.
Eriks vs. CA, 267 SCRA 567;
FACTS: Eriks Pte. Ltd. is a non-resident foreign
corporation engaged in the manufacture and sale of
elements used in sealing pumps, valves and pipes for
industrial purposes, valves and control equipment
used for industrial fluid control and PVC pipes and
fittings for industrial uses.
On various dates between January 17 to August 16,
1989, Delfin Enriquez, Jr., doing business under the
name of Delrene EB Controls Center and/or EB
Karmine Commercial, ordered and received from
petitioner various elements used in sealing pumps,
valves, pipes and control equipment, PVC pipes and
fittings. The transfers of goods were perfected in
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COMMERCIAL LAW REVIEW
Singapore, for Enriquez's account, F.O.B. Singapore,
with a 90-day credit term.
Subsequently, demands were made by Eriks upon
Enriquez to settle his account, but the latter failed to
do so. Eriks filed with the RTC of Makati, an action for
the recovery of $41,939.63 or its equivalent in
Philippine currency, plus interest thereon and
damages. Enriquez filed a Motion to Dismiss,
contending that Eriks had no legal capacity to sue.
RTC dismissed the action on the ground that Eriks is a
foreign corporation doing business in the Philippines
without a license. On appeal, the Court of Appeals
affirmed said order as it deemed the series of
transactions between Eriks and Enriquez not to be an
"isolated or casual transaction." Thus, the appellate
court likewise found Eriks to be without legal capacity
to sue. Eriks filed the petition for review.
ISSUE: WON a foreign corporation which sold its
products 16 times over a five-month period to the
same Filipino buyer without first obtaining a license to
do business in the Philippines, is prohibited from
maintaining an action to collect payment therefor in
Philippine courts
HELD: Section 133 of the Corporation Code prohibits,
not merely absence of the prescribed license, but it
also bars a foreign corporation "doing business" in the
Philippines without such license access to Philippine
courts. A foreign corporation without such license is
not ipso facto incapacitated from bringing an action. A
license is necessary only if it is "transacting or doing
business" in the country.
However, there is no definitive rule on what
constitutes "doing," "engaging in," or "transacting"
business. The Corporation Code itself does not define
such terms. The accepted rule in jurisprudence is that
each case must be judged in the light of its own
circumstances. It should be kept in mind that the
purpose of the law is to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of Philippine courts. It is not to prevent the
foreign corporation from performing single or isolated
acts, but to bar it from acquiring a domicile for the
purpose of business without first taking the steps
necessary to render it amenable to suits in the local
courts.
PINEDAPCGRNMAN
Herein, more than the sheer number of transactions
entered into, a clear and unmistakable intention on
the part of Eriks to continue the body of its business in
the Philippines is more than apparent. As alleged in its
complaint, it is engaged in the manufacture and sale
of elements used in sealing pumps, valves, and pipes
for industrial purposes, valves and control equipment
used for industrial fluid control and PVC pipes and
fittings for industrial use. Thus, the sale by Eriks of the
items covered by the receipts, which are part and
parcel of its main product line, was actually carried out
in the progressive prosecution of commercial gain and
the pursuit of the purpose and object of its business,
pure and simple.
Further, its grant and extension of 90-day credit terms
to Enriquez for every purchase made, unarguably
shows an intention to continue transacting with
Enriquez, since in the usual course of commercial
transactions, credit is extended only to customers in
good standing or to those on whom there is an
intention to maintain long-term relationship. The
series of transactions in question could not have been
isolated or casual transactions. What is determinative
of "doing business" is not really the number or the
quantity of the transactions, but more importantly,
the intention of an entity to continue the body of its
business in the country.
The phrase "isolated transaction" has a definite and
fixed meaning, i.e. a transaction or series of
transactions set apart from the common business of a
foreign enterprise in the sense that there is no
intention to engage in a progressive pursuit of the
purpose and object of the business organization. In
this case, the Court cannot see how Eriks' business
dealings will fit the category of "isolated transactions"
considering that its intention to continue and pursue
the corpus of its business in the country had been
clearly established. It has not presented any
convincing argument with equally convincing evidence
for the Court to rule otherwise. Accordingly, Eriks
must be held to be incapacitated to maintain the
action a quo against Enriquez.
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Merrill Lynch Futures, Inc. vs. CA, 211 SCRA 824;
FACTS: On 23 November 1987, Merrill Lynch futures,
Inc. (ML FUTURES) filed a complaint with the RTC of
Quezon City against the Spouses Pedro M. Lara and
Elisa G. Lara for the recovery of a debt and interest
thereon, damages, and attorney's fees. In its
complaint, ML FUTURES described itself as (a) "a non-
resident foreign corporation, not doing business in the
Philippines, duly organized and existing under and by
virtue of the laws of the state of Delaware, U.S.A.;" as
well as (b) a 'futures commission merchant' duly
licensed to act as such in the futures markets and
exchanges in the United States, . . . essentially
functioning as a broker (executing) orders to buy and
sell futures contracts received from its customers on
U.S. futures exchanges."
In its complaint ML FUTURES alleged (1) that on 28
September 1983 it entered into a Futures Customer
Agreement with the spouses (Account 138-12161), in
virtue of which it agreed to act as the latter's broker
for the purchase and sale of futures contracts in the
U.S.; (2) that pursuant to the contract, orders to buy
and sell futures contracts were transmitted to ML
FUTURES by the Lara Spouses "through the facilities of
Merrill Lynch Philippines, Inc., a Philippine corporation
and a company servicing ML Futures' customers;" (3)
that from the outset, the Lara Spouses "knew and
were duly advised that Merrill Lynch Philippines, Inc.
was not a broker in futures contracts," and that it "did
not have a license from the Securities and Exchange
Commission to operate as a commodity trading
advisor (i.e., "and entity which, not being a broker,
furnishes advice on commodity futures to persons
who trade in futures contracts"); (4) that in line with
the above mentioned agreement and through said
Merill Lynch Philippines, Inc., the Lara Spouses actively
traded in futures contracts, including "stock index
futures" for four years or so, i.e., from 1983 to
October, 1987, there being more or less regular
accounting and corresponding remittances of money
(or crediting or debiting) made between the spouses
and ML FUTURES; (5) that because of a loss amounting
to US $160,749.69 incurred in respect of 3
transactions involving "index futures," and after
setting this off against an amount of US $75,913.42
then owing by ML FUTURES to the Lara Spouses, said
spouses became indebted to ML FUTURES for the
ensuing balance of US $84,836.27, which the latter
PINEDAPCGRNMAN
asked them to pay; (6) that the Lara Spouses however
refused to pay this balance, "alleging that the
transactions were null and void because Merrill Lynch
Philippines, Inc., the Philippine company servicing
accounts of ML Futures, had no license to operate as a
"commodity and/or financial futures broker."
ML FUTURES prayed for a preliminary attachment
against the spouses' properties "up to the value of at
least P2,267,139.50," and to sentence the spouses to
pay ML FUTURES: (a) the Philippine peso equivalent of
$84,836.27 at the applicable exchange rate on date of
payment, with legal interest from the date of demand
until full payment; (b) exemplary damages in the sum
of at least P500,000,00; and (c) attorney's fees and
expenses of litigation as may be proven at the trial.
Preliminary attachment issued ex parte on 2
December 1987, and the spouses were duly served
with summons.
The spouses filed a motion to dismiss on the grounds
that (1) ML FUTURES had "no legal capacity to sue"
and (2) its "complaint states no cause of action since it
is not the real party in interest." RTC sustained the MD
and denied ML FUTURES reconsideration. ML
FUTURES appealed to the CA, which affirmed the RTC
judgment.
ISSUE: WON the Lara Spouses are estopped to impugn
ML FUTURES capacity to sue them in the courts of the
forum
HELD: The facts on record adequately establish that
ML FUTURES, operating in the United States, had
indeed done business with the Lara Spouses in the
Philippines over several years, had done so at all times
through Merrill Lynch Philippines, Inc. (MLPI), a
corporation organized in this country, and had
executed all these transactions without ML FUTURES
being licensed to so transact business here, and
without MLPI being authorized to operate as a
commodity futures trading advisor.
The Laras received benefits generated by their
business relations with ML FUTURES. Those business
relations, according to the Laras themselves, spanned
a period of 7 years; and they evidently found those
relations to be of such profitability as warranted their
Page 46
maintaining them for that not insignificant period of
time; otherwise, it is reasonably certain that they
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COMMERCIAL LAW REVIEW
would have terminated their dealings with ML
FUTURES much, much earlier.
Given these facts, and assuming that the Lara Spouses
were aware from the outset that ML FUTURES had no
license to do business in this country and MLPI, no
authority to act as broker for it, it would appear quite
inequitable for the Laras to evade payment of an
otherwise legitimate indebtedness due and owing to
ML FUTURES upon the plea that it should not have
done business in this country in the first place, or that
its agent in this country, MLPI, had no license either to
operate as a "commodity and/or financial futures
broker."
Agilent Technologies Singapore vs. Integrated Silicon
Technology Philippines Corporation, G.R. No. 154618,
April 14, 2004;
FACTS: Petitioner Agilent is a foreign corporation,
which, by its own admission, is not licensed to do
business in the Philippines. Respondent Integrated
Silicon is a private domestic corporation, 100% foreign
owned, which is engaged in the business of
manufacturing and assembling electronics
components.
The juridical relation among the various parties in this
case can be traced to a 5-year Value Added Assembly
Services Agreement (VAASA), between Integrated
Silicon and HP-Singapore. Under the terms of the
VAASA, Integrated Silicon was to locally manufacture
and assemble fiber optics for export to HP-Singapore.
HP-Singapore, for its part, was to consign raw
materials to Integrated Silicon. The VAASA had a five-
year term with a provision for annual renewal by
mutual written consent. Later, with the consent of
Integrated Silicon, HP-Singapore assigned all its rights
and obligations in the VAASA to Agilent.
Subsequently, Integrated Silicon filed a complaint for
“Specific Performance and Damages” against Agilent
and its officers. It alleged that Agilent breached the
parties’ oral agreement to extend the VAASA. Agilent
filed a separate complaint against Integrated Silicon
for “Specific Performance, Recovery of Possession,
and Sum of Money with Replevin, Preliminary
Mandatory Injunction, and Damages”.
PINEDAPCGRNMAN
Respondents filed a MTD in the 2nd case, on the
grounds of lack of Agilent’s legal capacity to sue; litis
pendentia; forum shopping; and failure to state a
cause of action.The trial court denied the MTD.
Respondents filed a petition for certiorari with the CA.
The CA granted respondents’ petition for certiorari,
and ordered the dismissal of the 2nd case. Hence, the
instant petition.
ISSUE: WON an unlicensed foreign corporation not
doing business in the Philippines lacks the legal
capacity to file suit.
HELD: NO. A foreign corporation without a license is
not ipso facto incapacitated from bringing an action in
Philippine courts. A license is necessary only if a
foreign corporation is “transacting” or “doing
business” in the country.
Section 133 of the Corporation Code prevents an
unlicensed foreign corporation “doing business” in the
Philippines from accessing our courts. In a number of
cases, however, SC held that an unlicensed foreign
corporation doing business in the Philippines may
bring suit in Philippine courts against a Philippine
citizen or entity who had contracted with and
benefited from said corporation. Such a suit is
premised on the doctrine of estoppel. A party is
estopped from challenging the personality of a
corporation after having acknowledged the same by
entering into a contract with it. This doctrine of
estoppel to deny corporate existence and capacity
applies to foreign as well as domestic corporations.
The application of this principle prevents a person
contracting with a foreign corporation from later
taking advantage of its noncompliance with the
statutes chiefly in cases where such person has
received the benefits of the contract.
The principles regarding the right of a foreign
corporation to bring suit in Philippine courts may thus
be condensed in four statements:
(1) if a foreign corporation does business in the
Philippines without a license, it cannot sue
before the Philippine courts;
(2) if a foreign corporation is not doing business
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in the Philippines, it needs no license to sue
before Philippine courts on an isolated
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COMMERCIAL LAW REVIEW
transaction or on a cause of action entirely
independent of any business transaction;
(3) if a foreign corporation does business in the
Philippines without a license, a Philippine
citizen or entity which has contracted with
said corporation may be estopped from
challenging the foreign corporation’s
corporate personality in a suit brought before
Philippine courts; and
(4) if a foreign corporation does business in the
Philippines with the required license, it can
sue before Philippine courts on any
transaction.
To constitute “doing business”, the activity to be
undertaken in the Philippines is one that is for profit-
making. By the clear terms of the VAASA, Agilent’s
activities in the Philippines were confined to (1)
maintaining a stock of goods in the Philippines solely
for the purpose of having the same processed by
Integrated Silicon; and (2) consignment of equipment
with Integrated Silicon to be used in the processing of
products for export. As such, based on the evidence
presented thus far, Agilent cannot be deemed to be
“doing business” in the Philippines. Respondents’
contention that Agilent lacks the legal capacity to file
suit is therefore devoid of merit. As a foreign
corporation not doing business in the Philippines, it
needed no license before it can sue before our courts.
Expertravel & Tours, Inc. vs. Court of Appeals and Korean
Airlines GR No. 152392, May 26, 2005;
FACTS: Korean Airlines (KAL) is a corporation
established and registered in the Republic of South
Korea and has been granted license to do business in
the Philippines. KAL, through its legal counsel, Atty.
Mario Aguinaldo filed a complaint against ETI
(petitioner) with the RTC of Manila, for the collection
of sum of money totaling PhP260,150.00 plus
attorney's fees and exemplary damages. The
complaint was attached with verification and
certificate of non-forum shopping wherein indicated
that Atty. Aguinaldo is the agent and legal counsel of
KAL and had caused the preparation of the said
complaint. ETI filed a motion to dismiss the complaint
on the ground that Atty. Aguinaldo was not authorized
PINEDAPCGRNMAN
to execute the above-mentioned verification and non-
forum shopping as required by Section 5, Rule 7 of the
Rules of Court. KAL, thereafter, opposed the motion
contending that Atty. Aguinaldo was its resident agent
and was registered as such with the Securities and
Exchange Commission (SEC). It was also alleged that
Atty. Aguinaldo also served as the company's
corporate secretary. KAL was given a period of 10
days within which to submit a copy of the resolution of
the Board of Directors authorizing Atty. Aguinaldo to
execute the said legal documents.
During the hearing, Atty Aguinaldo claimed that he
had been authorized to file the complaint through the
resolution approved by the KAL Board of Directors
during a special meeting held on June 25, 1999. As a
proof, KAL submitted an Affidavit alleging that the
board of directors conducted a special teleconference
which he and Atty. Aguinaldo attended. It was also
averred that in that Teleconference, the board of
directors approved a resolution authorizing Atty.
Aguinaldo to execute the certificate of non-forum
shopping and to file the said complaint. Furthermore,
Su Kyoo Kim alleged that the corporation had no
written copy of the aforesaid resolution.
Trial Court issued an order denying the motion to
dismiss, giving credence to the claims of Atty.
Aguinaldo and Su Kyoo Kim. ETI filed a motion for
reconsideration of the said order alleging that it is
inappropriate for the court to take judicial notice of
the said teleconference without any prior hearing. CA:
dismissed the MR and ruled that the verification and
certificate of non-forum shopping executed by Atty.
Aguinaldo was sufficient compliance with the Rules of
Court. Hence this petition.
ISSUE(s): WoN Atty. Aguinaldo as resident agent is
authorized to execute the certificate non-forum
shopping
WoN teleconference is allowed
HELD: NO. There was no allegation in the certification
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 therein.
While Atty. Aguinaldo is the resident agent of the
respondent in the Philippines, this does not mean that
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he is authorized to execute the requisite certification
against forum shopping. Under Section 127, in relation
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COMMERCIAL LAW REVIEW
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 upon
the duly-authorized officers of the foreign corporation
as its home office.[
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.
FAILURE TO SHOW THAT ATTY. AGUINALDO WAS
AUTHORIZED; VALIDITY OF TELECONFERENCE
MEETING
YES. 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
3
Petitioner Steelcase, Inc. (Steelcase) is a foreign corporation existing under
the laws of Michigan, United States of America (U.S.A.), and engaged in the
manufacture of office furniture.
PINEDAPCGRNMAN
Commission issued SEC Memorandum Circular No. 15,
on November 30, 2001, providing the guidelines to be
complied with related to such conferences. 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. However, even
given the possibility that Atty. Aguinaldo and Suk Kyoo
Kim participated in a teleconference along with the
respondent’s 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.
Steelcase, Inc. v. Design International Selections, Inc., 18
April 2012
FACTS:
 Sometime in 1986 or 1987, Steelcase and DISI3
orally entered into a dealership agreement
whereby Steelcase granted DISI the right to
market, sell, distribute, install, and service its
products to end-user customers within the
Philippines. The business relationship
terminated after the agreement was breached
with neither party admitting any fault.
 Steelcase filed a complaint for sum of money
against DISI alleging, among others, that DISI
had an unpaid account of US$600,000.00.
Steelcase prayed that DISI be ordered to pay
actual and other damages.
 Among the counter-arguments raised, DISI
alleged that the complaint failed to state a
cause of action and to contain the required
allegations on Steelcase’s capacity to sue in
the Philippines despite the fact that Steelcase
was doing business in the Philippines without
the required license to do so. Consequently, it
posited that the complaint should be
dismissed because of Steelcase’s lack of legal
capacity to sue in Philippine courts.
Respondent Design International Selections, Inc. (DISI) is a corporation
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existing under Philippine Laws and engaged in the furniture business,
including the distribution of furniture.
Intelligentia et Scientia Semper Mea
COMMERCIAL LAW REVIEW PINEDAPCGRNMAN
 RTC dismissed the complaint. The RTC stated personality of a corporation after having
that in requiring DISI to meet the standards it acknowledged the same by entering into a contract
set forth and in terminating the dealership with it. And the doctrine of estoppel to deny corporate
agreement with DISI based on its failure to existence applies to a foreign as well as to domestic
improve its performance, Steelcase corporations. One who has dealt with a corporation of
unwittingly revealed that it participated in the foreign origin as a corporate entity is estopped to deny
operations of DISI. The RTC concluded that its corporate existence and capacity.
Steelcase was "doing business" in the
Philippines, and since it did not have the
license to do business in the country, it was
barred from seeking redress from our courts
until it obtained the requisite license to do so.
The Court of Appeals affirmed.

ISSUES:
1) Whether or not Steelcase is doing business in
the Philippines without a license; and
2) Whether or not DISI is estopped from
challenging the Steelcase’s legal capacity to
sue.

HELD:
1) Steelcase is an unlicensed foreign corporation
not doing business in the Philippines
(here, SC went on enumerating acts which shall not be
deemed "doing business" in the Philippines4)
SC held that the appointment of a distributor in the
Philippines is not sufficient to constitute "doing
business" unless it is under the full control of the
foreign corporation. DISI is independently owned and
managed. In addition to Steelcase products, DISI also
distributed products of other companies. DISI was an
independent contractor, distributing various products
of Steelcase and of other companies, acting in its own
name and for its own account.
2) DISI is estopped from challenging Steelcase's
capacity to sue
On this point, the Supreme Court declared that “if
indeed Steelcase had been doing business in the
Philippines without a license, DISI would nonetheless
be estopped from challenging the former’s legal
capacity to sue. A party is estopped to challenge the

4
(a) mere investment as a shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or the exercise of rights as
such investor; (b) having a nominee director or officer to represent its
interest in such corporation; (c) appointing a representative or distributor
domiciled in the Philippines which transacts business in the representative's
processed by another entity in the Philippines; (f) consignment by a foreign
entity of equipment with a local company to be used in the processing of
products for export; (g) collecting information in the Philippines; and (h)
performing services auxiliary to an existing isolated contract of sale which are
not on a continuing basis, such as installing in the Philippines machinery it
Page 50

or distributor's own name and account; (d) the publication of a general has manufactured or exported to the Philippines, servicing the same, training
advertisement through any print or broadcast media; (e) maintaining a stock domestic workers to operate it, and similar incidental services.
of goods in the Philippines solely for the purpose of having the same

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