dissuades courts in resolving a case.
1 The Court may still take cognizance of an otherwise moot and academic case,
1.Narra Nickel Mining and Development Corporation v. Redmont Consolidated Mines, Corporation, G.R. No.
195580, January 28, 2015
Before the Court is the Motion for Reconsideration of its April 21, 2014 Decision, which denied the Petition for Review
on Certiorari under Rule 45 jointly interposed by petitioners Narra Nickel and Mining Development Corp. (Narra),
Tesoro Mining and Development, Inc. (Tesoro), and McArthur Mining Inc. (McArthur), and affirmed the October 1,
2010 Decision and February 15, 2011 Resolution of the Court of Appeals (CA) in CA-G.R. SP No. 109703.
Very simply, the challenged Decision sustained the appellate court’s ruling that petitioners, being foreign
corporations,are not entitled to Mineral Production Sharing Agreements (MPSAs). In reaching its conclusion, this
Court upheld with approval the appellate court’s finding that there was doubt as to petitioners’ nationality since a
100% Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns60% of the common stocks of the
petitioners by owning equity interest of petitioners’ other majority corporate shareholders.
In a strongly worded Motion for Reconsideration dated June 5, 2014, petitioners-movants argued, in the main, that the
Court’s Decision was not in accord with law and logic.In its September 2, 2014 Comment, on the other hand,
respondent Redmont Consolidated Mines Corp. (Redmont) countered that petitioners’ motion for reconsideration is
nothing but a rehash of their arguments and should, thus, be denied outright for being pro-forma. Petitioners have
interposed on September 30, 2014 their Reply to the respondent’s Comment.
After considering the parties’ positions, as articulated in their respective submissions, We resolve to deny the motion
for reconsideration.
I.The case has not been rendered moot and academic
Petitioners have first off criticized the Court for resolving in its Decision a substantive issue, which, as argued, has
supposedly been rendered moot by the fact that petitioners’ applications for MPSAs had already been converted to an
application for a Financial Technical Assistance Agreement (FTAA), as petitioners have in fact been granted an
FTAA. Further, the nationality issue, so petitioners presently claim, had been rendered moribund by the fact that
MBMI had already divested itself and sold all its shareholdings in the petitioners, as well as in their corporate
stockholders, to a Filipino corporation—DMCI Mining Corporation (DMCI).
As a counterpoint, respondent Redmont avers that the present case has not been rendered moot by the supposed
issuance of an FTAA in petitioners’ favor as this FTAA was subsequently revoked by the Office of the President (OP)
and is currently a subject of a petition pending in the Court’s First Division. Redmont likewise contends that the
supposed sale of MBMI’s interest in the petitioners and in their “holding companies” is a question of fact that is
outside the Court’s province to verify in a Rule 45 certiorari proceedings. In any case, assuming that the controversy
has been rendered moot, Redmont claims that its resolution on the merits is still justified by the fact that petitioners
have violated a constitutional provision, the violation is capable of repetition yet evading review, and the present case
involves a matter of public concern.
Indeed, as the Court clarified in its Decision, the conversion of the MPSA application to one for FTAAs and the
issuance by the OP of an FTAA in petitioners’ favor are irrelevant. The OP itself has already cancelled and revoked
the FTAA thus issued to petitioners. Petitioners curiously have omitted this critical fact in their motion for
reconsideration. Furthermore, the supposed sale by MBMI of its shares in the petitioner-corporations and in their
holding companies is not only a question of fact that this Court is without authority to verify, it also does not negate
any violation of the Constitutional provisions previously committed before any such sale.
We can assume for the nonce that the controversy had indeed been rendered moot by these two events. As this
Court has time and again declared, the “moot and academic” principle is not a magical formula that automatically
if it finds that (a) there is a grave violation of the Constitution; (b) the situation is of exceptional character and
paramount public interest is involved; (c) the constitutional issue raised requires formulation of controlling principles to
guide the bench, the bar, and the public; and (d) the case is capable of repetition yet evading review.2] The Court’s
April 21, 2014 Decision explained in some detail that all four (4) of the foregoing circumstances are present in the
case. If only to stress a point, we will do so again.
First, allowing the issuance of MPSAs to applicants that are owned and controlled by a 100% foreign-owned
corporation, albeit through an intricate web of corporate layering involving alleged Filipino corporations, is tantamount
to permitting a blatant violation of Section 2, Article XII of the Constitution. The Court simply cannot allow this breach
and inhibit itself from resolving the controversy on the facile pretext that the case had already been rendered
academic.
Second, the elaborate corporate layering resorted to by petitioners so as to make it appear that there is compliance
with the minimum Filipino ownership in the Constitution is deftly exceptional in character. More importantly, the case
is of paramount public interest, as the corporate layering employed by petitioners was evidently designed to
circumvent the constitutional caveat allowing only Filipino citizens and corporations 60%-owned by Filipino citizens to
explore, develop, and use the country’s natural resources.
Third, the facts of the case, involving as they do a web of corporate layering intended to go around the Filipino
ownership requirement in the Constitution and pertinent laws, require the establishment of a definite principle that will
ensure that the Constitutional provision reserving to Filipino citizens or “corporations at least sixty per centum of
whose capital is owned by such citizens” be effectively enforced and complied with. The case, therefore, is an
opportunity to establish a controlling principle that will “guide the bench, the bar, and the public.”
Lastly, the petitioners’ actions during the lifetime and existence of the instant case that gave rise to the present
controversy are capable of repetition yet evading review because, as shown by petitioners’ actions, foreign
corporations can easily utilize dummy Filipino corporations through various schemes and stratagems to skirt the
constitutional prohibition against foreign mining in Philippine soil.
II. The application of the Grandfather Rule is justified by the circumstances of the case to determine the nationality of
petitioners.
To petitioners, the Court’s application of the Grandfather Rule to determine their nationality is erroneous and allegedly
without basis in the Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine Mining Act of 1995,3 and
the Rules issued by the Securities and Exchange Commission (SEC). These laws and rules supposedly espouse the
application of the Control Test in verifying the Philippine nationality of corporate entities for purposes of determining
compliance with Sec. 2, Art. XII of the Constitution that only “corporations or associations at least sixty per centum of
whose capital is owned by such [Filipino] citizens” may enjoy certain rights and privileges, like the exploration and
development of natural resources.
The application of the Grandfather Rule in the
present case does not eschew the Control Test.
Clearly, petitioners have misread, and failed to appreciate the clear import of, the Court’s April 21, 2014 Decision.
Nowhere in that disposition did the Court foreclose the application of the Control Test in determining which
corporations may be considered as Philippine nationals. Instead, to borrow Justice Leonen’s term, the Court used the
Grandfather Rule as a “supplement” to the Control Test so that the intent underlying the averted Sec.2, Art. XII of the
Constitution be given effect. The following excerpts of the April 21, 2014 Decision cannot be clearer:
In ending, the “control test” is still the prevailing mode of determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. XII of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When in the mind of the Court, there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipino equity ownership in the corporation,
then it may apply the “grandfather rule.”(emphasis supplied)
With that, the use of the Grandfather Rule as a “supplement” to the Control Test is not proscribed by the Constitution
or the Philippine Mining Act of 1995.
The Grandfather Rule implements the intent of
the Filipinization provisions of the Constitution.
To reiterate, Sec. 2, Art. XII of the Constitution reserves the exploration, development, and utilization of natural
resources to Filipino citizens and “corporations or associations at least sixty per centum of whose capital is owned by
such citizens.” Similarly, Section 3(aq) of the Philippine Mining Act of 1995considers a “corporation xxx registered in
accordance with law at least sixty per cent of the capital of which is owned by citizens of the Philippines” as a person
qualified to undertake a mining operation. Consistent with this objective, the Grandfather Rule was originally
conceived to look into the citizenship of the individuals who ultimately own and control the shares of stock of a
corporation for purposes of determining compliance with the constitutional requirement of Filipino ownership.It cannot,
therefore, be denied that the framers of the Constitution have not foreclosed the Grandfather Rule as a tool in
verifying the nationality of corporations for purposes of ascertaining their right to participate in nationalized or partly
nationalized activities. The following excerpts from the Record of the 1986 Constitutional Commission suggest as
much:
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-
40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity
invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather
rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
As further defined by Dean Cesar Villanueva, the Grandfather Rule is “the method by which the percentage of Filipino
equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the
Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present, by
attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the
corporate shareholder.”4 Thus, to arrive at the actual Filipino ownership and control in a corporation, both the direct
and indirect shareholdings in the corporation are determined.
This concept of stock attribution inherent in the Grandfather Rule to determine the ultimate ownership in a corporation
is observed by the Bureau of Internal Revenue (BIR) in applying Section 127 (B)5 of the National Internal Revenue
Code on taxes imposed on closely held corporations, in relation to Section 96 of the Corporation Code6 on close
corporations. Thus, in BIR Ruling No. 148-10, Commissioner Kim Henares held:
In the case of a multi-tiered corporation, the stock attribution rule must be allowed to run continuously along the chain
of ownership until it finally reaches the individual stockholders. This is in consonance with the “grandfather rule”
adopted in the Philippines under Section 96 of the Corporation Code (Batas Pambansa Blg. 68) which provides that
notwithstanding the fact that all the issued stock of a corporation are held by not more than twenty persons, among
others, a corporation is nonetheless not to be deemed a close corporation when at least two thirds of its voting stock
or voting rights is owned or controlled by another corporation which is not a close corporation.7
In SEC-OGC Opinion No. 10-31 dated December 9, 2010 (SEC Opinion 10-31),the SEC applied the Grandfather Rule
even if the corporation engaged in mining operation passes the 60-40 requirement of the Control Test, viz:
You allege that the structure of MML’s ownership in PHILSAGA is as follows: (1) MML owns 40% equity in MEDC,
while the 60% is ostensibly owned by Philippine individual citizens who are actually MML’s controlled nominees; (2)
MEDC, in turn,owns 60% equity in MOHC, while MML owns the remaining 40%; (3) Lastly, MOHC owns 60% of
PHILSAGA, while MML owns the remaining 40%. You provide the following figure to illustrate this structure:
We note that the Constitution and the statute use the concept “Philippine citizens.” Article III, Section 1 of the
Constitution provides who are Philippine citizens: x x x This enumeration is exhaustive. In other words, there can be
no other Philippine citizens other than those falling within the enumeration provided by the Constitution. Obviously,
only natural persons are susceptible of citizenship. Thus, for purposes of the Constitutional and statutory restrictions
on foreign participation in the exploitation of mineral resources, a corporation investing in a mining joint venture can
never be considered as a Philippine citizen.
The Supreme Court En Banc confirms this [in]… Pedro R. Palting, vs. San Jose Petroleum [Inc.]. The Court held that
a corporation investing in another corporation engaged in a nationalized activity cannot beconsidered as a citizen for
purposes of the Constitutional provision restricting foreign exploitation of natural resources:
Accordingly, we opine that we must look into the citizenship of the individual stockholders, i.e. natural persons, of that
investor-corporation in order to determine if the Constitutional and statutory restrictions are complied with. If the
shares of stock of the immediate investor corporation is in turn held and controlled by another corporation, then we
must look into the citizenship of the individual stockholders of the latter corporation. In other words, if there are layers
of intervening corporations investing in a mining joint venture, we must delve into the citizenship of the individual
stockholders of each corporation. This is the strict application of the grandfather rule, which the Commission has been
consistently applying prior to the 1990s.
Indeed, the framers of the Constitution intended for the “grandfather rule” to apply in case a 60%-40% Filipino-Foreign
equity corporation invests in another corporation engaging in an activity where the Constitution restricts foreign
participation.
Accordingly, under the structure you represented, the joint mining venture is 87.04 % foreign owned, while it is only
12.96% owned by Philippine citizens. Thus, the constitutional requirement of 60% ownership by Philippine citizens is
violated. (emphasis supplied)
Similarly, in the eponymous Redmont Consolidated Mines Corporation v. McArthur Mining Inc., et al.,8 the SEC en
banc applied the Grandfather Rule despite the fact that the subject corporations ostensibly have satisfied the 60-40
Filipino equity requirement. The SEC en banc held that to attain the Constitutional objective of reserving to Filipinos
the utilization of natural resources, one should not stop where the percentage of the capital stock is 60%. Thus:
[D]oubt, we believe, exists in the instant case because the foreign investor, MBMI, provided practically all the funds of
the remaining appellee-corporations. The records disclose that: (1) Olympic Mines and Development Corporation
(“OMDC”), a domestic corporation, and MBMI subscribed to 6,663 and 3,331 shares, respectively, out of the
authorized capital stock of Madridejos; however, OMDC paid nothing for this subscription while MBMI paid
P2,803,900.00 out of its total subscription cost of P3,331,000.00; (2) Palawan Alpha South Resource Development
Corp. (“Palawan Alpha”), also a domestic corporation, and MBMI subscribed to 6,596 and 3,996 shares, respectively,
out of the authorized capital stock of Patricia Louise; however, Palawan Alpha paid nothing for this subscription while
MBMI paid P2,796,000.00 out of its total subscription cost of P3,996,000.00; (3) OMDC and MBMI subscribed to
6,663 and 3,331 shares, respectively, out of the authorized capital stock of Sara Marie; however, OMDC paid nothing
for this subscription while MBMI paid P2,794,000.00 out of its total subscription cost of P3,331,000.00; and (4) Falcon
Ridge Resources Management Corp. (“Falcon Ridge”), another domestic corporation, and MBMI subscribed to 5,997
and 3,998 shares, respectively, out of the authorized capital stock of San Juanico; however, Falcon Ridge paid
nothing for this subscription while MBMI paid P2,500,000.00 out of its total subscription cost of P3,998,000.00. Thus,
pursuant to the afore-quoted DOJ Opinion, the Grandfather Rule must be used.
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources.
Necessarily, therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal
fiction of corporate ownership and control. But the constitutional provision, as interpreted and practiced via the 1967
SEC Rules, has favored foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must
be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation
engaged in a nationalized activity or business.
The method employed in the Grandfather Rule of attributing the shareholdings of a given corporate shareholder to the
second or even the subsequent tier of ownership hews with the rule that the “beneficial ownership” of corporations
engaged in nationalized activities must reside in the hands of Filipino citizens. Thus, even if the 60-40 Filipino equity
requirement appears to have been satisfied, the Department of Justice (DOJ), in its Opinion No. 144, S. of 1977,
stated that an agreement that may distort the actual economic or beneficial ownership of a mining corporation may be
struck down as violative of the constitutional requirement, viz:
In this connection, you raise the following specific questions:
1. Can a Philippine corporation with 30% equity owned by foreigners enter into a mining service contract with a
foreign company granting the latter a share of not more than 40% from the proceeds of the operations?
By law, a mining lease may be granted only to a Filipino citizen, or to a corporation or partnership registered with the
[SEC] at least 60% of the capital of which is owned by Filipino citizens and possessing x x x. The sixty percent
Philippine equity requirement in mineral resource exploitation x x x is intended to insure, among other purposes, the
conservation of indigenous natural resources, for Filipino posterity x x x. I think it is implicit in this provision, even if it
refers merely to ownership of stock in the corporation holding the mining concession, that beneficial ownership of the
right to dispose, exploit, utilize, and develop natural resources shall pertain to Filipino citizens, and that the nationality
requirement is not satisfied unless Filipinos are the principal beneficiaries in the exploitation of the country’s natural
resources. This criterion of beneficial ownership is tacitly adopted in Section 44 of P.D. No. 463, above-quoted, which
limits the service fee in service contracts to 40% of the proceeds of the operation, thereby implying that the 60-40
benefit-sharing ration is derived from the 60-40 equity requirement in the Constitution.
It is obvious that while payments to a service contractor may be justified as a service fee, and therefore, properly
deductible from gross proceeds, the service contract could be employed as a means of going about or circumventing
the constitutional limit on foreign equity participation and the obvious constitutional policy to insure that Filipinos retain
beneficial ownership of our mineral resources. Thus, every service contract scheme has to be evaluated in its entirety,
on a case to case basis, to determine reasonableness of the total “service fee” x x x like the options available to the
contractor to become equity participant in the Philippine entity holding the concession, or to acquire rights in the
processing and marketing stages. x x x (emphasis supplied)
The “beneficial ownership” requirement was subsequently used in tandem with the “situs of control” to determine the
nationality of a corporation in DOJ Opinion No. 84, S. of 1988, through the Grandfather Rule, despite the fact that
both the investee and investor corporations purportedly satisfy the 60-40 Filipino equity requirement:
This refers to your request for opinion on whether or not there may be an investment in real estate by a domestic
corporation (the investing corporation) seventy percent (70%) of the capital stock of which is owned by another
domestic corporation with at least 60%-40% Filipino-Foreign Equity, while the remaining thirty percent (30%) of the
capital stock is owned by a foreign corporation.
This Department has had the occasion to rule in several opinions that it is implicit in the constitutional provisions, even
if it refers merely to ownership of stock in the corporation holding the land or natural resource concession, that the
nationality requirement is not satisfied unless it meets the criterion of beneficial ownership, i.e. Filipinos are the
principal beneficiaries in the exploration of natural resources (Op. No. 144, s. 1977; Op. No. 130, s. 1985), and that in
applying the same “the primordial consideration is situs of control, whether in a stock or non-stock corporation” (Op.
No. 178, s. 1974). As stated in the Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), obviously to insure that
corporations and associations allowed to acquire agricultural land or to exploit natural resources “shall be controlled
by Filipinos.” Accordingly, any arrangement which attempts to defeat the constitutional purpose should be eschewed
(Op. No 130, s. 1985).
We are informed that in the registration of corporations with the [SEC], compliance with the sixty per centum
requirement is being monitored by SEC under the “Grandfather Rule” a method by which the percentage of Filipino
equity in corporations engaged in nationalized and/or partly nationalized areas of activities provided for under the
Constitution and other national laws is accurately computed, and the diminution if said equity prevented (SEC Memo,
S. 1976). The “Grandfather Rule” is applied specifically in cases where the corporation has corporate stockholders
with alien stockholdings, otherwise, if the rule is not applied, the presence of such corporate stockholders could
diminish the effective control of Filipinos.
Applying the “Grandfather Rule” in the instant case, the result is as follows: xxx the total foreign equity in the investing
corporation is 58% while the Filipino equity is only 42%, in the investing corporation, subject of your query, is
disqualified from investing in real estate, which is a nationalized activity, as it does not meet the 60%-40% Filipino-
Foreign equity requirement under the Constitution.
This pairing of the concepts “beneficial ownership” and the “situs of control” in determining what constitutes “capital”
has been adopted by this Court in Heirs of Gamboa v. Teves.10In its October 9, 2012 Resolution, the Court clarified,
thus:
This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by “a trustee of
funds for pension or other employee retirement or separation benefits,” the trustee is a Philippine national if “at least
sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals.” Likewise, Section 1(b) of the
Implementing Rules of the FIA provides that “for stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights, is essential.” (emphasis supplied)
In emphasizing the twin requirements of “beneficial ownership” and “control” in determining compliance with the
required Filipino equity in Gamboa, the en banc Court explicitly cited with approval the SEC en banc’s application in
Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al. of the Grandfather Rule, to wit:
Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and opinions on behalf
of SEC, has adopted the Grandfather Rule in determining compliance with the 60-40 ownership requirement in favor
of Filipino citizens mandated by the Constitution for certain economic activities. This prevailing SEC ruling, which the
SEC correctly adopted to thwart any circumvention of the required Filipino “ownership and control,” is laid down in the
25 March 2010 SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.
xxx(emphasis supplied)
Applying Gamboa, the Court, in Express Investments III Private Ltd. v. Bayantel Communications, Inc.,11 denied the
foreign creditors’ proposal to convert part of Bayantel’s debts to common shares of the company at a rate of 77.7%.
Supposedly, the conversion of the debts to common shares by the foreign creditors would be done, both directly and
indirectly, in order to meet the control test principle under the FIA. Under the proposed structure, the foreign creditors
would own 40% of the outstanding capital stock of the telecommunications company on a direct basis, while the
remaining 40% of shares would be registered to a holding company that shall retain, on a direct basis, the other 60%
equity reserved for Filipino citizens. Nonetheless, the Court found the proposal non-compliant with the Constitutional
requirement of Filipino ownership as the proposed structure would give more than 60% of the ownership of the
common shares of Bayantel to the foreign corporations, viz:
In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantel is that its
shareholders shall relinquish the agreed-upon amount of common stock[s] as payment to Unsecured Creditors as per
the Term Sheet. Evidently, the parties intend to convert the unsustainable portion of respondent’s debt into common
stocks, which have voting rights. If we indulge petitioners on their proposal, the Omnibus Creditors which are foreign
corporations, shall have control over 77.7% of Bayantel, a public utility company. This is precisely the scenario
proscribed by the Filipinization provision of the Constitution. Therefore, the Court of Appeals acted correctly in
sustaining the 40% debt-to-equity ceiling on conversion. (emphasis supplied)
As shown by the quoted legislative enactments, administrative rulings, opinions, and this Court’s decisions, the
Grandfather Rule not only finds basis, but more importantly, it implements the Filipino equity requirement, in the
Constitution.
Application of the Grandfather
Rule with the Control Test.
Admittedly, an ongoing quandary obtains as to the role of the Grandfather Rule in determining compliance with the
minimum Filipino equity requirement vis-à-vis the Control Test. This confusion springs from the erroneous assumption
that the use of one method forecloses the use of the other.
As exemplified by the above rulings, opinions, decisions and this Court’s April 21, 2014 Decision, the Control Test can
be, as it has been, applied jointly with the Grandfather Rule to determine the observance of foreign ownership
restriction in nationalized economic activities. The Control Test and the Grandfather Rule are not, as it were,
incompatible ownership-determinant methods that can only be applied alternative to each other. Rather, these
methods can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations
engaged in fully or partly nationalized activities, as the mining operation involved in this case or the operation of public
utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a
corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly
nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be
applied. Put in another manner, if the subject corporation’s Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule
disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered
a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In
that instance, there is no need for a dissection or further inquiry on the ownership of the corporate shareholders in
both the investing and investee corporation or the application of the Grandfather Rule.12As a corollary rule, even if
the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the
Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.” In this case, a
further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporations is necessary.
As explained in the April 21, 2012 Decision, the “doubt” that demands the application of the Grandfather Rule in
addition to or in tandem with the Control Test is not confined to, or more bluntly, does not refer to the fact that the
apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. Rather, “doubt” refers to various
indicia that the “beneficial ownership” and “control” of the corporation do not in fact reside in Filipino shareholders but
in foreign stakeholders. As provided in DOJ Opinion No. 165, Series of 1984, which applied the pertinent provisions of
the Anti-Dummy Law in relation to the minimum Filipino equity requirement in the Constitution, “significant indicators
of the dummy status” have been recognized in view of reports “that some Filipino investors or businessmen are being
utilized or [are] allowing themselves to be used as dummies by foreign investors” specifically in joint ventures for
national resource exploitation. These indicators are:
1. That the foreign investors provide practically all the funds for the joint investment undertaken by these Filipino
businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the company and prepare all economic
viability studies.
Thus, In the Matter of the Petition for Revocation of the Certificate of Registration of Linear Works Realty
Development Corporation,13 the SEC held that when foreigners contribute more capital to an enterprise, doubt exists
as to the actual control and ownership of the subject corporation even if the 60% Filipino equity threshold is met.
Hence, the SEC in that one ordered a further investigation, viz:
x x x The [SEC Enforcement and Prosecution Department (EPD)] maintained that the basis for determining the level
of foreign participation is the number of shares subscribed, regardless of the par value. Applying such an
interpretation, the EPD rules that the foreign equity participation in Linear works Realty Development Corporation
amounts to 26.41% of the corporation’s capital stock since the amount of shares subscribed by foreign nationals is
1,795 only out of the 6,795 shares. Thus, the subject corporation is compliant with the 40% limit on foreign equity
participation. Accordingly, the EPD dismissed the complaint, and did not pursue any investigation against the subject
corporation.
x x x [I]n this respect we find no error in the assailed order made by the EPD. The EPD did not err when it did not take
into account the par value of shares in determining compliance with the constitutional and statutory restrictions on
foreign equity.
However, we are aware that some unscrupulous individuals employ schemes to circumvent the constitutional and
statutory restrictions on foreign equity. In the present case, the fact that the shares of the Japanese nationals have a
greater par value but only have similar rights to those held by Philippine citizens having much lower par value, is
highly suspicious. This is because a reasonable investor would expect to have greater control and economic rights
than other investors who invested less capital than him. Thus, it is reasonable to suspect that there may be secret
arrangements between the corporation and the stockholders wherein the Japanese nationals who subscribed to the
shares with greater par value actually have greater control and economic rights contrary to the equality of shares
based on the articles of incorporation.
With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised to avail of
the Commission’s subpoena powers in order to gather sufficient evidence, and file the necessary complaint.
As will be discussed, even if at first glance the petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt
exists in the present case that gives rise to a reasonable suspicion that the Filipino shareholders do not actually have
the requisite number of control and beneficial ownership in petitioners Narra, Tesoro, and McArthur. Hence, a further
investigation and dissection of the extent of the ownership of the corporate shareholders through the Grandfather
Rule is justified.
Parenthetically, it is advanced that the application of the Grandfather Rule is impractical as tracing the shareholdings
to the point when natural persons hold rights to the stocks may very well lead to an investigation ad infinitum. Suffice
it to say in this regard that, while the Grandfather Rule was originally intended to trace the shareholdings to the point
where natural persons hold the shares, the SEC had already set up a limit as to the number of corporate layers the
attribution of the nationality of the corporate shareholders may be applied.
In a 1977 internal memorandum, the SEC suggested applying the Grandfather Rule on two (2) levels of corporate
relations for publicly-held corporations or where the shares are traded in the stock exchanges, and to three (3) levels
for closely held corporations or the shares of which are not traded in the stock exchanges.14 These limits comply with
the requirement in Palting v. San Jose Petroleum , Inc.15that the application of the Grandfather Rule cannot go
beyond the level of what is reasonable.
A doubt exists as to the extent of control and
beneficial ownership of MBMI over the petitioners
and their investing corporate stockholders.
In the Decision subject of this recourse, the Court applied the Grandfather Rule to determine the matter of true
ownership and control over the petitioners as doubt exists as to the actual extent of the participation of MBMI in the 39.98% + .03% (shares of individual Filipino shareholders [SHs] in Tesoro)
equity of the petitioners and their investing corporations. =40.01%
=====
We considered the following membership and control structures and like nuances:
With only 40.01% Filipino ownership in petitioner Tesoro, as compared to 59.99% foreign ownership of its shares, it is
clear that petitioner Tesoro does not comply with the minimum Filipino equity requirement imposed in Sec. 2, Art. XII
Tesoro
of the Constitution. Hence, the appellate court’s observation that Tesoro is a foreign corporation not entitled to an
MPSA is apt.
Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97% of the 10,000 common shares of
petitioner Tesoro while the Canadian-owned company, MBMI, holds 39.98% of its shares.
McArthur

Name Nationality Number of Amount Amount Paid Petitioner McArthur follows the corporate layering structure of Tesoro, as 59.97% of its 10, 000 common shares is
Shares Subscribed owned by supposedly Filipino Madridejos Mining Corporation (Madridejos), while 39.98% belonged to the Canadian
Sara Marie Mining, Inc. Filipino 5,997 P5,997,000.00 P825,000.00 MBMI.
MBMI Resources, Inc.16 Canadian 3,998 P3,998,000.00 P1,878,174.60
Lauro L. Salazar Filipino 1 P1,000.00 P1,000.00
Name Nationality Number of Amount Amount Paid
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00 Shares Subscribed
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00 Madridejos Mining Corporation Filipino 5,997 P5,997,000.00 P825,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00 MBMI Resources, Inc.[18 Canadian 3,998 P3,998,000.00 P1,878,174.60
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00 Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,708,174.60 Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
In turn, the Filipino corporation Olympic Mines & Development Corp. (Olympic) holds 66.63% of Sara Marie’s shares Michael T. Mason American 1 P1,000.00 P1,000.00
while the same Canadian company MBMI holds 33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Olympic did not pay a single peso for its shares. On the contrary, MBMI paid for 99% of the paid-up capital of Sara Total 10,000 P10,000,000.00 P2,708,174.60
Marie.

In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its shares belonged to MBMI. Yet again,
Name Nationality Number of Amount Amount Paid Olympic did not contribute to the paid-up capital of Madridejos and it was MBMI that provided 99.79% of the paid-up
Shares Subscribed capital of Madridejos.
Olympic Mines & Development Filipino 6,663 P6,663,000.00 P0.00
Corp.17
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,794,000.00 Name Nationality Number of Amount Amount Paid
Shares Subscribed
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Olympic Mines & Development Filipino 6,663 P6,663,000.00 P0.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Corp.19
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
MBMI Resources, Inc. Canadian 3,331 P3,331,000.00 P2,803,900.00
Emmanuel G. Hernando Filipino 1 P1,000.00 P1,000.00
Amanti Limson Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
Fernando B. Esguerra Filipino 1 P1,000.00 P1,000.00
Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
Lauro Salazar Filipino 1 P1,000.00 P1,000.00
Total 10,000 P10,000,000.00 P2,800,000.00
Emmanuel G. Hernando Filipino 1 P1,000.00 P1,000.00
Michael T. Mason American 1 P1,000.00 P1,000.00
The fact that MBMI had practically provided all the funds in Sara Marie and Tesoro creates serious doubt as to the Kenneth Cawkel Canadian 1 P1,000.00 P1,000.00
true extent of its (MBMI) control and ownership over both Sara Marie and Tesoro since, as observed by the SEC, “a Total 10,000 P10,000,000.00 P2,809,900.00
reasonable investor would expect to have greater control and economic rights than other investors who invested less
capital than him.” The application of the Grandfather Rule is clearly called for, and as shown below, the Filipinos’
control and economic benefits in petitioner Tesoro (through Sara Marie) fall below the threshold 60%, viz: Again, the fact that MBMI had practically provided all the funds in Madridejos and McArthur creates serious doubt as
to the true extent of its control and ownership of MBMI over both Madridejos and McArthur. The application of the
Grandfather Rule is clearly called for, and as will be shown below, MBMI,along with the other foreign shareholders,
Filipino participation in petitioner Tesoro: 40.01%
breached the maximum limit of 40% ownership in petitioner McArthur, rendering the petitioner disqualified to an
MPSA:
66.67 (Filipino equity in Sara Marie) x59.97 (Sara Marie’s share in Tesoro) = 39.98%
100
Filipino participation in petitioner McArthur: 40.01% 66.02 (Filipino equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 39.59%
100
66.67 (Filipino equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 39.98%
100 39.59% + .05% (shares of individual Filipino SHs in McArthur)
=39.64%
39.98% + .03% (shares of individual Filipino SHs in McArthur) ====
=40.01% Foreign participation in petitioner Narra: 60.36%
=====

Foreign participation in petitioner McArthur: 59.99%
33.33 (Foreign equity in Madridejos) x 59.97 (Madridejos’ share in McArthur) = 19.99%
100
19.99% + 39.98% (MBMI’s direct participation in McArthur) + .02% (shares of foreign individual SHs in McArthur)
= 59.99%
=====
As with petitioner Tesoro, with only 40.01% Filipino ownership in petitioner McArthur, as compared to 59.99% foreign
ownership of its shares, it is clear that petitioner McArthur does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution. Thus, the appellate court did not err in holding that
petitioner McArthur is a foreign corporation not entitled to an MPSA.
Narra
As for petitioner Narra, 59.97% of its shares belonged to Patricia Louise Mining & Development Corporation
(PLMDC), while Canadian MBMI held 39.98% of its shares.
33.98 (Foreign equity in PLMDC) x 59.97 (PLMDC’s share in Narra) = 20.38%
100
20.38% + 39.96% (MBMI’s direct participation in Narra) + .02% (shares of foreign individual SHs in McArthur)
= 60.36%
=====
With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64% Filipino ownership of its shares, it is
clear that petitioner Narra does not comply with the minimum Filipino equity requirement imposed in Section 2, Article
XII of the Constitution. Hence, the appellate court did not err in holding that petitioner McArthur is a foreign
corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners’ Filipino equity composition was
based on their common shareholdings, not preferred or redeemable shares. Section 6 of the Corporation Code of the
Philippines explicitly provides that “no share may be deprived of voting rights except those classified as ‘preferred’ or
‘redeemable’ shares.” Further, as Justice Leonen puts it, there is “no indication that any of the shares x x x do not
have voting rights, [thus] it must be assumed that all such shares have voting rights.”22 It cannot therefore be
gainsaid that the foregoing computation hewed with the pronouncements of Gamboa, as implemented by SEC
Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8)23Section 2 of which states:

Name Nationality Number of Amount Amount Paid Section 2. All covered corporations shall, at all times, observe the constitutional or statutory requirement. For
Shares Subscribed purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to
Patricia Lousie Mining and Filipino 5,997 P5,997,000.00 P1,677,000.00 BOTH (a) the total outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of
Development Corp. outstanding shares of stock, whether or not entitled to vote in the election of directors.
MBMI Resources, Inc.[20 Canadian 3,996 P3,996,000.00 P1,116,000.00
Higinio C. Mendoza, Jr. Filipino 1 P1,000.00 P1,000.00 In fact, there is no indication that herein petitioners issued any other class of shares besides the 10,000 common
Henry E. Fernandez Filipino 1 P1,000.00 P1,000.00 shares. Neither is it suggested that the common shares were further divided into voting or non-voting common shares.
Ma. Elena A. Bocalan Filipino 1 P1,000.00 P1,000.00 Hence, for purposes of this case, items a) and b) in SEC Memo No. 8 both refer to the 10,000 common shares of
Michael T. Mason American 1 P1,000.00 P1,000.00 each of the petitioners, and there is no need to separately apply the 60-40 ratio to any segment or part of the said
Robert L. McCurdy Canadian 1 P1,000.00 P1,000.00 common shares.
Manuel A. Agcaoili Filipino 1 P1,000.00 P1,000.00
Bayani H. Agabin Filipino 1 P1,000.00 P1,000.00 III. In mining disputes, the POA has jurisdiction to pass upon the nationality of applications for MPSAs
Total 10,000 P10,000,000.00 P2,800,000.00
Petitioners also scoffed at this Court’s decision to uphold the jurisdiction of the Panel of Arbitrators (POA) of the
Department of Environment and Natural Resources (DENR) since the POA’s determination of petitioners’ nationalities
Yet again, PASRDC did not pay for any of its subscribed shares, while MBMI contributed 99.75% of PLMDC’s paid-up
capital. This fact creates serious doubt as to the true extent of MBMI’s control and ownership over both PLMDC and is supposedly beyond its limited jurisdiction, as defined in Gonzales v. Climax Mining Ltd.24 and Philex Mining Corp.
Narra since “a reasonable investor would expect to have greater control and economic rights than other investors who v. Zaldivia.25
invested less capital than him.” Thus, the application of the Grandfather Rule is justified. And as will be shown, it is
clear that the Filipino ownership in petitioner Narrafalls below the limit prescribed in both the Constitution and the The April 21, 2014 Decision did not dilute, much less overturn, this Court’s pronouncements in either Gonzales or
Philippine Mining Act of 1995. Philex Mining that POA’s jurisdiction “is limited only to mining disputes which raise questions of fact,” and not judicial
questions cognizable by regular courts of justice. However, to properly recognize and give effect to the jurisdiction
Filipino participation in petitioner Narra: 39.64% vested in the POA by Section 77 of the Philippine Mining Act of 1995,26 and in parallel with this Court’s ruling in
Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.,27the Court has recognized in its Decision that in
resolving disputes “involving rights to mining areas” and “involving mineral agreements or permits,” the POA has
jurisdiction to make a preliminary finding of the required nationality of the corporate applicant in order to determine its
right to a mining area or a mineral agreement.
There is certainly nothing novel or aberrant in this approach. In ejectment and unlawful detainer cases, where the
subject of inquiry is possession de facto, the jurisdiction of the municipal trial courts to make a preliminary
adjudication regarding ownership of the real property involved is allowed, but only for purposes of ruling on the
determinative issue of material possession.
The present case arose from petitioners’ MPSA applications, in which they asserted their respective rights to the
mining areas each applied for. Since respondent Redmont, itself an applicant for exploration permits over the same
mining areas, filed petitions for the denial of petitioners’ applications, it should be clear that there exists a controversy
between the parties and it is POA’s jurisdiction to resolve the said dispute. POA’s ruling on Redmont’s assertion that
petitioners are foreign corporations not entitled to MPSA is but a necessary incident of its disposition of the mining
dispute presented before it, which is whether the petitioners are entitled to MPSAs.
Indeed, as the POA has jurisdiction to entertain “disputes involving rights to mining areas,” it necessarily follows that
the POA likewise wields the authority to pass upon the nationality issue involving petitioners, since the resolution of
this issue is essential and indispensable in the resolution of the main issue, i.e., the determination of the petitioners’
right to the mining areas through MPSAs.
WHEREFORE, We DENY the motion for reconsideration WITH FINALITY. No further pleadings shall be entertained.
Let entry of judgment be made in due course.
SO ORDERED.
2.Indian Chamber of Commerce Phils., Inc. vs. Filipino Indian Chamber of Commerce in the Philippines, Inc.,
799 SCRA 278, G.R. No. 184008 August 3, 2016
JARDELEZA, J.:
This is a Petition for Review on Certiorari1 assailing the Decision and Resolution of the Court of Appeals (CA) dated
May 15, 20082 and August 4, 2008,3 respectively, in CA-G.R. SP No. 97320. The Decision and Resolution affirmed
the Securities and Exchange Commission En Banc (SEC En Banc) Decision dated November 30, 20064 directing
petitioner Indian Chamber of Commerce Phils., Inc. to modify its corporate name.
The Facts
Filipino-Indian Chamber of Commerce of the Philippines, Inc. (defunct FICCPI) was originally registered with the SEC
as Indian Chamber of Commerce of Manila, Inc. on November 24, 1951, with SEC Registration Number 64655 On
October 7, 1959, it amended its corporate name into Indian Chamber of Commerce of the Philippines, Inc., and
further amended it into Filipino-Indian Chamber of Commerce of the Philippines, Inc. on
March 4, 1977,.6 Pursuant to its Articles of Incorporation, and without applying for an extension of its corporate term,
the defunct FICCPI's term of existence expired on November 24, 2001. 7
SEC Case No. 05-008
On January 20, 2005, Mr. Naresh Mansukhani (Mansukhani) reserved
the corporate name "Filipino Indian Chamber of Commerce in the Philippines, Inc." (FICCPI), for the period
from January 20, 2005 to April 20, 2005, with the Company Registration and Monitoring Department (CRMD) of the
SEC.8In an opposition letter dated April 1, 2005, Ram Sitaldas (Sitaldas), claiming to be a representative of the
defunct FICCPI, alleged that the corporate name has been used by the defunct FICCPI since 1951, and that the
reservation by another person who is not its member or representative is illegal.9
The CRMD called the parties for a conference and required them to submit their position papers. Subsequently, on
May 27, 2005, the CRMD rendered a decision granting Mansukhani's reservation, holding that he possesses the
better right over the corporate name.11 The CRMD ruled that the defunct FICCPI has no legal personality to oppose
the reservation of the corporate name by Mansukhani. After the expiration of the defunct FICCPFs corporate
existence, without any act on its part to extend its term, its right over the name ended. Thus, the name "Filipino Indian
Chamber of Commerce in the Philippines, Inc." is free for appropriation by any party. 12
Sitaldas appealed the decision of the CRMD to the SEC En Bane, which appeal was docketed as SEC Case No. 05-
008. On December 7, 2005, the SEC En Bane denied the appeal, 13 thus:ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the instant appeal is HEREBY DISMISSED for lack of merit. Let a copy of
this decision be furnished the Company Registration and Monitoring Department of this Commission for its
appropriate action.14 (Emphasis in the original.)
Sitaldas appealed the SEC En Banc decision to the CA, docketed as CA-G.R. SP No. 92740. On September 27,
2006, the CA affirmed the decision of the SEC En Banc15. It ruled that Mansukhani, reserving the name 'Filipino
Indian Chamber of Commerce in the Philippines, Inc.," has the of the better right over the corporate name. It ruled that
with the expiration corporate life of the defunct FICCPI, without an extension having been filed and granted, it lost its
legal personality as a corporation.16 Thus, the CA affirmed the SEC En Banc ruling that after the expiration of its term,
the defunct FICCPI's rights over the name also ended.17 The CA also cited SEC Memorandum Circular No. 14-
200018 which gives protection to corporate names for a period of three years after the approval of the dissolution of
the corporation.19It noted that the reservation for the use of the corporate name "Filipino Indian Chamber of
Commerce in the Philippines, Inc.," and the opposition were filed only in January 2005, way beyond this three-year
period.20
On March 14, 2006, pending resolution by the CA, the SEC issued the Certificate of Incorporation of respondent
FICCPI, pursuant to its ruling in SEC Case No. 05-008.
SEC Case No. 06-014
Meanwhile, on December 8, 2005,22 Mr. Pracash Dayacanl, who allegedly represented the defunct FICCPI, filed an
application with the CRMD for the reservation of the corporate name "Indian Chamber of Commerce Phils., Inc."
(ICCPI).23 Upon knowledge, Mansukhani, in a letter dated February 14, 2006,24formally opposed the application.
Mansukhani cited the SEC En Banc decision in SEC Case No. 05-008 recognizing him as the one possessing the
better right over the corporate name "Filipino Chamber of Commerce in the Philippines, Inc. 25cralawred
In a letter dated April 5, 200626 the CRMD denied Mansukhani's opposition. It stated that the name "Indian Chamber
of Commerce Phils., Inc." is not deceptively or confusingly similar to "Filipino Indian Chamber of Commerce in the
Philippines, Inc." On the same date, the CRMD approved and issued the Certificate of Incorporation 27 of petitioner
ICCPI.
Thus, respondent FICCPI, through Mansukhani, appealed the CRMD's decision to the SEC En Banc.28 The appeal
was docketed as SEC Case No. 06-014. On November 30, 2006, the SEC En Bane granted the appeal filed by
FICCPI,29 and reversed the CRMD's decision. Citing Section 18 of the Corporation Code, 30the SEC En Bane made a
finding that "both from the standpoint of their [ICCPI and FICCPI] corporate names and the purposes for which they
were established, there exist[s] a similarity that could inevitably lead to confusion." 31 It also ruled that "oppositor
[FICCPI] has the prior right to use its corporate name to the exclusion of the others. It was registered with the
Commission on March 14, 2006 while respondent [ICCPI] was registered on April 05, 2006. By virtue of oppositor's
[FICCPI] prior appropriation and use of its name, it is entitled to protection against the use of identical or similar name
of another corporation."32
Thus, the SEC En Banc ruled, to wit:
WHEREFORE, the appeal is hereby granted and the assailed Order dated April 05, 2006 is hereby REVERSED and
SET ASIDE and respondent is directed to change or modify its corporate name within thirty (30) days from the date of
actual receipt hereof.
SO ORDERED.33 (Emphasis in the original.)
ICCPI appealed the SEC En Banc decision in SEC Case No. 06-014 to the CA.34 The appeal, docketed as CA-G.R.
SP No. 97320, raised
the following issues:
A. The Honorable SEC En Banc committed serious error when it held that petitioner's corporate name (ICCPI)
could inevitably lead to confusion;
 B. Respondent's corporate name (FICCPI) did not acquire secondary meaning; and cralawlawlibrary
C. The Honorable SEC En Bane violated the rule of equal protection when it denied petitioner (ICCPI) the use
of the descriptive generic words. 35
In a decision dated May 15, 2008,36 the CA affirmed the decision of the SEC En Banc. It held that by simply looking at
the corporate names of ICCPI and FICCPI, one may readily notice the striking similarity between the two. Thus, an
ordinary person using ordinary care and discrimination may be led to believe that the corporate names of ICCPI and
FICCPI refer to one and the same corporation.37 The CA further ruled that ICCPI's corporate name did not comply
with the requirements of SEC Memorandum Circular No. 14-2000. It noted that under the facts of this case, it is the
registered corporate name, FICCPI, which contains the word (Filipino) making it different from the proposed
corporate name. SEC Memorandum Circular No. 14-2000 requires, however, that it should be the proposed corporate
name which should contain one distinctive word different from the name of the corporation already registered, and not
the other way around, as In this case.39 Finally, the CA held that the SEC En Bane did not violate ICCPFs right to
equal protection when it ordered ICCPI to change its corporate name. The SEC En Bane merely compelled ICCPI to
comply with its undertaking to change its corporate name in case another person or firm has acquired a prior right to
the use of the said name or the same is deceptively or confusingly similar to one already registered with the SEC.40
The dispositive portion of the CA decision reads:
WHEREFORE, premises considered, the petition filed in this case is hereby DENIED and the assailed Decision of the
Securities and Exchange Commission en banc in SEC EN BANC Case No. 06-014 is hereby AFFIRMED.
SO ORDERED.41 (Emphasis in the original.)
In its Resolution dated August 4, 2008,42 the CA denied the Motion for Reconsideration filed by ICCPI.
The Petition43
ICCPI now appeals the CA decision before this Court raisin; following arguments:
A. The Honorable Court of Appeals committed serious error when it upheld the findings of the SEC En Banc;
B. The Honorable Court of Appeals committed serious error when it held that there is similarity between the
petitioner and the respondent (sic) corporate name that would inevitably lead to confusion;
and cralawlawlibrary
C. Respondent's corporate name did not acquire secondarymeaning. 44
The Court's Ruling
We uphold the decision of the CA.
Section 18 of the Coiporation Code expressly prohibits the use of a corporate name which is identical or deceptively
or confusingly similar to that of any existing corporation:ChanRoblesVirtualawlibrary
No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or
is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of
incorporation under the amended name. (Underscoring supplied.)
In Philips Export B. V. v. Court of Appeals,45 this Court ruled that to fall within the prohibition, two requisites must be
proven, to wit:
1. that the complainant corporation acquired a prior right over the use of such corporate name;
and cralawlawlibrary
2. the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing corporation or to any other name already
protected by law; or
(c) patently deceptive, confusing or contrary to existing law.46
These two requisites are present in this case.
FICCPI acquired a prior right over
the use of the corporate name
In Industrial Refractories Corporation of the Philippines v. Court of Appeals,47 the Court applied the priority of adoption
rule to determine prior right, taking into consideration the dates when the parties used their respective corporate
names. It ruled that "Refractories Corporation of the Philippines" (RCP), as opposed to "Industrial Refractories
Corporation of the Philippines" (IRCP), has acquired the right to use the word "Refractories" as part of its corporate
name, being its prior registrant on October 13, 1976. The Court noted that IRCP only started using its corporate name
when it amended its Articles of Incorporation on August 23, 1985. 48
In this case, FICCPI was incorporated on March 14, 2006. On the other hand, ICCPI was incorporated only on April 5,
2006, or a month after FICCPI registered its corporate name. Thus, applying the principle in the Refractories case, we
hold that FICCPI, which was incorporated earlier, acquired a prior right over the use of the corporate name.
ICCPI cannot argue that it first incorporated and held the "Filipino Indian Chamber of Commerce," in 1977; and that it
established the name's goodwill until it failed to renew its name due to oversight. 49 It is settled that a corporation
is ipso facto dissolved as soon as its term of existence expires.50 SEC Memorandum Circular No. 14-2000 likewise
provides for the use of corporate names of dissolved corporations:ChanRoblesVirtualawlibrary
14. The name of a dissolved firm shall not be allowed to be used by other firms within three (3) years after the
approval of the dissolution of the corporation by the Commission, unless allowed by the last stockholders representing
at least majority of the outstanding capital stock of the dissolved firm.
When the term of existence of the defunct FICCPI expired on November 24, 2001, its corporate name cannot be used
by other corporations within three years from that date, until November 24, 2004. FICCPI reserved the name "Filipino
Indian Chamber of Commerce in the Philippines, Inc." on January 20, 2005, or beyond the three-year period. Thus,
the SEC was correct when it allowed FICCPI to use the reserved corporate name.
ICCPI's name is identical and
deceptively or confusingly similar to
that of FICCPI
The second requisite in the Philips Export case likewise obtains in two respects: the proposed name is (a) identical or
(b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law.
On the first point, ICCPI's name is identical to that of FICCPI. ICCPFs and FICCPFs corporate names both contain
the same words "Indian Chamber of Commerce." ICCPI argues that the word "Filipino" in FICCPFs corporate name
makes it easily distinguishable from ICCPI.51 It adds that confusion and deception are effectively precluded by
appending the word "Filipino" to the phrase "Indian Chamber of Commerce." 52Further, ICCPI claims that the corporate
name of FICCPI uses the words "in the Philippines" while ICCPI uses only "Phils, Inc." 53
ICCPFs arguments are without merit. These words do not effectively distinguish the corporate names. On the one
hand, the word "Filipino" is merely a description, referring to a Filipino citizen or one living in the Philippines, to
describe the corporation's members. On the other, the words "in the Philippines" and "Phils., Inc." are simply
geographical locations of the corporations which, even if appended to both the corporate names, will not make one
distinct from the other. Under the facts of this case, these words cannot be separated from each other such that each
word can be considered to add distinction to the corporate names. Taken together, the words in the phrase "in the
Philippines" and in the phrase "Phils. Inc." are synonymous—they both mean the location of the corporation.
The same principle was adopted by this Court in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K. sa
Bansang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan: 54
Significantly, the only difference between the corporate names of petitioner and respondent are the
words SALIGAN and SUHAY. These words are synonymous-both mean ground, foundation or support. Hence, this
case is on all fours with Universal Mills Corporation v. Universal Textile Mills, Inc., where the Court ruled that the
corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are undisputably so similar that even
under the test of "reasonable care and observation" confusion may arise.55(Italics in the original.)
Thus, the CA is correct when it ruled, "[a]s correctly found by the SEC en bane, the word 'Filipino' in the corporate
name of the respondent [FICCPI] is merely descriptive and can hardly serve as an effective differentiating medium
necessary to avoid confusion. The other two words alluded to by petitioner [ICCPI] that allegedly distinguishes its
corporate name from that of the respondent are the words 'in' and 'the' in the respondent's corporate name. To our
mind, the presence of the words 'in' and 'the' in respondent's corporate name does not, in any way, make an effective
distinction to that of petitioner."56
Petitioner cannot argue that the combination of words in respondent's corporate name is merely descriptive and
generic, and consequently cannot be appropriated as a corporate name to the exclusion of the others. 57 Save for the
words "Filipino," "in the," and "Inc.," the corporate names of petitioner and respondent are identical in all other
respects. This issue was also discussed in the Iglesia case where this Court held,
Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot find justification under
the generic word rule. We agree with the Court of Appeals' conclusion that a contrary ruling would encourage other
corporations to adopt verbatim and register an
existing and protected corporate name, to the detriment of the public.58
On the second point, ICCPI's corporate name is deceptively or confusingly similar to that of FICCPI. It is settled that to
determire the existence of confusing similarity in corporate names, the test is whether the similarity is such as to
mislead a person, using ordinary care and discrimination. In so doing, the court must examine the record as well as
the names themselves.59 Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to
occur.60
In this case, the overriding consideration in determining wheiher a person, using ordinary care and discrimination,
might be misled is the circumstance that both ICCPI and FICCPI have a common primary purpose, that is, the
promotion of Filipino-Indian business in the Philippines.
The primary purposes of ICCPI as provided in its Articles of Incorporation are:
a. Develop a stronger sense of brotherhood;
b. Enhance the prestige of the Filipino-Indian business community in the Philippines;
c. Promote cordial business relations with Filipinos and other business communities in the Philippines, and
other overseas Indian business organizations;
d. Respond fully to the needs of a progressive economy and the Filipino-Indian Business community;
e. Promote and foster relations between the people and Governments of the Republics of the Philippines and
India in areas of Industry, Trade, and Culture.61
Likewise, the primary purpose of FICCPI is "[t]o actively promote and enhance the Filipino-Indian business
relationship especially in view of [current] local and global business trends." 62
Considering these corporate purposes, the SEC En Banc made a finding that "[i]t is apparent that both from the
standpoint of their corporate names and the purposes for which they were established, there exist a I similarity that
could inevitably lead to confusion."63 This finding of the SEC En Bane was fully concurred with and adopted by the
CA.64
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality by this
Court, if supported by substantial evidence, in recognition of their expertise on the specific matters under their
consideration, and more so if the same has been upheld by the appellate court, 65 as in this case.
Petitioner cannot argue that the CA erred when it upheld the SEC En Banc's decision to cancel ICCPFs corporate
name.66 By express mandate of law, the SEC has absolute jurisdiction, supervision and control over all
corporations.67 It is the SEC's duty to prevent confusion in the use of corporate names not only for the protection of
the corporation involved, but more so for the protection of the public. It has the authority to de-register at all times, and
under all circumstances corporate names which in its estimation are likely to generate confusion. 68
Pursuant to its mandate, the SEC En Banc correctly applied Section 18 of the Corporation Code, and Section 15 of
SEC Memorandum Circular No. 14-2000:ChanRoblesVirtualawlibrary
In implementing Section 18 of the Corporation Code of the Philippines (BP 68), the following revised guidelines in the
approval of corporate and partnership names are hereby adopted for the information and guidelines of all
concerned:
xxx
15. Registrant corporations or partnership shall submit a letter undertaking to change their corporate or partnership
name in case another person or firm has acquired a prior right to the use of said firm name or the same is deceptively
or confusingly similar to one already registered unless this undertaking is already included as one of the provisions of
the articles of incorporation or partnership of the registrant.
Finding merit in respondent's claims, the SEC En Bane merely compelled petitioner to comply with its undertaking. 69
WHEREFORE, the petition is DENIED. The Decision of the CA dated May 15, 2008 in CA-G.R. SP No. 97320 is
hereby AFFIRMED.
SO ORDERED.
3. Gold Line Tours, Inc. vs. Heirs of Maria Concepcion Lacsa, 673 SCRA 399, G.R. No. 159108 June 18, 2012
BERSAMIN, J.:
The veil of corporate existence of a corporation is a fiction of law that should not defeat the ends of justice.
Petitioner seeks to reverse the decision promulgated on October 30, 2002 [1] and the resolution promulgated on June
25, 2003,[2] whereby the Court of Appeals (CA) upheld the orders issued on August 2, 2001[3] and October 22, 2001[4] by
the Regional Trial Court (RTC), Branch 51, in Sorsogon in Civil Case No. 93-5917 entitled Heirs of Concepcion Lacsa,
represented by Teodoro Lacsa v. Travel & Tours Advisers, Inc., et al. authorizing the implementation of the writ of
execution against petitioner despite its protestation of being a separate and different corporate personality from Travel
& Tours Advisers, Inc. (defendant in Civil Case No. 93-5917).
In the orders assailed in the CA, the RTC declared petitioner and Travel & Tours Advisers, Inc. to be one and
the same entity, and ruled that the levy of petitioners property to satisfy the final and executory decision rendered on
June 30, 1997 against Travel & Tours Advisers, Inc. in Civil Case No. 93-5917[5] was valid even if petitioner had not
been impleaded as a party.
Antecedents
On August 2, 1993, Ma. Concepcion Lacsa (Concepcion) and her sister, Miriam Lacsa (Miriam), boarded a Goldline
passenger bus with Plate No. NXM-105 owned and operated by Travel &Tours Advisers, Inc. They were enroute from
Sorsogon to Cubao, Quezon City.[6] At the time, Concepcion, having just obtained her degree of Bachelor of Science in
Nursing at the Ago Medical and Educational Center, was proceeding to Manila to take the nursing licensure board
examination.[7] Upon reaching the highway at Barangay San Agustin in Pili, Camarines Sur, the Goldline bus, driven by
Rene Abania (Abania), collided with a passenger jeepney with Plate No. EAV-313 coming from the opposite direction
and driven by Alejandro Belbis.[8] As a result, a metal part of the jeepney was detached and struck Concepcion in the
chest, causing her instant death.[9]
On August 23, 1993, Concepcions heirs, represented by Teodoro Lacsa, instituted in the RTC a suit against Travel &
Tours Advisers Inc. and Abania to recover damages arising from breach of contract of carriage. [10] The complaint,
docketed as Civil Case No. 93-5917 and entitled Heirs of Concepcion Lacsa, represented by Teodoro Lacsa v. Travel
& Tours Advisers, Inc. (Goldline) and Rene Abania, alleged that the collision was due to the reckless and imprudent
manner by which Abania had driven the Goldline bus.[11]
In support of the complaint, Miriam testified that Abania had been occasionally looking up at the video monitor
installed in the front portion of the Goldline bus despite driving his bus at a fast speed;[12] that in Barangay San Agustin,
the Goldline bus had collided with a service jeepney coming from the opposite direction while in the process of
overtaking another bus;[13] that the impact had caused the angle bar of the jeepney to detach and to go through the
windshield of the bus directly into the chest of Concepcion who had then been seated behind the drivers seat; [14] that
concerned bystanders had hailed another bus to rush Concepcion to the Ago Foundation Hospital in Naga City because
the Goldline bus employees and her co-passengers had ignored Miriams cries for help;[15] and that Concepcion was
pronounced dead upon arrival at the hospital.[16]
To refute the plaintiffs allegations, the defendants presented SPO1 Pedro Corporal of the Philippine National Police
Station in Pili, Camarines Sur, and William Cheng, the operator of the Goldline bus.[17] SPO1 Corporal opined that based
on his investigation report, the driver of the jeepney had been at fault for failing to observe precautionary measures to
avoid the collision;[18] and suggested that criminal and civil charges should be brought against the operator and driver
of the jeepney.[19] On his part, Cheng attested that he had exercised the required diligence in the selection and
supervision of his employees; and that he had been engaged in the transportation business since 1980 with the use of
a total of 60 units of Goldline buses, employing about 100 employees (including drivers, conductors, maintenance
personnel, and mechanics);[20] that as a condition for regular employment, applicant drivers had undergone a one-month
training period and a six-month probationary period during which they had gotten acquainted with Goldlines driving
practices and demeanor;[21] that the employees had come under constant supervision, rendering improbable the claim
that Abania, who was a regular employee, had been glancing at the video monitor while driving the bus;[22] that the
incident causing Concepcions death was the first serious incident his (Cheng) transportation business had encountered,
because the rest had been only minor traffic accidents;[23] and that immediately upon being informed of the accident, he
had instructed his personnel to contact the family of Concepcion.[24]
The defendants blamed the death of Concepcion to the recklessness of Bilbes as the driver of the jeepney, and of its
operator, Salvador Romano;[25] and that they had consequently brought a third-party complaint against the latter.[26]
After trial, the RTC rendered its decision dated June 30, 1997, disposing:
ACCORDINGLY, judgment is hereby rendered:
(1) Finding the plaintiffs entitled to damages for the death of Ma. Concepcion Lacsa in
violation of the contract of carriage;
(2) Ordering defendant Travel & Tours Advisers, Inc. (Goldline) to pay plaintiffs:
a. P30,000.00 expenses for the wake;
b. P 6,000.00 funeral expenses;
c. P50,000.00 for the death of Ma. Concepcion Lacsa;
d. P150,000.00 for moral damages;
e. P20,000.00 for exemplary damages;
f. P8,000.00 for attorneys fees;
g. P2,000.00 for litigation expenses;
h. Costs of suit.
(3) Ordering the dismissal of the case against Rene Abania;
(4) Ordering the dismissal of the third-party complaint.
SO ORDERED.[27]
The RTC found that a contract of carriage had been forged between Travel & Tours Advisers, Inc. and
Concepcion as soon as she had boarded the Goldline bus as a paying passenger; that Travel & Tours Advisers, Inc.
had then become duty-bound to safely transport her as its passenger to her destination; that due to Travel & Tours
Advisers, Inc.s inability to perform its duty, Article 1786 of the Civil Code created against it the disputable presumption
that it had been at fault or had been negligent in the performance of its obligations towards the passenger; that Travel
& Tours Advisers, Inc. failed to disprove the presumption of negligence; and that a rigid selection of employees was not
sufficient to exempt Travel & Tours Advisers, Inc. from the obligation of exercising extraordinary diligence to ensure
that its passenger was carried safely to her destination.
Aggrieved, the defendants appealed to the CA.
On June 11, 1998,[28] the CA dismissed the appeal for failure of the defendants to pay the docket and other
lawful fees within the required period as provided in Rule 41, Section 4 of the Rules of Court (1997). The dismissal
became final, and entry of judgment was made on July 17, 1998.[29]
Thereafter, the plaintiffs moved for the issuance of a writ of execution to implement the decision dated June
30, 1997.[30] The RTC granted their motion on January 31, 2000, [31] and issued the writ of execution on February 24,
2000.[32]
On May 10, 2000, the sheriff implementing the writ of execution rendered a Sheriffs Partial
Return,[33] certifying that the writ of execution had been personally served and a copy of it had been duly tendered to
Travel & Tours Advisers, Inc. or William Cheng, through his secretary, Grace Miranda, and that Cheng had failed to
settle the judgment amount despite promising to do so. Accordingly, a tourist bus bearing Plate No. NWW-883 was
levied pursuant to the writ of execution.
The plaintiffs moved to cite Cheng in contempt of court for failure to obey a lawful writ of the RTC.[34] Cheng
filed his opposition.[35] Acting on the motion to cite Cheng in contempt of court, the RTC directed the plaintiffs to file a
verified petition for indirect contempt on February 19, 2001.[36]
On April 20, 2001, petitioner submitted a so-called verified third party claim,[37]claiming that the tourist bus
bearing Plate No. NWW-883 be returned to petitioner because it was the owner; that petitioner had not been made a
party to Civil Case No. 93-5917; and that petitioner was a corporation entirely different from Travel & Tours Advisers,
Inc., the defendant in Civil Case No. 93-5917.
It is notable that petitioners Articles of Incorporation was amended on November 8, 1993, [38] shortly after the
filing of Civil Case No. 93-5917 against Travel & Tours Advisers, Inc.
Respondents opposed petitioners verified third-party claim on the following grounds, namely: (a) the third-
party claim did not comply with the required notice of hearing as required by Rule 15, Sections 4 and 5 of the Rules of
Court; (b) Travel & Tours Advisers, Inc. and petitioner were identical entities and were both operated and managed by
the same person, William Cheng; and (c) petitioner was attempting to defraud its creditors respondents herein hence,
the doctrine of piercing the veil of corporate entity was squarely applicable.[39]
On August 2, 2001, the RTC dismissed petitioners verified third-party claim, observing that the identity of
Travel & Tours Adivsers, Inc. could not be divorced from that of petitioner considering that Cheng had claimed to be the
operator as well as the President/Manager/incorporator of both entities; and that Travel & Tours Advisers, Inc. had been
known in Sorsogon as Goldline.[40]
Petitioner moved for reconsideration,[41] but the RTC denied the motion on October 22, 2001.[42]
Thence, petitioner initiated a special civil action for certiorari in the CA,[43]asserting:
THE RESPONDENT HONORABLE RTC JUDGE HAD ACTED WITHOUT JURISDICTION OR
COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN
 ISSUING THE: (A) ORDER DATED 2 AUGUST 2001, COPY OF WHICH IS HERETO ATTACHED
AS ANNEX A, DISMISSING HEREIN PETITIONERS THIRD PARTY CLAIM; AND (B) ORDER
DATED 22 OCTOBER 2001, COPY OF WHICH IS HERETO ATTACHED AS ANNEX B DENYING
SAID PETITIONERS MOTION FOR RECONSIDERATION; AND THAT THERE IS NO APPEAL,
OR ANY PLAIN, SPEEDY AND ADEQUATE REMEDY AVAILABLE TO SAID PETITIONER.
On October 30, 2002, the CA promulgated its decision dismissing the petition for certiorari,[44] holding as follows:
The petition lacks merit.
As stated in the decision supra, William Ching disclosed during the trial of the case that
defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating sixty (60)
units of Goldline buses. That the Goldline buses are used in the operations of defendant company
is obvious from Mr. Chengs admission. The Amended Articles of Incorporation of Gold Line Tours,
Inc. disclose that the following persons are the original incorporators thereof: Antonio O. Ching,
Maribel Lim Ching, witness William Ching, Anita Dy Ching and Zosimo Ching. (Rollo, pp. 105-106)
We see no reason why defendant company would be using Goldline buses in its operations unless
the two companies are actually one and the same.
Moreover, the name Goldline was added to defendants name in the Complaint. There was
no objection from William Ching who could have raised the defense that Gold Line Tours, Inc. was
in no way liable or involved. Indeed, it appears to this Court that rather than Travel & Tours
Advisers, Inc., it is Gold Line Tours, Inc., which should have been named party defendant.
Be that as it may, We concur in the trial courts finding that the two companies are actually
one and the same, hence the levy of the bus in question was proper.
WHEREFORE, for lack of merit, the petition is DISMISSED and the assailed Orders
are AFFIRMED.
SO ORDERED.
Petitioner filed a motion for reconsideration,[45] which the CA denied on June 25, 2003.[46]
Hence, this appeal, in which petitioner faults the CA for holding that the RTC did not act without jurisdiction or grave
abuse of discretion in finding that petitioner and Travel & Tours Advisers, Inc., the defendant in Civil Case No. 5917,
were one and same entity, and for sustaining the propriety of the levy of the tourist bus with Plate No. NWW-883 in
satisfaction of the writ of execution. [47]
In the meantime, respondents filed in the RTC a motion to direct the sheriff to implement the writ of execution in view
of the non-issuance of any restraining order either by this Court or the CA. [48] On February 23, 2007, the RTC granted
the motion and directed the sheriff to sell the Goldline tourist bus with Plate No. NWW-883 through a public auction.[49]
Issue
Did the CA rightly find and conclude that the RTC did not gravely abuse its discretion in denying petitioners
verified third-party claim?
Ruling
We find no reason to reverse the assailed CA decision.
In the order dated August 2, 2001, the RTC rendered its justification for rejecting the third-party claim of
petitioner in the following manner:
xxx
The main contention of Third Party Claimant is that it is the owner of the Bus and therefore,
it should not be seized by the sheriff because the same does not belong to the defendant Travel &
Tours Advises, Inc. (GOLDLINE) as the third party claimant and defendant are two separate
corporation with separate juridical personalities. Upon the other hand, this Court had scrutinized
the documents submitted by the Third party Claimant and found out that William Ching who claimed
to be the operator of the Travel & Tours Advisers, Inc. (GOLDLINE) is also the President/Manager
and incorporator of the Third Party Claimant Goldline Tours Inc. and he is joined by his co-
incorporators who are Ching and Dy thereby this Court could only say that these two corporations
are one and the same corporations. This is of judicial knowledge that since Travel & Tours
Advisers, Inc. came to Sorsogon it has been known as GOLDLINE.
This Court is not persuaded by the proposition of the third party claimant that a corporation
has an existence separate and/or distinct from its members insofar as this case at bar is concerned,
for the reason that whenever necessary for the interest of the public or for the protection of
enforcement of their rights, the notion of legal entity should not and is not to be used to defeat
public convenience, justify wrong, protect fraud or defend crime.
Apposite to the case at bar is the case of Palacio vs. Fely Transportation Co., L-15121,
May 31, 1962, 5 SCRA 1011 where the Supreme Court held:
Where the main purpose in forming the corporation was to evade ones subsidiary
liability for damages in a criminal case, the corporation may not be heard to say that it
has a personality separate and distinct from its members, because to allow it to do so
would be to sanction the use of fiction of corporate entity as a shield to further an end
subversive of justice (La Campana Coffee Factory, et al. v. Kaisahan ng mga
Manggagawa, etc., et al., L-5677, May 25, 1953). The Supreme Court can even
substitute the real party in interest in place of the defendant corporation in order to
avoid multiplicity of suits and thereby save the parties unnecessary expenses and
delay. (Alfonso vs. Villamor, 16 Phil. 315).
This is what the third party claimant wants to do including the defendant in this case, to use the
separate and distinct personality of the two corporation as a shield to further an end subversive of
justice by avoiding the execution of a final judgment of the court.[50]
As we see it, the RTC had sufficient factual basis to find that petitioner and Travel and Tours Advisers, Inc.
were one and the same entity, specifically: (a) documents submitted by petitioner in the RTC showing that William
Cheng, who claimed to be the operator of Travel and Tours Advisers, Inc., was also the President/Manager and an
incorporator of the petitioner; and (b) Travel and Tours Advisers, Inc. had been known in Sorsogon as Goldline. On its
part, the CA cogently observed:
As stated in the (RTC) decision supra, William Ching disclosed during the trial of the case that
defendant Travel & Tours Advisers, Inc. (Goldline), of which he is an officer, is operating sixty (60)
units of Goldline buses. That the Goldline buses are used in the operations of
defendant company is obvious from Mr. Chengs admission. The Amended Articles of Incorporation
of Gold Line Tours, Inc. disclose that the following persons are the original incorporators thereof:
Antonio O. Ching, Maribel Lim Ching, witness William Ching, Anita Dy Ching and Zosimo Ching.
(Rollo, pp. 105-108) We see no reason why defendant company would be using Goldline buses in
its operations unless the two companies are actually one and the same.
Moreover, the name Goldline was added to defendants name in the Complaint. There was no
objection from William Ching who could have raised the defense that Gold Line Tours, Inc. was in
no way liable or involved. Indeed it appears to this Court that rather than Travel & Tours Advisers,
Inc. it is Gold Line Tours, Inc., which should have been named party defendant.
Be that as it may, We concur in the trial courts finding that the two companies are actually one and
the same, hence the levy of the bus in question was proper.[51]
 The RTC thus rightly ruled that petitioner might not be shielded from liability under the final judgment through
the use of the doctrine of separate corporate identity. Truly, this fiction of law could not be employed to defeat the ends
of justice.
But petitioner continues to challenge the RTC orders by insisting that the evidence to establish its identity
with Travel and Tours Advisers, Inc. was insufficient.
We cannot agree with petitioner. As already stated, there was sufficient evidence that petitioner and Travel
and Tours Advisers, Inc. were one and the same entity. Moreover, we remind that a petition for the writ
of certiorari neither deals with errors of judgment nor extends to a mistake in the appreciation of the contending parties
evidence or in the evaluation of their relative weight.[52] It is timely to remind that the petitioner in a special civil action
for certiorari commenced against a trial court that has jurisdiction over the proceedings bears the burden to demonstrate
not merely reversible error, but grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the
respondent trial court in issuing the impugned order.[53] The term grave abuse of discretion is defined as a capricious
and whimsical exercise of judgment so patent and gross as to amount to an evasion of a positive duty or a virtual refusal
to perform a duty enjoined by law, as where the power is exercised in an arbitrary and despotic manner because of
passion or hostility.[54] Mere abuse of discretion is not enough; it must be grave.[55] Yet, here, petitioner did not discharge
its burden because it failed to demonstrate that the CA erred in holding that the RTC had not committed grave abuse
of discretion. A review of the records shows, indeed, that the RTC correctly rejected petitioners third-party claim. Hence,
the rejection did not come within the domain of the writ of certioraris limiting requirement of excess or lack of
jurisdiction.[56]
WHEREFORE, the Court DENIES the petition for review on certiorari, and AFFIRMS the decision
promulgated by the Court of Appeals on October 30, 2002. Costs of suit to be paid by petitioner.
SO ORDERED.
4. Pioneer Insurance Surety Corporation vs. Morning Star Travel, 762 SCRA 283, G.R. No. 198436 July 8, 2015
1
As a general rule, a corporation has a separate and distinct personality from those who represent it. Its officers are
solidarily liable only when exceptional circumstances exist, such as cases enumerated in Section 31 of the
Corporation Code.2 The liability of the officers must be proven by evidence sufficient to overcome the burden of proof
borne by the plaintiff.
This case originated from a Complaint3 for Collection of Sum of Money and Damages filed by Pioneer Insurance &
Surety Corporation (Pioneer) against Morning Star Travel & Tours, Inc. (Morning Star) for the amounts Pioneer paid
the International Air Transport Association under its credit insurance policy. The amounts of P100,479,171.59 and
US$457,834.14 represent Morning Star's overdue remittances to the International Air Transport
Association.4redarclaw
Pioneer filed this Petition for Review5 assailing the Court of Appeals' February 28, 2011 Decision6 "only insofar as it
absolved the individual respondents of their joint and solidary liability to petitioner[,]" 7 and August 31, 2011
Resolution8 denying reconsideration.
Morning Star is a travel and tours agency with Benny Wong, Estelita Wong, Arsenio Chua, Sonny Chua, and Wong
Yan Tak as shareholders and members of the board of directors. 9redarclaw
International Air Transport Association is a Canadian corporation licensed to do business in the Philippines "to
promote safe, regular and economical air transport for all people, among others." 10redarclaw
International Air Transport Association appointed Morning Star as an accredited travel agent.11 Morning Star "avail[ed]
of the privilege of getting on credit... air transport tickets from various airline companies [to be sold] to passengers at
prices fixed by the airline companies[.]"12redarclaw
Morning Star and International Air Transport Association entered a Passenger Sales Agency Agreement such that
Morning Star must report all air transport ticket sales to International Air Transport Association and account all
payments received through the centralized system called Billing and Settlement Plan.13Morning Star only holds in trust
all monies collected as these belong to the airline companies.14redarclaw
International Air Transport Association obtained a Credit Insurance Policy from Pioneer to assure itself of payments
by accredited travel agents for ticket sales and monies due to the airline companies under the Billing and Settlement
Plan.15 The policy was for the period from November 1, 2001 to December 31, 2002, renewed for the period from
January 1, 2003 to December 31, 2003.16redarclaw
The policy was made known to the accredited travel agents. Morning Star, through its President, Benny Wong, was
among those that declared itself liable to indemnify Pioneer for any and all claims under the policy. He executed a
registration form under the Credit Insurance Program for BSP-Philippines Agents.17redarclaw
Morning Star had an accrued billing of P49,051,641.80 and US$325,865.35 for the period from December 16, 2002 to
December 31, 2002. It failed to remit these amounts through the Billing and Settlement Plan, prompting the
International Air Transport Association to send a letter dated January 17, 2003 advising on the overdue
remittance.18redarclaw
International Air Transport Association again declared Morning Star in default by a letter dated January 20, 2003 for
its overdue account covering the period from January 1, 2003 to January 20, 2003. 19redarclaw
Pursuant to the credit insurance policies, International Air Transport Association demanded from Pioneer the sums of
P109,728,051.00 and US$457,834.14 representing Morning Star's overdue account as of April 30, 2003. Pioneer
investigated, ascertained, and validated the claims, then paid International Air Transport Association the amounts of
P100,479,171.59 and US$457,834.14.20redarclaw
Consequently, Pioneer demanded these amounts from Morning Star through a letter dated September 23,
2003.21 International Air Transport Association executed in Pioneer's favor a Release of Claim and Subrogation
Receipt on December 23, 2003.22redarclaw
On November 10, 2005, Pioneer filed a Complaint for Collection of Sum of Money and Damages against Morning Star
and its shareholders and directors.23redarclaw
Morning Star, Benny Wong, and Estelita Wong were served with summons and a copy of the Complaint on November
22, 2005, while Arsenio Chua, Sonny Chua, and Wong Yan Tak were unserved. 24redarclaw
The trial court granted Pioneer's Motion to Declare Respondents in Default for failure to file an Answer within the
period.25 Pioneer presented its evidence ex-parte.26redarclaw
Meanwhile, Pioneer filed an Ex-Parte Motion for Issuance of Alias Summons since Morning Star was previously
served through substituted service. The trial court granted the Motion, and alias summons was served on February 5,
2007. Upon motion, Morning Star was declared in default for failure to file an Answer within the period. 27redarclaw
On June 28, 2007, Morning Star filed a Motion for Leave of Court to File Attached Answer explaining that it only
received a copy of the Complaint on February 5, 2007.28 Its counsel also alleged that he was retained only on June
22, 2007.29 The trial court denied the Motion on July 23, 2007, and also denied reconsideration. 30redarclaw
The Regional Trial Court in its Decision31 dated November 9, 2007 ruled in favor of Pioneer and ordered respondents
to jointly and severally pay Pioneer:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of the plaintiff as against the
defendants ordering the latter to jointly and severally pay the following amount:
1. One Hundred Million Four Hundred Seventy Nine Thousand One Hundred Seventy One Pesos and
Fifty Nine (Php100,479,171.59) and Four Hundred Fifty Seven Thousand Eight Hundred Thirty
Four Dollars and 14/100 (US$457,834.14), with interest at 12% per annum from September 23,
2003 until the sum is fully paid;
 2. Php100,000.00 as attorney's fees;
3. Php100,000.00 as exemplary damages;
4. Php200,000.00 as litigation expenses[;]
5. costs of suit.
SO ORDERED.32
The Court of Appeals, in its Decision dated February 28, 2011, affirmed the trial court with modification in that only
Morning Star was liable to pay petitioner:LawlibraryofCRAlaw
ChanRoblesVirtualawlibrary
WHEREFORE, premises considered, the instant Appeal is DENIED. Accordingly, the assailed 9 November 2007
Decision of the Regional Trial Court of Makati City, Branch 143 in Civil Case No. 05-993 is AFFIRMED with
MODIFICATION. Insofar as the trial court ordered Defendants-Appellants Estelita Co Wong, Benny H. Wong, Arsenio
Chua, Sonny Chua and Wong Yan Tak to jointly and severally pay the amounts awarded to Plaintiff-Appellee, the same
is deleted. Only Morning Star is held personally liable for the payment thereof. Further, exemplary damages and
attorney's fees are likewise deleted for lack of basis.
SO ORDERED.
The Court of Appeals denied Pioneer's Motion for Partial Reconsideration. 34 Thus, Pioneer filed this Petition.
Pioneer submits that its Petition falls under the exceptions to the general rule that petitions for review may raise only
questions of law.35 Pioneer raises conflicting findings and conclusions by the lower courts regarding solidary liability,
and misapprehension of facts by the Court of Appeals.36redarclaw
Pioneer argues that "the individual respondents were, at the very least, grossly negligent in running the affairs of
respondent Morning Star by knowingly allowing it to amass huge debts to [International Air Transport Association]
despite its financial distress, thus, giving sufficient ground for the court to pierce the corporate veil and hold said
individual respondents personally liable."37 It cites Section 31 of the Corporation Code on the liability of directors
"guilty of gross negligence or bad faith in directing the affairs of the corporation[.]" 38redarclaw
Pioneer also cites jurisprudence39 on the requisites for the doctrine of piercing the corporate veil to apply. 40 It submits
that all requisites are present, thus, the individual respondents should be held solidarity liable with Morning Star. 41 It
cites at length the testimony of its witness Atty. Vincenzo Nonato M. Taggueg (Atty. Taggueg)42 that based on
Morning Star's General Information Sheet and financial statements, Morning Star "has been accumulating losses as
early as 1998 continuing to 1999 and 2000 resulting to a deficit of Php26,168,1768.00 [sic] as of December 31,
2000[.]"43redarclaw
Pioneer contends that the abnormally large indebtedness to International Air Transport Association was incurred in
fraud and bad faith, with Morning Star having no intention to pay its debt.44 It cites Oria v. McMicking45 on the badges
of fraud.46 Pioneer then enumerates "the unmistakable badges of fraud and deceit committed by individual
respondents"47 such as the fact that Morning Star had no assets,48 but the two corporations also "controlled and
managed by the individual respondents were doing relatively well [at] the time . . . Morning Star was incurring huge
losses[.]"49 Moreover, a new travel agency called Morning Star Tour Planners, Inc. now operates at the Morning Star's
former principal place of business in Pedro Gil, Manila, with the children of individual respondents as its stockholders,
directors, and officers.50redarclaw
Respondents counter with the general rule clothing corporations with personality separate and distinct from their
officers and stockholders.51 They submit that "[m]ere sweeping allegations that officers acted in bad faith because it
incurred obligations it cannot pay will not hold any water."52 Respondents argue that Pioneer failed to prove bad faith,
relying only on Atty. Taggueg's testimony, but "Mr. Taggueg admitted that his knowledge about the defendant
Morning Star was merely based on his assumptions and his examination of the [Securities and Exchange
Commission] documents."53redarclaw
The issues for resolution are:LawlibraryofCRAlaw
First, whether this case involves an exception to the general rule that petitions for review are limited to questions of
law; and
Second, whether the doctrine of piercing the corporate veil applies to hold the individual respondents solidarily liable
with respondent Morning Star Travel and Tours, Inc. to pay the award in favor of petitioner Pioneer Insurance &
Surety Corporation.
I
Only questions of law may be raised in a petition for review.54 Factual findings of the Court of Appeals are generally
"final and conclusive, and cannot be reviewed on appeal by [this court], provided they are borne out by the record or
based on substantial evidence."55redarclaw
Issues such as whether the separate and distinct personality of a corporation was used for fraudulent ends, or
whether the evidence warrants a piercing of the corporate veil, involve questions of fact. 56redarclaw
Jurisprudence established exceptions from the general rule against a factual review by this court. These exceptions
include cases when the judgment appears to be based on a "patent misappreciation of facts." 57redarclaw
Petitioner invokes this exception in alleging that "the conflicting findings and conclusions between the Court of
Appeals and the trial court insofar as the solidary liability of respondents to pay petitioner and the misapprehensions
of facts by the Court of Appeals constrains petitioner to raise both questions of fact and law in the
Petition."58redarclaw
In ruling against the solidary liability of the individual respondents with respondent Morning Star, the Court of Appeals
discussed that "the trial court merely stated in the dispositive portion thereof that Defendants-Appellants are ordered
to pay Plaintiff-Appellee jointly and severally the judgment award without discussing in the body of the decision the
reason for such conclusion."59redarclaw
The Court of Appeals then enumerated the exceptional circumstances warranting solidary liabilities by corporate
agents based on jurisprudence, and found none to be present in this case.60redarclaw
We affirm the Court of Appeals.
II
The law vests corporations with a separate and distinct personality from those that represent these
corporations.61redarclaw
The corporate legal structure draws its "economic superiority"62 from key features such as a separate corporate
personality. Unlike other business associations such as partnerships, the corporate framework encourages
investment by allowing even small capital contributors to be part of a big business endeavor made possible by the
aggregation of their capital funds.63 The consequent limited liability feature, since corporate assets will answer for
corporate debts, also proves attractive for investors. However, this legal structure should not be abused.
A separate corporate personality shields corporate officers acting in good faith and within their scope of authority
from personal liability except for situations enumerated by law and jurisprudence, 64 thus:LawlibraryofCRAlaw
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Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may
so validly attach, as a rule, only when —
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'1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its
affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
'2. He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
'3. He agrees to hold himself personally and solidarity liable with the corporation; or

'4. He is made, by a specific provision of law, to personally answer for his corporate action.'65
The first exception comes from Section 31 of the Corporation Code:LawlibraryofCRAlaw
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SECTION 31. Liability of Directors, Trustees or Officers. — Directors or trustees who wilfully and knowingly vote for
or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as
such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by
the corporation, its stockholders or members and other persons. (Emphasis supplied)
Petitioner imputes gross negligence and bad faith on the part of the individual respondents for incurring the huge
indebtedness to International Air Transport Association.66redarclaw
Bad faith "imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, not simply bad
judgment or negligence."67 "[I]t means breach of a known duty through some motive or interest or ill will; it partakes
of the nature of fraud."68redarclaw
The trial court gave weight to its finding that respondent Morning Star still availed itself of loans and/or obligations
with International Air Transport Association despite its financial standing of operating at a loss:LawlibraryofCRAlaw
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Based on the plaintiff's examination of the financial statements submitted by the defendant Morning Star with the
Securities and Exchange Commission (SEC) for the years 2000 and 2001 with comparative figures for the years
ending 1998, 1999 and 2000, herein defendant corporation has been accumulating losses as early as 1998
continuing to 1999 and 2000 resulting to a deficit of Php26,168,176.80 as of December 31, 2000. It was also shown
that for the prior years of 1998 and 1999, defendant Morning Star incurred a deficit of Php3,910,763.00 as of
December 31, 1998 and Php2,841,626.00 as of December 31, 1999 and in the Balance Sheet, it indicated therein
the defendants' total assets of Php150,579,421.00 while the total liabilities amounted to Php160,222,966.00,
thereby making the defendant Morning Star insolvent. Despite the fact that defendant Morning Star was already
incurring losses as early as 1998 up to the year 2000, the latter still contracted loans and/or obligations with
IATA sometime in 2002 and which indebtedness ballooned to the huge amount of Phpl09,728,051.00 and
US$496,403.21 as of April 30, 2003, which obviously it could not pay considering its financial standing.
Further investigation by the plaintiff shows that it could not find any assets or properties in the name of defendant
Morning Star because even the land and the building where it held office was registered in the name of "Morning
Star Management Ventures Corporation", as evidenced by the certified true copies of the transfer certificates of title
(TCT) nos. 192243 and 192244 in the name of Morning Star Management Ventures Corporation and unlike the
defendant Morning Star, which has practically the same officers and members of the Board, has only an asset of
Php125,392,960.00 and liabilities of Php4,306,702[.]00 and an income deficit of Php26,922,598.00 as of December
31, 2001. Similarly, the Pic [']N Pac Mart, Inc., which has the same set of officers, said corporation has shown a total
assets of Php5,423,201.30 and liabilities/stockholders equity of Php5,423,201.30 but with a retained earnings of
Php194,412[.]74 as of December 31, 1999. Plaintiff contends that in such a case, defendant Morning Star has
used the separate and distinct corporate personality accorded to it under the Corporation Code to commit
said fraudulent transaction of incurring corporate debts and allow the herein individual defendants to
escape personal liability and placing the assets beyond the reach of the creditors. 69 (Emphasis supplied,
citations omitted)
On the other hand, the Court of Appeals ruled that the general rule on separate corporate personality and against
personal liability by corporate officers applies since petitioner failed to prove bad faith amounting to fraud by the
corporate officers:LawlibraryofCRAlaw
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The mere fact that Morning Star has been incurring huge losses and that it has no assets at the time it contracted
large financial obligations to IATA, cannot be considered that its officers, Defendants-Appellants Estelita Co Wong,
Benny H. Wong, Arsenio Chua, Sonny Chua and Wong Yan Tak, acted in bad faith or such circumstance would
amount to fraud, warranting personal and solidary liability of its corporate officers. The same is also true with the
fact that Morning Star Management Ventures Corporation and Pic 'N Pac Mart, Inc., corporations having the same
set of officers as Morning Star, were doing relatively well during the time that the former incurred huge losses. Thus,
only Morning Star should be held personally liable to Plaintiff-Appellee, and not its corporate officers.70
Piercing the corporate veil in order to hold corporate officers personally liable for the corporation's debts requires
that "the bad faith or wrongdoing of the director must be established clearly and convincingly[as] [b]ad faith is never
presumed."71redarclaw
III
Oria v. McMicking72 enumerates several badges of fraud. Petitioner argues the existence of the fourth to sixth
badges:73
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1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has been begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of the above
circumstances.
7. The failure of the vendee to take exclusive possession of all the property. 74 (Emphasis supplied)
Petitioner listed the following circumstances as constituting badges of fraud by the individual
respondents:LawlibraryofCRAlaw
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Attention is drawn to the following badges of fraud by individual respondents to use the corporate fiction of
respondent Morning Star as a veil or cloak to insulate themselves from any liability to pay its indebtedness to [sic],
to wit:LawlibraryofCRAlaw
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a. As members of the Board of Directors and at the same time, officers of respondent Morning Star, individual
respondents Estelita Co Wong (President and Member of the Board), Benny H. Wong (Chairman of the Board),
Arsenio Chua (Member of the Board), Sonny Chua (Secretary and Member of the Board) and Wong Yan Tak
(Treasurer and Member of the Board) undoubtedly exercised complete control and direction of the financial
management and business operations of respondent Morning Star;
b. Similarly, the individual respondents are likewise in direct control of the management of two other corporations,
Morning Star Management Ventures Corp. and Pic 'N Pac Mart[,] Inc., being the shareholders, members of the
Board and officers of the said corporations, as evidenced by the General Information Sheets (GIS) of the said
corporations filed with the Securities and Exchange Commission (Exhibits "O" to "0-4" and "P" to "P-3" of petitioner's
Formal Offer of Evidence dated August 15, 2007);
c. Respondent Morning Star has no assets or property in its name that may be levied upon for attachment and
execution to secure and to satisfy any judgment debt, as in fact the land and building where its offices can be found
and situated at J. Bocobo Street cor. Pedro Gil Street, Ermita Manila is not even registered in its name but in the
name of another corporation "Morning Star Management Ventures Corporation" which is similarly owned and
controlled by the individual respondents (Exhibits "S" to "S-2" and "T" to "T-2" of petitioner's Formal Offer of
Evidence dated August 15, 2007);
d. As early as 1998, respondent Morning Star had already been incurring huge losses which clearly show the
inability to pay its obligations to IATA but the individual respondents contracted its huge financial obligations from
IATA knowing fully well that respondent Morning Star will be unable to pay such obligations;
e. Strangely, on the other hand, Pic 'N Pac Mart, Inc. and Morning Star Management Ventures Corp., the other two
(2) corporations similarly controlled and managed by the individual respondents, were doing relatively well during
the time that respondent Morning Star was incurring huge losses (Exhibits "U" to "U-7" and "V" to "V-9" of
petitioner's Formal Offer of Evidence dated August 15, 2007);
f. Individual respondents allowed the indebtedness of respondent Morning Star to balloon to a staggering amount of
Php100,479,171.59 and US$457,834.14[.]75 (Citations omitted)
This court finds that petitioner was not able to clearly and convincingly establish bad faith by the individual
respondents, nor substantiate the alleged badges of fraud.
IV
First, petitioner failed to substantiate the fourth badge of fraud on "[e]vidence of large indebtedness or complete
insolvency."76redarclaw
In 1993, International Air Transport Association appointed respondent Morning Star as an accredited travel agent
with the privilege of getting air tickets on credit, and they entered a Passenger Sales Agency Agreement. 77 None of
the parties made allegations on the financial status or business standing of respondent Morning Star during the first
five years from its accreditation in 1993.
Petitioner relies on Atty. Taggueg's testimony regarding respondent Morning Star's financial statements with the
Securities and Exchange Commission.
Atty. Taggueg testified on the comparative figures for the years ended 1998, 1999, and 2000 and how the company
was "accumulating losses as early as 1998 continuing to 1999 and 2000 resulting to a deficit of Php26,168,1768.00
[sic] as of December 31, 2000 . . . deficit of Php3,910,763.00 as of December 31, 1998 and another deficit of
Php2,841,626.00 as of December 31, 1999[.]"78 He testified that as of December 31, 2000, respondent Morning Star
had total assets of Php150,579,421.00 and total liabilities of Php160,222,966.00. 79redarclaw
Atty. Taggueg then testified that despite this insolvency, "Morning Star Travel still contracted loans and/or
obligations from the IATA sometime in December 2002 which indebtedness with IATA ballooned to the huge
amount of Php109,728,051.00 and US$496,403.21 as of April 30, 2003 [.]" 80redarclaw
Petitioner did not present Securities and Exchange Commission documents on respondent Morning Star's total
assets as of December 2002. It did not present respondent Morning Star's financial statements for December 2002,
the year it incurred obligations from International Air Transport Association.81redarclaw
The financial statements for years 1998 to 1999 and 1999 to 2000 testified on by Atty. Taggueg are not
representative of the financial status of respondent Morning Star's business. Year 2000 reflected total assets of
P150,579,421.00 and total liabilities of P160,222,966.00.82 On the other hand, year 1999 showed total assets of
P134,361,353.00 and total liabilities of P120,678,345.00.83 Businesses may earn profits in some years and operate
at a loss in others as a result of changing economic conditions. These two financial statements do not show that
respondent Morning Star was operating at a loss in 2002. Deficits in the years 1998 to 2000 do not necessarily
mean deficits in 2002. It is unclear if these figures included previous obligations to International Air Transport
Association, or whether some or all of such obligations were paid in subsequent years as an indication of
respondent Morning Star's credit history.
In any event, it is in the nature of businesses to take risks when making business judgments, and this includes
taking loans and incurring liabilities.
Atty. Taggueg's association with respondent Morning Star, or this case, is also unclear. Respondents submit in their
memorandum that "[i]n his testimony[,] Mr. Taggueg admitted that his knowledge about . . . Morning Star was
merely based on his assumptions and his examination of the [Securities and Exchange Commission]
documents."84redarclaw
Petitioner's reliance on Atty. Taggueg's testimony on respondent Morning Star's financial statements for previous
years fails to clearly and convincingly establish bad faith by the individual respondents.
V individual respondents were in bad faith or gross negligence in directing the affairs of respondent Morning Star.
Second, petitioner failed to substantiate the fifth badge of fraud on the "transfer of all or nearly all of his property by
a debtor, especially when he is insolvent or greatly embarrassed financially." 85redarclaw
Mere allegations that Morning Star Management Ventures Corporation and Pic 'N Pac Mart, Inc. "were doing
relatively well during the time that respondent Morning Star was incurring huge losses"86 do not establish bad faith
or fraud by the individual respondents. Such allegations alone do not prove that the individual respondents were
transferring respondent Morning Star's properties in fraud of its creditors.
Neither does the allegation that Morning Star Management Ventures Corporation has title over the land and building
where the offices can be found establish bad faith or fraud. Petitioner did not show that this title was originally in
respondent Morning Star's name and was later transferred to respondent Morning Star.
This court has held that the "existence of interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other public policy
considerations."87redarclaw
VI
Third, petitioner also failed to substantiate the sixth badge of fraud that "the transfer is made between father and
son, when there are present other of the above circumstances." 88redarclaw
Petitioner submits that:LawlibraryofCRAlaw
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It would be the height of injustice to allow individual respondents to get away with their gross negligence to the
prejudice of petitioner, especially since there is now another travel agency in the name of Morning Star Tour
Planners, Inc. operating at the respondent Morning Star's former principal place of business at 1600 J. Bocobo St.
corner Pedro Gil Malate, Manila. . . .
....
Curiously, among the stockholders, directors and officers of Morning Star Tour Planners, Inc., are the following:
Belinda Wong, Billy Wong, Barbara C. Wong and Benny C. Wong, Jr., who all have the same address as individual
respondents Estelita Co Wong and Benny H. Wong.
Given, these vital pieces of information, it is at once indubitable that respondents have established another travel
agency in the name of their children in order to escape their solidary liability to petitioner! 89 (Citation omitted)
This court has held that "compliance with the recognized modes of acquisition of jurisdiction cannot be dispensed
with even in piercing the veil of corporate fiction[.]"90 Morning Star Tour Planners, Inc. is not a party in this case. It
would offend due process rights if what petitioner ultimately seeks in its allegation is to hold Morning Star Tour
Planners, Inc. responsible for respondent Morning Star's liability.
In any event, petitioner failed to plead and prove the circumstances that would pass the following control test for the
operation of the alter ego doctrine:LawlibraryofCRAlaw
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(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy
and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal right; and
(3) The aforesaid control and breach of duty must [have] proximately caused the injury or unjust loss complained
of.91
The records do not show that the individual respondents controlled Morning Star Tour Planners, Inc. and that such
control was used to commit fraud against petitioner. Neither does this suspicion support petitioner's position that the
Finally, pursuant to this court's pronouncement in Nacar v. Gallery Frames,92 the interest rate should be 6% per
annum on the amount owing to petitioner representing respondent Morning Star's unpaid air transport tickets availed
on credit.
WHEREFORE, the Petition is DENIED. The Court of Appeals Decision is AFFIRMED with MODIFICATION in that
legal interest is 6% per annum from September 23, 2003 until fully paid.
SO ORDERED.
5. Roy III vs. Herbosa, 810 SCRA 1, G.R. No. 207246 November 22, 2016
The petitions1 before the Court are special civil actions for certiorari under Rule 65 of the Rules of Court seeking to
annul Memorandum Circular No. 8, Series of 2013 ("SEC-MC No. 8") issued by the Securities and Exchange
Commission ("SEC") for allegedly being in violation of the Court's Decision2 ("GamboaDecision") and
Resolution3 ("Gamboa Resolution") in Gamboa v. Finance Secretary Teves, G.R. No. 176579, respectively
promulgated on June 28, 2011, and October 9, 2012, which jurisprudentially established the proper interpretation of
Section 11, Article XII of the Constitution.
The Antecedents
On June 28, 2011, the Court issued the Gamboa Decision, the dispositive portion of which reads:
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term
"capital" in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions
under the law.
SO ORDERED.4
Several motions for reconsideration were filed assailing the Gamboa Decision. They were denied in
the Gamboa Resolution issued by the Court on October 9, 2012, viz:
WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be entertained.
SO ORDERED.5
The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was thereafter issued on
December 11, 2012.6
On November 6, 2012, the SEC posted a Notice in its website inviting the public to attend a public dialogue and to
submit comments on the draft memorandum circular (attached thereto) on the guidelines to be followed in determining
compliance with the Filipino ownership requirement in public utilities under Section 11, Article XII of the Constitution
pursuant to the Court's directive in the Gamboa Decision.7
On November 9, 2012, the SEC held the scheduled dialogue and more than 100 representatives from various
organizations, government agencies, the academe and the private sector attended. 8
9
On January 8, 2013, the SEC received a copy of the Entry of Judgment from the Court certifying that on October 18,
2012, the Gamboa Decision had become final and executory.10
On March 25, 2013, the SEC posted another Notice in its website soliciting from the public comments and
suggestions on the draft guidelines.11
On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written comments on the draft guidelines. 12
On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC No. 8 entitled
"Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or
Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities." It was published in
the Philippine Daily Inquirer and the Business Mirror on May 22, 2013.13Section 2 of SEC-MC No. 8 provides:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement.
For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
Corporations covered by special laws which provide specific citizenship requirements shall comply with the provisions
of said law.14
On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition, 15 assailing the validity of SEC-MC No. 8
for not conforming to the letter and spirit of the Gamboa Decision and Resolution and for having been issued by the
SEC with grave abuse of discretion. Petitioner Roy seeks to apply the 60-40 Filipino ownership requirement
separately to each class of shares of a public utility corporation, whether common, preferred nonvoting, preferred
voting or any other class of shares. Petitioner Roy also questions the ruling of the SEC that respondent Philippine
Long Distance Telephone Company ("PLDT") is compliant with the constitutional rule on foreign ownership. He prays
that the Court declare SEC-MC No. 8 unconstitutional and direct the SEC to issue new guidelines regarding the
determination of compliance with Section 11, Article XII of the Constitution in accordance with Gamboa.
Wilson C. Gamboa, Jr.,16 Daniel V. Cartagena, John Warren P. Gabinete, Antonio V. Pesina, Jr., Modesto Martin Y.
Mamon III, and Gerardo C. Erebaren ("intervenors Gamboa, et al.") filed a Motion for Leave to File Petition-in-
Intervention17 on July 30, 2013, which the Court granted. The Petition-in-Intervention18filed by intervenors Gamboa, et
al. mirrored the issues, arguments and prayer of petitioner Roy.
On September 5, 2013, respondent PLDT filed its Comment (on the Petition dated 10 June 2013). 19 PLDT posited
that the Petition should be dismissed because it violates the doctrine of hierarchy of courts as there are no compelling
reasons to invoke the Court's original jurisdiction; it is prematurely filed because petitioner Roy failed to exhaust
administrative remedies before the SEC; the principal actions/remedies of mandamus and declaratory relief are not
within the exclusive and/or original jurisdiction of the Court; the petition for certiorari is an inappropriate remedy since
the SEC issued SEC-MC No. 8 in the exercise of its quasi-legislative power; it deprives the necessary and
indispensable parties of their constitutional right to due process; and the SEC merely implemented the dispositive
portion of the Gamboa Decision.
On September 20, 2013, respondents Chairperson Teresita Herbosa and SEC filed their Consolidated
Comment.20 They sought the dismissal of the petitions on the following grounds: (1) the petitioners do not
possess locus standi to assail the constitutionality of SEC-MC No. 8; (2) a petition for certiorari under Rule 65 is not
the appropriate and proper remedy to assail the validity and constitutionality of the SEC-MC No. 8; (3) the direct resort
to the Court violates the doctrine of hierarchy of courts; (4) the SEC did not abuse its discretion; (5) on PLDT's
compliance with the capital requirement as stated in the Gamboaruling, the petitioners' challenge is premature
considering that the SEC has not yet issued a definitive ruling thereon.
On October 22, 2013, PLDT filed its Comment (on the Petition-in-Intervention dated 16 July 2013).21PLDT adopted
the position that intervenors Gamboa, et al. have no standing and are not the proper party to question the
constitutionality of SEC-MC No. 8; they are in no position to assail SEC-MC No. 8 considering that they did not
participate in the public consultations or give comments thereon; and their Petition-in-Intervention is a disguised
motion for reconsideration of the Gamboa Decision and Resolution.
On May 7, 2014, Petitioner Roy and intervenors Gamboa, et al.22 filed their Joint Consolidated Reply with Motion for
Issuance of Temporary Restraining Order.23
On May 22, 2014, PLDT filed its Rejoinder [To Petitioner and Petitioners-in-Intervention's Joint Consolidated Reply
dated 7 May 2014] and Opposition [To Petitioner and Petitioners-in-Intervention's Motion for Issuance of a Temporary
Restraining Order dated 7 May 2014].24
On June 18, 2014, the Philippine Stock Exchange, Inc. ("PSE") filed its Motion to Intervene with Leave of Court 25 and
its Comment-in Intervention.26 The PSE alleged that it has standing to intervene as the primary regulator of the stock
exchange and will sustain direct injury should the petitions be granted. The PSE argued that in the Gamboa ruling,
"capital" refers only to shares entitled to vote in the election of directors, and excludes those not so entitled; and the
dispositive portion of the decision is the controlling factor that determines and settles the questions presented in the
case. The PSE further argued that adopting a new interpretation of Section 11, Article XII of the Constitution violates
the policy of conclusiveness of judgment, stare decisis, and the State's obligation to maintain a stable and predictable
legal framework for foreign investors under international treaties; and adopting a new definition of "capital" will prove
disastrous for the Philippine stock market. The Court granted the Motion to Intervene filed by PSE. 27
PLDT filed its Consolidated Memorandum 28 on February 10, 2015.
On June 1, 2016, Shareholders' Association of the Philippines, Inc.29 ("SHAREPHIL") filed an Omnibus Motion [1] For
Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention.30 The Court granted the Omnibus Motion of
SHAREPHIL.31
On June 30, 2016, petitioner Roy filed his Opposition and Reply to Interventions of Philippine Stock Exchange and
Sharephil.32 Intervenors Gamboa, et al. then filed on September 14, 2016, their Reply (to Interventions by Philippine
Stock Exchange and Sharephil).33
The Issues
The twin issues of the Petition and the Petition-in-Intervention are: (1) whether the SEC gravely abused its discretion
in issuing SEC-MC No. 8 in light of the Gamboa Decision and Gamboa Resolution, and (2) whether the SEC gravely
abused its discretion in ruling that PLDT is compliant with the constitutional limitation on foreign ownership.
The Court's Ruling
At the outset, the Court disposes of the second issue for being without merit. In its Consolidated Comment dated
September 13, 2013,34 the SEC already clarified that it "has not yet issued a definitive ruling anent PLDT's compliance
with the limitation on foreign ownership imposed under the Constitution and relevant laws [and i]n fact, a careful
perusal of x x x SEC-MC No. 8 readily reveals that all existing covered corporations which are non-compliant with
Section 2 thereof were given a period of one (1) year from the effectivity of the same within which to comply with said
ownership requirement. x x x."35 Thus, in the absence of a definitive ruling by the SEC on PLDT's compliance with the
capital requirement pursuant to the Gamboa Decision and Resolution, any question relative to the inexistent ruling is
premature.
Also, considering that the Court is not a trier of facts and is in no position to make a factual determination of PLDT's
compliance with the constitutional provision under review, the Court can only resolve the first issue, which is a pure
question of law. However, before the Court tackles the first issue, it has to rule on certain procedural challenges that
have been raised.
The Procedural Issues
The Court may exercise its power of judicial review and take cognizance of a case when the following specific
requisites are met: (1) there is an actual case or controversy calling for the exercise of judicial power; (2) the petitioner
has standing to question the validity of the subject act or issuance, i.e., he has a personal and substantial interest in
the case that he has sustained, or will sustain, direct injury as a result of the enforcement of the act or issuance; (3)
the question of constitutionality is raised at the earliest opportunity; and (4) the constitutional question is the very lis
mota of the case.36
The first two requisites of judicial review are not met.
Petitioners' failure to sufficiently allege, much less establish, the existence of the first two requisites for the exercise of
judicial review warrants the perfunctory dismissal of the petitions.
a. No actual controversy.
Regarding the first requisite, the Court in Belgica v. Ochoa37 stressed anew that an actual case or controversy is one
which involves a conflict of legal rights, an assertion of opposite legal claims, susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute since the courts will decline to pass upon
constitutional issues through advisory opinions, bereft as they are of authority to resolve hypothetical or moot
questions. Related to the requirement of an actual case or controversy is the requirement of "ripeness", and a
question is ripe for adjudication when the act being challenged has a direct adverse effect on the individual
challenging it.
Petitioners have failed to show that there IS an actual case or controversy which is ripe for adjudication.
The Petition and the Petition-in-Intervention identically allege:
3. The standing interpretation of the SEC found in MC8 practically encourages circumvention of the 60-40 ownership
rule by impliedly allowing the creation of several classes of voting shares with different degrees of beneficial ownership
over the same, but at the same time, not imposing a 40% limit on foreign ownership of the higher yielding stocks. 38
4. For instance, a situation may arise where a corporation may issue several classes of shares of stock, one of which
are common shares with rights to elect directors, another are preferred shares with rights to elect directors but with
much lesser entitlement to dividends, and still another class of preferred shares with no rights to elect the directors and
even less dividends. In this situation, the corporation may issue common shares to foreigners amounting to forty percent
(40%) of the outstanding capital stock and issue preferred shares entitled to vote the directors of the corporation to
Filipinos consisting of 60%39 percent (sic) of the outstanding capital stock entitled to vote. Although it may appear that
the 60-40 rule has been complied with, the beneficial ownership of the corporation remains with the foreign stockholder
since the Filipino owners of the preferred shares have only a miniscule share in the dividends and profit of the
corporation. Plainly, this situation runs contrary to the Constitution and the ruling of this x x x Court. 40
Petitioners' hypothetical illustration as to how SEC-MC No. 8 "practically encourages circumvention of the 60-40
ownership rule" is evidently speculative and fraught with conjectures and assumptions. There is clearly wanting
specific facts against which the veracity of the conclusions purportedly following from the speculations and
assumptions can be validated. The lack of a specific factual milieu from which the petitions originated renders any
pronouncement from the Court as a purely advisory opinion and not a decision binding on identified and definite
parties and on a known set of facts.
Firstly, unlike in Gamboa, the identity of the public utility corporation, the capital of which is at issue, is unknown. Its
outstanding capital stock and the actual composition thereof in terms of numbers, classes, preferences and features
are all theoretical. The description "preferred shares with rights to elect directors but with much lesser entitlement to
dividends, and still another class of preferred shares with no rights to elect the directors and even less dividends" is
ambiguous. What are the specific dividend policies or entitlements of the purported preferred shares? How are the
preferred shares' dividend policies different from those of the common shares? Why and how did the fictional public
utility corporation issue those preferred shares intended to be owned by Filipinos? What are the actual features of the
foreign-owned common shares which make them superior over those owned by Filipinos? How did it come to be that
Filipino holders of preferred shares ended up with "only a miniscule share in the dividends and profit of the
[hypothetical] corporation"? Any answer to any of these questions will, at best, be contingent, conjectural, indefinite or
anticipatory.
Secondly, preferred shares usually have preference over the common shares in the payment of dividends. If most of
the "preferred shares with rights to elect directors but with much lesser entitlement to dividends" and the other "class
of preferred shares with no rights to elect the directors and even less dividends" are owned by Filipinos, they stand to
receive their dividend entitlement ahead of the foreigners, who are common shareholders. For the common
shareholders to have "bigger dividends" as compared to the dividends paid to the preferred shareholders, which are
supposedly predominantly owned by Filipinos, there must still be unrestricted retained earnings of the fictional
corporation left after payment of the dividends declared in favor of the preferred shareholders. The fictional illustration
does not even intimate how this situation can be possible. No permutation of unrestricted retained earnings of the
hypothetical corporation is shown that makes the present conclusion of the petitioners achievable. Also, no concrete
meaning to the petitioners' claim of the Filipinos' "miniscule share in the dividends and profit of the [fictional]
corporation" is demonstrated.
Thirdly, petitioners fail to allege or show how their hypothetical illustration will directly and adversely affect them. That
is impossible since their relationship to the fictional corporation is a matter of guesswork.

From the foregoing, it is evident that the Court can only surmise or speculate on the situation or controversy that the
petitioners contemplate to present for judicial determination. Petitioners are likewise conspicuously silent on the direct
adverse impact to them of the implementation of SEC-MC No. 8. Thus, the petitions must fail because the Court is
barred from rendering a decision based on assumptions, speculations, conjectures and hypothetical or fictional
illustrations, more so in the present case which is not even ripe for decision.
b. No locus standi.
The personal and substantial interest that enables a party to have legal standing is one that is both material, an
interest in issue and to be affected by the government action, as distinguished from mere interest in the issue
involved, or a mere incidental interest, and real, which means a present substantial interest, as distinguished from a
mere expectancy or a future, contingent, subordinate, or consequential interest.41cralawred
As to injury, the party must show that (1) he will personally suffer some actual or threatened injury because of the
allegedly illegal conduct of the government; (2) the injury is fairly traceable to the challenged action; and (3) the injury
is likely to be redressed by a favorable action.42 If the asserted injury is more imagined than real, or is merely
superficial and insubstantial, an excursion into constitutional adjudication by the courts is not warranted.43
Petitioners have no legal standing to question the constitutionality of SEC-MC No. 8.
To establish his standing, petitioner Roy merely claimed that he has standing to question SEC-MC No. 8 "as a
concerned citizen, an officer of the Court and as a taxpayer" as well as "the senior law partner of his own law firm[,
which] x x x is a subscriber of PLDT."44 On the other hand, intervenors Gamboa, et al.allege, as basis of their locus
standi, their "[b]eing lawyers and officers of the Court" and "citizens x x x and taxpayers."45
The Court has previously emphasized that the locus standi requisite is not met by the expedient invocation of one's
citizenship or membership in the bar who has an interest in ensuring that laws and orders of the Philippine
government are legally and validly issued as these supposed interests are too general, which are shared by other
groups and by the whole citizenry.46 Per their allegations, the personal interest invoked by petitioners as citizens and
members of the bar in the validity or invalidity of SEC-MC No. 8 is at best equivocal, and totally insufficient.
Petitioners' status as taxpayers is also of no moment. As often reiterated by the Court, a taxpayer's suit is allowed
only when the petitioner has demonstrated the direct correlation of the act complained of and the disbursement of
public funds in contravention of law or the Constitution, or has shown that the case involves the exercise of the
spending or taxing power of Congress.47 SEC-MC No. 8 does not involve an additional expenditure of public funds
and the taxing or spending power of Congress.
The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is ambiguous. It is unclear whether his law firm
is a "subscriber" of PLDT's shares of stock or of its various telecommunication services. Petitioner Roy has not
identified the specific direct and substantial injury he or his law firm stands to suffer as "subscriber of PLDT" as a
result of the issuance of SEC-MC No. 8 and its enforcement.
As correctly observed by respondent PLDT, "(w]hether or not the constitutionality of SEC-MC No. 8 is upheld, the
rights and privileges of all PLDT subscribers, as with all the rest of subscribers of other corporations, are necessarily
and equally preserved and protected. Nothing is added [to] or removed from a PLDT subscriber in terms of the extent
of his or her participation, relative to what he or she had originally enjoyed from the beginning. In the most practical
sense, a PLDT subscriber loses or gains nothing in the event that SEC-MC No. 8 is either sustained or struck down
by [the Court]."48
More importantly, the issue regarding PLDT's compliance with Section 11, Article XII of the Constitution has been
earlier ruled as premature and beyond the Court's jurisdiction. Thus, petitioner Roy's allegation that his law firm is a
"subscriber of PLDT" is insufficient to clothe him with locus standi.
Petitioners' cursory incantation of "transcendental importance x x x of the rules on foreign ownership of corporations
or entities vested with public interest"49 does not automatically justify the brushing aside of the strict observance of the
requisites for the Court's exercise of judicial review. An indiscriminate disregard of the requisites every time
"transcendental or paramount importance or significance" is invoked would result in an unacceptable corruption of the
settled doctrine of locus standi, as every worthy cause is an interest shared by the general public. 50
In the present case, the general and equivocal allegations of petitioners on their legal standing do not justify the
relaxation of the locus standi rule. While the Court has taken an increasingly liberal approach to the rule of locus
standi, evolving from the stringent requirements of personal injury to the broader transcendental importance doctrine,
such liberality is not to be abused.51
The Rule on the Hierarchy of Courts has been violated.
The Court in Bañez, Jr. v. Concepcion52 stressed that:
The Court must enjoin the observance of the policy on the hierarchy of courts, and now affirms that the policy is not to
be ignored without serious consequences. The strictness of the policy is designed to shied the Court from having to
deal with causes that are also well within the competence of the lower courts, and thus leave time to the Court to deal
with the more fundamental and more essential tasks that the Constitution has assigned to it. The Court may act on
petitions for the extraordinary writs of certiorari, prohibition and mandamus only when absolutely necessary or when
serious and important reasons exist to justifY an exception to the policy. x x x
x x x Where the issuance of an extraordinary writ is also within the competence of the Court of Appeals or a Regional
Trial Court, it is in either of these courts that the specific action for the writ's procurement must be presented. This is
and should continue to be the policy in this regard, a policy that courts and lawyers must strictly observe. x x x53
Petitioners' invocation of "transcendental importance" is hollow and does not merit the relaxation of the rule on
hierarchy of courts. There being no special, important or compelling reason that justified the direct filing of the
petitions in the Court in violation of the policy on hierarchy of courts, their outright dismissal on this ground is further
warranted.54
The petitioners failed to implead indispensable parties.
The cogent submissions of the PSE in its Comment-in-Intervention dated June 16, 201455 and SHAREPHIL in its
Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30,
201656 demonstrate how petitioners should have impleaded not only PLDT but all other corporations in nationalized
and partlynationalized industries because the propriety of the SEC's enforcement of the Court's interpretation of
"capital" through SEC-MC No. 8 affects them as well.
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-interest without whom there can be
no final determination of an action. Indispensable parties are those with such a material and direct interest in the
controversy that a final decree would necessarily affect their rights, so that the court cannot proceed without their
presence.57 The interests of such indispensable parties in the subject matter of the suit and the relief are so bound
with those of the other parties that their legal presence as parties to the proceeding is an absolute necessity and a
complete and efficient determination of the equities and rights of the parties is not possible if they are not joined.58
Other than PLDT, the petitions failed to join or implead other public utility corporations subject to the same restriction
imposed by Section 11, Article XII of the Constitution. These corporations are in danger of losing their franchise and
property if they are found not compliant with the restrictive interpretation of the constitutional provision under review
which is being espoused by petitioners. They should be afforded due notice and opportunity to be heard, lest they be
deprived of their property without due process.
Not only are public utility corporations other than PLDT directly and materially affected by the outcome of the
petitions, their shareholders also stand to suffer in case they will be forced to divest their shareholdings to ensure
compliance with the said restrictive interpretation of the term "capital". As explained by SHAREPIDL, in five
corporations alone, more than Php158 Billion worth of shares must be divested by foreign shareholders and absorbed
by Filipino investors if petitioners' position is upheld.59
Petitioners' disregard of the rights of these other corporations and numerous shareholders constitutes another fatal
procedural flaw, justifYing the dismissal of their petitions. Without giving all of them their day in court, they will
definitely be deprived of their property without due process of law.
During the deliberations, Justice Velasco stressed on the foregoing procedural objections to the granting of the
petitions; and Justice Bersamin added that the special civil action for certiorari and prohibition is not the proper
remedy to assail SEC-MC No. 8 because it was not issued under the adjudicatory or quasi-judicial functions of the
SEC.
The Substantive Issue
The only substantive issue that the petitions assert is whether the SEC's issuance of SEC-MC No. 8 is tainted with
grave abuse of discretion.
The Court holds that, even if the resolution of the procedural issues were conceded in favor of petitioners, the
petitions, being anchored on Rule 65, must nonetheless fail because the SEC did notcommit grave abuse of
discretion amounting to lack or excess of jurisdiction when it issued SEC-MC No. 8. To the contrary, the Court finds
SEC-MC No. 8 to have been issued in fealty to the Gamboa Decision and Resolution.
The ratio in the Gamboa Decision and Gamboa Resolution.
To determine what the Court directed the SEC to do - and therefore resolve whether what the SEC did amounted to
grave abuse of discretion - the Court resorts to the decretal portion of the GamboaDecision, as this is the portion of
the decision that a party relies upon to determine his or her rights and duties, 60viz:
WHEREFORE, we PARTLY GRANT the petition and rule that the term "capital" in Section II, Article XII of the I987
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only
to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares).
Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term
"capital" in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone
Company, and if there is a violation of Section II, Article XII of the Constitution, to impose the appropriate sanctions
under the law.61
In turn, the Gamboa Resolution stated:
In any event, the SEC has expressly manifested62 that it will abide by the Court's decision and defer to the Court's
definition of the term "capital" in Section II, Article XII of the Constitution. Further, the SEC entered its special
appearance in this case and argued during the Oral Arguments, indicating its submission to the Court's jurisdiction. It
is clear, therefore, that there exists no legal impediment against the proper and immediate implementation of the Court's
directive to the SEC.
x x x x
x x x The dispositive portion of the Court's ruling is addressed not to PLDT but solely to the SEC, which is the
administrative agency tasked to enforce the 60-40 ownership requirement in favor of Filipino citizens in Section
11, Article XII of the Constitution.63
To recall, the sole issue in the Gamboa case was: "whether the term 'capital' in Section 11, Article XII of the
Constitution refers to the total common shares only or to the total outstanding capital stock (combined total of
common and non-voting preferred shares) of PLDT, a public utility."64
The Court directly answered the Issue and consistently defined the term "capital" as follows:
x x x The term "capital" in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock
comprising both common and non voting preferred shares.
x x x x
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the election of directors, then the term "capital"
shall include such preferred shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article XII
of the Constitution refers only to shares of stock that can vote in the election of directors.65
The decretal portion of the Gamboa Decision follows the definition of the term "capital" in the body of the decision, to
wit: "x x x we x x x rule that the term 'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of
stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the
total outstanding capital stock (common and non-voting preferred shares)."66
The Court adopted the foregoing definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in
furtherance of "the intent and letter of the Constitution that the 'State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos' [because a] broad definition unjustifiably disregards who owns
the all-important voting stock, which necessarily equates to control of the public utility." 67 The Court, recognizing that
the provision is an express recognition of the sensitive and vital position of public utilities both in the national economy
and for national security, also pronounced that the evident purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national interest.68 Further, the Court noted that
the foregoing interpretation is consistent with the intent of the framers of the Constitution to place in the hands of
Filipino citizens the control and management of public utilities; and, as revealed in the deliberations of the
Constitutional Commission, "capital" refers to the voting stock or controlling interest of a corporation.69
In this regard, it would be apropos to state that since Filipinos own at least 60% of the outstanding shares of stock
entitled to vote directors, which is what the Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all the rights of ownership including, but
not limited to, offering certain preferred shares that may have greater economic interest to foreign investors - as the
need for capital for corporate pursuits (such as expansion), may be good for the corporation that they own. Surely,
these "true owners" will not allow any dilution of their ownership and control if such move will not be beneficial to
them.
As owners of the corporation, the economic benefits will necessarily accrue to them. There is thus no logical reason
why Filipino shareholders will allow foreigners to have greater economic benefits than them. It is illogical to speculate
that they will create shares which have features that will give greater economic interests or benefits than they are
holding and not benefit from such offering, or that they will allow foreigners to profit more than them from their own
corporation - unless they are dummies. But, Commonwealth Act No. 108, the Anti-Dummy Law, is NOT in issue in
these petitions. Notably, even if the shares of a particular public utility were owned 100% Filipino, that does not
discount the possibility of a dummy situation from arising. Hence, even if the 60-40 ownership in favor of Filipinos rule
is applied separately to each class of shares of a public utility corporation, as the petitioners insist, the rule can easily
be side-stepped by a dummy relationship. In other words, even applying the 60-40 Filipino foreign ownership rule to
each class of shares will not assure the lofty purpose enunciated by petitioners.
The Court observed further in the Gamboa Decision that reinforcing this interpretation of the term "capital", as
referring to interests or shares entitled to vote, is the definition of a Philippine national in the Foreign Investments Act
of 1991 ("FIA"), which is explained in the Implementing Rules and Regulations of the FIA ("FIA-IRR"). The FIA-IRR
provides:
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital
stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.70
Echoing the FIA-IRR, the Court stated in the Gamboa Decision that:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The
legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation is "considered as non-Philippine national[s]."
x x x x
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights, is constitutionally required for the State's grant of authority to operate a 100 common shares
public utility. x x x71 100 Class A preferred shares (with right to elect directors)
Was the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution declared for the first time by 100 Class B preferred shares (without right to elect directors)
the Court in the Gamboa Decision modified in the Gamboa Resolution?
SEC-MC No. 8 GAMBOA DECISION
The Court is convinced that it was not. The Gamboa Resolution consists of 51 pages (excluding the dissenting
opinions of Associate Justices Velasco and Abad). For the most part of the Gamboa Resolution, the Court, after
reviewing SEC and DOJ72 Opinions as well as the provisions of the FIA and its predecessor statutes, 73 reiterated that (1) 60% (required percentage of Filipino) applied to the "shares of stock entitled to vote in the election of
both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a corporation is total number of outstanding shares of stock entitled to directors"80 (60% of the voting rights)
a "Philippine national"74 and that a "Philippine national," as defined in the FIA and all its predecessor statutes, is "a vote in the election of directors
Filipino citizen, or a domestic corporation "at least sixty percent (60%) of the capital stock outstanding and
entitled to vote," is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60% of
its voting stock is owned by Filipino citizens."75 The Court also reiterated that, from the deliberations of the If at least a total of 120 of common shares and Class A preferred shares (in any combination) are owned and
Constitutional Commission, it is evident that the term "capital" refers to controlling interest of a corporation,76 and controlled by Filipinos, Company X is compliant with the 60% of the voting rights in favor of Filipinos requirement of
the framers of the Constitution intended public utilities to be majority Filipino-owned and controlled. both SEC-MC No. 8 and the Gamboa Decision.

The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of the term "capital", and this is
quoted verbatim, to wit: SEC-MC No. 8 GAMBOA DECISION/RESOLUTION

XII.
(2) 60% (required percentage of Filipino) applied to "Full beneficial ownership of 60 percent of the
Final Word
BOTH (a) the total number of outstanding shares of outstanding capital stock, coupled with 60 percent of
stock, entitled to vote in the election of directors; AND the voting rights"81 or "Full beneficial ownership of the
The Constitution expressly declares as State policy the development of an economy "effectively controlled" by
(b) the total number of outstanding shares of stock, stocks, coupled with appropriate voting rights x x x
Filipinos. Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public
whether or not entitled to vote in the election of shares with voting rights, as well as with full beneficial
utilities to Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or
directors. ownership"82
corporations or associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIA's
implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of stocks, coupled with
appropriate voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the If at least a total of 180 shares of all the outstanding capital stock of Company X are owned and controlled by
term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as well as with Filipinos, provided that among those 180 shares a total of 120 of the common shares and Class A preferred shares
full beneficial ownership. This is precisely because the right to vote in the election of directors, coupled with full (in any combination) are owned and controlled by Filipinos, then Company X is compliant with both requirements of
beneficial ownership of stocks, translates to effective control of a corporation. 77 voting rights and beneficial ownership under SEC-MC No. 8 and the Gamboa Decision and Resolution.
Everything told, the Court, in both the Gamboa Decision and Gamboa Resolution, finally settled with the PIA's
definition of "Philippine national" as expounded in the FIA-IRR in construing the term "capital" in Section 11, Article XII From the foregoing illustration, SEC-MC No. 8 simply implemented, and is fully in accordance with,
of the 1987 Constitution. the Gamboa Decision and Resolution.

The assailed SEC-MC No. 8.
The relevant provision in the assailed SEC-MC No. 8 IS Section 2, which provides:
Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement.
For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total
number of outstanding shares of stock, whether or not entitled to vote in the election of directors.78
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest requirement. In
fact, Section 2 goes beyond requiring a 60-40 ratio in favor of Filipino nationals in the voting stocks; it
moreover requires the 60-40 percentage ownership in the total number of outstanding shares of stock,
whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's unambiguous pronouncement
that "[f]ull beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting
rights is required."79 Clearly, SEC-MC No. 8 cannot be said to have been issued with grave abuse of discretion.
A simple illustration involving Company X with three kinds of shares of stock, easily shows how compliance with the
requirements of SEC-MC No. 8 will necessarily result to full and faithful compliance with the Gamboa Decision as well
as the Gamboa Resolution.
The following is the composition of the outstanding capital stock of Company X:
While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or full beneficial ownership of stocks
requirement in the FIA, this will not, as it does not, render it invalid meaning, it does not follow that the SEC will not
apply this test in determining whether the shares claimed to be owned by Philippine nationals are Filipino, i.e., are
held by them by mere title or in full beneficial ownership. To be sure, the SEC takes its guiding lights also from the FIA
and its implementing rules, the Securities Regulation Code (Republic Act No. 8799; "SRC") and its implementing
rules.83
The full beneficial ownership test.
The minority justifies the application of the 60-40 Filipino-foreign ownership rule separately to each class of shares of
a public utility corporation in this fashion:
x x x The words "own and control," used to qualify the minimum Filipino participation in Section 11, Article XII of the
Constitution, reflects the importance of Filipinos having both the ability to influence the corporation through voting rights
and economic benefits. In other words, full ownership up to 60% of a public utility encompasses both
controland economic rights, both of which must stay in Filipino hands. Filipinos, who own 60% of the controlling
interest, must also own 60% of the economic interest in a public utility.
x x x In mixed class or dual structured corporations, however, there is variance in the proportion of stockholders'
controlling interest visa-vis their economic ownership rights. This resulting variation is recognized by the Implementing
Rules and Regulations (IRR) of the Securities Regulation Code, which defined beneficial ownership as that may exist
either through voting power and/or through investment returns. By using and/or in defining beneficial ownership,
the IRR, in effect, recognizes a possible situation where voting power is not commensurate to investment power.
The definition of "beneficial owner" or "beneficial ownership" in the Implementing Rules and Regulations of the
Securities Regulation Code ("SRC-IRR") is consistent with the concept of"full beneficial ownership" in the FIA-IRR.
As defined in the SRC-IRR, "[b]eneficial owner or beneficial ownership means any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power
(which includes the power to vote or direct the voting of such security) and/or investment returns or power (which
includes the power to dispose of, or direct the disposition of such security) x x x." 84
While it is correct to state that beneficial ownership is that which may exist either through voting power and/or
investment returns, it does not follow, as espoused by the minority opinion, that the SRC-IRR, in effect, recognizes a
possible situation where voting power is not commensurate to investment power. That is a wrong syllogism. The
fallacy arises from a misunderstanding on what the definition is for. The "beneficial ownership" referred to in the
definition, while it may ultimately and indirectly refer to the overall ownership of the corporation, more pertinently
refers to the ownership of the share subject of the question: is it Filipino-owned or not?
As noted earlier, the FIA-IRR states:
Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting
rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals.85
The emphasized portions in the foregoing provision is the equivalent of the so-called "beneficial ownership test". That
is all.
The term "full beneficial ownership" found in the FIA-IRR is to be understood in the context of the entire paragraph
defining the term "Philippine national". Mere legal title is not enough to meet the required Filipino equity, which means
that it is not sufficient that a share is registered in the name of a Filipino citizen or national, i.e., he should also have
full beneficial ownership of the share. If the voting right of a share held in the name of a Filipino citizen or national is
assigned or transferred to an alien, that share is not to be counted in the determination of the required Filipino equity.
In the same vein, if the dividends and other fruits and accessions of the share do not accrue to a Filipino citizen or
national, then that share is also to be excluded or not counted.
In this regard, it is worth reiterating the Court's pronouncement in the Gamboa Decision, which is consistent with the
FIA-IRR, viz:
Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the Constitution. Full beneficial
ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is
required. x x x
x x x x
The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in
accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is constitutionally required (or the State's grant of authority
to operate a public utility. x x x.86
And the "Final Word" of the Gamboa Resolution is in full accord with the foregoing pronouncement of the Court, to
wit:
XII.
Final Word
x x x The FIA's implementing rules explain that "[f]or stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of
the stocks, coupled with appropriate voting rights is essential."87
Given that beneficial ownership of the outstanding capital stock of the public utility corporation has to be determined
for purposes of compliance with the 60% Filipino ownership requirement, the definition in the SRC-IRR can now be
applied to resolve only the question of who is the beneficial owner or who has beneficial ownership of each "specific
stock" of the said corporation. Thus, if a "specific stock" is owned by a Filipino in the books of the corporation, but the
stock's voting power or disposing power belongs to a foreigner, then that "specific stock" will not be deemed as
"beneficially owned" by a Filipino.
Stated inversely, if the Filipino has the "specific stock's" voting power (he can vote the stock or direct another to vote
for him), or the Filipino has the investment power over the "specific stock" (he can dispose of the stock or direct
another to dispose it for him), or he has both (he can vote and dispose of the "specific stock" or direct another to vote
or dispose it for him), then such Filipino is the "beneficial owner" of that "specific stock" and that "specific stock" is
considered (or counted) as part of the 60% Filipino ownership of the corporation. In the end, all those "specific stocks"
that are determined to be Filipino (per definition of "beneficial owner" or "beneficial ownership") will be added together
and their sum must be equivalent to at least 60% of the total outstanding shares of stock entitled to vote in the
election of directors and at least 60% of the total number of outstanding shares of stock, whether or not entitled to
vote in the election of directors.
To reiterate, the "beneficial owner or beneficial ownership" definition in the SRC-IRR is understood only in
determining the respective nationalities of the outstanding capital stock of a public utility corporation in order to
determine its compliance with the percentage of Filipino ownership required by the Constitution.
The restrictive re-interpretation of "capital" as insisted by the petitioners is unwarranted.
Petitioners' insistence that the 60% Filipino equity requirement must be applied to each class of shares is simply
beyond the literal text and contemplation of Section 11, Article XII of the 1987 Constitution, viz:
Sec. 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at
least sixty per centum or whose capital is owned by such citizens, nor shall such franchise, certificate or authorization
be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common
good so requires. The State shall encourage equity participation in public utilities by the general public. The participation
of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such corporation or association must be citizens of the
Philippines.
As worded, effective control by Filipino citizens of a public utility is already assured in the provision. With respect to
a stock corporation engaged in the business of a public utility, the constitutional provision mandates three safeguards:
(1) 60% of its capital must be owned by Filipino citizens; (2) participation of foreign investors in its board of directors is
limited to their proportionate share in its capital; and (3) all its executive and managing officers must be citizens of the
Philippines.
In the exhaustive review made by the Court in the Gamboa Resolution of the deliberations of the Constitutional
Commission, the opinions of the framers of the 1987 Constitution, the opinions of the SEC and the DOJ as well as the
provisions of the FIA, its implementing rules and its predecessor statutes, the intention to apply the voting control test
and the beneficial ownership test was not mentioned in reference to "each class of shares." Even
the Gamboa Decision was silent on this point.
To be sure, the application of the 60-40 Filipino-foreign ownership requirement separately to each class of shares,
whether common, preferred non-voting, preferred voting or any other class of shares fails to understand and
appreciate the nature and features of stocks as financial instruments.88
There are basically only two types of shares or stocks, i.e., common stock and preferred stock. However, the classes
and variety of shares that a corporation may issue are dictated by the confluence of the corporation's financial position
and needs, business opportunities, short-term and long term targets, risks involved, to name a few; and they can be
classified and re-classified from time to time. With respect to preferred shares, there are cumulative preferred shares,
non-cumulative preferred shares, convertible preferred shares, participating preferred shares.
Because of the different features of preferred shares, it is required that the presentation and disclosure of these
financial instruments in financial statements should be in accordance with the substance of the contractual
arrangement and the definitions of a financial liability, a financial asset and an equity instrument. 89
Under IAS90 32.16, a financial instrument is an equity instrument only if (a) the instrument includes no contractual
obligation to deliver cash or another financial asset to another entity, and (b) if the instrument will or may be settled in
the issuer's own equity instruments, it is either: (i) a non derivative that includes no contractual obligation for the
issuer to deliver a variable number of its own equity instruments; or (ii) a derivative that will be settled only by the
issuer exchanging a fixed amount of cash or another financial asset for a fixed number of its own equity instruments. 91
The following are illustrations of how preferred shares should be presented and disclosed:
Illustration - preference shares
If an entity issues preference (preferred) shares that pay a fixed rate of dividend and that have a mandatory
redemption feature at a future date, the substance is that they are a contractual obligation to deliver cash and,
therefore, should be recognized as a liability. [IAS 32.18(a)] In contrast, preference shares that do not have a fixed
maturity, and where the issuer does not have a contractual obligation to make any payment are equity. In this
example even though both instruments are legally termed preference shares they have different contractual terms
and one is a financial liability while the other is equity.
Illustration - issuance of fixed monetary amount of equity instruments
A contractual right or obligation to receive or deliver a number of its own shares or other equity instruments that varies
so that the fair value of the entity's own equity instruments to be received or delivered equals the fixed monetary
amount of the contractual right or obligation is a financial liability. [IAS 32.20]
Illustration - one party bas a choice over bow an instrument is settled
When a derivative financial instrument gives one party a choice over how it is settled (for instance, the issuer or the
holder can choose settlement net in cash or by exchanging shares for cash), it is a financial asset or a financial
liability unless all of the settlement alternatives would result in it being an equity instrument. [IAS 32.26]92
The fact that from an accounting standpoint, the substance or essence of the financial instrument is the key
determinant whether it should be categorized as a financial liability or an equity instrument, there is no compelling
reason why the same treatment may not be recognized from a legal perspective. Thus, to require Filipino
shareholders to acquire preferred shares that are substantially debts, in order to meet the "restrictive" Filipino
ownership requirement that petitioners espouse, may not bode well for the Philippine corporation and its Filipino
shareholders.
Parenthetically, given the innumerable permutations that the types and classes of stocks may take, requiring the SEC
and other government agencies to keep track of the ever-changing capital classes of corporations will be
impracticable, if not downright impossible. And the law does not require the impossible. (Lex non cogit ad
impossibilia.)93
That stock corporations are allowed to create shares of different classes with varying features is a flexibility that is
granted, among others, for the corporation to attract and generate capital (funds) from both local and foreign capital
markets. This access to capital - which a stock corporation may need for expansion, debt relief/repayment, working
capital requirement and other corporate pursuits - will be greatly eroded with further unwarranted limitations that are
not articulated in the Constitution. The intricacies and delicate balance between debt instruments (liabilities) and
equity (capital) that stock corporations need to calibrate to fund their business requirements and achieve their
financial targets are better left to the judgment of their boards and officers, whose bounden duty is to steer their
companies to financial stability and profitability and who are ultimately answerable to their shareholders.
Going back to the illustration above, the restrictive meaning of the term "capital" espoused by petitioners will definitely
be complied with if 60% of each of the three classes of shares of Company X, consisting of 100 common shares, 100
Class A preferred shares (with right to elect directors) and 100 Class B preferred shares (without right to elect
directors), is owned by Filipinos. However, what if the 60% Filipino ownership in each class of preferred shares, i.e.,
60 Class A preferred shares and 60 Class B preferred shares, is not fully subscribed or achieved because there are
not enough Filipino takers? Company X will be deprived of capital that would otherwise be accessible to it were it not
for this unwarranted "restrictive" meaning of "capital".
The fact that all shares have the right to vote in 8 specific corporate actions as provided in Section 6 of the
Corporation Code does not per se justify the favorable adoption of the restrictive re-interpretation of "capital" as the
petitioners espouse. As observed in the Gamboa Decision, viz:
The Corporation Code of the Philippines classifies shares as common or preferred, thus:
Sec. 6. Classification of shares. The shares of stock of stock corporations may be divided into classes or series of
shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be
stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those
classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all
of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and
loan associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in
the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of
stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange
Commission.
xxxx
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal
requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be
equal in all respects to every other share.
Where the articles of incorporation provide for non voting shares in the cases allowed by this Code, the holders of
such shares shall nevertheless be entitled to vote on the following matters:cralawlawlibrary
1. Amendment of the articles of incorporation;ChanRoblesVirtualawlibrary
2. Adoption and amendment of by-laws;ChanRoblesVirtualawlibrary
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate
property;ChanRoblesVirtualawlibrary
4. Incurring, creating or increasing bonded indebtedness;ChanRoblesVirtualawlibrary
5. Increase or decrease of capital stock;ChanRoblesVirtualawlibrary
6. Merger or consolidation of the corporation with another corporation or other
corporations;ChanRoblesVirtualawlibrary
7. Investment of corporate funds in another corporation or business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act
as provided in this Code shall be deemed to refer only to stocks with voting rights.
Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation. This is exercised through his vote in the election of directors because it is the board of directors that
controls or manages the corporation. In the absence of provisions in the articles of incorporation denying voting rights
to preferred shares, preferred shares have the same voting rights as common shares. However, preferred
shareholders are often excluded from any control, that is, deprived of the right to vote in the election of directors and
on other matters, on the theory that the preferred shareholders are merely investors in the corporation for income in
the same manner as bondholders. In fact, under the Corporation Code only preferred or redeemable shares can be
deprived of the right to vote. Common shares cannot be deprived of the right to vote in any corporate meeting, and
any provision in the articles of incorporation restricting the right of common shareholders to vote is invalid.
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term "capital" in Section 11, Article XII of the Constitution refers only to common
shares. However, if the preferred shares also have the right to vote in the election of directors, then the term "capital"
shall include such preferred shares because the right to participate in the control or management of the corporation is
exercised through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article XII
of the Constitution refers only to shares of stock that can vote in the election of directors.
This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino
citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional
Commission, "capital" refers to the voting stock or controlling interest of a corporation x x x.94
The Gamboa Decision held that preferred shares are to be factored in only if they are entitled to vote in the election of
directors. If preferred shares have no voting rights, then they cannot elect members of the board of directors, which
wields control of the corporation. As to the right of non voting preferred shares to vote in the 8 instances enumerated
in Section 6 of the Corporation Code, the Gamboa Decision considered them but, in the end, did not find them
significant in resolving the issue of the proper interpretation of the word "capital" in Section 11, Article XII of the
Constitution.
Therefore, to now insist in the present case that preferred shares be regarded differently from their unambiguous
treatment in the Gamboa Decision is enough proof that the Gamboa Decision, which had attained finality more than 4
years ago, is being drastically changed or expanded.
In this regard, it should be noted that the 8 corporate matters enumerated in Section 6 of the Corporation Code
require, at the outset, a favorable recommendation by the management to the board. As mandated by Section 11,
Article XII of the Constitution, all the executive and managing officers of a public utility company must be Filipinos.
Thus, the all-Filipino management team must first be convinced that any of the 8 corporate actions in Section 6 will be
to the best interest of the company. Then, when the all-Filipino management team recommends this to the board, a
majority of the board has to approve the recommendation and, as required by the Constitution, foreign participation in
the board cannot exceed 40% of the total number of board seats. Since the Filipino directors comprise the majority,
they, if united, do not even need the vote of the foreign directors to approve the intended corporate act. After approval
by the board, all the shareholders (with and without voting rights) will vote on the corporate action. The required vote
in the shareholders' meeting is 2/3 of the outstanding capital stock.95 Given the super majority vote requirement,
foreign shareholders cannot dictate upon their Filipino counterpart. However, foreigners (if owning at least a third of
the outstanding capital stock) must agree with Filipino shareholders for the corporate action to be approved. The 2/3
voting requirement applies to all corporations, given the significance of the 8 corporate actions contemplated in
Section 6 of the Corporation Code.
In short, if the Filipino officers, directors and shareholders will not approve of the corporate act, the foreigners are
helpless.
Allowing stockholders holding preferred shares without voting rights to vote in the 8 corporate matters enumerated in
Section 6 is an acknowledgment of their right of ownership. If the owners of preferred shares without right to
vote/elect directors are not allowed to vote in any of those 8 corporate actions, then they will not be entitled to the
appraisal right provided under Section 8196 of the Corporation Code in the event that they dissent in the corporate act.
As required in Section 82, the appraisal right can only be exercised by any stockholder who voted against the
proposed action. Thus, without recognizing the right of every stockholder to vote in the 8 instances enumerated in
Section 6, the stockholder cannot exercise his appraisal right in case he votes against the corporate action. In simple
terms, the right to vote in the 8 instances enumerated in Section 6 is more in furtherance of the stockholder's right of
ownership rather than as a mode of control.
As to financial interest, giving short-lived preferred or superior terms to certain classes or series of shares may be a
welcome option to expand capital, without the Filipino shareholders putting up additional substantial capital and/or
losing ownership and control of the company. For shareholders who are not keen on the creation of those shares,
they may opt to avail themselves of their appraisal right. As acknowledged in the Gamboa Decision, preferred
shareholders are merely investors in the company for income in the same manner as bondholders. Without a lucrative
package, including an attractive return of investment, preferred shares will not be subscribed and the much-needed
additional capital will be elusive. A too restrictive definition of "capital", one which was never contemplated in
the GamboaDecision, will surely have a dampening effect on the business milieu by eroding the flexibility inherent in
the issuance of preferred shares with varying terms and conditions. Consequently, the rights and prerogatives of the
owners of the corporation will be unwarrantedly stymied.
Moreover, the restrictive interpretation of the term "capital" would have a tremendous impact on the country as a
whole and to all Filipinos.
The PSE's Comment-in-Intervention dated June 16, 201497 warns that:
80. [R]edefining "capital" as used in Section 11, Article XII of the 1987 Constitution and adopting the supposed
"Effective Control Test" will lead to disastrous consequences to the Philippine stock market.
81. Current data of the PSE show that, if the "Effective Control Test" were applied, the total value of shares that would
be deemed in excess of the foreign-ownership limits based on stock prices as of 30 April 2014 is One Hundred Fifty
Nine Billion Six Hundred Thirty Eight Million Eight Hundred Forty Five Thousand Two Hundred Six Pesos and
Eighty Nine Cents (Php159,638,845,206.89).
82. The aforementioned value of investments would have to be discharged by foreign holders, and consequently must
be absorbed by Filipino investors. Needless to state, the lack of investments may lead to shutdown of the affected
enterprises and to immeasurable consequences to the Philippine economy.98
In its Omnibus Motion [1] For Leave to Intervene; and [2] To Admit Attached Comment-in-Intervention dated May 30,
2016,99 SHAREPHIL further warns that "[t]he restrictive re-interpretation of the term "capital" will result in massive
forced divestment of foreign stockholdings in Philippine corporations."100SHAREPHIL explains:
4.51. On 16 October 2012, Deutsche Bank released a Market Research Study, which analyzed the implications of the
ruling in Gamboa. The Market Research Study stated that:
"If this thinking is applied and becomes established precedent, it would significantly expand on the rules for
determining nationality in partially nationalized industries. If that were to happen, not only will PLDT's move to issue
the 150m voting prefs be inadequate to address the issue, a large number of listed companies with similar capital
structures could also be affected."
4.52. In five (5) companies alone, One Hundred Fifty Eight Billion Pesos (PhP158,000,000,000.00) worth of shares will
have to be sold by foreign shareholders in a forced divestment, if the obiter in Gamboa were to be implemented. Foreign
shareholders of PLDT will have to divest One Hundred Three Billion Eight Hundred Sixty Million Pesos
(PhP103,860,000,000.00) worth of shares.
a. Foreign shareholders of Globe Telecom will have to divest Thirty Eight Billion Two Hundred Fifty Million Pesos
(PhP38,250,000,000.00) worth of shares.
b. Foreign shareholders of Ayala Land will have to divest Seventeen Billion Five Hundred Fifty Million Pesos
(PhP17,550,000,000.00) worth of shares.
c. Foreign shareholders of ICTSI will have to divest Six Billion Four Hundred Ninety Million Pesos
(PhP6,490,000,000.00) worth of shares.
d. Foreign shareholders of MWC will have to divest Seven Billion Seven Hundred Fourteen Million Pesos
(PhP7,714,000,000.00) worth of shares.
4.53. Clearly, the local stock market which has an average value turn-over of Seven Billion Pesos cannot adequately
absorb the influx of shares caused by the forced divestment. As a result, foreign stockholders will have to sell these
shares at bargain prices just to comply with the Obiter.
4.54. These shares being part of the Philippine index, their forced divestment vis-a-vis the inability of the local stock
market to absorb these shares will necessarily bring immense downward pressure on the index. A domino-effect
implosion of the Philippine stock market and the Philippine economy, in general is not remote. x x x. 101
Petitioners have failed to counter or refute these submissions of the PSE and SHAREPHIL. These unrefuted
observations indicate to the Court that a restrictive interpretation - or rather, re-interpretation, of "capital", as already
defined with finality in the Gamboa Decision and Resolution - directly affects the well-being of the country
and cannot be labelled as "irrelevant and impertinent concerns x x x add[ing] burden [to] the Court." 102 These
observations by the PSE103 and SHAREPHIL,104 unless refuted, must be considered by the Court to be valid and
sound.
The Court in Abacus Securities Corp. v. Ampil105 observed that: "[s]tock market transactions affect the general public
and the national economy. The rise and fall of stock market indices reflect to a considerable degree the state of the
economy. Trends in stock prices tend to herald changes in business conditions. Consequently, securities transactions
are impressed with public interest x x x."106 The importance of the stock market in the economy cannot simply be
glossed over.
In view of the foregoing, the pronouncement of the Court in the Gamboa Resolution - the constitutional requirement to
apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising
the capital of a corporation107 - is clearly an obiter dictum that cannot override the Court's unequivocal definition of the
term "capital" in both the Gamboa Decision and Resolution.
Nowhere in the discussion of the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in
the Gamboa Decision did the Court mention the 60% Filipino equity requirement to be applied to each class of
shares. The definition of "Philippine national" in the FIA and expounded in its IRR, which the Court adopted in its
interpretation of the term "capital", does not support such application. In fact, even the Final Word of
the Gamboa Resolution does not even intimate or suggest the need for a clarification or re-interpretation.
To revisit or even clarify the unequivocal definition of the term "capital" as referring "only to shares of stock entitled to
vote in the election of directors" and apply the 60% Filipino ownership requirement to each class of share is effectively
and unwarrantedly amending or changing the Gamboa Decision and Resolution. The Gamboa Decision and
Resolution Doctrine did NOT make any definitive ruling that the 60% Filipino ownership requirement was intended to
apply to each class of share.
In Malayang Manggagawa ng Stayfast Phils., Inc. v. NLRC,108 the Court stated:
Where a petition for certiorari under Rule 65 of the Rules of Court alleges grave abuse of discretion, the petitioner
should establish that the respondent court or tribunal acted in a capricious, whimsical, arbitrary or despotic
manner in the exercise of its jurisdiction as to be equivalent to lack of jurisdiction. This is so because "grave
abuse of discretion" is well-defined and not an amorphous concept that may easily be manipulated to suit one's purpose.
In this connection, Yu v. Judge Reyes-Carpio, is instructive:
The term "grave abuse of discretion" has a specific meaning. An act of a court or tribunal can only be considered as
with grave abuse of discretion when such act is done in a "capricious or whimsical exercise of judgment as is equivalent
to lack of jurisdiction." The abuse of discretion must be so patent and gross as to amount to an "evasion of a positive
duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as where the power
is exercised in an arbitrary and despotic manner by reason of passion and hostility." Furthermore, the use of a petition
for certiorari is restricted only to "truly extraordinary cases wherein the act of the lower court or quasi-judicial body is
wholly void." From the foregoing definition, it is clear that the special civil action of certiorari under Rule 65 can only
strike an act down for having been done with grave abuse of discretion if the petitioner could manifestly show that
such act was patent and gross. x x x.
The onus rests on petitioners to clearly and sufficiently establish that the SEC, in issuing SEC-MC No. 8, acted in a
capricious, whimsical, arbitrary or despotic manner in the exercise of its jurisdiction as to be equivalent to lack of
jurisdiction or that the SEC's abuse of discretion is so patent and gross as to amount to an evasion of a positive duty
or to a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law and
the Gamboa Decision and Resolution. Petitioners miserably failed in this respect.
The clear and unequivocal definition of "capital" in Gamboa has attained finality.
It is an elementary principle in procedure that the resolution of the court in a given issue as embodied in the
dispositive portion or fallo of a decision controls the settlement of rights of the parties and the questions,
notwithstanding statement in the body of the decision which may be somewhat confusing, inasmuch as the dispositive
part of a final decision is definite, clear and unequivocal and can be wholly given effect without need of interpretation
or construction.109
As explained above, the fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution are
definite, clear and unequivocaL While there is a passage in the body of the Gamboa Resolution that might have
appeared contrary to the fallo of the Gamboa Decision - capitalized upon by petitioners to espouse a restrictive re-
interpretation of "capital" - the definiteness and clarity of the fallo of the GamboaDecision must control over the obiter
dictum in the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign ownership requirement to
"each class of shares, regardless of differences in voting rights, privileges and restrictions."
The final judgment as rendered is the judgment of the court irrespective of all seemingly contrary statements in the
decision because at the root of the doctrine that the premises must yield to the conclusion is, side by side with the
need of writing finis to litigations, the recognition of the truth that "the trained intuition of the judge continually leads
him to right results for which he is puzzled to give unimpeachable legal reasons." 110
Petitioners cannot, after Gamboa has attained finality, seek a belated correction or reconsideration of the Court's
unequivocal definition of the term "capital". At the core of the doctrine of finality of judgments is that public policy and
sound practice demand that, at the risk of occasional errors, judgments of courts should become final at some definite
date fixed by law and the very objects for which courts were instituted was to put an end to controversies.111 Indeed,
the definition of the term "capital" in the fallo of the Gamboa Decision has acquired finality.
Because the SEC acted pursuant to the Court's pronouncements in both the Gamboa Decision
and Gamboa Resolution, then it could not have gravely abused its discretion. That portion found in the body of
the Gamboa Resolution which the petitioners rely upon is nothing more than an obiter dictum and the SEC could not
be expected to apply it as it was not - is not - a binding pronouncement of the Court.112
Furthermore, as opined by Justice Bersamin during the deliberations, the doctrine of immutability of judgment
precludes the Court from re examining the definition of "capital" under Section 11, Article XII of the Constitution.
Under the doctrine of finality and immutability of judgment, a decision that has acquired finality becomes immutable
and unalterable, and may no longer be modified in any respect, even if the modification is meant to correct erroneous
conclusions of fact and law, and even if the modification is made by the court that rendered it or by the Highest Court
of the land. Any act that violates the principle must be immediately stricken down. 113 The petitions have not
succeeded in pointing to any exceptions to the doctrine of finality of judgments, under which the present case falls, to
wit: (1) the correction of clerical errors; (2) the so-called nunc pro tunc entries which cause no prejudice to any party;
(3) void judgments; and (4) whenever circumstances transpire after the finality of the decision rendering its execution
unjust and inequitable.114
With the foregoing disquisition, the Court rules that SEC-MC No. 8 is not contrary to the Court's definition and
interpretation of the term "capital". Accordingly, the petitions must be denied for failing to show grave abuse of
discretion in the issuance of SEC-MC No. 8.
The petitions are second motions for Reconsideration, which are proscribed.
As Justice Bersamin further noted during the deliberations, the petitions are in reality second motions for
reconsideration prohibited by the Internal Rules of the Supreme Court.115 The parties, particularly intervenors
Gamboa, et al., could have filed a motion for clarification in Gamboa in order to fill in the perceived shortcoming
occasioned by the non-inclusion in the dispositive portion of the GamboaResolution of what was discussed in the
body.116 The statement in the fallo of the Gamboa Resolution to the effect that "[n]o further pleadings shall be
entertained" could not be a hindrance to a motion for clarification that sought an unadulterated inquiry arising upon an
ambiguity in the decision.117
Closing
Ultimately, the key to nationalism is in the individual. Particularly for a public utility corporation or association, whether
stock or non-stock, it starts with the Filipino shareholder or member who, together with other Filipino shareholders or
members wielding 60% voting power, elects the Filipino director who, in turn, together with other Filipino directors
comprising a majority of the board of directors or trustees, appoints and employs the all-Filipino management team.
This is what is envisioned by the Constitution to assure effective control by Filipinos. If the safeguards, which are
already stringent, fail, i.e., a public utility corporation whose voting stocks are beneficially owned by Filipinos, the
majority of its directors are Filipinos, and all its managing officers are Filipinos, is proalien (or worse, dummies), then
that is not the fault or failure of the Constitution. It is the breakdown of nationalism in each of the Filipino shareholders,
Filipino directors and Filipino officers of that corporation. No Constitution, no decision of the Court, no legislation, no
matter how ultranationalistic they are, can guarantee nationalism.
WHEREFORE, premises considered, the Court DENIES the Petition and Petition-in-Intervention.
6. Andaya vs. Rural Bank of Cabadbaran, Inc., 799 SCRA 325, G.R. No. 188769 August 3, 2016
This case concerns the dismissal1 of an action for mandamus that sought to compel respondents Rural Bank of
Cabadbaran, Inc., Demosthenes P. Oraiz, and Ricardo D. Gonzalez to register the transfer of shares of stock and issue
the corresponding stock certificates in favor of petitioner Joseph Omar O. Andaya. The Cabadbaran City Regional Trial
Court (RTC) ifuled that petitioner Andaya was not entitled to the remedy of mandamus, s|ince the transfer of the subject
shares of stock had not yet been recorded in the corporation's stock and transfer book, and the registered owner,
Conception O. Chute, had not given him a special power of attorney to makq the transfer. Andaya has filed a Rule 45
petition directly before this Court, insisting that he has a cause of action to institute the suit.
FACTS
Andaya bought from Chute 2,200 shares of stock in the Rural Bank of Cabadbaran for P220,000. 2 The transaction
was evidenced by a notarized document denominated as Sale of Shares of Stocks. 3 Chute duly endorsed and
delivered the certificates of stock to Andaya and, subsequently, requested the bank to register the transfer and issue
new stock certificates in favor of the latter.4 Andaya also separately communicated5 with the bank's corporate
secretary, respondent Oraiz, reiterating Chute's request for the issuance of new stock certificates in petitioner's favor.
A few days later, the bank's corporate secretary wrote6 Chute to inform her that he could not register the transfer. He
explained that under a previous stockholders' Resolution, existing stockholders were given priority to buy the shares
of others in the event that the latter offered those shares for sale (i.e., a right of first refusal). He then asked Chute if
she, instead, wished to have her shares offered to existing stockholders. He told her that if no other stockholder would
buy them, she could then proceed to sell her shares to outsiders.
Meanwhile, the bank's legal counsel, respondent Gonzalez, informed7 Andaya that the latter's request had been
referred to the bank's board of directors for evaluation. Gonzalez also furnished him a copy of the bank's previous
reply to Chute concerning a similar request from her. Andaya responded8 by reiterating his earlier request for the
registration of the transfer and the issuance of new certificates of stock in his favor. Citing Section 98 of the
Corporation Code, he claimed that the purported restriction on the transfer of shares of stock agreed upon during the
2001 stockholders' meeting could not deprive him of his right as a transferee. He pointed out that the restriction did
not appear in the bank's articles of incorporation, bylaws, or certificates of stock.
The bank eventually denied the request of Andaya.9 It reasoned that he had a conflict of interest, as he was then
president and chief executive officer of the Green Bank of Caraga, a competitor bank. Respondent bank concluded
that the purchase of shares was not in good faith, and that the purchase "could be the beginning of a hostile bid to
take-over control of the [Rural Bank of Cabadbaran]."10 Citing Gokongwei v. Securities and Exchange
Commission,11 respondent insisted that it may refuse to accept a competitor as one of its stockholders. It also
maintained that Chute should have first offered her shares to the other stockholders, as agreed upon during the 2001
stockholders' meeting.
Consequently, Andaya instituted an action for mandamus and damages 12 against the Rural Bank of Cabadbaran; its
corporate secretary, Oraiz; and its legal counsel, Gonzalez. Petitioner sought to compel them to record the transfer in
the bank's stock and transfer book and to issue new certificates of stock in his name.
The RTC issued a Decision dismissing the complaint. Citing Porice v. Alsons Cement Corporation13 the trial court
ruled that Andaya had no standing to compel the bank to register the transfer and issue stock certificates in his
name.14 It explained that he had failed "[to show] that the transfer of subject shares of stock [was] recorded in the
stock and transfer book of [the] bank or that [he was] authorized by [Chute] to make the transfer." 15 According to the
trial court, Ponce requires that a person seeking to transfer shares must appear to have an express instruction and a
specific authority from the registered stockholder, such as a special power of attorney, to cause the disposition of
stocks registered in the stockholder's name. It ruled that "[w]ithout the sale first registered or an authority from the
transferor, it [was] therefore unmistakably clear that [Andaya had] no cause of action for mandamus against [the]
bank."
Consequently, Andaya directly filed with this Court a Rule 45 petition for review on certiorari assailing the RTC
Decision on pure questions of law.
ISSUES
The Court culls the issues raised by petitioner as follows:
1. Whether Andaya, as a transferee of shares of stock, may initiate an action for mandamus compelling
the Rural Bank of Cabadbaran to record the transfer of shares in its stock and transfer book, as well as
issue new stock certificates in his name
2. Whether a writ of mandamus should issue in favor of petitioner
OUR RULING
The petition is partly meritorious.
It is already settled jurisprudence16 that the registration of a transfer of shares of stock is a ministerial duty on the
part of the corporation. Aggrieved parties may then resort to the remedy of mandamus to compel corporations that
wrongfully or unjustifiably refuse to record the transfer or to issue new certificates of stock. This remedy is available
even upon the instance of a bona fide transferee17 who is able to establish a clear legal right to the registration of the
transfer.18 This legal right inherently flows from the transferee's established ownership of the stocks, a right that has
been recognized by this Court as early as in Price v. Martin:19
A person who has purchased stock, and who desires to be recognized as a stockholder, for the purpose of
voting, must secure a standing by having the transfer recorded upon the books. If the transfer is not duly made upon
request, he has, as his remedy, to compel it to be made.20 (Emphases supplied)
Thus, in Pacific Basin Securities Co., Inc., v. Oriental Petroleum and Minerals Corp., 21this Court stressed that the
registration of a transfer of shares is ministerial on the part of the corporation:ChanRoblesVirtualawlibrary
Clearly, the right of a transferee/assignee to have stocks transferred to his name is an inherent right flowing
from his ownership of the stocks. The Court had ruled in Rural Bank of Salinas, Inc. v. Court of Appeals that
the corporation's obligation to register is ministerial, citing Fletcher, to wit:ChanRoblesVirtualawlibrary
In transferring stock, the secretary of a corporation acts in purely ministerial capacity, and does not try to decide the
question of ownership.
The duty of the corporation to transfer is a ministerial one and if it refuses to make such transaction without good cause,
it may be compelled to do so by mandamus.
The Court further held in Rural Bank of Salinas that the only limitation imposed by Section 63 of the Corporation
Code is when the corporation holds any unpaid claim against the shares intended to be transferred.22 (Emphasis
supplied; citations omitted)
Consequently, transferees of shares of stock are real parties in interest having a cause of action for mandamus to
compel the registration of the transfer and the corresponding issuance of stock certificates.
We also rule that Andaya has been able to establish that he is a bona fide transferee of the shares of stock of Chute.
In proving this fact, he presented to the RTC the following documents evidencing the sale: (1) a notarized Sale of
Shares of Stocks23 showing Chute's sale of 2,200 shares of stock to petitioner; (2) a Documentary Stamp Tax
Declaration/Return24 (3) Capital Gains Tax Return;25cralawred and (4) stock certificates26 covering the subject
shares duly endorsed by Chute. The existence, genuineness, and due execution of these documents have been
admitted27 and remain undisputed. There is no doubt that Andaya had the standing to initiate an action for mandamus
to compel the Rural Bank of Cabadbaran to record the transfer of shares in its stock and transfer book and to issue
new stock certificates in his name. As the transferee of the shares, petitioner stands to be benefited or injured by the
judgment in the instant petition, a judgment that will either order the bank to recognize the legitimacy of the transfer
and petitioner's status as stockholder or to deny the legitimacy thereof.
This Court further finds that the reliance of the RTC on Ponce in finding that petitioner had no cause of action for
mandamus against the defendant bank was misplaced. In Ponce, the issue resolved by this Court was whether the
petitioner therein had a cause of action for mandamus to compel the issuance of stock certificates, not the registration
of the transfer. Ruling in the negative, the Court said in that case that without any record of the transfer of shares in
the stock and transfer book of the corporation, there would be no clear basis to compel that corporation to issue a
stock certificate. By the import of Section 63 of the Corporation Code, the stock and transfer book would be the main
reference book in ascertaining a person's entitlement to the rights of a stockholder. Consequently, without the
registration of the transfer, the alleged transferee could not yet be recognized as a stockholder who is entitled to be
given a stock certificate.
In contrast, at the crux of this petition are the registration of the transfer and the issuance of the corresponding stock
certificates. Requiring petitioner to register the transaction before he could institute a mandamus suit in supposed
abidance by the ruling in Ponce was a palpable error. It led to an absurd, circuitous situation in which Andaya was
prevented from causing the registration of the transfer, ironically because the shares had not been registered. With
the logic resorted to by the RTC, transferees of shares of stock would never be able to compel the registration of the
transfer and the issuance of new stock certificates in their favor. They would first be required to show the registration
of the transfer in their names — the ministerial act that is the subject of the mandamus suit in the first place. The trial
court confuses the application of the dicta in Ponce, which is pertinent only to the issuance of new stock certificates,
and not to the registration of a transfer of shares. As Ponce itself provides, these two are entirely different events. The
RTC's anomalous reasoning cannot be given legal imprimatur by this Court.
With regard to the requisite authorization from the transferor, the Court stresses that the concern in Ponce was rooted
in whether or not the alleged right of the petitioner therein to compel the issuance of new stock certificates was clearly
established. Reiterating the ruling in Rivera v. FIorendo28 and Eager v. Bryan,29 the Court therein maintained that a
mere endorsement of stock certificates by the supposed owners of the stock could not be the basis of an action for
mandamus in the absence of express instructions from them. According to the Court, the reason behind this ruling
was that the corporation's duty and legal obligation therein were not so clear and indisputable as to justify the
issuance of the writ. The ambiguity of the alleged transferee's deed of undertaking with endorsement led the Court in
Ponce to rule that mandamus would have issued had the registered owner himself requested the registration of the
transfer, or had the person requesting the registration secured a special power of attorney from the registered owner.
In the instant case, however, the submitted documents did not merely consist of an endorsement. Rather, petitioner
presented several undisputed documents,30 among which was respondent Oraiz's letter to Chute denying her request
to transfer the stock standing in her name in favor of Andaya. This letter clearly indicated that the registered owner
herself had requested the registration of the transfer of shares of stock. There was therefore no sensible reason for
the RTC to perfunctorily extract the pronouncement in Ponce and then disregard it in the face of admitted facts in
addition to the duly endorsed stock certificates.
On whether the writ of mandamus should issue, Section 3, Rule 65 of the Rules of Court, provides for the rules
governing a petition for mandamus, viz:
SECTION 3. Petition for mandamus. — When any tribunal, corporation, board, officer or person unlawfully neglects
the performance of an act which the law specifically enjoins as a duty resulting from an office, trust, or station, or
unlawfully excludes another from the use and enjoyment of a right or office to which such other is entitled, and there is
no other plain, speedy and adequate remedy in the ordinary course of law, the person aggrieved thereby may file a
verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered commanding
the respondent, immediately or at some other time to be specified by the court, to do the act required to be done to
protect the rights of the petitioner, and to pay the damages sustained by the petitioner by reason of the wrongful acts
of the respondent.
The petition shall also contain a sworn certification of non-forum shopping as provided in the third paragraph of Section
3, Rule 46. (Emphases supplied)
Accordingly, a writ of mandamus to enforce a ministerial act may issue only when petitioner is able to establish the
presence of the following: (1) right clearly founded in law and is not doubtful; (2) a legal duty to perform the act; (3)
unlawful neglect in performing the duty enjoined by law; (4) the ministerial nature of the act to be performed; and (5)
the absence of other plain, speedy, and adequate remedy in the ordinary course of law.31
Respondents primarily challenge the mandamus suit on the grounds that the transfer violated the bank stockholders'
right of first refusal and that petitioner was a buyer in bad faith. Both parties refer to Section 98 of the Corporation
Code to support their arguments, which reads as follows:ChanRoblesVirtualawlibrary
SECTION 98. Validity of restrictions on transfer of shares. — Restrictions on the right to transfer shares must
appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the
same shall not be binding on any purchaser thereof in good faith. Said restrictions shall not be more than onerous
than granting the existing stockholders or the corporation the option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions or period stated therein. If upon the expiration of said period, the
existing stockholders or the corporation fails to exercise the option to purchase, the transferring stockholder may sell
his shares to any third person. (Emphases supplied)
It must be noted that Section 98 applies only to close corporations. Hence, before the Court can allow the operation of
this section in the case at bar, there must first be a factual determination that respondent Rural Bank of Cabadbaran
is indeed a close corporation. There needs to be a presentation of evidence on the relevant restrictions in the articles
of incorporation j and bylaws of the said bank. From the records or the RTC Decision, there is apparently no such
determination or even allegation that would assist this Court in ruling on these two major factual matters. With the
foregoing, the validity of the transfer cannot yet be tested using that provision. These are the factual matters that the
parties must first thresh out before the RTC.
After finding that petitioner has legal standing to initiate an action for mandamus, the Court now reinstates the action
he filed and remands the case to the RTC to resolve the propriety of issuing a writ of mandamus. The resolution of the
case must include the determination of all relevant factual matters in connection with the issues at bar. The RTC must
also resolve petitioner's prayer for the payment of attorney's fees, litigation expenses, moral damages, and exemplary
damages.
WHEREFORE, premises considered, the instant petition I is GRANTED. The Decision dated 17 April 2009 and the
Order dated 15 July 2009 of the Regional Trial Court, Branch 34, Cabadbaran City, which dismissed petitioner's
action for mandamus, are SET ASIDE. The action is hereby REINSTATED and the case REMANDED to the court of
origin for further proceedings. The trial court is further enjoined to proceed with [the resolution of this case with
dispatch.
SO ORDERED.
7. Anna Teng v. SEC; G. R. 184332; Feb 17, 2016)
This petition for review on certiorari1 under Rule 45 of the Rules of Court seeks the reversal of the Decision2 dated April
29, 2008 and the Resolution3 dated August 28, 2008 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 99836.
The CA affirmed the orders of the Securities and Exchange Commission (SEC) granting the issuance of an alias writ of
execution, compelling petitioner Anna Teng (Teng) to register and issue new certificates of stock in favor of respondent
Ting Ping Lay (Ting Ping).
The Facts
4
This case has its origin in G.R. No. 129777 entitled TCL Sales Corporation and Anna Teng v. Hon. Court of Appeals
and Ting Ping Lay. Herein respondent Ting Ping purchased 480 shares of TCL Sales Corporation (TCL) from Peter
Chiu (Chiu) on February 2, 1979; 1,400 shares on September 22, 1985 from his brother Teng Ching Lay (Teng
Ching), who was also the president and operations manager of TCL; and 1,440 shares from Ismaelita Maluto (Maluto)
on September 2, 1989.5
Upon Teng Ching's death in 1989, his son Henry Teng (Henry) took over the management of TCL. To protect his
shareholdings with TCL, Ting Ping on August 31, 1989 requested TCL's Corporate Secretary, herein petitioner Teng,
to enter the transfer in the Stock and Transfer Book of TCL for the proper recording of his acquisition. Lie also
demanded the issuance of new certificates of stock in his favor. TCL and Teng, however, refused despite repeated
demands. Because of their refusal, Ting Ping filed a petition for mandamus with the SEC against TCL and Teng,
docketed as SEC Case No. 3900.6
In its Decision7 dated July 20, 1994, the SEC granted Ting Ping's petition, ordering as follows:
WHEREFORE, in view of all the foregoing facts and circumstances, judgment is hereby rendered.
A. Ordering [TCL and Teng] to record in the Books of the Corporation the following shares:
1. 480 shares acquired by [Ting Ping] from [Chiu] per Deed of Sales [sic] dated February 20, 1979;
2. 1,400 shares acquired by [Ting Ping] from [Teng Ching] per Deed of Sale dated September 22, 1985; and
3. 1,440 shares acquired by [Ting Ping] from [Maluto] per Deed of Assignment dated Sept. 2, 1989 [sic].
B. Ordering [TCL and Teng] to issue corresponding new certificates of stocks (sic) in the name of [Ting Ping].
C. Ordering [TCL and Teng] to pay [Ting Ping] moral damages in the amount of One Hundred Thousand (P
100,000.00) Pesos and Fifty Thousand (P 50,000.00) Pesos for attorney's fees.
SO ORDERED.8
TCL and Teng appealed to the SEC en bane, which, in its Order9 dated June 11, 1996, affirmed the SEC decision
with modification, in that Teng was held solely liable for the payment of moral damages and attorney's fees.
Not contented, TCL and Teng filed a petition for review with the CA, docketed as CA-G.R. SP. No. 42035. On January
31, 1997, the CA, however, dismissed the petition for having been filed out of time and for finding no cogent and
justifiable grounds to disturb the findings of the SEC en banc.10 This prompted TCL and Teng to come to the
Court via a petition for review on certiorari under Rule 45.
On January 5, 2001, the Court promulgated its Decision in G.R. No. 129777, the dispositive portion of which states:
WHEREFORE, the petition is DENIED, and the Decision dated January 31, 1997, as well as the Resolution dated
July 3, 1997 of [the CA] are hereby AFFIRMED. Costs against [TCL and Teng].
SO ORDERED.11
After the finality of the Court's decision, the SEC issued a writ of execution addressed to the Sheriff of the Regional
Trial Court (RTC) of Manila. Teng, however, filed on February 4, 2004 a complaint for interpleader with the RTC of
Manila, Branch 46, docketed as Civil Case No. 02-102776, where Teng sought to compel Henry and Ting Ping to
interplead and settle the issue of ownership over the 1,400 shares, which were previously owned by Teng Ching.
Thus, the deputized sheriff held in abeyance the further implementation of the writ of execution pending outcome of
Civil Case No. 02-102776.12
On March 13, 2003, the RTC of Manila, Branch 46, rendered its Decision13 in Civil Case No. 02-102776, finding Henry
to have a better right to the shares of stock formerly owned by Teng Ching, except as to those covered by Stock
Certificate No. 011 covering 262.5 shares, among others.14
Thereafter, an Ex Parte Motion for the Issuance of Alias Writ of Execution15 was filed by Ting Ping where he sought
the partial satisfaction of SEC en banc Order dated June 11, 1996 ordering TCL and Teng to record the 480 shares
he acquired from Chiu and the 1,440 shares he acquired from Maluto, and for Teng's payment of the damages
awarded in his favor.
Acting upon the motion, the SEC issued an Order16 dated August 9, 2006 granting partial enforcement and
satisfaction of the Decision dated July 20, 1994, as modified by the SEC en banc's Order dated June 11, 1996.17 On
the same date, the SEC issued an alias writ of execution. 18
Teng and TCL filed their respective motions to quash the alias writ of execution, 19 which was opposed by Ting
Ping,20 who also expressed his willingness to surrender the original stock certificates of Chiu and Maluto to facilitate
and expedite the transfer of the shares in his favor. Teng pointed out, however, that the annexes in Ting Ping's
opposition did not include the subject certificates of stock, surmising that they could have been lost or
destroyed.21 Ting Ping belied this, claiming that his counsel Atty. Simon V. Lao already communicated with TCL's
counsel regarding the surrender of the said certificates of stock.22 Teng then filed a counter manifestation where she
pointed out a discrepancy between the total shares of Maluto based on the annexes, which is only 1305 shares, as
against the 1440 shares acquired by Ting Ping based on the SEC Order dated August 9, 2006.23
On May 25, 2007, the SEC denied the motions to quash filed by Teng and TCL, and affirmed its Order dated August
9, 2006.24
Unperturbed, Teng filed a petition for certiorari and prohibition under Rule 65 of the Rules of Court, docketed as CA-
G.R. SP No. 99836.25 The SEC, through the Office of the Solicitor General (OSG), filed a Comment dated June 30,
2008,26 which, subsequently, Teng moved to expunge.27cralawred
On April 29, 2008, the CA promulgated the assailed decision dismissing the petition and denying the motion to
expunge the SEC's comment.28
Hence, Teng filed the present petition, raising the following grounds:
I. THE RESPONDENT [CA] GRAVELY ERRED IN DECLARING THAT THERE WAS NO NEED TO
SURRENDER THE STOCK CERTIFICATES (REPRESENTING THE SHARES CONVEYED BY [MALUTO]
TO [TING PING] TO RECORD THE TRANSFER THEREOF IN THE CORPORATE BOOKS AND ISSUE
NEW STOCK CERTIFICATES[;]
II. THE RESPONDENT [CA] GRAVELY ERRED IN UPHOLDING THE POSE THAT THERE WAS NEITHER
AMENDMENT NOR ALTERATION OF THE FINAL DECISION OF THE SUPREME COURT IN "TCL SALE[S]
CORP., ET AL. VS. CA, ET AL.", G.R. NO. 129777, DESPITE THE CONTRARY RECORD THERETO[;]
III. THE RESPONDENT [CA] GRAVELY ERRED IN DECLARING THAT THE [OSG] WAS ALREADY
REQUIRED TO COMMENT ON [TENG'S] MOTION FOR RECONSIDERATION.29
The core question before the Court is whether the surrender of the certificates of stock is a requisite before
registration of the transfer may be made in the corporate books and for the issuance of new certificates in its stead.
Note at this juncture that the present dispute involves the execution of the Court's decision in G.R. No. 129777 but
only with regard to Chiu's and Maluto's respective shares. The subject of the orders of execution issued by the SEC
pertained only to these shares and the Court's decision will revolve only on these shares.
Teng argues, among others, that the CA erred when it held that the surrender of Maluto's stock certificates is not
necessary before their registration in the corporate books and before the issuance of new stock certificates. She
contends that prior to registration of stocks in the corporate books, it is mandatory that the stock certificates are first
surrendered because a corporation will be liable to a bona fide holder of the old certificate if, without demanding the
said certificate, it issues a new one. She also claims that the CA's reliance on Tan v. SEC30 is misplaced since therein
subject stock certificate was allegedly surrendered.31
On the other hand, Ting Ping contends that Section 63 of the Corporation Code does not require the surrender of the
stock certificate to the corporation, nor make such surrender an indispensable condition before any transfer of shares
can be registered in the books of the corporation. Ting Ping considers Section 63 as a permissive mode of
transferring shares in the corporation. Citing Rural Bank of Salinas, Inc. v. CA,32 he claims that the only limitation
imposed by Section 63 is when the corporation holds any unpaid claim against the shares intended to be transferred.
Thus, for as long as the shares of stock are validly transferred, the corporate secretary has the ministerial duty to
register the transfer of such shares in the books of the corporation, especially in this case because no less than this
Court has affirmed the validity of the transfer of the shares in favor of Ting Ping.33
Ruling of the Court
To restate the basics -
A certificate of stock is a written instrument signed by the proper officer of a corporation stating or acknowledging that
the person named in the document is the owner of a designated number of shares of its stock. It is prima
facie evidence that the holder is a shareholder of a corporation.34 A certificate, however, is merely a tangible evidence
of ownership of shares of stock.35 It is not a stock in the corporation and merely expresses the contract between the
corporation and the stockholder.36 The shares of stock evidenced by said certificates, meanwhile, are regarded as
property and the owner of such shares may, as a general rule, dispose of them as he sees fit, unless the corporation
has been dissolved, or unless the right to do so is properly restricted, or the owner's privilege of disposing of his
shares has been hampered by his own action.37
Section 63 of the Corporation Code prescribes the manner by which a share of stock may be transferred. Said
provision is essentially the same as Section 35 of the old Corporation Law, which, as held in Fleisher v. Botica
Nolasco Co.,38 defines the nature, character and transferability of shares of stock. Fleisher also stated that the
provision on the transfer of shares of stocks contemplates no restriction as to whom they may be transferred or sold.
As owner of personal property, a shareholder is at liberty to dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the general provisions of law. 39
Section 63 provides:
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued
are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner
or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporationshowing the names of
the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the
corporation. (Emphasis and underscoring ours)
Under the provision, certain minimum requisites must be complied with for there to be a valid transfer of stocks, to wit:
(a) there must be delivery of the stock certificate; (b) the certificate must be endorsed by the owner or his attorney-in-
fact or other persons legally authorized to make the transfer; and (c) to be valid against third parties, the transfer must
be recorded in the books of the corporation.40cralawred
It is the delivery of the certificate, coupled with the endorsement by the owner or his duly authorized representative
that is the operative act of transfer of shares from the original owner to the transferee. 41The Court even emphatically
declared in Fil-Estate Golf and Development, Inc., et al. v. Vertex Sales and Trading, Inc. 42 that in "a sale of shares of
stock, physical delivery of a stock certificate is one of the essential requisites for the transfer of ownership of the
stocks purchased."43 The delivery contemplated in Section 63, however, pertains to the delivery of the certificate of
shares by the transferor to the transferee, that is, from the original stockholder named in the certificate to the
person or entity the stockholder was transferring the shares to, whether by sale or some other valid form of absolute
conveyance of ownership.44 "[S]hares of stock may be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by the delivery of the duly indorsed certificate of stock."45
It is thus clear that Teng's position - that Ting Ping must first surrender Chiu's and Maluto's respective certificates of
stock before the transfer to Ting Ping may be registered in the books of the corporation -does not have legal basis.
The delivery or surrender adverted to by Teng, i.e., from Ting Ping to TCL, is not a requisite before the conveyance
may be recorded in its books. To compel Ting Ping to deliver to the corporation the certificates as a condition for the
registration of the transfer would amount to a restriction on the right of Ting Ping to have the stocks transferred to his
name, which is not sanctioned by law. The only limitation imposed by Section 63 is when the corporation holds any
unpaid claim against the shares intended to be transferred.
In Rural Bank of Salinas,46 the Court ruled that the right of a transferee/assignee to have stocks transferred to his
name is an inherent right flowing from his ownership of the stocks. 47 In said case, the private respondent presented to
the bank the deeds of assignment for registration, transfer of the shares assigned in the bank's books, cancellation of
the stock certificates, and issuance of new stock certificates, which the bank refused. In ruling favorably for the private
respondent, the Court stressed that a corporation, either by its board, its by-laws, or the act of its officers, cannot
create restrictions in stock transfers. In transferring stock, the secretary of a corporation acts in purely ministerial
capacity, and does not try to decide the question of ownership. 48 If a corporation refuses to make such transfer
without good cause, it may, in fact, even be compelled to do so by mandamus.49 With more reason in this case where
the Court, in G.R. No. 129777, already upheld Ting Ping's definite and uncontested titles to the subject shares, viz:
Respondent Ting Ping Lay was able to establish prima facie ownership over the shares of stocks in question, through
deeds of transfer of shares of stock of TCL Corporation. Petitioners could not repudiate these documents. Hence, the
transfer of shares to him must be recorded on the corporation's stock and transfer book.50 (Emphasis and
underscoring ours)
In the same vein, Teng cannot refuse registration of the transfer on the pretext that the photocopies of Maluto's
certificates of stock submitted by Ting Ping covered only 1,305 shares and not 1,440. As earlier stated, the respective
duties of the corporation and its secretary to transfer stock are purely ministerial.51 Aside from this, Teng's argument
on this point was adequately explained by both the SEC and CA in this wise:
In explaining the alleged discrepancy, the public respondent, in its 25 May 2007 order, cited the order of the Commission
En Banc, thus:
"An examination of this decision, however, reveals, no categorical pronouncements of fraud. The refusal to credit in
[Ting Ping's] favor five hundred eighty-five (585) shares in excess of what [Maluto] owned and the two hundred forty
(240) shares that [Ting Ping] bought from the corporation, is a mere product of the failure of the corporation to register
with the [SEC] the increase in the subscribed capital stock by 4000 shares last 1981. Surely, [Ting Ping] cannot be
faulted for this."52
Nevertheless, to be valid against third parties and the corporation, the transfer must be recorded or registered in the
books of corporation. There are several reasons why registration of the transfer is necessary: one, to enable the
transferee to exercise all the rights of a stockholder;53 two, to inform the corporation of any change in share ownership
so that it can ascertain the persons entitled to the rights and subject to the liabilities of a stockholder; 54 and three, to
avoid fictitious or fraudulent transfers,55among others. Thus, in Chita Giian v. Samahang Magsasaka, Inc.,56 the Court
stated that the only safe way to accomplish the hypothecation of share of stock is for the transferee [a creditor, in this
case] to insist on the assignment and delivery of the certificate and to obtain the transfer of the legal title to him on the
books of the corporation by the cancellation of the certificate and the issuance of a new one to him. 57 In this case,
given the Court's decision in G.R. No. 129777, registration of the transfer of Chiu's and Maluto's shares in Ting Ping's
favor is a mere formality in confirming the latter's status as a stockholder of TCL. 58
Upon registration of the transfer in the books of the corporation, the transferee may now then exercise all the rights of
a stockholder, which include the right to have stocks transferred to his name. 59 In Ponce v. Alsons Cement
Corporation,60 the Court stated that "[f]rom the corporation's point of view, the transfer is not effective until it is
recorded. Unless and until such recording is made[,] the demand for the issuance of stock certificates to the alleged
transferee has no legal basis, x x x [T]he stock and transfer book is the basis for ascertaining the persons entitled to
the rights and subject to the liabilities of a stockholder. Where a transferee is not yet recognized as a stockholder, the
corporation is under no specific legal duty to issue stock certificates in the transferee's name."61
The manner of issuance of certificates of stock is generally regulated by the corporation's by-laws. Section 47 of the
Corporation Code states: "a private corporation may provide in its by-laws for x x x the manner of issuing stock
certificates." Section 63, meanwhile, provides that "[t]he capital stock of stock corporations shall be divided into
shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws." In Bitong v.
CA,62 the Court outlined the procedure for the issuance of new certificates of stock in the name of a transferee:
First, the certificates must be signed by the president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation, x x x Second, delivery of the certificate is an essential element
of its issuance, x x x Third, the par value, as to par value shares, or the full subscription as to no par value shares, must
first be fully paid. Fourth, the original certificate must be surrendered where the person requesting the issuance
of a certificate is a transferee from a stockholder.63 (Emphasis ours and citations omitted)
The surrender of the original certificate of stock is necessary before the issuance of a new one so that the old
certificate may be cancelled. A corporation is not bound and cannot be required to issue a new certificate unless the
original certificate is produced and surrendered.64 Surrender and cancellation of the old certificates serve to protect
not only the corporation but the legitimate shareholder and the public as well, as it ensures that there is only one
document covering a particular share of stock.
In the case at bench, Ting Ping manifested from the start his intention to surrender the subject certificates of stock to
facilitate the registration of the transfer and for the issuance of new certificates in his name. It would be sacrificing
substantial justice if the Court were to grant the petition simply because Ting Ping is yet to surrender the subject
certificates for cancellation instead of ordering in this case such surrender and cancellation, and the issuance of new
ones in his name.65
On the other hand, Teng, and TCL for that matter, have already deterred for so long Ting Ping's enjoyment of his
rights as a stockholder. As early as 1989, Ting Ping already requested Teng to enter the transfer of the subject shares
in TCL's Stock and Transfer Book; in 2001, the Court, in G.R. No. 129777, resolved Ting Ping's rights as a valid
transferee and shareholder; in 2006, the SEC ordered partial execution of the judgment; and in 2008, the CA affirmed
the SEC's order of execution. The Court will not allow Teng and TCL to frustrate Ting Ping's rights any longer. Also,
the Court will not dwell on the other issues raised by Teng as it becomes irrelevant in light of the Court's disquisition.
WHEREFORE, the petition is DENIED. The Decision dated April 29, 2008 and Resolution dated August 28, 2008 of
the Court of Appeals in CA-G.R. SP No. 99836 are AFFIRMED.
Respondent Ting Ping Lay is hereby ordered to surrender the certificates of stock covering the shares respectively
transferred by Ismaelita Maluto and Peter Chiu. Petitioner Anna Teng or the incumbent corporate secretary of TCL
Sales Corporation, on the other hand, is hereby ordered, under pain of contempt, to immediately cancel Ismaelita
Maluto's and Peter Chiu's certificates of stock and to issue new ones in the name of Ting Ping Lay, which shall
include Ismaelita Maluto's shares not covered by any existing certificate of stock but otherwise validly transferred to
Ting Ping Lay.
Costs against petitioner Anna Teng.
SO ORDERED.cralawlawlibrary
8. Jose A. Bernas v. Jovencio F. Cinco, G.R. Nos. 163356-57/163368-69; July 10, 2015
Before us are two consolidated Petitions for Review on Certiorari1 assailing the 28 April 2003 Decision and the 27
April 2004 Resolution of the Court of Appeals in CA-G.R. SP No. 62683,2 which declared the 17 December 1997
Special Stockholders' Meeting of the Makati Sports Club invalid for having been improperly called but affirmed the
actions taken during the Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999 and 17 April 2000. The
dispositive portion of the assailed decision reads:
WHEREFORE, foregoing considered, the instant petition for review is hereby GRANTED. The appealed Decision
dated December 12, 2000 of the SEC en bane is SET ASIDE and the Decision dated April 20, 1998 of the Hearing
Officer is REINSTATED and AMENDED as follows:
1. The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called
by the [Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove [the
Bernas Group] as directors of the Makati Sports Club, Inc.;
2. The expulsion of petitioner Jose A. Bernas as well as the public auction of his share[s] is hereby declared
void and without legal effect;
3. The ratification of the removal of [the Bernas Group] as directors, the expulsion of petitioner Bernas and
the sale of his share by the defendants and by the stockholders held in their Regular Stockholders' Meeting
held in April of 1998, 1999 and 2000, is void and produces no effects as they were not the proper party to
cause the ratification;
4. All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders' Meetings
held in April 1998, 1999 and 2000, including the election of the [Cinco Group] as directors after the
expiration of the term of office of petitioners as directors, are hereby declared valid;
5. No awards for damages and attorney's fees.3
The Facts
Makati Sports Club (MSC) is a domestic corporation duly organized and existing under Philippine laws for the primary
purpose of establishing, maintaining, and providing social, cultural, recreational and athletic . activities among its
members.
Petitioners in G.R. Nos. 163356-57, Jose A. Bernas (Bernas), Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose
T. Frondoso, Ignacio T. Macrohon and Paulino T. Lim (Bernas Group) were among the Members of the Board of
Directors and Officers of the corporation whose terms were to expire either in 1998 or 1999.
Petitioners in G.R. Nos. 163368-69 Jovencio Cinco, Ricardo Librea · and Alex Y. Pardo (Cinco Group) are the
members and stockholders of the corporation who were elected Members of the Board of Directors and Officers of the
club during the 17 December 1997 Special Stockholders Meeting.
The antecedent events of the meeting and its results, follow:
Alarmed with the rumored anomalies in handling the corporate funds, the MSC Oversight Committee (MSCOC),
composed of the past presidents of the club, demanded from the Bernas Group, who were then incumbent officers of
the corporation, to resign from their respective positions to pave the way for the election of new set of
officers.4Resonating this clamor were the stockholders of the corporation representing at least 100 shares who sought
the assistance of the MSCOC to call for a special stockholders meeting for the purpose of removing the sitting officers
and electing new ones.5 Pursuant to such request, the MSCOC called a Special Stockholders' Meeting and sent out
notices6 to all stockholders and members stating therein the time, place and purpose of the meeting. For failure of the
Bernas Group to secure an injunction before the Securities Commission (SEC), the meeting proceeded wherein Jose
A. Bernas, Cecile H. Cheng, Victor Africa, Jesus Maramara, Jose T. Frondoso, Ignacio T. Macrohon, Jr. and Paulino
T. Lim were removed from office and, in their place and stead, Jovencio F. Cinco, Ricardo G. Librea, Alex Y. Pardo,
Roger T. Aguiling, Rogelio G. · Villarosa, Armando David, Norberto Maronilla, Regina de Leon-Herlihy and Claudio B.
Altura, were elected.7
Aggrieved by the turn of events, the Bernas Group initiated an action before the Securities Investigation and Clearing
Department (SICD) of the SEC docketed as SEC Case No. 5840 seeking for the nullification of the 17 December
1997 Special Stockholders Meeting on the ground that it was improperly called. Citing Section 28 of the Corporation
Code, the Bernas Group argued that the authority to call a meeting lies with the Corporate . Secretary and not with
the MSCOC which functions merely as an oversight body and is not vested with the power to call corporate meetings.
For being called by the persons not authorized to do so, the Bernas Group urged the SEC. to declare the 17 (4) The April 1999 meeting has not been raised as a defense in the Answer nor assailed in a supplemental
December 1997 Special Stockholders' Meeting, including the removal of the sitting officers and the election of new complaint. However, it has been raised by [the Cinco Group] in a manifestation dated April 21, 1999 and in
ones, be nullified. their position paper dated April 8, 2000. Its legal effects must be the subject of this Decision in order to put
an end to the controversy at hand. In the first place, by [the Cinco Group's] own admission, the alleged
attendance at the April 1999 meeting amounted to less than 2/3 of the stockholders entitled to vote, the
For their part, the Cinco Group insisted that the 17 December 1997 Special Stockholders' Meeting is sanctioned by
minimum number required to effect a removal. No removal or ratification of a removal may be effected by
the Corporation Code and the MSC by-laws. In justifying the call effected by the MSCOC, they reasoned that Section
less than 2/3 vote of the stockholders. Further, it cannot ratify the December 1997 meeting for failure to
258 of the MSC by-laws merely authorized the Corporate Secretary to issue notices of meetings and nowhere does it
adhere to the requirement of the By-laws on notice as explained in paragraph (2) above, even if it was
state that such authority solely belongs to him. It was further asseverated by the Cinco Group that it would be useless
accompanied by valid proxies, which it was not.
to course the request to call a meeting thru the Corporate Secretary because he repeatedly refused to call a special
stockholders' meeting despite demands and even "filed a suit to restrain the holding of a special meeting.9
(5) The [the Cinco Group], their agents, representatives and all persons acting for and conspiring on their
behalf, are hereby permanently enjoined from carrying into effect the resolutions and actions adopted
Meanwhile, the newly elected directors initiated an investigation on the alleged anomalies in administering the
during the 17 December 1997 and April 20, 1998 meetings and of the Board of Directors and/or other
corporate affairs and after finding Bernas guilty of irregularities,10 the Board resolved to expel him from the club by
stockholders' meetings resulting therefrom, and from performing acts of control and management of the
selling his shares at public auction.11 After the notice12 requirement was complied with, Bernas' shares was
club.
accordingly sold for ₱902,000.00 to the highest bidder:

(6) The expulsion of complainant Jose A. Bernas as well as the public auction of his share is hereby
Prior to the resolution of SEC Case No. 5840, an Annual Stockholders' Meeting was held on 20 April 1998 pursuant to
declared void and without legal effect, as prayed for. While it is true that [the Cinco Group] were no.t
Section 8 of the MSC bylaws.13 During the said meeting, which was attended by 1,017 stockholders representing 2/3
restrained from acting as directors during the pendency of this case, their tenure as directors prior to this
of the outstanding shares, the majority resolved to approve, confirm and ratify, among others, the calling and · holding
Decision is in the nature of de facto directors of a de facto Board. Only the ordinary acts of administration
of 17 December 1997 Special Stockholders' Meeting, the acts and resolutions adopted therein including the removal
which [the Cinco Group] carried out de facto in good faith are valid. Other acts, such as political acts and
of Bernas Group from the Board and the election of their replacements. 14
the expulsion or other disciplinary acts imposed on the [the Bernas Group] may not be appropriately taken
by de facto officers because the legality of their tenure as directors is not complete and subject to the
Due to the filing of several petitions for and against the removal of the Bernas Group from the Board pending before outcome of this case. (7) No awards for damages and attorney's fees. 18
the SEC resulting in the piling up of legal controversies involving MSC, the SEC En Banc, in its Decision 15 dated 30
March 1999, resolved to supervise the holding of the 1999 Annual Stockholders' Meeting. During the said meeting,
On appeal, the SEC En Banc, in its 12 December 2000 Decision19 reversed the findings of the SICD and validated the
the stockholders once again approved, ratified and confirmed the holding of the 17 December 1997 Special
holding of the 17 December 1997 Special Stockholders' Meeting as well as the Annual Stockholders' Meeting held on
Stockholders' Meeting.
20 April 1998 and 19 April 1999.

The conduct of the 17 December 1997 Special Stockholders' Meeting was likewise ratified by the stockholders during
On 28 April 2003, the Court of Appeals rendered a Decision20 declaring the 17 December 1997 Special Stockholders'
the 2000 Annual Stockholders' Meeting which was held on 17 April 2000. 16
Meeting invalid for being improperly called but affirmed the actions taken during the Annual Stockholders' Meeting
held on 20 April 1998, 19 April 1999 and 17 April 2000.
On 9 May 2000, the SICD rendered a Decision17 in SEC Case No. 12-. 97-5840 finding, among others, that the 17
December 1997 Special Stockholders' Meeting and the Annual Stockholders' Meeting conducted on 20 April 1998
In a Resolution21 dated 27 April 2004, the appellate court refused to reconsider its earlier decision.
and 19 April 1999 are invalid. The SICD likewise nullified the expulsion of Bernas from the corporation and the sale of
his share at the public auction. The dispositive portion of the said decision reads:
Aggrieved by the disquisition of the Court of Appeals, both parties elevated the case before this Court by filing their
respective Petitions for Review on Certiorari. While the Bernas Group agrees with the disquisition of the appellate
WHEREFORE, in view of the foregoing considerations this Office, through the undersigned Hearing Officer, hereby
court that the Special Stockholders' Meeting is invalid for being called by the persons not authorized to do so, they
declares as follows:
urge the Court to likewise invalidate the holding of the subsequent Annual Stockholders' Meetings invoking the
application of the holdover principle. The Cinco Group, for its part, insists that the holding. of 17 December 1997
(1) The supposed Special Stockholders' Meeting of December 17, 1997 was prematurely or invalidly called Special Stockholders' Meeting is valid and binding underscoring the overwhelming ratification made by the
by the [the Cinco Group]. It therefore failed to produce any legal effects and did not effectively remove [the stockholders during the subsequent annual stockholders' meetings and the previous refusal of the Corporate
Bernas Group] as directors of the Makati Sports Club, Inc. Secretary to call a special stockholders' meeting despite demand. For the resolution of the Court are the following
issues:
(2) The April 20, 1998 meeting was not attended by a sufficient number of valid proxies. No quorum could
have been present at the said meeting. No corporate business could have been validly completed and/or The Issues
transacted during the said meeting. Further, it was not called by the validly elected Corporate Secretary
Victor Africa nor presided over by the validly elected president Jose A. Bernas. Even if the April 20, 1998
I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE 17 DECEMBER
meeting was valid, it could not ratify the December 17, 1997 meeting because being a void meeting, the
1997 SPECIAL STOCKHOLDERS' MEETING IS INVALID; AND
December 1 7, 1997 meeting may not be ratified.

II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO NULLIFY THE HOLDING
(3) The April 1998 meeting was null and void and therefore produced no legal effect.
OF THE ANNUAL STOCKHOLDERS' MEETING ON 20 APRIL 1998, 19 APRIL 1999 AND 17 APRIL 2000.
 The Court's Ruling
The Corporation Code laid down the rules on the removal of the Directors of the corporation by providing, inter alia,
the persons authorized to call the meeting and the number of votes required for the purpose of removal, thus:
Sec. 28. Removal of directors or trustees. -Any director or trustee of a corporation may be removed from office by a
vote of the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of at least two-thirds (2/3) of the members entitled to vote: Provided,
That such removal shall take place either at a regular meeting of the corporation or at a special meeting called for the
purpose, and in either case, after previous notice to stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the stockholders or members of a corporation for the
purpose of removal of directors or trustees, or any of them, must be called by the secretary on order of the president
or on the written demand of the stockholders representing or holding at least a majority of the outstanding capital
stock, or, if it be a non-stock corporation, on the written demand of a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special meeting upon such demand or fail or refuse to give the notice, or if there
is no secretary, the call for the meeting may be addressed directly to the stockholders or members by any stockholder
or member of the corporation signing the demand. Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be entitled under Section 24 of this Code.
(Emphasis supplied)
Corollarily, the pertinent provisions of MSC by-laws which govern the manner of calling and sending of notices of the
annual stockholders' meeting and the special stockholders' meeting provide:
SEC. 8. Annual Meetings. The annual meeting of stockholders shall be held at the Clubhouse on the third Monday of
April of every year unless such day be a holiday in which case the annual meeting shall be held on the next
succeeding business day. At such meeting, the President shall render a report to the stockholders of the clubs.
SEC. 10. Special Meetings. Special meetings of stockholders shall be held at the Clubhouse when called by the
President or by the Board of Directors or upon written request of the stockholders representing not less than one
hundred (100) shares. Only matters specified in the notice and call will be taken up at special meetings.
SEC. 25. Secretary. The Secretary shall keep the stock and transfer book and the corporate seal, which he shall
stamp on all documents requiring such seal, fill and sign together with the President, all the certificates of stocks
issued, give or caused to be given all notices required by law of these By-laws as well as notices of all meeting of the
Board and of the stockholders; shall certify as to quorum at meetings; shall approve and sign all correspondence
pertaining to the Office of the Secretary; shall keep the minutes of all meetings of the stockholders, the Board of
Directors and of all committees in a book or books kept for that purpose; and shall be acting President in the absence
of the President and Vice-:President. The Secretary must be a citizen and a resident of the Philippines. The Secretary
shall keep a record of all the addresses and telephone numbers of all stockholders. 22
Textually, only the President and the Board of Directors are authorized by the by-laws to call a special meeting. In
cases where the person authorized to call a meeting refuses, fails or neglects to call a meeting, then the stockholders
representing at least 100 shares, upon written request, may file a petition to call a special stockholder's meeting.
In the instant case, there is no dispute that the 17 December 1997 Special Stockholders' Meeting was called neither
by the President nor by the Board of Directors but by the MSCOC. While the MSCOC, as its name suggests, is
created for the purpose of overseeing the affairs of the corporation, nowhere in the by-laws does it state that it is
authorized to exercise corporate powers, such as the power to call a special meeting, solely vested by law and the
MSC by-laws on the President or the Board of Directors.
The board of directors is the directing and controlling body of the corporation. It is a creation of the stockholders and
derives its power to control and direct the affairs of the corporation from them. The board of directors, in drawing to
itself the power of the corporation, occupies a position of trusteeship in relation to the stockholders, in the sense that
the board should exercise not only care and diligence, but utmost good faith in the management of the corporate
affairs.23
The underlying policy of the Corporation Code is that the business and affairs of a corporation must be governed by a
board of directors whose members have stood for election, and who have actually been elected by the stockholders,
on an annual basis. Only in that way can the continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured. The shareholder vote is critical to the theory that
legitimizes the exercise of power by the directors or officers over the properties that they do not own. 24
Even the Corporation Code is categorical in stating that a corporation exercises its powers through its board of
directors and/or its duly authorized officers and agents, except in instances where the Corporation Code requires
stockholders' approval for certain specific acts:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all the
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors and trustees x x x.
A corporation's board of directors is understood to be that body which (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation; and (3) controls and holds all the property of the
corporation. Its members have been characterized as trustees or directors clothed with fiduciary character. 25
It is ineluctably clear that the fiduciary relation is between the stockholders and the board of directors and who are
vested with the power to manage the affairs of the corporation. The ordinary trust relationship of · directors of a
corporation and stockholders is not a matter of statutory or technical law. 26 It springs from the fact that directors have
the control and guidance of corporate affairs and property and hence of the property interests of the
stockholders.27 Equity recognizes that stockholders are the proprietors of the corporate interests and are ultimately
the only beneficiaries thereof.28 Should the board fail to perform its fiduciary duty to safeguard the interest of the
stockholders or commit acts prejudicial to their interest, the law and the by-laws provide mechanisms to remove and
replace the erring director.29
Relative to the powers of the Board of Directors, nowhere in the Corporation Code or in the MSC by-laws can it be
gathered that the Oversight Committee is authorized to step in wherever there is breach of fiduciary duty and call a
special meeting for the purpose of removing the existing officers and electing their replacements even if such call was
made upon the request of shareholders. Needless to say, the MSCOC is neither · empowered by law nor the MSC
by-laws to call a meeting and the subsequent ratification made by the stockholders did not cure the substantive
infirmity, the defect having set in at the time the void act was done. The defect goes into the very authority of the
persons who made the call for the meeting. It is apt to recall that illegal acts of a corporation which contemplate the
doing of an act which is contrary to law, morals or public order, or contravenes some rules of public policy or public
duty, are, like similar transactions between individuals, void.30 They cannot serve as basis for a court action, nor
acquire validity by performance, ratification or estoppel. 31 The same principle can apply in the present case. The void
election of 17 December 1997 cannot be ratified by the subsequent Annual Stockholders' Meeting.
A distinction should be made between corporate acts or contracts which are illegal and those which are merely ultra
vires. The former contemplates the doing of an act which are contrary to law, morals or public policy or public duty,
and are, like similar transactions between individuals, void: They cannot serve as basis of a court action nor acquire
validity by performance, ratification or estoppel. Mere ultra vires acts, on the other hand, or those which are not illegal
or void ab initio, but are not merely within the scope of the articles of incorporation, are merely voidable and may
become binding and enforceable when ratified by the stockholders. 32 The 1 7 December 1997 Meeting belongs to the
category of the latter, that is, it is void ab initio and cannot be validated.
Consequently, such Special Stockholders' Meeting called by the Oversight Committee cannot have any legal effect.
The removal of the Bernas Group, as well as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void, and since the Cinco Group has no legal right to sit in the board, their subsequent
acts of expelling Bernas from the club and the selling of his shares. at the public auction, are likewise invalid.
The Cinco Group cannot invoke the application of de facto officership doctrine to justify the actions taken after the
invalid election since the operation of the principle is limited to third persons who were originally not part of the
corporation but became such by reason of voting of government-sequestered shares.33 In Cojuangco v. Roxas,34 the
Court deemed the directors who were elected through the voting of government of sequestered shares who assumed
office in good faith as de facto officers, viz:
In the light of the foregoing discussion, the Court finds and so holds that the PCGG has no right to vote the
sequestered shares of petitioners including the sequestered corporate shares. Only their owners, duly authorized
representatives or proxies may vote the said shares. Consequently, the election of private respondents Adolfo
Azcuna, Edison Coseteng and Patricio Pineda as members of the board of directors of SMC for 1990-1991 should be
set aside. However, petitioners cannot be declared as duly elected members of the board of directors thereby. An
election for the purpose should be held where the questioned shares may be voted by their owners and/or their
proxies. Such election may be held at the next shareholders' meeting in April 1991 or at such date as may be set
under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de facto officers who in good faith assumed their duties
and responsibilities as duly elected members of the board of directors of the SMC. They are thereby legally entitled to
emoluments of the office including salary, fees and other compensation attached to the office until they vacate the
same. (Emphasis supplied)
Apparently, the assumption of office of the Cinco Group did not bear parallelism with the factual milieu in Cojuangco
and as such they cannot be considered as de facto officers and thus, they are without colorable authority to authorize
the removal of Bernas and the sale of his shares at the public auction. They cannot bind the corporation to third
persons who acquired the shares of Bernas and such third persons cannot be deemed as buyer in good faith.35
The case would have been different if the petitioning stockholders went directly to the SEC and sought its assistance
to call a special stockholders' meeting citing the previous refusal of the Corporate Secretary to call a meeting. Where
there is an officer authorized to call a meeting and that officer refuses, fails, or neglects to call a meeting, the SEC can
assume jurisdiction and issue an order to the petitioning stockholder to call a meeting pursuant to its regulatory and
administrative powers to implement the Corporation Code.36 This is clearly provided for by Section 50 of the
Corporation Code which we quote:
Sec. 50. Regular and special meetings of stockholders or members. - x x x
Whenever, for any cause, there is no person authorized to call a meeting, the Securities and Exchange Commission,
upon petition of a stockholder or member, and on a showing of good cause therefore, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the corporation by giving proper notice required
by this Code or by the by-laws. The petitioning stockholder or member shall preside thereat until at least majority of
the stockholders or members present have chosen one of their member[s] as presiding officer.
As early as Ponce v. Encarnacion, etc. and Gapol,37 the Court of First Instance (now the SEC)38 is empowered to call
a meeting upon petition of the stockholder or member and upon showing of good cause, thus:
On the showing of good cause therefore, the court may authorize a stockholder to call a meeting and to preside
thereat until the majority stockholders representing a majority of the stock present and permitted to be voted shall
have chosen one among them to preside it. And this showing of good cause therefor exists when the court is apprised
of the fact that the by-laws of the corporation require the calling of a general meeting of the stockholders to elect the
board of directors but the call for such meeting has not been done.39
The same jurisprudential rule resonates in Philippine National Construction Corporation v. Pabion, 40 where the Court
validated the order of the SEC to compel the corporation to conduct a stockholders' meeting in the exercise of its
regulatory and administrative powers to implement the Corporation Code:
SEC's assumption of jurisdiction over this case is proper, as the controversy involves the election of PNCC's
directors. Petitioner does not really contradict the nature of the question presented and agrees that there is an intra-
corporate question involved.
Prescinding from the above premises, it necessarily follows that SEC can compel PNCC to hold a stockholders'
meeting for the purpose of electing members of the latter's board of directors.
As respondents point out, the SEC's action is also justified by its regulatory and administrative powers to implement
the Corporation Code, specifically to compel the PNCC to hold a stockholders' meeting for election purposes.41
Given the broad administrative and regulatory powers of the SEC outlined under Section 50 of the Corporation Code
and Section 6 of Presidential Decree (PD) No. 902-A, the Cinco Group cannot claim that if was left without recourse
after the Corporate Secretary previously refused to heed its demand to call a special stockholders' meeting. If it be
true that the Corporate Secretary refused to call a meeting despite fervent demand from the MSCOC, the remedy of
the stockholders would have been to file a petition to the SEC to direct him to call a meeting by giving proper notice
required under the Code. To rule otherwise would open the floodgates to abuse where any stockholder, who consider
himself aggrieved by certain corporate actions, could call a special stockholders' meeting for the purpose of removing
the sitting officers in direct violation of the rules pertaining to the call of meeting laid down in the by-laws.
Every corporation has the inherent power to adopt by-laws for its internal government, and to regulate the conduct
and prescribe the rights and duties of its members towards itself and among themselves in reference to the
management of its affairs.42 The by-laws of a corporation are its own private laws which substantially have the same
effect as the laws of the corporation. They are in effect written into the charter. In this sense they become part of the
fundamental law of the corporation with which the corporation and its directors and officers must comply. 43 The
general rule is that a corporation, through its board of directors, should act in the manner and within the formalities, if
any, prescribed in its charter or by the general law. Thus, directors must act as a body in a meeting called pursuant to
the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by the objecting director
or shareholder.44
Certainly, the rules set in the by-laws are mandatory for every member of the corporation to respect.1âwphi1 They are
the fundamental law of the corporation with which the corporation and its officers and members must comply. It is on
this score that we cannot upon the other hand sustain the Bernas Group's stance that the subsequent annual
stockholders' meetings were invalid.
First, the 20 April 1998 Annual Stockholders Meeting was valid because it was sanctioned by Section 845 of the MSC
bylaws. Unlike in Special Stockholders Meeting46 wherein the bylaws mandated that such meeting shall be called by
specific persons only, no such specific requirement can be obtained under Section 8.
Second, the 19 April 1999 Annual Stockholders Meeting is likewise valid because in addition to the fact that it was
conducted in accordance to Section 8 of the MSC bylaws, such meeting was supervised by the SEC in the exercise of
its regulatory and administrative powers to implement the Corporation Code. 47
Needless to say, the conduct of SEC supervised Annual Stockholders Meeting gave rise to the presumption that the
corporate officers who won the election were duly elected to their positions and therefore can be rightfully considered
as de jure officers. As de jure officials, they can lawfully exercise functions and legally perform such acts that are
within the scope of the business of the corporation except ratification of actions that are deemed void from the
beginning.
Considering that a new set of officers were already duly elected in 1998 and 1999 Annual Stockholders Meetings, the
Bernas Group cannot be permitted to use the holdover principle as a shield to perpetuate in office. Members of the
group had no right to continue as directors of the corporation unless reelected by the stockholders in a meeting called
for that purpose every year.48 They had no right to hold-over brought about by the failure to perform the duty
incumbent upon them.49 If they were sure to be reelected, why did they fail, neglect, or refuse to call the meeting to
elect the members of the board?50
Moreover, it is fundamental rule that factual findings of quasi-judicial agencies like the SEC, if supported by
substantial evidence, are generally accorded not only great respect but even finality, and are binding upon this Court
unless it was shown that the quasi-judicial agencies had arbitrarily disregarded evidence before it had
misapprehended evidence to such an extent as to compel a contrary conclusion if such evidence had been properly
appreciated.51 It is not the function of this Court to analyze or weigh all over again the evidence and credibility of
witnesses presented before the lower court, tribunal, or office, as we are not trier of facts. 52 Our jurisdiction is limited
to reviewing and revising errors of law imputed to the lower court, the latter's finding of facts being conclusive and not
reviewable by this Court.53 However, when it can be shown that administrative bodies grossly misappreciated
evidence of such nature as to compel a contrary conclusion, the Court will not hesitate to reverse its factual
findings.54 In the case at bar, the incongruent findings of the SEC on the one hand, and the Court of Appeals on the
other, constrained the Court to review the records to ascertain which body correctly appreciated the facts vis-a-vis the
standing statutory and jurisprudential principles.
After finding that the ruling of the appellate court was in accordance with the existing laws and jurisprudence as
exhaustively discussed above, we hereby quote with approval its disquisition: (1) The supposed Special Stockholders'
Meeting of 1 7 December 1997 was prematurely or invalidly called by the [Cinco Group]. It therefore failed to produce
any legal effects and did not effectively remove [the Bernas Group] as directors of the Makati Sports Club, Inc.;
(2) The expulsion of [Bernas] as well as the public auction of his shares is hereby declared void and without
legal effect;
(3) The ratification of the removal of [the Bernas Group] as directors, the expulsion of Bernas and the sale
of his share by the [Cinco Group] and by the stockholders held in their Regular Stockholders' Meeting held
in April of 1998, 1999 and 2000, is void and produces no effects as they were not the proper party to cause
the ratification;
(4) All other actions of the [Cinco Group] and stockholders taken during the Regular Stockholders' Meetings
held in April 1998, 1999 and 2000, including the election of the [Cinco Group] as directors after the
expiration of the term of office of [Bernas Group] as directors, are hereby declared valid.55
In fine, we hold that 17 December 1997 Special Stockholders' Meeting is null and void and produces no effect; the
resolution expelling the Bernas Group from the corporation and authorizing the sale of Bernas' shares at the public
auction is likewise null and void. The subsequent Annual Stockholders' Meeting held on 20 April 1998, 19 April 1999
and 17 April 2000 are valid and binding except the ratification of the removal of the Bernas Group and the sale of
Bernas' shares at the public auction effected by the body during the said meetings. The expulsion of the Bernas
Group and the subsequent auction of Bernas' shares are void from the very beginning and therefore the ratifications
effected during the subsequent meetings cannot be sustained. A void act cannot be the subject of ratification. 56
WHEREFORE, premises considered, the petitions of Jose A. Bernas, Cecile. H. Cheng, Victor Africa, Jesus B.
Maramara, Jose T. Frondoso, Ignacio A. Macrohon and Paulino T. Lim in G.R. Nos. 163356-57 and of Jovencio
Cinco, Ricardo Librea and Alex Y. Pardo in G.R. Nos. 163368-69 are hereby DEN~ED. The assailed Decision dated
28 April 2003 and Resolution dated 27 April 2004 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.
9. Philippine Associated Smelting and Refining Corporation vs. Lim, 804 SCRA 600, G.R. No. 172948 October
5, 2016
An action for injunction filed by a corporation generally does not lie to prevent the enforcement by a stockholder of his
or her right to inspection.1
Philippine Associated Smelting and Refining Corporation filed a Petition for Review on Certiorari2 to assail the Court
of Appeals Decision3 dated January 243 2006 and Resolution4 dated May 18, 2006, The Court of Appeals lifted and
cancelled the writ of preliminary injunction issued by the Regional Trial Court, 5which enjoined respondents Pablito O.
Lim (Lim), Manuel A. Agcaoili (Agcaoili), and Consuelo M. Padilla (Padilla), or their representatives, from gaining
access to the records of Philippine Associated Smelting and Refining Corporation.: The records were then classified
as either confidential or inexistent until further orders from the court. 6
As summarized by the Court of Appeals, the facts are as follows:
Philippine Associated Smelting and Refining Corporation (hereafter PASAR) is a corporation duly organized and
existing under the laws of the Philippines and is engaged in copper smelting and refining.
On the other hand, Pablito Lim, Manuel Agcaoili and Consuelo Padilla (collectively referred to as petitioners) were
former senior officers and presently shareholders of PASAR holding 500 shares each.
An Amended Petition for Injunction and Damages with prayer for Preliminary Injunction and/or Temporary Restraining
Order, dated February 4, 2004 was filed by PASAR seeking to restrain petitioners from demanding inspection of its
confidential and inexistent records.
On February 23, 2004, petitioners moved for the dismissal of the petition on the following grounds: 1) the petition
states no cause of action; 2) the petition should be dismissed on account of litis pendentia; 3) the petition is a
nuisance or harassment suit; and 4) the petition should be dismissed on account of improper venue.
On April 14, 2004, the RTC issued an Order granting PASAR's prayer for a writ of preliminary injunction. The RTC
held that the right to inspect book should not be denied to the stockholders, however, the same may be restricted.
The right to inspect should be limited to the ordinary records as identified and classified by PASAR. Thus, pending the
determination of which records are confidential or inexistent, the petitioners should be enjoined from inspecting the
books. The dispositive portion of said Order states:
"WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim, Manuel A. Agcaoili
and Consuelo N. Padilla or their representatives from gaining access to records of Philippine Associated Smelting and
Refining Corporation which are presently classified as either confidential or inexistent, until further orders from this
Court.
Petitioner is required to execute a bond in the amount of FIVE HUNDRED THOUSAND PESOS (P500,000.00) in
favor of herein respondents to answer for all damages which the latter may sustain by reason of the injunction should
this Court, finally decide that petitioner is not entitled thereto.
SO ORDERED."
On May 26, 2004, petitioners filed a Motion for Dissolution of the Writ of Preliminary Injunction on the ground that the
petition is insufficient. Petitioners claim that the enforcement of the right to inspect book should be on the stockholders
and not on PASAR. Petitioners further claim that no irreparable injury is caused to PASAR which justifies the issuance
of the writ of preliminary injunction.
On January 10, 2005, the RTC issued the assailed Order, denying the Motion to Dismiss filed by petitioners on the
ground that it is a prohibited pleading under Section 8, Rule 1 of the Interim Rules on Intra-Corporate
Controversies under the Securities Regulation Code (RA 8799). The Motion for Dissolution of the Writ of Preliminary
Injunction was likewise denied on the ground that the writ does not completely result in unjust denial of petitioners'
right to inspect the books of the corporation. The RTC further stated that if no preliminary injunction is issued,
petitioners may, before final judgment, do the act which PASAR is seeking the Court to restrain which will make
ineffectual the final judgment that it may afterward render.7 (Emphasis in the original)

Aggrieved, Lim, Agcaoili, and Padilla filed before the Court of Appeals a Petition for Certiorari8questioning the
propriety of the writ of preliminary injunction. The Court of Appeals held that there was no basis to issue an injunctive
writ, thus:
We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary injunction is uncalled
for. The petition is a pre-emptive action unjustly intended to impede and restrain the stockholders' rights. If a
stockholder demands the inspection of corporate books, the corporation could refuse to heed to such demand. When
the corporation, through its officers, denies the stockholders of such right, the latter could then go to court and enforce
their rights. It is then that the corporation could set up its defenses and the reasons for the denial of such right. Thus,
the proper remedy available for the enforcement of the right of inspection is undoubtedly the writ of mandamus to be
filed by the stockholders and not a petition for injunction filed by the corporation.
The Order of the RTC shows that indeed there is no basis for the issuance not only of the temporary but also of the
permanent injunctive writ. The Order dated April 14, 2004 states:
"In the present case, PASAR failed to present sufficient evidence to show that respondents' (petitioners') demand to
inspect the corporate records was not made in good faith nor for a lawful purpose. . . . PASAR is reminded that it is its
burden to prove that respondents' action in seeking examination of the corporate records was moved by unlawful or
ill-motivated designs which could appropriately call for a judicial protection against the exercise of such right[.]" 9
Hence, Philippine Associated Smelting and Refining Corporation filed this Petition praying that this Court render
judgment:
(a) reversing and setting aside the Decision dated 24 January 2006 and Resolution dated 18 May 2006 rendered by
the Court of Appeals;ChanRoblesVirtualawlibrary
(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April 2004, and consequently
ordering respondents to desist from further harassing, vexing, or annoying petitioner with threats of filing criminal
complaints against its President, Bruce Anderson, and other appropriate parties, as embodied in the letters dated 25
and 27 February 2006 and 31 March 2006;ChanRoblesVirtualawlibrary
(c) reinstating the main action for injunction and ordering the RTC to continue hearing SEC Case No. 04-
33;ChanRoblesVirtualawlibrary
(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be issued by this
Honorable Court to urgently restrain respondents from further committing acts which are bases for the application of
the writ of preliminary injunction.10
In the Resolution11 dated July 19, 2006, this Court denied petitioner's prayer for the issuance of a temporary
restraining order and required respondents Lim, Agcaoili, and Padilla to comment on the Petition.
Respondents filed their Comment12 on October 16, 2006 through counsel Cayetano Sebastian Ata Dado & Cruz. On
October 20, 2006, they filed a second Comment13 through counsel Siguion Reyna Montecillo & Ongsiako. Petitioner
filed a Motion for Leave to Admit Attached Reply,14 together with its Reply,15 on December 12, 2006.
In the Resolution16 dated January 24, 2007, this Court noted respondents' separate Comments and petitioner's Reply.
The parties were also directed to submit their respective memoranda within 30 days from notice. 17 Respondents filed
their Memorandum18 on March 26, 2007, and petitioner filed its Memorandum 19 on April 2, 2007.
Petitioner argues that the right of a stockholder to inspect corporate books and records is limited in that any demand
must be made in good faith or for a legitimate purpose.20 Respondents, however, have no legitimate purpose in this
case.21 If respondents gain access to petitioner's confidential records, petitioner's trade secrets and other confidential
information will be used by its former officers to give undue commercial advantage to third parties. 22 Petitioner insists
that to hold that objections to the right of inspection can only be raised in an action for mandamus brought by the
stockholder, would leave a corporation helpless and without an adequate legal remedy. 23 To leave the corporation
helpless negates the doctrine that where there is a right, there is a remedy for its violation.24
Petitioner argues that it has the right to protect itself against all forms of embarrassment or harassment against its
officers, including the filing of criminal cases against them. 25 Moreover, respondents' request for inspection of
confidential corporate records and documents violates and breaches petitioner's right to peaceful and continuous
possession of its confidential records and documents.26
Petitioner further argues that respondents' Motion for Dissolution before the Court of Appeals did not comply with Rule
58, Section 6 of the Rules of Court. Therefore, the Motion should not have been granted. 27 Likewise, respondents'
Motion to Dismiss is a prohibited pleading under Rule 1, Section 8 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies28 and should not have been granted.29 In any case, the Court of Appeals should have
remanded the case to the trial court for further disposition. 30
We are asked to resolve whether injunction properly lies to prevent respondents from invoking their right to inspect.
We deny the Petition.
I The Petition asks this Court to enjoin acts beyond what was enjoined by the Regional Trial Court in its April 14,
2004 Order.31 The Regional Trial Court Order did not specify the particular acts it enjoined respondents from doing:
The question as to what records should be deemed confidential and inexistent, however, cannot be passed upon at
this time, since neither were admissions made nor sufficient evidence presented to categorically determine which
corporate records are to be considered confidential and inexistent. In the meantime, then, and in order to prevent
grave and irreparable injury on the part of PASAR should otherwise be allowed [sic], respondents' right to inspect is
limited to the ordinary records as identified and classified by PASAR. Subsequent hearings shall be set to determine
which among the corporate records demanded to be inspected by the respondents are indeed confidential or
inexistent, and to further determine whether or not the issuance of a writ of final injunction is in order.
WHEREFORE, let a writ of preliminary injunction be issued enjoining respondents Pablito Lim, Manuel A. Agcaoili
and Consuelo N. Padilla or their representatives from gaining access to records of Philippine Associated Smelting &
Refining Corporation which are presently classified as either confidential or inexistent, until further orders from this
Court.32 (Emphasis supplied)
What precisely is contemplated by the phrase "gaming access to records" is not clear.
Taking advantage of this ambiguity, petitioner prays that the injunction be reinstated and that this Court enjoin
respondents from "harassing, vexing, or annoying petitioner with threats of filing criminal complaints" and from "further
committing acts which are bases for the application of the writ of preliminary injunction":
(b) reinstating the writ of preliminary injunction granted by the RTC in its Order dated 14 April 2004, and consequently
ordering respondents to desist from further harassing, vexing, or annoying petitioner with threats of filing criminal
complaints against its President, Bruce Anderson, and other appropriate parties, as embodied in the letters dated 25
and 27 February 2006 and 31 March 2006;ChanRoblesVirtualawlibrary
.....
(d) meanwhile, it is respectfully prayed that a temporary restraining order or status quo order be issued by this
Honorable Court to urgently restrain respondents from further committing acts which are bases for the application of
the writ of preliminary injunction.33
Petitioner claims that respondents are materially and substantially invading its right to protect itself by demanding to
inspect petitioner's purportedly confidential records. Respondents wrote petitioner and demanded to inspect its
corporate books and records.34 They reiterated this demand in a subsequent letter.35
On at least two (2) occasions, respondents went to petitioner's office to again demand that they be allowed to
inspect.36 On one of these occasions, respondents brought members of the press, caused work disruption, and
harassed petitioner's representatives who met with them. 37 When asked the purpose of the inspection of certain
records not ordinarily inspected by stockholders, respondents answered they wished to ensure that petitioner's
business transactions were "above board" and "entered into for the best interest of the company." 38
During negotiations on the terms of confidentiality agreements to be executed before respondents are allowed to
inspect certain confidential records, respondents wrote petitioner stating that they would proceed to inspect the
corporate books and records. They warned petitioner that should petitioner fail to allow inspection, they would initiate
legal proceedings against it.39 They refused to accept the final terms and conditions of the confidentiality agreement
and wrote another letter, reiterating their demand to inspect confidential records. 40
After petitioner filed before the Regional Trial Court of Pasig City a Petition for Declaratory Relief41seeking a
declaration of the rights and duties of the parties in relation to the inspection of the records, respondent Lim filed a
criminal Complaint42 against some of petitioner's officers for infringing on their right to inspect petitioner's corporate
books and records.43 As a result, a criminal case was filed against Javier Herrero, petitioner's Former President, and
Jocelyn Sanchez-Salazar, its Former Corporate Secretary.44 Respondents caused news reports to be published on
the arrest warrants issued in relation to these Informations. 45
Respondents wrote another letter dated January 30, 2004 demanding again that they be allowed to inspect, among
others, the confidential records.46 On March 31, 2006, respondents wrote another letter threatening to file criminal
charges if they were not allowed to inspect the confidential records. They stated that they wanted to ensure that
petitioner complied with environmental laws in the operations of its plant in Leyte. 47
On April 7, 2006, petitioner advised respondents that it would furnish them with records kept by the Department of
Environment and Natural Resources. These records supposedly showed that all environmental laws were complied
with.48 On June 28, 2006 and July 4, 2006, respondents Lim and Padilla wrote to demand that they be allowed to
inspect the audited financial statements for 2004 and 2005; the interim statements for the end of May 2006; and more
detailed records on finance, production, marketing, and purchasing.49
In September 2006, after a stockholders' meeting, respondents again demanded access to certain information and
documents.50 In a letter dated September 8, 2006, respondents again asked about balance sheet accounts, advances
to suppliers, trade and other receivables, inventory, investments, current assets, trade and other payables, related
party transactions, cost of goods manufactured and sold, selling and administrative expenses, other operating
expenses, metal hedging, and staff costs, among others.51
For an action for injunction to prosper, the applicant must show the existence of a right, as well as the actual or
threatened violation of this right.52
Specifically, for a writ of preliminary injunction to be issued, Rule 58 of the Rules of Court provides:
RULE 58
PRELIMINARY INJUNCTION
SEC. 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when it is
established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the
commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts either for
a limited period or perpetually;ChanRoblesVirtualawlibrary
(b) That the commission, continuance or non- performance of the act or acts complained of during the litigation would
probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to
be done some act or acts probably in violation of the rights of the applicant respecting the subject of the action or
proceeding, and tending to render the judgment ineffectual.
In Duvaz Corp. v. Export and Industry Bank:53
Anent the first issue, the requisites for preliminary injunctive relief are: (a) the invasion of the right sought to be
protected is material and substantial; (b) the right of the plaintiff is clear and unmistakable; and (c) there is an urgent
and paramount necessity for the writ to prevent serious damage. As such, a writ of preliminary injunction may be
issued only upon clear showing of an actual existing right to be protected during the pendency of the principal action.
The twin requirements of a valid injunction are the existence of a right and its actual or threatened violation. Thus, to
be entitled to an injunctive writ, the right to be protected and the violation against that right must be shown.
In Almeida v. Court of Appeals, the Court stressed how important it is for the applicant for an injunctive writ to
establish his right thereto by competent evidence:
Thus, the petitioner, as plaintiff, was burdened to adduce testimonial and/or documentary evidence to establish her
right to the injunctive writs. It must be stressed that injunction is not designed to protect contingent or future rights,
and, as such, the possibility of irreparable damage without proof of actual existing right is no ground for an injunction.
A clear and positive right especially calling for judicial protection must be established. Injunction is not a remedy to
protect or enforce contingent, abstract, or future rights; it will not issue to protect a right not in esse and which may
never arise, or to restrain an action which did not give rise to a cause of action. There must be an existence of an
actual right. Hence, where the plaintiffs right or title is doubtful or disputed, injunction is not proper.
An injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences
which cannot be remedied under any standard compensation. The possibility of irreparable damage without proof of
an. actual existing right would not justify injunctive relief in his favor.
In the absence of a clear legal right, the issuance of the injunctive writ constitutes grave abuse of discretion. As the
Court had the occasion to state in Olalia v. Hizon . . . :
It has been consistently held that there is no power the exercise of which is more delicate, which requires greater
caution, deliberation and sound discretion, or more dangerous in a doubtful case, than the issuance of an injunction. It
is the strong arm of equity that should never be extended unless to cases of great injury, where courts of law cannot
afford an adequate or commensurate remedy in damages.
Every court should remember that an injunction is a limitation upon the freedom of action of the defendant and should
not be granted lightly or precipitately. It should be granted only when the court is fully satisfied that the law permits it
and the emergency demands it.54 (Emphasis supplied, citations omitted)
Thus, an injunction must fail where there is no clear showing of both an actual right to be protected and its threatened
violation, which calls for the issuance of an injunction.
The Corporation Code provides that a stockholder has the right to inspect the records of all business transactions of
the corporation and the minutes of any meeting at reasonable hours on business days. The stockholder may demand
in writing for a copy of excerpts from these records or minutes, at his or her expense:
Title VIII
Corporate Books and Records
SECTION 74. Books to be Kept; Stock Transfer Agent. — Every corporation shall, at its principal office, keep and
carefully preserve a record of all business transactions, and minutes of all meetings of stockholders or members, or of
the board of directors or trustees, in which shall be set forth in detail the time and place of holding the meeting, how
authorized, the notice given, whether the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. Upon the demand of any director, trustee, stockholder or
member, the time when any director, trustee, stockholder or member entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee, stockholder or member on any action or proposed action
must be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of any meetings shall be open to the
inspection of any director, trustee, stockholder or member of the corporation at reasonable hours on business days
and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code,
shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is 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. (Emphasis supplied)
The right to inspect under Section 74 of the Corporation Code is subject to certain limitations. However, these
limitations are expressly provided as defenses in actions filed under Section 74. Thus, this Court has held that a
corporation's objections to the right to inspect must be raised as a defense:
2) the person demanding to examine and copy excerpts from the corporation's records and minutes has not
improperly used any information secured through any previous examination of the records of such corporation; and 3)
the demand is made in good faith or for a legitimate purpose. The latter two limitations, however, must be set up as a
defense by the corporation if it is to merit judicial cognizance. As such, and in the absence of evidence, the PCGG
cannot unilaterally deny a stockholder from exercising his statutory right of inspection based on an unsupported and
naked assertion that private respondent's motive is improper or merely for curiosity or on the ground that the
stockholder is not in friendly terms with the corporation's officers.55
Gokongwei, Jr. v. Securities and Exchange Commission56 stresses that "impropriety of purpose . . . must be set up
the [sic] corporation defensively":
The stockholder's right of inspection of the corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of ownership of the corporate property, whether this
ownership or interest be termed an equitable ownership, a beneficial ownership, or a quasi-ownership. This right is
predicated upon the necessity of self-protection. It is generally held by majority of the courts that where the right is
granted by statute to the stockholder, it is given to him as such and must be exercised by him with respect to his
interest as a stockholder and for some purpose germane thereto or in the interest of the corporation. In other words,
the inspection has to be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. In Grey v. Insular Lumber, this Court held that "the right to
examine the books of the corporation must be exercised in good faith, for specific and honest purpose, and not to
gratify curiosity, or for speculative or vexatious purposes." The weight of judicial opinion appears to be, that on
application for mandamus to enforce the right, it is proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives hi seeking inspection. Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is used to the detriment of the
corporation." But the "impropriety of purpose such as will defeat enforcement must be set up the corporation
defensively if the Court is to take cognizance of it as a qualification. In other words, the specific provisions take
from the stockholder the burden of showing propriety of purpose and place upon the corporation the burden of
showing impropriety of purpose or motive." It appears to be the "general rule that stockholders are entitled to full
information as to the management of the corporation and the manner of expenditure of its funds, and to inspection to
obtain such information, especially where it appears that the company is being mismanaged or that it is being
managed for the personal benefit of officers or directors or certain of the stockholders to the exclusion of
others."57 (Emphasis supplied, citations omitted)
Terelay Investment and Development Corp. v. Yulo58 has held that although the corporation may deny a stockholder's
request to inspect corporate records, the corporation must show that the purpose of the shareholder is improper by
way of defense:
The right of the shareholder to inspect the books and records of the petitioner should not be made subject to the
condition of a showing of any particular dispute or of proving any mismanagement or other occasion rendering an
examination proper, but if the right is to be denied, the burden of proof is upon the corporation to show that the
purpose of the shareholder is improper, by way of defense. According to a recognized commentator:
By early English decisions it was formerly held that there must be something more than bare suspicion of
mismanagement or fraud. There must be some particular controversy or question in which the party applying was
interested, and inspection would be granted only so far as necessary for that particular occasion. By the general rule
in the United States, however, shareholders have a right to inspect the books and papers of the corporation without
first showing any particular dispute or proving any mismanagement or other occasion rendering an examination
proper. The privilege, however, is not absolute and the corporation may show in defense that the applicant is acting
from wrongful motives.
In Guthrie v. Harkness, there was involved the right of a shareholder hi a national bank to inspect its books for the
purpose of ascertaining whether the business affairs of the bank' had been conducted according to law, and whether,
as suspected, the bank was guilty of irregularities. The court said: "The decisive weight of American authority
recognizes the right of the shareholder, for proper purposes and under reasonable regulations as to place and time, to
inspect the books of the corporation of which he is a member. . . . In issuing the writ of mandamus the court will
exercise a sound discretion and grant the right under proper safeguards to protect the interest of all concerned. The
writ should not be granted for speculative purposes or to gratify idle curiosity or to aid a blackmailer, but it may not be
denied to the stockholder who seeks the information for legitimate purposes."
Among the purposes held to justify a demand for inspection are the following: (1) To ascertain the financial condition
of the company or the propriety of dividends; (2) the value of the shares of stock for sale or investment; (3) whether
there has been mismanagement; (4) in anticipation of shareholders' meetings to obtain a mailing list of shareholders
to solicit proxies or influence voting; (5) to obtain information in aid of litigation with the corporation or its officers as to
corporate transactions. Among the improper purposes which may justify denial of the right of inspection are: (1)
Obtaining of information as to business secrets or to aid a competitor; (2) to secure business "prospects" or
investment or advertising lists; (3) to find technical defects in corporate transactions in order to bring "strike suits" for
purposes of blackmail or extortion.
In general, however, officers and directors have no legal authority to close the office doors against shareholders for
whom they are only agents, and withhold from them the right to inspect the books which furnishes the most effective
method of gaining information which the law has provided, on mere doubt or suspicion as to the motives of the
shareholder. While there is some conflict of authority, when an inspection by a shareholder is contested, the burden is
usually held to be upon the corporation to establish a probability that the applicant is attempting to gain inspection for
a purpose not connected with his interests as a shareholder, or that his purpose is otherwise improper. The burden is
not upon the petitioner to show the propriety of his examination or that the refusal by the officers or directors was
wrongful, except under statutory provisions.59 (Citations omitted)
Among the actions that may be filed is an action for specific performance, damages, petition for mandamus, or for
violation of Section 74, in relation to Section 144 of the Corporation Code, which provides:
SECTION 144. Violations of the Code. — Violations of any of the provisions of this Code or its amendments not
otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos
but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more
than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may,
after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the
director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this
section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.
In this case, petitioner invokes its right to raise the limitations provided under Section 74 of the Corporation Code.
However, petitioner provides scant legal basis to claim this right because it does not raise the limitations as a matter
of defense. As properly appreciated by the Court of Appeals:
We agree. The act of PASAR in filing a petition for injunction with prayer for writ of preliminary injunction is uncalled
for. The petition is a pre-emptive action unjustly intended to impede and restrain the stockholders' rights. If a
stockholder demands the inspection of corporate books, the corporation could refuse to heed to such demand. When
the corporation, through its officers, denies the stockholders of such right, the latter could then go to court and enforce
their rights. It is then that the corporation could set up its defenses and the reasons for the denial of such right. Thus,
the proper remedy available for the enforcement of the right of inspection is undoubtedly the writ of mandamus to be
filed by the stockholders and not a petition for injunction filed by the corporation. 60
Petitioner insists that the Court of Appeals erred in relying on Section 74 of the Corporation Code. It claims that
jurisprudence allows the corporation to prevent a stockholder from inspecting records containing confidential
information.61 Petitioner cites W.G Philpotts v. Philippine Manufacturing Company:62
In order that the rule above stated may not be taken in too sweeping a sense, we deem it advisable to say that there
are some things which a corporation may undoubtedly keep secret, notwithstanding the right of inspection given by
law to the stockholder; as, for instance, where a corporation engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it in the manufacture of its products. It is not
our intention to declare that the authorities of the corporation, and more particularly the Board of Directors, might not
adopt measures for the protection of such process from publicity. 63
However, W.G Philpotts cannot support petitioner's contention since it involved a petition for mandamus where the
stockholder prayed to be allowed to exercise its right to inspect, and the respondent's objections were raised as a
defense. Nothing in W.G. Philpotts grants a corporation a cause of action to enjoin the exercise of the right of
inspection by a stockholder.
The clear provision in Section 74 of the Corporation Code is sufficient authority to conclude that an action for
injunction and, consequently, a writ of preliminary injunction filed by a corporation is generally unavailable to prevent
stockholders from exercising their right to inspection. Specifically, stockholders cannot be prevented from gaining
access to the (a) records of all business transactions of the corporation; and (b) minutes of any meeting of
stockholders or the board of directors, including their various committees and subcommittees.
The grant of legal personality to a corporation is conditioned on its compliance with certain obligations. Among these
are its fiduciary responsibilities to its stockholders. Providing stockholders with access to information is a fundamental
basis for their intelligent participation in the governance of the corporation as a business organization that they
partially own. The law is agnostic with respect to the amount of shares required. Generally, each individual
stockholder should be given reasonable access so that he or she can assess or share his or her assessment of the
management of the corporation with other stockholders. The separate legal personality of a corporation is not so
absolutely separate that it divorces itself from its responsibility to its constituent owners.
The law takes into consideration the potential disparity in the financial legal resources between the corporation and an
ordinary stockholder. The phraseology of the text of the law provides that access to the information mentioned in
Section 74 of the Corporation Code is mandatory. The presumption is that the corporation should provide access. If it
has basis for denial, then the corporation shoulders the risks of being sued and of successfully raising the proper
defenses. The corporation cannot immediately deploy its resources—part of which is owned by the requesting
stockholder—to put the owner on the defensive.
Specifically, corporations may raise their objections to the right of inspection through affirmative defense in an
ordinary civil action for specific performance or damages, or through a comment (if one is required) in a petition for
mandamus.64 The corporation or defendant or respondent still carries the burden of proving (a) that the stockholder
has improperly used information before; (b) lack of good faith; or (c) lack of legitimate purpose.65
Good faith and a legitimate purpose are presumed. It is the duty of the corporation to allege and prove with sufficient
evidence the facts that give rise to a claim of bad faith as to the existence of an illegitimate purpose.
The confidentiality of business transactions is not a magical incantation that will defeat the request of a stockholder to
inspect the records. Although it is true that the business is entitled to the protection of its trade secrets and other
intellectual property rights, facts must be pleaded to convince the court that a specific stockholder's request for
inspection, under certain conditions, would violate the corporation's own legal right.
Furthermore, the discomfort caused to the management of a corporation when a request for inspection is claimed is
part of the regular matters that a business wanting to ensure good governance must endure. The range between
discomfort and vexation is a broad one, which may tend to be located in the personalities of those involved.
Certainly, by themselves, these are not sufficient factual basis to conclude bad faith on the part of the requesting
stockholder. Courts must be convinced that the scope or manner of the request and the conditions under which it was
made are so frivolous that the huge cost to the business will, in equity, be unfair to the other stockholders. There is no
iota of evidence that this happened here.
II The Court of Appeals did not commit an error of law in disregarding the procedure on dissolution of injunctive writs.
It lifted and cancelled the injunction via a petition for certiorari under Rule 65 of the Rules of Court based on the grave
abuse of discretion on the part of the Regional Trial Court in issuing the writ of preliminary injunction.
Petitioner invokes Rule 58, Section 6 of the Rules of Court, which provides:
SEC. 6. Grounds for Objection to, or for Motion of Dissolution of, Injunction or Restraining Order. — The application
for injunction or restraining order may be denied, upon a showing of its insufficiency. The injunction or restraining
order may also be denied, or, if granted, may be dissolved, on other grounds upon affidavits of the party or person
enjoined, which may be opposed by the applicant also by affidavits. It may further be denied, or, if granted, may be
dissolved, if it appears after hearing that although the applicant is entitled to the injunction or restraining order, the
issuance or continuance thereof, as the case may be, would cause irreparable damage to the party or person
enjoined while the applicant can be fully compensated for such damages as he may suffer, and the former files a
bond in an amount fixed by the court conditioned that he will pay all damages which the applicant may suffer by the
denial or the dissolution of the injunction or restraining order. If it appears that the extent of the preliminary injunction
or restraining order granted is too great, it may be modified.
Petitioner assails respondents' failure to submit any affidavit or counter-bond pertaining to irreparable damage and
compensation of damages that may be suffered if the injunction is dissolved. 66
However, the injunction was lifted and cancelled via a petition for certiorari under Rule 65 of the Rules of Court,67 not
based on a motion for dissolution of the injunction. Thus, the Court of Appeals evaluated the basis for the injunction
granted by the Regional Trial Court rather than whether the injunction would cause irreparable damage to
respondents.
WHEREFORE, the Petition is DENIED.
SO ORDERED.ChanRo
10. Agdao Landless Residents Association, Inc. vs. Maramion, 806 SCRA 74, G.R. Nos. 188642; 189425, G.R.
Nos. 188888-89 October 17, 2016
hese are consolidated petitions for review on certiorari assailing the Court of Appeals' (CA) Decision1and
Resolution2 dated November 24, 2008 and June 19, 2009, respectively, in CA-G.R. SP No. 01858-MIN and CA-G.R.
SP No. 01861-MIN. The CA affirmed with modification the Decision3 of the Regional Trial Court (court a quo) dated July
11, 2007 which ruled in favor of respondents.
The Parties
Petitioners are Agdao Landless Residents Association, Inc. (ALRAI), a non-stock, non-profit corporation duly
organized and existing under and by virtue of the laws of the Republic of the Philippines,4 and its board of
directors,5 namely, Armando Javonillo (Javonillo), Ma. Acelita Armentano (Armentano), Alex Josol, Salcedo de la
Cruz, Jr., Claudio Lao, Antonia Amorada, Julius Alinsub, Pompeniano Espinosa, Consorcio Delgado, Romeo Cabillo,
Benjamin Lamigo, Ricardo Bacong, Rodolfo Galenzoga, and Asuncion Alcantara (Alcantara). 6 Respondents are
allegedly ousted members of ALRAI, namely, Rolando Maramion, Leonidas Jamisola, Virginia Canoy (Canoy),
Elizabeth Gonzales, Crispiniano Quire-Quire, Emestino Dunlao, Ella Demandante, Ella Ria Demandante, Elgin
Demandante, Satumina Witara (Witara), Virgilio Dayondon (Dayondon), Melencia Maramion, Angelica Penkian
(Penkian), Presentacion Tan, Hemani Gregory (Gregory), Rudy Gimarino (Gimarino), Valentin Cameros, Radel
Cameros (Cameros), Zoilo Jabonete, Luisito Tan (Tan), Joseph Quire Quire, Emestino Dunlao, Jr., Fred Dunlao, Liza
Maramion, Clarita Robilla (Robilla), Renata Dunlao and Prudencio Juariza, Jr. (Juariza). 7
The Antecedents
Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation8 in favor of ALRAI covering 46 titled lots (donated
lots).9 One Deed of Donation10 prohibits ALRAI, as donee, from partitioning or distributing individual certificates of title
of the donated lots to its members, within a period of five years from execution, unless a written authority is secured
from Dakudao.11 A violation of the prohibition will render the donation void, and title to and possession of the donated
lot will revert to Dakudao.12 The other five Deeds of Donation do not provide for the five-year restriction.
In the board of directors and stockholders meetings held on January 5, 2000 and January 9, 2000, respectively,
members of ALRAI resolved to directly transfer 10 of the donated lots to individual members and non members of
ALRAI.13 Transfer Certificate of Title (TCT) Nos. T-62124 (now T-322968), T-297811 (now TCT No. T-322966), T-
297813 (now TCT No. T-322967) and T-62126 (now TCT No. T-322969) were transferred to Romeo Dela Cruz (Dela
Cruz). TCT Nos. T-41374 (now TCT No. T-322963) and T-41361 (now TCT No. T-322962) were transferred to
petitioner Javonillo, the president of ALRAI. TCT Nos. T-41365 (now TCT No. T-322964) and T-41370 (now TCT No.
T-322964) were transferred to petitioner Armentano, the secretary of ALRAI. TCT Nos. T-41367 (now TCT No. T-
322971) and T-41366 were transferred to petitioner Alcantara, the widow of the fanner legal counsel of ALRAI. The
donated lot covered by TCT No. T-41366 (replaced by TCT No. T-322970) was sold to Lily Loy (Loy) and now
covered by TCT No. T-338403.14
Respondents filed a Complaint15 against petitioners. Respondents alleged that petitioners expelled them as members
of ALRAI, and that petitioners are abusing their powers as officers. 16 Respondents further alleged that petitioners
were engaged in the following anomalous and illegal acts: (1) requiring ALRAI's members to pay exorbitant arrear
fees when ALRAI's By-Laws only set membership dues at P1.00 per month;17 (2) partially distributing the lands
donated by Dakudao to some officers of ALRAI and to some non-members in violation of the Deeds of Donation;18 (3)
illegally expelling them as members of ALRAI without due process; 19 and (4) being unable to show the books of
accounts of ALRAI.20 They also alleged that Loy (who bought one of the donated lots from Alcantara) was a buyer in
bad faith, having been aware of the status of the land when she bought it. 21
Thus, respondents prayed for: (1) the restoration of their membership to ALRAI; (2) petitioners to stop selling the
donated lands and to annul the titles transferred to Javonillo, Armentano, Dela Cruz, Alcantara and Loy; (3) the
production of the accounting books of ALRAI and receipts of payments from ALRAI's members; (4) the accounting of
the fees paid by ALRAI's members; and (5) damages.22
In their Answer,23 petitioners alleged that ALRAI transferred lots to Alcantara as attorney's fees ALRAI owed to her
late husband, who was the legal counsel of ALRAI.24 On the other hand, Javonillo and Armentano, as president and
secretary of ALRAI, respectively, made a lot of sacrifices for ALRAI, while Dela Cruz provided financial assistance to
ALRAI.25cralawred
Petitioners also alleged that respondents who are non-members of ALRAI have no personality to sue. They also
claimed that the members who were removed were legally ousted due to their absences in meetings. 26
The Ruling of the RTC
On July 11, 2007, the court a quo promulgated its Decision,27 the decretal portion of which reads:
After weighing the documentary and testimonial evidence presented, as well as the arguments propounded by the
counsels, this Court tilts the scale of justice in favor of complainants and hereby grants the following:
1. Defendants are enjoined from disposing or selling further the donated lands to the detriment of the beneficiary-
members of the Association;
2. The Complainants and/or the ousted members are hereby restored to their membership with ALRAI, and a
complete list of all bona fide members should be made and submitted before this Court;
3. The Register of Deeds of the City of Davao is directed to annul the Land Titles transferred to Armando Javonillo,
Ma. Acelita Armentano, Romeo dela Cruz, Asuncion Alcantara and Lily Loy with TCT Nos. T-322962, T-322963,
T-322964, T-322965, T-322966, T-322967, T-322968, T-322969, T-322971 and T-338403 (formerly T-322970),
respectively; and to register said titles to the appropriate donee provided in the Deeds of Donation;
and cralawlawlibrary
4. Defendants are further directed to produce all the Accounting Books of the Association, receipts of the payments
made by all the members, and for an accounting of the fees paid by the members from the time of its incorporation
up to the present;
5. Moral, exemplary and attorney's fees being unsubstantiated, the same cannot be given due course;
and cralawlawlibrary
6. Defendants are ordered to shoulder the costs of suit.
SO ORDERED.28
The court a quo treated the case as an intra-corporate dispute.29 It found respondents to be bona fidemembers of
ALRAI.30 Being bona fide members, they are entitled to notices of meetings held for the purpose of suspending or
expelling them from ALRAI.31 The court a quo however found that respondents were expelled without due process. 32 It
also annulled all transfers of the donated lots because these violated the five-year prohibition under the Deeds of
Donation.33 It also found Loy a purchaser in bad faith.34
Both Loy and petitioners filed separate appeals with the CA. Loy's appeal was docketed as CA-G.R. SP No.
01858;35 while petitioners' appeal was docketed as CA-G.R. SP No. 1861.36 In its Resolution37 dated October 19,
2007, the CA ordered the consolidation of the appeals.
The Ruling of the Court of Appeals
The CA affirmed with modification the court a quo's Decision. The decretal portion of the CA Decision38dated
November 24, 2008 reads:
WHEREFORE, the consolidated petitions are PARTLY GRANTED. The assailed Decision dated July 11,2007 of the
Regional Trial Court (RTC), Eleventh (11th)Judicial Region, Branch No. 10 of Davao City in Civil Case No. 29,047-02 is
hereby AFFIRMED with MODIFICATION.
The following Transfer Certificates of Title are declared VALID:
1. TCT Nos. T-322966, T-322967, T-322968 and T-322969 in the name of petitioner Romeo C.
DelaCruz; and
2. TCT No. T-338403 in the name of petitioner Lily Loy.
The following Transfer Certificates of Title are declared VOID:
1. TCT Nos. T-322963 and T-322962 in the name of Petitioner Armando Javonillo;
2. TCT Nos. T-322964 and T-322965 in the name of petitioner Ma. Acelita Armentano; and
3. TCT No. T-322971 in the name of petitioner Asuncion A. Alcantara.
Petitioners who are members of ALRAI may inspect all the records and books of accounts of ALRAI and demand
accounting of its funds in accordance with Section 1, Article VII and Section 6, Article V of ALRAI's Constitution and By-
Laws.
SO ORDERED.39
Under Section 2, Article III of ALRAI's Amended Constitution and By-Laws (ALRAI Constitution), the corporate
secretary should give written notice of all meetings to all members at least three days before the date of the
meeting.40 The CA found that respondents were not given notices of the meetings held for the purpose of their
termination from ALRAI at least three days before the date of the meeting. 41Being existing members of ALRAI,
respondents are entitled to inspect corporate books and demand accounting of corporate funds in accordance with
Section 1, Article VII and Section 6, Article V ofthe ALRAI Constitution. 42
The CA also noted that among the donated lots transferred, only one [under TCT No. T-41367 (now TCT No. 322971)
and transferred to Alcantara] was covered by the five-year prohibition.43 Although petitioners attached to their
Memorandum44 dated November 19, 2007 a Secretary's Certificate45 of Dakudao resolving to remove the restriction
from the land covered by TCT No. T-41367, the CA did not take this certificate into consideration because petitioners
never mentioned its existence in any of their pleadings before the court a quo. Thus, without the required written
authority from the donor, the CA held that the disposition of the land covered by TCT No. T-41367 is prohibited and
the land's subsequent registration under TCT No. T-322971 is void.46
However, the CA nullified the transfers made to Javonillo and Armentano because these transfers violated Section 6
of Article IV of the ALRAI Constitution. Section 6 prohibits directors from receiving any compensation, except for per
diems, for their services to ALRAI.47 The CA upheld the validity of the transfers to Dela Cruz and Alcantara48 because
the ALRAI Constitution does not prohibit the same. The CA held that as a consequence, the subsequent transfer of
the lot covered by TCT No. T-41366 to Loy from Alcantara was also valid.49
Both parties filed separate motions for reconsideration with the CA but these were denied in a Resolution50 dated
June 19, 2009.
Thus, the parties filed separate petitions for review on certiorari under Rule 45 of the Rules of Court with this Court. In
a Resolution51 dated September 30, 2009, we resolved to consolidate the petitions considering they assail the same
CA Decision and Resolution dated November 24, 2008 and June 19, 2009, respectively. The petitions also involve the
same parties and raise interrelated issues.
The Issues
Petitioners raise the following issues for resolution of the Court, to wit:
1. Whether respondents should be reinstated as members of ALRAI; and
2. Whether the transfers of the donated lots are valid.
Our Ruling
We find the petition partly meritorious.
I. Legality of respondents' termination
Petitioners argue that respondents were validly dismissed for violation of the ALRAI Constitution particularly for non-
payment of membership dues and absences in the meetings.52
Petitioners' argument is without merit. We agree with the CA's finding that respondents were illegally dismissed from
ALRAI.
We stress that only questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of
Court, since "the Supreme Court is not a trier of facts."53 It is not our function to review, examine and evaluate or
weigh the probative value of the evidence presented.
When supported by substantial evidence, the findings of fact of the CA are conclusive and binding on the parties and
are not reviewable by this Court, unless the case falls under any of the recognized exceptions in Jurisprudence.54
The court a quo held that respondents are bona fide members of ALRAL55 This finding was not disturbed by the CA
because it was not raised as an issue before it and thus, is binding and conclusive on the parties and upon this
Court.56 In addition, both the court a quo and the CA found that respondents were illegally removed as members of
ALRAI. Both courts found that in terminating respondents from ALRAI, petitioners deprived them of due process. 57
Section 9158 of the Corporation Code of the Philippines (Corporation Code)59 provides that membership in a non-
stock, non-profit corporation (as in petitioner ALRAI in this case) shall be terminated in the manner and for the cases
provided in its articles of incorporation or the by-laws.
60
In tum, Section 5, Article II of the ALRAI Constitution states:
Sec. 5. - Termination of Membership - Membership may be lost in any of the following: a) Delinquent in the payment
of monthly dues; b) failure to [attend] any annual or special meeting of the association for three consecutive
times without justifiable cause, and c) expulsion may be exacted by majority vote of the entire members, on causes
which herein enumerated: 1) Act and utterances which are derogatory and harmful to the best interest of the association;
2) Failure to attend any annual or special meeting of the association for six (6) consecutive months, which shall be
construed as lack of interest to continue his membership, and 3) any act to conduct which are contrary to the objectives,
purpose and aims of the association as embodied in the charter[.] 61
Petitioners allege that the membership of respondents in ALRAI was terminated due to (a) non-payment of
membership dues and (b) failure to consecutively attend meetings.62 However, petitioners failed to substantiate these
allegations. In fact, the court a quo found that respondents submitted several receipts showing their compliance with
the payment of monthly dues.63 Petitioners likewise failed to prove that respondents' absences from meetings were
without any justifiable grounds to result in the loss of their membership in ALRAI.
Even assuming that petitioners were able to prove these allegations, the automatic termination of respondents'
membership in ALRAI is still not warranted. As shown above, Section 5 of the ALRAI Constitution does not state that
the grounds relied upon by petitioners will cause the automatictermination of respondents' membership. Neither can
petitioners argue that respondents' memberships in ALRAI were terminated under letter (c) of Section 5, to wit:
x x x c) expulsion may be exacted by majority vote of the entire members, on causes which herein enumerated: 1) Act
and utterances which are derogatory and harmful to the best interest of the association; 2) Failure to attend any annual
or special meeting of the association for six (6) consecutive months, which shall be construed as lack of interest to
continue his membership, and 3) any act to conduct which are contrary to the objectives, purpose and aims of the
association as embodied in the charter; x x x64
Although termination of membership from ALRAI may be made by a majority of the members, the court a quo found
that the "guideline (referring to Section 2, Article III of the ALRAI Constitution) was not followed, hence, complainants'
ouster from the association was illegally done."65 The court a quo cited Section 2, Article III of the ALRAI Constitution
which provides, thus:
Sec. 2. -Notice- The Secretary shall give or cause to be given written notice of all meetings, regular or special to all
members of the association at least three (3) days before the date of each meetings either by mail or personally. Notice
for special meetings shall specify the time and the purposes or purpose for which it was called; x x x 66
The CA concurred with the finding of the court a quo.67 The CA noted that the evidence presented revealed that the
General Meeting for the termination of membership was to be held on July 29, 2001, at 2 o'clock in the afternoon; but
the Notice to all officers and members of ALRAI informing them about the General Meeting appeared to have been
signed by ALRAI's President only on July 27, 2001.68 Thus, the CA held that the "notice for the July 29, [2001]
meeting where the general membership of ALRAI approved the expulsion of some of the respondents was short of
the three (3)-day notice requirement. More importantly, the petitioners have failed to adduce evidence showing that
the expelled members were indeed notified of any meeting or investigation proceeding where they are given the
opportunity to be heard prior to the termination of their membership."69
The requirement of due notice becomes more essential especially so since the ALRAI Constitution provides for the
penalties to be imposed in cases where any member is found to be in arrears in payment of contributions, or is found
to be absent from any meeting without any justifiable cause. Section 3, Article II and Section 3, Article III of the ALRAI
Constitution provide, to wit:
Article II
Sec. 3. - Suspension of members Any member who shall be six (6) months in arrears in the payment of monthly dues
or additional contributions or assessments shall be automatically suspended and may be reinstated only upon payment
of the corresponding dues in arrears or additional contributions and after approval of the board of Directors. 70
Article III
Sec. 3. - Any member who shall be absent from any meeting without justifiable causes shall be liable to a fine of Two
Pesos (P 2.00);71
Clearly, members proved to be in arrears in the payment of monthly dues, contributions, or assessments shall only be
automatically suspended; while members who shall be absent from any meeting without any justifiable cause shall
only be liable for a fine. Nowhere in the ALRAI Constitution does it say that the foregoing actions shall cause the
automatic termination of membership. Thus, the CA correctly ruled that "respondents' expulsion constitutes an
infringement of their constitutional right to due process of law and is not in accord with the principles established
in Article 19 of the Civil Code, x x x."72
There being no valid termination of respondents' membership m ALRAI, respondents remain as its existing
members.73 It follows that as members, respondents are entitled to inspect the records and books of accounts of
ALRAI subject to Section 1, Article VII74 of ALRAI's Constitution, and they can demand the accounting of its funds in
accordance with Section 6, Article V of the ALRAI Constitution. 75 In addition, Sections 7476 and 7577 of the Corporation
Code also sanction the right of respondents to inspect the records and books of accounts of ALRAI and demand the
accounting of its funds.
II. On the validity of the donated lots
We modify the decision of the CA.
At the onset, we find that the cause of action and the reliefs sought in the complaint pertaining to the donated lands
(ALRAI's corporate property) strictly call for the filing of a derivative suit, and not an individual suit which respondents
filed.
Individual suits are filed when the cause of action belongs to the stockholder personally, and not to the stockholders
as a group, or to the corporation, e.g. denial of right to inspection and denial of dividends to a stockholder. If the
cause of action belongs to a group of stockholders, such as when the rights violated belong to preferred stockholders,
a class or representative suit may be filed to protect the stockholders in the group. 78
A derivative suit, on the other hand, is one which is instituted by a shareholder or a member of a corporation, for and
in behalf of the corporation for its protection from acts committed by directors, trustees, corporate officers, and even
third persons.79 The whole purpose of the law authorizing a derivative suit is to allow the stockholders/members to
enforce rights which are derivative (secondary) in nature, i.e., to enforce a corporate cause of action.80
The nature of the action, as well as which court or body has jurisdiction over it, is determined based on the allegations
contained in the complaint of the plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all or
some of the claims asserted therein.81
In this case, the complaint alleged, thus:
FIRST CAUSE OF ACTION
9. Sometime in 2001, Complainants accidentally discovered that portions of the aforementioned donated lands were
partially distributed by the Officers of said association, AMONG THEMSELVES, without knowledge of its members.
11. Then there was illegal partial distribution of the donated lands. Not only the President and Secretary of the
Association, but also some personalities who are not members of the association and who themselves own big tracts
of land, are the recipients of the donated lands, which acts are contrary to the clear intents as indicated in the deed of
donation. x x x82
In the same complaint, respondents prayed .for the following reliefs, among others, to wit:
a) An Order for a writ of PRELIMINARY PROHIBITORY MANDATORY INJUNCTION to stop the Defendants from
disposing the donated lands to the detriment of the beneficiary-members of the Association[.]
c) To cease and desist from selling donated lands subject of this case and to annul the titles transferred x x x.
d) To annul the Land Titles fraudulently and directly transferred from the Dacudao in the names of Defendants Javonillo,
Armentano, Romeo de la Cruz and Alcantara, and subsequently to defendant Lily Loy in the name of Agdao Landless
Associatidn.83
In a strict sense, the first cause of action, and:the reliefs sought, should have been brought through a derivative suit.
The first cause of action pertains to the corporate right of ALRAI involving its corporate properties which it owned by
virtue of the Deeds of Donation. In derivative suits, the real party-in-interest is the corporation, and the suing
stockholder is a mere nominal party.84 A derivative suit, therefore, concerns "a wrong to the corporation itself." 85
However, we liberally treat this case (in relation to the cause of action pertaining to ALRAI's corporate properties) as
one pursued by the corporation itself, for the following reasons.
First, the court a quo has jurisdiction to hear and decide this controversy. Republic Act No. 8799, 86 in relation to
Section 5 of Presidential Decree No. 902-A,87 vests the court a quo with original and exclusive jurisdiction to hear and
decide cases involving:
Sec. 5. x x x
(a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of
the stockholders, partners, members of associations or organizations registered with the Commission.
Second, we note that petitioners did not object to the institution of the case (on the ground that a derivative suit should
have been lodged instead of an individual suit) in any of the proceedings before the court a quo or before the CA.88
Third, a reading of the complaint (in relation to the cause of action pertaining to ALRAI's corporate properties) shows
that respondents do not pray for reliefs for their personal benefit; but in fact, for the benefit of the ALRAI, to wit:
c) To cease and desist from selling donated lands subject of this case and to annul the titles transferred to Armando
Javonillo, Ma. Acelita Armentano, Romeo de Ia Cruz, Asuncion Alcantara and Lily Loy x x x.
d) To annul the Land Titles fraudulently and directly transferred from the (sic) Dacudao in the names of Defendants
Javonillo, Armentano, Romeo de la Cruz and Alcantara, and subsequently to Defendant Lily Loy in the name of Agdao
Landless Assiociation.89
The reliefs sought show that the complaint was filed ultimately to curb the alleged mismanagement of ALRAI's
corporate properties. We note that the danger sought to be avoided in Evangelista v. Santos90does not exist in this
case. In Santos, plaintiff stockholders sought damages against the principal officer of the corporation, alleging that the
officer's mismanagement of the affairs and assets of the corporation brought about the loss of the value of its stocks.
In ruling against the plaintiff-stockholders, this Court held that "[t]he 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 x x x."91 More, in Santos, if only the case was brought
before the proper venue, this Court added, "we note that the action stated in their complaint is susceptible of being
converted into a derivative suit for the benefit of the corporation by a mere change in the prayer." 92
In this case, the reliefs sought do not entail the premature distribution of corporate assets. On the contrary, the reliefs
seek to preserve them for the corporate interest of ALRAI. Clearly then, any benefit that may be recovered is
accounted for, not in favor of respondents, but for the corporation, who is the real party-in-interest Therefore, the
occasion for the strict application of the rule that a derivative suit should be brought in order to protect and vindicate
the interest of the corporation does not obtain under the circumstances of this case.
Commart (Phils.), Inc. v. Securities and Exchange Commission (SEC)93 upholds the same principle. In that case, the
chairman and board of directors of Commart were sued for diverting into their private accounts amounts due to
Commart as commissions. Respondents argued that the Hearing Panel of the SEC should dismiss the case·on the
ground that it has no jurisdiction over the matter because the case is not a derivative suit The Hearing Panel denied
the motion, and was affirmed by the SEC. Upon appeal, this Court affirmed the decision of the SEC, to wit:
The complaint in SEC Case No. 2673, particularly paragraphs 2 to 9 under First Cause of Action, readily shows that it
avers the diversion of corporate income into the private bank accounts of petitioner x x x and his wife. Likewise, the
principal relief prayed for in the complaint is the recovery of a sum of money in favor of the corporation. This being the
case, the complaint is definitely a derivative suit. Xxx
In any case, the suit is for the benefit of Commart itself, for a judgment in favor of the complainants will necessarily
mean recovery by the corporation of the US$2.5 million alleged to have been diverted from its coffers to the private
bank accounts of its top managers and directors. Thus, the prayer in the Amended Complaint is for judgment ordering
respondents x x x, "to account for and to, turn over or deliver to the Corporation" the aforesaid sum, with legal interest,
and "ordering all the respondents, as members of the Board of Directors to take such remedial steps as would protect
the corporation from further depredation of the funds and property."94
Fourth, based on the records, we find that there is substantial compliance with the requirements of a derivative suit, to
wit:
a) [T]he party bringing suit should be a shareholder as of the time of the act or transaction complained of, the number
of his shares not being material;
b) [H]e has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and
c) [T]he cause of action actually devolves on the corporation, the wrongdoing or harm having been, or being caused
to the corporation and not to the particular stockholder bringing the suit. 95
Here, the court a quo found that respondents are bona fide members of ALRAI.96 As for the second requisite,
respondents also have tried to demand appropriate relief within the corporation, but the demand was unheeded. In
their Memorandum before the CA, respondents alleged, thus:
4.18 The occurrence of the series of distressing revelation prompted Respondents to confront Defendant Armentano
on the accounting of all payments made including the justification for the illegal distribution of the Donated Land to four
persons mentioned in preceding paragraph (4.12) of this memorandum. Unfortunately, Petitioner Armentano merely
reasoned their (referring to the four persons) right to claim ownership of the land as compensation for their service and
attorney's fees;
4.19 Anxious of the plan of action taken by the Respondents against the Petitioners, the latter started harassing the
unschooled Respondents by unduly threatening them. Respondents simply wanted the land due them, an accounting
of the finances of the Association and justification of the illegal disposition of the Donated Land which was donated for
the landless members of the Association;
4.20 As a consequence, Petitioners on their own, with grave abuse of power and in violation of the Constitution and By-
Laws of the Association maliciously expelled the Respondents particularly those persistently inquisitive about
Petitioners' moves and acts which only emphasized their practice of upholding the MOB RULE by presenting solicited
signatures of alleged members and non-members written on a scrap of paper signifying confirmation of the ouster (sic)
members. x x x97
We note that respondents' demand on Armentano substantially complies with the second requirement. While it is true
that the complaining stockholder must show that he has exhausted all the means within his reach to attain within the
corporation the redress for his grievances, demand is unnecessary if the exercise will result in futility. 98 Here, after
respondents demanded Armentano to justify the transfer of ALRAI's properties to the individual petitioners,
respondents were expelled from the corporation, which termination we have already ruled as invalid. To our mind, the
threat of expulsion against respondents is sufficient to forestall any expectation of further demand for relief from
petitioners. Ultimately, to make an effort to demand redress within the corporation will only result in futility, rendering
the exhaustion of other remedies unnecessary.
Finally, the third requirement for the institution of a derivative suit is clearly complied with. As discussed in the
previous paragraphs, the cause of action and the reliefs sought ultimately redound to the benefit of ALRAI. In this
case, and as in a proper derivative suit, ALRAI is the party-in-interest and respondents are merely nominal parties.
In view of the foregoing, and considering further the interest of justice, and the length of time that this case has been
pending, we liberally treat this case as one pursued by the corporation to protect its corporate rights. As the court a
quo noted, this case "commenced [on] April 2, 2002, blossomed in a full-blown trial and ballooned into seven (7)
voluminous rollos."99
We now proceed to resolve the issue of the validity of the transfers of the donated lots to Javonillo, Armentano,
DelaCruz, Alcantara and Loy. We agree with the CA in ruling that the TCTs issued in the names of Javonillo,
Armentano and Alcantara are void.100 We modify the ruling of the CA insofar as we rule that the TCTs issued in the
names of Dela Cruz and Loy are also void.101
One of the primary purposes of ALRAI is the giving of assistance in uplifting and promoting better living conditions to
all members in particular and the public in general.102 One of its objectives includes "to uplift and promote better living
condition, education, health and general welfare of all members in particular and the public in general by providing its
members humble shelter and decent housing."103Respondents maintain that it is pursuant to this purpose and
objective that the properties subject of this case were donated to ALRAI. 104
Section 36, paragraphs 7 and 11 of the Corporation Code provide:
Sec. 36. Corporate powers and capacity. - Every corporation incorporated under this Code has the power and capacity:
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real
and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of
the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the
Constitution.
11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in
the articles of incorporation.105
The Corporation Code therefore tells us that the power of a corporation to validly grant or convey any of its real or
personal properties is circumscribed by its primary purpose. It is therefore important to determine whether the grant or
conveyance is pursuant to a legitimate corporate purpose, or is at least reasonable and necessary to further its
purpose.
Based on the records of this case, we find that the transfers of the corporate properties to Javonillo, Armentano, Dela
Cruz, Alcantara and Loy are bereft of any legitimate corporate purpose, nor were they shown to be reasonably
necessary to further ALRAI's purposes. This is principally because, as respondents argue, petitioners "personally
benefitted themselves by allocating among themselves vast track of lands at the dire expense of the landless general
membership of the Association."106
We take first the cases of Dela Cruz, Alcantara and Loy.
We disagree with theCA in ruling that the TCTs issued in the name of Dela Cruz are valid. The transfer of property to
him does not further the corporate purpose of ALRAI. To justify the transfer to Dela Cruz, petitioners merely allege
that, "[o]n the other hand, the lots given by ALRAI to Romeo de la Cruz were compensation for the financial
assistance he had been extending to ALRAI."107 Records of this case do not bear any evidence to show how much
Dela Cruz has extended to ALRAI as financial assistance. The want of evidence to support this allegation cannot
allow a determination whether the amount of the financial help that Dela Cruz extended to ALRAI is commensurate to
the amount of the property transferred to him. The lack of evidence on this point is prejudicial to ALRAI because
ALRAI had parted with its property without any means by which to determine whether the transfer is fair and
reasonable under the circumstances.
The same is true with the transfer of properties to Alcantara. Petitioners allege that Alcantara's husband, Atty. Pedro
Alcantara, "handled all the legal work both before the Regional Trial Court in Davao City (Civil Case No. 16192) and
the Court of Appeals in Manila (CA GR No. 13744). He agreed to render his services although he was being paid
intermittently, with just small amounts, in the hope that he will be compensated when ALRAI triumphs in the
litigation."108 Petitioners thus claim that "[b]ecause of the legal services of her husband, who is now deceased,
petitioner Alcantara was given by ALRAI two (2) lots x x x."109
Petitioners admit that Atty. Pedro Alcantara represented ALRAI as counsel on part contingency basis. 110In their
Memorandum before the court a quo, respondents alleged that, "[i]n fact, Complainants have duly paid Atty.
Alcantara's legal fees as evidence (sic) by corresponding receipts issued by the receiving Officer of the
Association."111 The aforementioned receipts112 show that Atty. Pedro Alcantara had already been paid the total
amount of P16,845.00.
In Rayos v. Hernandez,113 we held that a contingent fee arrangement is valid in this jurisdiction. It is generally
recognized as valid and binding, but must be laid down in an express contract. In the same case, we have identified
the circumstances to be considered in determining the reasonableness of a claim for attorney's fees as follows: (1) the
amount and character of the service rendered; (2) labor, time, and trouble involved; (3) the nature and importance of
the litigation or business in which the services were rendered; (4) the responsibility imposed; (5) the amount of money
or the value of the property affected by the controversy or involved in the employment; (6) the skill and experience
called for in the performance of the services; (7) the professional character and social standing of the attorney; (8) the
results secured; (9) whether the fee is absolute or contingent, it being recognized that an attorney may properly
charge a much larger fee when it is contingent than when it is not; and (10) the financial capacity and economic status
of the client have to be taken into account in fixing the reasonableness of the fee.114
In this case however, petitioners did not substantiate the extent of the services that Atty. Pedro Alcantara rendered for
ALRAL In fact, no engagement or retainer contract was ever presented to prove the terms of their agreement.
Petitioners did not also present evidence as to the value of the ALRAI properties at the time of transfer to Alcantara.
There is therefore no proof that the amount of the properties transferred to Alcantara, in addition to the legal fees he
received, is commensurate (as compensation) to the reasonable value of his legal services. Using the guidelines set
forth in Rayos, absent proof, there is no basis to determine whether the transfer of the property to Alcantara is
reasonable under the circumstances.115
The importance of this doctrine in Rayos is emphasized in the Canons of Professional Ethics 116 and the Rules of
Court.117 In both, the overriding consideration is the reasonableness of the terms of the contingent fee agreement, so
much so that the grant of the contingent fee is subject to the supervision of the court. 118
Spouses Cadavedo v. Lacaya119 further illustrates this principle. In that case, this Court was confronted with the issue
of whether the contingent attorney's fees consisting of one-half of the property that was subject of litigation was valid
and reasonable. This Court ruled that the attorney's fee is excessive and unconscionable, and is therefore void. The
Court said that as "matters then stood, [there] was not a sufficient reason to justify a large fee in the absence of any
showing that special skills and additional work had been involved."120 The Court also noted that Spouses Cadavedo
and Atty. Lacaya already made arrangements for the cost and expenses for the cases handled. 121
Similarly in this case, there is no proof that special skills and additional work have been put in by Atty. Pedro
Alcantara. Further, as adverted to in previous paragraphs, receipts show that intermittent payments as legal fees have
already been paid to him. We also note that in this case, not only one-half of a property was transferred to Alcantara
as compensation; but two whole parcels of land - one with more or less 400 square meters (TCT No. 41366), and the
other with more or less 395 square meters (TCT No. 41367). 122 The amount of fee contracted for, standing alone and
unexplained would be sufficient to show that an unfair advantage had been taken of the client, or that a legal fraud
had been perpetrated on him.123
Consequently, we also find that Alcantara's subsequent sale to Loy is not valid. Alcantara cannot sell the property,
over which she did not have the right to own, in the first place. More, based on the records, the court a quo had
124
already made a finding that Loy is guilty of bad faith as to render her purchase of the property from Alcantara void.
We likewise find that there is failure to show any legitimate corporate purpose in the transfer of ALRAI's corporate
properties to Javonillo and Armentano.
The Board Resolution125 confirming the transfer of ALRAI's corporate properties to Javonillo and Armentano merely
read, "[t]hat the herein irrevocable confirmation is made in recognition of, and gratitude for the outstanding services
rendered by x x x Mr. Armando Javonillo, our tireless President and Mrs. Acelita Armentano, our tactful, courageous,
and equally tireless Secretary, without whose efforts and sacrifices to acquire a portion of the realty of Dacudao &
Sons, Inc., would not have been attained."126 In their Memorandum, petitioners also alleged that "[t]he most difficult
part of their (Javonillo and Armentano) job was to raise money to meet expenses. x x x It was very difficult for
petitioners Javonillo and Armentano when they needed to pay P300,000.00 for realty tax on the land donated by
Dakudao and Sons, Inc. to ALRAI. It became more difficult when the Bureau of Internal Revenue was demanding
P6,874,000.00 as donor's tax on the donated lands. Luckily, they were able to make representation with the BIR to
waive the tax."127
These reasons cannot suffice to prove any legitimate corporate purpose in the transfer of the properties to Javonillo
and Armentano. For one, petitioners cannot argue that the properties transferred to them will serve as
reimbursements of the amounts they advanced for ALRAL There is no evidence to show that they indeed paid the
realty tax on the donated lands. Neither did petitioners present any proof of actual disbursements they incurred
whenever Javonillo and Armentano allegedly helped Atty. Pedro Alcantara in handling the cases involving
ALRAI.128 Like in the cases of Dela Cruz and Alcantara, absent proof, there was no basis by which it could have been
determined whether the transfer of properties to Javonillo and Armentano was reasonable under the circumstances at
that time. Second, petitioners cannot argue that the properties are transferred as compensatioh for Javonillo. It is well
settled that directors of corporations presumptively serve without compensation; so that while the directors, in
assigning themselves additional duties, act within their power, they nonetheless act in excess of their authority by
voting for themselves compensation for such additional duties. 129 Even then, aside from the claim of petitioners, there
is no showing that Javonillo rendered extraordinary or unusual services to ALRAI.
The lack of legitimate corporate purpose is even more emphasized when Javonillo and Armentano, as a director and
an officer of ALRAI, respectively, violated the fiduciary nature130 of their positions in the corporation.
Section 32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the corporation. —A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation, unless all of the following
conditions are present:
1. That the presence of such director or trustee in the board meeting in which the contract was approved was not
necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in case of an officer, the contract has been previously authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is absent, in the case of a contract with a
director or trustee, such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least two thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or trustees involved is made at such meeting:
Provided, however, That the contract is fair and reasonable under the circumstances.
Being the corporation's agents and therefore, entrusted with the management of its affairs, the directors or trustees
and other officers of a corporation occupy a fiduciary relation towards it, and cannot be allowed to contract with the
corporation, directly or indirectly, or to sell property to it, or purchase property from it, where they act both for the
corporation and for themselves.131 One situation where a director may gain undue advantage over his corporation is
when he enters into a contract with the latter. 132
Here, we note that Javonillo, as a director, signed the Board Resolutions 133 confirming the transfer of the corporate reconsideration of the assailed Decision.cralawlibrary
properties to himself, and to Armentano. Petitioners cannot argue that the transfer of the corporate properties to them
is valid by virtue of the Resolution134 by the general membership of ALRAI confirming the transfer for three reasons. Factual Antecedents

First, as cited, Section 32 requires that the contract should be ratified by a vote representing at least two-thirds of the On October 5, 2004, Vitaliano filed, in his individual capacity and on behalf of FQB+7, Inc. (FQB+7), a
members in a meeting called for the purpose. Records of this case do not show whether the Resolution was indeed Complaint4ςrνl1 for intra-corporate dispute, injunction, inspection of corporate books and records, and damages,
voted by the required percentage of membership. In fact, respondents take exception to the credibility of the against respondents Nathaniel D. Bocobo (Nathaniel), Priscila D. Bocobo (Priscila), and Antonio De Villa (Antonio).
signatures of the persons who voted in the Resolution. They argue that, "from the alleged 134 signatures, 24 of which The Complaint alleged that FQB+7 was established in 1985 with the following directors and subscribers, as reflected
are non-members, 4 of which were signed twice under different numbers, and 27 of which are apparently proxies in its Articles of Incorporation:chanroblesvirtualawlibrary
unequipped with the proper authorization. Obviously, on such alleged general membership meeting the majority of the
entire membership was not attained."135
Directors Subscribers
Second, there is also no showing that there was full disclosure of the adverse interest of the directors involved when 1. Francisco Q. Bocobo 1. Francisco Q. Bocobo
the Resolution was approved. Full disclosure is required under the aforecited Section 32 of the Corporation Code. 136 2. Fidel N. Aguirre 2. Fidel N. Aguirre
3. Alfredo Torres 3. Alfredo Torres
Third, Section 32 requires that the contract be fair and reasonable under the circumstances. As previously discussed, 4. Victoriano Santos 4. Victoriano Santos
we find that the transfer of the corporate properties to the individual petitioners is not fair and reasonable for (1) want 5. Victorino Santos5ςrνl1 5. Victorino Santos
of legitimate corporate purpose, and for (2) the breach of the fiduciary nature of the positions held by Javonillo and 6. Vitaliano N. Aguirre II
Armentano. Lacking any of these (full disclosure and a showing that the contract is fair and reasonable), ratification by 7. Alberto Galang
the two-thirds vote would be of no avail.137 8. Rolando B. Bechayda6ςrνl1

In view of the foregoing, we rule that the transfers of ALRAI's corporate properties to Javonillo, Armentano, Dela Cruz,
Alcantara and Loy are void. We affirm the finding of the court a quo when it ruled that "[n]o proof was shown to justify
the transfer of the titles, hence, said transfer should be annulled." 138
WHEREFORE, in view of the foregoing, the petitions for review on certiorari in G.R. Nos. 188642 & 189425 and in
G.R. Nos. 188888-89 are PARTIALLY GRANTED. The Decision of the CA dated November 24, 2008 and its
Resolution dated June 19, 2009 ruling that respondents are reinstated as members of ALRAI are hereby AFFIRMED.
The Decision of theCA dated November 24, 2008 and its Resolution dated June 19, 2009 are MODIFIED as follows:
To Vitaliano's knowledge, except for the death of Francisco Q. Bocobo and Alfredo Torres, there has been no other
change in the above listings.cralawlibrary
The Complaint further alleged that, sometime in April 2004, Vitaliano discovered a General Information Sheet (GIS) of
FQB+7, dated September 6, 2002, in the Securities and Exchange Commission (SEC) records. This GIS was filed by
Francisco Q. Bocobo's heirs, Nathaniel and Priscila, as FQB+7's president and secretary/treasurer, respectively. It
also stated FQB+7's directors and subscribers, as follows:chanroblesvirtualawlibrary

The following Transfer Certificates of Title are VOID: Directors Subscribers

(1) TCT Nos. T-322962 and T-322963 in the name of Armando Javonillo; 1. Nathaniel D. Bocobo 1. Nathaniel D. Bocobo
(2) TCT Nos. T-322964 and T-322965 in the name of Ma. Acelita Armentano; 2. Priscila D. Bocobo 2. Priscila D. Bocobo
(3) TCT Nos. T-322966, T-322967, T-322968, and T-322969 in the name of Romeo Dela Cruz; 3. Fidel N. Aguirre 3. Fidel N. Aguirre
(4) TCT No. T-338403 in the name of Lily Loy; and 4. Victoriano Santos 4. Victorino7ςrνl1 Santos
(5) TCT No. T-322971 in the name of Asuncion Alcantara. 5. Victorino Santos 5. Victorino Santos
6. Consolacion Santos8ςrνl1 6. Consolacion Santos9ςrνl1
SO ORDERED.
Further, the GIS reported that FQB+7's stockholders held their annual meeting on September 3, 2002.10ςrνl1
11.Aguirre II vs. FQB+7, Inc., 688 SCRA 242, G.R. No. 170770 January 9, 2013
The substantive changes found in the GIS, respecting the composition of directors and subscribers of FQB+7,
prompted Vitaliano to write to the "real" Board of Directors (the directors reflected in the Articles of Incorporation),
Pursuant to Section 145 of the Corporation Code, an existing intra-corporate dispute, which does not constitute a represented by Fidel N. Aguirre (Fidel). In this letter11ςrνl1 dated April 29, 2004, Vitaliano questioned the validity and
continuation of corporate business, is not affected by the subsequent dissolution of the corporation.cralawlibrary truthfulness of the alleged stockholders meeting held on September 3, 2002. He asked the "real" Board to rectify what
he perceived as erroneous entries in the GIS, and to allow him to inspect the corporate books and records. The "real"
Before the Court is a Petition for Review on Certiorari of the June 29, 2005 Decision1ςrνl1 of the Court of Appeals Board allegedly ignored Vitaliano's request.cralawlibrary
(CA) in CA-G.R. SP No. 87293, which nullified the trial court's writ of preliminary injunction and dismissed petitioner
Vitaliano N. Aguirre's (Vitaliano) Complaint before the Regional Trial Court (RTC) for lack of jurisdiction. The On September 27, 2004, Nathaniel, in the exercise of his power as FQB+7's president, appointed Antonio as the
dispositive portion of the assailed Decision reads:chanroblesvirtualawlibrary corporation's attorney-in-fact, with power of administration over the corporation's farm in Quezon
Province.12ςrνl1 Pursuant thereto, Antonio attempted to take over the farm, but was allegedly prevented by Fidel and
his men.13ςrνl1
WHEREFORE, the assailed October 15, 2004 Order, as well as the October 27, 2004 Writ of Preliminary Injunction,
are SET ASIDE. With FQB+7, Inc.'s dissolution on September 29, 2003 and Case No. 04111077's ceasing to become Characterizing Nathaniel's, Priscila's, and Antonio's continuous representation of the corporation as a usurpation of
an intra-corporate dispute, said case is hereby ordered DISMISSED for want of jurisdiction.cralawlibrary the management powers and prerogatives of the "real" Board of Directors, the Complaint asked for an injunction
against them and for the nullification of all their previous actions as purported directors, including the GIS they had
SO ORDERED.2ςrνl1 filed with the SEC. The Complaint also sought damages for the plaintiffs and a declaration of Vitaliano's right to
inspect the corporate records.cralawlibrary
Likewise assailed in this Petition is the appellate court's December 16, 2005 Resolution, 3ςrνl1 which denied a
The case, docketed as SEC Case No. 04-111077, was assigned to Branch 24 of the RTC of Manila (Manila RTC),
which was a designated special commercial court, pursuant to A.M. No. 03-03-03-SC.14ςrνl1
The respondents failed, despite notice, to attend the hearing on Vitaliano's application for preliminary
injunction.15ςrνl1 Thus, in an Order16ςrνl1 dated October 15, 2004, the trial court granted the application based only
on Vitaliano's testimonial and documentary evidence, consisting of the corporation's articles of incorporation, by-laws,
the GIS, demand letter on the "real" Board of Directors, and police blotter of the incident between Fidel's and
Antonio's groups. On October 27, 2004, the trial court issued the writ of preliminary injunction17ςrνl1 after Vitaliano
filed an injunction bond.cralawlibrary
The respondents filed a motion for an extension of 10 days to file the "pleadings warranted in response to the
complaint," which they received on October 6, 2004.18ςrνl1 The trial court denied this motion for being a prohibited
pleading under Section 8, Rule 1 of the Interim Rules of Procedure Governing Intra-corporate Controversies under
Republic Act (R.A.) No. 8799.19ςrνl1
The respondents filed a Petition for Certiorari and Prohibition,20ςrνl1 docketed as CA-G.R. SP No. 87293, before the
CA. They later amended their Petition by impleading Fidel, who allegedly shares Vitaliano's interest in keeping them
out of the corporation, as a private respondent therein.21ςrνl1
The respondents sought, in their certiorari petition, the annulment of all the proceedings and issuances in SEC Case
No. 04-11107722ςrνl1 on the ground that Branch 24 of the Manila RTC has no jurisdiction over the subject matter,
which they defined as being an agrarian dispute.23ςrνl1 They theorized that Vitaliano's real goal in filing the
Complaint was to maintain custody of the corporate farm in Quezon Province. Since this land is agricultural in nature,
they claimed that jurisdiction belongs to the Department of Agrarian Reform (DAR), not to the Manila
RTC.24ςrνl1 They also raised the grounds of improper venue (alleging that the real corporate address is different
from that stated in the Articles of Incorporation)25ςrνl1 and forum-shopping26ςrνl1(there being a pending case
between the parties before the DAR regarding the inclusion of the corporate property in the agrarian reform
program).27ςrνl1 Respondents also raised their defenses to Vitaliano's suit, particularly the alleged disloyalty and
fraud committed by the "real" Board of Directors,28ςrνl1 and respondents' "preferential right to possess the corporate
property" as the heirs of the majority stockholder Francisco Q. Bocobo. 29ςrνl1
The respondents further informed the CA that the SEC had already revoked FQB+7's Certificate of Registration on
September 29, 2003 for its failure to comply with the SEC reportorial requirements. 30ςrνl1The CA determined that
the corporation's dissolution was a conclusive fact after petitioners Vitaliano and Fidel failed to dispute this factual
assertion.31ςrνl1
Ruling of the Court of Appeals
The CA determined that the issues of the case are the following: (1) whether the trial court's issuance of the writ of
preliminary injunction, in its October 15, 2004 Order, was attended by grave abuse of discretion amounting to lack of
jurisdiction; and (2) whether the corporation's dissolution affected the trial court's jurisdiction to hear the intracorporate
dispute in SEC Case No. 04-111077.32ςrνl1
On the first issue, the CA determined that the trial court committed a grave abuse of discretion when it issued the writ
of preliminary injunction to remove the respondents from their positions in the Board of Directors based only on
Vitaliano's self-serving and empty assertions. Such assertions cannot outweigh the entries in the GIS, which are
documented facts on record, which state that respondents are stockholders and were duly elected corporate directors
and officers of FQB+7, Inc. The CA held that Vitaliano only proved a future right in case he wins the suit. Since an
injunction is not a remedy to protect future, contingent or abstract rights, then Vitaliano is not entitled to a writ. 33ςrνl1
Further, the CA disapproved the discrepancy between the trial court's October 15, 2004 Order, which granted the
application for preliminary injunction, and its writ dated October 27, 2004. The Order enjoined all the respondents
"from entering, occupying, or taking over possession of the farm owned by Atty. Vitaliano Aguirre II," while the writ
states that the subject farm is "owned by plaintiff corporation located in Mulanay, Quezon Province." The CA held that
this discrepancy imbued the October 15, 2004 Order with jurisdictional infirmity. 34ςrνl1
On the second issue, the CA postulated that Section 122 of the Corporation Code allows a dissolved corporation to
continue as a body corporate for the limited purpose of liquidating the corporate assets and distributing them to its
creditors, stockholders, and others in interest. It does not allow the dissolved corporation to continue its business.
That being the state of the law, the CA determined that Vitaliano's Complaint, being geared towards the continuation
of FQB+7, Inc.'s business, should be dismissed because the corporation has lost its juridical
personality.35ςrνl1 Moreover, the CA held that the trial court does not have jurisdiction to entertain an intra-corporate
dispute when the corporation is already dissolved.36ςrνl1
After dismissing the Complaint, the CA reminded the parties that they should proceed with the liquidation of the
dissolved corporation based on the existing GIS, thus:chanroblesvirtualawlibrary
With SEC's revocation of its certificate of registration on September 29, 2004 [sic], FQB+7, Inc. will be obligated to wind
up its affairs. The Corporation will have to be liquidated within the 3-year period mandated by Sec. 122 of the
Corporation Code.cralawlibrary
Regardless of the method it will opt to liquidate itself, the Corporation will have to reckon with the members of the board
as duly listed in the General Information Sheet last filed with SEC. Necessarily, and as admitted in the complaint below,
the following as listed in the Corporation's General Information Sheet dated September 6, 2002, will have to continue
acting as Members of the Board of FQB+7, Inc. viz:
Herein petitioners filed a Motion for Reconsideration.38ςrνl1 They argued that the CA erred in ruling that the October
15, 2004 Order was inconsistent with the writ. They explained that pages 2 and 3 of the said Order were interchanged
in the CA's records, which then misled the CA to its erroneous conclusion. They also posited that the original
sentence in the correct Order reads: "All defendants are further enjoined from entering, occupying or taking over
possession of the farm owned by plaintiff corporation located in Mulanay, Quezon." This sentence is in accord with
what is ordered in the writ, hence the CA erred in nullifying the Order.cralawlibrary
On the second issue, herein petitioners maintained that the CA erred in characterizing the reliefs they sought as a
continuance of the dissolved corporation's business, which is prohibited under Section 122 of the Corporation Code.
Instead, they argued, the relief they seek is only to determine the real Board of Directors that can represent the
dissolved corporation.cralawlibrary
The CA denied the Motion for Reconsideration in its December 16, 2005 Resolution. 39ςrνl1 It determined that the
crucial issue is the trial court's jurisdiction over an intra-corporate dispute involving a dissolved
corporation.40ςrνl1 Based on the prayers in the Complaint, petitioners seek a determination of the real Board that
can take over the management of the corporation's farm, not to sit as a liquidation Board. Thus, contrary to
petitioners' claims, their Complaint is not geared towards liquidation but a continuance of the corporation's
business.cralawlibrary
Issues
1. Whether the CA erred in annulling the October 15, 2004 Order based on interchanged pages.cralawlibrary
2. Whether the Complaint seeks to continue the dissolved corporation's business.cralawlibrary
3. Whether the RTC has jurisdiction over an intra-corporate dispute involving a dissolved corporation.cralawlibrary
Our Ruling
The Petition is partly meritorious.cralawlibrary
On the nullification of the Order of
preliminary injunction.
Petitioners reiterate their argument that the CA was misled by the interchanged pages in the October 15, 2004 Order.
They posit that had the CA read the Order in its correct sequence, it would not have nullified the Order on the ground
that it was issued with grave abuse of discretion amounting to lack of jurisdiction. 41ςrνl1

Petitioners' argument fails to impress. The CA did not nullify the October 15, 2004 Order merely because of the
interchanged pages. Instead, the CA determined that the applicant, Vitaliano, was not able to show that he had an
actual and existing right that had to be protected by a preliminary injunction. The most that Vitaliano was able to prove
was a future right based on his victory in the suit. Contrasting this future right of Vitaliano with respondents' existing
right under the GIS, the CA determined that the trial court should not have disturbed the status quo. The CA's
discussion regarding the interchanged pages was made only in addition to its above ratiocination. Thus, whether the
pages were interchanged or not will not affect the CA's main finding that the trial court issued the Order despite the
absence of a clear and existing right in favor of the applicant, which is tantamount to grave abuse of discretion. We
cannot disturb the CA's finding on this score without any showing by petitioners of strong basis to warrant the
reversal.cralawlibrary
Is the Complaint a continuation of business?
Section 122 of the Corporation Code prohibits a dissolved corporation from continuing its business, but allows it to
continue with a limited personality in order to settle and close its affairs, including its complete liquidation,
thus:chanroblesvirtualawlibrary
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets, but not for the purpose of continuing the
business for which it was established.
xxxx
Upon learning of the corporation's dissolution by revocation of its corporate franchise, the CA held that the intra-
corporate Complaint, which aims to continue the corporation's business, must now be dismissed under Section
122.cralawlibrary
Petitioners concede that a dissolved corporation can no longer continue its business. They argue, however, that
Section 122 allows a dissolved corporation to wind up its affairs within 3 years from its dissolution. Petitioners then
maintain that the Complaint, which seeks only a declaration that respondents are strangers to the corporation and
have no right to sit in the board or act as officers thereof, and a return of Vitaliano's stockholdings, intends only to
resolve remaining corporate issues. The resolution of these issues is allegedly part of corporate winding
up.cralawlibrary
Does the Complaint seek a continuation of business or is it a settlement of corporate affairs? The answer lies in the
prayers of the Complaint, which state:chanroblesvirtualawlibrary
PRAYER
WHEREFORE, it is most respectfully prayed of this Honorable Court that judgment be rendered in favor of the plaintiffs
and against the defendants, in the following wise:
I. ON THE PRAYER OF TRO/STATUS QUO ORDER AND WRIT OF PRELIMINARY INJUNCTION:
1. Forthwith and pending the resolution of plaintiffs' prayer for issuance of writ of preliminary injunction, in
order to maintain the status quo, a status quo order or temporary restraining order (TRO) be issued
enjoining the defendants, their officers, employees, and agents from exercising the powers and authority
as members of the Board of Directors of plaintiff FQB as well as officers thereof and from misrepresenting
and conducting themselves as such, and enjoining defendant Antonio de Villa from taking over the farm
of the plaintiff FQB and from exercising any power and authority by reason of his appointment emanating
from his co-defendant Bocobos.cralawlibrary
2. After due notice and hearing and during the pendency of this action, to issue writ of preliminary injunction
prohibiting the defendants from committing the acts complained of herein, more particularly those
enumerated in the immediately pr[e]ceeding paragraph, and making the injunction permanent after trial on
the merits.
II. ON THE MERITS
After trial, judgment be rendered in favor of the plaintiffs and against the defendants, as follows:
1. Declaring defendant Bocobos as without any power and authority to represent or conduct themselves as
members of the Board of Directors of plaintiff FQB, or as officers thereof.cralawlibrary
2. Declaring that Vitaliano N. Aguirre II is a stockholder of plaintiff FQB owning fifty (50) shares of stock
thereof.cralawlibrary
3. Allowing Vitaliano N. Aguirre II to inspect books and records of the company.cralawlibrary
4. Annulling the GIS, Annex "C" of the Complaint as fraudulent and illegally executed and filed.cralawlibrary
5. Ordering the defendants to pay jointly and solidarily the sum of at least P200,000.00 as moral damages; at
least P100,000.00 as exemplary damages; and at least P100,000.00 as and for attorney's fees and other
litigation expenses.
Plaintiffs further pray for costs and such other relief just and equitable under the premises.42ςrνl1
The Court fails to find in the prayers above any intention to continue the corporate business of FQB+7. The Complaint
does not seek to enter into contracts, issue new stocks, acquire properties, execute business transactions, etc. Its aim
is not to continue the corporate business, but to determine and vindicate an alleged stockholder's right to the return of
his stockholdings and to participate in the election of directors, and a corporation's right to remove usurpers and
strangers from its affairs. The Court fails to see how the resolution of these issues can be said to continue the
business of FQB+7.cralawlibrary
Neither are these issues mooted by the dissolution of the corporation. A corporation's board of directors is not
rendered functus officio by its dissolution. Since Section 122 allows a corporation to continue its existence for a
limited purpose, necessarily there must be a board that will continue acting for and on behalf of the dissolved
corporation for that purpose. In fact, Section 122 authorizes the dissolved corporation's board of directors to conduct
its liquidation within three years from its dissolution. Jurisprudence has even recognized the board's authority to act as
trustee for persons in interest beyond the said three-year period.43ςrνl1 Thus, the determination of which group is
the bona fide or rightful board of the dissolved corporation will still provide practical relief to the parties
involved.cralawlibrary
The same is true with regard to Vitaliano's shareholdings in the dissolved corporation. A party's stockholdings in a
corporation, whether existing or dissolved, is a property right 44ςrνl1 which he may vindicate against another party
who has deprived him thereof. The corporation's dissolution does not extinguish such property right. Section 145 of
the Corporation Code ensures the protection of this right, thus:chanroblesvirtualawlibrary
Sec. 145. Amendment or repeal. – No right or remedy in favor of or against any corporation, its stockholders,
members, directors, trustees, or officers, nor any liability incurred by any such corporation, stockholders, members,
directors, trustees, or officers, shall be removed or impaired either by the subsequent dissolution of said corporation or
by any subsequent amendment or repeal of this Code or of any part thereof. (Emphases supplied.)
On the dismissal of the Complaint for
lack of jurisdiction.
The CA held that the trial court does not have jurisdiction over an intra-corporate dispute involving a dissolved
corporation. It further held that due to the corporation's dissolution, the qualifications of the respondents can no longer
be questioned and that the dissolved corporation must now commence liquidation proceedings with the respondents
as its directors and officers.cralawlibrary

The CA's ruling is founded on the assumptions that intra-corporate controversies continue only in existing
corporations; that when the corporation is dissolved, these controversies cease to be intra-corporate and need no
longer be resolved; and that the status quo in the corporation at the time of its dissolution must be maintained. The
Court finds no basis for the said assumptions.cralawlibrary
Intra-corporate disputes remain even
when the corporation is dissolved.
Jurisdiction over the subject matter is conferred by law. R.A. No. 879945ςrνl1 conferred jurisdiction over intra-
corporate controversies on courts of general jurisdiction or RTCs, 46ςrνl1 to be designated by the Supreme Court.
Thus, as long as the nature of the controversy is intra-corporate, the designated RTCs have the authority to exercise
jurisdiction over such cases.cralawlibrary
So what are intra-corporate controversies? R.A. No. 8799 refers to Section 5 of Presidential Decree (P.D.) No. 902-A
(or The SEC Reorganization Act) for a description of such controversies:chanroblesvirtualawlibrary
a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of
the stockholder, partners, members of associations or organizations registered with the Commission;
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members,
or associates; between any or all of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; and between such corporation, partnership or association and the
state insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of such corporations,
partnerships or associations.
The Court reproduced the above jurisdiction in Rule 1 of the Interim Rules of Procedure Governing Intra-corporate
Controversies under R.A. No. 8799:chanroblesvirtualawlibrary
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.
Meanwhile, jurisprudence has elaborated on the above definitions by providing tests in determining whether a
controversy is intra-corporate. Reyes v. Regional Trial Court of Makati, Br. 14247ςrνl1 contains a comprehensive
discussion of these two tests, thus:chanroblesvirtualawlibrary
A review of relevant jurisprudence shows a development in the Court's approach in classifying what constitutes an
intra-corporate controversy. Initially, the main consideration in determining whether a dispute constitutes an intra-
corporate controversy was limited to a consideration of the intra-corporate relationship existing between or among the
parties. The types of relationships embraced under Section 5(b) x x x were as follows:
a) between the corporation, partnership, or association and the public;
b) between the corporation, partnership, or association and its stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the State as far as its franchise, permit or license to
operate is concerned; and
d) among the stockholders, partners or associates themselves. xxx
The existence of any of the above intra-corporate relations was sufficient to confer jurisdiction to the SEC [now the
RTC], regardless of the subject matter of the dispute. This came to be known as the relationship test.cralawlibrary
However, in the 1984 case of DMRC Enterprises v. Esta del Sol Mountain Reserve, Inc., the Court introduced the
nature of the controversy test. We declared in this case that it is not the mere existence of an intra-corporate
relationship that gives rise to an intra-corporate controversy; to rely on the relationship test alone will divest the
regular courts of their jurisdiction for the sole reason that the dispute involves a corporation, its directors, officers, or
stockholders. We saw that there is no legal sense in disregarding or minimizing the value of the nature of the
transactions which gives rise to the dispute.cralawlibrary
Under the nature of the controversy test, the incidents of that relationship must also be considered for the purpose of
ascertaining whether the controversy itself is intra-corporate. The controversy must not only be rooted in the
existence of an intra-corporate relationship, but must as well pertain to the enforcement of the parties'
correlative rights and obligations under the Corporation Code and the internal and intra-corporate regulatory
rules of the corporation. If the relationship and its incidents are merely incidental to the controversy or if there will
still be conflict even if the relationship does not exist, then no intra-corporate controversy exists.cralawlibrary
The Court then combined the two tests and declared that jurisdiction should be determined by considering
not only the status or relationship of the parties, but also the nature of the question under controversy. This
two-tier test was adopted in the recent case of Speed Distribution, Inc. v. Court of Appeals:chanroblesvirtualawlibrary
'To determine whether a case involves an intra-corporate controversy, and is to be heard and decided by the
branches of the RTC specifically designated by the Court to try and decide such cases, two elements must concur:
(a) the status or relationship of the parties, and [b] the nature of the question that is the subject of their
controversy.cralawlibrary
The first element requires that the controversy must arise out of intra-corporate or partnership
relations between any or all of the parties and the corporation, partnership, or association of which they are
stockholders, members or associates, between any or all of them and the corporation, partnership or association of
which they are stockholders, members or associates, respectively; and between such corporation, partnership, or
association and the State insofar as it concerns the individual franchises. The second element requires that the
dispute among the parties be intrinsically connected with the regulation of the corporation. If the nature of the
controversy involves matters that are purely civil in character, necessarily, the case does not involve an intra-
corporate controversy.' (Citations and some emphases omitted; emphases supplied.)
Thus, to be considered as an intra-corporate dispute, the case: (a) must arise out of intra-corporate or partnership
relations, and (b) the nature of the question subject of the controversy must be such that it is intrinsically connected
with the regulation of the corporation or the enforcement of the parties' rights and obligations under the Corporation
Code and the internal regulatory rules of the corporation. So long as these two criteria are satisfied, the dispute is
intra-corporate and the RTC, acting as a special commercial court, has jurisdiction over it.cralawlibrary
Examining the case before us in relation to these two criteria, the Court finds and so holds that the case is essentially
an intra-corporate dispute. It obviously arose from the intra-corporate relations between the parties, and the questions
involved pertain to their rights and obligations under the Corporation Code and matters relating to the regulation of the
corporation. We further hold that the nature of the case as an intra-corporate dispute was not affected by the
subsequent dissolution of the corporation.cralawlibrary
It bears reiterating that Section 145 of the Corporation Code protects, among others, the rights and remedies of
corporate actors against other corporate actors. The statutory provision assures an aggrieved party that the
corporation's dissolution will not impair, much less remove, his/her rights or remedies against the corporation, its
stockholders, directors or officers. It also states that corporate dissolution will not extinguish any liability already
incurred by the corporation, its stockholders, directors, or officers. In short, Section 145 preserves a corporate actor's
cause of action and remedy against another corporate actor. In so doing, Section 145 also preserves the nature of the
controversy between the parties as an intra-corporate dispute.cralawlibrary
The dissolution of the corporation simply prohibits it from continuing its business. However, despite such dissolution,
the parties involved in the litigation are still corporate actors. The dissolution does not automatically convert the
parties into total strangers or change their intra-corporate relationships. Neither does it change or terminate existing
causes of action, which arose because of the corporate ties between the parties. Thus, a cause of action involving an
intra-corporate controversy remains and must be filed as an intra-corporate dispute despite the subsequent
dissolution of the corporation.cralawlibrary
WHEREFORE, premises considered, the Petition for Review on Certiorari is PARTIALLY GRANTED. The assailed
June 29, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 87293, as well as its December 16, 2005
Resolution, are ANNULLED with respect to their dismissal of SEC Case No. 04-111077 on the ground of lack of
jurisdiction. The said case is ordered REINSTATED before Branch 24 of the Regional Trial Court of Manila. The rest
of the assailed issuances are AFFIRMED.
SO ORDERED.
12.Lim vs. Moldex Land, Inc., 815 SCRA 619, G.R. No. 206038 January 25, 2017
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the March 4, 2013
Decision 1 of the Regional Trial Court of Manila, Branch 24, (RTC) in Civil Case No. 12-128478, which dismissed the
complaint against the respondents for 1] annulment of the July 21, 2012 general membership meeting of 1322 Roxas
Boulevard Condominium Corporation (Condocor); 2] annulment of election of Jeffrey Jaminola (Jaminola), Edgardo
Macalintal (Macalintal), Joji Milanes (Milanes), and Clothilda Anne Roman (Roman) (collectively referred to as
"individual respondents") as members of the Board of Directors; and 3] accounting.
The primordial issue presented before the R TC, acting as a special commercial court, was the validity, legality and
effectivity of the July 21, 2012 Annual General Membership Meeting and Organizational Meeting of Condocor's Board
of Directors.2
Initially, the Court, in its Resolution3 dated April 1, 2013, denied the petition for having availed of the wrong mode of
appeal because Lim raised mixed questions of fact and law, which should have been filed before the Court of
Appeals (CA).4Upon motion for reconsideration, however, the Court granted it. Thereafter, the respondents filed their
Comment5 and Lim filed a Reply6 thereto.
The Antecedents
Lim is a registered unit owner of 1322 Golden Empire Tower (Golden Empire Tower), a condominium project of
Moldex Land, Inc. (Moldex), a real estate company engaged in the construction and development of high-end
condominium projects and in the marketing and sale of the units thereof to the general public. Condocor, a non-stock,
non-profit corporation, is the registered condominium corporation for the Golden Empire Tower. Lim, as a unit owner
of Golden Empire Tower, is a member of Condocor.
Lim claimed that the individual respondents are non-unit buyers, but all are members of the Board of Directors of
Condocor, having been elected during its organizational meeting in 2008. They were again elected during the July 21,
2012 general membership meeting.7
Moldex became a member of Condocor on the basis of its ownership of the 220 unsold units in the Golden Empire
Tower. The individual respondents acted: as its representatives.
On July 21, 2012, Condocor held its annual general membership meeting. Its corporate secretary certified, and
Jaminola, as Chairman, declared the existence of a quorum even though only 29 of the 1088 unit buyers were
present. The declaration of quorum was based on the presence of the majority of the voting rights, including those
pertaining to the 220 unsold units held by Moldex through its representatives. Lim, through her attorney-in-fact,
objected to the validity of the meeting. The objection was denied. Thus, Lim and all the other unit owners present,
except for one, walked out and left the meeting.
Despite the walkout, the individual respondents and the other unit owner proceeded with the annual general
membership meeting and elected the new members of the Board of Directors for 2012-2013. All four (4) individual
respondents were voted as members of the board, together with three (3) others whose election was conditioned on
their subsequent confirmation.9 Thereafter, the newly elected members of the board conducted an organizational
meeting and proceeded with the election of its officers. The individual respondents were elected as follows:
1. Atty. Jeffrey Jaminola - Chairman of the Board and President
2. Ms. Joji Milanes - Vice-President
3. Ms. Clothilda Ann Roman - Treasurer
4. Mr. Edgardo Macalintal - Corporate Secretary
5. Atty. Ma. Rosario Bernardo - Asst. Corporate Secretary
6. Atty. Mary Rose Pascual - Asst. Corporate Secretary
7. Atty. Jasmin Cuizon - Asst. Corporate Secretary10
Consequently, Lim filed an election protest before the RTC. Said court, however, dismissed the complaint holding that
there was a quorum during the July 21, 2012 annual membership meeting; that Moldex is a member of Condocor,
being the registered owner of the unsold/unused condominium units, parking lots and storage areas; and that the
individual respondents, as Moldex's representatives, were entitled to exercise all membership rights, including the
right to vote and to be voted. 11 In so ruling, the trial court explained that the presence or absence of a quorum in the
subject meeting was determined on the basis of the voting rights of all the units owned by the members in good
standing. 12 The total voting rights of unit owners in good standing was 73,376 and, as certified by the corporate
secretary, 83.33% of the voting rights in good standing were present in the said meeting, inclusive of the 5 8,504
voting rights of Moldex. 13
Not in conformity, Lim filed the subject petition raising the following
ISSUES
A. THE LOWER COURT GRAVELY ERRED IN RULING THAT IN DETERMINING THE PRESENCE OR ABSENCE
OF QUORUM AT GENERAL OR ANNUAL MEMBERSHIP MEETINGS OF RESPONDENT CONDOCOR, EVEN
NONUNIT BUYERS SHOULD BE INCLUDED DESPITE THE EXPRESS PROVISION OF ITS BY-LAWS, THE LAW
AND SETTLED JURISPRUDENCE;
B. THE LOWER COURT ERRED IN RULING THAT RESPONDENT MOLDEX IS A MEMBER OF RESPONDENT
CONDOCOR AND THAT IT MAY APPOINT INDIVIDUAL RESPONDENTS TO REPRESENT IT THEREIN;
C. EVEN ASSUMING THAT RESPONDENT MOLDEX MAY BE A MEMBER OF RESPONDENT CONDOCOR,
THERE IS STILL NO BASIS FOR IT TO BE ELECTED TO THE BOARD OF DIRECTORS OF RESPONDENT
CONDOCOR BECAUSE IT IS A JURIDICAL PERSON;
D. ASSUMING FURTHER THAT DESPITE BEING A JURIDICAL PERSON, IT MAY BE ELECTED TO THE
BOARD OF DIRECTORS OF RESPONDENT CONDOCOR, THERE IS NO LEGAL BASIS FOR THE LOWER
COURT TO HOLD THAT RESPONDENT MOLDEX HAS AUTOMATICALLY RESERVED FOUR SEATS THEREIN;
AND,
E. THE LOWER COURT GRAVELY ERRED IN RULING TO RECOGNIZE RESPONDENT MOLDEX AS
OWNERDEVELOPER HAVING FOUR RESERVED SEATS IN RESPONDENT CONDOCOR BOARD, AS SUCH
RULING EFFECTIVELY ALLOWED THE VERY EVIL THAT PD 957 SOUGHT TO PREVENT FROM DOMINATING
THE CONTROL AND MANAGEMENT OF RESPONDENT CONDOCOR TO THE GRAVE AND IRREPARABLE
DAMAGE AND INJURY OF PETITIONER AND THE OTHER UNIT BUYERS, WHO ARE THE BONA FIDE
MEMBERS OF RESPONDENT CONDOCOR.
In sum, the primordial issues to be resolved are: 1) whether the July 21, 2012 membership meeting was valid; 2)
whether Moldex can be deemed a member of Condocor; and 3) whether a non-unit owner can be elected as a
member of the Board of Directors of Condocor.
Procedural Issues
The issues raised being purely legal, the Court may properly entertain the subject petition.
The subject case was initially denied because it appeared that Lim raised mixed questions of fact and law which
should have been filed before the CA. After judicious perusal of Lim's arguments, however, the Court ascertained that
a reconsideration of its April 1, 2013 Resolution14 was in order.
It has been consistently held that only pure questions of law can be entertained in a petition for review under Rule 45
of the Rules of Court. In Century Iron Works, Inc. v. Banas,15the Court held:
A petition for review on certiorari under Rule 45 is an appeal from a ruling of a lower tribunal on pure questions of law.
It is only in exceptional circumstances that we admit and review questions of fact.
A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question
of fact when the doubt arises as to the truth or falsity of the alleged facts. For a question to be one of law, the question
must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The
resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear
that the issue invites a review of the evidence presented, the question posed is one of fact.
Thus, the test of whether a question is one of law or of fact is not the appellation given to such question by
the party raising the same; rather, it is whether the appellate court can determine the issue raised without
reviewing or evaluating the evidence, in which case, it is a question of law; otherwise it is a question of
fact. 16 [Emphasis supplied]
Respondents argued that the initial denial of the petition was correct because Lim availed of the wrong mode of
appeal. As the assailed judgment involved an intra-corporate dispute cognizable by the RTC, the appeal should have
been filed before the CA, and not before this Court.
Doubtless, this case involves intra-corporate controversies and, thus, jurisdiction lies with the R TC, acting as a
special commercial court. Section 5.2 of Republic Act No. 8799 (R.A. No. 8799)17effectively transferred to the
appropriate RTCs jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A (P.D. No.
902-A), to wit:
a) Devices or schemes employed by or any acts, of the board of directors, business associates, its officers or
partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/ or
of the stockholder, partners, members of associations or organizations registered with the Commission;
b) Controversies arising out of intra-corporate or partnership relations, between and
amongstockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such corporation,
partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;
and
c) Controversies in the election or appointments of directors, trustees, officers or managers of such
corporations, partnerships or associations. [Emphases supplied]
Pursuant to A.M. No. 04-9-07-SC, all decisions and final orders in cases falling under the Interim Rules of Corporate
Rehabilitation and the Interim Rules of Procedure Governing Intra-Corporate Controversies shall be appealable to the
CA through a petition for review under Rule 43 of the Rules of Court. Such petition shall be taken within fifteen (15)
days from notice of the decision or final order of the RTC. 18
In turn, Rule 43 governs the procedure for appeals from judgments or final orders of quasi-judicial agencies to the CA,
whether it involves questions of fact, of law, or mixed questions of fact and law. Nevertheless, a party may directly file
a petition for review on certiorari before the Court to question the judgment of a lower court, especially when the issue
raised is purely of law and is one of novelty.
Substantive Issues
Lim is still a member of Condocor
Respondents argued that Lim had no cause of action to file the subject action because she was no longer the owner
of a condominium unit by virtue of a Deed of Assignment19 she executed in favor of Reynaldo Valera Lim and Dianna
Mendoza Lim, her nephew and niece.
Section 90 of the Corporation Code states 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. A perusal of
Condocor's By-Laws as regards membership and transfer of rights or ownership over the unit reveal that:
Membership in the CORPORATION is a mere appurtenance of the ownership of any unit in the CONDOMINIUM and
may not therefore be sold, transferred or otherwise encumbered separately from the said unit. Any member who
sells or transfer his/her/its unit/s in the CONDOMINIUM shall automatically cease to be a member of the
CORPORATION, the membership being automatically assumed by the buyer or transferee upon registration
of the sale or transfer and ownership of the latter over the unit with the Register of Deeds for the City of
Manila.20 [Emphasis supplied.]
Likewise, the Master Deed of Condocor provides:
Section 11 : MORTGAGES, LIENS, LEASES, TRANSFERS OF RIGHTS AND SALE OF UNITS: All transactions
involving the transfer of the ownership or occupancy of any UNIT, such as sale, transfer of rights or leases, as well as
encumbrances involving said UNIT, such as mortgages, liens and the like, shall be reported to the CORPORATION
within five (5) days after the effectivity of said transactions.21
Nothing in the records showed that the alleged transfer made by Lim was registered with the Register of Deeds of the
City of Manila or was reported to the corporation. Logically, until and unless the registration is effected, Lim remains to
be the registered owner of the condominium unit and thus, continues to be a member of Condocor.
Moreover, even assuming that there was a transfer by virtue of the Deed of Assignment, the Confirmatory Special
Power of Attorney22 executed later by Lim, wherein she reiterated her membership in Condocor and constituted
Reynaldo V. Lim as her true and lawful Attorney-in-Fact, strengthened the fact that she still owns the condominium
unit and that there has been no transfer of ownership over the said property to her nephew, but only a mere
assignment of rights to the latter. As held by the Court in Casabuena v. CA,23 at most, an assignee can only acquire
rights duplicating those which his assignor is entitled by law to exercise. 24 Had it been otherwise, Reynaldo V. Lim
himself would have questioned and objected to the granting of the special power of attorney, and would have insisted
that he was really the owner of the condominium unit.
In non-stock corporations, quorum
is determined by the majority
of its actual members
In corporate parlance, the term "meeting" applies to every duly convened assembly either of stockholders, members,
directors, trustees, or managers for any legal purpose, or the transaction of business of a common interest. 25 Under
Philippine corporate laws, meetings may either be regular or special. A stockholders' or members' meeting must
comply with the following requisites to be valid:
1. The meeting must be held on the date fixed in the By-Laws or in accordance with law;26
2. Prior written notice of such meeting must be sent to all stockholders/members of record; 27
3. It must be called by the proper party;28
4. It must be held at the proper place;29 and
5. Quorum and voting requirements must be met. 30
Of these five (5) requirements, the existence of a quorum is crucial. Any act or transaction made during a meeting
without quorum is rendered of no force and effect, thus, not binding on the corporation or parties concerned.
In relation thereto, Section 52 of the Corporation Code of the Philippines (Corporation Code) provides:
Section 52. Quorum in meetings. - Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the
case of non-stock corporations.
Thus, for stock corporations, the quorum is based on the number of outstanding voting stocks while for non-stock
corporations, only those who are actual, living members with voting rights shall be counted in determining the
existence of a quorum. 31
To be clear, the basis in determining the presence of quorum in non-stock corporations is the numerical equivalent of
all members who are entitled to vote, unless some other basis is provided by the By-Laws of the corporation. The
qualification "with voting rights" simply recognizes the power of a non-stock corporation to limit or deny the right to
vote of any of its members.32 To include these members without voting rights in the total number of members for
purposes of quorum would be superfluous for although they may attend a particular meeting, they cannot cast their
vote on any matter discussed therein.
Similarly, Section 6 of Condocor's By-Laws reads: "The attendance of a simple majority of the members who are in
good standing shall constitute a quorum ... x x x." The phrase, "members in good standing," is a mere qualification as
to which members will be counted for purposes of quorum. As can be gleaned from Condocor's By-Laws, there are
two (2) kinds of members: 1) members in good standing; and 2) delinquent members. Section 6 merely stresses that
delinquent members are not to be taken into consideration in determining quorum. In relation thereto, Section 733 of
the By-Laws, referring to voting rights, also qualified that only those members in good standing are entitled to vote.
Delinquent members are stripped off their right to vote. Clearly, contrary to the ruling of the RTC, Sections 6 and 7 of
Condocor's By-Laws do not provide that majority of the total voting rights, without qualification, will constitute a
quorum.
It must be emphasized that insofar as Condocor is concerned, quorum is different from voting rights. Applying the law
and Condocor's By-Laws, if there are 100 members in a non-stock corporation, 60 of which are members in good
standing, then the presence of 50% plus 1 of those members in good standing will constitute a quorum. Thus, 31
members in good standing will suffice in order to consider a meeting valid as regards the presence of quorum. The 31
members will naturally have to exercise their voting rights. It is in this instance when the number of voting rights each
member is entitled to becomes significant. If 29 out of the 31 members are entitled to 1 vote each, another member
(known as A) is entitled to 20 votes and the remaining member (known as B) is entitled to 15 votes, then the total
number of voting rights of all 31 members is 64. Thus, majority of the 64 total voting rights, which is 33 (50% plus 1),
is necessary to pass a valid act. Assuming that only A and B concurred in approving a specific undertaking, then their
35 combined votes are more than sufficient to authorize such act.
The By-Laws of Condocor has no rule different from that provided in the Corporation Code with respect the
determination of the existence of a quorum. The quorum during the July 21, 2012 meeting should have been majority
of Condocor's members in good standing. Accordingly, there was no quorum during the July 21, 2012 meeting
considering that only 29 of the 108 unit buyers were present.
As there was no quorum, any resolution passed during the July 21, 2012 annual membership meeting was null and
void and, therefore, not binding upon the corporation or its members. The meeting being null and void, the resolution
and disposition of other legal issues emanating from the null and void July 21, 2012 membership meeting has been
rendered unnecessary.
To serve as a guide for the bench and the bar, however, the Court opts to discuss and resolve the same.
Moldex is a member
Of Condocor
Matters involving a condominium are governed by Republic Act No. 4726 (Condominium Act). Said law sanctions the
creation of a condominium corporation which is especially formed for the purpose of holding title to the common
areas, including the land, or the appurtenant interests in such areas, in which the holders of separate interest shall
automatically be members or shareholders, to the exclusion of others, in proportion to the appurtenant interest of their
respective units in the common areas. 34 In relation thereto, Section 10 of the same law clearly provides that the
condominium corporation shall constitute the management body of the project.
Membership in a condominium corporation is limited only to the unit owners of the condominium project. This is
provided in Section 10 of the Condominium Act which reads:
Membership in a condominium corporation, regardless of whether it is a stock or non-stock corporation, shall not be
transferable separately from the condominium unit of which it is an appurtenance. When a member or
stockholder ceases to own a unit in the project in which the condominium corporation owns or holds the common
areas, he shall automatically cease to be a member or stockholder of the condominium
corporation.35 [Emphases supplied]
Although the Condominium Act provides for the minimum requirement for membership in a condominium corporation,
a corporation's articles of incorporation or by-laws may provide for other terms of membership, so long as they are not
inconsistent with the provisions of the law, the enabling or master deed, or the declaration of restrictions of the
condominium project.
In this case, Lim argued that Moldex cannot be a member of Condocor. She insisted that a condominium corporation
is an association of homeowners for the purpose of managing the condominium project, among others. Thus, it must
be composed of actual unit buyers or residents of the condominium project. 36 Lim further averred that the ownership
contemplated by law must result from a sale transaction between the owner-developer and the purchaser. She
advanced the view that the ownership of Moldex was only in the nature of an owner-developer and only for the sole
purpose of selling the units.37 In justifying her arguments, Lim cited Section 30 of Presidential Decreee No. 957,
known as The Subdivision and Condominium Buyers' Protective Decree (P.D. No. 957), to wit:
Section 30. Organization of Homeowners Association. The owner or developer of a subdivision project or
condominium project shall initiate the organization of a homeowners association among the buyers and residents
of the projects for the purpose of promoting and protecting their mutual interest and assist in their community
development. [Emphasis in the original.]
Furthermore, in distinguishing between a unit buyer and an owner-developer of a project, Lim cited Section 25 of P.D.
No. 957, which provides:
Section 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full
payment of the lot or unit. xxx
Likewise, Lim relied on Sunset View Condominium Corp. v. Hon. Campos, Jr., 38 where the Court wrote:
The share of stock appurtenant to the unit will be transferred accordingly to the purchaser of the unit only upon
full payment of the purchase price at which time he will also become the owner of the unit. Consequently, even
under the contract, it is only the owner of a unit who is a shareholder of the Condominium Corporation.
Inasmuch as owners is conveyed only upon full payment of the purchase price, it necessarily follows that a
purchaser of a unit who has not paid the full purchase price thereof is not the owner of the unit and
consequently is not a shareholder of the Condominium Corporation.[Emphasis in the original]
On these grounds, Lim asserted that only unit buyers are entitled to become members of Condocor. 39
The Court finds itself unable to agree.
Lim's reliance of P.D. No. 957 is misplaced. There is no provision in P.D. No. 957 which states that an owner-
developer of a condominium project cannot be a member of a condominium corporation. Section 30 of P.D. No. 957
determines the purposes of a homeowners association - to promote and protect the mutual interest of the buyers and
residents, and to assist in their community development. A condominium corporation, however, is not just a
management body of the condominium project. It also holds title to the common areas, including the land, or the
appurtenant interests in such areas. Hence, it is especially governed by the Condominium Act. Clearly, a
homeowners association is different from a condominium corporation. P.D. No. 957 does not regulate condominium
corporations and, thus, cannot be applied in this case.
Sunset View merely delineated the difference between a "purchaser" and an "owner," whereby the former could be
considered an owner only upon full payment of the purchase price. The case merely clarified that not every purchaser
of a condominium unit could be a shareholder of the condominium corporation.
Respondents, for their part, countered that a registered owner of a unit in a condominium project or the holders of
duly issued condominium certificate of title (CCT),40automatically becomes a member of the condominium
corporation,41 relying on Sections 2 and 10 of the Condominium Act, the Master Deed and Declaration of Restrictions,
as well as the By-Laws of Condocor. For said reason, respondents averred that as Moldex is the owner of 220 unsold
units and the parking slots and storage areas attached thereto, it automatically became a member of Condocor upon
the latter's creation.42
On this point, respondents are correct.
Section 2 of the Condominium Act states:
Sec. 2. A condominium is an interest in real property consisting of separate interest in a unit in a residential, industrial
or commercial building and an undivided interest in common, directly or indirectly, in the land on which it is located
and in other common areas of the building. A condominium may include, in addition, a separate interest in other
portions of such real property. Title to the common areas, including the land, or the appurtenant interests in
such areas, may be held by a corporation specially formed for the purpose (hereinafter known as the
"condominium corporation") in which the holders of separate interest shall automatically be members or
shareholders, to the exclusion of others, in proportion to the appurtenant interest of their respective units in
the common areas. [Emphasis supplied]
In Sunset View,43the Court elucidated on what constitutes "separate interest," in relation to membership, as
mentioned in the Condominium Act, to wit:
By necessary implication, the "separate interest" in a condominium, which entitles the holder to become
automatically a shareholder in the condominium corporation, as provided in Section 2 of the Condominium
Act, can be no other than ownership of a unit. This is so because nobody can be a shareholder unless he is the
owner of a unit and when he ceases to be the owner, he also ceases automatically to be a shareholder. 44 [Emphasis
supplied.]
Thus, law and jurisprudence dictate that ownership of a unit entitles one to become a member of a condominium
corporation.1âwphi1 The Condominium Act does not provide a specific mode of acquiring ownership. Thus, whether
one becomes an owner of a condominium unit by virtue of sale or donation is of no moment.
It is erroneous to argue that the ownership must result from a sale transaction between the owner-developer and the
purchaser. Such interpretation would mean that persons who inherited a unit, or have been donated one, and properly
transferred title in their names cannot become members of a condominium corporation.
The next issue is - may Moldex appoint duly authorized representatives who will exercise its membership rights,
specifically the right to be voted as corporate directors/officers?
Moldex may appoint a
duly authorized representative
A corporation can act only through natural persons duly authorized for the purpose or by a specific act of its board of
directors.45 Thus, in order for Moldex to exercise its membership rights and privileges, it necessarily has to appoint its
representatives.
Section 58 of the Corporation Code mandates:
Section 58. Proxies. - Stockholders and members may vote in person or by proxy in all meetings of stockholders
or members. Proxies shall in writing, signed by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a period longer than five (5) years at any one time. [Emphasis
supplied]
Relative to the above provision is Section 1, Article II of Condocor's By-Laws, 46 which grants registered owners the
right to designate any person or entity to represent them in Condocor, subject to the submission of a written
notification to the Secretary of such designation. Further, the owner's representative is entitled to enjoy and avail
himself of all the rights and privileges, and perform all the duties and responsibilities of a member of the corporation.
The law and Condocor's By-Laws evidently allow proxies in members' meeting.
Prescinding therefrom, Moldex had the right to send duly authorized representatives to represent it during the
questioned general membership meeting. Records showed that, pursuant to a Board Resolution, as certified 47 by
Sandy T. Uy, corporate secretary of Moldex, the individual respondents were instituted as Moldex's representatives.
This was attested to by Mary Rose V. Pascual, Assistant Corporate Secretary of Condocor, in a sworn statement48she
executed on August 31, 2012.
Next question is - can the individual respondents be elected as directors of Condocor?
Individual respondents who
are non-members cannot be
elected as directors and officers
of the condominium corporation
The governance and management of corporate affairs in a corporation lies with its board of directors in case of stock
corporations, or board of trustees in case of non-stock corporations. As the board exercises all corporate powers and
authority expressly vested upon it by law and by the corporations' by-laws, there are minimum requirements set in
order to be a director or trustee, one of which is ownership of a share in one's name or membership in a non-stock
corporation. Section 23 of the Corporation Code provides:
Section 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or
where there is no stock, from among the members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which
share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least
one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members thereof.A majority of the directors or trustees of
all corporations organized under this Code must be residents of the Philippines. [Emphases supplied]
This rule was reiterated in Section 92 of the Corporation Code, which states:
Section 92. Election and term of trustees. – x x x No person shall be elected as trustee unless he is a member of the
corporation. x x x
While Moldex may rightfully designate proxies or representatives, the latter, however, cannot be elected as directors
or trustees of Condocor. First, the Corporation Code clearly provides that a director or trustee must be a member of
record of the corporation. Further, the power of the proxy is merely to vote. If said proxy is not a member in his own
right, he cannot be elected as a director or proxy.
Respondents cannot rely on the Securities and Exchange Commission (SEC) Opinions they cited to justify the
individual respondents' election as directors. In Heirs of Gamboa v. Teves,49 the Court En Banc held that opinions
issued by SEC legal officers do not have the force and effect of SEC rules and regulations because only the SEC en
banc can adopt rules and regulations.
Following Section 25 of the Corporation Code, the election of individual respondents, as corporate officers, was
likewise invalid.
Section 25 of the Corporation Code mandates that the President shall be a director. As previously discussed,
Jaminola could not be elected as a director. Consequently, Jaminola's election as President was null and void.
The same provision allows the election of such other officers as may be provided for in the by-laws. Condocor's By-
Laws, however, require that the Vice-President shall be elected by the Board from among its member-directors in
good standing, and the Secretary may be appointed by the Board under the same circumstance. Like Jaminola,
Milanes and Macalintal were not directors and, thus, could not be elected and appointed as Vice-President and
Secretary, respectively.
Insofar as Roman's election as Treasurer is concerned, the same would have been valid, as a corporate treasurer
may or may not be a director of the corporation's board. The general membership meeting of Condocor, however,
was null and void. As a consequence, Roman's election had no legal force and effect.
In fine, the July 21, 2012 annual general membership meeting of Condocor being null and void, all acts and
resolutions emanating therefrom are likewise null and void.
WHEREFORE, the petition is GRANTED. The March 4, 2013 Decision of the Regional Trial Court, Branch 24, Manila,
in Civil Case No. 12-128478 is hereby REVERSED and SET ASIDE. The Court declares that:
a) The July 21, 2012 Annual General Membership Meeting of Condocor is null and void;
b) The election of members of the Board of Directors in the annual general membership meeting is likewise null and
void; and
c) The succeeding Organizational Meeting of Condocor's Board of Directors as well as the election of its corporate
officers are of no force and effect.
Costs against respondents.
SO ORDERED.
13. Air Canada vs. Commissioner of Internal Revenue, 778 SCRA 131, G.R. No. 169507 January 11, 2016
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a
resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(1), and not
Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which the
Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may
only be imposed a maximum tax of 1 1/2% of its gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc, which in
turn affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First
Division denying Air Canada's claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]" 5 On April 24, 2000, it was
granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which
authority would expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not have flights originating from or
coming to the Philippines [and does not] operate any airplane [in] the Philippines[.]" 7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the
Philippines.8 Aerotel "sells [Air Canada's] passage documents in the Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed
quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in the total amount of
P5,185,676.77,10 detailed as follows:
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29,2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30,2001 522,465.39
2nd Qtr 2001 August 29,2001 1,033,423.34
3rd Qtr 2001 November 29,2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30,2002 594,850.13
2nd Qtr 2002 August 29,2002 1,164,664.11
TOTAL P 5,185,676.77"cralawlawlibrary
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes
amounting to P5,185,676.77 before the Bureau of Internal Revenue,12 Revenue District Office No. 47-East Makati.13 It
found basis from the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National
Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half
percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight,irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline
form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at
any port outside the Philippines on another airline, only-the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis
supplied)cralawlawlibrary
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax
Appeals on November 29, 2002.15 The case was docketed as C.T.A. Case No. 6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for Review
and, hence, the claim for refund.17 It found that Air Canada was engaged in business in the Philippines through a local
agent that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation at the regular
rate of 32%.18 Further, according to the Court of Tax Appeals First Division, Air Canada was deemed to have
established a "permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic of the Philippines-
Canada Tax Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an
outlet where sales of [airline] tickets are made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax Appeals
First Division's Resolution dated April 8, 2005 for lack of merit.22 The First Division held that while Air Canada was not
liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32%
corporate income tax on income derived from the sale of airline tickets within the Philippines pursuant to Section
28(A)(1).23
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Bane.24 The appeal was docketed as CTAEB
No. 86.25cralawred
In the Decision dated August 26, 2005, the Court of Tax Appeals En Bane affirmed the findings of the First
Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation doing business in the
Philippines since it sold airline tickets in the Philippines.27 The Court of Tax Appeals En Bane disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit.28cralawlawlibrary
Hence, this Petition for Review29 was filed. The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a general
sales agent in the Philippines, is-a resident foreign corporation within the meaning of Section 28(A)(1) of the 1997
National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 21/2% tax on Gross Philippine Billings pursuant to Section
28(A)(3). If not, whether an offline international carrier selling passage documents through a general sales agent can
be subject to the regular corporate income tax of 32% on taxable income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of
"permanent establishment" under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of P5,185,676.77 pertaining allegedly to erroneously
paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign corporations
provided under Section 28(A)(1) of the 1997 National Internal Revenue Code does not apply to "international
carriers,"31 which are especially classified and taxed under Section 28(A)(3). 32 It adds that the fact that it is no longer
subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does not render it ipso
facto subject to 32% income tax on taxable income as a resident foreign corporation." 33 Petitioner argues that to
impose the 32% regular corporate income tax on its income would violate the Philippine government's covenant under
Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1 Vi% of the carrier's
gross revenue derived from sources within the Philippines.34 It would also allegedly result in "inequitable tax treatment
of on-line and off-line international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income from
services and not income from sales of personal property. 36 Petitioner cites the deliberations of the Bicameral
Conference Committee on House Bill No. 9077 (which eventually became the 1997 National Internal Revenue Code),
particularly Senator Juan Ponce Enrile's statement,37 to reveal the "legislative intent to treat the revenue derived from
air carriage as income from services, and that the carriage of passenger or cargo as the activity that generates the
income."38 Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner claims that its
income derived "from services rendered outside the Philippines [was] not subject to Philippine income taxation." 39
Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be
considered to have a "permanent establishment"40 in the Philippines pursuant to Article V(6) of the Republic of the
Philippines-Canada Tax Treaty.41 It points out that Aerotel is an "independent general sales agent that acts as such
for ... other international airline companies in the ordinary course of its business." 42 Aerotel sells passage tickets on
behalf of petitioner and receives a commission for its services. 43 Petitioner states that even the Bureau of Internal
Revenue— through VAT Ruling No. 003-04 dated February 14, 2004—has conceded that an offline international air
carrier, having no flight operations to and from the Philippines, is not deemed engaged in business in the Philippines
by merely appointing a general sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously paid
Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax under Section 28 (A)
(I)"45 since it has not been assessed at all by the Bureau of Internal Revenue for any income tax liability.46
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a resident
foreign corporation doing business in the Philippines. Petitioner's total payment of P5,185,676.77 allegedly shows that
petitioner was earning a sizable income from the sale of its plane tickets within the Philippines during the relevant
period.47 Respondent further points out that this court in Commissioner of Internal Revenue v. American Airlines,
Inc.,48 which in turn cited the cases involving the British Overseas Airways Corporation and Air India, had already
settled that "foreign airline companies which sold tickets in the Philippines through their local agents . . . [are]
considered resident foreign corporations engaged in trade or business in the country." 49 It also cites Revenue
Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the Philippines" as including
"regular sale of tickets in the Philippines by offline international airlines either by themselves or through their
agents."50
Respondent further contends that petitioner is not entitled to its claim for refund because the amount of
P5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still short of the 32%
income tax due for the period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right amount of tax
since the National Internal Revenue Code became operative on January 1, 1998 and by 2000, petitioner should have
already been aware of the implications of Section 28(A)(3) and the decided cases of this court's ruling on the taxability
of offline international carriers selling passage tickets in the Philippines.52
I
At the outset, we affirm the Court of Tax Appeals' ruling that petitioner, as an offline international carrier with no
landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997
National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half
percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine
Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on
another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to
the point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)cralawlawlibrary
Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents
were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the
definition of resident • foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it
may be subject to 32%53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to
an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable
year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall
be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty- three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied)cralawlawlibrary
The definition of "resident foreign corporation" has not substantially changed throughout the amendments of the
National Internal Revenue Code. All versions refer to "a foreign corporation engaged in trade or business within the
Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15, 1939, defined
"resident foreign corporation" as applying to "a foreign corporation engaged in trade or business within the Philippines
or having an office or place of business therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved on August
4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign country,
except a foreign life insurance company, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all
sources within the Philippines.56 (Emphasis supplied)cralawlawlibrary
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National Internal
Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but it still provides that "[a]
corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business
within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received
in the preceding taxable year from all sources within the Philippines[.]" 57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation58 declared
British Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a
resident foreign corporation engaged in business in the Philippines through its local sales agent that sold and issued
tickets for the airline company.59 This court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must
be judged in the light of its peculiar environmental circumstances. 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 commercial gain or for the
purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character. ["]

BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the Philippines.
That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier.
In fact, the regular sale of tickets, its main activity, is the very lifeWood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)cralawlawlibrary
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of "doing
business" with regard to foreign corporations. Section 3(d) of the law enumerates the activities that constitute doing
business:
d. the phrase "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[.]61 (Emphasis supplied)cralawlawlibrary
While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account" is not considered as "doing business," the Implementing
Rules and Regulations of Republic Act No. 7042 clarifies that "doing business" includes "appointing representatives or
distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any
calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more[.]" 62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office
or who has designated or appointed agents or employees in the Philippines, who sells or offers for sale any air
transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation,
advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board for such
authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly report containing information on
the tickets sold, such as the origin and destination of the passengers, carriers involved, and commissions received. 65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioner's
business. The activities of Aerotel bring direct receipts or profits to petitioner. 66 There is nothing on record to show that
Aerotel solicited orders alone and for its own account and without interference from, let alone direction of, petitioner.
On the contrary, Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the express
written consent of [the latter,]"67 and it must perform its functions according to the standards required by
petitioner.68 Through Aerotel, petitioner is able to engage in an economic activity in the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the
Philippines for a period of five years, or from April 24, 2000 until April 24, 2005. 69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the
Philippines. Petitioner's income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its
business activities in the Philippines.
Ill
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal Revenue
Code must consider the existence of an effective tax treaty between the Philippines and the home country of the
foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that Section
28(A)(3)(a) does not categorically exempt all international air carriers from the coverage of Section 28(A)(1). Thus, if
Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)(1) does not apply. If,
however, Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax under Section
28(A)(1).71
This court in South African Airways declared that the correct interpretation of these provisions is that: "international air
carrier[s] maintaining] flights to and from the Philippines . . . shall be taxed at the rate of 21/2% of its Gross Philippine
Billings[;] while international air carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country [like sale of airline tickets] will be taxed at the rate of 32% of such [taxable]
income."72
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double taxation on
income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and
equitable tax treatment to foreign residents or nationals."73Commissioner of Internal Revenue v. S.C. Johnson and
Son, Inc.74 explained the purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties
in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax
conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined
as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject
matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and
the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and
dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate.75(Emphasis in the
original, citations omitted)cralawlawlibrary
Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional
provision that the Philippines "adopts the generally accepted principles of international law as part of the law of the
land[.]" 76Pacta sunt servanda is a fundamental international law principle that requires agreeing parties to comply
with their treaty obligations in good faith.77
Hence, the application of the provisions of the National Internal Revenue Code must be subject to the provisions of
tax treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue, 78 this court stressed the binding effects of
tax treaties. It dealt with the issue of "whether the failure to strictly comply with [Revenue Memorandum Order] RMO
No. 1-200079 will deprive persons or corporations of the benefit of a tax treaty." 80 Upholding the tax treaty over the
administrative issuance, this court reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of the law of the land.
The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty
obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties,
and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force
and effect of law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the
taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc. further
clarifies that "tax conventions are drafted with a view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a
fairly predictable and reasonable international investment climate and the protection against double taxation is crucial
in creating such a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those modifications that
may be necessary to ensure the fulfillment of the obligations undertaken. " Thus, laws and issuances must ensure
that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose
additional requirements that would negate the availment of the reliefs provided for under international agreements.
More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits
under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required
by RMO No. 1 -2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty
required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a
taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax
treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of
the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically,
noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign
investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure,
these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we
cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an
administrative issuance requiring prior application for tax treaty relief.81 (Emphasis supplied, citations
omitted)cralawlawlibrary
82
On March 11, 1976, the representatives for the government of the Republic of the Philippines and for the
government of Canada signed the Convention between the Philippines and Canada for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada
Tax Treaty). This treaty entered into force on December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent establishment" as a "fixed place
of business in which the business of the enterprise is wholly or partly carried on." 84
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent
establishment in the other Contracting State if under certain conditions there is a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person acting in a
Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of independent status
to whom paragraph 6 applies) shall be deemed to be a permanent establishment in the first-mentioned State if . . . he
has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his
activities are limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to
one who would be considered an agent under Article 186883 of the Civil Code of the Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be deemed to have a
permanent establishment in the other Contracting State merely because it carries on business in that other State
through a broker, general commission agent or any other agent of an independent status, where such persons are
acting in the ordinary course of their business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the term "dependent" would
imply a relationship between the principal and the agent that is akin to an employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises comprehensive control
and detailed instructions over the means and results of the activities of the agent. 87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines, defines a
general sales agent as "a person, not a bonafide employee of an air carrier, who pursuant to an authority from an
airline, by itself or through an agent, sells or offers for sale any air transportation, or negotiates for, or holds himself
out by solicitation, advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for, such
air transportation."88 General sales agents and their property, property rights, equipment, facilities, and franchise are
subject to the regulation and control of the Civil Aeronautics Board.89 A permit or authorization issued by the Civil
Aeronautics Board is required before a general sales agent may engage in such an activity. 90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a
"permanent"establishment" in the Philippines as defined under the Republic of the Philippines-Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on petitioner
and handle reservations, appointment, and supervision of International Air Transport Association-approved and
petitioner-approved sales agents, including the following services:
ARTICLE 7
GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter relating to
this Agreement;
c) Promotion of passenger transportation on AC;
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA [Philippines], of
traffic documents issued by AC outside the said territory of the GSA [Philippines], as required by the passenger(s);
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity material
provided by AC in accordance with the reasonable requirements of AC;
j) Distribution of official press releases provided by AC to media and reference of any press or public relations
inquiries to AC;
o) Submission for AC's approval, of an annual written sales plan on or before a date to be determined by AC and in a
form acceptable to AC;
q) Submission of proposals for AC's approval of passenger sales agent incentive plans at a reasonable time in
advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and agencies in
the Territory [Philippines].
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise stated in
the guidelines, refer all such claims and complaints to AC.91cralawlawlibrary
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own expense and
acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff, equipment, documentation,
facilities and supervision and in consideration of the remuneration and expenses payable[,] [will] defray all costs and
expenses of and incidental to the Agency."92 "[I]t is the sole employer of its employees and . . . is responsible for
[their] actions ... or those of any subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner
a commission on sales of transportation plus override commission on flown revenues.94 Aerotel would also be
reimbursed "for all authorized expenses supported by original supplier invoices." 95
Aerotel is required to keep "separate books and records of account, including supporting documents, regarding all
transactions at, through or in any way connected with [petitioner Air Canada] business." 96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way." 97Aerotel cannot
"accept additional appointments as General Sales Agent of any other carrier without the prior written consent of
[petitioner Air Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without cause upon [no] less
than 60 days' prior notice in writing[.]"99 In case of breach of any provisions of the Agreement, petitioner may require
Aerotel "to cure the breach in 30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]" 100
The following terms are indicative of Aerotel's dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control of another entity
or merges with or is acquired or controlled by another person or entity[,]" 101 Except with the written consent of
petitioner, Aerotel must not acquire a substantial interest in the ownership, management, or profits of a passenger
sales agent affiliated with the International Air Transport Association or a non-affiliated passenger sales agent nor
shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its commercial policy
and/or management decisions.102Aerotel must also provide petitioner "with a report on any interests held by [it], its
owners, directors, officers, employees and their immediate families in companies and other entities in the aviation
industry or ... industries related to it[.]"103 Petitioner may require that any interest be divested within a set period of
time.104
Second, in carrying out the services, Aerotei cannot enter into any contract on behalf of petitioner without the express
written consent of the latter;105 it must act according to the standards required by petitioner;106 "follow the terms and
provisions of the [petitioner Air Canada] GS A Manual [and all] written instructions of [petitioner Air Canada;]"107 and
"[i]n the absence of an applicable provision in the Manual or instructions, [Aerotei must] carry out its functions in
accordance with [its own] standard practices and procedures[.]" 108
Third, Aerotei must only "issue traffic documents approved by [petitioner Air Canada] for all transportation over [its]
services[.]"109 All use of petitioner's name, logo, and marks must be with the written consent of petitioner and
according to petitioner's corporate standards and guidelines set out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by Aerotei
are for the account of petitioner, except in the case of negligence of Aerotei. 111
Aerotei is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement
executed between the parties. It has the authority or power to conclude contracts or bind petitioner to contracts
entered into in the Philippines. A third-party liability on contracts of Aerotei is to petitioner as the principal, and not to
Aerotei, and liability to such third party is enforceable against petitioner. While Aerotei maintains a certain
independence and its activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner
pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and according to the
latter's Manual and written instructions. Aerotei is required to submit its annual sales plan for petitioner's approval.
In essence, Aerotei extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through
which petitioner's airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the "business profits" of an
enterprise of a Contracting State is "taxable only in that State[,] unless the enterprise carries on business in the other
Contracting State through a permanent establishment);.]"113 Thus, income attributable to Aerotel or from business
activities effected by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same Treaty, the tax imposed
on income derived from the operation of ships or aircraft in international traffic should not exceed 1 1/2% of gross
revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal
Revenue Code on its taxable income116 from sale of airline tickets in the Philippines, it could only be taxed at a
maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty
that applies to petitioner as a "foreign corporation organized and existing under the laws of Canada[.]" 117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction principle that
specific laws prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid and
effective on that date. On the other hand, the applicable provisions 120 relating to the taxability of resident foreign
corporations and the rate of such tax found in the National Internal Revenue Code became effective on January 1,
1998.121 Ordinarily, the later provision governs over the earlier one.122 In this case, however, the provisions of the
Republic of the Philippines-Canada Tax Treaty are more specific than the provisions found in the National Internal
Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds
of all the Members of the Senate.cralawlawlibrary
This provision states the second of two ways through which international obligations become binding. Article II,
Section 2 of the Constitution deals with international obligations that are incorporated, while Article VII, Section 21
deals with international obligations that become binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite prestations have
effects equivalent to a statute. Thus, these specific treaty provisions may amend statutory provisions. Statutory
provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga omnes.We are also
not required to rule in this case on the effect of international customary norms especially those with jus
cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State derived by an
enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in
the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and one-half per cent of the
gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such profits
derived by an enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government of Canada on Air
Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-
Canada Tax Treaty:

ARTICLE XVI
(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the
Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income, signed at Manila on March 31, 1976 and entered into force on December 21, 1977, and any
amendments thereto, in respect of the operation of aircraft in international traffic. 123cralawlawlibrary
Petitioner's income from sale of ticket for international carriage of passenger is income derived from international
operation of aircraft. The sale of tickets is closely related to the international operation of aircraft that it is considered
incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain
extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local
sales agent the benefit of a lower tax equivalent to 1 1/2% on business profits derived from sale of international air
transportation.
V
Finally, we reject petitioner's contention that the Court of Tax Appeals erred in denying its claim for refund of
erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax under Section 28(A)(1) of
the National Internal Revenue Code because (a) it has not been assessed at all by the Bureau of Internal Revenue for
any income tax liability;125 and (b) internal revenue taxes cannot be the subject of set-off or
compensation,126 citing Republic v. Mambulao Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue, 129 we have ruled that "[i]n an action for
the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine whether there are taxes that
should have been paid in lieu of the taxes paid."130 The determination of the proper category of tax that should have
been paid is incidental and necessary to resolve the issue of whether a refund should be granted. 131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or other taxes
at the first instance. The Court of Tax Appeals has no power to make an assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner's transactions
are subject to capital gains tax, however, the Court of Tax Appeals was not making an assessment. It was merely
determining the proper category of tax that petitioner should have paid, in view of its claim that it erroneously imposed
upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental matter necessary for
the resolution of the principal issue, which is whether petitioner was entitled to a refund.
The issue of petitioner's claim for tax refund is intertwined with the issue of the proper taxes that are due from
petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the tax return filed
was not proper, the correctness of the amount paid and, therefore, the claim for refund become questionable. In that
case, the court must determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable for taxes
other than that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of its
erroneously paid 2 1/2% taxes on its gross Philippine billings. This court did not immediately grant South African's
claim for refund. This is because although this court found that South African Airways was not subject to the 2 1/2%
tax on its gross Philippine billings, this court also found that it was subject to 32% tax on its taxable income.
In this case, petitioner's claim that it erroneously paid the 5% final tax is an admission that the quarterly tax return it
filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being claimed, the Court of Tax
Appeals has the duty to determine if petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes
other than the 5% final tax. As in South African Airways, petitioner's request for refund can neither be granted nor
denied outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the taxpayer's
liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the issue of
the taxpayer's entitlement to refund. The question of tax deficiency is distinct and unrelated to the question of
petitioner's entitlement to refund. Tax deficiencies should be subject to assessment procedures and the rules of
prescription. The court cannot be expected to perform the BIR's duties whenever it fails to do so either through
neglect or oversight. Neither can court processes be used as a tool to circumvent laws protecting the rights of
taxpayers.132cralawlawlibrary
Hence, the Court of Tax Appeals properly denied petitioner's claim for refund of allegedly erroneously paid tax on its
Gross Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its taxable income
received from sources within the Philippines. Its determination of petitioner's liability for the 32% regular income tax
was made merely for the purpose of ascertaining petitioner's entitlement to a tax refund and not for imposing any
deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on different
circumstances. In both cited cases,133 the taxpayer claimed that his (its) tax liability was off-set by his (its) claim
against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al, Mambulao Lumber contended that the amounts it paid to the
government as reforestation charges from 1947 to 1956, not having been used in the reforestation of the area
covered by its license, may be set off or applied to the payment of forest charges still due and owing from
it.134 Rejecting Mambulao's claim of legal compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on
compensation is inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and
debtors of each other. With respect to the forest charges which the defendant Mambulao Lumber Company has paid
to the government, they are in the coffers of the government as taxes collected, and the government does not owe
anything to defendant Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual
debts. * * *.cralawlawlibrary
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can not
be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of
set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S. 73-
74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for
taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes
are not in the nature of contracts between the party and party but grow out of a duty to, and are the positive acts of
the government, to the making and enforcing of which, the personal consent of individual taxpayers is not required. * *
* If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a claim against
the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary expenditure
must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result of a
lawsuit, and meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-
767.)135 (Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal compensation provided under
Article 1279 were present.136 In that case, a portion of Francia's property in Pasay was expropriated by the national
government,137 which did not immediately pay Francia. In the meantime, he failed to pay the real property tax due on
his remaining property to the local government of Pasay, which later on would auction the property on account of such
delinquency. He then moved to set aside the auction sale and argued, among others, that his real property tax
delinquency was extinguished by legal compensation on account of his unpaid claim against the national
government.139 This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are
reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case
do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;
(3) that the two debts be due.
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on
the ground that the government owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government.
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while
the expropriation was effected by the national government.Moreover, the amount of P4,116.00 paid by the national
government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before
the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by
the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the
deposit so that he could pay the tax obligation thus aborting the sale at public auction. 140cralawlawlibrary
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on
Audit141 and Philex Mining Corporation v. Commissioner of Internal Revenue. 142 In Caltex, this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the
subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to beset-off.143 (Citations
omitted)cralawlawlibrary
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the Government in
its corporate capacity, while taxes are due to the Government in its sovereign capacity."144 Rejecting Philex Mining's
assertion that the imposition of surcharge and interest was unjustified because it had no obligation to pay the excise
tax liabilities within the prescribed period since, after all, it still had pending claims for VAT input credit/refund with the
Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax
claim for refund or credit against the government which has not yet been granted. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend
upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer
cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the
collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory
that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax
liabilities.145 (Citations omitted)
cralawlawlibrary
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground
that the tax liabilities were off-set against any alleged claim the taxpayer may have against the government. Such
would merely be in keeping with the basic policy on prompt collection of taxes as the lifeblood of the government.
Here, what is involved is a denial of a taxpayer's refund claim on account of the Court of Tax Appeals' finding of its
liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the denial of claim for tax
refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner's supplemental motion for
reconsideration alleging bringing to said court's attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite
the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private
respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same
year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true
and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge
against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence,
cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim
of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in
the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the
said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines."
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result
in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government
will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be
filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent
return involved. This would necessarily require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-
needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally
appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax
refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and
the Government alike be given equal opportunities to avail of remedies under the law to defeat each other's claim and
to determine all matters of dispute between them in one single case. It is important to note that in determining whether
or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the
Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of
the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the
matters subject thereof or necessarily involved therein.cralawlawlibrary
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements
are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec.
28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.146 (Emphasis supplied, citation omitted)cralawlawlibrary
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue,147 this court upheld the denial of
the claim for refund based on the Court of Tax Appeals' finding that the taxpayer had, through erroneous deductions
on its gross income, underpaid its Gross Philippine Billing tax on cargo revenues for 1999, and the amount of
underpayment was even greater than the refund sought for erroneously paid Gross Philippine Billings tax on
passenger revenues for the same taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 1/2% of
its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is
quite apparent that the tax imposable under Section 28(A)(1) of the 1997 National Internal Revenue Code [32% of
taxable income, that is, gross income less deductions] will exceed the maximum ceiling of 1 1/2% of gross revenues
as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated April 8, 2005 of
the Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.
14. Steelcase, Inc. v. Design International Selections, Inc., 18 April 2012
This is a petition for review on certiorari under Rule 45 assailing the March 31, 2005 Decision [1] of the Court of
Appeals (CA) which affirmed the May 29, 2000 Order[2] of the Regional Trial Court, Branch 60, Makati City (RTC),
dismissing the complaint for sum of money in Civil Case No. 99-122 entitled “Steelcase, Inc. v. Design International
Selections, Inc.”cralaw
The Facts
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 with dealers worldwide. [3]Respondent Design
International Selections, Inc. (DISI) is a corporation existing under Philippine Laws and engaged in the furniture
business, including the distribution of furniture.[4]
Sometime in 1986 or 1987, Steelcase and DISI 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 continued smoothly until it was terminated sometime in January 1999 after the
agreement was breached with neither party admitting any fault.[5]
On January 18, 1999, Steelcase filed a complaint[6] 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 or compensatory
damages, exemplary damages, attorney’s fees, and costs of suit.
In its Answer with Compulsory Counterclaims[7] dated February 4, 1999, DISI sought the following: (1) the issuance of
a temporary restraining order (TRO) and a writ of preliminary injunction to enjoin Steelcase from selling its products in
the Philippines except through DISI; (2) the dismissal of the complaint for lack of merit; and (3) the payment of actual,
moral and exemplary damages together with attorney’s fees and expenses of litigation. 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 it (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.
On March 3, 1999, Steelcase filed its Motion to Admit Amended Complaint [8] which was granted by the RTC, through
then Acting Presiding Judge Roberto C. Diokno, in its Order[9] dated April 26, 1999. However, Steelcase sought to
further amend its complaint by filing a Motion to Admit Second Amended Complaint[10] on March 13, 1999.
In his Order[11] dated November 15, 1999, Acting Presiding Judge Bonifacio Sanz Maceda dismissed the complaint,
granted the TRO prayed for by DISI, set aside the April 26, 1999 Order of the RTC admitting the Amended Complaint,
and denied Steelcase’s Motion to Admit Second Amended Complaint. The RTC stated that in requiring DISI to meet
the Dealer Performance Expectation and in terminating the dealership agreement with DISI based on its failure to
improve its performance in the areas of business planning, organizational structure, operational effectiveness, and
efficiency, Steelcase unwittingly revealed that it participated in the operations of DISI. It then concluded that
Steelcase was “doing business” in the Philippines, as contemplated by Republic Act (R.A.) No. 7042 (The Foreign
Investments Act of 1991), 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. Its determination was further bolstered
by the appointment by Steelcase of a representative in the Philippines. Finally, despite a showing that DISI transacted
with the local customers in its own name and for its own account, it was of the opinion that any doubt in the factual
environment should be resolved in favor of a pronouncement that a foreign corporation was doing business in the
Philippines, considering the twelve-year period that DISI had been distributing Steelcase products in the Philippines.
Steelcase moved for the reconsideration of the questioned Order but the motion was denied by the RTC in its May 29,
2000 Order.[12]
Aggrieved, Steelcase elevated the case to the CA by way of appeal, assailing the November 15, 1999 and May 29,
2000 Orders of the RTC. On March 31, 2005, the CA rendered its Decision affirming the RTC orders, ruling that
Steelcase was a foreign corporation doing or transacting business in the Philippines without a license. The CA stated
that the following acts of Steelcase showed its intention to pursue and continue the conduct of its business in the
Philippines: (1) sending a letter to Phinma, informing the latter that the distribution rights for its products would be
established in the near future and directing other questions about orders for Steelcase products to Steelcase
International; (2) cancelling orders from DISI’s customers, particularly Visteon, Phils., Inc. (Visteon); (3) continuing to
send its products to the Philippines through Modernform Group Company Limited (Modernform), as evidenced by an
Ocean Bill of Lading; and (4) going beyond the mere appointment of DISI as a dealer by making several impositions
on management and operations of DISI. Thus, the CA ruled that Steelcase was barred from access to our courts for
being a foreign corporation doing business here without the requisite license to do so.
Steelcase filed a motion for reconsideration but it was denied by the CA in its Resolution dated March 23, 2006. [13]
Hence, this petition.
The Issues
Steelcase filed the present petition relying on the following grounds:
I THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT FOUND THAT STEELCASE HAD
BEEN “DOING BUSINESS” IN THE PHILIPPINES WITHOUT A LICENSE.
II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN NOT FINDING THAT RESPONDENT WAS
ESTOPPED FROM CHALLENGING STEELCASE’S LEGAL CAPACITY TO SUE, AS AN AFFIRMATIVE
DEFENSE IN ITS ANSWER.
The issues to be resolved in this case are:
(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.
The Court’s Ruling
The Court rules in favor of the petitioner.
Steelcase is an unlicensed foreign
corporation NOT doing business
in the Philippines

Anent the first issue, Steelcase argues that Section 3(d) of R.A. No. 7042 or the Foreign Investments Act of
1991 (FIA) expressly states that the phrase “doing business” excludes the appointment by a foreign corporation of a
local distributor domiciled in the Philippines which transacts business in its own name and for its own
account. Steelcase claims that it was not doing business in the Philippines when it entered into a dealership
agreement with DISI where the latter, acting as the former’s appointed local distributor, transacted business in its own
name and for its own account. Specifically, Steelcase contends that it was DISI that sold Steelcase’s furniture directly
to the end-users or customers who, in turn, directly paid DISI for the furniture they bought. Steelcase further claims
that DISI, as a non-exclusive dealer in the Philippines, had the right to market, sell, distribute and service Steelcase
products in its own name and for its own account. Hence, DISI was an independent distributor of Steelcase products,
and not a mere agent or conduit of Steelcase.
On the other hand, DISI argues that it was appointed by Steelcase as the latter’s exclusive distributor of Steelcase
products. DISI likewise asserts that it was not allowed by Steelcase to transact business in its own name and for its
own account as Steelcase dictated the manner by which it was to conduct its business, including the management
and solicitation of orders from customers, thereby assuming control of its operations. DISI further insists that
Steelcase treated and considered DISI as a mere conduit, as evidenced by the fact that Steelcase itself directly sold
its products to customers located in the Philippines who were classified as part of their “global accounts.” DISI cited
other established circumstances which prove that Steelcase was doing business in the Philippines including the
following: (1) the sale and delivery by Steelcase of furniture to Regus, a Philippine client, through Modernform, a Thai
corporation allegedly controlled by Steelcase; (2) the imposition by Steelcase of certain requirements over the
management and operations of DISI; (3) the representations made by Steven Husak as Country Manager of
Steelcase; (4) the cancellation by Steelcase of orders placed by Philippine clients; and (5) the expression by
Steelcase of its desire to maintain its business in the Philippines. Thus, Steelcase has no legal capacity to sue in
Philippine Courts because it was doing business in the Philippines without a license to do so.
The Court agrees with the petitioner.
The rule that an unlicensed foreign corporations doing business in the Philippine do not have the capacity to sue
before the local courts is well-established. Section 133 of the Corporation Code of the Philippines explicitly states:
Sec. 133. Doing business without a license. - 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 of 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 phrase “doing business” is clearly defined in Section 3(d) of R.A. No. 7042 (Foreign Investments Act of 1991), to
wit:
d) The phrase “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; (Emphases
supplied)
This definition is supplemented by its Implementing Rules and Regulations, Rule I, Section 1(f) which elaborates on
the meaning of the same phrase:
f. “Doing business” shall include soliciting orders, service contracts, opening offices, whether liaison offices or
branches; appointing representatives or distributors, operating under full control of the foreign corporation, domiciled
in the Philippines or who in any calendar year stay in the country for a period 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.
The following acts shall not be deemed “doing business” in the Philippines:
1. 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;
2. Having a nominee director or officer to represent its interest in such corporation;
3. Appointing a representative or distributor domiciled in the Philippines which transacts business in the
representative's or distributor's own name and account;
4. The publication of a general advertisement through any print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another
entity in the Philippines;
6. Consignment by a foreign entity of equipment with a local company to be used in the processing of products for
export;
7. Collecting information in the Philippines; and
8. 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 has manufactured or exported to the Philippines, servicing the same, training
domestic workers to operate it, and similar incidental services. (Emphases supplied)
From the preceding citations, 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. On the other hand, if the distributor is an
independent entity which buys and distributes products, other than those of the foreign corporation, for its own name
and its own account, the latter cannot be considered to be doing business in the Philippines. [14] It should be kept in
mind that the determination of whether a foreign corporation is doing business in the Philippines must be judged in
light of the attendant circumstances.[15]
In the case at bench, it is undisputed that DISI was founded in 1979 and is independently owned and managed by the
spouses Leandro and Josephine Bantug.[16] In addition to Steelcase products, DISI also distributed products of other
companies including carpet tiles, relocatable walls and theater settings.[17] The dealership agreement between
Steelcase and DISI had been described by the owner himself as:
xxx basically a buy and sell arrangement whereby we would inform Steelcase of the volume of the products needed
for a particular project and Steelcase would, in turn, give ‘special quotations’ or discounts after considering the value of
the entire package. In making the bid of the project, we would then add out profit margin over Steelcase’s prices. After
the approval of the bid by the client, we would thereafter place the orders to Steelcase. The latter, upon our payment,
would then ship the goods to the Philippines, with us shouldering the freight charges and taxes. [18] [Emphasis supplied]
This clearly belies DISI’s assertion that it was a mere conduit through which Steelcase conducted its business in the
country. From the preceding facts, the only reasonable conclusion that can be reached is that DISI was an
independent contractor, distributing various products of Steelcase and of other companies, acting in its own name and
for its own account.
The CA, in finding Steelcase to be unlawfully engaged in business in the Philippines, took into consideration the
delivery by Steelcase of a letter to Phinma informing the latter that the distribution rights for its products would be
established in the near future, and also its cancellation of orders placed by Visteon. The foregoing acts were
apparently misinterpreted by the CA. Instead of supporting the claim that Steelcase was doing business in the
country, the said acts prove otherwise. It should be pointed out that no sale was concluded as a result of these
communications. Had Steelcase indeed been doing business in the Philippines, it would have readily accepted and
serviced the orders from the abovementioned Philippine companies. Its decision to voluntarily cease to sell its
products in the absence of a local distributor indicates its refusal to engage in activities which might be construed as
“doing business.”
Another point being raised by DISI is the delivery and sale of Steelcase products to a Philippine client by Modernform
allegedly an agent of Steelcase. Basic is the rule in corporation law that a corporation has a separate and distinct
personality from its stockholders and from other corporations with which it may be connected. [19] Thus, despite the
admission by Steelcase that it owns 25% of Modernform, with the remaining 75% being owned and controlled by Thai
stockholders,[20] it is grossly insufficient to justify piercing the veil of corporate fiction and declare that Modernform
acted as the alter ego of Steelcase to enable it to improperly conduct business in the Philippines. The records are
bereft of any evidence which might lend even a hint of credence to DISI’s assertions. As such, Steelcase cannot be
deemed to have been doing business in the Philippines through Modernform.
Finally, both the CA and DISI rely heavily on the Dealer Performance Expectation required by Steelcase of its
distributors to prove that DISI was not functioning independently from Steelcase because the same imposed certain
conditions pertaining to business planning, organizational structure, operational effectiveness and efficiency, and
financial stability. It is actually logical to expect that Steelcase, being one of the major manufacturers of office
systems furniture, would require its dealers to meet several conditions for the grant and continuation of a
distributorship agreement. The imposition of minimum standards concerning sales, marketing, finance and operations
is nothing more than an exercise of sound business practice to increase sales and maximize profits for the benefit of
both Steelcase and its distributors. For as long as these requirements do not impinge on a distributor’s
independence, then there is nothing wrong with placing reasonable expectations on them.
All things considered, it has been sufficiently demonstrated that DISI was an independent contractor which sold
Steelcase products in its own name and for its own account. As a result, Steelcase cannot be considered to be doing
business in the Philippines by its act of appointing a distributor as it falls under one of the exceptions under R.A. No.
7042.
DISI is estopped from challenging
Steelcase’s legal capacity to sue
Regarding the second issue, Steelcase argues that assuming arguendo that it had been “doing business” in the
Philippines without a license, DISI was nonetheless estopped from challenging Steelcase’s capacity to sue in the
Philippines. Steelcase claims that since DISI was aware that it was doing business in the Philippines without a
license and had benefited from such business, then DISI should be estopped from raising the defense that Steelcase
lacks the capacity to sue in the Philippines by reason of its doing business without a license.
On the other hand, DISI argues that the doctrine of estoppel cannot give Steelcase the license to do business in the
Philippines or permission to file suit in the Philippines. DISI claims that when Steelcase entered into a dealership
agreement with DISI in 1986, it was not doing business in the Philippines. It was after such dealership was put in
place that it started to do business without first obtaining the necessary license. Hence, estoppel cannot work against
it. Moreover, DISI claims that it suffered as a result of Steelcase’s “doing business” and that it never benefited from
the dealership and, as such, it cannot be estopped from raising the issue of lack of capacity to sue on the part of
Steelcase.
The argument of Steelcase is meritorious.
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.
It cannot be denied that DISI entered into a dealership agreement with Steelcase and profited from it for 12 years
from 1987 until 1999. DISI admits that it complied with its obligations under the dealership agreement by exerting
more effort and making substantial investments in the promotion of Steelcase products. It also claims that it was able
to establish a very good reputation and goodwill for Steelcase and its products, resulting in the establishment and
development of a strong market for Steelcase products in the Philippines. Because of this, DISI was very proud to be
awarded the “Steelcase International Performance Award” for meeting sales objectives, satisfying customer needs,
managing an effective company and making a profit.[21]
Unquestionably, entering into a dealership agreement with Steelcase charged DISI with the knowledge that
Steelcase was not licensed to engage in business activities in the Philippines. This Court has carefully combed the
records and found no proof that, from the inception of the dealership agreement in 1986 until September 1998, DISI
even brought to Steelcase’s attention that it was improperly doing business in the Philippines without a license. It was
only towards the latter part of 1998 that DISI deemed it necessary to inform Steelcase of the impropriety of the
conduct of its business without the requisite Philippine license. It should, however, be noted that DISI only raised the
issue of the absence of a license with Steelcase after it was informed that it owed the latter US$600,000.00 for the
sale and delivery of its products under their special credit arrangement.
By acknowledging the corporate entity of Steelcase and entering into a dealership agreement with it and even
benefiting from it, DISI is estopped from questioning Steelcase’s existence and capacity to sue. This is consistent
with the Court’s ruling in Communication Materials and Design, Inc. v. Court of Appeals[22] where it was written:
Notwithstanding such finding that ITEC is doing business in the country, petitioner is nonetheless estopped from
raising this fact to bar ITEC from instituting this injunction case against it.
A foreign corporation doing business in the Philippines may sue in Philippine Courts although not authorized
to do business here against a Philippine citizen or entity who had contracted with and benefited by said
corporation. To put it in another way, a party is estopped to challenge the personality of a corporation after
having acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny corporate
existence applies to a foreign as well as to domestic corporations. One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its corporate existence and capacity: The principle will be applied to
prevent 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 rule is deeply rooted in the time-honored axiom of Commodum ex injuria sua non habere debet — no
person ought to derive any advantage of his own wrong. This is as it should be for as mandated by law,
“every person must in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith.”
Concededly, corporations act through agents, like directors and officers. Corporate dealings must be characterized by
utmost good faith and fairness. Corporations cannot just feign ignorance of the legal rules as in most cases, they are
manned by sophisticated officers with tried management skills and legal experts with practiced eye on legal problems.
Each party to a corporate transaction is expected to act with utmost candor and fairness and, thereby allow a
reasonable proportion between benefits and expected burdens. This is a norm which should be observed where one
or the other is a foreign entity venturing in a global market.
By entering into the "Representative Agreement" with ITEC, petitioner is charged with knowledge that ITEC was not
licensed to engage in business activities in the country, and is thus estopped from raising in defense such incapacity
of ITEC, having chosen to ignore or even presumptively take advantage of the same.[23] (Emphases supplied)
The case of Rimbunan Hijau Group of Companies v. Oriental Wood Processing Corporation[24] is likewise instructive:
Respondent’s unequivocal admission of the transaction which gave rise to the complaint establishes the applicability
of estoppel against it. Rule 129, Section 4 of the Rules on Evidence provides that a written admission made by a party
in the course of the proceedings in the same case does not require proof. We held in the case of Elayda v. Court of
Appeals, that an admission made in the pleadings cannot be controverted by the party making such admission and
are conclusive as to him. Thus, our consistent pronouncement, as held in cases such as Merril Lynch Futures v. Court
of Appeals, is apropos:
The rule is that a party is estopped to challenge the personality of a corporation after having acknowledged the
same by entering into a contract with it. And the ‘doctrine of estoppel to deny corporate existence applies to
foreign as well as to domestic corporations;’ “one who has dealt with a corporation of foreign origin as a
corporate entity is estopped to deny its existence and capacity.” The principle “will be applied to prevent 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 . . .”
All things considered, respondent can no longer invoke petitioner’s lack of capacity to sue in this jurisdiction.
Considerations of fair play dictate that after having contracted and benefitted from its business transaction with
Rimbunan, respondent should be barred from questioning the latter’s lack of license to transact business in the
Philippines.
In the case of Antam Consolidated, Inc. v. CA, this Court noted that it is a common ploy of defaulting local companies
which are sued by unlicensed foreign corporations not engaged in business in the Philippines to invoke the latter’s lack
of capacity to sue. This practice of domestic corporations is particularly reprehensible considering that in requiring a
license, the law never intended to prevent foreign corporations from performing single or isolated acts in this country,
or to favor domestic corporations who renege on their obligations to foreign firms unwary enough to engage in solitary
transactions with them. Rather, the law was intended to bar foreign corporations from acquiring a domicile for the
purpose of business without first taking the steps necessary to render them amenable to suits in the local courts. It was
to prevent the foreign companies from enjoying the good while disregarding the bad.
As a matter of principle, this Court will not step in to shield defaulting local companies from the repercussions
of their business dealings. While the doctrine of lack of capacity to sue based on failure to first acquire a local
license may be resorted to in meritorious cases, it is not a magic incantation. It cannot be called upon when no
evidence exists to support its invocation or the facts do not warrant its application. In this case, that the
respondent is estopped from challenging the petitioners’ capacity to sue has been conclusively established, and the
forthcoming trial before the lower court should weigh instead on the other defenses raised by the
respondent.[25] (Emphases supplied)
As shown in the previously cited cases, this Court has time and again upheld the principle that a foreign corporation
doing business in the Philippines without a license may still sue before the Philippine courts a Filipino or a Philippine
entity that had derived some benefit from their contractual arrangement because the latter is considered to be
estopped from challenging the personality of a corporation after it had acknowledged the said corporation by entering
into a contract with it.[26]
In Antam Consolidated, Inc. v. Court of Appeals,[27] this Court had the occasion to draw attention to the common ploy
of invoking the incapacity to sue of an unlicensed foreign corporation utilized by defaulting domestic companies which
seek to avoid the suit by the former. The Court cannot allow this to continue by always ruling in favor of local
companies, despite the injustice to the overseas corporation which is left with no available remedy.
During this period of financial difficulty, our nation greatly needs to attract more foreign investments and encourage
trade between the Philippines and other countries in order to rebuild and strengthen our economy. While it is
essential to uphold the sound public policy behind the rule that denies unlicensed foreign corporations doing business
in the Philippines access to our courts, it must never be used to frustrate the ends of justice by becoming an all-
encompassing shield to protect unscrupulous domestic enterprises from foreign entities seeking redress in our
country. To do otherwise could seriously jeopardize the desirability of the Philippines as an investment site and would
possibly have the deleterious effect of hindering trade between Philippine companies and international
corporations.cralaw
WHEREFORE, the March 31, 2005 Decision of the Court of Appeals and its March 23, 2006 Resolution are
hereby REVERSED and SET ASIDE. The dismissal order of the Regional Trial Court dated November 15, 1999 is
hereby set aside. Steelcase’s Amended Complaint is hereby ordered REINSTATED and the case is REMANDED to
the RTC for appropriate action.
SO ORDERED.
15. Vicmar Development Corporation vs. Elarcosa G.R. No. 202215, December 9, 2015
Before us is a Petition for Review on Certiorari assailing the November 24, 2009 Decision9 of the Court of Appeals
(CA) in CA-G.R SP No. 01853-MN. The CA granted the Petition for Certiorari filed therewith, and reversed and set
aside the February 2, 200710 Resolution of the National Labor Relations Commission (NLRC), Fifth Division, Cagayan
de Oro, which in turn, affirmed the May 25, 200611 and May 29, 200612respective Decisions of Executive Labor
Arbiters (LA) Benjamin E. Pelaez (Pelaez) and Noel Augusto S. Magbanua (Magbanua) dismissing the complaints for
lack of merit. Also assailed is the May 10, 2012 CA Resolution13 denying the motion for reconsideration.
Factual Antecedents
This case stemmed from a Complaint for illegal dismissal and money claims filed by Ruben Panes, Ruel Cabanday
and Jonard Abugho (respondents) against Vicmar Development Corporation (Vicmar) and/or Robert Kua (Kua), its
owner and Juanito Pagcaliwagan (Pagcaliwagan), its manager, docketed as NLRC Case No. RAB-10-08-00593-
2005;14 and consolidated Complaints for illegal dismissal and money claims filed by Camilo Elarcosa, Marlon Banda,
Dante Balamad, Rodrigo Colanse, Chiquito Pacaldo, Robinson Panaga, Romel Patoy, Wilfredo Ladra, Junie Abugho,
Silverio Narisma, Armando Gonzales, Teofilo Elbina, Francisco Baguio, Gelven Rhyan Ramos, Julito Siman,
Recarido Panes, Jesus Tinsay, Agapito Cafias, Jr., Oliver Lobaynon, Rolando Tacbobo, Simeon Baguio, Roberto
Paguican, Joseph Salcedo, Donil Indino, Wilfredo Gulben, Jesreil Taneo, Renante Pamon, Richie Gulben, Daniel
EUo, Rexy Dofeliz, Ronald Noval, Norberto Belarca, and Allan Baguio (respondents), among others, against Vicmar,
Kua, and Pagcaliwagan (petitioners), docketed as NLRC Case Nos. RAB-10-09-00603-2004; RAB-10-09-00609-
2004; RAB-10-09-00625-2004; and RAB-10-02-00190-2005.15
Respondents alleged that Vicmar, a domestic corporation engaged in manufacturing of plywood for export and for
local sale, employed them in various capacities - as boiler tenders, block board receivers, waste feeders, plywood
checkers, plywood sander, conveyor operator, ripsaw operator, lumber grader, pallet repair, glue mixer, boiler
fireman, steel strap repair, debarker operator, plywood repair and reprocessor, civil workers and plant maintenance.
They averred that Vicmar has two branches, Top Forest Developers, Incorporated (TFDI) and Greenwood
International Industries, Incorporated (GUI) located in the same compound where Vicmar operated. 16
According to respondents, Vicmar employed some of them as early as 1990 and since their engagement they had
been performing the heaviest and dirtiest tasks in the plant operations. They claimed that they were supposedly
employed as "extra" workers; however, their assignments were necessary and desirable in the business of Vicmar.
They asserted that many of them were assigned at the boilers for at least 11 hours daily. 17 They emphasized that the
boiler section was necessary to Vicmar's business because it was where pieces of plywood were dried and cooked to
perfection.18 They further stated that a number of them were also assigned at the plywood repair and processing
section, which required longer working hours.19
Respondents declared that Vicmar paid them minimum wage and a small amount for overtime but it did not give them
benefits as required by law, such as Philhealth, Social Security System, 13th month pay, holiday pay, rest day and
night shift differential.20 They added that Vicmar employed more than 200 regular employees and more than 400
"extra" workers.21
Sometime in 2004, Vicmar allegedly informed respondents that they would be handled by contractors. 22Respondents
stated that these contractors were former employees of Vicmar and had no equipment and facilities of their
own.23 Respondents averred that as a result thereof, the wages of a number of them who were receiving P276.00 as
daily wage, were reduced to P200.00 or P180.00, despite overtime work; and the wages of those who were receiving
P200.00 and P180.00 were reduced to P145.00 or P131.00. Respondents protested said wage decrease but to no
avail. Thus, they filed a Complaint with the DOLE24for violations of labor standards for which appropriate compliance
orders were issued against Vicmar.25cralawred
Respondents claimed that on September 13, 2004, 28 of them were no longer scheduled for work and that the
remaining respondents, including their sons and brothers, were subsequently not given any work schedule. 26
Respondents maintained that they were regular employees of Vicmar; that Vicmar employed a number of them as
early as 1990 and as late as 200327 through Pagcaliwagan, its plant manager; that Vicmar made them perform tasks
necessary and desirable to its usual business; and that Vicmar paid their wages and controlled the means and
methods of their work to meet the standard of its products. Respondents averred that Vicmar dismissed them from
service without cause or due process that prompted the filing of this illegal dismissal case. 28
Respondents claimed that they were illegally dismissed after "vicmar learned that they instituted the subject In addition, respondents averred that even assuming that they were seasonal employees, they were still regular
Complaint through the simple expedience of not being scheduled for work. Even those persons associated with them employees whose employment was never severed during off-season. Thus, they asserted that the decision to farm
were dismissed. They also asserted that Vicmar did not comply with the twin notice requirement in dismissing them out to contractors was in violation of their right to security of tenure and was an evidence of bad faith on the part
employees.29 of Vicmar.

Furthermore, respondents contended that while Vicmar, TFDI and Gin were separately registered with the On February 2, 2007, the NLRC affirmed the Decisions of ELAs Pelaez and Magbanua.49 On April 30, 2007, it denied
SEC,30 they were involved in the same business, located in the same compound, owned by one person, had one respondents' motion for reconsideration.50
resident manager, and one and the same administrative department, personnel and finance sections. They claimed
that the employees of these companies were identified as employees of Vicmar even if they were assigned in TFDI or Ruling of the Court of Appeals
GIII.31
Undaunted, respondents filed with the CA a Petition51 for Certiorari maintaining that they were regular employees of
On the other hand, petitioners stated that Vicmar is a domestic corporation engaged in wood processing, including the Vicmar and that the latter illegally dismissed them. They insisted that the labor contractors engaged by Vicmar were
manufacture of plywood since 1970;32 that Vicmar employed adequate regular rank-and-file employees for its normal "labor-only" contractors, as they have no equipment and facilities of their own.
operation; and that it engaged the services of additional workers when there were unexpected high demands of
plywood products and when several regular employees were unexpectedly absent or on leave. 33 Petitioners, for their part, reiterated that Vicmar employed respondents as additional workforce when there was high
demand for plywood thus, they were merely seasonal employees of Vicmar. They argued that Vicmar engaged
Petitioners pointed out that the engagement of Vicmar's "extra" workers was not continuous and not more than four of independent contractors as a cost-saving measure; and these contractors exercised direct control and supervision
them were engaged per section in every shift. They added that from the time of engagement, respondents were not over respondents. In conclusion, petitioners declared that respondents were not illegally dismissed but lost their
assigned for more than one year in a section or a specific activity. 34They explained that some of Vicmar's "extra" employment because of refusal to coordinate with Vicmar's independent contractors.
workers were engaged under "pakyaw" system and were paid based on the items repaired or retrieved.35 Petitioners
also stated that respondents Allan Baguio, Romel Patoy, Rexy Dofeliz, Marlon Banda, Gulben Rhyan Ramos, Julieto On November 24,2009, the CA rendered the assailed Decision granting the Petition for Certiorari, the dispositive
Simon and Agapito Canas, Jr. were "extra" workers of TFDI, not Vicmar. 36 They likewise alleged that a number of portion of which reads:
respondents were engaged to assist regular employees in the company, 37 and the others were hired to repair used
steel straps and retrieve useable veneer materials, or to perform janitorial services.38
WHEREFORE, premises considered, the Petition is GRANTED. The Resolution dated February 2,2007 of the
National Labor Relations Commission (NLRC), Fifth Division, Cagayan de Oro City is REVERSED and SET ASIDE.
Moreover, petitioners argued that the engagement of additional workforce was subject to the availability of forest
Private respondents are ORDERED to reinstate petitioners to their former positions, without loss of seniority rights,
products, as well as veneer materials from Malaysia or Indonesia and the availability of workers.39
and to pay full backwages from the time they were illegally dismissed until actual reinstatement.
Petitioners further asseverated that sometime in August 2004, they decided to engage the services of legitimate
SO ORDERED.52ChanRoblesVirtualawlibrary
independent contractors, namely, E.A. Rosales Contracting Services and Candole Contracting Services, to provide
The CA held that a number of respondents were assigned to the boiler section where plywood was dried and cooked
additional workforce.40 Petitioners claimed that they were unaware that respondents were dissatisfied with this
to perfection; and while the other respondents were said to have been assigned at the general service section, they
decision leading to the DOLE case.41 They insisted that hiring said contractors was a cost-saving measure, which was
were "cleaners on an industrial level handling industrial refuse." 53 As such, according to the CA, respondents
part of Vicmar's management prerogative.42
performed activities necessary and desirable in the usual business of Vicmar, as they were assigned to departments
vital to its operations. It also noted that the repeated hiring of respondents proved the importance of their work to
Ruling of the Executive Labor Arbiters
Vicmar's business. It maintained that the contractors were engaged by Vicmar only for the convenience of Vicmar. In
sum, the CA declared that respondents were illegally dismissed since there was no showing of just cause for their
On May 25, 2006, ELA Pelaez dismissed the complaints in NLRC Case Nos. RAB-10-09-00603-2004; RAB-10-09-
termination and of compliance by Vicmar to due process of law.
00609-2004; RAB-10-09-00625-2004; and RAB-10-02-00190-2005.43 On May 29, 2006, ELA Magbanua dismissed
the complaint in NLRC Case No. RAB-10-08-00593-2005.44
On May 10, 2012, the CA denied petitioners' motion for reconsideration.54
Both ELAs Pelaez and Magbanua held that respondents were seasonal employees of Vicmar, whose work was "co-
Petitioners thus filed this Petition raising the sole ground as follows:
terminus or dependent upon the extraordinary demands for plywood products and also on the availability of logs or
timber to be processed into plywood."45 They noted that Vicmar could adopt cost-saving measures as part of its
THE HONORABLE COURT OF APPEALS, WITH ALL DUE RESPECT AND DEFERENCE, ERRED IN REVERSING
management prerogative, including engagement of legitimate independent contractors. 46
AND SETTING ASIDE THE FINDINGS OF FACTS AND CONCLUSIONS OF THE NATIONAL LABOR RELATIONS
COMMISSION (NLRC). THE DECISION AS WELL AS THE RESOLUTION ARE NOT IN ACCORDANCE WITH LAW
Ruling of the National Labor Relations Commission
AND APPLICABLE JURISPRUDENCE AND IF NOT CORRECTED, WILL CAUSE GRAVE INJUSTICE AND
IRREPERABLE [SIC] DAMAGE TO THE PETITIONERS WHO WILL BE CONSTRAINED TO ABSORB UNCESSARY
Consequently, respondents filed a Notice of Appeal with Motion to Consolidate Cases 47 alleging that the foregoing
[SIC] WORKFORCE, WHICH WILL LEAD TO THE FURTHER DETERIORATION OF ITS FINANCIAL INSTABILITY
cases involved same causes of actions, issues, counsels, and respondents, and complainants therein were similarly
[SIC] AND POSSIBLY TO ITS CLOSURE.55ChanRoblesVirtualawlibrary
situated.
Petitioners contend that it is irregular for the CA to reverse the findings of facts of the NLRC and the ELAs based on
two work schedules of different companies and identification cards of five respondents. They maintain that said
Thereafter, in their Consolidated Memorandum on Appeal,48 respondents argued that their work in Vicmar was not
evidence cannot conclusively prove that respondents were regular employees of Vicmar. 56
seasonal. They averred that since their employment in 1990 until their termination in 2004, they continuously worked
for Vicmar and were not allowed to work for other companies. They alleged that there was never a decline in the
Additionally, petitioners argue that the CA erred in finding that they (petitioners) have the burden to prove that
demand and production of plywood. They also claimed that they continuously worked in Vicmar the whole year,
respondents were hired for only one season to establish that they were mere seasonal employees. Petitioners
except in December during which the machines were shut down for servicing and clean-up. They, nonetheless, stated
emphasize that since the inception of this case, they have been denying respondents' claim that they were working
that some of them were the ones who had been cleaning these machines.
under regular working hours and working days.57
Petitioners maintain that respondents were Vicmar's "extra" workers; 58 that the engagement of independent
contractors was a management prerogative exercised in good faith; 59 that some of the respondents were engaged by Balamad, Dante July 1994 Boiler Sept. 2004
TFDI and thus, they have no standing in this case.60
Baguio, Simeon 1995 Boiler Sept. 2004
Respondents, on their part, assert that petitioners have the burden to prove that they (respondents) were seasonal
employees because such allegation is a critical fact that must be substantiated.61 They likewise restate that they were
regular employees of Vicmar because they had been performing tasks necessary and desirable for the production of Baguio, Francisco 1995 Block Board June 2004
plywood; they continuously worked in Vicmar for more than 11 hours daily until they were terminated in September
2004; and they were not allowed to work for companies other than Vicmar. 62
Tacbobo, Rolando Jan. 1995 Plant Maint. Sept. 2004
Respondents claim that assuming that they were "extra" workers, still, their continued and repeated hiring for more
than 10 years made their functions necessary or desirable in the usual business of Vicmar.63 Belarga, Norberto 1995 Boiler July 2004
Issue: Did the CA err in finding that the NLRC gravely abused its discretion in affirming the ELAs' Decisions
dismissing the complaint? Elarcosa, Camilo 1995 Boiler Sept. 2004

Our Ruling: In labor cases, grave abuse of discretion may be ascribed to the NLRC when its findings and
conclusions are not supported by substantial evidence or such relevant evidence that a reasonable mind might accept Abugho, Junie June 1996 Boiler Sept. 2004
as adequate to support a conclusion.64 The CA may grant a Petition for Certiorari if it finds that the NLRC committed
grave abuse of discretion by capriciously, whimsically or arbitrarily disregarding the material evidence decisive of a Pamon, Renante June 1996 Assy./Fin. Sept. 2004
case. It cannot "make this determination without looking into the evidence presented by the parties. Necessarily, the
appellate court can only evaluate the materiality or significance of the evidence, which is alleged to have been
capriciously, whimsically, or arbitrarily disregarded by the NLRC, in relation to all other evidence on record." 65 Abugho, Jonard June 1996 Boiler Oct. 2004

In this case, we find that the CA correctly granted respondents' Petition for Certiorari because the NLRC gravely
Noval, Ronald 1997 Boiler Aug. 2004
abused its discretion when it affirmed the dismissal of respondents' Complaints.

Section 280 of the Labor Code defines a regular employee as one who is 1) engaged to perform tasks usually Siman, Julito 1997 Boiler Sept. 2004
necessary or desirable in the usual business or trade of the employer, unless the employment is one for a specific
project or undertaking or where the work is seasonal and for the duration of a season; or 2) has rendered at least 1
year of service, whether such service is continuous or broken, with respect to the activity for which he is employed Baguio, Allan 1997 Boiler Sept. 2004
and his employment continues as long as such activity exists.66
Cabanday, Ruel 1998 Assy./Fin. Oct. 2004
Here, there is substantial evidence to prove that respondents were regular employees such that their separation from
work without valid cause amounted to illegal dismissal.
Salcedo, Joseph 1998 Assy./Fin. Sept. 2004
To support their illegal dismissal case, respondents listed the date of their hiring, the date they were terminated and
the sections where they were assigned prior to dismissal, to wit:67
Lobaynon, Oliver 1998 Boiler Sept. 2004

NAMES DATE HIRED SECTION DATE FIRED Panaga, Robinson 1999 Assy./Fin. March 2004

Panes, Ruben June 1990 Boiler Oct. 2004 Paguican, Roberto 1999 Boiler Sept. 2004

Panes, Recarido August 1990 Boiler Sept. 2004 Ello, Daniel 1999 Boiler Sept. 2004

Tinsay, Jesus 1991 Boiler Sept. 2004 Taneo, Jesrile 1999 Plywood Rep. Sept. 2004

Gonzales, Armando June 1991 Assy./Fin. Feb. 2004 Indino, Donil 1999 Plywood Rep. Sept. 2004

Patoy, Romel Nov. 1991 Boiler Sept. 2004 Narisma, Silverio July 1999 Assy ./Fin. Sept. 2004

Ladra, Wilfredo 1992 Plant Maint. Sept. 2004 Canas, Agapito Jr. Jan. 2000 Plant Maint. Sept. 2004
 regular employment should be granted in their favor pursuant to Article 280 of the Labor Code since they had been
Gulben, Wilfredo Dec. 2000 Plywood Rep. Sept. 2004 performing the same activity for at least one year, as they were assigned to the same sections, and there is no
indication that their respective activities ceased.71
Gulben, Rechie Mar. 2000 Plywood Rep. Sept. 2004
The test to determine whether an employee is regular is the reasonable connection between the activity he performs
and its relation to the employer's business or trade, as in the case of respondents assigned to the boiler section.
Pacaldo, Chiquito Mar. 2000 Green End May 2002 Nonetheless, the continuous re-engagement of all respondents to perform the same kind of tasks proved the
necessity and desirability of their services in the business of Vicmar. 72 Likewise, considering that respondents
appeared to have been performing their duties for at least one year is sufficient proof of the necessity, if not the
Dofeliz, Rexy June 2001 Boiler Aug. 2004 indispensability of their activities in Vicmar's business.73

Ramos, Gelven Rhyan July 2002 Boiler Sept. 2004 The Court also holds that Vicmar failed to prove that the contractors it engaged were legitimate labor contractors.

Colansi, Rodrigo Oct. 2002 Assy./Fin. Sept. 2004
xxxx Jan. 2002 Boiler Sept. 2004
Banda, Marlon June 2003 Boiler Sept. 2004
Elbina, Teofilo Nov. 2003 Boiler July 2004
The foregoing allegations were uncontroverted as no relevant employment files, payrolls and records were submitted
by petitioners to refute the information. Being the employer, petitioners have custody and control of important
employment documents. As such, failure to submit them gives rise to the presumption that their presentation would be
prejudicial to petitioners' cause and leads the Court to conclude that the assertions of respondents are truthful
declarations.68
Interestingly, in the DOLE case filed by respondents against Vicmar and TFDI, the latter did not also submit
documents to disprove respondents' claim for wage differentials, 13th month pay and holiday pay. Because of this, the
DOLE Secretary denied their appeal. In her February 17, 2006 Order, 69 the DOLE Secretary made the following
pronouncements:
In this case, the appellants (Vicmar and TFDI) were given seven x x x days to comply with the Notice of Inspection
Results or to contest the findings therein, but they chose to ignore the directive. Summary hearings were conducted x
x x to give the appellants ample time to submit payrolls, but they merely promised to do so x x x [A]t the extra hearing
on 18 November, they still failed to do so. x x x There being none, the Director could not but sustain the inspection
report.
Neither can the Director be faulted for not referring the case to the NLRC on the ground that material evidence, namely,
the payrolls and the daily time records, were not duly considered during inspection. The appellants cannot raise this
argument because it was they who failed to produce the records for the consideration of the inspector and the Regional
Director[.]70ChanRoblesVirtualawlibrary
Similarly, we cannot fault the CA in the instant case for giving credence to the assertions and documentary evidence
adduced by respondents. Petitioners had the opportunity to discredit them had they presented material evidence,
including payrolls and daily time records, which are within their custody, to prove that respondents were mere
additional workforce engaged when there are extraordinary situations, such as high demands for plywood products or
unexpected absences of regular employees; and that respondents were not assigned for more than one year to the
same section or activity.
Moreover, respondents were shown to have performed activities necessary in the usual business of Vicmar. Most of
them were assigned to activities essential for plywood production, the central business of Vicmar. In the list above,
more than half of the respondents were assigned to the boiler, where pieces of plywood were cooked to perfection.
While the other respondents appeared to have been assigned to other sections in the company, the presumption of
To determine the existence of independent contractorship, it is necessary to establish that the contractor carries a
distinct and independent business, and undertakes to perform work on its own account and under its responsibility
and pursuant to its own manner and method, without the control of the principal, except as to the result; that the
contractor has substantial capital or investment; and, that the agreement between the principal and the contractor
assures the contractual employees to all labor and occupational safety and health standards, to right to self-
organization, security of tenure and other benefits.74
Other than their respective Certificates75 of Registration issued by the DOLE on August 12, 2004, E.A Rosales
Contracting Services and Candole Labor Contracting Services were not shown to have substantial capital or
investment, tools and the like. Neither was it established that they owned equipment and machineries for the
purported contracted job. Also, the allegation that they had clients other than Vicmar remained to be bare assertion
without corresponding proof. More importantly, there was no evidence presented that these contractors undertook the
performance of their service contracts with Vicmar pursuant to their own manner and method, without the control and
supervision of Vicmar.76
Petitioners cannot rely on the registration of their contractors to prove that the latter are legitimate independent
contractors. Such registration is not conclusive of the status of a legitimate contractor; rather, it merely prevents the
presumption of being a labor-only contractor from arising. Indeed, to determine whether labor-only contracting exists,
the totality of the facts and circumstances of the case must be considered. 77
The Court also gives merit to the finding of the CA that Vicmar is the employer of respondents despite the allegations
that a number of them were assigned to the branches of Vicmar. Petitioners failed to refute the contention that Vicmar
and its branches have the same owner and management - which included one resident manager, one administrative
department, one and the same personnel and finance sections. Notably, all respondents were employed by the same
plant manager, who signed their identification cards some of whom were under Vicmar, and the others under TFDI.
Where it appears that business enterprises are owned, conducted and controlled by the same parties, law and equity
will disregard the legal fiction that these corporations are distinct entities and shall treat them as one. This is in order
to protect the rights of third persons, as in this case, to safeguard the rights of respondents.78
Considering that respondents were regular employees and their termination without valid cause amounts to illegal
dismissal, then for its contrary ruling unsupported by substantial evidence, the NLRC gravely abused its discretion in
dismissing the complaints for illegal dismissal. Therefore, the CA Decision setting aside that of the NLRC is in order
and must be sustained.79
WHEREFORE, the Petition is DENIED. The Decision dated November 24,2009 and Resolution dated May 10, 2012
of the Court of Appeals in CA-G.R. SP No. 01853-MIN are AFFIRMED.
SO ORDERED.
16. Dutch Movers, Inc. vs. Vs. Lequin G.R. No. 210032; April 25, 2017
Before the Court is a Petition for Review on Certiorari assailing the July 1, 2013 Decision3 of the Court of Appeals in
CA-G.R. SP No. 113774. The CA reversed and set aside the October 29, 20094 and January 29, 20105 Resolutions of
the National Labor Relations Commission (NLRC), which in turn reversed and set aside the Order 6 dated September
4, 2009 of Labor Arbiter Lilia S. Savari (LA Savari).
Also challenged is the November 13, 2013 CA Resolution.7 which denied the Motion for Reconsideration on the
assailed Decision.
Factual Antecedents
This case is an offshoot of the illegal dismissal Complaint 8 filed by Edilberto Lequin (Lequin), Christopher Salvador,
Reynaldo Singsing, and Raffy Mascardo (respondents) against Dutch Movers, Inc. (DMI), and/or spouses Cesar Lee
and Yolanda Lee (petitioners), its alleged President/Owner, and Manager respectively.
thy cannot be held liable for the liabilities of DMI.
On April 1, 2009, LA Savari issued an Order22 holding petitioners liable for the judgment awards. LA Savari decreed
that petitioners represented themselves to respondents as the owners of DMI; and were the ones who managed the
same. She further noted that petitioners were afforded due process as they were impleaded from the beginning of this
case.
Later, respondents filed anew a Reiterating Motion for Writ of Execution and Approve[d) Updated Computation of Full
Backwages.23
On July 31, 2009, LA Savari issued a Writ of Execution, the pertinent portion of which reads:

In their Amended Complaint and Position Paper,9 respondents stated that DMI, a domestic corporation engaged in
hauling liquefied petroleum gas, employed Lequin as truck driver and the rest of respondents as helpers; on
December 28, 2004, Cesar Lee, through the Supervisor Nazario Furio, informed them that DMI would cease its
hauling operation for no reason; as such, they requested DMI to issue a formal notice regarding the matter but to no
avail. Later, upon respondents' request, the DOLE NCR10 issued a certification11 revealing that DMI did not file any
notice of business closure. Thus, respondents argued that they were illegally dismissed as their termination was
without cause and only on the pretext of closure.
On October 28, 2005, LA Aliman D. Mangandog dismissed12 the case for lack of cause of action.
On November 23, 2007, the NLRC reversed and set aside the LA Decision. It ruled that respondents were illegally
dismissed because DMI simply placed them on standby, and no longer provide them with work. The dispositive
portion of the NLRC Decision13 reads:
NOW THEREFORE, you [Deputy Sheriff] are commanded to proceed to respondents DUTCH MOVERS and/or CESAR
LEE and YOLANDA LEE with address at c/o Toyota Alabang, Alabang Zapote Road, Las Piñas City or wherever they
may be found within the jurisdiction of the Republic of the Philippines and collect from said respondents the amount of
THREE MILLION EIGHT HUNDRED EIGHTEEN THOUSAND ONE HUNDRED EIGHTY SIX PESOS & 66/100
(Php3,818,186.66) representing Complainants' awards plus 10%, Attorney's fees in the amount of THREE HUNDRED
EIGHTY ONE THOUSAND EIGHT HUNDRED EIGHTEEN PESOS & 66/100 (Php381,818.66) and execution fee in the
amount of FORTY THOUSAND FIVE HUNDRED PESOS (Php40,500.00) or a total of FOUR MILLION TWO
HUNDRED FORTY THOUSAND FIVE HUNDRED FIVE PESOS & 32/100 (Php4,240,505.32) x x x24
Petitioners moved25 to quash the Writ of Execution contending that the April 1, 2009 LA Order was void because the
LA has no jurisdiction to modify the final and executory NLRC Decision and the same cannot anymore be altered or
modified since there was no finding of bad faith against them.
Ruling of the Labor Arbiter

On September 4, 2009, LA Savari denied petitioners' Motion to Quash because it did not contain any ground that
WHEREFORE, the Decision dated October 28, 2005 is hereby REVERSED and SET ASIDE and a new judgment is
must be set forth in such motion.
hereby rendered ordering respondent Dutch Movers, Inc. to reinstate complainants to their former positions without loss
of seniority rights and other privileges. Respondent corporation is also hereby ordered to pay complainants their full
Thus, petitioners appealed to the NLRC.
backwages from the time they were illegally dismissed up to the date of their actual reinstatement and ten (10%) percent
of the monetary award as for attorney's fees.
Ruling of the National Labor Relations Commission
SO ORDERED.14
On October 29, 2009, the NLRC quashed the Writ of Execution insofar as it held petitioners liable to pay the judgment
The NLRC Decision became final and executory on December 30, 2007. 15 And, on February 14, 2008, the NLRC
awards. The decretal portion of the NLRC Resolution reads:
issued an Entry of Judgment16 on the case.
WHEREFORE, in view of the foregoing, the assailed Order dated September 4, 2009 denying respondents' Motion to
Consequently, respondents filed a Motion for Writ of Execution.17 Later, they submitted a Reiterating Motion for Writ of
Quash Writ is hereby REVERSED and SET ASIDE. The Writ of Execution dated July 13, 26 2009 is hereby QUASHED
Execution with Updated Computation of Full Backwages.18 Pending resolution of these motions, respondents filed a
insofar as it holds individual respondents Cesar Lee and Yolanda Lee liable for the judgment award against the
Manifestation and Motion to Implead19 stating that upon investigation, they discovered that DMI no longer operates.
complainants.
They, nonetheless, insisted that petitioners - who managed and operated DMI, and consistently represented to
respondents that they were the owners of DMI - continue to work at Toyota Alabang, which they (petitioners) also own
Let the entire record of the case be forwarded to the Labor Arbiter of origin for appropriate proceedings.
and operate. They further averred that the Articles of Incorporation (AOI) of DMI ironically did not include petitioners
as its directors or officers; and those named directors and officers were persons unknown to them. They likewise
SO ORDERED.27
claimed that per inquiry with the SEC20 and the DOLE, they learned that DMI did not tile any notice of business
The NLRC ruled that the Writ of Execution should only pertain to DMI since petitioners were not held liable to pay the
closure; and the creation and operation of DMI was attended with fraud making it convenient for petitioners to evade
awards under the final and executory NLRC Decision. It added that petitioners could not be sued personally for the
their legal obligations to them.
acts of DMI because the latter had a separate and distinct personality from the persons comprising it; and, there was
no showing that petitioners were stockholders or officers of DMI; or even granting that they were, they were not
Given these developments, respondents prayed that petitioners, and the officers named in DMI's AOI, which included
shown to have acted in bad faith against respondents.
Edgar N. Smith and Millicent C. Smith (spouses Smith), be impleaded, and be held solidarity liable with DMI in paying
the judgment awards.
On January 29, 2010, the NLRC denied respondents' Motion for Reconsideration.
21
In their Opposition to Motion to Implead, spouses Smith alleged that as part of their services as lawyers, they lent
Undaunted, respondents filed a Petition for Certiorari with the CA ascribing grave abuse of discretion against the
their names to petitioners to assist them in incorporating DMI. Allegedly, after such undertaking, spouses Smith
NLRC in quashing the Writ of Execution insofar as it held petitioners liable to pay the judgment awards.
promptly transferred their supposed rights in DMI in favor of petitioners.
Ruling of the Court of Appeals
Spouses Smith stressed that they never participated in the management and operations of DMI, and they were not its
stockholders, directors, officers or managers at the time respondents were terminated. They further insisted that they
On July 1, 2013, the CA reversed and set aside the NLRC Resolutions, and accordingly affirmed the Writ of Execution
were not afforded due process as they were not impleaded from the inception of the illegal dismissal case; and hence,
impleading petitioners as party-respondents liable to answer for the judgment awards.
The CA ratiocinated that as a rule, once a judgment becomes final and executory, it cannot anymore be altered or
modified; however, an exception to this rule is when there is a supervening event, which renders the execution of
judgment unjust or impossible. It added that petitioners were afforded due process as they were impleaded from the
beginning of the case; and, respondents identified petitioners as the persons who hired them, and were the ones
behind DMI. It also noted that such participation of petitioners was confirmed by DIVII's two incorporators who
attested that they lent their names to petitioners to assist the latter in incorporating DMI; and, after their undertaking,
these individuals relinquished their purported interests in DMI in favor of petitioners.
On November 13, 2013, the CA denied the Motion for Reconsideration on the assailed Decision.
Thus, petitioners filed this Petition raising the following grounds:
THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT RESPONDENTS
SHOULD BE LIABLE FOR THE JUDGMENT AWARD TO RESPONDENTS BASED ON THE FOLLOWING:
I their rights in DMI to petitioners, which proved that petitioners were the ones in control of DMI, and used the same in
THE VALDERAMA VS. NLRC AND DAVID VS. CA ARE NOT APPLICABLE IN THE INSTANT CASE.
II
THERE IS NO LEGAL BASIS TO PIERCE THE VEIL OF CORPORATE FICTION OF DUTCH MOVERS, INC. 28
Petitioners argue that the circumstances in Valderrama v. National Labor Relations Commission29 differ with those of
the instant case. They explain that in Valderrama, the LA therein granted a motion for clarification. In this case,
however, the LA made petitioners liable through a mere manifestation and motion to implead filed by respondents.
They further stated that in Valderrama, the body of the decision pointed out the liability of the individual respondents
therein while here, there was no mention in the November 23, 2007 NLRC Decision regarding petitioners' liability. As
such they posit that they cannot be held liable under said NLRC Decision.
In addition, petitioners claim that there is no basis to pierce the veil of corporate fiction because DMI had a separate
and distinct personality from the officers comprising it. They also insist that there was no showing that the termination
of respondents was attended by bad faith.
In fine, petitioners argue that despite the allegation that they operated and managed the affairs of DMI, they cannot be
held accountable for its liability in the absence of any showing of bad faith on their part.
Respondents, on their end, counter that petitioners were identified as the ones who owned and managed DMI and
therefore, they should be held liable to pay the judgment awards. They also stress that petitioners were consistently
impleaded since the filing of the complaint and thus, they were given the opportunity to be heard.
Issue: Whether petitioners are personally liable to pay the judgment awards in favor of respondents
Our Ruling: The Court denies the Petition.
To begin with, the Court is not a trier of facts and only questions of law may be raised in a petition under Rule 45 of
the Rules of Court. This rule, nevertheless, allows certain exceptions, which include such instance where the factual
findings of the CA are contrary to those of the lower court or tribunal. Considering the divergent factual findings of the
CA and the NLRC in this case, the Court deems it necessary to examine, review and evaluate anew the evidence on
record.30
Moreover, after a thorough review of the records, the Court finds that contrary to petitioners' claim, Valderrama v.
National Labor Relations Commission,31 and David v. Court of Appeals32 are applicable here. In said cases, the Court
held that the principle of immutability of judgment, or the rule that once a judgment has become final and executory,
the same can no longer be altered or modified and the court's duty is only to order its execution, is not absolute. One
of its exceptions is when there is a supervening event occurring after the judgment becomes final and executory,
which renders the decision unenforceable.33
To note, a supervening event refers to facts that transpired after a judgment has become final and executory, or to
new situation that developed after the same attained finality. Supervening events include matters that the parties were
unaware of before or during trial as they were not yet existing during that time. 34
In Valderrama, the supervening event was the closure of Commodex, the company therein, after the decision became
final and executory, and without any showing that it filed any proceeding for bankruptcy. The Court held that therein
petitioner, the owner of Commodex, was personally liable for the judgment awards because she controlled the
company.
Similarly, supervening events transpired in this case after the NLRC Decision became final and executory, which
rendered its execution impossible and unjust. Like in Valderrama, during the execution stage, DMI ceased its
operation, and the same did not file any formal notice regarding it. Added to this, in their Opposition to the Motion to
Implead, spouses Smith revealed that they only lent their names to petitioners, and they were included as
incorporators just to assist the latter in forming DMI; after such undertaking, spouses Smith immediately transferred
furthering their business interests.
In considering the foregoing events, the Court is not unmindful of the basic tenet that a corporation has a separate
and distinct personality from its stockholders, and from other corporations it may be connected with. However, such
personality may be disregarded, or the veil of corporate fiction may be pierced attaching personal liability against
responsible person if the corporation's personality "is used to defeat public convenience, justify wrong, protect fraud
or defend crime, or is used as a device to defeat the labor laws x x x." 35 By responsible person, we refer to an
individual or entity responsible for, and who acted in bad faith in committing illegal dismissal or in violation of the
Labor Code; or one who actively participated in the management of the corporation. Also, piercing the veil of
corporate fiction is allowed where a corporation is a mere alter ego or a conduit of a person, or another corporation. 36
Here, the veil of corporate fiction must be pierced and accordingly, petitioners should be held personally liable for
judgment awards because the peculiarity of the situation shows that they controlled DMI; they actively participated in
its operation such that DMI existed not as a separate entity but only as business conduit of petitioners. As will be
shown be shown below, petitioners controlled DMI by making it appear to have no mind of its own, 37 and used DMI as
shield in evading legal liabilities, including payment of the judgment awards in favor of respondents.38
First, petitioners and DMI jointly filed their Position Paper,39 Reply,40 and Rejoinder41 in contesting respondents' illegal
dismissal. Perplexingly, petitioners argued that they were not part of DMI and were not privy to its dealings;42 yet,
petitioners, along with DMI, collectively raised arguments on the illegal dismissal case against them.
Stated differently, petitioners denied having any participation in the management and operation of DMI; however, they
were aware of and disclosed the circumstances surrounding respondents' employment, and propounded arguments
refuting that respondents were illegally dismissed.
To note, petitioners revealed the annual compensation of respondents and their length of service; they also set up the
defense that respondents were merely project employees, and were not terminated but that DMI's contract with its
client was discontinued resulting in the absence of hauling projects for respondents.
If only to prove that they were not part of DMI, petitioners could have revealed who operated it, and from whom they
derived the information embodied in their pleadings. Such failure to reveal thus gives the Court reasons to give
credence to respondents' firm stand that petitioners are no strangers to DMI, and that they were the ones who
managed and operated it.
Second, the declarations made by spouses Smith further bolster that petitioners and no other controlled DMI, to wit:
Complainants [herein respondents] in their own motion admit that they never saw [spouses Smith] at the office of [DMI],
and do not know them at all. This is because [spouses Smith's] services as lawyers had long been dispensed by the
Spouses Lee and had no hand whatsoever in the management of the company. The Smiths, as counsel of the spouses
at [that] time, [lent] their names as incorporators to facilitate the [incorporation of DMI.] Respondent Edgard Smith was
then counsel of Toyota Alabang and acts as its corporate secretary and as favor to his former client and employer,
Respondent Cesar Lee, agreed to help incorporate [DMI] and even asked his wife Respondent, Millicent Smith, to act
as incorporator also [to] complete the required 5 man incorporators. After the incorporation they assigned and
transferred all their purported participation in the company to the Respondents Spouses Cesar and Yolanda Lee, who
acted as managers and are the real owners of the corporation. Even at the time complainant[s were] fired from [their]
employment respondents Spouses Smith had already given up their shares. The failure to an1end the Articles of
Incorporation of [DMI], and to apply for closure is the fault of the new board, if any was constituted subsequently, and
not of Respondents Smiths. Whatever fraud committed was not committed by the Respondents Smiths, hence they
could not be made solidarily liable with Respondent Corporation or with the spouses Lee. If bad faith or fraud did attend
the termination of complainant[s], respondents Smiths would know nothing of it because they had ceased any
connection with [DMI] even prior to such time. And they had at the inception of the corporation never exercised
management prerogatives in the selection, hiring, and firing of employees of [DMI]. 43
Spouses Smith categorically identified petitioners as the owners and managers of DMI. In their Motion to Quash,
however, petitioners neither denied the allegation of spouses Smith nor adduced evidence to establish that they were
not the owners and managers of DMI. They simply insisted that they could not be held personally liable because of
the immutability of the final and executory NLRC Decision, and of the separate and distinct personality of DMI.
Furthermore, the assailed CA Decision heavily relied on the declarations of spouses Smith but still petitioners did not
address the matters raised by spouses Smith in the instant Petition with the Court.
Indeed, despite sufficient opportunity to clarify matters and/or to refute them, petitioners simply brushed aside the
allegations of spouses Smith that petitioners owned and managed DMI. Petitioners just maintain that they did not act
in bad faith; that the NLRC Decision is final and executory; and that DMI has a distinct and separate personality.
Hence, for failure to address, clarify, or deny the declarations of spouses Smith, the Court finds respondents' position
that petitioners owned, and operated DMI with merit.
Third, piercing the veil of corporate fiction is allowed, and responsible persons may be impleaded, and be held
solidarily liable even after final judgment and on execution, provided that such persons deliberately used the
corporate vehicle to unjustly evade the judgment obligation, or resorted to fraud, bad faith, or malice in evading their
obligation.44
In this case, petitioners were impleaded from the inception of this case. They had ample opportunity to debunk the
claim that they illegally dismissed respondents, and that they should be held personally liable for having controlled
DMI and actively participated in its management, and for having used it to evade legal obligations to respondents.
While it is true that one's control does not by itself result in the disregard of corporate fiction; however, considering the
irregularity in the incorporation of DMI, then there is sufficient basis to hold that such corporation was used for an
illegal purpose, including evasion of legal duties to its employees, and as such, the piercing of the corporate veil is
warranted. The act of hiding behind the cloak of corporate fiction will not be allowed in such situation where it is used
to evade one's obligations, which "equitable piercing doctrine was formulated to address and prevent." 45
Clearly, petitioners should be held liable for the judgment awards as they resorted to such scheme to countermand
labor laws by causing the incorporation of DMI but without any indication that they were part thereof. While such
device to defeat labor laws may be deemed ingenious and imaginative, the Court will not hesitate to draw the line,
and protect the right of workers to security of tenure, including ensuring that they will receive the benefits they
deserve when they fall victims of illegal dismissal.46
Finally, it appearing that respondents' reinstatement is no longer feasible by reason of the closure of DMI, then
separation pay should be awarded to respondents instead.47
WHEREFORE, the Petition is DENIED. The July 1, 2013 Decision and November 13, 2013 Resolution of the Court of
Appeals in CA-G.R. SP 113774 are AFFIRMED with MODIFICATION that instead of reinstatement, Dutch Movers,
Inc. and spouses Cesar Lee and Yolanda Lee are solidarily liable to pay respondents' separation pay for every year of
service.
SO ORDERED.
17. Federated LPG Dealers Association vs. Ma. Cristina l. del Rosario, et al.
G.R. No. 202639; November 9, 2016
This Petition for Review on Certiorari assails the April 27, 2012 Decision1 and July 6, 2012 Resolution2 of the Court of
Appeals (CA) in CA-G.R. SP No. 115750, which respectively dismissed the Petition for Certiorari filed therewith by
petitioner Federated LPG Dealers Association and denied the motion for reconsideration thereto.
Factual Antecedents
On June 1, 2006, petitioner, through counsel Atty. Genesis M. Adarlo (Atty. Adarlo) of Joaquin Adarlo and Caoile, sought
assistance from the Criminal Investigation and Detection Group, Anti-Fraud and Commercial Crimes Division (CIDG-
AFCCD) of the Philippine National Police3 in the surveillance, investigation, apprehension, and prosecution of certain
persons and establishments within Metro Manila reportedly committing acts violative of Batas Pambansa Blg. 33 (BP
33),4 as amended by Presidential Decree No. 1865 (PD 1865), 5 to wit: (1) refilling of Liquefied Petroleum Gas (LPG)
cylinders branded as Shellane, Petron Gasul, Caltex, Totalgaz and Superkalan Gaz without any written authorization
from the companies which own the said brands in violation of Section 2(a), 6 in relation to Sections 37 and 4;8 (2)
underfilling of LPG products or possession of underfilled LPG cylinders for the purpose of sale, distribution,
transportation, exchange or barter in violation of Section 2(c), 9 in relation to Sections 310and 4; and, (3) refilling LPG
cylinders without giving any receipt therefor, or giving out receipts without indicating the brand name, tare weight, gross
weight and/or price thereof, among others, again in violation of Section 2(a) in relation to Sections 3(b) 11 and 4.
A few days later or on June 8, 2006, Atty. Adarlo again wrote the CIDG-AFCCD informing the latter of its confirmation
that ACCS Ideal Gas Corporation (ACCS), which allegedly has been refilling branded LPG cylinders in its refilling plant
at 882 G. Araneta Avenue, Quezon City, has no authority to refill per certifications from gas companies owning the
branded LPG cylinders.12
Acting on the same, a group composed of P/Supt. Francisco M. Esguerra (P/Supt. Esguerra) and PO2 Joseph R.
Faeldonia (PO2 Faeldonia), both of the CIDG-AFCCD, and a team of paralegal investigators having extensive training
and experience in LPG matters led by Bernabe C. Alajar (Alajar), mapped out a plan for the surveillance and
investigation of ACCS.13 After a series of surveillance, the group observed that various vehicles and individuals carrying
branded LPG cylinders have been going in and out of ACCS refilling plant. Hence, on July 15, 2006, they conducted a
test-buy operation, the details of which were uniformly narrated by P/Supt. Esguerra, PO2 Faeldonia, and Alajar as
follows:
x x x On 15 July 2006, using an investigation pre-text, we went undercover and executed our test-buy operations. In
order for us to successfully execute our test-buy operation and avoid suspicion, we decided to separately and
successively bring FOUR (4) empty branded LPG cylinders to the ACCS Refilling Plant.
x x x It is worthy to emphasize that while we were bringing with us the FOUR (4) empty branded LPG cylinders, we
observed that other individuals were simultaneously bringing in for refilling various empty unbranded and branded LPG
cylinders, including Shellane, Petron Gasul, Totalgaz, and Superkalan Gaz LPG cylinders.
x x x In particular, we were able to conduct our test-buy operation in the following manner:
(a) We first brought one (1) empty Petron Gasul 11 kg. LPG cylinder and one (1) empty Shellane 11 kg. LPG cylinder
for refilling. An employee of the ACCS Refilling Plant got our empty branded LPG cylinders, brought them to the refilling
platform inside, and refilled them. From our location, we witnessed the actual refilling of our empty branded LPG
cylinders. We were thereafter required to pay the total amount of NINE HUNDERED FIFTY-FOUR PESOS (Php954.00)
for the refilled branded LPG cylinders. We made the necessary payment and, in turn, we were issued ACCS Control
Receipt No. 12119 doted 15 July 2006 x x x.
(b) Lastly, we brought on (1) empty Totalgaz 11 kg. LPG cylinder and on (1) Superkalan Gaz 2.7 kg. LPG cylinder for
refilling. An employee of the ACCS Refilling Plant got our empty branded LPG Cylinders, brought them to the refilling
platform inside, and refilled them. Again, from our location, we witnessed the actual refilling of our empty branded LPG
cylinders. We were thereafter required to pay the amount of FIVE HUNDRED NINETY PESOS (Php590.00). We made
the necessary payment, and in turn, we were issued ACCS Control No. 12120 dated 15 July 2006 x x x
cralawlawlibrary
x x x Thereafter, we left the premises of ACCS Refilling Plant and brought with us the abovementioned refilled branded
LPG Cylinders, which all did not have any LPG valve seals. Immediately, we proceeded to the CIDG-AFCCD
Headquarters and made the proper identification markings on the branded LPG cylinders, such as the name of ACCS
Refilling Plant where they were refilled and the date when they were refilled. x x x14
Inspection and evaluation of the refilled LPG cylinders further revealed that they were underfilled by 0.4 kg to 1.3 kg.15
Having reasonable grounds to believe that ACCS was in violation of BP 33, P/Supt. Esguerra filed with the Regional
Trial Court (RTC) of Manila applications for search warrant against the officers of ACCS, to wit: Antonio G. Del
Rosario (Antonio) and, respondents Ma. Cristina L. Del Rosario, Celso E. Escobido II, and Shiela M. Escobido.
Pursuant to search warrants16 accordingly issued by the said court on August 1, 2006, a search and seizure operation
was conducted on August 3, 2006 at No. 882 G. Araneta Avenue, Quezon City. This resulted in the seizure of an
electric motor, a hose with filling head, scales, v-belt, vapor compressor, booklets of various receipts, and 73 LPG
cylinders of various brands and sizes, four of which were filled, i.e., two Superkalan 3.7 kg. LPG cylinders, one
Shellane 11 kg. LPG cylinder, and one Totalgaz 11 kg. cylinder.17 Inspection and evaluation of the said filled LPG
cylinders showed that they were underfilled by 0.5 kg. to 0.9 kg. 18
On December 14, 2006, P/Supt Esguerra filed with the Department of Justice (DOJ) Complaints-Affidavits against
Antonio and respondents for illegal trading of petroleum products and for underfilling of LPG cylinders under Section
2(a) and 2(c), respectively, of BP 33, as amended.19
In his Counter-Affidavit,20 Antonio admitted that he was the General Manager of ACCS but denied that the company
was engaged in illegal trading and underfilling. He claimed that ACCS was merely a dealer of LPG products to various
retailers in Quezon City and that the alleged refilling plant in G. Araneta Avenue, Quezon City was only being used by
ACCS as storage of LPG products intended for distribution. He also denied that ACCS has anything to do with the
persons allegedly in-charge of refilling activities in the said compound since they were not its employees. Likewise,
the properties seized during the search and seizure operation were not owned by ACCS but by third parties who were
bringing in LPG tanks for refilling with which, as mentioned, ACCS has nothing to do. Antonio likewise asserted that
the herein respondents were merely incorporators of ACCS who have no active participation in the operation of the
business of the corporation.
Respondents, for their part, filed a Joint Counter-Affidavit21 corroborating the statements of Antonio that they were
merely incorporators/stockholders of ACCS who have no active participation in the operation, management, and
control of the business; that ACCS was only engaged in the distribution of LPG products and not in the refilling of LPG
cylinders; and, that ACCS did not commit any violation of BP 33 as amended.
P/Supt. Esguerra filed a Reply-Affidavit22 wherein he pointed out that during the test-buy operation, his team was
issued ACCS Control Receipts. To him, this negated the claim of Antonio and respondents that ACCS was not
engaged in the refilling of cylinder tanks and that the persons in-charge thereof were not ACCS' employees. P/Supt.
Esguerra likewise stressed that pursuant to Section 4 of BP 33, the President, General Manager, Managing Partner,
or such other officer charged with the management of the business affairs of the corporation, or the employee
responsible for the violation shall be criminally liable. Thus, Antonio, being the General Manager, is criminally liable.
Anent the respondents, P/Supt. Esguerra averred that the Articles of Incorporation (AOI) of ACCS provides that there
shall be five incorporators who shall also serve as the directors. Considering that respondents were listed in the AOI
as incorporators, they are thus deemed as the directors of ACCS. And since the By-Laws of ACCS provides that all
business shall be conducted and all property of the corporation controlled and held by the Board of Directors, and
also pursuant to Section 2323 of the Corporation Code, respondents are likewise criminally liable.
In their Joint Rejoinder-Affidavit,24 Antonio and respondents reiterated that ACCS was only a dealer and distributor of
petroleum products and not engaged in refilling activities. They also stressed, among others, that respondents cannot
be held liable under BP 33 as amended since the AOI of ACCS did not state that they were the President, General
Manager, Managing Partner, or such other officer charged with the management of business affairs, What the AOI
plainly indicated was that they were the incorporating stockholders of the corporation and nothing more.
However, P/Supt. Esguerra in his Sur-Rejoinder Affidavit25cralawred insisted that ACCS committed illegal trading of
petroleum products and underfilling and that Antonio and respondents are criminally liable for the same.
Ruling of the Department of Justice
In a Joint Resolution26 dated June 25, 2008, Chief State Prosecutor Jovencito R Zuño approved the finding of
probable cause by Senior State Prosecutor Edwin S. Dayog, albeit only against Antonio and only for the charge of
illegal trading, viz.:
The pieces of documentary evidence on record, notably the receipts issued to the operatives of the PNP, CIDG, who
conducted the 'test-buy' operations on 15 July 2006, and the inventory of the items they seized pursuant to the search
warrant issued by the Regional Trial Court of Manila, tend to suggest that ACCS Ideal Gas Corporation did engage in
refilling LPG cylinders bearing the brands Shellane, Petron Gasul, Totalgaz, and Superkalan Gas. There is no dispute
that ACCS Ideal Gas was not duly authorized by Pilipinas Shell, Petron, and Total (Philippines) Inc. to refill their
respective LPG cylinders with LPG. Consequently, the act of ACCS Ideal Gas in refilling the LPG cylinders constitutes
'illegal trading in petroleum and/or petroleum products' under Section 2(a) of Batas Pambansa Bilang 33 as amended
by Presidential Decree No. 1986, for which respondent Antonio G. Del Rosario, the general manager of ACCS Ideal
Gas Corporation, should be prosecuted. The offense of underfilling of LPG cylinders under Section 2(c) may not be
considered a distinct offense, the very same act being involved. We hold that underfilling of LPG cylinders under Section
2(c) presupposes that the person or entity who committed it is duly authorized to refill LPG cylinders.
The other respondents may not be prosecuted for the offense. The law specifies the persons to be charged in case
where violations of B.P. Blg. 33 are committed by a corporation, to wit, the president, general manager, officer charged
with the management of the business affairs thereof, or employee responsible therefor (Section 4, B.P. Blg. 33). The
record fails to disclose who among the respondents was the president, officer charged with the management of the
business affairs of ACCS Ideal Gas, or the employee responsible for the commission of the offense. It is simply improper
to charge all respondents for the offense based so1ely on the met that they were the directors of ACCS Ideal Gas at
the time the alleged violation was committed. A member of the board of directors of a corporation is not necessarily an
'officer charged with the management of the business affairs thereof.'
VHEREFORE, it is respectfully recommended that Antonio G. Del Rosario be charged with illegal refilling of LPG
cylinders penalized under Section 2(a) of Batas Pambansa Bilang 33 as amended by Presidential Decree No. 1865
and that the complaints as against Ma. Cristina L. Del Rosario, Celso E. Escobido II, Sheila M. Escobido, and Resty P.
Capili be dismissed.
SO RESOLVED.27
The respective motions for reconsideration of P/Supt. Esguerra and Antonio were denied in another Joint
Resolution28 dated November 11, 2008.
P/Supt. Esguerra, now joined by petitioner, filed a Petition for Review29 before the Secretary of Justice assailing the
aforementioned Joint Resolutions. The Secretary of Justice, however, upheld the said issuances and dismissed the
Petition in a Resolution30 dated September 4, 2009. The Motion for Reconsideration31 thereto was likewise denied in a
Resolution32 dated June 23, 2010.
Ruling of the Court of Appeals
P/Supt. Esguerra and petitioner elevated the matter to the CA through a certiorari petition. They contended that the
Secretary of Justice acted with grave abuse of discretion amounting to lack of or in excess of jurisdiction in affirming
the dropping of respondents from the complaints and the ruling out of the offense of underfilling.
The CA, however, sustained the Secretary of Justice and on April 27, 2012 rendered a Decision, 33 the dispositive
portion of which reads as follows:
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition. The assailed
Resolutions are hereby AFFIRMED. No costs.
SO ORDERED.34

The Motion for Reconsideration35 thereto having been denied in a Resolution36 dated July 6, 2012, petitioner comes to
this Court through this Petition for Review on Certiorari.
Issues: Essentially at fore in this Petition are the following questions:
1. Can respondents, as members of the Board of Directors of ACCS, be criminally prosecuted for the latter's alleged
violation/s of BP 33 as amended?
2. Are the offenses of illegal trading of petroleum products under Section 2(a) and underfilling under Section 2(c),
both of BP 33 as amended, distinct offenses?
Our Ruling
There is partial merit in the Petition.
Respondents cannot be prosecuted for
ACCS' alleged violations of BP 33. They
were thus correctly dropped as
respondents in the complaints.
The CA ratiocinated that by the election or designation of Antonio as General Manager of ACCS, the daily business
operations of the corporation were vested in his hands and had ceased to be the responsibility of respondents as
members of the Board of Directors. Respondents, therefore, were not officers charged with the management of the
business affairs who could be held liable pursuant to paragraph 3, Section 4 of BP 33, as amended, which states that:
When the offender is a corporation, partnership, or other juridical person, the president, the general manager, managing
partner, or such other officer charged with the management of the business affairs thereof, or employee responsible for
the violation shall be criminally liable. x x x
Petitioner, on the other hand, insists that the Board of Directors, by law, is responsible for the general management of
the business affairs of a corporation. Conversely, respondents as members of the Board of Directors of ACCS fall
under the classification of officers charged with the management of business affairs.
The Court finds no need to be labor this point as it has already made a definite pronouncement on an identical issue
in Ty v. NBI Supervising Agent De Jemil.37
In the said case, therein petitioners were members of the Board of Directors of Omni Gas Corporation (Omni), which
was found by operatives of the National Bureau of Investigation (NBI) as allegedly engaged in illegal trading of LPG
and underfilling of LPG cylinders. While the State Prosecutor found probable cause against therein petitioners, the
Secretary of Justice, however, reversed and set aside the said finding. On certiorari petition by the Office of the
Solicitor General, the CA granted the same and consequently reinstated the finding of probable cause of the State
Prosecutor. Naturally, petitioners brought the matter to this Court through a Petition for Review on Certiorari where
one of the core issues raised was whether therein petitioners could be held liable for the corporation's alleged
violations of BP 33. In resolving the same, the Court ratiocinated, viz.:
Sec. 4 of BP 33. as amended. provides for x x x persons who are criminally liable, thus:
When the offender is a corporation, partnership, or other juridical person, the president, the general manager,
managing partner, or such other officer charged with the management of the business affairs thereof or
employee responsible for the violation shall be criminally liable;
Relying on the x x x above statutory proviso, petitioners argue that they cannot be held liable for any perceived
violations of BP 33. as amended, since they are mere directors of Omni who are not in charge of the management of
its business affairs. Reasoning that criminal liability is personal, liability attaches to a person from his personal act or
omission but not from the criminal act or negligence of another. Since Sec. 4 of BP 33, as amended, clearly provides
and enumerates who are criminally liable, which do not include members of the board of directors of a corporation,
petitioners, mere members of the board of directors who are not in charge of Omni's business affairs, maintain that
they cannot be held liable for any perceived violations of BP 33, as amended. To bolster their position, they attest to
being full-time employees of various firms as shown by the Certificates of Employment they submitted tending to
show that they are neither involved in the day-to-day business of Omni nor managing it. Consequently, they posit that
even if BP 33, as amended, had been violated by Omni they cannot be held criminally liable [therefor, they] not being
in any way connected with the commission of the alleged violations, and, consequently, the criminal complaints filed
against them based solely on their being members of the board of directors as per the [General Information Sheet
(GIS)] submitted by Onmi to SEC are grossly discriminatory.
On this point, we agree with petitioners except as to petitioner Arnel U. Ty who is undisputably the President of Omni.
It may be noted that Sec. 4 above enumerates the persons who may be held liable for violations of the law, viz[.]: (1)
the president, (2) general manager, (3) managing partner, (4) such other officer charged with the management of the
business affairs of the corporation or juridical entity, or (5) the employee responsible for such violation. A common
thread of the first four enumerated officers is the fact that they manage the business affairs of the corporation or
juridical entity. In short, they are operating officers of a business concern, while the last in the list is self-explanatory.
It is undisputed that petitioners are members of the board of directors of Omni at the time pertinent. There can be no
quibble that the enumeration of persons who may be held liable for corporate violators of BP 33, as amended,
excludes the members of the board of directors. This stands to reason for the board of directors of a corporation is
generally a policy making body. Even if the corporate powers of a corporation are reposed in the board of directors
under the first paragraph of Sec. 23 of the Corporation Code, it is of common knowledge and practice that the board
of directors is not directly engaged or charged with the running of the recurring business affairs of the corporation.
Depending on the powers granted to them by the Articles of Incorporation, the members of the board generally do not
concern themselves with the day-to-day affairs of the corporation, except those corporate officers who are charged
with running the business of the corporation and are concomitantly members of the board, like the President. Section
25 of the Corporation Code requires the president of a corporation to be also a member of the board of directors.
Thus, the application of the legal maxim expressio unius est exclusio alterius, which means the mention of one thing
implies the exclusion of another thing not mentioned. If a statute enumerates the thing upon which it is to operate,
everything else must necessarily and by implication be excluded from its operation and effect. The fourth officer in the
enumerated list is the catch-all 'such other officer charged with the management of the business affairs' of the
corporation or juridical entity which is a factual issue which must be alleged and supported by evidence.
A scrutiny of the GIS reveals that among the petitioners who are members of the board of directors are the following
who are likewise elected as corporate officers of Omni: (1) Petitioner Arnel U. Ty (Arnel) as President; (2) petitioner
Mari Antonette Ty as Treasurer; and (3) petitioner Jason Ong as Corporate Secretary. Sec. 4 of BP 33, as amended,
clearly indicated firstly the president of a corporation or juridical entity to be criminally liable for violations of BP 33, as
amended.
Evidently, petitioner Arnel, as President, who manages the business affairs of Omni, can be held liable for probable
violations by Omni of BP 33, as amended. The fact that petitioner Arnel is ostensibly the operations manager of Multi-
Gas Corporation, a family owned business, does not deter him from managing Omni as well. It is well-settled that
where the language of the law is clear and unequivocal, it must be taken to mean exactly what it says. As to the other
petitioners, unless otherwise shown that they are situated under the catch-all 'such other officer charged with the
management of the business affairs' they may not be held liable under BP 33, as amended, for probable violations.
Consequently, with the exception of petitioner Arnel, the charges against other petitioners must perforce be dismissed
or dropped.38
As clearly enunciated in Ty, a member of the Board of Directors of a corporation, cannot, by mere reason of such
membership, be held liable for corporation's probable violation of BP 33. If one is not the President, General Manager
or Managing Partner, it is imperative that it first be shown that he/she falls under the catch-all "such other officer
charged with the management of the business affairs," before he/she can be prosecuted. However, it must be
stressed, that the matter of being an officer charged with the management of the business affairs is a factual issue
which must be alleged and supported by evidence. Here, there is no dispute that neither of the respondents was the
President, General Manager, or Managing Partner of ACCS. Hence, it becomes incumbent upon petitioner to show
that respondents were officers charged with the management of the business affairs. However, the Complaint-
Affidavit39attached to the records merely states that respondents were members of the Board of Directors based on
the AOI of ACCS. There is no allegation whatsoever that they were in-charge of the management of the corporation's
business affairs.
At any rate, the Court has gone through the By-Laws of ACCS and found nothing therein which would suggest that
respondents were directly involved in the day-to-day operations of the corporation. True, Section 140 of Article III
thereof contains a general statement that the corporate powers of ACCS shall be exercised, all business conducted,
and all property of the corporation controlled and held by the Board of Directors. Notably, however, the same
provision likewise significantly vests the Board with specific powers that were generally concerned with policy making
from which it can reasonably be deduced that the Board only concerns itself in the business affairs by setting
administrative and operational policies. It is actually the President under Section 2, 41 Article IV of the said by-laws who
is vested with wide latitude in controlling the business operations of the corporation. Among others, the President is
specifically empowered to supervise and manage the business affairs of the corporation, to implement the
administrative and operational policies of the corporation under his supervision and control, to appoint, remove,
suspend or discipline employees of the corporation, prescribe their duties, and determine their salaries. With these
functions, the President appears to be the officer charged with the management of the business affairs of ACCS. But
since there is no allegation or showing that any of the respondents was the President of ACCS, none of them,
therefore, can be considered as an officer charged with the management of the business affairs even in so far as the
By-Laws of the subject corporation is concerned.
Clearly, therefore, it is only Antonio, who undisputedly was the General Manager – a position among those expressly
mentioned as criminally liable under paragraph 4, Section 3 of BP 33, as amended – can be prosecuted for ACCS'
perceived violations of the said law. Respondents who were mere members of the Board of Directors and not shown
to be charged with the management of the business affairs were thus correctly dropped as respondents in the
complaints.
The offenses of illegal trading under
Section 2(a) and underfilling under
Section 2(c) both under BP 33, as
amended distinct offenses.
The State Prosecutor held that the offense of illegal trading by means of unauthorized refilling is not distinct from the
offense of underfilling since these two offenses involve the very same act of refilling. He likewise held that the
offender in the latter offense must be an entity duly authorized to refill LPG cylinders. And in view of his finding that
ACCS probably committed illegal trading by refilling "without authority", the State Prosecutor impliedly held that the
charge of underfilling could not prosper in this case.
Petitioner, however, argues otherwise. It asserts that illegal trading of LPG products is committed when an entity not
authorized to refill a specified brand of LPG cylinder refills the same, regardless of whether or not the LPG cylinder is
underfilled. Underfilling, on the other hand, is committed when an entity refills an LPG cylinder below the required
quantity, regardless of whether or not such entity is authorized to refill. Hence, the two offenses are separate and
distinct.
The Court agrees with petitioner.
Illegal trading and underfilling are among the eight acts prohibited under Section 2 of BP 33, as amended.
By definition, the acts penalized by both offenses are essentially different. Under paragraph 1(c) of Section 3 of the
said law, illegal trading in petroleum and/or petroleum products is committed by refilling LPG cylinders without
authority from the Bureau of Energy Utilization, or refilling of another company's or firm's cylinder without such
company's or firm's written authorization. Underfilling or underdelivery, on the other hand, under paragraph 3 of the
same section refers to a sale, transfer, delivery or filling of petroleum products of a quantity that is actually below the
quantity indicated or registered on the metering device of a container. While it may be said that an act could be
common to both of them, the act of refilling does not in itself constitute illegal trading through unauthorized refilling or
that of underfilling. The concurrence of an additional requisite different in each one is necessary to constitute each
offense. Thus, aside from the act of refilling, the offender must have no authority to refill from the concerned
government agency or the company or firm owning the LPG cylinder refilled for the act to be considered illegal trading
through unauthorized refilling. Whereas in underfilling, it is necessary that apart from the act of refilling, the offender
must have refilled the LPG cylinder below the authorized limits in the sale of petroleum products. Moreover, the
offense of underfilling is not limited to the act of refilling below the authorized limits. Possession of an underfilled LPG
cylinder another way of committing the offense. As therefore correctly argued by petitioner, the offenses of illegal
trading through unauthorized refilling and underfilling are separate and distinct offenses.
Besides, it is not accurate to say that in this case the charges of illegal trading and underfilling were based on the
same act of refilling committed by ACCS during the test-buy operation. While it appears from the records that the
charge of illegal trading was principally based on ACCS' act of refilling the four branded LPG cylinders without
authority during the test buy, the Complaint-Affidavit for underfilling would show that it was not solely based on the
same. Aside from the four branded LPG cylinders caused to be refilled by police operatives in the test buy which were
later found to be underfilled by 0.5 kg to 1.3 kg, the said complaint was likewise anchored on the other four branded
LPG cylinders seized during the search and seizure operation which were also found to be underfilled, this time by 0.5
kg. to 0.9 kg. It is thus apparent that with respect to the last four underfilled cylinders, the basis for the charge is not
the act of refilling but ACCS's possession of the same since as already mentioned, the offense of underfilling is not
limited to the act of refilling an LPG cylinder below authorized limits but also contemplates possession of underfilled
LPG cylinders for the purpose of sale, distribution, transportation, exchange or barter.
In any event, the Court in Ty had impliedly upheld the filing of separate Informations for illegal trading through
unauthorized refilling and for underfilling even if the charges emanated from the same act of refilling. There, the
charge of underfilling was based on the fact that one of the eight LPG cylinders illegally refilled during a test-buy
operation turned out to be underfilled. Notably, the same eight LPG cylinders illegally refilled, including the one
underfilled, also formed part of the bases for the charge of illegal trading.
Further, the Court finds without legal basis the conclusion of the State Prosecutor that the offense of underfilling
presupposes that the offender is a duly authorized refiller. Section 4 of BP 33, as amended, clearly provides that any
of the acts prohibited by the said law can be committed by any person and not only by a duly authorized refiller. And
while the same provision lays down an additional penalty of cancellation of license in case the offender is an oil
company, marketer, distributor, refiller, dealer, sub-dealer, other retail outlets, or hauler, it cannot be deduced
therefrom that only a duly-licensed refiller can be held liable for underfilling. Verily, it can also be committed by an
authorized marketer, distributor, dealer, sub-dealer or hauler which so happened to have a license to do business in
such capacity but nevertheless commits underfilling. Plainly, the law does not limit the commission of the offense of
underfilling to offenders who/which are duly authorized to refill. "It is [a] well recognized rule that where the law does
not distinguish, courts should not distinguish. Ubi lex non, distinguit nec nos distinguere debemos. The rule, founded
on logic, is a corollary of the principle that general words and phrases in a statute should ordinarily be accorded their
natural and general significance. The rule requires that a general term or phrase should not be reduced into parts and
one part distinguished from the other so as to justify its exclusion from the operation of the law. In other words, there
should be no distinction in the application of a statute where none is indicated." 42
All told, the Court so holds that aside from illegal trading through unauthorized refilling, the State Prosecutor should
have also taken cognizance of the complaint for underfilling. Consequently, the CA erred when it affirmed in full the
Resolutions of the Secretary of Justice sustaining the ruling of the State Prosecutor.
WHEREFORE, the Petition for Review on Certiorari is PARTLY GRANTED. The assailed April 27, 2012 Decision and
July 6, 2012 Resolution of the Court of Appeals in CA-G.R. SP No. 115750 are AFFIRMED with MODIFICATION that
the State Prosecutor is ORDERED to take cognizance of the Complaint-Affidavit for Underfilling under Section 2(c),
BP 33, as amended, docketed as I.S. No. 2006-1173, but only insofar as Antonio G. Del Rosario is concerned.
SO ORDERED
18. California Manufacturing Company, Inc. vs. Advanced Technology System, Inc., 824 SCRA 295, G.R. No.
202454 April 25, 2017
Before us is a Petition for Review on Certiorari assailing the Decision 1 of the Court of Appeals (CA) in CA-G.R. CV
No. 94409, which denied the appeal filed by California Manufacturing Company, Inc. (CMCI) from the Decision2 of
Regional Trial Court (RTC) of Pasig City, Branch 268, in the Complaint for Sum of Money3 filed by Advanced
Technology Systems, Inc. (ATSI) against the former.
The RTC ordered CMCI to pay ATSI the amount of ₱443,729.39 for the unpaid rentals for a Prodopak machine, plus
legal interest from the date of extra-judicial demand until full payment; 30% of the judgment award as attorney's fees;
and the costs of litigation. The CA affirmed the trial court's decision, but it deleted the award of attorney's fees for lack
of factual and legal basis and ordered CMCI to pay the costs of litigation.
THE ANTECEDENT FACTS
Petitioner CMCI is a domestic corporation engaged in the food and beverage manufacturing business. Respondent
ATSI is also a domestic corporation that fabricates and distributes food processing machinery and equipment, spare
parts, and its allied products.4
In August 200 I, CMCI leased from ATSI a Prodopak machine which was used to pack products in 20-ml.
pouches.5The parties agreed to a monthly rental of ₱98,000 exclusive of tax. Upon receipt of an open purchase order
on 6 August 2001, ATSI delivered the machine to CMCI's plant at Gateway Industrial Park, General Trias, Cavite on 8
August 2001.
In November 2003, ATSI filed a Complaint for Sum of Money against CMCI to collect unpaid rentals for the months of
June, July, August, and September 2003. ATSI alleged that CMCI was consistently paying the rents until June 2003
when the latter defaulted on its obligation without just cause. ATSI also claimed that CMCI ignored all the billing
statements and its demand letter. Hence, in addition to the unpaid rents A TSI sought payment for the contingent
attorney's fee equivalent to 30% of the judgment award.
CMCI moved for the dismissal of the complaint on the ground of extinguishment of obligation through legal
compensation. The RTC, however, ruled that the conflicting claims of the parties required trial on the merits. It
therefore dismissed the motion to dismiss and directed CMCI to file an Answer. 7
In its Answer,8 CMCI averred that ATSI was one and the same with Processing Partners and Packaging Corporation
(PPPC), which was a toll packer of CMCI products. To support its allegation, CMCI submitted copies of the Articles of
Incorporation and General Information Sheets (GIS)9 of the two corporations. CMCI pointed out that ATSI was even a
stockholder of PPPC as shown in the latter's GIS. 10
CMCI alleged that in 2000, PPPC agreed to transfer the processing of CMCI's product line from its factory in
Meycauayan to Malolos, Bulacan. Upon the request of PPPC, through its Executive Vice President Felicisima
Celones, CMCI advanced ₱4 million as mobilization fund. PPPC President and Chief Executive Officer Francis
Celones allegedly committed to pay the amount in 12 equal instalments deductible from PPPC's monthly invoice to
CMCI beginning in October 2000. 11 CMCI likewise claims that in a letter dated 30 July 2001, 12 Felicisima proposed
to set off PPPC's obligation to pay the mobilization fund with the rentals for the Prodopak machine.
CMCI argued that the proposal was binding on both PPPC and A TSI because Felicisima was an officer and a
majority stockholder of the two corporations. Moreover, in a letter dated 16 September 2003, 13 she allegedly
represented to the new management of CMCI that she was authorized to request the offsetting of PPPC's obligation
with ATSI's receivable from CMCI. When ATSI filed suit in November 2003, PPPC's debt arising from the mobilization
fund allegedly amounted to ₱10,766.272.24.
Based on the above, CMCl argued that legal compensation had set in and that ATSI was even liable for the balance
of PPPC's unpaid obligation after deducting the rentals for the Prodopak machine.
After trial, the RTC rendered a Decision in favor of ATSI with the following dispositive portion:
WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiff and against the
defendant, ordering the latter to pay the former, the following sums:
1. Php443,729.39 representing the unpaid rental for the prodopak machine plus legal interest from the date
of extra judicial demand (October 13, 2003 - Exh. "E") until satisfaction of this judgment;
2. 30% of the judgment award as and by way of attorney's fees; and
3. Cost of litigation.14
The trial court ruled that legal compensation did not apply because PPPC had a separate legal personality from its
individual stockholders, the Spouses Celones, and ATSI. Moreover, there was no board resolution or any other proof
showing that Felicisima's proposal to set-off the unpaid mobilization fund with CMCI 's rentals to A TSI for the
Prodopak Machine had been authorized by the two corporations. Consequently, the RTC ruled that CMCI's financial
obligation to pay the rentals for the Prodopak machine stood and that its claim against PPPC could be properly
ventilated in the proper proceeding upon payment of the required docket fees. 15
On appeal by CMCI, the CA affirmed the trial court's ruling that legal compensation had not set in because the
element of mutuality of parties was lacking. Likewise, the appellate court sustained the trial court's refusal to pierce
the corporate veil. It ruled that there must be clear and convincing proof that the Spouses Celones had used the
separate personalities of ATSI or PPPC as a shield to commit fraud or any wrong against CMCI, which was not
existing in this case. 16
Aside from the absence of a board resolution issued by ATSI, the CA observed that the letter dated 30 July 2001
clearly showed that Felicisima's proposal to effect the offsetting of debts was limited to the obligation of PPPC. 17The
appellate court thus sustained the trial court's finding that ATSI was not bound by Felicisima's conduct.
Moreover, the CA rejected CMCI's argument that ATSI is barred by estoppel as it found no indication that ATSI had
created any appearance of false fact. 18 CA also held that estoppel did not apply to PPPC because the latter was not
even a party to this case.
The CA, however, deleted the trial court's award of attorney's fees and costs of litigation in favor of ATSI as it found
no discussion in the body of the decision of the factual and legal justification for the award.
CMCI filed a Motion for Reconsideration of the CA Decision, but the appellate court denied the motion for lack of
merit. 19 Hence, this petition.20
THE ISSUE: The assignment of errors raised by CMCI all boil down to the question of whether the CA erred in
affirming the ruling of the RTC that legal compensation between ATSI's claim against CMCI on the one hand, and the
latter's claim against PPPC on the other hand, has not set in.
OUR RULING: We affirm the CA Decision in toto.
CMCI argues that both the RTC and the CA overlooked the circumstances that it has proven to justify the piercing of
corporate veil in this case, i.e., (1) the interlocking board of directors, incorporators, and majority stockholder of PPPC
and ATSI; (2) control of the two corporations by the Spouses Celones; and (3) the two corporations were mere alter
egos or business conduits of each other. CMCI now asks us to disregard the separate corporate personalities of A
TSI and PPPC based on those circumstances and to enter judgment in favor of the application of legal compensation.
Whether one corporation is merely an alter ego of another, a sham or subterfuge, and whether the requisite quantum
of evidence has been adduced to warrant the puncturing of the corporate veil are questions of fact. 21Relevant to this
point is the settled rule that in a petition for review on certiorari like this case, this Court's jurisdiction is limited to
reviewing errors of law in the absence of any showing that the factual findings complained of are devoid of support in
the records or are glaringly erroneous. 22 This rule alone wan-ants the denial of the petition, which essentially asks us
to reevaluate the evidence adduced by the pm1ies and the credibility of the witnesses presented.
We have reviewed the evidence on record and have found no cogent reason to disturb the findings of the co mis a
quo that A TSI is distinct and separate from PPPC, or from the Spouses Celones.
Any piercing of the corporate veil must be done with caution.23 As the CA had correctly observed, it must be ce11ain
that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another,
in disregard of rights. Moreover, the wrongdoing must be clearly and convincingly established. Sarona v.
NLRC24 instructs, thus:
Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately
pleaded or proved. However, any piercing of the corporate veil has to be done with caution, albeit the Court will not
hesitate to disregard the corporate veil when it is misused or when necessary in the interest of justice. After all, the
concept of corporate entity was not meant to promote unfair objectives.
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases
or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a
corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit
or adjunct of another corporation.25
CMCI 's alter ego theory rests on the alleged interlocking boards of directors and stock ownership of the two
corporations. The CA, however, rejected this theory based on the settled rule that mere ownership by a single
stockholder of even all or nearly all of the capital stocks of a corporation, by itself, is not sufficient ground to disregard
the corporate veil. We can only sustain the CA's ruling. The instrumentality or control test of the alter ego doctrine
requires not mere majority or complete stock control, but complete domination of finances, policy and business
practice with respect to the transaction in question. The corporate entity must be shown to have no separate mind,
will, or existence of its own at the time of the transaction. 26
Without question, the Spouses Celones are incorporators, directors, and majority stockholders of the ATSI and PPPC.
But that is all that CMCI has proven. There is no proof that PPPC controlled the financial policies and business
practices of ATSI either in July 2001 when Felicisima proposed to set off the unpaid ₱3.2 million mobilization fund
with CMCI's rental of Prodopak machines; or in August 2001 when the lease agreement between CMCI and ATSI
commenced. Assuming arguendo that Felicisima was sufficiently clothed with authority to propose the offsetting of
obligations, her proposal cannot bind ATSI because at that time the latter had no transaction yet with CMCI. Besides,
CMCI had leased only one Prodopak machine. Felicisima's reference to the Prodopak machines in its letter in July
2001 could only mean that those were different from the Prodopak machine that CMCI had leased from A TSI.
Contrary to the claim of CMCI, none of the letters from the Spouses Celones tend to show that ATSI was even
remotely involved in the proposed offsetting of the outstanding debts of CMCI and PPPC. Even Felicisima's letter to
the new management of CMCI in 2003 contains nothing to support CMCI's argument that Felicisima represented
herself to be clothed with authority to propose the offsetting. For clarity, we quote below the relevant portions of her
letter:
Gentlemen:
I apologize for writing this letter. But kindly spare me your time and allow to ventilate my grievances against California
Manufacturing Corporation x x x. I had formally lodged my grievances with the management of CMC, but until now, no
action has been done yet. It is on this spirit and time tested principle of diplomacy that I write this letter.
I am the Executive Vice President of Processing Partners & Packaging Corporation (PPPC), a duly organized
domestic corporation, engaged in the toll packing business.
Sometime in November of 1996, CMC availed of the toll packing services of PPPC. At the outset, business
relationship between the two was going smoothly. In due time, PPPC proved its name to CMC in delivering quality toll
packing services. As a matter of fact, after the expiration of the toll packing contract, CMC still retained the services of
PPPC. Thus, sometime in the year 2000, CMC executed another toll packing contract with PPC.
However, the business relationship unexpectedly turned sour when CMC changed its Management in the latter part of
2002. Since then CMC's new management has been committing unsound business practices prejudicial to the
interests of PPPC.
Failure of CMC to honor its
agreement with PPC anent
the pickling machinery
Leapfrog Plant/Jasmine al)d
Rose Plant
Pre-termination of toll
[p]acking [a]greement for
KLS Spaghetti Sauce without
just cause
Unpaid rentals for the lease
of machinery from Advanced
Technology Systems, Inc.
CMC has been leasing a machinery of Advanced Technology Systems, Inc. (Advanced Tech), a domestic corporation
of which I am also the majority stockholder. CMC owes Advanced Tech. unpaid rentals in
the amount of P443,729.37, but despite various demands, CMC refused to pay Advanced Tech.
We have already formally lodged our grievances concerning the foregoing with the management of CMC. However,
until now, no action has been done. We believe that before we take coercive actions available under the law, it is wise
to bring said grievances first to your attention to exhaust available venues for amicable settlement.
Though PPPC's grievances are ripe for judicial action, we still hope that we can settle [the] same amicably. However,
if we run out of choices, we will [be] constrained to invoke the aid of the appropriate court. (Emphases supplied)27
Nothing in the narration above supports CMCI's claim that it had been led to believe that ATSI and PPPC were one
and the same; or, that ATSI's collectible was intertwined with the business transaction of PPPC with CMCI.
In all its pleadings, CMCI averred that the P4 million mobilization fund was in furtherance of its agreement with PPPC
in 2000.1awp++i1 Prior thereto, PPPC had been a toll packer of its products as early as 1996. Clearly, CMCI had
been dealing with PPPC as a distinct juridical person acting through its own corporate officers from 1996 to 2003.
CMCI's dealing with ATSI began only in August 2001. It appears, however, that CMCI now wants the Court to gloss
over the separate corporate existence ATSI and PPPC notwithstanding the dearth of evidence showing that either
PPPC or ATSI had used their corporate cover to commit fraud or evade their respective obligations to CMCI. It even
appears that CMCI faithfully discharged its obligation to ATSI for a good two years without raising any concern about
its relationship to PPPC.
The fraud test, which is the second of the three-prong test to determine the application of the alter ego doctrine,
requires that the parent corporation's conduct in using the subsidiary corporation be unjust, fraudulent or wrongful.
Under the third prong, or the harm test, a causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff has to be
established.28 None of these elements have been demonstrated in this case. Hence, we can only agree with the CA
and RTC in ruling out mutuality of parties to justify the application of legal compensation in this case.

Article 1279 of the Civil Code provides:
ARTICLE 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
The law, therefore, requires that the debts be liquidated and demandable. Liquidated debts are those whose exact
amounts have already been determined. 29
CMCI has not presented any credible proof, or even just an exact computation, of the supposed debt of PPPC. It
claims that the mobilization fund that it had advanced to PPPC was in the amount of ₱4 million. Yet, Felicisima's
proposal to conduct offsetting in her letter dated 30 July 2001 pertained to a ₱3.2 million debt of PPPC to CMCI.
Meanwhile, in its Answer to ATSI's complaint, CMCI sought to set off its unpaid rentals against the alleged ₱10 million
debt of PPPC. The uncertainty in the supposed debt of PPPC to CMCI negates the latter's invocation of legal
compensation as justification for its non-payment of the rentals for the subject Prodopak machine.
WHEREFORE, the Decision dated 25 August 2011 and Resolution dated 21 June 2012 issued by the Court of
Appeals in CA-G.R. CV No. 94409 are AFFIRMED. The instant Petition is DENIED for lack of merit.
SO ORDERED.
19. Bustos vs. Millians Shoe, Inc., 824 SCRA 67, G.R. No. 185024 April 24, 2017
Before this Court is a Rule 45 Petition1 assailing the Decision and the Resolution2 of the Court of Appeals (CA). The CA
did not find any grave abuse of discretion on the part of the Regional Trial Court, Imus, Cavite, Branch 21 (RTC). The
RTC had issued Orders3 refusing to exclude the subject property in the Stay Order pertaining to assets under
rehabilitation of respondent Millians Shoe, Inc. (MSI).
FACTS OF THE CASE
Spouses Fernando and Amelia Cruz owned a 464-square-meter lot covered by Transfer Certificate of Title (TCT) No.
N-126668.4 On 6 January 2004, the City Government of Marikina levied the property for nonpayment of real estate
taxes. The Notice of Levy was annotated on the title on 8 January 2004. On 14 October 2004, the City Treasurer of
Marikina auctioned off the property, with petitioner Joselito Hernand M. Bustos emerging as the winning bidder.
Petitioner then applied for the cancellation of TCT No. N-126668. On 13 July 2006, the Regional Trial Court, Marikina
City, Branch 273, rendered a final and executory Decision ordering the cancellation of the previous title and the
issuance of a new one under the name of petitioner.5
Meanwhile, notices of lis pendens were annotated on TCT No. N-126668 on 9 February 2005.6 These markings
indicated that SEC Corp. Case No. 036-04, which was filed before the RTC and involved the rehabilitation
proceedings for MSI, covered the subject property and included it in the Stay Order issued by the RTC dated 25
October 2004.7
On 26 September 2006, petitioner moved for the exclusion of the subject property from the Stay Order.8He claimed
that the lot belonged to Spouses Cruz who were mere stockholders and officers of MSL He further argued that since
he had won the bidding of the property on 14 October 2004, or before the annotation of the title on 9 February 2005,
the auctioned property could no longer be part of the Stay Order.
The RTC denied the entreaty of petitioner. It ruled that because the period of redemption up to 15 October 2005 had
not yet lapsed at the time of the issuance of the Stay Order on 25 October 2004, the ownership thereof had not yet
been transferred to petitioner.9
Petitioner moved for reconsideration,10 but to no avail.11 He then filed an action for certiorari before the CA. He
asserted that the Stay Order undermined the taxing powers of the local government unit. He also reiterated his
arguments that Spouses Cruz owned the property, and that the lot had already been auctioned to him.
In the assailed Decision dated 12 June 2008, the CA brushed aside the claim that the suspension orders undermined
the power to tax. As regards petitioner's main contention, the CA ruled as follows:
In the case at bar, the delinquent tax payers were the Cruz Spouses who were the registered owners of the said parcel
of land at the time of the delinquency sale. The sale was held on October 14, 2004 and the Cruz Spouses had until
October 15, 2005 within which to redeem the parcel of land. The stay order was issued on October 25, 2004 and
inscribed at the back of the title on February 9, 2005, which is within the redemption period. The Cruz Spouses were
still the owners of the land at the time of the issuance of the stay order. The said parcel of land which secured several
mortgage liens for the account of MSI remains to be an asset of the Cruz Spouses, who are the stockholders and/or
officers of MSI, a close corporation. Incidentally, as an exception to the general rule, in a close corporation, the
stockholders and/or officers usually manage the business of the corporation and are subject to all liabilities of directors,
i.e. personally liable for corporate debts and obligations. Thus, the Cruz Spouses being stockholders of MSI are
personally liable for the latter's debt and obligations.
Petitioner unsuccessfully moved for reconsideration. The CA maintained its ruling and even held that his prayer to
exclude the property was time-barred by the 10-day reglementary period to oppose rehabilitation petitions under Rule
4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation.
Before this Court, petitioner maintains three points: (1) the Spouses Cruz are not liable for the debts of MSI; (2) the
Stay Order undermines the taxing power of Marikina City; and (3) the time bar rule does not apply to him, because he
is not a creditor of MSI.12
In their Comment,13 respondents do not contest that Spouses Cruz own the subject property. Rather, respondents
assert that as stockholders and officers of a close corporation, they are personally liable for its debts and obligations.
Furthermore, they argue that since the Rehabilitation Plan of MSI has been approved, petitioner can no longer assail
the same.
ISSUE OF THE CASE
The controlling issue in this case is whether the CA correctly considered the properties of Spouses Cruz answerable
for the obligations of MSI.
If the answer is in the affirmative, then the courts a quo correctly ruled that the Stay Order involving the assets of MSI
included the property covered by TCT No. N-126668. Petitioner would also be considered a creditor of MSI who must
timely file an opposition to the proposed rehabilitation plan of the corporation.
RULING OF THE COURT
We set aside rulings of the CA for lack of basis.
In finding the subject property answerable for the obligations of MSI, the CA characterized respondent spouses as
stockholders of a close corporation who, as such, are liable for its debts. This conclusion is baseless.
To be considered a close corporation, an entity must abide by the requirements laid out in Section 96 of the
Corporation Code, which reads:
Sec. 96. Definition and applicability of Title. - A close corporation, within the meaning of this Code, is one whose articles
of incorporation provide that: (1) All 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 twenty (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 two-thirds (2/3) of
its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the
meaning of this Code. x x x. (Emphasis supplied)
In San Juan Structural and Steel Fabricators. Inc. v. Court of Appeals,14 this Court held that a narrow distribution of
ownership does not, by itself, make a close corporation. Courts must look into the articles of incorporation to find
provisions expressly stating that (1) the number of stockholders shall not exceed 20; or (2) a preemption of shares is
restricted in favor of any stockholder or of the corporation; or (3) the listing of the corporate stocks in any stock
exchange or making a public offering of those stocks is prohibited.
Here, neither the CA nor the RTC showed its basis for finding that MSI is a close corporation. The courts a quo did
not at all refer to the Articles of Incorporation of MSI. The Petition submitted by respondent in the rehabilitation
proceedings before the RTC did not even include those Articles of Incorporation among its attachments. 15
In effect, the CA and the RTC deemed MSI a close corporation based on the allegation of Spouses Cruz that it was
so. However, mere allegation is not evidence and is not equivalent to proof. 16For this reason alone, the CA rulings
should be set aside.
Furthermore, we find that the CA seriously erred in portraying the import of Section 97 of the Corporation Code. Citing
that provision, the CA concluded that "in a close corporation, the stockholders and/or officers usually manage the
business of the corporation and are subject to all liabilities of directors, i.e. personally liable for corporate debts and
obligations."17
However, Section 97 of the Corporation Code only specifies that "the stockholders of the corporation shall be subject
to all liabilities of directors." Nowhere in that provision do we find any inference that stockholders of a close
corporation are automatically liable for corporate debts and obligations.
Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly provides for personal liability of
stockholders of close corporation, viz:
Sec. 100. Agreements by stockholders. -
5. To the extent that the stockholders are actively engaged in the management or operation of the business and
affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each other and among
themselves. Said stockholders shall be personally liable for corporate tortsunless the corporation has obtained
reasonably adequate liability insurance. (Emphasis supplied)
As can be read in that provision, several requisites must be present for its applicability. None of these were alleged in
the case of Spouses Cruz. Neither did the RTC or the CA explain the factual circumstances for this Court to discuss
the personally liability of respondents to their creditors because of "corporate torts."18
We thus apply the general doctrine of separate juridical personality, which provides that a corporation has a legal
personality separate and distinct from that of people comprising it.19 By virtue of that doctrine, stockholders of a
corporation enjoy the principle of limited liability: the corporate debt is not the debt of the stockholder. 20 Thus, being an
officer or a stockholder of a corporation does not make one's property the property also of the corporation.21
Situs Development Corp. v. Asiatrust Bank22 is analogous to the case at bar. We held therein that the parcels of land
mortgaged to creditor banks were owned not by the corporation. but by the spouses who were its stockholders.
Applying the doctrine of separate juridical personality, we ruled that the parcels of land of the spouses could not be
considered part of the corporate assets that could be subjected to rehabilitation proceedings.
In rehabilitation proceedings, claims of creditors are limited to demands of whatever nature or character against
a debtor or its property, whether for money or otherwise.23 In several cases,24 we have already held that stay orders
should only cover those claims directed against corporations or their properties, against their guarantors, or their
sureties who are not solidarily liable with them, to the exclusion of accommodation mortgagors. 25 To repeat, properties
merely owned by stockholders cannot be included in the inventory of assets of a corporation under rehabilitation.
Given that the true owner the subject property is not the corporation, petitioner cannot be considered a creditor of MSI
but a holder of a claim against respondent spouses.26
Rule 4, Section 6 of the Interim Rules of Procedure on Corporate Rehabilitation, directs creditors of the debtor to file
an opposition to petitions for rehabilitation within 10 days before the initial hearing of rehabilitation proceedings. Since
petitioner does not hold any claim over the properties owned by MSI, the time-bar rule does not apply to him.
WHEREFORE, the Petition for review on certiorari filed by petitioner Joselito Hernand M. Bustos is GRANTED. The
Decision dated 12 June 2008 and Resolution dated 27 October 2008 of the Court of Appeals in C.A.-G.R. SP. No.
100298 are REVERSED and SET ASIDE.
SO ORDERED.
20. Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., 317 SCRA 728, G.R. No. 136448 November 3,
1999
A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide
the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own
to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed
assets. Being partners, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have
directly transacted on its behalf, but reaped benefits from that contract.
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court
of Appeals in CA-GR CV 41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads
as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter
made by reason of the special and unique facts and circumstances and the proceedings that transpired during the
trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement
plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on their respective amounts as
follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20,
1990 (date of attachment) to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in
the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted
that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon
agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was
ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning
bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff until full
payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for
this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor
of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will
have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and
floats. Considering, however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the defendants who are not
entitled to damages and who did not put up a single centavo to raise the amount of P900,000.00 aside from the fact
that they are not the owners of the nets and floats. For this reason, the defendants are hereby relieved from any and
all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to retain possession
and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of
Court.
SO ORDERED. [3]
FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated
February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who
however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces
of floats worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection
suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the allegation that Ocean Quest Fishing Corporation
was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. [5] On
September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching
the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable
time within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present
evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed
an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court
maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds
of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was
entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the
witnesses presented and (2) on a Compromise Agreement executed by the three[9] in Civil Case No. 1492-MN which
Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial
documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00
including the fishing net. This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever will be the
excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be shouldered
and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. [11]
The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint
liability could be presumed from the equal distribution of the profit and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and
may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The
appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a partnership for
a specific undertaking, that is for commercial fishing x x x. Obviously, the ultimate undertaking of the defendants was
to divide the profits among themselves which is what a partnership essentially is x x x. By a contract of partnership,
two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New Civil Code). [13]
Hence, petitioner brought this recourse before this Court.[14]
ISSUE: In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO
AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED
AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING
CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIMS
GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats purchased from respondent,
the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into
a partnership.
RULING: The Petition is devoid of merit.
First and Second Issues: Existence of a Partnership and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA
finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding
on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets,
alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives
of the respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990, showed that he had merely leased to the two the main asset of the
purported partnership -- the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500
plus 25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed
that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the following factual
findings:[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while
Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats, the FB
Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these two (2)
boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other expenses for
the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership in the amount of
P1 million secured by a check, because of which, Yao and Chua entrusted the ownership papers of two other boats,
Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from Respondent
Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua and Peter
Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed between the parties-litigants the
terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim
who was petitioners brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan
with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed money, fell under the term common fund under Article
1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That
the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them
also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets
and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their
business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the
acquisition of the aforesaid equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in
the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed
that the proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only questions of
law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that
the present action is embraced by one of the exceptions to the rule.[16] In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership was the Compromise
Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to
adjudicate their preexisting rights and obligations. His arguments are baseless.The Agreement was but an embodiment
of the relationship extant among the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise all relevant
facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate
that the CA and the RTC delved into the history of the document and explored all the possible consequential
combinations in harmony with law, logic and fairness. Verily, the two lower courts factual findings mentioned above
nullified petitioners argument that the existence of a partnership was based only on the Compromise Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua and Yao, not a partner
in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers showing
that he was the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his
own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No
lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership
among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which
debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their
fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property
but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a debt he did not
incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and
not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority
to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result
thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the
ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from
denying its corporate existence. The reason behind this doctrine is obvious - an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport
to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle
of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal,
possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of
a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first
instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege
lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against
the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation,
despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it
sold. The only question here is whether petitioner should be held jointly[18] liable with Chua and Yao. Petitioner contests
such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since
his name does not appear on any of the contracts and since he never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier
been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has
effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although
it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as
contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation
and those benefited by it, knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the
benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to
be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the
ruling of the Court in Alonso v. Villamor:[19]
A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of
movement and position , entraps and destroys the other. It is, rather, a contest in which each contending party fully
and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested
rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court
of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners
owed. The nets and the floats were specifically manufactured and tailor-made according to their own design, and were
bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the
price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.
SO ORDERED.
21. Mindanao Savings and Loan Association, Inc. vs. Willkom, 634 SCRA 291, G.R. No. 178618 October 20,
2010
This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao Savings and Loan
Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit Insurance Corporation (PDIC), against
respondents Edward R. Willkom (Willkom); Gilda Go (Go); Remedios Uy (Uy); Malayo Bantuas (sheriff Bantuas), in
his capacity as sheriff of the Regional Trial Court (RTC), Branch 3 of Iligan City; and the Register of Deeds of
Cagayan de Oro City. MSLAI seeks the reversal and setting aside of the Court of Appeals1cra1aw (CA)
Decision2cra1awdated March 21, 2007 and Resolution3cra1aw dated June 1, 2007 in CA-G.R. CV No. 58337.
The controversy stemmed from the following facts:
The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan Association, Inc.
(DSLAI) are entities duly registered with the Securities and Exchange Commission (SEC) under Registry Nos. 34869
and 32388, respectively, primarily engaged in the business of granting loans and receiving deposits from the general
public, and treated as banks.4
Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation.5cra1aw The
articles of merger were not registered with the SEC due to incomplete documentation.6cra1aw On August 12, 1985,
DSLAI changed its corporate name to MSLAI by way of an amendment to Article 1 of its Articles of Incorporation, but
the amendment was approved by the SEC only on April 3, 1987.7
Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board Resolution No. 86-002,
assigning its assets in favor of DSLAI which in turn assumed the formers liabilities. 8
The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the Philippines ordered its
closure and placed it under receivership per Monetary Board Resolution No. 922 dated August 31, 1990. The
Monetary Board found that MSLAIs financial condition was one of insolvency, and for it to continue in business would
involve probable loss to its depositors and creditors. On May 24, 1991, the Monetary Board ordered the liquidation of
MSLAI, with PDIC as its liquidator.9
It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an action for collection of
sum of money against FISLAI, docketed as Civil Case No. 111-697. On October 19, 1989, the RTC issued a
summary decision in favor of Uy, directing defendants therein (which included FISLAI) to pay the former the sum
of P136,801.70, plus interest until full payment, 25% as attorneys fees, and the costs of suit. The decision was
modified by the CA by further ordering the third-party defendant therein to reimburse the payments that would be
made by the defendants. The decision became final and executory on February 21, 1992. A writ of execution was
thereafter issued.10
On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in Cagayan de Oro City,
and the notice of sale was subsequently published. During the public auction on May 17, 1993, Willkom was the
highest bidder. A certificate of sale was issued and eventually registered with the Register of Deeds of Cagayan de
Oro City. Upon the expiration of the redemption period, sheriff Bantuas issued the sheriffs definite deed of sale. New
certificates of title covering the subject properties were issued in favor of Willkom. On September 20, 1994, Willkom
sold one of the subject parcels of land to Go.11
On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan de Oro City, a
complaint for Annulment of Sheriffs Sale, Cancellation of Title and Reconveyance of Properties against
respondents.12cra1aw MSLAI alleged that the sale on execution of the subject properties was conducted without
notice to it and PDIC; that PDIC only came to know about the sale for the first time in February 1995 while discharging
its mandate of liquidating MSLAIs assets; that the execution of the RTC decision in Civil Case No. 111-697 was illegal
and contrary to law and jurisprudence, not only because PDIC was not notified of the execution sale, but also
because the assets of an institution placed under receivership or liquidation such as MSLAI should be deemed in
custodia legis and should be exempt from any order of garnishment, levy, attachment, or execution. 13
In answer, respondents averred that MSLAI had no cause of action against them or the right to recover the subject
properties because MSLAI is a separate and distinct entity from FISLAI. They further contended that the "unofficial
merger" between FISLAI and DSLAI (now MSLAI) did not take effect considering that the merging companies did not
comply with the formalities and procedure for merger or consolidation as prescribed by the Corporation Code of the
Philippines. Finally, they claimed that FISLAI is still a SEC registered corporation and could not have been absorbed
by petitioner.14
On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The RTC declared that it
could not annul the decision in Civil Case No. 111-697, having been rendered by a court of coordinate jurisdiction.15
On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC resolution. The dispositive
portion of the assailed CA Decision reads:chanroblesvirtualawlibrary
WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is AFFIRMED.
We REFER Sheriff Malayo B. Bantuas violation of the Supreme Court Administrative Circular No. 12 to the Office of
the Court Administrator for appropriate action. The Division Clerk of Court is hereby DIRECTED to furnish the Office
of the Court Administrator a copy of this decision.
SO ORDERED.16
The appellate court sustained the dismissal of petitioners complaint not because it had no jurisdiction over the case,
as held by the RTC, but on a different ground. Citing Associated Bank v. CA, 17cra1aw the CA ruled that there was no
merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure laid down by the
Corporation Code for a valid merger or consolidation. The CA then concluded that the two corporations retained their
separate personalities; consequently, the claim against FISLAI is warranted, and the subsequent sale of the levied
properties at public auction is valid. The CA went on to say that even if there had been a de facto merger between
FISLAI and MSLAI (formerly DSLAI), Willkom, having relied on the clean certificates of title, was an innocent
purchaser for value, whose right is superior to that of MSLAI. Furthermore, the alleged assignment of assets and
liabilities executed by FISLAI in favor of MSLAI was not binding on third parties because it was not registered. Finally,
the CA said that the validity of the auction sale could not be invalidated by the fact that the sheriff had no authority to
conduct the execution sale.18
Petitioners motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence, the instant petition
anchored on the following grounds:chanroblesvirtualawlibrary
THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE AND REVERSIBLE ERROR
WHEN:
(1) IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE SURVIVING ENTITY IN
THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE IN AN ACTION OTHER THAN IN A QUO
WARRANTO PROCEEDING UPON THE INSTITUTION OF THE SOLICITOR GENERAL AS MANDATED UNDER
SECTION 20 OF BATAS PAMBANSA BLG. 68.
(2) IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH DSLAI AS THE
SURVIVING CORPORATION.
(3) IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA LEGIS AND
THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, ATTACHMENT OR EXECUTION.19
To resolve this petition, we must address two basic questions: (1) Was the merger between FISLAI and DSLAI (now
MSLAI) valid and effective; and (2) Was there novation of the obligation by substituting the person of the debtor?
We answer both questions in the negative.
Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and continues the
combined business, while the rest are dissolved and all their rights, properties, and liabilities are acquired by the
surviving corporation.20cra1aw Although there is a dissolution of the absorbed or merged corporations, there is no
winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all
their rights, privileges, and powers, as well as their liabilities. 21
The merger, however, does not become effective upon the mere agreement of the constituent
corporations.22cra1aw Since a merger or consolidation involves fundamental changes in the corporation, as well as in
the rights of stockholders and creditors, there must be an express provision of law authorizing them. 23
The steps necessary to accomplish a merger or consolidation, as provided for in Sections
76,24cra1aw77,25cra1aw 78,26cra1aw and 7927cra1aw of the Corporation Code, are:chanroblesvirtualawlibrary
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any
amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all
the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at
least two (2) weeks notice must be sent to all stockholders or members, personally or by registered mail. A summary
of the plan must be attached to the notice. Vote of two-thirds of the members or of stockholders representing two-
thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the corporate officers
of each constituent corporation. These take the place of the articles of incorporation of the consolidated corporation,
or amend the articles of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation. 28
Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject to its prior
determination that the merger is not inconsistent with the Corporation Code or existing laws. 29cra1aw Where a party
to the merger is a special corporation governed by its own charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should first be obtained.30
In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered with the SEC
due to incomplete documentation. Consequently, the SEC did not issue the required certificate of merger. Even if it is
true that the Monetary Board of the Central Bank of the Philippines recognized such merger, the fact remains that no The consent of the creditor to a novation by change of debtor is as indispensable as the creditors consent in
certificate was issued by the SEC. Such merger is still incomplete without the certification. conventional subrogation in order that a novation shall legally take place.39cra1awSince novation implies a waiver of
the right which the creditor had before the novation, such waiver must be express.40
The issuance of the certificate of merger is crucial because not only does it bear out SECs approval but it also marks
the moment when the consequences of a merger take place. By operation of law, upon the effectivity of the merger, WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated March 21, 2007
the absorbed corporation ceases to exist but its rights and properties, as well as liabilities, shall be taken and deemed and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are AFFIRMED.
transferred to and vested in the surviving corporation.31
SO ORDERED.
The same rule applies to consolidation which becomes effective not upon mere agreement of the members but only
upon issuance of the certificate of consolidation by the SEC. 32cra1aw When the SEC, upon processing and examining
the articles of consolidation, is satisfied that the consolidation of the corporations is not inconsistent with the
provisions of the Corporation Code and existing laws, it issues a certificate of consolidation which makes the
reorganization official.33cra1aw The new consolidated corporation comes into existence and the constituent
corporations are dissolved and cease to exist.34

There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as respondents, the two
corporations shall not be considered as one but two separate corporations. A corporation is an artificial being created
by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence.35cra1aw It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it may be related.36cra1aw Being separate entities, the
property of one cannot be considered the property of the other.

Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as its assets and cannot
be considered as belonging to DSLAI and MSLAI, notwithstanding the Deed of Assignment wherein FISLAI assigned
its assets and properties to DSLAI, and the latter assumed all the liabilities of the former. As provided in Article 1625
of the Civil Code, "an assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment
involves real property." The certificates of title of the subject properties were clean and contained no annotation of the
fact of assignment. Respondents cannot, therefore, be faulted for enforcing their claim against FISLAI on the
properties registered under its name. Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal
standing to annul the execution sale over the properties of FISLAI. With more reason can it not cause the cancellation
of the title to the subject properties of Willkom and Go.

Petitioner cannot also anchor its right to annul the execution sale on the principle of novation. While it is true that
DSLAI (now MSLAI) assumed all the liabilities of FISLAI, such assumption did not result in novation as would release
the latter from liability, thereby exempting its properties from execution. Novation is the extinguishment of an
obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first,
either by changing the object or principal conditions, by substituting another in place of the debtor, or by subrogating a
third person in the rights of the creditor.37

It is a rule that novation by substitution of debtor must always be made with the consent of the
creditor.38cra1aw Article 1293 of the Civil Code is explicit, thus:chanroblesvirtualawlibrary

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him the rights mentioned in Articles 1236 and 1237.

In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that DSLAI (now MSLAI)
would assume the liabilities of FISLAI. Such agreement cannot prejudice Uy. Thus, the assets that FISLAI transferred
to DSLAI remained subject to execution to satisfy the judgment claim of Uy against FISLAI. The subsequent sale of
the properties by Uy to Willkom, and of one of the properties by Willkom to Go, cannot, therefore, be questioned by
MSLAI.