34.

THIRD DIVISION
[G.R. No. 142936. April 17, 2002.] PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

Salvador Luy for petitioners. Renecio Espiritu for private respondent.

SYNOPSIS Respondent filed an action against petitioners for the unpaid balance on electrical services it previously rendered to Pampanga Sugar Mill (PASUMIL). Respondent alleged that petitioners became liable to them when the former acquired the assets of, took over, and operated PASUMIL. The Court disagreed with respondent. The following precludes the piercing of the corporate veil in the case at bar: Other than the fact that petitioners acquired the assets of PASUMIL, there was no showing that their control over it warrants the disregard of corporate personalities, there was no evidence that their juridical personality was used to commit fraud or to do a wrong, or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person; respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL. Neither is there merger nor consolidation with respect to PASUMIL and PNB. SYLLABUS 1.REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PETITION FOR REVIEW; QUESTIONS OF FACT MAY NOT RE RAISED THEREIN; EXCEPTION IS WHEN THERE IS MISAPPRECIATION OF EVIDENCE. As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of

Court. To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals. After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented. Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision. 2.COMMERCIAL LAW; PRIVATE CORPORATIONS; WHERE CORPORATION PURCHASED THE ASSETS OF ANOTHER CORPORATION, THE FORMER WILL NOT BE LIABLE TO THE DEBTS OF THE LATTER; EXCEPTIONS. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts.
SCHATc

3.ID.; ID.; CORPORATION; ELUCIDATED. 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. 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. This is basic. 4.ID.; ID.; DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION; WHEN PROPER. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons. Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application. This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or to cover up an otherwise blatant violation of the prohibition against

forum-shopping. Only in these and similar instances may the veil be pierced and disregarded. 5.ID.; ID.; ID.; ELEMENTS; NOT PRESENT IN CASE AT BAR. The question of whether a corporation is a mere alter ego is one of fact. Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control not mere stock control, but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such 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 a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of. We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person. Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL. Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. However, it utterly failed to discharge this burden; it failed to establish by competent evidence that petitioner's separate corporate veil had been used to conceal fraud, illegality or inequity. The CA erred in affirming the trial court's lifting of the corporate mask. The CA did not point to any fact evidencing bad faith on the part of PNB and its transferee. The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime. None of the foregoing exceptions was shown to exist in the present case. On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow. 6.ID.; ID.; CONSOLIDATION OR MERGER OF CORPORATIONS; REQUISITES; NOT PRESENT IN CASE AT BAR. A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. The merger, however, does not become effective upon the mere

agreement of the constituent corporations. 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. For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations. In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code was not followed.
AEIcSa

DECISION PANGANIBAN, J :
p

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL's contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 57610. The decretal portion of the challenged Decision reads as follows: "WHEREFORE, the judgment appealed from is hereby AFFIRMED."
2

The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and operating under the laws of the

Philippines, with office and principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm of the PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to perform the following, to wit

'(a)Construction of one (1) power house building; '(b)Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine generating set[s]; '(c)Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets; '(d)Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s]; '(e)Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided those stated units are completely supplied with their accessories;

'(f)Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and earth fillings all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as Annex 'A' and made an integral part of this complaint;' that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra work, and provide electrical equipment and spare parts, such as: '(a)Supply of electrical devices; '(b)Extra mechanical works; '(c)Extra fabrication works; '(d)Supply of materials and consumable items; '(e)Electrical shop repair; '(f)Supply of parts and related works for turbine generator; '(g)Supply of electrical equipment for machinery; '(h)Supply of diesel engine parts and other related works including fabrication of parts.' that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is appended as Annex 'C' of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the plaintiff; that because of

the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorney's fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit: '(1)Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the obligation falls due and demandable; '(2)Condemning the defendants to pay attorney's fees amounting to 25% of the amount claim; '(3)Ordering the defendants to pay the costs of the suit.' "The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214. "The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the defendants to file their answer to the complaint within 15 days. "In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit: 'That the complaint does not state a sufficient cause of action against the defendant NASUDECO because: (a) NASUDECO is not . . . privy to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189A (as well as in LOI No. 311) authorized or commanded the PNB

or its subsidiary corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the problems concerning the same.' "By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of attorney's fees as well as exemplary damages. "In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the defendant PASUMIL upon which plaintiff's suit is erected, was rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB takeover of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNB's management and operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank of the Philippines (DBP) entered into a 'Redemption Agreement' whereby DBP sold, transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL, as shown in Annex 'C' which is made an integral part of the answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under the above 'Redemption Agreement.' This

is shown in Annex 'D' which is also made an integral part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to manage and operate the above-mentioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate obligations of PASUMIL, including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to 'make a study of and submit recommendation on the problems concerning the claims of PASUMIL creditors,' under sub-par. 5 LOI No. 311. "In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is entitled to claim attorney's fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorney's fees, aside from exemplary damages in such amount that the court may seem just and equitable in the premises. "Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial Court. "After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads: 'WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the following: '1.The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25, 1980 until fully paid; '2.The sum of P102,724.76 as attorney's fees; and, '3.Costs.

'SO ORDERED. 'Manila, Philippines, September 4, 1986. '(SGD) ERNESTO S. TENGCO

'Judge '"

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom. 4 Hence, this Petition.
5

Issues
In their Memorandum, petitioners raise the following errors for the Court's consideration:
"I The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has not been legally extinguished or terminated, simply because of petitioners['] take-over of the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311. "II The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415." 6

Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent.

This Court's Ruling

The Petition is meritorious.

Main Issue: Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court. 7 To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals. 8 After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence presented. 9 Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the assailed Decision. 10 Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latter's foreclosed assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly and severally held liable for PASUMIL's unpaid obligation. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is fraudulently entered into in order to escape liability for those debts. 11

Piercing the Corporate Veil Not Warranted

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. 12 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. 13 This is basic. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. 14 For reasons of public policy and in the interest of

justice, the corporate veil will justifiably be impaled 15 only when it becomes a shield for fraud, illegality or inequity committed against third persons. 16 Hence, any application of the doctrine of piercing the corporate veil should be done with caution. 17 A court should be mindful of the milieu where it is to be applied. 18 It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. 19 The wrongdoing must be clearly and convincingly established; it cannot be presumed. 20 Otherwise, an injustice that was never unintended may result from an erroneous application. 21 This Court has pierced the corporate veil to ward off a judgment credit, 22 to avoid inclusion of corporate assets as part of the estate of the decedent, 23 to escape liability arising from a debt, 24 or to perpetuate fraud and/or confuse legitimate issues 25either to promote or to shield unfair objectives 26 or to cover up an otherwise blatant violation of the prohibition against forumshopping. 27 Only in these and similar instances may the veil be pierced and disregarded. 28 The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control not mere stock control, but complete domination not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such 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 a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiff's legal right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of. 30 We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate personalities. 31 Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person. 32 Third, respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL. 33

Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate personality rule. 34 However, it utterly failed to discharge this burden; 35 it failed to establish by competent evidence that petitioner's separate corporate veil had been used to conceal fraud, illegality or inequity. 36 While we agree with respondent's claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced to PASUMIL, 37 we are not convinced that the transfer of the latter's assets to petitioners was fraudulently entered into in order to escape liability for its debt to respondent. 38 A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder at the public auction conducted. 39 The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20 percent of the total outstanding obligation. 40 Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties. 41 Pursuant to LOI No. 189-A 42 as amended by LOI No. 311, 43 PNB acquired PASUMIL's assets that DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a subsidiary corporation. 44 PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135. 45These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement46 PNB, as successor-in-interest, stepped into the shoes of DBP as PASUMIL's creditor. 47 By way of a Deed of Assignment,48 PNB then transferred to NASUDECO all its rights under the Redemption Agreement. In Development Bank of the Philippines v. Court of Appeals, 49 we had the occasion to resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Mining's unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil. In the instant case, the CA erred in affirming the trial court's lifting of the corporate mask. 50 The CA did not point to any fact evidencing bad faith on the

part of PNB and its transferee. 51 The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud or defend crime. 52 None of the foregoing exceptions was shown to exist in the present case. 53On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow.

No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation. A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. 54 The merger, however, does not become effective upon the mere agreement of the constituent corporations. 55 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. 56 For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required. 57 These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations. 58

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title IX of the Corporation Code 59 was not followed. In fact, PASUMIL's corporate existence, as correctly found by the CA, had not been legally extinguished or terminated. 60Further, prior to PNB's acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the former's obligation in the amount of P777,263.80. As of June

27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000. Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. 61 LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMIL's creditors. 62 Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondent's insistence to the contrary. 63 WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs.
DHTCaI

SO ORDERED.

Vitug, Sandoval-Gutierrez and Carpio, JJ., concur. Melo, J., Abroad, is on official leave.

Footnotes
35.

EN BANC
[G.R. No. L-21601. December 28, 1968.] NIELSON & COMPANY, INC., plaintiffappellant, vs. LEPANTO CONSOLIDATED MINING COMPANY,defendant-appellee. SYLLABUS 1.REMEDIAL LAW; APPEAL; QUESTION OF FACT OR LAW NOT RAISED IN THE LOWER COURT MAY NOT BE RAISED ON APPEAL; INSTANT CASE. In the pleadings filed by defendant Lepanto in the lower court and its memorandum and brief on appeal it never asserted the theory that it has the right to terminate the management contract because that contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, it has the right to terminate the management contract in question, that

plea of its right to terminate was not based upon the ground that the relation between defendant and plaintiff was that of principal and agent but upon the ground that plaintiff had allegedly not complied with certain terms of the management contract. If defendant had thought of considering the management contract as one of agency it could have amended its answer by stating exactly its position. It could have asserted its theory of agency in its memorandum for the lower and in its brief on appeal. This, defendant did not do. It is the rule, and the settled doctrine that a party cannot change his theory on appeal, that is, that a party cannot raise in the appellate court any question of law or of fact that was not raised in the court below or which was not within the issue made by the parties in their pleadings. 2.CIVIL LAW; SPECIAL CONTRACTS; AGENCY DISTINGUISHED FROM LEASE OF SERVICES. In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer while the agent represents his principal. Agency is a preparatory contract as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease services contemplate only material (nonjuridical) acts." 3.ID.; ID.; CONTRACT IN INSTANT CASE IS FOR LEASE OF SERVICES. It appears that the principal and paramount undertaking of plaintiff under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking plaintiff was not in any way executing juridical acts for defendant, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking plaintiff was not acting as an agent of defendant Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation.

4.ID.; ID.; ID.; DEFENDANT MAY NOT TERMINATE CONTRACT AT WILL. In the instant case, paragraph XI of the contract provides: ". . . Nielson agrees that Lepanto may cancel this agreement at any time upon ninety days written notice, in the event that Nielson for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein described, in good faith and in accordance with the approved mining practice" defendant could not terminate the agreement at will. Under the provision, it could terminate or cancel the agreement by giving notice of termination 90 days in advance only in the event that plaintiff should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of defendant. Defendant could not terminate the agreement if plaintiff should cease to prosecute the operation and development of the mining properties by reason of acts of God, strike and other causes beyond the control of plaintiff. It is, therefore, by express stipulation of the parties, the management contract in question is not revocable at will of defendant. This management contract is not a contract of agency as defined in Article 1700 of the Old Civil Code, but a contract of lease of service as defined in Article 1544 of the same code. This contract can not be unilaterally revoked by defendant. 5.ID.; ID.; ID.; EXTENSION OF CONTRACT EQUAL TO PERIOD OF SUSPENSION. The nature of the contract for management and operation of mines justifies the interpretation of the force majeure clause, that a period equal to the period of suspension due to force majeure should be added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling in our decision that since the management contract in the instant case was suspended from February 1942 to June 26, 1948, from the latter the contract had yet five years to go. 6.ID.; ID.; ID.; ID.; PLAINTIFF LIMITED TO MANAGEMENT FEES FOR PERIOD OF EXTENSION. Since the management contract had been extended for 5 years, or 60 months, from June 27, 1948 to June 26, 1953, and the cause of action of plaintiff to claim for its compensation during that period of extension had not prescribed, it follows that plaintiff should be awarded the management fees during the whole period of extension plus the 10% of the value of the dividends declared during the said period of extension the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for capital account. 7.ID.; PRESCRIPTION; INAPPLICABILITY THEREOF IN INSTANT CASE. The claim accrued on December 31, 1941, and the right to commence an action

thereon started on January 1, 1942. The action on this claim did not prescribe although the complaint was filed on February 6, 1958 - or after a lapse of 16 years, 1 month and 5 days because of the operation of moratorium law. The moratorium period of 8 years, 2 months and 8 days should be deducted from the period that had elapsed since the accrual of the cause of action to the date of the filing of the complaint, so that there is a period of less than 8 years to be reckoned for the purpose of prescription. 8.ID.; EXECUTIVE ORDER NUMBER 32, MORATORIUM LAW. Executive Order No. 32 covered all debts and monetary obligation on contract before the war (or before December 1941) and those contracted subsequent to Dec. 8, 1941 and during the Japanese occupation. RA No. 342, approved on July 26, 1948, lifted the moratorium provided for in Executive Order No. 32 on pre-war (or pre-Dec. 8, 1941) debts of debtors who had not filed war damage claims with the United States War Damage Commission. In other words, after the effectivity of RA No. 342, the debt moratorium was limited (1) to debts and other monetary obligations which were contracted after Dec. 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or pre-Dec. 8, 1941) debts and other monetary claims. That was the situation up to May 18, 1953 when this Court declared RA No. 342 unconstitutional. It has been held by this Court, however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 when RA No. 342 was declared unconstitutional or a period of 8 years, 2 months and 8 days the debt moratorium was in force, and had the effect of suspending the period of prescription. 9.MERCANTILE LAW; CORPORATIONS; SHARES OF STOCK; ISSUANCE THEREOF. From Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property and (3) undistributed profits. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If the shares of stocks are issued in exchange of cash or Property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property because services is equivalent to property. Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized.

10.ID.; ID.; STOCK DIVIDEND, DEFINED. A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par. When a corporation issues stock dividends, it shows that the corporations' accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or in kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from the surplus to assets and no longer available for actual distribution.

11.ID.; ID.; DIVIDEND. The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as a dividend, and duly ordered by the directory, or by the stockholders at a corporate meeting to be divided or distributed among the stockholders according to their respective interests. 12.ATTORNEYS; ATTORNEYS FEES; AWARD OF ATTORNEYS FEES IS WITHIN THE SOUND DISCRETION OF THE COURT. The matter of the award of attorneys fees is within the sound discretion of this court. In our decision We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court as reasonable. DECISION ZALDIVAR, J :
p

Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for reconsideration is based on two sets of grounds the first set consisting of four principal grounds, and the second set consisting of five alternative grounds, as follows:

Principal Grounds:
1.The court erred in overlooking and failing to apply the proper law applicable to the agency or management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the new), by virtue of which said agency was effectively revoked and terminated in 1945 when, as stated in paragraph 20 of the complaint, "defendant voluntarily . . . prevented plaintiff from resuming management and operation of said mining properties." 2.The court erred in holding that paragraph II of the management contract (Exhibit C) suspended the period of said contract. 3.The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence of this Supreme Court, that the management agreement was only suspended but not extended on account of the war. 4The court erred in reversing the finding of the trial judge that Nielson's action had prescribed, but considering only the first claim and ignoring the prescriptibility of the other claims.

Alternative Grounds:
5.The court erred in holding that the period of suspension of the contract on account of the war lasted from February 1942 to June 26, 1948. 6.Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January, 1942; and (c) the full contract price for the extended period of sixty months, since these damages were neither demanded nor proved and, in any case, not allowable under the general law of damages. 7.Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee to issue and deliver to appellant shares of stock together with fruits thereof. 8.The court erred in awarding to appellant an undetermined amount of shares of stock and/or cash, which award cannot be ascertained and executed without further litigation. 9.The court erred in rendering judgment for attorney's fees.

We are going to dwell on these grounds in the order they are presented. 1.In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the real nature of the management contract entered into by and between Lepanto and Nielson, and the law that is applicable on said contract. Lepantonow asserts for the first time - and this is done in a motion for reconsideration that the management contract in question is a contract of agency such that it has the right to revoke and terminate the said contract, as it did terminate the same, under the law of agency, and particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code) We have taken note that Lepanto is advancing a new theory. We have carefully examined the pleadings filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did it assert the theory that it has the right to terminate the management contract because that contract is one of agency which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, in its answer in the court below, Lepanto pleaded that it had the right to terminate the management contract in question, that plea of its right to terminate was not based upon the ground that the relation betweenLepanto and Nielson was that of principal and agent but upon the ground that Nielson had allegedly not complied with certain terms of the management contract. If Lepanto had thought of considering the management contract as one of agency it could have amended its answer by stating exactly its position. It could have asserted its theory of agency in its memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the rule, and the settled doctrine of this Court, that a party cannot change his theory on appeal that is, that a party cannot raise in the appellate court any question of law or of fact that was not raised in the court below or which was not within the issue made by the parties in their pleadings (Section 19, Rule 49 of the old Rules of Court, and also Section 18 of the new Rules of Court; Hautea vs. Magallon, L20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884, February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs. Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil. 49) At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the proceedings, this Court cannot sustain the same. Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1) Nielson was to manage and operate the mining properties and mill on behalf, and for the account, of Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto's behalf, into contracts

for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined. All these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to execute juridical acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto "at all times". Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that an agency is revocable at the will of the principal (Article 1733 of the Old Civil Code) regardless of any term or period stipulated in the contract, and it was in pursuance of that right that Lepanto terminated the contract in 1945 when it took over and assumed exclusive management of the work previously entrusted to Nielson under the contract. Lepanto finally maintains that Nielson as an agent is not entitled to damages since the law gives to the principal the right to terminate the agency at will. Because of Lepanto's new theory We consider it necessary to determine the nature of the management contract whether it is a contract of agency or a contract of lease of services. Incidentally, we have noted that the lower court, in the decision appealed from, considered the management contract as a contract of lease of services. Article 1709 of the Old Civil Code, defining contract of agency, provides:
"By the contract of agency, one person binds himself to render some service or do something for the account or at the request of another."

Article 1544, defining contract of lease of service, provides:

"In a lease of work or services, one of the parties binds himself to make or construct something or to render a service to the other for a price certain."

In both agency and lease of services one of the parties binds himself to render some service to the other party. Agency, however, is distinguished from lease of work or services in that the basis of agency is representation, while in the lease of work or services the basis is employment. The lessor of services does not represent his employer, while the agent represents his principal. Manresa, in his "Commentarios al Codigo Civil Espaol" (1931, Tomo IX, pp. 372-373), points out that the element of representation distinguishes agency from lease of services, as follows:
"Nuestro art. 1.709 como el art 1.984 del Codigo de Napoleon y cuantos textos legales citamos en las concordancias,expresan claramente esta idea de la representacin, 'hacer alguna cosa por cuenta o encargo de

otra' dice nuestro Codigo; 'poder de hacer alguna cosa para el mandante o en su nombre' dice el Codigo de Napoleon, y en tales palabras aparece vivo y luminoso el concepto y la teoria de la representacion, tan fecunda en enseanzas, que a su sola luz es como se explican las diferencias que separan el mandato del arrendamiento de servicios, de los contratos inominados, del consejo y de la gestion de negocios. "En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja, en verdad, para el dueo que remunera la labor, pero ni se le representa ni se obra en su nombre . . ."

On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil Code has defined the contract of agency in more explicit terms, as follows:
"By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter."

There is another obvious distinction between agency and lease of services. Agency is a preparatory contract, as agency "does not stop with the agency because the purpose is to enter into other contracts." The most characteristic feature of an agency relationship is the agent's power to bring about business relations between his principal and third persons. "The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease of services contemplate only material (non-juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277)

In the light of the interpretations we have mentioned in the foregoing paragraphs, let us now determine the nature of the management contract in question. Under the contract, Nielson had agreed, for a period of five years, with the right to renew for a like period, to explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill, such pay ore as may be found therein and to market the metallic products recovered therefrom which may prove to be marketable, as well as to render for Lepanto other services specified in the contract. We gather from the contract that the work undertaken by Nielsonwas to take complete charge, subject at all times to the general control of the Board of Directors of Lepanto, of the exploration and development of the mining claims, of the hiring of a sufficient and competent staff and of sufficient and capable laborers, of the prospecting and development of the mine,

of the erection and operation of the mill, and of the beneficiation and marketing of the minerals found on the mining properties; and in carrying out said obligation Nielson should proceed diligently and in accordance with the best mining practice. In connection with its work Nielson was to submit reports, maps, plans and recommendations with respect to the operation and development of the mining properties, make recommendations and plans on the erection or enlargement of any existing mill, dispatch mining engineers and technicians to the mining properties as from time to time may reasonably be required to investigate and make recommendations without cost or expense to Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other necessary purchases by Lepanto, provided, however, that no purchase shall be made without the prior approval of Lepanto; and provided further, that no commission shall be claimed or retained byNielson on such purchase"; and "to submit all requisition for supplies, all contracts and arrangement with engineers, and staff and all matters requiring the expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts subject to the prior approval of Lepanto for the sale and marketing of the minerals mined from said properties, when said products are in a suitable condition for marketing." 1 It thus appears that the principal and paramount undertaking of Nielson under the management contract was the operation and development of the mine and the operation of the mill. All the other undertakings mentioned in the contract are necessary or incidental to the principal undertaking these other undertakings being dependent upon the work on the development of the mine and the operation of the mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was performing material acts for an employer, for a compensation. It is true that the management contract provides that Nielson would also act as purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an agent.

Lepanto contends that the management contract in question being one of agency it had the right to terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find, however, a provision in the management contract which militates against this stand of Lepanto. Paragraph XI of the contract provides:
"Both parties to this agreement fully recognize that the terms of this Agreement are made possible only because of the faith or confidence that the Officials of each company have in the other; therefore, in order to assure that such confidence and faith shall abide and continue, NIELSON agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days written notice, in the event that NIELSON for any reason whatsoever, except acts of God, strike and other causes beyond its control, shall cease to prosecute the operation and development of the properties herein described, in good faith and in accordance with approved mining practice."

It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by giving notice of termination ninety days in advance only in the event that Nielson should prosecute in bad faith and not in accordance with approved mining practice the operation and development of the mining properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease to prosecute the operation and development of the mining properties by reason of acts of God, strike and other causes beyond the control of Nielson. The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made possible only because of the faith and confidence of the officials of each company have in the other" in paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as that of principal and agent based on trust and confidence, such that the contractual relation may be terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather, that phrase simply implies the circumstance that brought about the execution of the management contract. Thus, in the annual report for 1936 2 , submitted by Mr. C. A. Dewit, President of Lepanto, to its' stockholders, under date of March 15, 1937, we read the following:
"To the Stockholders: xxx xxx xxx

"The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson & Co., Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated August 11, 1936, reading as follows: 'Messrs. Cookes and Lednicky,' 'Present. 'Re: Mankayan Copper Mines. 'GENTLEMEN: 'After an examination of your property by our engineers, we have decided to offer as we hereby offer to underwrite the entire issue of stock of a corporation to be formed for the purpose of taking over said properties, said corporation to have an authorized capital of P1,750,000.00, of which P700,000.00 will be issued in escrow to the claimowners in exchange for their claims, and the balance of P1,050,000.00 we will sell to the public at par or take ourselves. 'The arrangement will be under the following conditions: '1.The subscriptions for cash shall be payable 50% at time of subscription and the balance subject to the call of the Board of Directors of the proposed corporation. '2.We shall have an underwriting and brokerage commission of 10% of the P1,050,000.00 to be sold for cash to the public, said commission to be payable from the first payment of 50% on each subscription. '3.We will bear the cost of preparing and mailing any prospectus that may be required, but no such prospectus will be sent out until the text thereof has been first approved by the Board of Directors of the proposed corporation. '4.That after the organization of the corporation, all operating contract be entered into between ourselves and said corporation, under the terms which the property will be developed and mined and a mill erected, under our supervision, our compensation to be P2,000.00 per month until the property is put on a profitable basis and P2,500.00 per month plus 10% of the net profits for a period of five years thereafter.`

'5.That we shall have the option to renew said operating contract for an additional period of five years, on the same basis as the original contract, upon the expiration thereof. 'It is understood that the development and mining operations on said property, and the erection of the mill thereon, and the expenditures therefore, shall be subject to the general control of the Board of Directors of the proposed corporation, and, in case you accept this proposition, that a detailed operating contract will be entered into, covering the relationships between the parties. Yours very truly, (Sgd.) L. R. Nielson'" "Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions for One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their underwriting and brokerage commission has been paid. More than fifty per cent of these subscriptions have been paid to the Company in cash. The claimowners have transferred their claims to the Corporation, but the P700,000.00 in stock which they are to receive therefor, is as yet held in escrow. "Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the Management of the property under the control of the Board of Directors. A modification in the Management Contract was made with the consent of all the then stockholders, in virtue of which the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill construction began. The formal Management Contract was not entered into until January 30, 1937." xxx xxx xxx "Manila, March 15, 1937 (Sgd.) "C.A. DeWitt "President"

We can gather from the foregoing statements in the annual report for 1936, and from the provision of paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and manage its mines was principally in consideration of the know-how and technical services that Nielson offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by Lepanto was a "detailed operating

contract". It was not a contract of agency. Nowhere in the record is it shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management contract because it had lost its trust and confidence in Nielson.

The contention of Lepanto that it had terminated the management contract in 1945, following the liberation of the mines from Japanese control, because the relation between it and Nielson was one of agency and as such it could terminate the agency at will, is, therefore, untenable. On the other hand, it can be said that, in asserting that it had terminated or cancelled the management contract in 1945, Lepanto had thereby violated the express terms of the management contract. The management contract was renewed to last until January 31, 1947, so that the contract had yet almost two years to go upon the liberation of the mines in 1945. There is no showing that Nielson had ceased to prosecute the operation and development of the mines in good faith and in accordance with approved mining practice which would warrant the termination of the contract upon ninety days written notice. In fact there was no such written notice of termination. It is an admitted fact that Nielson ceased to operate and develop the mines because of the war a cause beyond the control of Nielson. Indeed, if the management contract in question was intended to create a relationship of principal and agent between Lepanto andNielson, paragraph XI of the contract should not have been inserted because, as provided in Article 1733 of the old Civil Code, agency is essentially revocable at the will of the principal that means, with or without cause. But precisely said paragraph XI was inserted in the management contract to provide for the cause for its revocation. The provision of paragraph XI must be given effect. In the construction of an instrument where there are several provisions or particulars, such a construction is, if possible, to be adopted as will give effect to all, 3 and if some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. 4 It is Our considered view that by express stipulation of the parties, the management contract in question is not revocable at the will of Lepanto. We rule that this management contract is not a contract of agency as defined in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of the same Code. This contract can not be unilaterally revoked by Lepanto.

The first ground of the motion for reconsideration should, therefore, be brushed aside. 2.In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this Court erred, in holding that paragraph II of the management contract suspended the period of said contract, in holding that the agreement was not only suspended but was extended on account of the war, and in holding that the period of suspension on account of the war lasted from February, 1942 to June 26, 1948. We are going to discuss these three grounds together because they are inter-related. In Our decision we have dwelt lengthily on the points that the management contract was suspended because of the war, and that the period of the contract was extended for the period equivalent to the time when Nielson was unable to perform the work of mining and milling because of the adverse effects of the war on the work of mining and milling. It is the contention of Lepantothat the happening of those events, and the effects of those events, simply suspended the performance of the obligations by either party in the contract, but did not suspend the period of the contract, much less extended the period of the contract. We have conscientiously considered the arguments of Lepanto in support of these three grounds, but We are not persuaded to reconsider the rulings that We made in Our decision. We want to say a little more on these points, however. Paragraph II of the management contract provides as follows:
"In the event of inundation, flooding of the mine, typhoon, earthquake or any other force majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or other event or cause reasonably beyond the control of NIELSON and which adversely affects the work of mining and milling; NIELSON shall report such fact toLEPANTO and without liability or breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially during the terms of such inability."(Italics supplied)

A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of any of the events enumerated therein, which adversely affects the work of mining and milling, the agreement is deemed suspended for as long asNielson is unable to perform its work of mining and milling because of the adverse effects of the happening of the event on the work of mining and

milling. During the period when the adverse effects on the work of mining and milling exist, neither party in the contract would be held liable for noncompliance of its obligation under the contract. In other words, the operation of the contract is suspended for as long as the adverse effects of the happening of any of those events had impeded or obstructed the work of mining and milling. An analysis of the phraseology of the above-quoted paragraph II of the management contract readily supports the conclusion that it is the agreement, or the contract, that is suspended. The phrase "the same" can refer to no other than the term "Agreement" which immediately precedes it. The "Agreement" may be wholly or partially suspended, and this situation will depend on whether the event wholly or partially affected adversely the work of mining and milling. In the instant case, the war had adversely affected and wholly at that the work of mining and milling. We have clearly stated in Our decision the circumstances brought about by the war which caused the whole or total suspension of the agreement or of the management contract. LEPANTO itself admits that the management contract was suspended. We quote from the brief of LEPANTO:
"Probably, what Nielson meant was, it was prevented by Lepanto to assume again the management of the mine in 1945, at the precise time when defendant was at the feverish phase of rehabilitation and although the contract had already been suspended." (Lepanto's Brief, p. 9) ". . . it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and operate the same and because, as provided in the agreement, the contract was suspended by reason of the war." (Lepanto's Brief, pp. 9-10) "Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force majeure, such as war, adversely affects the work of mining and milling." (Lepanto's Brief, p. 49)

Lepanto is correct when it said that the obligations under the contract were suspended upon the happening of any of the events enumerated in paragraph II of the management contract. Indeed, those obligations were suspended because the contract itself was suspended. When we talk of a contract that has been suspended we certainly mean that the contract temporarily ceased to be operative, and the contract becomes operative again upon the happening of a condition or when a situation obtains which warrants the termination of the suspension of the contract.

In Our decision We pointed out that the agreement in the management contract would be suspended when two conditions concur, namely: (1) the happening of the event constituting a force majeure that was reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure adversely affected the work of mining and milling. The suspension, therefore, would last not only while the event constituting the force majeure continued to occur but also for as long as the adverse effects of the force majeure on the work of mining and milling had not been eliminated. Under the management contract the happening alone of the event constituting the force majeure which did not affect adversely the work of mining and milling would not suspend the period of the contract. It is only when the two conditions concur that the period of the agreement is suspended. It is not denied that because of the war, in February 1942, the mine, the original mill, the original power plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto, were destroyed upon order of the United States Army, to prevent their utilization by the enemy. It is not denied that for the duration of the war Nielson could not undertake the work of mining and milling. When the mines were liberated from the enemy in August, 1945, the condition of the mines, the mill, the power plant and other installations, was not the same as in February 1942 when they were ordered destroyed by the US army. Certainly, upon the liberation of the mines from the enemy, the work of mining and milling could not be undertaken by Nielsonunder the same favorable circumstances that obtained before February 1942. The work of mining and milling, as undertaken byNielson in January, 1942, could not be resumed by Nielson soon after liberation because of the adverse effects of the war, and this situation continued until June of 1948. Hence, the suspension of the management contract did not end upon the liberation of the mines in August, 1945. The mines and the mill and the installations, laid waste by the ravages of war, had to be reconstructed and rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects of the war on the work of mining and milling had ended, because it was on that date that the operation of the mines and the mill was resumed. The period of suspension should, therefore, be reckoned from February 1942 until June 26, 1948, because it was during this period that the war and the adverse effects of the war on the work of mining and milling had lasted. The mines and the installations had to be rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon after the liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in Lepanto's annual report to its stockholders for the year 1948, "June 28, 1948 marked the official return to operation of this company at its properties at Mankayan, Mountain province, Philippines" (Exh. F-1).

Lepanto would argue that if the management contract was suspended at all the suspension should cease in August of 1945, contending that the effects of the war should cease upon the liberation of the mines from the enemy. This contention cannot be sustained, because the period of rehabilitation was still a period when the physical effects of the war the destruction of the mines and of all the mining installations adversely affected, and made impossible, the work of mining and milling. Hence, the period of the reconstruction and rehabilitation of the mines and the installations must be counted as part of the period of suspension of the contract. Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the mines because soon after the liberation of the mines Nielson insisted to resume the management work, and that Nielson was under obligation to reconstruct the mill in the same way that it was under obligation to construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to resume its management work after liberation, but this was only for the purpose of restoring the mines, the mill, and other installations to their operating and producing condition as of February 1942 when they were ordered destroyed. It is not shown by any evidence in the record, that Nielson had agreed, or would have agreed, that the period of suspension of the contract would end upon the liberation of the mines. This is so because, as found by this Court, the intention of the parties in the management contract, and as understood by them, the management contract was suspended for as long as the adverse effects of the force majeure on the work of mining and milling had not been removed, and the contract would be extended for as long as it was suspended. Under the management contract Nielson had the obligation to erect and operate the mill, but not to re-erect or reconstruct the mill in case of its destruction by force majeure. It is the considered view of this Court that it would not be fair to Nielson to consider the suspension of the contract as terminated upon the liberation of the mines because then Nielson would be placed in a situation whereby it would have to suffer the adverse effects of the war on the work of mining and milling. The evidence shows that as of January 1942 the operation of the mines under the management of Nielson was already under beneficial conditions, so much so that dividends were already declared by Lepanto for the years 1939, 1940 and 1941. To make the management contract immediately operative after the liberation of the mines from the Japanese, at the time when the mines and all its installations were laid waste as a result of the war, would be to place Nielson in a

situation whereby it would lose all the benefits of what it had accomplished in placing theLepanto mines in profitable operation before the outbreak of the war in December, 1941. The record shows that Nielson started its management operation way back in 1936, even before the management contract was entered into. As early as August 1936Nielson negotiated with Messrs. C.I. Cookes and V.L. Lednicky for the operation of the Mankayan mines and it was the result of those negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto, and that after the formation of the corporation (Lepanto) Nielson immediately assumed the management of the mining properties of Lepanto. It was not until January 30, 1937 when the management contract in question was entered into between Lepanto and Nielson(Exhibit A). A contract for the management and operation of mines calls for a speculative and risky venture on the part of the manager-operator. The manager-operator invests its technical know-how, undertakes back-breaking efforts and tremendous spade-work, so to say, in the first years of its management and operation of the mines, in the expectation that the investment and the efforts employed might be rewarded later with success. This expected success may never come. This had happened in the very case of the Mankayan mines where, as recounted by Mr. Lednicky of Lepanto, various persons and entities of different nationalities, including Lednicky himself, invested all their money and failed. The manager-operator may not strike sufficient ore in the first, second, third, or fourth year of the management contract, or he may not strike ore even until the end of the fifth year. Unless the manager-operator strikes sufficient quantity of ore he cannot expect profits or reward for his investment and efforts. In the case of Nielson, its corps of competent engineers, geologists, and technicians begun working on the Mankayan mines ofLepanto since the latter part of 1936, and continued their work without success and profit through 1937, 1938, and the earlier part of 1939. It was only in December of 1939 when the efforts of Nielson started to be rewarded when Lepanto realized profits and the first dividends were declared. From that time on Nielson could expect profit to come to it as in fact Lepanto declared dividends for 1940 and 1941 if the development and operation of the mines and the mill would continue unhampered. The operation, and the expected profits, however, would still be subject to hazards due to the occurrence of fortuitous events, fires, earthquakes, strikes, war, etc., constituting force majeure, which would result in the destruction of the mines and the mill. One of these diverse causes, or one after the other, may consume the whole period of the contract, and if it should happen that way the manager- operator would reap no profit to compensate for the first years of spade-work and investment of efforts and know-how. Hence, in fairness to the manager-operator, so that he may not be deprived of the benefits

of the work he had accomplished, the force majeure clause is incorporated as a standard clause in contracts for the management and operation of mines. The nature of the contract for the management and operation of mines justifies the interpretation of the force majeure clause, that a period equal to the period of suspension due to force majeure should be added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling in Our decision that the management contract in the instant case was suspended from February, 1942 to June 26, 1948, and that from the latter date the contract had yet five years to go. 3.In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in reversing the finding of the trial court that Nielson's action has prescribed, by considering only the first claim and ignoring the prescriptibility of the other claims. This ground of the motion for reconsideration has no merit. In Our decision We stated that the claims of Nielson are based on a written document, and, as such, the cause of action prescribes in ten years. 5 Inasmuch as there are different claims which accrued on different dates the prescriptive periods for all the claims are not the same. The claims of Nielson that have been awarded by this Court are itemized in the dispositive part of the decision. The first item of the awards in Our decision refers to Nielson's compensation in the sum of P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in December, 1941. As We have stated in Our decision, this claim accrued on December 31, 1941, and the right to commence an action thereon started on January 1, 1942. We declared that the action on this claim did not prescribe although the complaint was filed on February 6, 1958 or after a lapse of 16 years, 1 month and 5 days because of the operation of the moratorium law. We declared that under the applicable decisions of this Court 6 the moratorium period of 8 years, 2 months and 8 days should be deducted from the period that had elapsed since the accrual of the cause of action to the date of the filing of the complaint, so that there is a period of less than 8 years to be reckoned for the purpose of prescription. This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which provides as follows:
"Enforcement of payments of all debts and other monetary obligations payable in the Philippines, except debts and other monetary

obligations entered into in any area after declaration by Presidential Proclamation that such area has been freed from enemy occupation and control, is temporarily suspended pending action by the Commonwealth Government." (41 O.G. 56-57; Emphasis supplied)

Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or before December 8, 1941) and those contracted subsequent to December 8, 1941 and during the Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who had not filed war damage claims with the United States War Damage Commission. In other words, after the effectivity of Republic Act No. 342, the debt moratorium was limited: (1) to debts and other monetary obligations which were contracted after December 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or pre-December 8, 1941) debts and other monetary obligations where the debtors filed war damage claims. That was the situation up to May 18, 1953 when this Court declared Republic Act No. 342 unconstitutional. 7 It has been held by this Court, however, that from March 10, 1945 when Executive Order No. 32 was issued, to May 18, 1953 when Republic Act No. 342 was declared unconstitutional or a period of 8 years, 2 months and 8 days the debt moratorium was in force, and had the effect of suspending the period of prescription. 8 Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-war obligations or those incurred prior to December 8, 1941," and that "the moratorium was lifted and terminated with respect to obligations incurred after December 8, 1941." 9

This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and did not lift the moratorium in relation thereto. 10 In the case of Abraham, et al. vs. Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
"Respondents, however, contend that Republic Act No. 342, which took effect on July 26, 1948, lifted the moratorium on debts contracted during the Japanese occupation. The court has already held that Republic Act No. 342 did not lift the moratorium on debts contracted during the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949)

but modified Executive Order No. 32 as to pre-war debts, making the protection available only to debtors who had war damage claims (Sison vs. Mirasol, G.R. No. L-4711, Oct. 3, 1952)"

We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to Nielson had not prescribed. What we have stated herein regarding the non-prescription of the cause of action of the claim involved in the first item in the award also holds true with respect to the second item in the award, which refers to Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits that this second item, like the first, is a monetary obligation. The right of action ofNielson regarding this claim accrued on January 31, 1942. As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable. That is the reason why in Our decision We did not discuss the question of prescription regarding these items. The claims of Nielson involved in these items are based on the management contract, and Nielson's cause of action regarding these claims prescribes in ten years. Corollary to Our ruling that the management contract was suspended from February, 1942 until June 26, 1948, and that the contract was extended for five years from June 26, 1948, the right of action of Nielson to claim for what is due to it during that period of extension accrued during the period from June 26, 1948 till the end of the fiveyear extension period or until June 26, 1953. And so, even if We reckon June 26, 1948 as the starting date of the ten-year period in connection with the prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in the decision, it is obvious that when the complaint was filed on February 6, 1958 the ten-year prescriptive period had not yet lapsed. In Our decision We have also ruled that the right of action of Nielson against Lepanto had not prescribed because of the arbitration clause in the Management contract. We are satisfied that there is evidence that Nielson had asked for arbitration, and an arbitration committee had been constituted. The arbitration committee, however, failed to bring about any settlement of the differences between Nielson and Lepanto. On June 25, 1957 counsel for Lepanto definitely advised Nielson that they were not entertaining any claim of Nielson. The complaint in this case was filed on February 6, 1958. 4.In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the extended

period of 60 months, since the damages were never demanded nor proved and, in any case, not allowable under the general law on damages." We have stated in Our decision that the original agreement in the management contract regarding the compensation of Nielsonwas modified, such that instead of receiving a monthly compensation of P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding month, 11 Nielson would receive a compensation of P2,500.00 a month, plus (1)10% of the dividends declared and paid, when and as paid, during the period of the contract, and at the end of each year, (2)10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account. It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by Lepanto. 12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of P17,500.00. We have found that this amount was not paid toNielson. In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been paid to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement book that the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson& Co. Inc." The entry does not make any reference to dividends or participation of Nielson in the profits. On the other hand, in the photographic copy of page 89 of the 1941 cash disbursement book, also attached to the motion for reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states "Accts. Pay. Particip. Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of Nielson in the profits based on dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not stated that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that dividends were declared in December 1941. We cannot entertain this piece of evidence for several reasons: (1) because this evidence was not presented during the trial in the court below; (2) there is no showing that this piece of evidence is newly discovered and that Lepanto was not in possession of said evidence when this case was being tried in the court below; and (3) according to Exhibit L cash dividends of P175,000.00 were declared in December, 1941, and so the sum of P17,500.00 which appears to have been paid to Nielson in October 1941 could not be payment of the equivalent of 10% of the cash dividends that were later declared in December, 1941.

As regards the management fee of Nielson corresponding to January, 1942, in the sum of P2,500.00, We have also found thatNielson is entitled to be paid this amount, and that this amount was not paid by Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the management fees of Nielson for November and December, 1941, 13 it was not able to present any evidence to show that the management fee of P2,500.00 for January, 1942 had been paid. It having been declared in Our decision, as well as in this resolution, that the management contract had been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the cause of action of Nielson to claim for its compensation during that period of extension had not prescribed, it follows that Nielson should be awarded the management fees during the whole period of extension, plus the 10% of the value of the dividends declared during the said period of extension, the 10% of the depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for capital account. 5.In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof. In Our decision, We declared that pursuant to the modified agreement regarding the compensation of Nielson which provides, among others, that Nielson would receive 10% of any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto during the period of extension of the contract. It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00; and on August 22, 1950, it declared stock dividends worth P2,000,000.00. In other words, during the period of extension Lepanto had declared stock dividends worth 3,000,000.00. We held in Our decision that Nielson is entitled to receive 10% of the stock dividends declared, or shares of stocks, worth P300,000.00 at the par value of P0.10 per share. We ordered Lepanto to issue and deliver to Nielsonthose shares of stocks as well as all the fruits or dividends that accrued to said shares. In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as compensation for its services under the management contract is a violation of the Corporation Law, and that it was not, and it could not be, the intention of Lepanto and Nielson as contracting

parties that the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto. We have assiduously considered the arguments adduced by Lepanto in support of its contention, as well as the answer of Nielson in this connection, and We have arrived at the conclusion that there is merit in the contention of Lepanto. Section 16 of the Corporation Law, in part, provides as follows:
"No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or issued value of the stock or bonds so issued; and in case of disagreement as to their value, the same shall be presumed to be the assessed value or the value appearing in invoices or other commercial documents, as the case may be; and the burden or proof that the real present value of the property is greater than the assessed value or value appearing in invoices or other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits earned

by it but not distributed among its stockholders or members; Provided, however, That no stock or bond dividend shall be issued without the

approval of stockholders representing not less than two-thirds of all stock then outstanding and entitled to vote at a general meeting of the corporation or at a special meeting duly called for the purpose.

xxx xxx xxx "No corporation shall make or declare any dividend except from the surplus profits arising from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution: Provided, That banking, savings and loan, and trust corporations may receive deposits and issue certificates of deposit, checks, drafts, and bills of exchange, and the like in the transaction of the ordinary business of banking, savings and loan, and trust corporations." (As amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)

From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are given the special name "stock dividends" only if they are issued in lieu of undistributed profits. If

shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of "stock dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services is equivalent to property. 14Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation. A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits.15 So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par. 16 When a corporation issues stock dividends, it shows that the corporation's accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution. 17 Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder remains the same. 18 If a stockholder is deprived of his stock dividends and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder then the proportion of the stockholder's interest changes

radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. 19 The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division among the holders of the capital stock. It means the fund actually set aside, and declared by the directors of the corporation as a dividends, and duly ordered by the director, or by the stockholders at a corporate meeting, to be divided or distributed among the stockholders according to their respective interests. 20 It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can not be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record. We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and Nielson regarding the application and interpretation of certain provisions of the original contract particularly with regard to the 10% participation of Nielson in the net profits, so that some adjustments had to be made. In the minutes of the meeting of the Board of Directors of Lepanto on August 21, 1940, We read the following:
"The Chairman stated that he believed that it would be better to tie the

computation of the 10% participation ofNielson & Company, Inc. to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared. In addition to the
dividend, we have been setting up a depletion reserve and it does not seem fair to burden the 10% participation of Nielson with the depletion reserve, as the depletion reserve should not be considered as an operating expense. After a prolonged discussion, upon motion duly made and seconded, it was "RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937, effective

January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any dividends declared and paid, when and as paid during the period of the contract and at the end of each year, 10% of any depletion reserve that may be set up and 10% of any amount expended during the year out of surplus earnings for capital account." (Emphasis supplied.)

From the sentence, "The Chairman stated that he believed that it would be better to tie the computation of the 10% participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to definitely compute its net participation by the amount of the dividends declared" the idea is conveyed that the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make the value of the dividends declared whether the dividends were in cash or in stock as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the dividends so declared. It does not mean, however, that the compensation of Nielson would be taken from the amount actually declared as cash dividend to be distributed to the stockholder, nor from the shares of stocks to be issued to the stockholders as stock dividends, but from the other assets or funds of the corporation which are not burdened by the dividends thus declared. In other words, if, for example, cash dividends of P300,000.00 are declared. Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00 should not be taken from the P300,000.00 to be distributed as cash dividends to the stockholders but from some other funds or assets of the corporation which are not included in the amount to answer for the cash dividends thus declared. This is so because if the P30,000.00 would be taken out from the P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00 as dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to each share of stock held by the stockholders. Similarly, if there were stock dividends worth one million pesos that were declared, which means an issuance of ten million shares at the par value of ten centavos per share, it does not mean that Nielson would be given 100,000 shares. It only means that Nielson should be given the equivalent of 10% of the aggregate cash value of those shares issued as stock dividends. That this was the understanding of Nielson itself is borne out by the fact that in its appeal brief Nielson urged that it should be paid P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on November 28, 1949 and August 20, 1950 . . ." 21 We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares of stock worth P300,000.00 based on the stock dividends

declared on November 28, 1949 and on August 20, 1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is entitled to payment by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money value of the stock dividends worth P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950, with interest thereon at the rate of 6% from February 6, 1958.

6.In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not be ascertained and executed without further litigation. In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock dividends in payment of its compensation under the management contract, We do not consider it necessary to discuss this ground of the motion for reconsideration. The awards in the present case are all reduced to specific sums of money. 7.In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in rendering judgment or attorney's fees. The matter of the award of attorney's fees is within the sound discretion of this Court. In Our decision We have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court as reasonable. Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense that instead of awardingNielson shares of stock worth P300,000.00 at the par value of ten centavos (P0.10) per share based on the stock dividends declared by Lepanto on November 28, 1949 and August 20, 1950, together with their fruits, Nielson should be awarded the sum of P300,000.00 which is an amount equivalent to 10% of the cash value of the stock dividends thus declared, as part of the compensation due Nielson under the management contract. The dispositive portion of the decision should, therefore, be amended, to read as follows: IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the different amounts as specified hereinbelow:

(1)Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash dividends of December, 1941, with legal interest thereon from the date of the filing of the complaint; (2)Two thousand five hundred pesos (P2,500.00), as management fee for January, 1942, with legal interest thereon from the date of the filing of the complaint; (3)One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-month period of extension of the management contract, with legal interest thereon from the date of the filing of the complaint; (4)One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash dividends declared during the period of extension of the management contract, with legal interest thereon from the date of the filing of the complaint; (5)Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the stock dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon from the date of the filing of the complaint; (6)Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88), equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest thereon from the date of the filing of the complaint; (7)Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos (P694,364.76), equivalent to 10% of the expenses for capital account during the period of extension, with legal interest thereon from the date of the filing of the complaint; (8)Fifty thousand pesos (P50,000.00) as attorney's fees; and (9)The costs. It is so ordered..

Concepcion, C . J ., Reyes, J.B.L., Dizon, Makalintal, Sanchez and Ruiz Castro, JJ ., concur. Fernando, Capistrano, Teehankee and Barredo, JJ ., did not take part.

Footnotes
36.

FIRST DIVISION
[G.R. No. 160215. November 10, 2004.] HYDRO RESOURCES CONTRACTORS CORPORATION, petitioner, vs. NATIONAL IRRIGATION ADMINISTRATION, respondent. DECISION YNARES-SANTIAGO, J :
p

Challenged in this petition for review on certiorari under Rule 45 is the Decision of the Court of Appeals 1 dated October 29, 2002 and its Resolution dated September 24, 2003 2 in CA-G.R. SP No. 44527, 3 reversing the judgment of the Construction Industry Arbitration Commission (CIAC) dated June 10, 1997 4 in CIAC Case No. 14-98 in favor of petitioner Hydro Resources Contractors Corporation. The facts are undisputed and are matters of record. In a competitive bidding conducted by the National Irrigation Administration (NIA) sometime in August 1978, Hydro Resources Contractors Corporation (Hydro) was awarded Contract MPI-C-2 5 involving the main civil work of the Magat River Multi-Purpose Project. The contract price for the work was pegged at P1,489,146,473.72 with the peso component thereof amounting to P1,041,884,766.99 and the US$ component valued at $60,657,992.37 at the exchange rate of P7.3735 to the dollar or P447,361,706.73. On November 6, 1978, the parties signed Amendment No. 1 6 of the contract whereby NIA agreed to increase the foreign currency allocation for equipment financing from US$28,000,000.00 for the first and second years of the contract to US$38,000,000.00, to be made available in full during the first year of the

contract to enable the contractor to purchase the needed equipment and spare parts, as approved by NIA, for the construction of the project. On April 9, 1980, the parties entered into a Memorandum of Agreement 7 (MOA) whereby they agreed that Hydro may directly avail of the foreign currency component of the contract for the sole purpose of purchasing necessary spare parts and equipment for the project. This was made in order for the contractor to avoid further delays in the procurement of the said spare parts and equipment. A few months after the MOA was signed, NIA and Hydro entered into a Supplemental Memorandum of Agreement (Supplemental MOA) to include among the items to be financed out of the foreign currency portion of the Contract "construction materials, supplies and services as well as equipment and materials for incorporation in the permanent works of the Project." 8 Work on the project progressed steadily until Hydro substantially completed the project in 1982 and the final acceptance was made by NIA on February 14, 1984. 9 During the period of the execution of the contract, the foreign exchange value of the peso against the US dollar declined and steadily deteriorated. Whenever Hydro's availment of the foreign currency component exceeded the amount of the foreign currency payable to Hydro for a particular period, NIA charged interest in dollars based on the prevailing exchange rate instead of the fixed exchange rate of P7.3735 to the dollar. Yet when Hydro received payments from NIA in Philippine Pesos, NIA made deductions from Hydro's foreign currency component at the fixed exchange rate of P7.3735 to US$1.00 instead of the prevailing exchange rate.
AEHTIC

Upon completion of the project, a final reconciliation of the total entitlement of Hydro to the foreign currency component of the contract was made. The result of this final reconciliation showed that the total entitlement of Hydro to the foreign currency component of the contract exceeded the amount of US dollars required by Hydro to repay the advances made by NIA for its account in the importation of new equipment, spare parts and tools. Hydro then requested a full and final payment due to the underpayment of the foreign exchange portion caused by price escalations and extra work orders. In 1983, NIA and Hydro prepared a joint computation denominated as the "MPI-C-2 Dollar Rate Differential on Foreign Component of Escalation." 10Based on said joint computation, Hydro was still entitled to a foreign exchange differential of US$1,353,771.79 equivalent to P10,898,391.17.

Hydro then presented its claim for said foreign exchange differential to NIA on August 12, 1983 11 but the latter refused to honor the same. Hydro made several 12 demands to recover its claim until the same was turned down with finality by then NIA Administrator Federico N. Alday, Jr. on January 6, 1987. 13 On December 7, 1994, Hydro filed a request for arbitration with the Construction Industry Arbitration Commission (CIAC). 14 In the said request, Hydro nominated six (6) arbitrators. The case was docketed as CIAC Case No. 18-94. NIA filed its Answer with Compulsory Counterclaim 15 raising laches, estoppel and lack of jurisdiction by CIAC as its special defenses. NIA also submitted its six (6) nominees to the panel of arbitrators. After appointment of the arbitrators, both parties agreed on the Terms of Reference 16 as well as the issues submitted for arbitration. On March 13, 1995, NIA filed a Motion to Dismiss 17 questioning CIAC's jurisdiction to take cognizance of the case. The latter, however, deferred resolution of the motion and set the case for hearing for the reception of evidence. 18 NIA moved 19 for reconsideration but the same was denied by CIAC in an Order dated April 25, 1995. 20 Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of Appeals where the same was docketed as CA-G.R. SP No. 37180, 21 which dismissed the petition in a Resolution dated June 28, 1996. 22 NIA challenged the resolution of the Court of Appeals before this Court in a special civil action for certiorari, docketed as G.R. No. 129169. 23 Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of Hydro. 24 NIA filed a Petition for Review on Appeal before the Court of Appeals, which was docketed as CA-G.R. SP No. 44527. 25 During the pendency of CA-G.R. SP No. 44527 before the Court of Appeals, this Court dismissed special civil action for certioraridocketed as G.R. No. 129169 on the ground that CIAC had jurisdiction over the dispute and directed the Court of Appeals to proceed with reasonable dispatch in the disposition of CA-G.R. SP No. 44527. NIA did not move for reconsideration of the said decision, hence, the same became final and executory on December 15, 1999. 26 Thereafter, the Court of Appeals rendered the challenged decision in CA-G.R. SP No. 44527, reversing the judgment of the CIAC on the grounds that: (1) Hydro's

claim has prescribed; (2) assuming that Hydro was entitled to its claim, the rate of exchange should be based on a fixed rate; (3) Hydro's claim is contrary to R.A. No. 529; 27 (4) NIA's Certification of Non-Forum-Shopping was proper even if the same was signed only by counsel and not by NIA's authorized representative; and (5) NIA did not engage in forum-shopping. Hydro's Motion for Reconsideration was denied in Resolution of September 24, 2003. Hence, this petition. Addressing first the issue of prescription, the Court of Appeals, in ruling that Hydro's claim had prescribed, reasoned thus:
Nevertheless, We find good reason to apply the principle of prescription against HRCC. It is well to note that Section 25 of the General Conditions of the subject contract provides (CIAC Decision, p. 15, Rollo, p. 57): Any controversy or dispute arising out of or relating to this Contract which cannot be resolved by mutual agreement shall be decided by the Administrator within thirty (30) calendar days from receipt of a written notice from Contractor and who shall furnish Contractor a written copy of this decision. Such decision shall be

final and conclusive unless within thirty (30) calendar days from the date of receipt thereof, Contractor shall deliver to NIA a written notice addressed to the Administrator that he desires that the dispute be submitted to arbitration. Pending decision from arbitration, Contractor shall proceed diligently with the performance of the Contract and in accordance with the decision of the Administrator. (Emphasis and Italics Ours)
Both parties admit the existence of this provision in the Contract (Petition, p. 4; Comment, p. 16; Rollo, pp. 12 and 131). Apropos, the following matters are clear: (1) any controversy or dispute between the parties arising from the subject contract shall be governed by the provisions of the contract; (2) upon the failure to arrive at a mutual agreement, the contractor shall submit the dispute to the Administrator of NIA for determination; and (3) the decision of the Administrator shall become final and conclusive, unless within thirty (30) calendar days from the date of receipt thereof, the Contractor shall deliver to NIA a written notice addressed to the Administrator that he desires that the dispute be submitted for arbitration.
cHCIDE

Prescinding from the foregoing matters, We find that the CIAC erred in granting HRCC's claim considering that the latter's right to make such demand had clearly prescribed. To begin with, on January 7, 1986, Cesar L. Tech (NIA's Administrator at the time) informed HRCC in writing that after a review of the additional points raised by the latter, NIA confirms its original recommendation not to allow the said claim (Annex "F"; Rollo, p. 81; CIAC Decision, p. 11; Rollo, p. 53). This should have propelled private respondent to notify and signify to NIA of intention to submit the dispute to arbitration pursuant to the provision of the contract. Yet, it did not. Instead it persisted to send several letters to NIA reiterating the reason for its rejected claim (CIAC Decision, p. 11; Rollo, p. 53). 28

We disagree for the following reasons:

First, the appellate court clearly overlooked the fact that NIA, through then

Administrator Federico N. Alday, Jr., denied "with finality" Hydro's claim only on January 6, 1987 in a letter bearing the same date 29 which reads:

This refers to your letter dated November 7, 1986 requesting reconsideration on your claim for payment of the Dollar Rate Differential of Price Escalation in Contract No. MPI-C-2.

We have reviewed the relevant facts and issues as presented and the additional points raised in the abovementioned letter in the context of the Contract Documents and we find no strong and valid reason to reverse the earlier decision of NIA's previous management denying your claim. Therefore, we regret that we have to reiterate the earlier official
stand of NIA under its letter dated January 7, 1986, that confirms the original recommendation which had earlier been presented in our 4th Indorsement dated February 5, 1985 to your office. In view hereof, we regret to say with finality that the claim cannot be given favorable consideration. (Emphasis and italics supplied)

Hydro received the above-mentioned letter on January 27, 1987. 30 Pursuant to Section 25 of the Contract's General Conditions (GC-25), Hydro had thirty (30) days from receipt of said denial, or until February 26, 1987, within which to notify NIA of its desire to submit the dispute to arbitration.

On February 18, 1987, Hydro sent a letter 31 to NIA, addressed to then NIA Administrator Federico N. Alday, Jr., manifesting its desire to submit the dispute to arbitration. The letter was received by NIA on February 19, 1987, which was within the thirty-day prescriptive period. Moreover, a circumspect scrutiny of the wording of GC-25 with regard to the thirty-day prescriptive period shows that said proviso is intended to apply to disputes which arose during the actual construction of the project and not for controversies which occurred after the project is completed. The rationale for such a stipulation was aptly explained thus by the CIAC in its Decision in CIAC Case No. 18-94:
In construction contracts, there is invariably a provision for interim settlement of disputes. The right to settle disputes is given to the owner or his representative, either an architect or engineer, designated as "owner's representative," only for the purpose of avoiding delay in the completion of the project. In this particular contract, that right was reserved to the NIA Administrator. The types of disputes contemplated were those which may have otherwise affected the progress of the work. It is very clear that this is the purpose of the limiting periods in this clause that the dispute shall be resolved by the Administrator within 30 days from receipt of a written notice from the Contractor and that the Contractor may submit to arbitration this dispute if it does not agree with the decision of the Administrator, and "Pending decision from arbitration, Contractor shall proceed diligently with the performance of the Contract and in accordance with the decision of the Administrator." In this case, the dispute had arisen after completion of the Project. The reason for the 30-day limitation no longer applies, and we find no legal basis for applying it. Moreover, in Exhibit "B," NIA Administrator Cesar L. Tech had, instead of rendering an adverse decision, by signing the document with HRCC's Onofre B. Banson, implicitly approved the payment of the foreign exchange differential, but this payment could not be made because of the opinion of Auditor Saldua and later of the Commission on Audit. 32

Second, as early as April 1983, Hydro and NIA, through its Administrator Cesar L.
Tech, prepared the Joint Computation which shows that Hydro is entitled to the foreign currency differential. 33 As correctly found by the CIAC, this computation constitutes a written acknowledgment of the debt by the debtor under Article 1155 of the Civil Code, which states:

ART. 1155.The prescription of actions is interrupted when they are filed before the court, when there is a written extrajudicial demand by the creditors, and when there is any written acknowledgment of the debt by the debtor. (Emphasis and italics supplied)
aDSIHc

Instead of upholding the CIAC's findings on this point, the Court of Appeals ruled that Cesar L. Tech's act of signing the Joint Computation was an ultra vices act. This again is patent error. It must be noted that the Administrator is the highest officer of the NIA. Furthermore, Hydro has been dealing with NIA through its Administrator in all of its transactions with respect to the contract and subsequently the foreign currency differential claim. The NIA Administrator is empowered by the Contract to grant or deny foreign currency differential claims. It would be preposterous for the NIA Administrator to have the power of granting claims without the authority to verify the computation of such claims. Finally, the records of the case will show that NIA itselfnever disputed its Administrator's capacity to sign the Joint Computation because it knew that the Administrator, in fact, had such capacity. Even assuming for the sake of argument that the Administrator had no authority to bind NIA, the latter is already estopped after repeatedly representing to Hydro that the Administrator had such authority. A corporation may be held in estoppel from denying as against third persons the authority of its officers or agents who have been clothed by it with ostensible or apparent authority. 34 Indeed
. . . The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of, his actual authority if he acts within the scope of an apparent authority with which the corporation has clothed him by holding him out or permitting him to appear as having such authority, the corporation is bound thereby in favor of a person who deals with him in good faith in reliance on such apparent authority, as where an officer is allowed to exercise a particular authority with respect to the business, or a particular branch of it, continuously and publicly, for a considerable time.". . . 35

Third, NIA has clearly waived the prescriptive period when it continued to

entertain Hydro's claim regarding new matters raised by the latter in its letters to NIA and then issuing rulings thereon. In this regard, Article 1112 of the Civil Code provides that:
ART. 1112.Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future.

Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. (Emphasis and italics supplied)

Certainly, when a party has renounced a right acquired by prescription through its actions, it can no longer claim prescription as a defense. 36

Fourth, even assuming that NIA did not waive the thirty-day prescriptive period,
it clearly waived the effects of such period when it actively participated in arbitration proceedings through the following acts:
a)On January 6, 1995, NIA voluntarily filed its written appearance, readily submitted its Answer and asserted its own Counterclaims; b)In the Compliance which accompanied the Answer, NIA also submitted its six nominees to the Arbitral Tribunal to be constituted, among of which one was eventually appointed to the tribunal; c)NIA also actively participated in the deliberations for and the formulation of the Terms of Reference during the preliminary conference set by CIAC; and d)For the purpose of obviating the introduction of testimonial evidence on the authenticity and due execution of its documentary evidence, NIA even had examined, upon prior request to Hydro, all of the documents which the latter intended to present as evidentiary exhibits for the said arbitration case.

We now come to the issue of whether or not the provisions of R.A. No. 529, otherwise known as an Act To Assure Uniform Value to Philippine Coin And Currency, is applicable to Hydro's claim. The Contract between NIA and Hydro is an internationally tendered contract considering that it was funded by the International Bank for Reconstruction and Development (IBRD). As a contract funded by an international organization, particularly one recognized by the Philippines, 37 the contract is exempt from the provisions of R.A. No. 529. R.A. No. 4100 amended the provisions of R.A. 529 thus:
SECTION 1.Section one of Republic Act Numbered Five hundred and twenty-nine, entitled "An Act to Assure Uniform Value of Philippine Coin and Currency," is hereby amended to read as follows:

Sec. 1.Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provisions purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not

apply to (a) transactions where the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the funds are identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high-priority

economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transaction entered into between banks or between banks and individuals or juridical persons; (d) importexport and other international banking, financial investment and industrial transactions. With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provisions, in which bases the terms of the parties' agreement shall apply, every other domestic obligation heretofore or hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore and hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private.
ACETSa

SECTION 2.This Act shall take effect upon its approval. (Emphasis and italics supplied)

Even assuming ex gratia argumenti that R.A. No. 529 is applicable, it is still erroneous for the Court of Appeals to deny Hydro's claim because Section 1 of R.A. No. 529 states that only the stipulation requiring payment in foreign currency is void, but not theobligation to make payment. This can be gleaned from the provision that "every other domestic obligation heretofore or hereafter incurred" shall be "discharged upon payment in any coin and currency which at the time is legal tender for public and private debts." In Republic Resources and Development Corporation v. Court of Appeals, 38 it was held:
. . . it is clear from Section 1 of R.A. No. 529 that what is declared null and void is the "provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby" and not the contract or agreement which contains such proscribed provision. (Emphasis supplied)

More succinctly, we held in San Buenaventura v. Court of Appeals

39

that

It is to be noted under the foregoing provision that while an agreement to pay an obligation in a currency other than Philippine currency is null and void as contrary to public policy, what the law specifically prohibits

is payment in currency other than legal tender but does not defeat a creditor's claim for payment. A contrary rule would allow a person to
profit or enrich himself inequitably at another's expense. (Emphasis supplied)

It is thus erroneous for the Court of Appeals to disallow petitioner's claim for foreign currency differential because NIA's obligation should be converted to Philippine Pesos which was legal tender at the time. 40 The next issue to be resolved is whether or not Hydro's claim should be computed at the fixed rate of exchange. When the MOA 41 and the Supplemental MOA 42 were in effect, there were instances when the foreign currency availed of by Hydro exceeded the foreign currency payable to it for that particular Progress Payment. In instances like these, NIA actually charged Hydro interest in foreign currency computed at the prevailing exchange rate and not at the fixed rate. NIA now insists that the

exchange rate should be computed according to the fixed rate and not the escalating rate it actually charged Hydro. Suffice it to state that this flip-flopping stance of NIA of adopting and discarding positions to suit its convenience cannot be countenanced. A person who, by his deed or conduct has induced another to act in a particular manner, is barred from adopting an inconsistent position, attitude or course of conduct that thereby causes loss or injury to another. 43 Indeed, the application of the principle of estoppel is proper and timely in heading off NIA's efforts at renouncing its previous acts to the prejudice of Hydro which had dealt with it honestly and in good faith.
. . . A principle of equity and natural justice, this is expressly adopted under Article 1431 of the Civil Code, and pronounced as one of the conclusive presumptions under Rule 131, Section 3(a) of the Rules of Court, as follows: Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led another to believe a particular thing to be true, and to act upon such a belief he cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify it.
aTcIAS

Petitioner, having performed affirmative acts upon which the respondents based their subsequent actions, cannot thereafter refute his acts or renege on the effects of the same, to the prejudice of the latter. To allow him to do so would be tantamount to conferring upon him the liberty to limit his liability at his whim and caprice, which is against the very principles of equity and natural justice. . . . 44

NIA is, therefore, estopped from invoking the contractual stipulation providing for the fixed rate to justify a lower computation than that claimed by Hydro. It cannot be allowed to hide behind the very provision which it itself continuously violated. 45 An admission or representation is rendered conclusive upon the person making it and cannot be denied nor disproved as against the person relying thereon. 46 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 47 NIA was guilty of forum-shopping. Forum-shopping refers to the act of availing oneself of several judicial remedies in different courts, either simultaneously or successively, substantially founded on the same transaction and identical

material facts and circumstances, raising basically the like issues either pending in, or already resolved by, some other court. 48 It has been characterized as an act of malpractice that is prohibited and condemned as trifling with the courts and abusing their processes. It constitutes improper conduct which tends to degrade the administration of justice. It has also been described as deplorable because it adds to the congestion of the heavily burdened dockets of the courts. 49 The test in determining the presence of this pernicious practice is whether in the two or more cases pending, there is identity of: (a) parties; (b) rights or causes of action; and (c) reliefs sought. 50 Applying the foregoing yardstick to the instant case, it is clear that NIA violated the prohibition against forum-shopping. Besides filing CA-G.R. SP No. 44527 wherein the Court of Appeals' decision is the subject of appeal in this proceeding, NIA previously filed CA-G.R. SP No. 37180 and G.R. No. 129169 which is a special civil action for certiorari. In all three cases, the parties are invariably Hydro and NIA. In all three petitions, NIA raised practically the same issues 51 and in all of them, NIA's prayer was the same: to nullify the proceedings commenced at the CIAC. It must be pointed out in this regard that the first two petitions namely, CA-G.R. SP No. 37180 and G.R. No. 129169 are bothoriginal actions. Since NIA failed to file a petition for review on certiorari under Rule 45 of the Rules of Court challenging the decision of the appellate court in CA-G.R. SP No. 37180 dismissing its petition, it opted to file an original action for certiorariunder Rule 65 with this Court where the same was docketed as G.R. No. 129169. For its failure to appeal the judgments in CA-G.R. SP No. 37180 and G.R. No. 129169, NIA is necessarily bound by the effects of those decisions. The filing of CA-G.R. SP No. 44527, which raises the issues already passed upon in both cases is a clear case of forum-shopping which merits outright dismissal. The issue of whether or not the Certification of Non-Forum Shopping is valid despite that it was signed by NIA's counsel must be answered in the negative. Applicable is the ruling in Mariveles Shipyard Corp. v. Court of Appeals, et al.: 52
It is settled that the requirement in the Rules that the certification of non-forum shopping should be executed and signed by the plaintiff or the principal means that counsel cannot sign said certification unless clothed with special authority to do so. The reason for this is that the

plaintiff or principal knows better than anyone else whether a petition has previously been filed involving the same case or substantially the same issues. Hence, a certification signed by counsel alone is defective

and constitutes a valid cause for dismissal of the petition. In the case of
natural persons, the Rule requires the parties themselves to sign the certificate of non-forum shopping. However, in the case of the

corporations, the physical act of signing may be performed, on behalf of the corporate entity, only by specifically authorized individuals for the
simple reason that corporations, as artificial persons, cannot personally do the task themselves. . . . It cannot be gainsaid that obedience to the

requirements of procedural rule[s] is needed if we are to expect fair results therefrom. Utter disregard of the rules cannot justly be rationalized by harking on the policy of liberal construction. (Emphasis
and italics supplied)
HASDcC

In this connection, the lawyer must be "specifically authorized" in order to validly sign the certification. 53 In closing, we restate the rule that the courts will not interfere in matters which are addressed to the sound discretion of government agencies entrusted with the regulation of activities coming under the special technical knowledge and training of such agencies. 54 An action by an administrative agency may be set aside by the judicial department only if there is an error of law, abuse of power, lack of jurisdiction or grave abuse of discretion clearly conflicting with the letter and spirit of the law. 55 In the case at bar, there is no cogent reason to depart from the general rule because the action of the CIAC conforms rather than conflicts with the governing statutes and controlling case law on the matter. WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 44527 dated October 29, 2002 and the Resolution dated September 24, 2003 are REVERSED aid SET ASIDE. The Decision of the Construction Industry Arbitration Commission dated June 10, 1997 in CIAC Case No. 18-94 is REINSTATED. SO ORDERED.

Davide, Jr., C .J ., Quisumbing, Carpio and Azcuna, JJ ., concur.

Footnotes
37.

SECOND DIVISION
[G.R. No. 126006. January 29, 2004.] LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, petitioners, vs. COURT OF APPEALS (Seventeenth Division) and ALLIED BANKING CORP., respondents. DECISION CALLEJO, SR., J :
p

Before the Court is the petition for review on certiorari filed by the Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and set aside the Decision 1 dated June 26, 1996 of the Court of Appeals (CA) in CA-G.R. CV No. 37162 ordering the petitioners, jointly and solidarily, to pay the respondent Allied Banking Corporation the amount of P493,566.61 plus interests and other charges. Likewise, sought to be reversed and set aside is the appellate court's Resolution dated August 19, 1996 denying the petitioners' motion for reconsideration. The case stemmed from the following facts: Sometime in 1977, petitioner Elias Q. Tan, then President of the co-petitioner Lapulapu Foundation, Inc., obtained four loans from the respondent Allied Banking Corporation covered by four promissory notes in the amounts of P100,000 each. The details of the promissory notes are as follows:
P/N No.Date of P/NMaturity DateAmount as of 1/23/79 BD No. 504Nov. 7, 1977Feb. 5, 1978P123,377.76 BD No. 621Nov. 28, 1977Mar. 28, 1978P123,411.10 BD No. 716Dec. 12, 1977Apr. 11, 1978P122,322.21 BD No. 839Jan. 5, 1978May 5, 1978P120,455.54 2

As of January 23, 1979, the entire obligation amounted to P493,566.61 and despite demands made on them by the respondent Bank, the petitioners failed to

pay the same. The respondent Bank was constrained to file with the Regional Trial Court of Cebu City, Branch 15, a complaint seeking payment by the petitioners, jointly and solidarily, of the sum of P493,566.61 representing their loan obligation, exclusive of interests, penalty charges, attorney's fees and costs. In its answer to the complaint, the petitioner Foundation denied incurring indebtedness from the respondent Bank alleging that the loans were obtained by petitioner Tan in his personal capacity, for his own use and benefit and on the strength of the personal information he furnished the respondent Bank. The petitioner Foundation maintained that it never authorized petitioner Tan to cosign in his capacity as its President any promissory note and that the respondent Bank fully knew that the loans contracted were made in petitioner Tan's personal capacity and for his own use and that the petitioner Foundation never benefited, directly or indirectly therefrom. The petitioner Foundation then interposed a cross-claim against petitioner Tan alleging that he, having exceeded his authority, should be solely liable for said loans, and a counterclaim against the respondent Bank for damages and attorney's fees. For his part, petitioner Tan admitted that he contracted the loans from the respondent Bank in his personal capacity. The parties, however, agreed that the loans were to be paid from the proceeds of petitioner Tan's shares of common stocks in the Lapulapu Industries Corporation, a real estate firm. The loans were covered by promissory notes which were automatically renewable ("rolled-over") every year at an amount including unpaid interests, until such time as petitioner Tan was able to pay the same from the proceeds of his aforesaid shares. According to petitioner Tan, the respondent Bank's employee required him to affix two signatures on every promissory note, assuring him that the loan documents would be filled out in accordance with their agreement. However, after he signed and delivered the loan documents to the respondent Bank, these were filled out in a manner not in accord with their agreement, such that the petitioner Foundation was included as party thereto. Further, prior to its filing of the complaint, the respondent Bank made no demand on him. After due trial, the court a quo rendered judgment the dispositive portion of which reads:
WHEREFORE, in view of the foregoing evidences [sic], arguments and considerations, this court hereby finds the preponderance of evidence in favor of the plaintiff and hereby renders judgment as follows:

"1.Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc. [the petitioners herein] to pay jointly and solidarily to the plaintiff Allied Banking Corporation [the respondent herein] the amount of P493,566.61 as principal obligation for the four promissory notes, including all other charges included in the same, with interest at 14% per annum, computed from January 24, 1979, until the same are fully paid, plus 2% service charges and 1% monthly penalty charges. "2.Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay jointly and solidarily, attorney's fees in the equivalent amount of 25% of the total amount due from the defendants on the promissory notes, including all charges; "3.Requiring the defendants Elias Q. Tan and Lapulapu Foundation, Inc., to pay jointly and solidarily litigation expenses of P1,000.00 plus costs of the suit." 3

On appeal, the CA affirmed with modification the judgment of the court a quo by deleting the award of attorney's fees in favor of the respondent Bank for being without basis. The appellate court disbelieved petitioner Tan's claim that the loans were his personal loans as the promissory notes evidencing them showed upon their faces that these were obligations of the petitioner Foundation, as contracted by petitioner Tan himself in his "official and personal character." Applying the parol evidence rule, the CA likewise rejected petitioner Tan's assertion that there was an unwritten agreement between him and the respondent Bank that he would pay the loans from the proceeds of his shares of stocks in the Lapulapu Industries Corp. Further, the CA found that demand had been made by the respondent Bank on the petitioners prior to the filing of the complainta quo. It noted that the two letters of demand dated January 3, 1979 4 and January 30, 1979 5 asking settlement of the obligation were sent by the respondent Bank. These were received by the petitioners as shown by the registry return cards 6presented during trial in the court a quo. Finally, like the court a quo, the CA applied the doctrine of piercing the veil of corporate entity in holding the petitioners jointly and solidarily liable. The evidence showed that petitioner Tan had represented himself as the President of the petitioner Foundation, opened savings and current accounts in its behalf, and

signed the loan documents for and in behalf of the latter. The CA, likewise, found that the petitioner Foundation had allowed petitioner Tan to act as though he had the authority to contract the loans in its behalf. On the other hand, petitioner Tan could not escape liability as he had used the petitioner Foundation for his benefit. Aggrieved, the petitioners now come to the Court alleging that: I.THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE LOANS SUBJECT MATTER OF THE INSTANT PETITION ARE ALREADY DUE AND DEMANDABLE DESPITE ABSENCE OF PRIOR DEMAND. II.THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE PAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT AND SOLIDARY LIABILITY ON THE PART OF PETITIONERS ELIAS Q. TAN AND LAPULAPU FOUNDATION, INC. 7 The petitioners assail the appellate court's finding that the loans had become due and demandable in view of the two demand letters sent to them by the respondent Bank. The petitioners insist that there was no prior demand as they vigorously deny receiving those letters. According to petitioner Tan, the signatures on the registry return cards were not his. The petitioners' denial of receipt of the demand letters was rightfully given scant consideration by the CA as it held:
Exhibits "R" and "S" are two letters of demand, respectively dated January 3, 1979 and January 30, 1979, asking settlement of the obligations covered by the promissory notes. The first letter was written by Ben Tio Peng Seng, Vice-President of the bank, and addressed to Lapulapu Foundation, Inc., attention of Mr. Elias Q. Tan, President, while the second was a final demand written by the appellee's counsel, addressed to both defendants-appellants, and giving them five (5) days from receipt within which to settle or judicial action would be instituted against them. Both letters were duly received by the defendants, as shown by the registry return cards, marked as Exhibits "R-2" and "S-1," respectively. The allegation of Tan that he does not know who signed the said registry return receipts merits scant consideration, for there is no showing that the addresses thereon were wrong. Hence, the disputable presumption "that a letter duly directed and mailed was

received in the regular course of mail" (per par. V, Section 3, Rule 131 of the Revised Rules on Evidence) still holds. 8

There is no dispute that the promissory notes had already matured. However, the petitioners insist that the loans had not become due and demandable as they deny receipt of the respondent Bank's demand letters. When presented the registry return cards during the trial, petitioner Tan claimed that he did not recognize the signatures thereon. The petitioners' allegation and denial are selfserving. They cannot prevail over the registry return cards which constitute documentary evidence and which enjoy the presumption that, absent clear and convincing evidence to the contrary, these were regularly issued by the postal officials in the performance of their official duty and that they acted in good faith. 9 Further, as the CA correctly opined, mails are presumed to have been properly delivered and received by the addressee "in the regular course of the mail." 10 As the CA noted, there is no showing that the addresses on the registry return cards were wrong. It is the petitioners' burden to overcome the presumptions by sufficient evidence, and other than their barefaced denial, the petitioners failed to support their claim that they did not receive the demand letters; therefore, no prior demand was made on them by the respondent Bank.

Having established that the loans had become due and demandable, the Court shall now resolve the issue of whether the CA correctly held the petitioners jointly and solidarily liable therefor. In disclaiming any liability for the loans, the petitioner Foundation maintains that these were contracted by petitioner Tan in his personal capacity and that it did not benefit therefrom. On the other hand, while admitting that the loans were his personal obligation, petitioner Tan avers that he had an unwritten agreement with the respondent Bank that these loans would be renewed on a year-to-year basis and paid from the proceeds of his shares of stock in the Lapulapu Industries Corp. These contentions are untenable. The Court particularly finds as incredulous petitioner Tan's allegation that he was made to sign blank loan documents and that the phrase "IN MY OFFICIAL/PERSONAL CAPACITY" was superimposed by the respondent Bank's employee despite petitioner Tan's protestation. The Court is hard pressed to

believe that a businessman of petitioner Tan's stature could have been so careless as to sign blank loan documents. In contrast, as found by the CA, the promissory notes 11 clearly showed upon their faces that they are the obligation of the petitioner Foundation, as contracted by petitioner Tan "in his official and personal capacity." 12 Moreover, the application for credit accommodation, 13 the signature cards of the two accounts in the name of petitioner Foundation, 14 as well as New Current Account Record, 15 all accompanying the promissory notes, were signed by petitioner Tan for and in the name of the petitioner Foundation. 16 These documentary evidence unequivocally and categorically establish that the loans were solidarily contracted by the petitioner Foundation and petitioner Tan. As a corollary, the parol evidence rule likewise constrains this Court to reject petitioner Tan's claim regarding the purported unwritten agreement between him and the respondent Bank on the payment of the obligation. Section 9, Rule 130 of the of the Revised Rules of Court provides that "[w]hen the terms of an agreement have been reduced to writing, it is to be considered as containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms other than the contents of the written agreement." 17 In this case, the promissory notes are the law between the petitioners and the respondent Bank. These promissory notes contained maturity dates as follows: February 5, 1978, March 28, 1978, April 11, 1978 and May 5, 1978, respectively. That these notes were to be paid on these dates is clear and explicit. Nowhere was it stated therein that they would be renewed on a year-to-year basis or "rolled-over" annually until paid from the proceeds of petitioner Tan's shares in the Lapulapu Industries Corp. Accordingly, this purported unwritten agreement could not be made to vary or contradict the terms and conditions in the promissory notes. Evidence of a prior or contemporaneous verbal agreement is generally not admissible to vary, contradict or defeat the operation of a valid contract. 18 While parol evidence is admissible to explain the meaning of written contracts, it cannot serve the purpose of incorporating into the contract additional contemporaneous conditions which are not mentioned at all in writing, unless there has been fraud or mistake. 19 No such allegation had been made by the petitioners in this case.

Finally, the appellate court did not err in holding the petitioners jointly and solidarily liable as it applied the doctrine of piercing the veil of corporate entity. The petitioner Foundation asserts that it has a personality separate and distinct from that of its President, petitioner Tan, and that it cannot be held solidarily liable for the loans of the latter. The Court agrees with the CA that the petitioners cannot hide behind the corporate veil under the following circumstances:
The evidence shows that Tan has been representing himself as the President of Lapulapu Foundation, Inc. He opened a savings account and a current account in the names of the corporation, and signed the application form as well as the necessary specimen signature cards (Exhibits "A," "B" and "C") twice, for himself and for the foundation. He

submitted a notarized Secretary's Certificate (Exhibit "G") from the corporation attesting that he has been authorized inter alia to sign for and in behalf of the Lapulapu Foundation any and all checks, drafts or other orders with respect to the bank; to transact business with the Bank, negotiate loans, agreements, obligations, promissory notes and other commercial documents: and to initially obtain a loan for P100,000.00 from any bank (Exhibits "G-1" and "G-2"). Under these
circumstances, the defendant corporation is liable for the transactions entered into by Tan on its behalf. 20

Per its Secretary's Certificate, the petitioner Foundation had given its President, petitioner Tan, ostensible and apparent authority to inter alia deal with the respondent Bank. Accordingly, the petitioner Foundation is estopped from questioning petitioner Tan's authority to obtain the subject loans from the respondent Bank. It is a familiar doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent's authority. 21 In fine, there is no cogent reason to deviate from the CA's ruling that the petitioners are jointly and solidarily liable for the loans contracted with the respondent Bank.
AEcIaH

WHEREFORE, premises considered, the petition is DENIED and the Decision dated June 26, 1996 and Resolution dated August 19, 1996 of the Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in toto.

SO ORDERED.

Puno, Quisumbing, Austria-Martinez and Tinga, JJ., concur.

Footnotes
38.

SECOND DIVISION
[G.R. No. 117188. August 7, 1997.] LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO, respondents.

Rene A. Diokno for petitioner. Reyno De Vera Tiu Domingo and Santos for private respondents.
SYLLABUS 1.STATUTORY CONSTRUCTION; STATUTE; INTERPRETATION; THE WORD "MUST" IS NOT ALWAYS IMPERATIVE. Ordinarily, the word "must" connotes an imperative act or operates to impose a duty which may be enforced. It is synonymous with "ought" which connotes compulsion or mandatoriness. However, the word "must" in a statute, like, "shall", is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret "shall" as the context or a reasonable construction of the statute in which it is used demands or requires. This is equally true as regards the word "must". Thus, if the language of a statute considered as a whole and with due regard to its nature and object reveals that the legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning.
cdt

2.COMMERCIAL LAW; CORPORATION CODE; SEC. 46 (ADOPTION OF BY-LAWS); BY-LAWS; REQUIREMENT FOR THE ADOPTION THEREOF WITHIN THE PERIOD PROVIDED; NOT MANDATORY. Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum). Section 46 of the Corporation Code reveals the legislative intent to attach a directory, and not mandatory, meaning for the word "must" in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission". It necessarily follows that failure to file the by-laws within any period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus: "In the absence of charter or statutory provisions to the contrary, by-laws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid." As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. 3.ID.; ID.; ID.; EFFECT OF FAILURE TO FILE. Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state: "SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: . . . (1) to suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or

associations, upon any of the grounds provided by law, including the following: . . . Failure to file by-laws within the required period; . . . In the exercise of the foregoing authority and jurisdiction of the Commissions or by a Commissioner or by such there bodies, boards committees and/or any officer as may be created or designated by the Commission for the purpose. The decision, ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings and appeals of cases falling within its jurisdiction. The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court." Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation Code. There is no outright "demise" private of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same. That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the provisions above-quoted supply the law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence.
cdasia

DECISION ROMERO, J :
p

May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as mandated by Section 46 of the Corporation Code, result in its automatic dissolution? This is the issue raised in this petition for review on certiorari of the Decision 1 of the Court of Appeals affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body recognized Loyola Grand Villas

Homeowners Association (LGVHA) as the sole homeowners' association in Loyola Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was owned and developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand Villas Homeowners (North) Association Incorporated (the North Association for brevity) and Loyola Grand Villas Homeowners (South) Association Incorporated (the South Association).
aisadc

LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of the Loyola Grand Villas. It was registered with the Home Financing Corporation, the predecessor of herein respondent HIGC, as the sole homeowners' organization in the said subdivision under Certificate of Registration No. 04-197. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven, himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-laws. Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. 2 'To the officers' consternation, they discovered that there were two other organizations within the subdivision the North Association and the South Association. According to private respondents, a non-resident and Soliven himself, respectively headed these associations. They also discovered that these associations had five (5) registered homeowners each who were also the incorporators, directors and officers thereof. None of the members of the LGVHAI was listed as member of the North Association while three (3) members of LGVHAI were listed as members of the South Association. 3 The North Association was registered with the HIGC on February 13, 1989 under Certificate of Registration No. 04-1160 covering Phases West II, East III, West III and East IV. It submitted its by-laws on December 20, 1988. In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two reasons. First, it did not submit its by-laws within the period required by the Corporation Code and, second, there was non-user of corporate charter because HIGC had not received any report on the association's activities. Apparently, this information resulted in the registration of the South Association with the HIGC on July 27, 1989 covering Phases West I, East I and East II. It filed its by-laws on July 26, 1989. These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They questioned the revocation of LGVHAI's certificate of registration without due notice and hearing and concomitantly prayed for the cancellation of the certificates of registration of the North and South Associations

by reason of the earlier issuance of a certificate of registration in favor of LGVHAI. On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as follows:

"WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola Grand Villas Homeowners Association, Inc., all assets and records of the Association now under his custody and possession."

The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8, 1993, the Board 4dismissed the appeal for lack of merit. Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First, whether or not LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two homeowners' associations may be authorized by the HIGC in one "sprawling subdivision." However, in the Decision of August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of the HIGC Appeals Board. In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private corporation commences to have corporate existence and juridical personality from the date the Securities and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The requirement for the filing of by-laws under Section 46 of the Corporation Code within one month from official notice of the issuance of the certificate of incorporation presupposes that it is already incorporated, although it may file its by-laws with its articles of incorporation. Elucidating on the effect of a delayed filing of by-laws, the Court of Appeals said:

"We also find nothing in the provisions cited by the petitioner, i.e., Sections 46 and 22, Corporation Code, or in any other provision of the Code and other laws which provide or at least imply that failure to file the by-laws results in an automatic dissolution of the corporation. While Section 46, in prescribing that by-laws must be adopted within the period prescribed therein, may be interpreted as a mandatory provision, particularly because of the use of the word 'must,' its meaning cannot be stretched to support the argument that automatic dissolution results from non-compliance. We realize that Section 46 or other provisions of the Corporation Code are silent on the result of the failure to adopt and file the by-laws within the required period. Thus, Section 46 and other related provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A. This section empowers the SEC to suspend or revoke certificates of registration on the grounds listed therein. Among the grounds stated is the failure to file by-laws (see also II Campos: The Corporation Code, 1990 ed., pp. 124-125). Such suspension or revocation, the same section provides, should be made upon proper notice and hearing. Although P.D. 902-A refers to the SEC, the same principles and procedures apply to the public respondent HIGC as it exercises its power to revoke or suspend the certificates of registration or homeowners associations. (Section 2 [a], E.O. 535, series 1979, transferred the powers and authorities of the SEC over homeowners associations to the HIGC.) We also do not agree with the petitioner's interpretation that Section 46, Corporation Code prevails over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the former. There is no basis for such interpretation considering that these two provisions are not inconsistent with each other. They are, in fact, complementary to each other so that one cannot be considered as invalidating the other."

The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been validly revoked, it continued to be the duly registered homeowners' association in the Loyola Grand Villas. More importantly, the South Association did not dispute the fact that LGVHAI had been organized and that, thereafter, it transacted business within the period prescribed by law. On the second issue, the Court of Appeals reiterated its previous ruling 5 that the HIGC has the authority to order the holding of a referendum to determine which of two contending associations should represent the entire community, village or subdivision.

Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole issue for resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect of automatically dissolving the said corporation. Petitioner contends that, since Section 46 uses the word "must" with respect to the filing of by-laws, noncompliance therewith would result in "self-extinction" either due to non-occurrence of a suspensive condition or the occurrence of a resolutory condition ''under the hypothesis that (by) the issuance of the certificate of registration alone the corporate personality is deemed already formed." It asserts that the Corporation Code provides for a "gradation of violations of requirements." Hence, Section 22 mandates that the corporation must be formally organized and should commence transactions within two years from date of incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if the corporation commences operations but becomes continuously inoperative for five years, then it may be suspended or its corporate franchise revoked. Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for sanctions for non-filing of the by-laws. However, it insists that no sanction need be provided "because the mandatory nature of the provision is so clear that there can be no doubt about its being an essential attribute of corporate birth." To petitioner, its submission is buttressed by the facts that the period for compliance is "spelled out distinctly," that the certification of the SEC/HIGC must show that the by-laws are not inconsistent with the Code, and that a copy of the by-laws "has to be attached to the articles of incorporation." Moreover, no sanction is provided for because "in the first place, no corporate identity has been completed." Petitioner asserts that "nonprovision for remedy or sanction is itself the tacit proclamation that noncompliance is fatal and no corporate existence had yet evolved," and therefore, there was "no need to proclaim its demise." 6 In a bid to convince the Court of its arguments, petitioner stresses that:
". . . the word MUST is used in Sec. 46 in its universal literal meaning and corollary human implication its compulsion is integrated in its very essence MUST is always enforceable by the inevitable consequence that is, 'OR ELSE'. The use of the word MUST in Sec. 46 is no exception it means file the by-laws within one month after notice of issuance of certificate of registration OR ELSE. The OR ELSE, though not specified, is inextricably a part of MUST. Do this or if you do not you are 'Kaput'. The importance of the by-laws to corporate

existence compels such meaning for as decreed the by-laws is 'the government' of the corporation. Indeed, how can the corporation do any lawful act as such without by-laws. Surely, no law is intended to create chaos." 7

Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code which itself does not provide sanctions for non-filing of bylaws. For the petitioner, it is "not proper to assess the true meaning of Sec. 46 . . . on an unauthorized provision on such matter contained in the said decree." In their comment on the petition, private respondents counter that the requirement of adoption of by-laws is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement is mandatory or merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private respondents contend that Section 6(I) of that decree provides that non-filing of by-laws is only a ground for suspension or revocation of the certificate of registration of corporations and, therefore, it may not result in automatic dissolution of the corporation. Moreover, the adoption and filing of by-laws is a condition subsequent which does not affect the corporate personality of a corporation like the LGVHAI. This is so because Section 9 of the Corporation Code provides that the corporate existence and juridical personality of a corporation begins from the date the SEC issues a certificate of incorporation under its official seal. Consequently, even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To emphasize the fact the LGVHAI was registered as the sole homeowners' association in the Loyola Grand Villas, private respondents point out that membership in the LGVHAI was an "unconditional restriction in the deeds of sale signed by lot buyers."
cdtai

In its reply to private respondents' comment on the petition, petitioner reiterates its argument that the word "must" in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must first resolve the issue of whether or not the provisions of P.D. No. 902-A prescribing the rules and regulations to implement the Corporation Code can "rise above and change" the substantive provisions of the Code. The pertinent provision of the Corporation Code that is the focal point of controversy in this case states:

"Sec. 46.Adoption of by-laws. Every corporation formed under this Code, must within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission, adopt a code of by-laws for its government not inconsistent with this Code. For the adoption of by-laws by the corporation, the affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members, in the case of non-stock corporations, shall be necessary. The by-laws shall be signed by the stockholders or members voting for them and shall be kept in the principal office of the corporation, subject to inspection of the stockholders or members during office hours; and a copy thereof, shall be filed with the Securities and Exchange Commission which shall be attached to the original articles of incorporation. Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed prior to incorporation; in such case, such by-laws shall be approved and signed by all the incorporators and submitted to the Securities and Exchange Commission, together with the articles of incorporation. In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code. The Securities and Exchange Commission shall not accept for filing the by-laws or any amendment thereto of any bank, banking institution, building and loan association, trust company, insurance company, public utility, educational institution or other special corporations governed by special laws, unless accompanied by a certificate of the appropriate government agency to the effect that such by-laws or amendments are in accordance with law."

As correctly postulated by the petitioner, interpretation of this provision of law begins with the determination of the meaning and import of the word "must" in this section. Ordinarily, the word "must" connotes an imperative act or operates to impose a duty which may be enforced. 9 It is synonymous with "ought" which connotes compulsion or mandatoriness. 10 However, the word "must" in a statute, like "shall," is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the tendency has been to interpret "shall" as the context or a reasonable construction of the statute in which it is used demands or requires. 11 This is equally true as regards the word "must." Thus, if the language of a statute considered as a whole and with due regard to

its nature and object reveals that the legislature intended to use the words "shall" and "must" to be directory, they should be given that meaning. 12 In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are illuminating:
"MR. FUENTEBELLA. Thank you, Mr. Speaker. On page 34, referring to the adoption of by-laws, are we made to understand here, Mr. Speaker, that by-laws must immediately be filed within one month after the issuance? In other words, would this be mandatory or directory in character? MR. MENDOZA. This is mandatory. MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure of the corporation to file these by- laws within one month? MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes the consequences of violations of any provision of this Code. One such consequence is the dissolution of the corporation for its inability, or perhaps, incurring certain penalties. MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by merely failing to file the by-laws within one month. Supposing the corporation was late, say, five days, what would be the mandatory penalty? MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of the corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where a quo warranto action is brought, one takes to account the gravity of the violation committed. If the by-laws were late the filing of the by-laws were late by, perhaps, a day or two, I would suppose that might be a tolerable delay, but if they are delayed over a period of months as is happening now because of the absence of a clear requirement that by-laws must be completed within a specified period of time, the corporation must suffer certain consequences." 13

This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-laws on time was never the intention of the legislature. Moreover, even without resorting to the records of deliberations of the Batasang

Pambansa, the law itself provides the answer to the issue propounded by petitioner. Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima statuli interpretatix est ipsum statutum), 14 Section 46 aforequoted reveals the legislative intent to attach a directory, and not mandatory, meaning for the word ''must" in the first sentence thereof. Note should be taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation. This provision in the same section of the Code rules out mandatory compliance with the requirement of filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the "government" of the corporation but these are subordinate to the articles of incorporation as well as to the Corporation Code and related statutes. 15 There are in fact cases where by-laws are unnecessary to corporate existence or to the valid exercise of corporate powers, thus:
"In the absence of charter or statutory provisions to the contrary, bylaws are not necessary either to the existence of a corporation or to the valid exercise of the powers conferred upon it, certainly in all cases where the charter sufficiently provides for the government of the body; and even where the governing statute in express terms confers upon the corporation the power to adopt by-laws, the failure to exercise the

power will be ascribed to mere nonaction which will not render void any acts of the corporation which would otherwise be valid." 16 (Emphasis
supplied.)

As Fletcher aptly puts it:

"It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws have been adopted the corporation may not be able to act for the purposes of its creation, and that the first and most important duty of the members is to adopt them. This would seem to follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar circumstances attending the formation of a corporation may impose the obligation to adopt certain by-laws, as in the case of a close corporation organized for specific purposes. And the statute or general laws from which the corporation derives its corporate existence may expressly require it to make and adopt by-laws and specify to some extent what they shall

contain and the manner of their adoption. The mere fact, however, of

the existence of power in the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such power essential to its corporate life, or to the validity of any of its acts." 17

Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the consequences of the non-filing of the same within the period provided for in Section 46. However, such omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of the SEC of which state:
"SEC. 6.In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: xxx xxx xxx (l)To suspend, or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law, including the following: xxx xxx xxx 5.Failure to file by-laws within the required period; xxx xxx xxx In the exercise of the foregoing authority and jurisdiction of the Commission, hearings shall be conducted by the Commission or by a Commissioner or by such other bodies, boards, committees and/or any officer as may be created or designated by the Commission for the purpose. The decision, ruling or order of any such Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision, ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings, hearings and appeals of cases falling within its jurisdiction.
cdpr

The aggrieved party may appeal the order, decision or ruling of the Commission sitting en banc to the Supreme Court by petition for review in accordance with the pertinent provisions of the Rules of Court."

Even under the foregoing express grant of power and authority, there can be no automatic corporate dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in Section 46 of the Corporation

Code. There is no outright "demise" of corporate existence. Proper notice and hearing are cardinal components of due process in any democratic institution, agency or society. In other words, the incorporators must be given the chance to explain their neglect or omission and remedy the same.

That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed and harmonized with other statutes as to form a uniform system of jurisprudence. 18 As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it," 19 by-laws are indispensable to corporations in this jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Nonetheless, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation. In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka Bio v. Intermediate Appellate Court, 20 as follows:
". . . Moreover, failure to file the by-laws does not automatically operate to dissolve a corporation but is now considered only a ground for such dissolution. Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code, provided that the powers of the corporation would cease if it did not formally organize and commence the transaction of its business or the continuation of its works within two years from date of its incorporation. Section 20, which has been reproduced with some modifications in Section 46 of the Corporation Code, expressly declared that 'every corporation formed under this Act, must within one month after the filing of the articles of incorporation with the Securities and Exchange Commission, adopt a code of by-laws.' Whether this provision should be given mandatory or only directory effect remained a controversial question until it became academic with

the adoption of PD 902-A. Under this decree, it is now clear that the failure to file by-laws within the required period is only a ground for suspension or revocation of the certificate of registration of corporations. Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(l) of PD 902-A, the SEC is empowered to 'suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of a corporation' on the ground inter alia of 'failure to file by-laws within the required period.' It is clear from this provision that there must first of all be a hearing to determine the existence of the ground, and secondly, assuming such finding, the penalty is not necessarily revocation but may be only suspension of the charter. In fact, under the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely with the imposition of an administrative fine without affecting the corporate existence of the erring firm. It should be stressed in this connection that substantial compliance with conditions subsequent will suffice to perfect corporate personality. Organization and commencement of transaction of corporate business are but conditions subsequent and not prerequisites for acquisition of corporate personality. The adoption and filing of by-laws is also a condition subsequent. Under Section 19 of the Corporation Code, a corporation commences its corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues certificate of incorporation under its official seal. This may be done even before the filing of the by-laws, which under Section 46 of the Corporation Code, must be adopted 'within one month after receipt of official notice of the issuance of its certificate of incorporation.'" 21

That the corporation involved herein is under the supervision of the HIGC does not alter the result of this case. The HIGC has taken over the specialized functions of the former Home Financing Corporation by virtue of Executive Order No. 90 dated December 17, 1986. 22 With respect to homeowners associations, the HIGC shall "exercise all the powers, authorities and responsibilities that are vested on the Securities and Exchange Commission . . ., the provision of Act 1459, as amended by P.D. 902-A, to the contrary notwithstanding." 23 WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision of the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs against petitioner.
cda

SO ORDERED.

Regalado, Puno and Mendoza, JJ ., concur. Torres, Jr., J ., is on leave.

Footnotes
39.

FIRST DIVISION
[G.R. No. 117604. March 26, 1997.] CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.

Lim Vigilia Cinco & Orencia for petitioner. Jose F . Manacop for private respondent.
SYLLABUS 1.COMMERCIAL LAW; P.D. 902-A; JURISDICTION OF THE SECURITIES AND EXCHANGE COMMISSION; CASE AT BAR; INTRA-CORPORATE CONTROVERSY BETWEEN A CORPORATION AND ITS STOCKHOLDER. There is no question that the purchase of the subject share or membership certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same to the latter and thus entitled petitioner to have the said share registered in its name as a member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by the original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate books. In addition, Calapatia, the original owner of the subject share, has not contested the said transfer. By virtue of the afore-mentioned sale, petitioner became abona fide stockholder of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly exemplies

an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A. 2.ID.; ID.; ID.; THE SECURITIES AND EXCHANGE COMMISSION TOOK PROPER COGNIZANCE OF THE INSTANT CASE. An important consideration, moreover, is the nature of the controversy between petitioner and private respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club . . ." It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special competence of the SEC. We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz: 6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management Controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction. . . the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge, experience, and

services of the administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regulatory statute administered." In this era of clogged court

dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]"' The Court in the earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts,

"evidently, . . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim." In this case, the need for the SEC's technical expertise cannot be overemphasized involving as it does the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case. 3.ID.; ID.; ID.; THE FILING OF A COMPLAINT WITH ONE COURT WHICH HAS NO JURISDICTION OVER IT DOES NOT PREVENT THE PLAINTIFF FROM FILING THE SAME COMPLAINT LATER WITH THE COMPETENT COURT. VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between itself and VGCCI. VGCCI's contention lacks merit. In Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani A. Cruz, declared that: "It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it does not prevent the plaintiff from filing the same complaint later with the competent court. The plaintiff is not estopped from doing so simply because it made a mistake before in the choice of the proper forum . . ." We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically, stated (in its motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court dismissed petitioner's complaint and led to petitioner's recourse to the SEC. 4.ID.; CORPORATION CODE; BY-LAWS; THIRD PERSONS ARE NOT BOUND BY THE BY-LAWS OF A CORPORATION SINCE THEY ARE NOT PRIVY THERETO. In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its bylaws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. 5.ID.; ID.; SECTION 63 THEREOF; THE TERM "UNPAID CLAIM" REFERS TO ANY UNPAID CLAIM ARISING FROM UNPAID SUBSCRIPTION, AND NOT TO ANY INDEBTEDNESS WHICH A SUBSCRIBER OR STOCKHOLDER MAY OWE THE

CORPORATION FROM ANY OTHER TRANSACTION. Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." In the case at bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219. What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply. 6.CIVIL LAW; SPECIAL CONTRACTS; PLEDGE; RULE THAT THE CREDITOR MUST TAKE CARE OF THE THING PLEDGED WITH THE DILIGENCE OF A GOOD FATHER OF A FAMILY; DOES NOT APPLY TO A PLEDGEE OF A SHARE OF STOCK. VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. The case ofCruz & Serrano v. Chua A. H. Lee, is clearly not applicable: "In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive. It is quite obvious from the aforequoted case that a membership share is quite different in character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's by-laws. DECISION KAPUNAN, J :
p

Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994 nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of

Appeals' resolution dated 4 September 1994 which denied petitioner's motion for reconsideration. The case unfolds thus: On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner China Banking Corporation (CBC, for brevity). 1 On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its books.2

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in petitioner's favor was duly noted in its corporate books. 3 On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured by the aforestated pledge agreement still existing between Calapatia and petitioner. 4 Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock. 5 On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to petitioner's request in view of Calapatia's unsettled accounts with the club. 6 Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued the corresponding certificate of sale. 7 On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24. 8 Said notice was followed by

a demand letter dated 12 December 1985 for the same amount notice dated 22 November 1986 for P23,483.24. 10

and another

On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock (Stock Certificate No. 1219). Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership due to the sale of his share of stock in the 10 December 1986 auction. 11 On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock be issued in its name. 12 On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 December 1986 for P25,000.00. 13 On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its name. 14 On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intracorporate dispute and on 27 August 1990 denied petitioner's motion for reconsideration. On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation. On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI) until liquidation of delinquency." 15 Consequently, the case was dismissed. 16

On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17 Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, appellant-petitioner can proceed with the foreclosure of the pledged share. WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992 are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on December 10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is ordered to issue another membership certificate in the name of appellant-petitioner bank. SO ORDERED.
18

VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its resolution dated 7 December 1993. 19 The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case, the controversy must pertain to any of the following relationships: (a) between the corporation, partnership or association and the public; (b) between the corporation, partnership or association and its stockholders, partners, members, or officers; (c) between the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is concerned, and (d) among the stockholders, partners or associates themselves (Union Glass and Container Corporation vs. SEC, November 28, 1983, 126 SCRA 31). The establishment of any of the relationship mentioned will not necessarily always confer jurisdiction over the dispute on the Securities and Exchange Commission to the exclusion of the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits of no exceptions or distinctions is not that absolute. The better policy in determining which

body has jurisdiction over a case would be to consider not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323). Indeed, the controversy between petitioner and respondent bank which involves ownership of the stock that used to belong to Calapatia, Jr. is not within the competence of respondent Commission to decide. It is not any of those mentioned in the aforecited case. WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of its hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside for lack of jurisdiction over the subject matter of the case. Accordingly, the complaint of respondent China Banking Corporation (Annex Q, petition) is DISMISSED. No pronouncement as to costs in this instance. SO ORDERED.
20

Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994. 21 Hence, this petition wherein the following issues were raised:
II ISSUES WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division) GRAVELY ERRED WHEN: 1.IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT MATTER OF THE CASE; 2.IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP

CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.

The petition is granted. The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts or the SEC. P.D. No. 902-A conferred upon the SEC the following pertinent powers:
SEC. 3. The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines, and in the exercise of its authority, it shall have the power to enlist the aid and support of and to deputize any and all enforcement agencies of the government, civil or military as well as any private institution, corporation, firm, association or person. xxx xxx xxx SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a)Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners, members of associations or organizations registered with the Commission. b)Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity;

c)Controversies in the election or appointment of directors, trustees, officers, or managers of such corporations, partnerships or associations.

d)Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all of its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this Decree.

The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases of Mainland Construction Co., Inc. v. Movilla23 and Bernardo v. CA, 24 thus:
. . . The better policy in determining which body has jurisdiction over a case would be to consider not only the status or relationship of the parties but also the nature of the question that is the subject of their controversy.

Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of the controversy between petitioner and private respondent corporation is intra-corporate. As to the first query, there is no question that the purchase of the subject share or membership certificate at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same to the latter and thus entitled petitioner to have the said share registered in its name as a member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by the original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate books. 25 In addition, Calapatia, the original owner of the subject share, has not contested the said transfer. By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly exemplifies an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.

An important consideration, moreover, is the nature of the controversy between petitioner and private respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the Club . . ."26 It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for the special competence of the SEC.
cdphil

We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27 :
6.In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious doctrine of primary jurisdiction . . . the courts cannot or will not determine a controversy involving a question which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of sound administrative discretion requiring the special knowledge,

experience, and services of the administrative tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is essential to comply with the purposes of the regulatory statute administered."

In this era of clogged court dockets, the need for specialized administrative boards or commissions with the special knowledge, experience and capability to hear and determine promptly disputes on technical matters or essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman, noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC

their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently,. . . had second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible conflicting findings and conclusions by two tribunals on one and the same claim."

In this case, the need for the SEC's technical expertise cannot be overemphasized involving as it does the meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case. VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it filed with the RTC of Makati (Civil Case No. 901112) that there is no intra-corporate relations between itself and VGCCI. VGCCI's contention lacks merit. In Zamora v. Court of Appeals, declared that:
28

this Court, through Mr. Justice Isagani A. Cruz,

It follows that as a rule the filing of a complaint with one court which has no jurisdiction over it does not prevent the plaintiff from filing the same complaint later with the competent court. The plaintiff is not estopped from doing so simply because it made a mistake before in the choice of the proper forum . . .

We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court dismissed petitioner's complaint and led to petitioner's recourse to the SEC. Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this Court likewise deems it procedurally sound to proceed and rule on its merits in the same proceedings. It must be underscored that petitioner did not confine the instant petition for review on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the case. In turn, in its

responsive pleadings, private respondent duly answered and countered all the issues raised by petitioner. Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic Archbishop of Manila v. Court of Appeals: 31
In the interest of the public and for the expeditious administration of justice the issue on infringement shall be resolved by the court considering that this case has dragged on for years and has gone from one forum to another. It is a rule of procedure for the Supreme Court to strive to settle the entire controversy in a single proceeding leaving no root or branch to bear the seeds of future litigation. No useful purpose will be served if a case or the determination of an issue in a case is remanded to the trial court only to have its decision raised again to the Court of Appeals and from there to the Supreme Court. We have laid down the rule that the remand of the case or of an issue to the lower court for further reception of evidence is not necessary where the Court is in position to resolve the dispute based on the records before it and particularly where the ends of justice would not be subserved by the remand thereof. Moreover, the Supreme Court is clothed with ample authority to review matters, even those not raised on appeal if it finds that their consideration is necessary in arriving at a just disposition of the case.

In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court, through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that that since the filing of this suit before the trial court, none of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or proceeding. The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of the respective parties on file have amply ventilated their various positions and arguments on the matter necessitating prompt adjudication.

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

The procedural niceties settled, we proceed to the merits. VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends that the same was null and void for lack of consideration because the pledge agreement was entered into on 21 August 1974 33 but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3 August 1983. 34 VGCCI's contention is unmeritorious. A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly stipulated therein that the said pledge will also stand as security for any future advancements (or renewals thereof) that Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx This pledge is given as security for the prompt payment when due of all loans, overdrafts, promissory notes, drafts, bills or exchange, discounts, and all other obligations of every kind which have heretofore been contracted, or which may hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including discounts of Chinese drafts, bills of exchange, promissory notes, etc., without any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the accrued interest thereon, as hereinafter provided, plus the costs, losses, damages and expenses (including attorney's fees) which PLEDGEE may incur in connection with the collection thereof. 35 (Emphasis ours.)

The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.

VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to sell the share in question in accordance with the express provision found in its by-laws. Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending notices of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI had officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction. By doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound by the bylaws of a corporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The exception to this is when third persons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed on September 17, 1985. This is proven by the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private respondent's by-laws which is material to the issue herein in a letter it wrote to private respondent. Because of this actual knowledge of such by-laws then the same bound the petitioner as of the time when petitioner purchased the share. Since the by-laws was already binding upon petitioner when the latter purchased the share of Calapatia on September 17, 1985 then the petitioner purchased the said share subject to the right of the private respondent to sell the said share for reasons of delinquency and the right of private respondent to have a first lien on said shares as these rights are provided for in the by-laws very very clearly. 36

VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
"And moreover, the by-law now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares

were assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser. "An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption." (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.) "When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice." (Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.) "The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone." (Ireland vs. Globe Milling Co., 21 R.I., 9.) "A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons." (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Emphasis ours.)

In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into, in this case, at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its bylaws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of

the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. (9 Fletcher 4166. 1982 Ed.) The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. (Ibid.) Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme Court held that the by-law restricting the transfer of shares cannot have any effect on the the transferee of the shares in question as he "had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by the by-law between the shareholder . . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as a purchaser." (Emphasis supplied.) By analogy of the above-cited case, the Commission en banc is of the opinion that said case is applicable to the present controversy. Appellant-petitioner bank as a third party can not be bound by appelleerespondent's by-laws. It must be recalled that when appelleerespondent communicated to appellant-petitioner bank that the pledge agreement was duly noted in the club's books there was no mention of the shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the June 25, 1991 Hearing reveals that the pledgor became delinquent only in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement was contracted. The Commission en banc also believes that for the exception to the general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over the pledged share. Art. 2087 of the Civil Code provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor.

In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission issued an opinion to the effect that: According to the weight of authority, the pledgee's right is entitled to full protection without surrender of the certificate, their cancellation, and the issuance to him of new ones, and when done, the pledgee will be fully protected against a subsequent purchaser who would be charged with constructive notice that the certificate is covered by the pledge. (12-A Fletcher 502)

The pledgee is entitled to retain possession of the stock until the pledgor pays or tenders to him the amount due on the debt secured. In other words, the pledgee has the right to resort to its collateral for the payment of the debts. (Ibid, 502) To cancel the pledged certificate outright and the issuance of new certificate to a third person who purchased the same certificate covered by the pledge, will certainly defeat the right of the pledgee to resort to its collateral for the payment of the debt. The pledgor or his representative or registered stockholders has no right to require a return of the pledged stock until the debt for which it was given as security is paid and satisfied, regardless of the length of time which have elapsed since debt was created. (12-A Fletcher 409) A bona fide pledgee takes free from any latent or secret equities or liens in favor either of the corporation or of third persons, if he has no notice thereof, but not otherwise. He also takes it free of liens or claims that may subsequently arise in favor of the corporation if it has notice of the pledge, although no demand for a transfer of the stock to the pledgee on the corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739) 38

Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H . Lee, 39 is clearly not applicable:
In applying this provision to the situation before us it must be borne in mind that the ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes from hand to hand by mere

delivery of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the holder who must renew the pledge, if it is to be kept alive.

It is quite obvious from the aforequoted case that a membership share is quite different in character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia' s unpaid accounts and the restrictive provisions in VGCCI's by-laws. Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." 40 In the case at bar, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation were merely the monthly dues. Hence, the aforequoted provision does not apply. WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED. SO ORDERED.

Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ ., concur.

Footnotes
40.

EN BANC
[G.R. Nos. 147062-64. December 14, 2001.] REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG), petitioner, vs. COCOFED et al. and BALLARES et

al., 1 EDUARDO M. COJUANGCO JR. and the SANDIGANBAYAN (First Division) respondents.

The Solicitor General for petitioners. Mario E. Ongkiko for petitioners-intervenors. Abello Concepcion Regala & Cruz for COCOFED, et al. & Ballares, et al. Estelito P. Mendoza for E.M. Cojuangco, Jr. Catapang Guzman Tiongco & Torres for UCPB & 14 CIIF Holding Co. Sycip Salazar Hernandez & Gatmaitan for UCPB.
SYNOPSIS The first Division of the Sandiganbayan in Civil Case Nos. 0033-A, 0033-B and 0033-P allowed respondents COCOFED, et al., and Ballares, et al., as well as Eduardo Cojuangco, et al., acknowledged registered stockholders of the United Coconut Planters Bank (UCPB) and all other registered stockholders of the bank, to exercise their right to vote their shares of stock and themselves to be voted upon in the UCPB at the scheduled Stockholders' Meeting on March 6, 2001 or on any subsequent continuation or resetting thereof, and to perform such acts as will normally follow in the exercise of these rights as registered stockholders. In its petition, the Republic of the Philippines, represented by the Presidential Commission on Good Government (PCGG), contended that respondent Sandiganbayan committed grave abuse of discretion in enjoining them from voting the sequestered shares of stock in UCPB despite the fact that the sequestration share were purchased with coconut levy funds (which were declared public in character) and the continuing effectivity of Resolution dated February 16, 1993 in G.R. No. 96073 which allows the PCGG to vote said sequestered shares. The Supreme Court uphold the contention of the PCGG ands set aside the assailed order of the Sandiganbayan. The Court held that the government should be allowed to continue voting those shares inasmuch as they were purchased with coconut levy funds funds that are prima facie public in character or, at the very least, are "clearly affected withy public interest," and because they belong to it as the prima facie beneficial and true owner thereof. Voting is an act

of dominion that should be exercised by the share owner. One of the recognized rights of an owner is the right to vote at meetings of the corporation. The right to vote is classified as the right to control. Voting rights may be for the purpose of, among others, electing or removing directors, amending a charter or making or amending by laws. Because the subject UCPB shares were acquired with government funds, the government becomes their prima facie beneficial and true owner. Ownership includes the right to enjoy, dispose of, exclude and recover a thing without limitations other than those established by law or by the owner. Ownership has been aptly described as the most comprehensive of all real rights and the right to vote shares is a mere incident of ownership. In the present case, the government has been shown to be the prima facie owner of the funds used to purchase the shares. Hence, it should be allowed the rights and privileges flowing from such fact.
HCSEcI

SYLLABUS 1. MERCANTILE LAW; CORPORATION CODE; SHARES OF STOCK; GENERAL RULE; SEQUESTERED SHARES OF STOCK ARE VOTED BY THE REGISTERED HOLDER. It is necessary to restate the general rule that the registered owner of the shares of a corporation exercises the right and the privilege of voting. This principle applies even to shares that are sequestered by the government, over which the PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. On the other hand, it is authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v. Calpo and PCGG v. Cojuangco Jr., as follows: (1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the State? (2) Is there an imminent danger of dissipation, thus necessitating their continued sequestration and voting by the PCGG, while the main issue is pending with the Sandiganbayan? 2. ID.; ID.; ID.; EXCEPTION TO THE RULE; SEQUESTERED SHARES ACQUIRED WITH PUBLIC FUNDS. The Court inBaseco v. PCGG (hereinafter "Baseco") and Cojuangco Jr. v. Roxas ("Cojuangco-Roxas") has provided two clear "public character" exceptions under which the government is granted the authority to vote the shares: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names, and (2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. The exceptions are based on the common-sense principle that legal fiction must yield to truth; that public property registered in the names of

non-owners is affected with trust relations; and that the prima facie beneficial owner should be given the privilege of enjoying the rights flowing from the prima facie fact of ownership. 3. ID:, ID.; ID.; COCONUT LEVY FUNDS ARE AFFECTED WITH PUBLIC INTEREST. Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies, we hold that these funds and shares are, at the very least, "affected with public interest." The Resolution issued by the Court on February 16, 1993 in Republic v. Sandiganbayan stated that coconut levy funds were "clearly affected with public interest"; thus, herein private respondents even if they are the registered shareholders cannot be accorded the right to vote them. 4. ID.; ID.; COCONUT LEVY FUNDS ARE PRIMA FACIE PUBLIC FUNDS; SAID FUND SATISFY THE GENERAL DEFINITION OF PUBLIC FUNDS. To avoid misunderstanding and confusion, this Court will even be more categorical and positive than its earlier pronouncements: the coconut levy funds are not only affected with public interest; they are, in fact, prima facie public funds. Public funds are those moneys belonging to the State or to any political subdivision of the State; more specifically, taxes, customs duties and moneys raised by operation of law for the support of the government or for the discharge of its obligations. Undeniably, coconut levy funds satisfy this general definition of public funds.
CcEHaI

5. ID.; ID.; ID.; COCONUT LEVY FUND RAISED THROUGH STATE'S POLICE AND TAXING POWER. Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced proportional contributions from persons and properties, exacted by the State by virtue of its sovereignty for the support of government and for all public needs. Based on this definition, a tax has three elements, namely: a) it is an enforced proportional contribution from persons and properties; b) it is imposed by the State by virtue of its sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall squarely into these elements. 6. ID.; ID.; ID.; HAVING BEEN ACQUIRED WITH PUBLIC FUNDS, THE SUBJECT SHARES BELONG, PRIMA FACIE, TO THE GOVERNMENT. Having shown that the coconut levy funds are not only affected with public interest, but are in fact prima facie public funds, this Court believes that the government should be allowed to vote the questioned shares, because they belong to it as the prima facie beneficial and true owner. As stated at the beginning, voting is an act of dominion that should be exercised by the share owner. One of the recognized

rights of an owner is the right to vote at meetings of the corporation. The right to vote is classified as the right to control. Voting rights may be for the purpose of, among others, electing or removing directors, amending a charter, or making or amending bylaws. Because the subject UCPB shares were acquired with government funds, the government becomes their prima facie beneficial and true owner. Ownership includes the right to enjoy, dispose of, exclude and recover a thing without limitations other than those established by law or by the owner. Ownership has been aptly described as the most comprehensive of all real rights. And the right to vote shares is a mere incident of ownership. In the present case, the government has been shown to be the prima facie owner of the funds used to purchase the shares. Hence, it should be allowed the rights and privileges flowing from such fact. 7. REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI; GRAVE ABUSE OF DISCRETION MAY ARISE WHEN A LOWER COURT OR TRIBUNAL VIOLATES OR CONTRAVENES THE CONSTITUTION, THE LAW OR EXISTING JURISPRUDENCE. We hold that the Sandiganbayan gravely abused its discretion when it contravened the rulings of this Court in Baseco andCojuangco-Roxas thereby unlawfully, capriciously and arbitrarily depriving the government of its right to vote sequestered shares purchased with coconut levy funds which are prima facie public funds. Indeed, grave abuse of discretion may arise when a lower court or tribunal violates or contravenes the Constitution, the law or existing jurisprudence. In one case, this Court ruled that the lower court's resolution was "tantamount to overruling a judicial pronouncement of the highest Court . . . and unmistakably a very grave abuse of discretion."
TSIDEa

8. ID.; ID.; ID.; PUBLIC CHARACTER OF SHARES IS A VALID ISSUE. The main issue of who may vote the shares cannot be determined without passing upon the question of the public/private character of the shares and the funds used to acquire them. The latter issue, although not specifically raised in the Court a quo, should still be resolved in order to fully adjudicate the main issue. Indeed, this Court has "the authority to waive the lack of proper assignment of errors if the unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors refer to matters upon which the determination of the questions raised by the errors properly assigned depend." Therefore, "where the issues already raised also rest on other issues not specifically presented as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the Court has the authority to include them in its discussion of the controversy as well as to pass upon them."

9. ID.; ID.; ID.; NO POSITIVE RELIEF FOR INTERVENORS; THEIR RIGHT IS DEPENDENT UPON THE SANDIGANBAYAN'S RESOLUTION ON THE ACTION FOR THE RECOVERY OF THE SEQUESTERED SHARES. We cannot rule on intervenors' alleged right to vote at this time and in this case. That right is dependent upon the Sandiganbayan's resolution of their action for the recovery of said sequestered shares. Given the patent fact that intervenors are not registered stockholders of UCPB as of the moment, their asserted rights cannot be ruled upon in the present proceedings. Hence, no positive relief can be given them now, except insofar as they join petitioner in barring private respondents from voting the subject shares. VITUG, J., separate opinion: 1. MERCANTILE LAW, CORPORATION CODE; SHARES OF STOCK; PURCHASE BY THE COCONUT INDUSTRY INVESTMENT FUND COMPANIES OF THE COCONUT FARMER'S SHARE IN UNITED COCONUT PLANTERS BANK DID NOT CHANGE THE PUBLIC CHARACTER OF THE SHARES. To account for their equity holdings in the bank, COCOFED, et al., in their Memorandum, would advance that, in 1975, COCOFED, a private national association of coconut producers, was designated by the Philippine Coconut Authority ("PCA") as being the implementing agency for the free distribution of the shares of stock of the UCPB to the coconut farmers. By 02 May 1981, 232,805,852.16 of said shares were distributed to the farmers. Still there remained 15,619,419.84 shares registered in the name of COCOFED which, according to it, were ultimately given to the farmers. Prior to June 1986, a substantial number of the coconut farmers sold their shares in the bank at prices below par value. By way of a financial assistance to the selling coconut farmers, the UCPB Board of Directors authorized the CIIF companies to purchase their holdings in the bank at par value. These transactions, nevertheless, did not change the character of the UCPB shares, these having been bought with coconut levy funds which the Court distinctly characterized to be "clearly affected with public interest" and "raised such as they were by the State's police and taxing powers." The fundamental rule is that

tax proceeds may only be used for a public purpose, which may either be a general public purpose to support the existence of the state or a special public purpose to pursue certain legitimate objects of government in the exercise of police power, and none other. As a measure to ensure the proper utilization of money collected for a specified public purpose, the 1987 Constitution, restating another general principle, treats the proceeds as a special fund to be paid out for such purpose. If, however, that purpose has been fulfilled or is no longer forthcoming, the balance, if any, shall then be transferred to the general funds of the government, which may thereafter be appropriated by Congress and

expended for any legitimate purpose within the scope of the general fund. An entity, whether public or private, which holds the tax money has no authority to disburse it or to pay any of it to anyone, the power to dispose of such money being vested in the legislature. Thus, the 1987 Constitution, like its counterparts in the 1935 and the 1973 Constitution, mandates that no money shall be paid out of the national treasury except in pursuance of an appropriation made by law.
SECHIA

2. ID.; ID.; ID.; PENDING A CONCLUSIVE DETERMINATION ON THE LEGALITY OF THE 10% EQUITY RETENTION STANDING IN THE NAME OF RESPONDENT EDUARDO COJUANGCO, JR., IT WOULD BE NEITHER RIGHT NOR JUST TO DEPRIVE HIM FROM MEANWHILE EXERCISING HIS RIGHT TO AT LEAST VOTE THE SAME. Respondent Eduardo Cojuangco, Jr., upon the other hand, in claiming ownership over a portion of the sequestered UCPB shares, advanced two documents an agreement in May 1975, where he appeared to have exercised his option to acquire the UCPB shares of stock owned by the family of the late Don Jose Cojuangco, Sr., amounting to 72.2% equity holding in the bank, at two hundred pesos (Php200.00) per share, and the "Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines," dated 25 May 1975, whereby the PCA purchased with funds from the CCSF the aforesaid UCPB shares from Eduardo Cojuangco, Jr., also at two hundred pesos (Php200.00) per share. In the latter agreement, it was stipulated that as compensation for exercising his personal and exclusive option to acquire the UCPB shares and for transferring such shares to the PCA, Eduardo Cojuangco, Jr., would receive one (1) share for every nine (9) shares acquired by the PCA and additional equity in the bank. In sum, correlating the two agreements, Eduardo Cojuangco, Jr., would contend, in effect, that he retained title over roughly 10% equity holding in the bank and established his prima facie right over the corresponding shares independently sourced from the coconut levy funds. Even if it were to be conceded that the said 10% holding in UCPB of Eduardo Cojuangco, Jr., could be assailed, pending a conclusive determination on the legality of such a retention, however, it would neither be right nor just to deprive him from meanwhile exercising his right to at least vote the same. For the foregoing reasons, I vote to grant the petition in part and to deny it insofar as the shares of stock pertaining to the 10% of the 72% equity retention standing in the name of Eduardo Cojuangco, Jr., are concerned. In passing, I should like to state my understanding of the ruling of the Court. I must first clarify, however, that sequestration does not mean the vesting of title in the hands of the sequestering authority; rather, the term implies the preservation of assets. Neither ownership nor rights thereover are acquired or

lost by virtue alone of sequestration a mere ancillary remedy to secure a disputed asset. MELO, J., dissenting opinion: 1. MERCANTILE LAW; CORPORATION LAW; SHARES OF STOCK; THE VALIDITY OF THE ACQUISITION OF THE UNITED COCONUT PLANTERS BANK SHARES IS THE VERY LIS MOTA OF THE ACTION FOR RECONVEYANCE, ACCOUNTING, REVERSION AND RESTITUTION FILED BY THE PCGG WITH THE SANDIGANBAYAN; TO RULE ON THE MATTER WOULD BE TO PREEMPT SAID COURT. The view expressed by the majority that the UCPB shares, having been acquired with the use of coconut levy funds, and, therefore belong to the government, may very well turn out to be correct. However, since these issues are still pending litigation at the Sandiganbayan, it would be premature, I submit, to rule on this point at this time. Verily, the validity of the acquisition by Cojuangco Jr., et al. of their UCPB shares is the very lis mota of the action for reconveyance, accounting, reversion, and restitution filed by the PCGG with the Sandiganbayan. To rule on this matter would be to preempt said court. Too, the argument that the coconut levy funds used to purchase the sequestered UCPB shares of stock are public funds does not appear to have been raised before the Sandiganbayan; consequently, the Sandiganbayan did not rule on the nature of the fund. It would be absurd to hold that the Sandiganbayan gravely abused its discretion in not holding that the sequestered shares belong prima facie to the government, the issue of whether or not coconut levy funds are public funds not having been raised before it.
DAaIHT

2. ID.; ID.; ID.; THE DETERMINATION OF WHETHER THE COCONUT LEVY FUNDS ARE PUBLIC FUNDS INVOLVES THE ASCERTAINMENT OF THE CONSTITUTIONALITY OF SECTION 5 OF ARTICLE III OF PRESIDENTIAL DECREE NO. 1468. Moreover, and as mentioned earlier, the nature of the funds used is a matter which should be decided first-hand by theSandiganbayan when it resolves the merits of Civil Case No. 0033-A. Note should also be taken of the fact that the determination of whether the coconut levy funds are public funds involves the ascertainment of the constitutionality of Section 5, Article III of Presidential Decree No. 961 and Section 5, Article III of Presidential Decree No. 1468. Presidential Decrees No. 961 and 1468 have not been repealed, revoked, or declared unconstitutional, hence they are presumed valid and binding. Without a previous declaration of unconstitutionality, the coconut levy funds may not thus be characterized as prima facie belonging to the government. That issue must first be resolved by the Sandiganbayan. In fact, when the Solicitor General, in G.R. No. 96073, filed a motion to declare the coconut levies collected pursuant

to the various issuances as public funds and to declare Section 5, Article III of Presidential Decree No. 1468 as unconstitutional, the Court denied the same in a Resolution dated March 26, 1996. 3. ID.; ID.; ID.; THE QUESTION OF WHETHER THE COCONUT LEVY FUNDS ARE PUBLIC FUNDS IS NOT IN ISSUE IN THE PRESENT CASE. And if it is to be recalled, the issue involved herein is whether or not the Sandiganbayan committed grave abuse of discretion when it issued the disputed order allowing respondents to vote the UCPB shares of stock registered in their names. The question of whether the coconut levy funds are public funds is not in issue here. In fact, the constitutionality of Presidential Decrees No. 961 and 1468 have not been raised by the PCGG during the proceedings before the Sandiganbayan. Moreover, it should be pointed out that the avowed purpose of sequestration is to preserve the assets sequestered to assure that if, and when, judgment is rendered in favor of the petitioner, the judgment may be implemented. "Preservation," not "deprivation" before judgment, is its essence. In the instant case, however, the actuations of PCGG with regard to the sequestered shares partake more of deprivation rather than preservation. As pointed out by respondents, since 1986, only one (1) stockholders' meeting of UCPB has been held. At this meeting, PCGG voted all of the shares, as a result of which all members of the Board of UCPB, since 1986 to the present, have been PCGG nominees. When vacancies in the Board occur because of resignation, replacements are installed by the remaining members of the Board on nomination of the PCGG. The stockholders' meeting scheduled on March 6, 2001 would have been the first stockholders' meeting since 1986 at which registered stockholders would exercise their right to vote and by their vote elect the members of the Board of Directors. Also, the shares of stock in UCPB were sequestered in 1986. The civil action "Republic of the Philippines v. Eduardo M. Cojuangco, Jr., Civil Case No. 033," was instituted before the Sandiganbayan on July 30, 1987. This action included, among other things, the UCPB shares of stock and was filed to maintain the effectivity of the writs of sequestration pursuant to Section 26, Article XVIII of the Constitution. Notwithstanding the lapse of more than 14 years, the proceedings have barely gone beyond the pretrial stage. PCGG's exercise of the right to vote the sequestered shares of stock for a period of 14 years constitutes effectively a deprivation of a property right belonging to the registered stockholders (18 Am. Jur. 2d, Corporations 2d Section 1065, p. 859, citing cases), a state of affairs not within the contemplation of "sequestration" as a means of preservation of assets.
DHATcE

4. ID.; ID.; INCIDENTS CONCERNING THE VOTING OF THE SEQUESTERED SHARES BEING MATTERS INCIDENTAL TO THE SEQUESTRATION SHOULD BE ADDRESSED TO THE SANDIGANBAYAN. I regret to say that I find unacceptable the contention that the "law of the case" herein should be the Resolution dated February 16, 1993, in Republic of the Philippines vs. Sandiganbayan, et al. For one, the UCPB shares of stock of respondents COCOFED, et al. and Ballares, et al. are not the subject of the case relied upon. Hence, the Resolution therein could not have referred to or covered said shares. For another, and more importantly, what is invoked by petitioner is, in effect, merely a restraining order which was not re-affirmed by the Court when we rendered the main decision in the said consolidated sequestration cases. Rather, what I believe is truly applicable herein is the Court's decision in COCOFED vs. PCGG (178 SCRA 236 [1989]) wherein it was held that "the incidents concerning

the voting of the sequestered shares, the COCOFED elections, and the replacement of directors, being matters incidental to the sequestration, should be addressed to the Sandiganbayan." Thus, the Sandiganbayan has been given

by the Court full discretion to evaluate and to allow or disallow the duly registered stockholders of the UCPB shares to exercise the right to vote the said shares in the UCPB elections and/or appointment/replacement of its directors. If, as in the case at hand, the Sandiganbayan, in the exercise of its sound discretion and for justifiable reasons cited in its assailed Order of February 28, 2001, allowed herein private respondents to vote the sequestered shares in question, one would simply be at a loss to understand how such action could be said to be tainted with grave abuse of discretion.
SHIETa

DECISION PANGANIBAN, J :
P

The right to vote sequestered shares of stock registered in the names of private individuals or entities and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the registered owner. The PCGG may, however, be granted such voting right provided it can (1) show prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus necessitating their continued sequestration and voting by the government until a decision, ruling with finality on their ownership, is promulgated by the proper court.
cdasia

However, the foregoing two-tiered test does not apply when the sequestered stocks are acquired with funds that are prima facie public in character or, at least, are affected with public interest. Inasmuch as the subject UCPB shares in the present case were undisputably acquired with coco levy funds which are public in character, then the right to vote them shall be exercised by the PCGG. In sum, the public character test, not the two-tiered one, applies in the instant controversy.

The Case
Before us is a Petition for Certiorari with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary injunction under Rule 65 of the Rules of Court, seeking to set aside the February 28, 2001 Order 2 of the First Division of the Sandiganbayan 3 in Civil Case Nos. 0033-A, 0033-B and 0033-F. The pertinent portions of the assailed Order read as follows:
In view hereof, the movants COCOFED, et al. and Ballares, et al. as well as Eduardo Cojuangco, et al., who were acknowledged to be registered stockholders of the UCPB are authorized, as are all other registered stockholders of the United Coconut Planters Bank, until further orders from this Court, to exercise their rights to vote their shares of stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled Stockholders Meeting on March 6, 2001 or on any subsequent continuation or resetting thereof, and to perform such acts as will normally follow in the exercise of these rights as registered stockholders. Since by way of form, the pleadings herein had been labeled as praying for an injunction, the right of the movants to exercise their right as abovementioned will be subject to the posting of a nominal bond in the amount of FIFTY THOUSAND PESOS (P50,000.00) jointly for the defendants COCOFED, et al. and Ballares, et al., as well as all other registered stockholders of sequestered shares in that bank, and FIFTY THOUSAND PESOS (P50,000.00) for Eduardo Cojuangco, Jr., et al., to answer for any undue damage or injury to the United Coconut Planters Bank as may be attributed to their exercise of their rights as registered stockholders. 4

The Antecedents
The very roots of this case are anchored on the historic events that transpired during the change of government in 1986. Immediately after the 1986 EDSA

Revolution, then President Corazon C. Aquino issued Executive Order (E.O.) Nos. 1, 5 2 6 and 14. 7
On the explicit premise that vast resources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad, the Presidential Commission on Good Government (PCGG) was created by Executive Order No. 1 to assist the President in the recovery of the illgotten wealth thus accumulated whether located in the Philippines or abroad. 8

Executive Order No. 2 states that the ill-gotten assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world. 9 Executive Order No. 14, on the other hand, empowered the PCGG, with the assistance of the Office of the Solicitor General and other government agencies, inter alia, to file and prosecute all cases investigated by it under E.O. Nos. 1 and 2.
IDASHa

Pursuant to these laws, the PCGG issued and implemented numerous sequestrations, freeze orders and provisional takeovers of allegedly ill-gotten companies, assets and properties, real or personal. 10 Among the properties sequestered by the Commission were shares of stock in the United Coconut Planters Bank (UCPB) registered in the names of the alleged one million coconut farmers, the so-called Coconut Industry Investment Fund companies (CIIF companies) and Private Respondent Eduardo Cojuangco Jr. (hereinafter Cojuangco). In connection with the sequestration of the said UCPB shares, the PCGG, on July 31, 1987, instituted an action for reconveyance, reversion, accounting, restitution and damages docketed as Case No. 0033 in the Sandiganbayan. On November 15, 1990, upon Motion 11 of Private Respondent COCOFED, the Sandiganbayan issued a Resolution 12 lifting the sequestration of the subject UCPB shares on the ground that herein private respondents in particular, COCOFED and the so-called CIIF companies had not been impleaded by the PCGG as parties-defendants in its July 31, 1987 Complaint for reconveyance, reversion, accounting, restitution and damages. The Sandiganbayan ruled that

the Writ of Sequestration issued by the Commission was automatically lifted for PCGGs failure to commence the corresponding judicial action within the sixmonth period ending on August 2, 1987 provided under Section 26, Article XVIII of the 1987 Constitution. The anti-graft court noted that though these entities were listed in an annex appended to the Complaint, they had not been named as parties-respondents. This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari docketed as G.R. No. 96073 in this Court. Meanwhile, upon motion of Cojuangco, the anti-graft court ordered the holding of elections for the Board of Directors of UCPB. However, the PCGG applied for and was granted by this Court a Restraining Order enjoining the holding of the election. Subsequently, the Court lifted the Restraining Order and ordered the UCPB to proceed with the election of its board of directors. Furthermore, it allowed the sequestered shares to be voted by their registered owners. The victory of the registered shareholders was fleeting because the Court, acting on the solicitor generals Motion for Clarification/Manifestation, issued a Resolution on February 16, 1993, declaring that the right of petitioners [herein private respondents] to vote stock in their names at the meetings of the UCPB cannot be conceded at this time. That right still has to be established by them before the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB stock and cannot be accorded the right to vote them. 13 The dispositive portion of the said Resolution reads as follows:
IN VIEW OF THE FOREGOING, the Court recalls and sets aside the Resolution dated March 3, 1992 and, pending resolution on the merits of the action at bar, and until further orders, suspends the effectivity of the lifting of the sequestration decreed by the Sandiganbayan on November 15, 1990, and directs the restoration of the status quo ante, so as to allow the PCGG to continue voting the shares of stock under sequestration at the meetings of the United Coconut Planters Bank. 14

On January 23, 1995, the Court rendered its final Decision in G.R. No. 96073, nullifying and setting aside the November 15, 1990 Resolution of the Sandiganbayan which, as earlier stated, lifted the sequestration of the subject UCPB shares. The express impleading of herein Respondents COCOFED et al. was deemed unnecessary because the judgment may simply be directed against the shares of stock shown to have been issued in consideration of ill-gotten wealth. 15 Furthermore, the companies are simply the res in the actions for the recovery of illegally acquired wealth, and there is, in principle, no cause of action against them and no ground to implead them as defendants in said case. 16

A month thereafter, the PCGG pursuant to an Order of the Sandiganbayan subdivided Case No. 0033 into eight Complaints and docketed them as Case Nos. 0033-A to 0033-H.
CaDEAT

Six years later, on February 13, 2001, the Board of Directors of UCPB received from the ACCRA Law Office a letter written on behalf of the COCOFED and the alleged nameless one million coconut farmers, demanding the holding of a stockholders meeting for the purpose of, among others, electing the board of directors. In response, the board approved a Resolution calling for a stockholders meeting on March 6, 2001 at three oclock in the afternoon. On February 23, 2001, COCOFED, et al. and Ballares, et al. filed the Class Action Omnibus Motion 17 referred to earlier in Sandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F, asking the court a quo:
1. To enjoin the PCGG from voting the UCPB shares of stock registered in the respective names of the more than one million coconut farmers; and 2. To enjoin the PCGG from voting the SMC shares registered in the names of the 14 CIIF holding companies including those registered in the name of the PCGG. 18

On February 28, 2001, respondent court, after hearing the parties on oral argument, issued the assailed Order. Hence, this Petition by the Republic of the Philippines represented by the PCGG. 19 The case had initially been raffled to this Courts Third Division which, by a vote of 3-2, 20 issued a Resolution 21 requiring the parties to maintain the status quo existing before the issuance of the questioned Sandiganbayan Order dated February 28, 2001. On March 7, 2001, Respondent COCOFED et al. moved that the instant Petition be heard by the Court en banc. 22 The Motion was unanimously granted by the Third Division. On March 13, 2001, the Court en banc resolved to accept the Third Divisions referral. 23 It heard the case on Oral Argument in Baguio City on April 17, 2001. During the hearing, it admitted the intervention of a group of coconut farmers and farm worker organizations, the Pambansang Koalisyon ng mga Samahang

Magsasaka at Manggagawa ng Niyugan (PKSMMN). The coalition claims that its members have been excluded from the benefits of the coconut levy fund. Inter alia, it joined petitioner in praying for the exclusion of private respondents in
voting the sequestered shares.

Issues
Petitioner submits the following issues for our consideration:
A. Despite the fact that the subject sequestered shares were purchased with coconut levy funds (which were declared public in character) and the continuing effectivity of Resolution dated February 16, 1993 in G.R. No. 96073 which allows the PCGG to vote said sequestered shares, Respondent Sandiganbayan, with grave abuse of discretion, issued its Order dated February 28, 2001 enjoining PCGG from voting the sequestered shares of stock in UCPB. B. The Respondent Sandiganbayan violated petitioners right to due process by taking cognizance of the Class Action Omnibus Motion dated 23 February 2001 despite gross lack of sufficient notice and by issuing the writ of preliminary injunction despite the obvious fact that there was no actual pressing necessity or urgency to do so.
24

In its Resolution dated April 17, 2001, the Court defined the issue to be resolved in the instant case simply as follows:
Did the Sandiganbayan commit grave abuse of discretion when it issued the disputed Order allowing respondents to vote UCPB shares of stock registered in the name of respondents?

This Courts Ruling

The Petition is impressed with merit.

Main Issue: Who May Vote the Sequestered Shares of Stock?

Simply stated, the gut substantive issue to be resolved in the present Petition is: Who may vote the sequestered UCPB shares while the main case for their reversion to the State is pending in the Sandiganbayan? This Court holds that the government should be allowed to continue voting those shares inasmuch as they were purchased with coconut levy funds funds that are prima facie public in character or, at the very least, are clearly affected with public interest.

General Rule: Sequestered Shares Are Voted by the Registered Holder

At the outset, it is necessary to restate the general rule that the registered owner of the shares of a corporation exercises the right and the privilege of voting. 25 This principle applies even to shares that are sequestered by the government, over which the PCGG as a mere conservator cannot, as a general rule, exercise acts of dominion. 26 On the other hand, it is authorized to vote these sequestered shares registered in the names of private persons and acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test devised by the Court in Cojuangco v. Calpo 27 and PCGG v. Cojuangco Jr., 28 as follows: (1) Is there prima facie evidence showing that the said shares are ill-gotten and thus belong to the State? (2) Is there an imminent danger of dissipation, thus necessitating their continued sequestration and voting by the PCGG, while the main issue is pending with the Sandiganbayan?

Sequestered Shares Acquired with Public Funds Are an Exception

From the foregoing general principle, the Court in Baseco v. PCGG 29 (hereinafter Baseco) and Cojuangco Jr. v. Roxas 30(Cojuangco-Roxas) has provided two clear public character exceptions under which the government is granted the authority to vote the shares: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names, and

(2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. The exceptions are based on the common-sense principle that legal fiction must yield to truth; that public property registered in the names of non-owners is affected with trust relations; and that the prima facie beneficial owner should be given the privilege of enjoying the rights flowing from the prima facie fact of ownership. In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was placed under sequestration by the PCGG. Explained the Court:
The facts show that the corporation known as BASECO was owned and controlled by President Marcos during his administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence, and that it was by and through the same means, that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co., Inc., and other governmentowned or controlled entities. 31

Given this factual background, the Court discussed PCGGs right over BASECO in the following manner:
Now, in the special instance of a business enterprise shown by evidence to have been taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos, the PCGG is given power and authority, as already adverted to, to provisionally take (it) over in the public interest or to prevent . . . (its) disposal or dissipation; and since the term is obviously employed in reference to going concerns, or business enterprises in operation, something more than mere physical custody is connoted; the PCGG may in this case exercise some measure of control in the operation, running, or management of the business itself. 32

Citing an earlier Resolution, it ruled further:

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President . . . (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through its designated

directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government

itself and over which the persons who appear in this case on behalf of

BASECO have failed to show any right or even any shareholding in said corporation. 33 (Italics supplied)

The Court granted PCGG the right to vote the sequestered shares because they appeared to be assets belonging to the government itself. The Concurring Opinion of Justice Ameurfina A. Melencio-Herrera, in which she was joined by Justice Florentino P. Feliciano, explained this principle as follows:
I have no objection to according the right to vote sequestered stock in case of a take-over of business actually belonging to the government or whose capitalization comes from public funds but which, somehow, landed in the hands of private persons, as in the case of BASECO. To my mind, however, caution and prudence should be exercised in the case of sequestered shares of an on-going private business enterprise, specially the sensitive ones, since the true and real ownership of said shares is yet to be determined and proven more conclusively by the Courts.34 (Italics supplied)

The exception was cited again by the Court in Cojuangco-Roxas

35

in this wise:

The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership of sequestered property. It is a mere conservator. It may not vote the shares in a corporation and elect the members of the board of directors. The only conceivable exception is in

a case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO. 36 (Italics supplied)

The public character test was reiterated in many subsequent cases; most recently, in Antiporda v. Sandiganbayan. 37Expressly citing CojuangcoRoxas, 38 this Court said that in determining the issue of whether the PCGG should be allowed to vote sequestered shares, it was crucial to find out first whether these were purchased with public funds, as follows:

It is thus important to determine first if the sequestered corporate shares came from public funds that landed in private hands. 39

In short, when sequestered shares registered in the names of private individuals or entities are alleged to have been acquired with ill-gotten wealth, then the twotiered test is applied. However, when the sequestered shares in the name of

private individuals or entities are shown, prima facie, to have been (1) originally government shares, or (2) purchased with public funds or those affected with public interest, then the two-tiered test does not apply. Rather, the public character exceptions in Baseco v. PCGG and Cojuangco Jr. v. Roxas prevail; that is, the government shall vote the shares.

UCPB Shares Were Acquired With Coconut Levy Funds

In the present case before the Court, it is not disputed that the money used to purchase the sequestered UCPB shares came from the Coconut Consumer Stabilization Fund (CCSF), otherwise known as the coconut levy funds. This fact was plainly admitted by private respondents counsel, Atty. Teresita J. Herbosa, during the Oral Arguments held on April 17, 2001 in Baguio City, as follows:
Justice Panganiban: In regard to the theory of the Solicitor General that the funds used to purchase [both] the original 28 million and the subsequent 80 million came from the CCSF, Coconut Consumers Stabilization Fund, do you agree with that? Atty. Herbosa: Yes, Your Honor. xxx xxx xxx Justice Panganiban: So it seems that the parties [have] agreed up to that point that the funds used to purchase 72% of the former First United Bank came from the Coconut Consumers Stabilization Fund? Atty. Herbosa: Yes, Your Honor.
40

Indeed in Cocofed v. PCGG, 41 this Court categorically declared that the UCPB was acquired with the use of the Coconut Consumers Stabilization Fund in virtue of Presidential Decree No. 755, promulgated on July 29, 1975.

Coconut Levy Funds Are Affected With Public Interest

Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies, we hold that these funds and shares are, at the very least, affected with public interest. The Resolution issued by the Court on February 16, 1993 in Republic v. Sandiganbayan 42 stated that coconut levy funds were clearly affected with public interest; thus, herein private respondents even if they are the registered shareholders cannot be accorded the right to vote them. We quote the said Resolution in part, as follows:
The coconut levy funds being clearly affected with public interest, it follows that the corporations formed and organized from those funds, and all assets acquired therefrom should also be regarded as clearly affected with public interest. 43

xxx xxx xxx

Assuming, however, for purposes of argument merely, the lifting of sequestration to be correct, may it also be assumed that the lifting of sequestration removed the character of the coconut levy companies of being affected with public interest, so that they and their stock and assets may now be considered to be of private ownership? May it be assumed that the lifting of sequestration operated to relieve the holders of stock in the coconut levy companies affected with public interest of the obligation of proving how that stock had been legitimately transferred to private ownership, or that those stockholders who had had some part in the collection, administration, or disposition of the coconut levy funds are now deemed qualified to acquire said stock, and freed from any doubt or suspicion that they had taken advantage of their special or fiduciary relation with the agencies in charge of the coconut levies and the funds thereby accumulated? The obvious answer to each of the questions is a negative one. It seems plain that the lifting of sequestration has no relevance to the nature of the coconut levy companies or their stock or property, or to the legality of the acquisition by private persons of their interest therein, or to the latters capacity or

disqualification to acquire stock in the companies or any property acquired from coconut levy funds.

This being so, the right of the [petitioners] to vote stock in their names at the meetings of the UCPB cannot be conceded at this time. That right still has to be established by them before the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB stock and cannot be accorded the right to vote them. 44 (Italics supplied)

It is however contended by respondents that this Resolution was in the nature of a temporary restraining order. As such, it was supposedly interlocutory in character and became functus oficio when this Court decided G.R. No. 96073 on January 23, 1995.
LexLib

This argument is aptly answered by petitioner in its Memorandum, which we quote:

The ruling made in the Resolution dated 16 February 1993 confirming the public nature of the coconut levy funds and denying claimants their purported right to vote is an affirmation of doctrines laid down in the cases of COCOFED v. PCGG supra, Baseco v. PCGG, supra, and Cojuangco v. Roxas, supra. Therefore it is of no moment that the Resolution dated 16 February 1993 has not been ratified. Its jurisprudential bases remain. 45 (Italics supplied)

Granting arguendo that the Resolution is interlocutory, the truth remains: the coconut levy funds are still clearly affected with public interest. That was the truth in 1989 as quoted by this Court in its February 16, 1993 Resolution, and so it is today. Said the Court in 1989:
The utilization and proper management of the coconut levy funds, raised as they were by the States police and taxing powers, are certainly the concern of the Government. It cannot be denied that it was the welfare of the entire nation that provided the prime moving factor for the imposition of the levy. It cannot be denied that the coconut industry is one of the major industries supporting the national economy. It is, therefore, the States concern to make it a strong and secure source not only of the livelihood of a significant segment of the population but also of export earnings the sustained growth of which is one of the imperatives of economic stability. The coconut levy funds are

clearly affected with public interest. Until it is demonstrated satisfactorily that they have legitimately become private funds, they must prima facie and by reason of the circumstances in which they were raised and

accumulated be accounted subject to the measures prescribed in E.O. Nos. 1, 2, and 14 to prevent their concealment, dissipation, etc., which measures include the sequestration and other orders of the PCGG complained of. 46 (Italics supplied)

To repeat, the foregoing juridical situation has not changed. It is still the truth today: the coconut levy funds are clearly affected with public interest. Private respondents have not demonstrated satisfactorily that they have legitimately become private funds. If private respondents really and sincerely believed that the final Decision of the Court in Republic v. Sandiganbayan (G.R. No. 96073, promulgated on January 23, 1995) granted them the right to vote, why did they wait for the lapse of six long years before definitively asserting it (1) through their letter dated February 13, 2001, addressed to the UCPB Board of Directors, demanding the holding of a shareholders meeting on March 6, 2001; and (2) through their Omnibus Motion dated February 23, 2001 filed in the court a quo, seeking to enjoin PCGG from voting the subject sequestered shares during the said stockholders meeting? Certainly, if they even half believed their submission now that they already had such right in 1995 why are they suddenly and imperiously claiming it only now? It should be stressed at this point that the assailed Sandiganbayan Order dated February 28, 2001 allowing private respondents to vote the sequestered shares is not based on any finding that the coconut levies and the shares have legitimately become private funds. Neither is it based on the alleged lifting of the TRO issued by this Court on February 16, 1993. Rather, it is anchored on the grossly mistaken application of the two-tiered test mentioned earlier in this Decision. To stress, the two-tiered test is applied only when the sequestered asset in the hands of a private person is alleged to have been acquired with ill-gotten wealth. Hence, in PCGG v. Cojuangco, 47 we allowed Eduardo Cojuangco Jr. to vote the sequestered shares of the San Miguel Corporation (SMC) registered in his name but alleged to have been acquired with ill-gotten wealth. We did so on his representation that he had acquired them with borrowed funds and upon failure of the PCGG to satisfy the two-tiered test. This test was, however, not applied to sequestered SMC shares that were purchased with coco levy funds.
DHcESI

In the present case, the sequestered UCPB shares are confirmed to have been acquired with coco levies, not with alleged ill-gotten wealth. Hence, by parity of

reasoning, the right to vote them is not subject to the two-tiered test but to the public character of their acquisition, which per Antiporda v. Sandiganbayan cited earlier, must first be determined.

Coconut Levy Funds Are Prima Facie Public Funds

To avoid misunderstanding and confusion, this Court will even be more categorical and positive than its earlier pronouncements:the coconut levy funds

are not only affected with public interest; they are, in fact, prima facie public funds.

Public funds are those moneys belonging to the State or to any political subdivision of the State; more specifically, taxes, customs duties and moneys raised by operation of law for the support of the government or for the discharge of its obligations.48 Undeniably, coconut levy funds satisfy this general definition of public funds, because of the following reasons:

1. Coconut levy funds are raised with the use of the police and taxing powers of the State. 2. They are levies imposed by the State for the benefit of the coconut industry and its farmers. 3. Respondents have judicially admitted that the sequestered shares were purchased with public funds. 4. The Commission on Audit (COA) reviews the use of coconut levy funds. 5. The Bureau of Internal Revenue (BIR), with the acquiescence of private respondents, has treated them as public funds. 6. The very laws governing coconut levies recognize their public character. We shall now discuss each of the foregoing reasons, any one of which is enough to show their public character.

1. Coconut Levy Funds Are Raised Through the States Police and Taxing Powers.
Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced proportional contributions from persons and properties, exacted by the State by virtue of its sovereignty for the support of government and for all public needs. 49 Based on this definition, a tax has three elements, namely: a) it is an enforced proportional contribution from persons and properties; b) it is imposed by the State by virtue of its sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall squarely into these elements for the following reasons: (a) They were generated by virtue of statutory enactments imposed on the coconut farmers requiring the payment of prescribed amounts. Thus, P.D. No. 276, which created the Coconut Consumers Stabilization Fund (CCSF), mandated the following:
a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in other coconut products, shall be imposed on every first sale, in accordance with the mechanics established under R.A. 6260, effective at the start of business hours on August 10, 1973. The proceeds from the levy shall be deposited with the Philippine National Bank or any other government bank to the account of the Coconut Consumers Stabilization Fund, as a separate trust fund which shall not form part of the general fund of the government. 50

The coco levies were further clarified in amendatory laws, specifically P.D. No. 961 51 and P.D. No. 1468 52 in this wise:
The Authority (Philippine Coconut Authority) is hereby empowered to impose and collect a levy, to be known as the Coconut Consumers Stabilization Fund Levy, on every one hundred kilos of copra resecada, or its equivalent in other coconut products delivered to, and/or purchased by, copra exporters, oil millers, desiccators and other endusers of copra or its equivalent in other coconut products. The levy shall be paid by such copra exporters, oil millers, desiccators and other endusers of copra or its equivalent in other coconut products under such rules and regulations as the Authority may prescribe. Until otherwise

prescribed by the Authority, the current levy being collected shall be continued. 53

Like other tax measures, they were not voluntary payments or donations by the people. They were enforced contributions exacted on pain of penal sanctions, as provided under P.D. No. 276:
3. Any person or firm who violates any provision of this Decree or the rules and regulations promulgated thereunder, shall, in addition to penalties already prescribed under existing administrative and special law, pay a fine of not less than P2,500 or more than P10,000, or suffer cancellation of licenses to operate, or both, at the discretion of the Court. 54

Such penalties were later amended thus:

Whenever any person or entity willfully and deliberately violates any of the provisions of this Act, or any rule or regulation legally promulgated hereunder by the Authority, the person or persons responsible for such violation shall be punished by a fine of not more than P20,000.00 and by imprisonment of not more than five years. If the offender be a corporation, partnership or a juridical person, the penalty shall be imposed on the officer or officers authorizing, permitting or tolerating the violation. Aliens found guilty of any offenses shall, after having served his sentence, be immediately deported and, in the case of a naturalized citizen, his certificate of naturalization shall be cancelled. 55

(b) The coconut levies were imposed pursuant to the laws enacted by the proper legislative authorities of the State. Indeed, the CCSF was collected under P.D. No. 276, issued by former President Ferdinand E. Marcos who was then exercising legislative powers. 56 (c) They were clearly imposed for a public purpose. There is absolutely no question that they were collected to advance the governments avowed policy of protecting the coconut industry. This Court takes judicial notice of the fact that the coconut industry is one of the great economic pillars of our nation, and coconuts and their by products occupy a leading position among the countrys export products; that it gives employment to thousands of Filipinos; that it is a great source of the States wealth; and that it is one of the important sources of foreign exchange needed by our country and, thus, pivotal in the plans of a government committed to a policy of currency stability.

Taxation is done not merely to raise revenues to support the government, but also to provide means for the rehabilitation and the stabilization of a threatened industry, which is so affected with public interest as to be within the police power of the State, as held in Caltex Philippines v. COA 57 and Osmea v. Orbos. 58 Even if the money is allocated for a special purpose and raised by special means, it is still public in character. In the case before us, the funds were even used to organize and finance State offices. In Cocofed v. PCGG, 59 the Court observed that certain agencies or enterprises were organized and financed with revenues derived from coconut levies imposed under a succession of laws of the late dictatorship . . . with deposed Ferdinand Marcos and his cronies as the suspected authors and chief beneficiaries of the resulting coconut industry monopoly. 60 The Court continued: . . . . It cannot be denied that the coconut industry is one of the major industries supporting the national economy. It is, therefore, the States concern to make it a strong and secure source not only of the livelihood of a significant segment of the population, but also of export earnings the sustained growth of which is one of the imperatives of economic stability. . . .. 61

2. Coconut Funds Are Levied for the Benefit of the Coconut Industry and Its Farmers.
Just like the sugar levy funds, the coconut levy funds constitute state funds even though they may be held for a special public purpose. In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the coconut levy funds to the sugar levy funds, both being special public funds acquired through the taxing and police powers of the State. The sugar levy funds, which are strikingly similar to the coconut levies in their imposition and purpose, were declared public funds by this Court in Gaston v. Republic Planters Bank, 62 from which we quote:
The stabilization fees collected are in the nature of a tax which is within the power of the State to impose for the promotion of the sugar industry (Lutz vs. Araneta, 98 Phil. 148). They constitute sugar liens (Sec. 7[b], P.D. No. 388). The collections made accrue to a Special Fund, a Development and Stabilization Fund, almost identical to the Sugar Adjustment and Stabilization Fund created under Section 6 of Commonwealth Act 567. The tax collected is not in a pure exercise of the taxing power. It is levied with a regulatory purpose, to provide

means for the stabilization of the sugar industry. The levy is primarily in the exercise of the police power of the State. (Lutz vs. Araneta, supra.)63

The Court further explained:

64

The stabilization fees in question are levied by the State upon sugar millers, planters and producers for a special purpose that of financing the growth and development of the sugar industry and all its components, stabilization of the domestic market including the foreign market. The fact that the State has taken possession of moneys

pursuant to law is sufficient to constitute them as state funds, even though they are held for a special purpose (Lawrence v. American Surety Co., 263 Mich 586, 294 ALR 535, cited in 42 Am. Jur., Sec. 2., p. 718). Having been levied for a special purpose, the revenues collected are to be treated as a special fund, to be, in the language of the statute, administered in trust for the purpose intended. Once the purpose has been fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of the Government. That is the essence of the trust intended (see 1987 Constitution, Art. VI, Sec. 29[3], lifted from the 1935 Constitution, Article VI, Sec. 23[1]. (Italics supplied)
The character of the Stabilization Fund as a special fund is emphasized by the fact that the funds are deposited in the Philippine National Bank and not in the Philippine Treasury, moneys from which may be paid out only in pursuance of an appropriation made by law (1987 Constitution, Article VI, Sec. 29[1], 1973 Constitution, Article VIII, Sec. 18[1]). That the fees were collected from sugar producers, planters and millers, and that the funds were channeled to the purchase of shares of stock in respondent Bank do not convert the funds into a trust fund for their benefit nor make them the beneficial owners of the shares so purchased. It is but rational that the fees be collected from them since it is also they who are to be benefited from the expenditure of the funds derived from it. The investment in shares of respondent Bank is not alien to the purpose intended because of the Banks character as a commodity bank for sugar conceived for the industrys growth and development. Furthermore, of note is the fact that one-half (1/2) or P0.50 per picul, of the amount levied under P.D. No. 388 is to be utilized for the payment of salaries and wages of personnel, fringe benefits and allowances of officers and employees of PHILSUCOM thereby immediately negating the claim that the entire amount levied is in trust for sugar, producers, planters and millers.

To rule in petitioners favor would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry, and all its components, stabilization of the domestic market including the foreign market, the industry being of vital importance to the countrys economy and to national interest.

In the same manner, this Court has also ruled that the oil stabilization funds were public in character and subject to audit by COA. It ruled in this wise:
Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it byE.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a trust liability account, the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a special fund. Indeed, the practice is not without precedent. 65

In his Concurring Opinion in Kilosbayan v. Guingona, 66 Justice Florentino P. Feliciano explained that the funds raised by the On-line Lottery System were also public in nature. In his words:
. . .. In the case presently before the Court, the funds involved are clearly public in nature. The funds to be generated by the proposed lottery are to be raised from the population at large. Should the proposed operation be as successful as its proponents project, those funds will come from well-nigh every town and barrio of Luzon. The funds here involved are public in another very real sense: they will belong to the PCSO, a government owned or controlled corporation and an instrumentality of the government and are destined for utilization in social development projects which, at least in principle, are designed to benefit the general public. . . .. The interest of a private citizen in seeing to it that public funds, from whatever source they may have been derived, go only to the uses directed and permitted by law is as real and personal and substantial as the interest of a private taxpayer in seeing to it that tax monies are not intercepted on their way to the public treasury or otherwise diverted from uses prescribed or allowed by law. It is also pertinent to note that the more successful the government is in raising revenues by non-traditional methods such as PAGCOR operations

and privatization measures, the lesser will be the pressure upon the traditional sources of public revenues, i.e., the pocket books of individual taxpayers and importers. 67

Thus, the coconut levy funds like the sugar levy and the oil stabilization funds, as well as the monies generated by the On-line Lottery System are funds exacted by the State. Being enforced contributions, they are prima facie public funds.

3. Respondents Judicially Admit That the Levies Are Government Funds.

Equally important as the fact that the coconut levy funds were raised through the taxing and police powers of the State is respondents effective judicial admission that these levies are government funds. As shown by the attachments to their pleadings, 68 respondents concede that the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Investment Development Fund constitute government funds . . . for the benefit of coconut farmers.
Collections on both levies constitute government funds. However, unlike other taxes that the Government levies and collects such as income tax, tariff and customs duties, etc., the collections on the CCSF and CIDF are, by express provision of the laws imposing them, for a definite purpose, not just for any governmental purpose. As stated above part of the collections on the CCSF levy should be spent for the benefit of the coconut farmers. And in respect of the collections on the CIDF levy, P.D. 582 mandatorily requires that the same should be spent exclusively for the establishment, operation and maintenance of a hybrid coconut seed garden and the distribution, for free, to the coconut farmers of the hybrid coconut seednuts produced from that seed garden.
IDAESH

On the other hand, the laws which impose special levies on specific industries, for example on the mining industry, sugar industry, timber industry, etc., do not, by their terms, expressly require that the collections on those levies be spent exclusively for the benefit of the industry concerned. And if the enabling law thus so provide, the fact remains that the governmental agency entrusted with the duty of implementing the purpose for which the levy is imposed is vested with the discretionary power to determine when and how the collections should be appropriated. 69

4. The COA Audit Shows the Public Nature of the Funds.

Under COA Office Order No. 86-9470 dated April 15, 1986, 70 the COA reviewed the expenditure and use of the coconut levies allocated for the acquisition of the UCPB. The audit was aimed at ascertaining whether these were utilized for the purpose for which they had been intended. 71 Under the 1987 Constitution, the powers of the COA are as follows:
The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities . . . . 72

Because these funds have been subjected to COA audit, there can be no other conclusion than that they are prima facie public in character.

5. The BIR Has Pronounced That the Coconut Levy Funds Are Taxes.
In response to a query posed by the administrator of the Philippine Coconut Authority regarding the character of the coconut levy funds, the Bureau of Internal Revenue has affirmed that these funds are public in character. It held as follows: [T]he coconut levy is not a public trust fund for the benefit of the coconut farmers, but is in the nature of a tax and, therefore, . . . public funds that are subject to government administration and disposition. 73 Furthermore, the executive branch treats the coconut levies as public funds. Thus, Executive Order No. 277, issued on September 24, 1995, directed the mode of treatment, utilization, administration and management of the coconut levy funds. It provided as follows:
(a) The coconut levy funds, which include all income, interests, proceeds or profits derived therefrom, as well as all assets, properties and shares of stocks procured or obtained with the use of such funds, shall be treated, utilized, administered and managed as public funds consistent with the uses and purposes under the laws which constituted them and the development priorities of the government, including the governments coconut productivity, rehabilitation, research extension, farmers organizations, and market promotions programs,

which are designed to advance the development of the coconut industry and the welfare of the coconut farmers. 74 (Italics supplied)

Doctrinally, acts of the executive branch are prima facie valid and binding, unless declared unconstitutional or contrary to law.

6. Laws Governing Coconut Levies Recognize Their Public Nature.

Finally and tellingly, the very laws governing the coconut levies recognize their public character. Thus, the third Whereas clause of P.D. No. 276 treats them as special funds for a specific public purpose. Furthermore, P.D. No. 711 transferred to the general funds of the State all existing special and fiduciary funds including the CCSF. On the other hand, P.D. No. 1234 specifically declared the CCSF as a special fund for a special purpose, which should be treated as a special account in the National Treasury.
TcEaDS

Moreover, even President Marcos himself, as the sole legislative/executive authority during the martial law years, struck off the phrase which is a private fund of the coconut farmers from the original copy of Executive Order No. 504 dated May 31, 1978, and we quote:
WHEREAS, by means of the Coconut Consumers Stabilization Fund (CCSF), which is the private fund of the coconut farmers (deleted), essential coconut-based products are made available to household consumers at socialized prices. (Italics supplied)

The phrase in bold face which is the private fund of the coconut farmers was crossed out and duly initialed by its author, former President Marcos. This deletion, clearly visible in Attachment C of petitioners Memorandum, 75 was a categorical legislative intent to regard the CCSF as public, not private, funds.

Having Been Acquired With Public Funds, UCPB Shares Belong, Prima Facie, to the Government
Having shown that the coconut levy funds are not only affected with public interest, but are in fact prima facie public funds, this Court believes that the

government should be allowed to vote the questioned shares, because they belong to it as the prima facie beneficial and true owner. As stated at the beginning, voting is an act of dominion that should be exercised by the share owner. One of the recognized rights of an owner is the right to vote at meetings of the corporation. The right to vote is classified as the right to control. 76Voting rights may be for the purpose of, among others, electing or removing directors, amending a charter, or making or amending bylaws. 77 Because the subject UCPB shares were acquired with government funds, the government becomes theirprima facie beneficial and true owner. Ownership includes the right to enjoy, dispose of, exclude and recover a thing without limitations other than those established by law or by the owner. 78 Ownership has been aptly described as the most comprehensive of all real rights. 79 And the right to vote shares is a mere incident of ownership. In the present case, the government has been shown to be the prima facie owner of the funds used to purchase the shares. Hence, it should be allowed the rights and privileges flowing from such fact.

And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic should continue to vote those shares until and unless private respondents are able to demonstrate, in the main cases pending before the Sandiganbayan, that they [the sequestered UCPB shares] have legitimately become private.

Procedural and Incidental Issues: Grave Abuse of Discretion, Improper Arguments and Intervenors Relief
Procedurally, respondents argue that petitioner has failed to demonstrate that the Sandiganbayan committed grave abuse of discretion, a demonstration required in every petition under Rule 65. 80 We disagree. We hold that the Sandiganbayan gravely abused its discretion when it contravened the rulings of this Court inBaseco and Cojuangco-Roxas thereby unlawfully, capriciously and arbitrarily depriving the government of its

right to vote sequestered shares purchased with coconut levy funds which are prima facie public funds. Indeed, grave abuse of discretion may arise when a lower court or tribunal violates or contravenes the Constitution, the law or existing jurisprudence. In one case, 81 this Court ruled that the lower courts resolution was tantamount to overruling a judicial pronouncement of the highest Court . . . and unmistakably a very grave abuse of discretion. 82

The Public Character of Shares Is a Valid Issue

Private respondents also contend that the public nature of the coconut levy funds was not raised as an issue before the Sandiganbayan. Hence, it could not be taken up before this Court. Again we disagree. By ruling that the two-tiered test should be applied in evaluating private respondents claim of exercising voting rights over the sequestered shares, the Sandiganbayan effectively held that the subject assets were private in character. Thus, to meet this issue, the Office of the Solicitor General countered that the shares were not private in character, and that quite the contrary, they were and are public in nature because they were acquired with coco levy funds which are public in character. In short, the main issue of who may vote the shares cannot be determined without passing upon the question of the public/private character of the shares and the funds used to acquire them. The latter issue, although not specifically raised in the Court a quo, should still be resolved in order to fully adjudicate the main issue. Indeed, this Court has the authority to waive the lack of proper assignment of errors if the unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors refer to matters upon which the determination of the questions raised by the errors properly assigned depend. 83 Therefore, where the issues already raised also rest on other issues not specifically presented as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the Court has the authority to include them in its discussion of the controversy as well as to pass upon them. 84

No Positive Relief

For Intervenors
Intervenors anchor their interest in this case on an alleged right that they are trying to enforce in another Sandiganbayan case docketed as SB Case No. 0187. 85 In that case, they seek the recovery of the subject UCPB shares from herein private respondents and the corporations controlled by them. Therefore, the rights sought to be protected and the reliefs prayed for by intervenors are still being litigated in the said case. The purported rights they are invoking are mere expectancies wholly dependent on the outcome of that case in the Sandiganbayan. Clearly, we cannot rule on intervenors alleged right to vote at this time and in this case. That right is dependent upon the Sandiganbayans resolution of their action for the recovery of said sequestered shares. Given the patent fact that intervenors are not registered stockholders of UCPB as of the moment, their asserted rights cannot be ruled upon in the present proceedings. Hence, no positive relief can be given them now, except insofar as they join petitioner in barring private respondents from voting the subject shares.

Epilogue
In sum, we hold that the Sandiganbayan committed grave abuse of discretion in grossly contradicting and effectively reversing existing jurisprudence, and in depriving the government of its right to vote the sequestered UCPB shares which are prima faciepublic in character. In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may conduct or the final judgment it may promulgate in Civil Case Nos. 0033-A, 0033-B and 0033-F. Our determination here is merely prima facie, and should not bar the anti-graft court from making a final ruling, after proper trial and hearing, on the issues and prayers in the said civil cases, particularly in reference to the ownership of the subject shares.
cTSHaE

We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in character, we are not ruling in any final manner on their classification whether they are general or trust or special funds since such classification is not at issue here. Suffice it to say that the public nature of the coco levy funds is decreed by the Court only for the purpose of determining the right to vote the shares, pending the final outcome of the said civil cases. Neither are we resolving in the present case the question of whether the shares held by Respondent Cojuangco are, as he claims, the result of private enterprise.

This factual matter should also be taken up in the final decision in the cited cases that are pending in the court a quo. Again suffice it to say that the only issue settled here is the right of PCGG to vote the sequestered shares, pending the final outcome of said cases. This matter involving the coconut levy funds and the sequestered UCPB shares has been straddling the courts for about 15 years. What we are discussing in the present Petition, we stress, is just an incident of the main cases which are pending in the anti-graft court the cases for the reconveyance, reversion and restitution to the State of these UCPB shares. The resolution of the main cases has indeed been long overdue. Every effort, both by the parties and the Sandiganbayan, should be exerted to finally settle this controversy. WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET ASIDE. The PCGG shall continue voting the sequestered shares until Sandiganbayan Civil Case Nos. 0033-A, 0033-B and 0033-F are finally and completely resolved. Furthermore, the Sandiganbayan is ORDERED to decide with finality the aforesaid civil cases within a period of six (6) months from notice. It shall report to this Court on the progress of the said cases every three (3) months, on pain of contempt. The Petition in Intervention is DISMISSED inasmuch as the reliefs prayed for are not covered by the main issues in this case. No costs.
IAEcCT

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Mendoza, Quisumbing, Buena, De Leon, Jr., and Carpio, JJ., concur. Melo, J., see dissenting opinion. Puno, J., joins the separate opinion of J. Vitug. Vitug, J., see separate opinion.
dissenting opinion of J. Melo.

Kapunan, Ynares-Santiago, Sandoval-Gutierrez, JJ., concur with the Pardo, J., Join in the result of the dissents

Separate Opinions
VITUG, J., separate opinion: The Presidential Commission on Good Government ("PCGG"), representing the Republic of the Philippines, assails in the instant special action for certiorari under Rule 65 of the Rules of Court, the order, dated 28 February 2001, of public respondent Sandiganbayan (First Division) in Civil Cases No. 0033-A, 0033-B, and 0033-F, entitled "Republic of the Philippines vs. Eduardo Cojuangco, Jr., et al.," on the ground of grave abuse of discretion amounting to lack of jurisdiction. In the order, the Sandiganbayan enjoined the PCGG from voting the sequestered shares of stock of the United Coconut Planters' Bank ("UCPB") and authorized private respondents Philippines Coconut Producers Federation, Inc. ("COCOFED"), et al., Ballares, et al., and Eduardo Cojuangco, Jr., et al., to vote the UCPB shares registered in their names and themselves be voted upon at the stockholders' meeting of the bank. The institution of sequestration proceedings by the PCGG against the shares of stock of the UCPB claimed to be owned by one million coconut farmers and the "Coconut Industry Investment Fund" ("CIIF") companies, was among the measures undertaken by the Aquino Government shortly after the February 1986 Revolution for the recovery of "ill-gotten wealth" said to have been amassed by former President and Mrs. Ferdinand E. Marcos, their relatives, friends and business associates. Among the initial cases filed with the Sandiganbayan was Case No. 003 against private respondent Eduardo Cojuangco, Jr., and sixty others, for reconveyance, reversion, accounting, restitution and damages. Sequestration orders were later issued by the Sandiganbayan.
CaTcSA

Subsequently, however, Sandiganbayan issued a resolution lifting the sequestration of the UCPB shares of stock registered in the name of the coconut farmers and the CIIF companies on the thesis that these entities were not so impleaded by the PCGG as party-defendants, having merely been listed in an annex appended to the complaint in Case No. 003. The PCGG questioned, viaa petition for certiorari, docketed G.R. No. 96073, that resolution before this Court. In the interim, the Sandiganbayan authorized the holding of a stockholders' meeting for the election of the members of the Board of Directors of the UCPB. Ruling in favor of a petition filed by Eduardo Cojuangco, Jr., this Court lifted the temporary restraining order it issued against the holding of said meeting and allowed private respondents to vote the sequestered shares of stock. On 16 February 1993, the Court recalled this order by issuing another resolution, directing the restoration of the status quo ante in G.R. No. 96073. The resolution

allowed the PCGG to continue voting the sequestered shares of stock of the UCPB at the bank's meetings, pending determination of the validity of the Sandiganbayan resolution lifting the sequestration of said shares. Justifying the new order, the Court adverted to its earlier decision in COCOFED vs. PCGG 1 which dismissed the petition of private respondent COCOFED to nullify the sequestration order against, inter alia, the UCPB shares of stock. The acquisition of the UCPB shares was explained thusly:

"The United Coconut Planters Bank (or the UCPB) is a commercial bank acquired 'for the benefit of the coconut farmers' (Section 1, P.D. 755) with the use of the Coconut Consumers Stabilization Fund (CCSF) in virtue of P.D. 755, promulgated on 29 July 1975. The Decree authorized the Bank to provide the intended beneficiaries with 'readily available credit facilities at preferential rates' (Ibid.). It also authorized the distribution of the Bank's shares of stock, free, to the coconut farmers; and some 1,405,366 purported recipients have been listed as UCPB stockholders as of 10 April 1986 (Item A.1.1. Of the UCPB List of Stockholders.)"

The Coconut Consumers Stabilization Fund (CCSF) was established by P.D. 276 on 29 August 1973. Its funds, used in acquiring UCPB, were derived from the collection of a "Stabilization Fund Levy" of fifteen pesos (P15.00) on the first sale of every 100 kilograms of copra resecada or equivalent product. The CCSF, later firmed up by amendatory decrees, was intended to subsidize the sale of coconutbased products at prices set by the Price Control Council in order to stabilize the price of edible oil and other coconut oil-based products for the benefit of consumers. 2 Relying on these pronouncements, the Court, in its 16th February 1993 resolution, raised the following relevant questions: "How is it that shares of stock

in such entities which were organized and financed by revenues derived from coconut levy funds which were imbued with public interest ended up in private hands who are not farmers or beneficiaries; and whether or not the holders of said stock, who in one way or another had had some part in the collection, administration, disbursement or other disposition of the coconut levy funds, were qualified to acquire stock, in the corporations formed and operated from those funds." These issues, the Court noted, were still unresolved and, in fact,
unaffected by the issue of the automatic lifting of the sequestration. Thus, the resolution declared: "The right of the petitioners to vote stock in their names at

the meetings of the UCPB cannot be conceded at this time. That right still has to

be established by them before the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB stock and cannot be accorded me right to vote them."
ATcEDS

On 23 January 1995, the Court, in a consolidated decision which, among other cases, included G.R. No. 96073, nullified and set aside the disputed Sandiganbayan resolution and upheld the sequestration of the UCPB shares of stock on the ground that the impleading of the subject firms would be unnecessary since, if warranted by the evidence, judgments could be handed down against the defendants divesting them of their ownership of said shares and imposing upon them the obligation of surrendering the shares of stock to the Government. The decision, while not expressly ratifying the 16th February 1993 resolution, was a mandate, nevertheless, for the maintenance of the status quo ante that embraced the exercise by the PCGG of its voting rights on the sequestered shares of stock of the UCPB. Since 1986, the PCGG had been able to effectively install its nominees to the Board of Directors of the UCPB. Such was the state of affairs when the Sandiganbayan so issued the challenged resolution on 28 February 2001, authorizing COCOFED, et al., Ballares, et al., and Eduardo Cojuangco, Jr., et al., along with all other registered stockholders of UCPB, to vote the shares of stock and themselves be voted upon at stockholders' meetings of the UCPB. In support of this order, preempting the final disposition of the main case in Case No. 003, Sandiganbayan applied the two-tiered test enunciated in Eduardo Cojuangco, Jr.,vs. Calpo 3 and PCGG vs. Eduardo Cojuangco, Jr. 4 As so aptly argued by petitioner, however, the test would find no application to a case of the "takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands." 5 The Court acknowledged to be a fact that the money used to purchase and capitalize the UCPB had come from the CCSF, 6 a fund raised from the exercise by the State of its inherent police and taxing powers. To account for their equity holdings in the bank, COCOFED, et al., in their Memorandum, 7 would advance that, in 1975, COCOFED, a private national association of coconut producers, was designated 'by the Philippine Coconut Authority ("PCA") as being the implementing agency for the free distribution of the shares of stock of the UCPB to the coconut farmers. By 02 May 1981, 232,805,852.16 of said shares were distributed to the farmers. Still there remained 15,619,419.84 shares registered in the name of COCOFED which, according to it, were ultimately given to the farmers. Prior to June 1986, a substantial number of the coconut farmers sold their shares in the bank at prices

below par value. By way of a financial assistance to the selling coconut farmers, the UCPB Board of Directors authorized the CIIF companies to purchase their holdings in the bank at par value. These transactions, nevertheless, did not change the character of the UCPB shares, these having been bought with coconut levy funds which the Court distinctly characterized to be "clearly affected with public interest" and "raised such as they were by the State's police and taxing powers." 8 The fundamental rule is that tax proceeds may only be used for a public purpose, which may either be a general public purpose to support the existence of the state or a special public purpose to pursue certain legitimate objects of government in the exercise of police power, and none other. As a measure to ensure the proper utilization of money collected for a specified public purpose, the 1987 Constitution, restating another general principle, treats the proceeds as a special fund to be paid out for such purpose. If, however, that purpose has been fulfilled or is no longer forthcoming, the balance, if any, shall then be transferred to the general funds of the government, 9 which may thereafter be appropriated by Congress and expended for any legitimate purpose within the scope of the general fund. An entity, whether public or private, which holds the tax money has no authority to disburse it or to pay any of it to anyone, the power to dispose of such money being vested in the legislature. 10 Thus, the 1987 Constitution, like its counterparts in the 1935 and the 1973 Constitution, mandates that no money shall be paid out of the national treasury except in pursuance of an appropriation made by law. 11 Respondent Eduardo Cojuangco, Jr., upon the other hand, in claiming ownership over a portion of the sequestered UCPB shares, advanced two documents an agreement in May 1975, where he appeared to have exercised his option to acquire the UCPB shares of stock owned by the family of the late Don Jose Cojuangco, Sr., amounting to 72.2% equity holding in the bank, at two hundred pesos (Php 200.00) per share, and the "Agreement for the Acquisition of a Commercial Bank for the Benefit of the Coconut Farmers of the Philippines", dated 25 May 1975, whereby the PCA purchased with funds from the CCSF the aforesaid UCPB shares from Eduardo Cojuangco, Jr., also at two hundred pesos (Php 200.00) per share. 12 In the latter agreement, it was stipulated that as compensation for exercising his personal and exclusive option to acquire the UCPB shares and for transferring such shares to the PCA, Eduardo Cojuangco, Jr., would receive one (1) share for every nine (9) shares acquired by the PCA and additional equity in the bank. In sum, correlating the two agreements, Eduardo Cojuangco, Jr., would contend, in effect, that he retained title over roughly 10% equity holding in the bank and established his prima facie right

over the corresponding shares independently sourced from the coconut levy funds. Even if it were to be conceded that the said 10% holding in UCPB of Eduardo Cojuangco, Jr., could be assailed, pending a conclusive determination on the legality of such a retention, however, it would neither be right nor just to deprive him from meanwhile exercising his right to at least vote the same. For the foregoing reasons, I vote to grant the petition in part and to deny it insofar as the shares of stock pertaining to the 10% of the 72% equity retention standing in the name of Eduardo Cojuangco, Jr., are concerned.
aTcESI

In passing, I should like to state my understanding of the ruling of the Court. I must first clarify, however, that sequestration does not mean the vesting of title in the hands of the sequestering authority; rather, the term implies the preservation of assets. Neither ownership nor rights thereover are acquired or lost by virtue alone of sequestration a mere ancillary remedy to secure a disputed asset. (a) By a vote of ten justices, namely, Chief Justice Davide and Justices Bellosillo, Puno, Vitug, Mendoza, Panganiban, Quisumbing, Buena, de Leon and Carpio, the coconut levy funds have been declared prima facie to be "public funds." Justices Melo, Kapunan, Pardo, Ynares-Santiago and Sandoval-Gutierrez have dissented from the view of the majority. (b) The Sandiganbayan must now determine conclusively and with deliberate dispatch the status of sequestered shares of stock, as well as whether or not the shares have been acquired utilizing the coconut levy funds, and, ultimately, the ownership thereof. (c) Meanwhile, the right to vote the disputed shares belongs to whoever or whichever can show prima facie ownership or a better right thereover. Chief Justice Davide and Justices Bellosillo, Mendoza, Panganiban, Quisumbing, Buena, de Leon and Carpio hold that such prima facie showing exists in favor of the government on all the disputed shares. Justices Puno and Vitug concur except for the 10% of the 72% disputed shares in the name of respondent Cojuangco over which the PCGG will yet have to establish a prima facie right of ownership.
SEIcAD

Justices Melo, Kapunan, Pardo, Ynares-Santiago and Sandoval-Gutierrez maintain the view that, the coconut levy funds not being public funds and the government

not having been able to satisfactorily establish to date its title over the sequestered shares, the PCGG has no right to vote any of the disputed shares. MELO, J ., dissenting opinion: I respectfully dissent from the majority opinion, penned by Mr. Justice Panganiban, upholding the right of the PCGG to vote the sequestered UCPB shares of stock. The petition sprung from the following factual antecedents: In 1986 and 1987, numerous business enterprises, entities, and pieces of property, real and personal, were sequestered or taken over by the PCGG on the ground that these were ill-gotten property of former President Marcos, his family, and close associates. Among these sequestered property were shares of stock in the United Coconut Planters Bank (UCPB) registered in the name of 1,405,366 coconut farmers and of the so-called Coconut Industry Investment Fund (CIIF) companies.
IaHDcT

In connection with the sequestration and take-over of said UCPB shares of stock, the PCGG, on July 31, 1987, instituted an action for reconveyance, reversion, accounting, restitution, and damages against Eduardo Cojuangco, Jr. and sixty others with the Sandiganbayan, docketed therein as Case No. 0033. On November 19, 1990, and during the pendency of the case, the Sandiganbayan issued a resolution lifting the sequestration of the UCPB shares of stock registered in the name of "1 million coconut farmers" and the CIIF companies, on the ground that these entities were not impleaded by the PCGG as party-defendants within the 6-month period ending on August 2, 1987 fixed by the Constitution, having merely been listed in an annex appended to the complaint in Case No. 0033. This Resolution was challenged by the PCGG in a petition for certiorari filed with the Court, docketed herein as G.R. No. 96073. Pending resolution of the case, the Sandiganbayan, on March 4, 1991, ordered the holding of elections for members of the Board of Directors of UCPB. Opposing the holding of elections, PCGG applied for, and was granted by the Court a restraining order enjoining the holding of a stockholders' meeting for the election of the Board of Directors of UCPB. However, on March 3, 1992, acting on a petition filed by Eduardo Cojuangco, Jr., the Court lifted the restraining order it had issued and ordered instead that UCPB

elect its Board of Directors. Furthermore, the Court allowed the sequestered shares of UCPB to be voted by the registered owners thereof. The shareholders' victory would, however, be fleeting. On February 17, 1993, acting on the Solicitor General's Clarification/Manifestation with Motion, the Court issued a subsequent Resolution declaring that "the right of the petitioners to vote stock in their names at the meetings of the UCPB cannot be conceded at this time. That right still has to be established by them before the Sandiganbayan. Until that is done, they cannot be deemed legitimate owners of UCPB stock and cannot be accorded the right to vote them." Accordingly, the dispositive portion of said Resolution provided:
IN VIEW OF THE FOREGOING, the Court recalls and sets aside the Resolution dated March 3, 1992 and; pending resolution on the merits of the action at bar, and until further orders, suspends the effectivity of the lifting of the sequestration decreed by the Sandiganbayan on November 15, 1990, and directs the restoration of the status quo ante, so as to allow the PCGG to continue voting the shares of stock under sequestration at the meetings of the United Coconut Planters Bank. IT IS SO ORDERED. (Rollo, p. 73.)

Two years thereafter, on January 23, 1995, the Court rendered a decision in G.R. No. 96073 (240 SCRA 376) nullifying and setting aside the November 19, 1990 Resolution of the Sandiganbayan lifting the sequestration of the shares of stock of UCPB registered in the name of "1 million coconut farmers" and of the CIIF companies on the ground that "as regards actions in which the complaints seek recovery of defendants' shares of stock in existing corporations (e.g. San Miguel Corporation, Benguet Corporation, Meralco, etc.) because allegedly purchased with misappropriated public funds, in breach of fiduciary duty, or otherwise under illicit or anomalous conditions, the impleading of said firms would clearly appear to be unnecessary" since, if warranted by the evidence, judgments could be handed down against the defendants divesting them of their ownership of said stock and imposing upon them the obligation of surrendering said stock to the Government. It may be noted that in said decision, the Court did not reaffirm and maintain its Resolution dated February 17, 1993. A month thereafter, the PCGG, pursuant to the order of the Sandiganbayan, subdivided Case No. 0033 into eight complaints, docketed as Cases No. 0033-A to 0033-H.

Six years thereafter, on February 13, 2001, the Board of Directors of UCPB, received a letter from the ACCRA Law Office. Written on behalf of the Philippine Coconut Producers' Federation (COCOFED), et al. and the more than one million coconut farmers who are registered stockholders of UCPB, the letter demanded of UCPB, which had not held any stockholders' meeting since 1986, to call such a meeting on March 6, 2001, at 3 o'clock in the afternoon, for the purpose of, among other things, electing the Board of Directors. In the same letter, COCOFED also requested information as to whether UCPB had investigated and reported to the Bangko Sentral ng Pilipinas the large scale estafa allegedly committed by the previous members of the board and other responsible officials of UCPB. On February 26, 2001, the UCPB Board of Directors, by way of response to the aforementioned letter, passed and approved a resolution calling for a stockholders' meeting of the bank on March 6, 2001 at 3 o'clock in the afternoon, the date fixed in the bank's By-Laws. In anticipation of the announced stockholders' meeting, COCOFED, et al. and Ballares, et al., filed, in the following Sandiganbayancases:
Civil Case No. 0033-A; Civil Case No. 0033-B; and Civil Case No. 0033-F,

a class action omnibus motion dated February 23, 2001, seeking to enjoin the PCGG from voting in the announced stockholders' meeting of March 6, 2001 (a) the UCPB shares of stock registered in the names of the more than one million coconut farmers; (b) the San Miguel Corporation (SMC) shares registered in the names of the 14 CIIF Holding Companies and beneficially owned by COCOFED; and (c) the shares of stock registered in the name of PCGG itself. Because of the motion's extreme urgency, and as prayed for by the movants themselves, the Sandiganbayan (1st Division) heard the motion on February 28, 2001. Lorenzo V. Tan, President of UCPB, was present during this hearing and in a manifestation, he asked to be heard therein. The Sandiganbayan noted the manifestation of Mr. Lorenzo V. Tan, as follows:

At a certain state of the argument on this matter, the UCPB sought to be heard in "executive session" upon the alleged significant matters of fact to be conveyed by the UCPB to this Court. Duly warned by the engaged counsel for the UCPB, Atty. Roberto San Juan, the Court excluded all private individuals and all counsel not related to these cases so that whatever matters of a restricted or confidential character of significance to banks in the business community, and of the UCPB in particular, could be heard in confidence. The bank's President in the person of Mr. Lorenzo V. Tan was heard. While the matters he put forth might be relevant to the bank, the entire thrust of the clarification made by the president was the need to dispose of this case expeditiously so that question of ownership of the shares and therefore of the bank, would be resolved with finality; this apparently is a desirable element in the business world and in the market in which banks operate, as much for drawing investments as for acceptability of other transactions and "products" of banks in the market. It must be stated that the matter, while important in itself, is of minor relevance to the issue at bar. (p. 3, Order dated February 28, 2001.)

Following the conclusion of the hearing, the Sandiganbayan issued in open court on the same date February 28, 2001 the Order authorizing COCOFED, et al., Ballares, et al. and Eduardo Cojuangco, Jr., et al. and all other registered stockholders of UCPB to vote their shares of stock and themselves to be voted upon at the UCPB announced stockholders' meeting of March 6, 2001 or in any subsequent continuation or resetting thereof, and to perform such acts as will normally follow in the exercise of their rights as registered stockholders. More specifically, the pertinent portion of the Order declared:
In view hereof, the movants COCOFED, et al. and Ballares, et al. as well as Eduardo Cojuangco, et al. who were acknowledged to be registered stockholders of the UCPB are authorized, as are all other registered stockholders of the United Coconut Planters Bank, until further orders from this Court, to exercise their rights to vote their shares of stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB) at the scheduled Stockholders' Meeting on May 6, 2001 or on any subsequent continuation or resetting thereof, and to perform such acts as will normally follow in the exercise of these rights as registered stockholders.

On March 1, 2001, the Sandiganbayan issued a writ of preliminary injunction enjoining PCGG or any person acting in its behalf from voting the sequestered shares of UCPB at its scheduled stockholders' meeting of March 6, 2001, or at anytime at which the meeting may be continued or reset until otherwise ordered by the same court. In the same writ, the Sandiganbayan also directed the chairman and the secretary of the stockholders' meeting of UCPB on the above scheduled date and other dates to which the meeting may be reset, to acknowledge the right of Eduardo M. Cojuangco, Jr., et al. to vote the shares of stock registered in their names on all matters that may be properly considered before said stockholders' meeting.
DaAIHC

Such was the state of things when, on March 5, 2001, herein petitioner Republic of the Philippines, represented by the PCGG, filed the instant petition premised on the fact that at all times prior to the questioned order, PCGG had been voting the sequestered UCPB shares registered in the names of private respondents under the authority of the Court's pronouncement in G.R. No. 96073 and 104850. PCGG claimed that the right granted to it to vote the sequestered shares was the status quo and for this status quo to be disturbed, there must be a clear showing that this Court has reversed or, at the very least, modified its prior pronouncements on the matter. Since there was none, petitioner contended that respondent Sandiganbayan gravely abused its discretion, tantamount to lack or excess of jurisdiction, when it granted the right to vote said sequestered shares to private respondents COCOFED, Ballares, and Cojuangco, Jr. et al. PCGG likewise insisted that the subject sequestered shares were purchased with coconut levy funds, funds declared public in character, and that the Resolution issued by this Court dated February 13,1993 in G.R. No. 96073 remains effective. In its Resolution of April 17, 2001, the Court defined the issue to be resolved in the instant case in this fashion:
Did the Sandiganbayan commit grave abuse of discretion when it issued the disputed order allowing respondents to vote UCPB shares of stock registered in the name of respondents?

While the majority declares that, indeed, the Sandiganbayan acted with grave abuse of discretion in allowing respondents to vote their UCPB shares of stock registered in their names, I respectfully submit that it did not. In determining whether there has been "grave abuse of discretion", under Rule 65, the "unyielding yardstick" is whether the abuse of discretion is "so patent

and gross as to amount to an evasion of positive duty or 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 or hostility (Sinon vs. Civil Service Commission, 215 SCRA 410 [1992]; Planters Products, Inc. vs. Court of Appeals, 193 SCRA 563 [1991]; Litton Mills, Inc. vs. Galleon Trader, Inc., 163 SCRA 489 [1988]; Esguerra vs. Court of Appeals, 267 SCRA 380 [1997]; Republic vs. Villarama, 278 SCRA 736 [1997]). To discharge its burden of showing that the Sandiganbayan acted with grave abuse of discretion, the PCGG relies principally on the Court's February 16, 1993 Resolution in Republic vs. Sandiganbayan, et al., G.R. No. 96073 where we ordered the restoration of the status quo ante so as to allow PCGG to continue voting the shares of stock under sequestration at the meetings of the UCPB. As correctly pointed out by respondents, the February 16, 1993 Resolution, is in the nature of a temporary restraining order, having been issued to recall the March 3, 1992 Resolution lifting of the temporary restraining order previously issued by the Court on March 5, 1991. In other words, the subject resolution merely reinstated the temporary restraining order which the Court had earlier issued enjoining private respondents from voting the sequestered shares registered in their names. Being in the nature of a restraining order, the same is interlocutory in character and it became functus oficio when this Court decided the PCGG Sequestration Cases, including G.R. No. 96073, on January 23, 1995. A restraining order is but a provisional remedy to which parties may resort "for the preservation or protection of their rights or interests, and for no other purpose, during the pendency of the principal action (Commissioner of Customs vs. Cloribel, 19 SCRA 234 [1967]). Moreover, the Resolution of February 16, 1993 explicitly provided that it shall be effective only "pending resolution on the merits of the action at bar." G.R. No. 96073, the "action at bar" referred to, was decided on the merits on January 23, 1995. The dispositive portion of the decision in the aforementioned PCGG Sequestration Cases, including G.R. No. 96073, provided:
WHEREFORE, judgment is hereby rendered: A. NULLIFYING AND SETTING ASIDE: xxx xxx xxx B. CONFIRMING AND MAINTAINING the temporary restraining orders issued in G.R. Nos. 104883, 105170, 105206,

105808, 105809, 107233, and 107908, which shall continue in force and effect during the continuation of the proceedings in the corresponding civil actions in the Sandiganbayan, subject to the latter's power to modify or terminate the same in the exercise of its sound discretion in light of such evidence as may be subsequently adduced; and C. DISMISSING the petitions in G.R. Nos. 107908 and 109592, for lack of merit (Republic v. Sandiganbayan [First Division, 240 SCRA 376 [1995], at pp. 474-476.)

Even a casual study of the above dispositive portion would show that the Court's Resolution dated February 16, 1993 is not among the temporary restraining orders "confirmed and maintained" in the January 23, 1995 decision. In fact, in Calpo vs. Sandiganbayan (Third Division) (265 SCRA 380 [1996]), the Court clarified that the "PCGG Sequestration Cases," including G.R. No. 96073, did not involve the issue of PCGG's right to vote sequestered corporate shares. The Court held thus:
The crucial question in "The PCGG Sequestration Cases," capsulized by the Court in its resolution of 23 January 1995, is this: "DOES INCLUSION IN THE COMPLAINTS FILED BY THE PCGG BEFORE THE SANDIGANBAYAN OF SPECIFIC ALLEGATIONS OF CORPORATIONS BEING "DUMMIES" OR UNDER THE CONTROL OF ONE OR ANOTHER OF THE DEFENDANTS NAMED THEREIN AND USED AS INSTRUMENTS FOR ACQUISITION, OR AS BEING DEPOSITARIES OR PRODUCTS, OF ILL-GOTTEN WEALTH; OR THE ANNEXING TO SAID COMPLAINTS OF A LIST OF SAID FIRMS, BUT WITHOUT ACTUALLY IMPLEADING THEM AS DEFENDANTS, SATISFY THE CONSTITUTIONAL REQUIREMENT THAT IN ORDER TO MAINTAIN A SEIZURE EFFECTED IN ACCORDANCE WITH EXECUTIVE ORDER NO. 1, s. 1986, THE CORRESPONDING "JUDICIAL ACTION OR PROCEEDING" SHOULD BE FILED WITHIN THE SIX-MONTH PERIOD PRESCRIBED IN SECTION 26, ARTICLE XVIII, OF THE (1987) CONSTITUTION? xxx xxx xxx

Neither the qualifications of the PCGG nominees to sit in the SMC Board of Directors nor the right of the PCGG to vote the sequestered corporate shares have been mentioned, even in passing, by the Court. In fact, the promulgation of the Court's resolution in the PCGG sequestration cases should now pave the way for the cognizance by theSandiganbayan of the quo warranto proceedings. (p. 386-387; italics supplied.)

The issue being limited to the propriety of impleading the firms and corporations subject of sequestration, the Court's failure to "confirm and maintain" the February 16, 1993 Resolution only means that it became functus oficio upon resolution of the main action on January 23, 1995. The PCGG cannot, therefore, claim the continuing effectivity of said Resolution so as to authorize it to continue voting the sequestered UCPB shares.
AHSEaD

The majority opinion, however, claims that PCGG's right to vote said shares remains on the ground that the jurisprudential basesfor the Court's Resolution dated February 16, 1993 still remain. In Buayan Cattle Co. vs. Quintillan (128 SCRA 276 [1984]), the Court categorically declared that a complaint for injunctive relief must be construed strictly against the pleader. Even if the jurisprudential bases for the Resolution are still extant, the fact that said Resolution was not "confirmed and maintained" by the Court after it decided the main action militates against its continuing effectivity, otherwise a temporary restraining order would no longer be "temporary." With the February 16, 1993 Resolution having lost effectivity, the question as to who could then vote the sequestered shares should then revert to the Sandiganbayan, in accordance with our ruling in Philippine Coconut Producers Federation, Inc.(COCOFED) vs. Presidential Commission on Good Government (178 SCRA 236[1989]), where we directed:
3. The incidents concerning the voting of the sequestered shares, the COCOFED elections, and the replacement of directors, being matters incidental to the sequestration, should be addressed to the Sandiganbayan in accordance with the doctrine laid down in PCGG vs. Pena, 159 SCRA 556, reiterated in G.R. No. 74910, Andres Soriano III vs. Hon. Manuel Yuzon; G.R. No. 75075, Eduardo Cojuangco, Jr. vs. Securities and Exchange Commission; G.R. No. 75094,Clifton Ganay vs. Presidential Commission on Good Government; G.R. No. 76397, Board of

Directors of San Miguel Corporation vs. Securities and Exchange Commission; G.R. No. 79459, Eduardo Cojuangco, Jr. vs. Hon. Pedro N.

Laggui; G.R. No. 79520, Neptunia Corporation, Ltd. vs. Presidential Commission on Good Government, August 10, 1988.
(p. 253.)

Significantly, even the Resolution in dispute recognizes that it is the Sandiganbayan which should determine who has the right to vote said shares, the same stating that "the right of the petitioners to vote stock in their names at the meetings of the UCPB cannot be conceded at this time. That right still has to be established by them before the Sandiganbayan." It must also be pointed out that even the temporary restraining orders "confirmed and maintained" by the Court in the Sequestration Cases were made subject to the Sandiganbayan's "powers to modify or terminate the same in the exercise of its sound discretion," thereby reinforcing the conclusion that the February 16, 1993 Resolution relied upon by PCGG (which was not "confirmed and maintained" by the Court) was, in any event, subject to modification or termination by the Sandiganbayan. And in the exercise of its power to determine who should vote the sequestered shares, the Sandiganbayan must be guided by the principles first enunciated in BASECO vs. PCGG (150 SCRA 181 [1987]), and further elucidated by the Court in Cojuangco, Jr. vs. Roxas (195 SCRA 797 [1991]), where we stated that:

Nothing is more settled than the ruling of this Court in BASECO vs. PCGG, that the PCGG cannot exercise acts of dominion over property sequestered. It may not vote sequestered shares of stock or elect the members of the board of directors of the corporation concerned a. PCGG May Not Exercise Acts of Ownership One thing is certain, and should be stated at the outset: the PCGG

cannot exercise acts of dominion over property sequestered, frozen or provisionally taken over. As already stressed with no little insistence, the act of sequestration,freezing or provisional takeover of property does not import or bring about a divestment of title over said property;does not make the PCGG the owner thereof. In relation to the property sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strict ownership; and this is specially true in the situations contemplated by
the sequestration rules where, unlike cases of receivership, for example,

no court exercises effective supervision or can upon due application and hearing, grant authority for the performance of acts of dominion. Equally evident is that the resort to the provisional remedies in question shall entail the least possible interference with business operations or activities so that, in the event that the accusation of the business enterprise being 'ill-gotten' be not proven, it may be returned to its rightful owner as far as possible in the same condition as it was at the time of sequestration. b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business sequestered provisionally taken over, much like a

court-appointed receiver, such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality of the government. In the case of sequestered businesses generally,

(i.e., going concerns, businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator, 'watchdog' or overseer, it is not that of manager, or innovator, much less an owner.
xxx xxx xxx d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may properly exercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippines through a memorandum dated June 26, 1986. That memorandum authorizes the PCGG, 'pending the outcome of proceedings to determine the ownership of . . . (sequestered) shares of stock,' 'to vote such shares of stock as it may have sequestered in corporations at all stockholders' meetings called for the election of directors, declaration of dividends, amendment of the Articles of Incorporation, etc.' The Memorandum should be construed in such a manner as to be consistent with, and not contradictory of the Executive

Orders earlier promulgated on the same matter. There should be no exercise of the right to vote simply because the right exists, or because the stocks sequestered constitute the controlling or a substantial part of the corporate voting power. The stock is not to be voted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial changes in policy, program or practice of the corporation except for demonstrably weighty and defensible grounds, and always in the context of the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or undue disposal of the corporate assets.Directors are not to be voted out simply because the

power to do so exists. Substitution of directors is not to be done without reason or rhyme, should indeed be shunned if at all possible, and undertaken only when essential to prevent disappearance or wastage of corporate property, and always under such circumstances as to assure
that the replacements are truly possessed of competence, experience and probity.

In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This is why, in its Resolution of October 28, 1986; this Court declared that 'Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President . . . (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through its designated directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation.' It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in the management of the company's affairs should be henceforth be guided and governed by the norms herein laid down. They should never for a moment allow themselves to forget that they are conservators, not owners of the business; they are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the premises, required. xxx xxx xxx

The rule in this jurisdiction is, therefore, clear. The PCGG cannot

perform acts of strict ownership of sequestered property. It is a mere conservator. It may not vote the shares in a corporation and elect the members of the board of directors. The only conceivable exception is in
a case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO.

The constitutional right against deprivation of life, liberty and property without due process of law is so well-known and too precious so that the hand of the PCGG must be stayed in its indiscriminate takeover of and voting of shares allegedly ill-gotten in these cases. It is only after appropriate judicial proceedings when a clear determination is made that said shares are truly ill-gotten when such a takeover and exercise of acts of strict ownership by the PCGG are justified. (pp. 808-813.)

These principles were subsequently refined in the cases of Eduardo Cojuangco, Jr. vs. Calpo (G.R. No. 115352, June 10, 1997) and PCGG vs. Eduardo Cojuangco, Jr. (G.R. No. 133197, January 27, 1999) where we held that:
The issue of whether PCGG may vote the sequestered shares in SMC necessitates a determination of at least two factual matters:
EDcICT

1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the State; and 2. whether there is an imminent danger of dissipation thus necessitating their continued sequestration and voting by the PCGG while the main issue pends with the Sandiganbayan. The foregoing two points require presentation of evidence which can only be done before the Sandiganbayan, it being settled that the Supreme Court is not a trier of facts. (p. 2, Resolution, June 10, 1997.)

However, the majority opinion holds that the two-tiered test above-enunciated finds no application to the case of a take-over of a business belonging to government or whose capitalization comes from public funds, but which landed in private hands, citingCojuangco vs. Roxas and BASECO as authority therefor. The majority opinion asserts that the government is granted authority to vote sequestered shares:

1. Where government shares are taken over by private persons or entities who/which registered them in their own names; and 2. Where the capitalization or shares that were acquired with public funds somehow landed in private hands.

In fine, the majority points out that since the instant case involves shares that were acquired with public funds which somehow landed in private hands, there is no more need to apply the two-tiered test, the right to vote said shares automatically vesting in the government, acting through the PCGG. As stated earlier, the Court, in Cojuangco vs. Roxas, unequivocally declared that "[t]he rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership of sequestered property. It is a mere conservator. It may not vote the shares in a corporation and elect the members of the board of directors. The only conceivable exception is in a case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO." Thus, it is well-settled that the only instance when PCGG can vote the shares in a sequestered corporation is in case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands. The foregoing principle, as stated in the majority opinion, has been reiterated in many subsequent cases, most recently in Antiporda vs. Sandiganbayan (G.R. No. 116941, May 31, 2001). On the other hand, the two-tiered test, first enunciated in Cojuangco vs. Calpo and subsequently in PCGG vs. Cojuangco Jr., provides the guidelines or requisites to be fulfilled in determining whether or not PCGG can vote shares in a sequestered corporation. Since PCGG can vote the shares in a sequestered corporation only in case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands, plainly the two-tiered test is applicable only in this instance. In other words, the two-tiered test is designed precisely to verify whether or not the sequestered corporation is a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands! Thus, I submit that the Sandiganbayan did not err when it applied the two-tiered test in disallowing the PCGG to vote the sequestered shares.

In authorizing COCOFED, Ballares, and Eduardo Cojuangco, Jr. to exercise their right to vote their shares of stock, theSandiganbayan stated:
Jurisprudence, from as far back as the leading case of Baseco (150 SCRA 181), has clearly defined the functions and authority of the PCGG in relation to sequestered property. Be it noted by way of footnote that government agencies as well as government officials, do not have rights in the exercise of the functions of the office. They have only duties to perform and authority by means of which they may comply with those duties under the law. In this instance, the issue is whether or not the authority of the PCGG exists to remain in control of the voting rights of sequestered shares of stock in general, and whether or not the sequestered shares of stock in the UCPB in particular may be voted by it as part of its functions as sequestor of these shares of stock; corollarily, may the moving stockholders exercise of their proprietary rights over the shares of stock, save for the limitations of free disposal, until judgment shall have been rendered against them thereon. It may be stated that jurisprudence has evolved from certain categorical positions originally enunciated to more refinements as time and events demonstrated to be appropriate. Let it also be noted that jurisprudence has not reversed itself; rather, jurisprudence has re-stated the rules as the circumstances and the facts presented before the courts had required in order to put in proper perspective the earlier assertions of jurisprudence. In this light, the Court is faced now with the question: Who may vote sequestered shares of stock in general, and who may vote them in the particular instance of the UCPB shares of stock at its scheduled Stockholders' Meeting on March 5, 2001?
CacTIE

xxx xxx xxx In the light of all of the above, the Court submits itself to jurisprudence and with the statements of the Supreme Court in G.R. No. 115352 entitled Enrique Cojuangco, Jr., et al. vs. Jaime Calpo, et al. dated June 10, 1997, as well as the resolution of the Supreme Court promulgated on January 27, 1999 in the case of PCGG vs. Eduardo Cojuangco, Jr., et al., G.R. No. 13319 which included the Sandiganbayan as one of the respondents. In these two cases, the Supreme Court ruled that the voting of sequestered shares of stock is governed by two considerations, namely,

1. whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the State; and 2. whether there is an imminent danger of dissipation thus necessitating their continued sequestration and voting by the PCGG while the main issue pends with the Sandiganbayan. (p. 5, Presidential Commission on Good Government vs. Eduardo M. Cojuangco, Jr., et al., supra) This ruling does not state where, what or who the cause of the dissipation might be to justify the vote by the PCGG of the shares under sequestration. If the registered stockholders, however, have not participated in the management of the corporation, and the dissipation has not been demonstrated to have been caused either by the stockholders' action in the past, nor by action independent of the management during sequestration, then whatever "imminent danger of dissipation necessitating their continued sequestration and voting by the PCGG. . ." could not be raised against the voting rights of the asserting stockholders. The Court has sought to obtain by all means any form of reinforcement from the PCGG on this matter, not only this morning but over the months that go as far back as July of the year 2000. Much to the impatience of this Court, the matter has not been responded to in any satisfactory manner. (pp. 2-5, Order dated February 28, 2001.)

A perusal of the above order would show that the Sandiganbayan, in allowing private respondents to vote their shares, merely followed judicial precedents laid down by the Court. These decisions have not been challenged by the PCGG. Their review, much less reversal, has not been sought. They continue to express good law. I find no "patent or gross" arbitrariness or despotism by reason of passion or personal hostility in the Sandiganbayan's adherence to these precedents. I thus submit that one can hardly characterize the Sandiganbayan's order authorizing private respondents to vote their sequestered shares of stock as having been issued with grave abuse of discretion.
CSAcTa

Additionally, Cojuangco, Jr. vs. Roxas is cited by the other side as authority for the proposition that PCGG should be the one to vote the sequestered shares, the

Court having declared in Roxas that: "[t]he only conceivable exception (to the rule that PCGG may not vote the shares in a corporation and elect the members of the board of directors) is in a case of a takeover of a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO." PCGG thus, likens the facts of the instant petition to the BASECO case. The BASECO case does not support petitioner's position. It was proven in the BASECO case that 95.82% of the outstanding stock of BASECO, endorsed in blank by the owners thereof, were inexplicably in the possession of then President Marcos. More, deeds of assignment of practically all the stock of the corporations owning the aforementioned 95.82% were also inexplicably in the possession of President Marcos. Thus, in the case of BASECO, the directors thereof were merely Marcos nominees or dummies, it having been proven that President Marcos not only exercised control over BASECO but also that he actually owned almost 100% of BASECO's outstanding stock. Then too, it was proven that BASECO had been able to take-over and acquire the business and assets of the National Shipyard and Steel Corporation and other governmentowned or controlled entities through the undue exercise by then President Marcos of his powers, authority, and influence. Upon these premises, the Court held that the government could properly exercise control and management over what appeared to be properties and assets owned and belonging to the government itself. Hereunder are the pertinent observations of the Court in said case:
The facts show that the corporation known as BASECO was owned or controlled by President Marcos "during his administration, through nominees, by taking undue advantage of his public office and/or using his powers, authority, or influence," and that it was by and through the same means, that BASECO had taken over the business and/or assets of the National Shipyard and Engineering Co., Inc., and other governmentowned or controlled entities. xxx xxx xxx In the case at bar, there was adequate justification to vote the incumbent directors out of office and elect others in their stead because the evidence showed prima facie that the former were just tools of

President Marcos and were no longer owners of any stock in the firm, if they ever were at all. This is why, in its Resolution of October 28, 1986;
this Court declared that

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and holding of a stockholders' meeting for the election of directors as authorized by the memorandum of the President (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, though its designated directors, properly exercise control and management over what appear to be properties and assets owned and belonging to the government itself and over which the

persons who appear in this case on behalf of BASECO have failed to show any right or even any shareholding in said corporation."

In contrast, respondents in the instant case are the registered stockholders. No evidence was presented before theSandiganbayan showing that respondents are mere "tools of President Marcos and were no longer owners of any stock in the firm if they ever were at all." Nor has it been shown that the sequestered UCPB shares of stock were inexplicably acquired by respondents. Respondent Cojuangco Jr. obtained his shares by virtue of an agreement with the Philippine Coconut Authority (PCA) whereby, as compensation for exercising his personal and exclusive option to acquire UCPB shares, Cojuangco Jr. would receive 1 share for every 9 acquired by PCA. The UCPB shares of stock in the name of the 1,405,366 coconutfarmers, on the other hand, were distributed to them by virtue of Presidential Decree No. 755, which authorized the distribution of UCPB's shares of stock, free, to coconut farmers. Other UCPB shares were acquired by the CIIF companies. It is precisely the validity of these acquisitions which is under litigation in the main case pending with the Sandiganbayan. The view expressed by the majority that the UCPB shares, having been acquired with the use of coconut levy funds, and, therefore belong to the government, may very well turn out to be correct. However, since these issues are still pending litigation at the Sandiganbayan, it would be premature, I submit, to rule on this point at this time. Verily, the validity of the acquisition by Cojuangco Jr., et al. of their UCPB shares is the very lis mota of the action for reconveyance, accounting, reversion, and restitution filed by the PCGG with the Sandiganbayan. To rule on this matter would be to preempt said court. Too, the argument that the coconut levy funds used to purchase the sequestered UCPB shares of stock are public funds does not appear to have been raised before the Sandiganbayan; consequently, the Sandiganbayan did not rule on the nature of the fund. It would be absurd to hold that the Sandiganbayan gravely abused its discretion in not holding that the sequestered shares belong prima

facie to the government, the issue of whether or not coconut levy funds are
public funds not having been raised before it. Moreover, and as mentioned earlier, the nature of the funds used is a matter which should be decided first-hand by theSandiganbayan when-it resolves the merits of Civil Case No. 0033-A. Note should also be taken of the fact that the determination of whether the coconut levy funds are public funds involves the ascertainment of the constitutionality of Section 5, Article III of Presidential Decree No. 961 and Section 5, Article III of Presidential Decree No. 1468, both of which contain the following identical provisions:

Section 5. Exemptions. The Coconut Consumers Stabilization Fund and the Coconut Industry Development Fund as well as all disbursements of said Funds for the benefit of the coconut farmers as herein authorized shall not be construed or interpreted, under any law or regulation, as special or fiduciary funds, or as part of the general funds of the national government within the contemplation of P.D. 771; nor as a subsidy, donation, levy, government funded investment or government share within the contemplation of P.D. 898, the intention being that said Fund and the disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned by them in their own private capacities.

Presidential Decrees No. 961 and 1468 have not been repealed, revoked, or declared unconstitutional, hence they are presumed valid and binding. Without a previous declaration of unconstitutionality, the coconut levy funds may not thus be characterized asprima facie belonging to the government. That issue must first be resolved by the Sandiganbayan. In fact, when the Solicitor General, in G.R. No. 96073, filed a motion to declare the coconut levies collected pursuant to the various issuances as public funds and to declare Section 5, Article III of Presidential Decree No. 1468 as unconstitutional, the Court denied the same in a Resolution dated March 26, 1996. Parenthetically, in Philippine Coconut Producers Federation, Inc. vs. PCGG (supra), the Court ruled that the fund is "affected with public interest," implying that the fund is private in character. If the coconut levy funds were public funds, then the Court would have so held and there would be no reason to describe the same as funds "affected with public interest." It may not, thus, be immediately said that the coconut levy funds are public funds, the resolution of the issue being left, at the first instance, with theSandiganbayan.
HDTSIE

And if it is to be recalled, the issue involved herein is whether or not the Sandiganbayan committed grave abuse of discretion when it issued the disputed order allowing respondents to vote the UCPB shares of stock registered in their names. The question of whether the coconut levy funds are public funds is not in issue here. In fact, the constitutionality of Presidential Decrees No. 961 and 1468 have not been raised by the PCGG during the proceedings before the Sandiganbayan. Moreover, it should be pointed out that the avowed purpose of sequestration is to preserve the assets sequestered to assure that if, and when, judgment is rendered in favor of the petitioner, the judgment may be implemented. "Preservation", not "deprivation" before judgment, is its essence. That is why in BASECO, we emphasized:
d. No Divestment of Title Over Property Seized It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just described. Indeed the law plainly qualifies the remedy of takeover by the adjective, "provisional." These remedies may be resorted to only for a particular exigency: to prevent in the public interest the disappearance or dissipation of property or business, and conserve it pending adjudgment in appropriate proceedings of the primary issue of whether or not the acquisition of title or other right thereto by the apparent owner was attended by some vitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to the property sequestered, frozen or taken over and vest it in the sequestering agency, the Government or other person. This can be done only for the causes and by the processes laid down by law. That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood and exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1 declares that the sequestration of property the acquisition of which is suspect shall last "until the transactions leading to such acquisition . . . can be disposed of by the appropriate authorities." Executive Order No. 2 declares that the assets or properties therein mentioned shall remain frozen "pending the outcome of appropriate proceedings in the

Philippines to determine whether any such assets or properties were acquired" by illegal means. Executive Order No. 14 makes clear that

judicial proceedings are essential for the resolution of the basic issue of whether or not particular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

(pp. 211-212.)

In the instant case, however, the actuations of PCGG with regard to the sequestered shares partake more of deprivation rather than preservation. As pointed out by respondents, since 1986, only one (1) stockholders' meeting of UCPB has been held. At this meeting, PCGG voted all of the shares, as a result of which all members of the Board of UCPB, since 1986 to the present, have been PCGG nominees. When vacancies in the Board occur because of resignation, replacements are installed by the remaining members of the Board-on nomination of the PCGG. The stockholders' meeting scheduled on March 6, 2001 would have been the first stockholders' meeting since 1986 at which registered stockholders would exercise their right to vote and by their vote elect the members of the Board of Directors. Also, the shares of stock in UCPB were sequestered in 1986. The civil action "Republic of the Philippines v. Eduardo M. Cojuangco, Jr., Civil Case No. 033," was instituted before the Sandiganbayan on July 30, 1987. This action included, among other things, the UCPB shares of stock and was filed to maintain the effectivity of the writs of sequestration pursuant to Section 26, Article XVIII of the Constitution. Notwithstanding the lapse of more than 14 years, the proceedings have barely gone beyond the pre-trial stage. PCGG's exercise of the right to vote the sequestered shares of stock for a period of 14 years constitutes effectively a deprivation of a property right belonging to the registered stockholders (18 Am. Jur. 2d, Corporations 2d Section 1065, p. 859, citing cases), a state of affairs not within the contemplation of "sequestration" as a means of preservation of assets. To recapitulate, evaluated in accordance with applicable jurisprudence, I hold that the issuance by respondent Sandiganbayan of its impugned Order dated February 28, 2001, is clearly not an act committed in grave abuse of discretion. Simply put, petitioner PCGG failed to persuade the Sandiganbayan on the basis of the "two-tiered test" enunciated by this Court in the San Miguelcase, supra that it is entitled to vote the UCPB sequestered shares. Verily, the Sandiganbayan was duty-bound to comply with the jurisprudence laid down by the Court on the matter. This is certainly not a case of abuse, much more grave abuse of discretion, on the part of respondent Sandiganbayan. I regret to say that I find unacceptable the contention that the "law of the case" herein should be the Resolution dated February 16, 1993 in Republic of the Philippines vs. Sandiganbayan, et al. For one, the UCPB shares of stock of respondents COCOFED,et al. and Ballares, et al. are not the subject of the case

relied upon. Hence, the Resolution therein could not have referred to or covered said shares. For another, and more importantly, what is invoked by petitioner is, in effect, merely a restraining order which was not re-affirmed by the Court when we rendered the main decision in the said consolidated sequestration cases. Rather, what I believe is truly applicable herein is the Court's decision in COCOFED vs. PCGG (178 SCRA 236 [1989]) wherein it was held that "the

incidents concerning the voting of the sequestered shares, the COCOFED elections, and the replacement of directors, being matters incidental to the sequestration, should be addressed to the Sandiganbayan." Thus, the Sandiganbayanhas been given by the Court full discretion to evaluate and to

allow or disallow the duly registered stockholders of the UCPB shares to exercise the right to vote the said shares in the UCPB elections and/or appointment/replacement of its directors. If, as in the case at hand, the Sandiganbayan, in the exercise of its sound discretion and for justifiable reasons cited in its assailed Order of February 28, 2001, allowed herein private respondents to vote the sequestered shares in question, one would simply be at a loss to understand how such action could be said to be tainted with grave abuse of discretion.
AcHEaS

FOR THE FOREGOING REASONS, I vote to DISMISS the instant petition for lack of merit.

Footnotes
41.

FIRST DIVISION
[G.R. No. L-1721. May 19, 1950.] JUAN D. EVANGELISTA ET AL., plaintiffs-appellants, vs. RAFAEL SANTOS, defendant-appellee.

Antonio Gonzales for appellants. Benjamin H. Tirol for appellee.

SYLLABUS 1.PLEADING AND PRACTICE; VENUE; MERE SOJOURNING IN A PLACE DOES NOT MAKE THE LATTER A RESIDENT FOR PURPOSES OF VENUE. The facts in this case show that the objection to the venue is well-founded. The fact that defendant was sojourning in Pasay at the time he was served with summons does not make him a resident of that place for purposes of venue. 2.PARTIES; CORPORATION; MISMANAGEMENT BY ITS OFFICER; RIGHT OF STOCKHOLDERS TO BEING SUIT. The plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. DECISION REYES, J :
p

This is an action by the minority stockholders of a corporation against its principal officer for damages resulting from his mismanagement of its affairs and misuse of its assets. The complaint alleges that plaintiff's are minority stockholders of the Vitali Lumber Company, Inc., a Philippine corporation organized for the exploitation of a lumber concession in Zamboanga, Philippines; that defendant holds more than 50 per cent of the stocks of said corporation and also is and always has been the president, manager, and treasurer thereof; and that defendant, in such triple capacity, through fault, neglect, and abandonment allowed its lumber concession to lapse and its properties and assets, among them machineries, buildings, warehouses, trucks, etc., to disappear, thus causing the complete ruin of the corporation and total depreciation of its stocks. The complaint therefore prays for judgment requiring defendant: (1) to render an account of his administration of the corporate affairs and assets: (2) to pay plaintiffs the value of their respective participation in said assets on the basis of the value of the stocks held by each of them; and (3) to pay the costs of suit. Plaintiffs also ask for such other remedy as may be just and equitable.

The complaint does not give plaintiffs' residence, but, for purposes of venue, alleges that defendant resides at 2112 Dewey Boulevard, corner Libertad Street, Pasay, province of Rizal. Having been served with summons at that place, defendant filed a motion for the dismissal of the complaint on the ground of improper venue and also on the ground that the complaint did not state a cause of action in favor of plaintiffs. In support of the objection to the venue, the motion, which is under oath, states that defendant is a resident of Iloilo City and not of Pasay, and at the hearing of the motion defendant also presented further affidavit to the effect that while he has a house in Pasay, where members of his family who are studying in Manila live and where he himself is sojourning for the purpose of attending to his interests in Manila, yet he has his permanent residence in the City of Iloilo where he is registered as a voter for election purposes and has been paying his residence certificate. Plaintiffs opposed the motion for dismissal but presented no counter proof and merely called attention to the Sheriff's return showing service of summons on defendant personally at his alleged residence at No. 2112 Dewey Boulevard, Pasay. After hearing, the lower court rendered its order, granting the motion for dismissal upon the two grounds alleged by defendant, and reconsideration of this order having been denied, plaintiffs have appealed to this Court. The appeal presents two questions. The first refers to venue and the second, to the right of the plaintiffs to bring this action for their benefit. As to the first question, it is important to remember that the laying of the venue of an action is not left to plaintiff's caprice. The matter is regulated by the Rules of Court. And in actions like the present, which is one in personam, the regulation applicable is that contained in section 1 of Rule 5, which provides:. "Civil action in Courts of First Instance may be commenced and tried where the defendant or any of the defendant resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff.". Objection to improper venue may be interposed at any time prior to the trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p. 108.). Believing that defendant resided in the province of Rizal, herein plaintiffs brought their action in the Court of First Instance of that province. But that belief proved erroneous, for the lower court found after hearing that defendant had his residence in Iloilo. The finding is based on defendant's sworn statement not rebutted by any proof to the contrary.

There is nothing to the contention that defendant's motion to dismiss necessarily presupposes a hypothetical admission of the allegations of the complaint, among them the averment that defendant is a resident of Rizal province, for the motion precisely denies that averment and alleges that his real residence is in Iloilo City. This, defendant had the right to do in objecting to the court's jurisdiction on the ground of improper venue. Section 1 of Rule 5 may seem, at first blush, to authorize the laying of the venue in the province where the defendant "may be found." But this phrase has already been held to have a limited application. It is the same phrase used in section 377 of Act 190 from which section 1 of Rule 5 was taken, and as construed by this Court it applies only to cases where defendant has no residence in the Philippine Islands. This was the construction adopted in the case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526, which was an action brought in Manila by a nonresident against a corporation which had its residence for legal purposes in Baguio but whose President was found in Manila and there served with summons. This Court there said: "Section 377 provides that actions of this character 'may be brought in any province where the defendant or any necessary party defendant may reside or be found, or in any province where the plaintiff or one of the plaintiffs resides, at the election of the plaintiff.' The plaintiff in this action has no residence in the Philippine Islands. Only one of the parties to the action resides here. There can be, therefore, no election by plaintiff as to the place of trial. It must be in the province where the defendant resides. The defendant resides, in the eye of the law, in Baguio. Was it 'found' in the city of Manila under section 377, its president being in that city where the service of summons was made? We think not. The word 'found' as used in section 377 has a different meaning that belongs to it as used in section 394, which refers exclusively to the place where the summons may be served. As we have said a summons may be legally served on a defendant wherever he may be 'found,' i. e., wherever he may be, provided he be in the Philippine Islands; but the venue cannot be laid wherever the defendant may be 'found.' There is an element entering in section 377 which is not present in section 394, that is a residence. Residence of the plaintiff or defendant does not affect the place where a summons may be served; but residence is the vital thing when we deal with venue. The venue must be laid in the province where one of the parties resides. If the plaintiff is a nonresident the venue must be laid in the province of the defendant's residence. The venue can be laid in the province where defendant is 'found' only when defendant has no residence in the Philippine Islands. A defendant can not have a residence in one province and be 'found' in another. As long as he has a residence in the

Philippine Islands he can be 'found,' for the purposes of section 377, only in the province of his residence. In such case the words 'residence' and 'found' are synonymous. If he is a nonresident then the venue may be laid in the province where he is 'found' at the time the action is commenced or in the province of plaintiff's residence. This applies also to a domestic corporation. "While the service of the summons was good in either Baguio or Manila we are of the opinion that the objection of the defendant to the place of trial was proper in both cases and that the trial court should have held that the venue was improperly laid.". And elaborating on the point when the case came up for reconsideration, the Court further said:. "The moving party contends that the venue was properly laid under section 377 in that it was laid in the province where the defendant was found at the time summons was served on its president, he having been found and served with process in the city of Manila. For the purposes of the discussion we assumed in the main case, as the plaintiff claimed, that the defendant was in fact and in law found in the city of Manila; and proceeded to decide the cause upon the theory that, even if the defendant were found in the city of Manila, that did not justify, under the facts of the case, the laying of the venue in the city of Manila. "We do not believe that the moving party's objection that our construction deprives the word 'found' of all significance and results, in effect, in eliminating it from the statute, is sound. We do not deprive it of all significance and effect and do not eliminate it from the statute. We give it the only effect which can be given it and still accord with the other provisions of the section which give defendant the right to have the venue laid in the province of his residence, the effect which it was intended by the legislature they should have. We held that the word 'found' was applicable in certain cases, and in such cases gave it full significance and effect. We declared that it was applicable and effective in cases where the defendant is a nonresident. In such cases the venue may be laid wherever he may be found in the Philippine Islands at the time of the service of the process, but we also held that where he is a resident of the Philippine Islands the word 'found' has no application and the venue must be laid in the province where he resides. "The construction which the moving party asks us to place on that provision of section 377 above quoted would result in the destruction of the privilege conferred by the section upon a resident defendant which requires the venue to be laid in the province where he resides. This is clear; for, if the

venue may be laid in any province where the defendant, although a resident of some other province, may be found at the time process is served on him, then the provision that it shall be laid in the province where he resides is of no value to him. If a defendant residing in the province of Rizal is helpless when the venue is laid in the province of Mindoro in an action in which the plaintiff is a nonresident or resides in Manila, what is the value of a residence in Rizal? If a defendant residing in Jolo is without remedy when a nonresident plaintiff or a plaintiff residing in Jolo lays the venue in Bontoc because the defendant happens to be found there, of what significance is a residence in Jolo? The phrases 'where the defendant *** may reside' and 'or be found' must be construed together and in such manner that both may be given effect. The construction asked for by the moving party would deprive the phrase 'where the defendant *** may reside' of all significance, as the plaintiff could always elect to lay the venue in the province where the defendant was 'found' and not where he resided; whereas the construction which we place upon these phrases permits both to have effect. We declare that, when the defendant is a resident of the Philippine Islands, the venue must be laid either in the province where the plaintiff resides or in the province where the defendant resides, and in no other province. Where, however, the defendant is a nonresident the venue may be laid wherever defendant may be found in the Philippine Islands. This construction gives both phrases their proper and legitimate effect without doing violence to the spirit which informs all laws relating to venue and which insists always that the action shall be tried in the place where the greatest convenience of the parties will be served. Ordinarily a defendant's witnesses are found where the defendant resides; and plaintiffs witnesses are generally found where he resides or where the defendant resides. It is, therefore, generally desirable to have the action tried where one of the parties resides. Where the plaintiff is a nonresident and the contract upon which suit is brought was made in the Philippine Islands it may safely be asserted that the convenience of the defendant would be best served by a trial in the province where he resides. The fact that defendant was sojourning in Pasay at the time he was served with summons does not make him a resident of that place for purposes of venue. Residence is "the permanent home, the place to which, whenever absent for business or pleasure, one intends to return, ***" (67 C. J., pp. 123-124.) A man can have but one domicile at a time (Alcantara vs. Secretary of Interior, 61 Phil., 459), and residence is synonymous with domicile under section 1 of Rule 5 (Moran's Comments, supra, p. 104). In view of the foregoing, we hold that the objection to the venue was correctly sustained by the lower court.

As to the second question, the complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of the corporation by its principal officer, it being alleged that defendant's maladministration has brought about the ruin of the corporation and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities, something which cannot be legally done in view of section 16 of the Corporation Law, which provides:. "No corporation shall make or declare any stock or bond dividend or any dividend whatsoever except from the surplus profits arising from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until after the payment of its debts and the termination of its existence by limitation or lawful dissolution.". But while it is to the corporation that the action should pertain in cases of this nature, however, if the officers of the corporation, who are the ones called upon to protect their rights, refuse to sue, or where a demand upon them to file the necessary suit would be futile because they are the very ones to be sued or because they hold the controlling interest in the corporation, then in that case any one of the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of Corporations, pp. 977-980). But in that case it is the corporation itself and not the plaintiff stockholder that is the real party in interest, so that such damages as may be recovered shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other words, it is a derivative suit brought by a stockholder as the nominal party plaintiff for the benefit of the corporation, which is the real party in interest (13 Fletcher, Cyclopedia of Corporations, p. 295). In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit, since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of the provisions of section 16 of the Corporation Law.It results that

plaintiffs' complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on that ground. While plaintiffs ask for a remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law be first complied with, 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. Such amendment, however, is not possible now, since the complaint has been filed in the wrong court, so that the same has to be dismissed. The order appealed from is therefore affirmed, but without prejudice to the filing of the proper action in which the venue shall be laid in the proper province. Appellants shall pay costs. So ordered.

Moran, C. J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ., concur.
Order affirmed.

42.

FIRST DIVISION
[G.R. No. 150793. November 19, 2004.] FRANCIS CHUA, petitioner, vs. HON. COURT OF APPEALS and LYDIA C. HAO, respondents. DECISION QUISUMBING, J :
p

Petitioner assails the Decision, 1 dated June 14, 2001, of the Court of Appeals in CA-G.R. SP No. 57070, affirming the Order, dated October 5, 1999, of the Regional Trial Court (RTC) of Manila, Branch 19. The RTC reversed the Order, dated April 26, 1999, of the Metropolitan Trial Court (MeTC) of Manila, Branch 22. Also challenged by herein petitioner is the CA Resolution, 2dated November 20, 2001, denying his Motion for Reconsideration.

The facts, as culled from the records, are as follows: On February 28, 1996, private respondent Lydia Hao, treasurer of Siena Realty Corporation, filed a complaint-affidavit with the City Prosecutor of Manila charging Francis Chua and his wife, Elsa Chua, of four counts of falsification of public documents pursuant to Article 172 3 in relation to Article 171 4 of the Revised Penal Code. The charge reads:
That on or about May 13, 1994, in the City of Manila, Philippines, the said accused, being then a private individual, did then and there willfully, unlawfully and feloniously commit acts of falsification upon a public document, to wit: the said accused prepared, certified, and falsified the Minutes of the Annual Stockholders meeting of the Board of Directors of the Siena Realty Corporation, duly notarized before a Notary Public, Atty. Juanito G. Garcia and entered in his Notarial Registry as Doc No. 109, Page 22, Book No. IV and Series of 1994, and therefore, a public document, by making or causing it to appear in said Minutes of the Annual Stockholders Meeting that one LYDIA HAO CHUA was present and has participated in said proceedings, when in truth and in fact, as the said accused fully well knew that said Lydia C. Hao was never present during the Annual Stockholders Meeting held on April 30, 1994 and neither has participated in the proceedings thereof to the prejudice of public interest and in violation of public faith and destruction of truth as therein proclaimed. CONTRARY TO LAW.
5

Thereafter, the City Prosecutor filed the Information docketed as Criminal Case No. 285721 6 for falsification of public document, before the Metropolitan Trial Court (MeTC) of Manila, Branch 22, against Francis Chua but dismissed the accusation against Elsa Chua. Herein petitioner, Francis Chua, was arraigned and trial ensued thereafter. During the trial in the MeTC, private prosecutors Atty. Evelyn Sua-Kho and Atty. Ariel Bruno Rivera appeared as private prosecutors and presented Hao as their first witness. After Hao's testimony, Chua moved to exclude complainant's counsels as private prosecutors in the case on the ground that Hao failed to allege and prove any civil liability in the case.

In an Order, dated April 26, 1999, the MeTC granted Chua's motion and ordered the complainant's counsels to be excluded from actively prosecuting Criminal Case No. 285721. Hao moved for reconsideration but it was denied. Hence, Hao filed a petition for certiorari docketed as SCA No. 9994846, 7 entitled Lydia C. Hao, in her own behalf and for the benefit of Siena

Realty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega, Presiding Judge, Branch 22, Metropolitan Trial Court of Manila, before the
Regional Trial Court (RTC) of Manila, Branch 19.
TcDaSI

The RTC gave due course to the petition and on October 5, 1999, the RTC in an order reversed the MeTC Order. The dispositive portion reads:
WHEREFORE, the petition is GRANTED. The respondent Court is ordered to allow the intervention of the private prosecutors in behalf of petitioner Lydia C. Hao in the prosecution of the civil aspect of Crim. Case No. 285721, before Br. 22 [MeTC], Manila, allowing Attys. Evelyn Sua-Kho and Ariel Bruno Rivera to actively participate in the proceedings. SO ORDERED.
8

Chua moved for reconsideration which was denied. Dissatisfied, Chua filed before the Court of Appeals a petition for certiorari. The petition alleged that the lower court acted with grave abuse of discretion in: (1) refusing to consider material facts; (2) allowing Siena Realty Corporation to be impleaded as co-petitioner in SCA No. 99-94846 although it was not a party to the criminal complaint in Criminal Case No. 285721; and (3) effectively amending the information against the accused in violation of his constitutional rights. On June 14, 2001, the appellate court promulgated its assailed Decision denying the petition, thus:
WHEREFORE, premises considered, the petition is hereby DENIED DUE COURSE and DISMISSED. The Order, dated October 5, 1999 as well as the Order, dated December 3, 1999, are hereby AFFIRMED in toto. SO ORDERED.
9

Petitioner had argued before the Court of Appeals that respondent had no authority whatsoever to bring a suit in behalf of the Corporation since there was no Board Resolution authorizing her to file the suit.

For her part, respondent Hao claimed that the suit was brought under the concept of a derivative suit. Respondent maintained that when the directors or trustees refused to file a suit even when there was a demand from stockholders, a derivative suit was allowed. The Court of Appeals held that the action was indeed a derivative suit, for it alleged that petitioner falsified documents pertaining to projects of the corporation and made it appear that the petitioner was a stockholder and a director of the corporation. According to the appellate court, the corporation was a necessary party to the petition filed with the RTC and even if private respondent filed the criminal case, her act should not divest the Corporation of its right to be a party and present its own claim for damages. Petitioner moved for reconsideration but it was denied in a Resolution dated November 20, 2001. Hence, this petition alleging that the Court of Appeals committed reversible errors:
I.. . . IN RULING THAT LYDIA HAO'S FILING OF CRIMINAL CASE NO. 285721 WAS IN THE NATURE OF A DERIVATIVE SUIT II.. . . IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENA REALTY WAS A PROPER PETITIONER IN SCA NO. [99-94846] III.. . . IN UPHOLDING JUDGE DAGUNA'S DECISION ALLOWING LYDIA HAO'S COUNSEL TO CONTINUE AS PRIVATE PROSECUTORS IN CRIMINAL CASE NO. 285721 IV.. . . IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUE THAT JUDGE DAGUNA ACTED IN GRAVE ABUSE OF DISCRETION IN NOT DISMISSING THE PETITION IN SCA NO. [99-94846] FOR BEING A SHAM PLEADING. 10

The pertinent issues in this petition are the following: (1) Is the criminal complaint in the nature of a derivative suit? (2) Is Siena Realty Corporation a proper petitioner in SCA No. 99-94846? and (3) Should private prosecutors be allowed to actively participate in the trial of Criminal Case No. 285721. On the first issue, petitioner claims that the Court of Appeals erred when (1) it sustained the lower court in giving due course to respondent's petition in SCA No. 99-94846 despite the fact that the Corporation was not the private

complainant in Criminal Case No. 285721, and (2) when it ruled that Criminal Case No. 285721 was in the nature of a derivative suit. Petitioner avers that a derivative suit is by nature peculiar only to intra-corporate proceedings and cannot be made part of a criminal action. He cites the case of Western Institute of Technology, Inc. v. Salas, 11 where the court said that an appeal on the civil aspect of a criminal case cannot be treated as a derivative suit. Petitioner asserts that in this case, the civil aspect of a criminal case cannot be treated as a derivative suit, considering that Siena Realty Corporation was not the private complainant. Petitioner misapprehends our ruling in Western Institute. In that case, we said:
Here, however, the case is not a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the RTC of Iloilo for estafa and falsification of public document. Among the basic requirements for a derivative suit to prosper is that the minority shareholder who is suing for and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a derivative cause of action on behalf of the corporation and all other shareholders similarly situated who wish to join. . . . This was not complied with by the petitioners either in their complaint before the court a quo nor in the instant petition which, in part, merely states that "this is a petition for review on certiorari on pure questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097 and 37098" since the trial court's judgment of acquittal failed to impose civil liability against the private respondents. By no amount of equity considerations, if at all deserved, can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit. 12

Moreover, in Western Institute, we said that a mere appeal in the civil aspect cannot be treated as a derivative suit because the appeal lacked the basic requirement that it must be alleged in the complaint that the shareholder is suing on a derivative cause of action for and in behalf of the corporation and other shareholders who wish to join.
CDESIA

Under Section 36 13 of the Corporation Code, read in relation to Section 23, 14 where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. 15 An individual stockholder is permitted to institute a derivative suit on behalf of the corporation wherein he holds stocks in order to protect or vindicate corporate rights, whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold the control of the

corporation. In such actions, the suing stockholder is regarded as a nominal party, with the corporation as the real party in interest. 16

A derivative action is a suit by a shareholder to enforce a corporate cause of action. The corporation is a necessary party to the suit. And the relief which is granted is a judgment against a third person in favor of the corporation. Similarly, if a corporation has a defense to an action against it and is not asserting it, a stockholder may intervene and defend on behalf of the corporation. 17 Under the Revised Penal Code, every person criminally liable for a felony is also civilly liable. 18 When a criminal action is instituted, the civil action for the recovery of civil liability arising from the offense charged shall be deemed instituted with the criminal action, unless the offended party waives the civil action, reserves the right to institute it separately or institutes the civil action prior to the criminal action. 19 In Criminal Case No. 285721, the complaint was instituted by respondent against petitioner for falsifying corporate documents whose subject concerns corporate projects of Siena Realty Corporation. Clearly, Siena Realty Corporation is an offended party. Hence, Siena Realty Corporation has a cause of action. And the civil case for the corporate cause of action is deemed instituted in the criminal action. However, the board of directors of the corporation in this case did not institute the action against petitioner. Private respondent was the one who instituted the action. Private respondent asserts that she filed a derivative suit in behalf of the corporation. This assertion is inaccurate. Not every suit filed in behalf of the corporation is a derivative suit. For a derivative suit to prosper, it is required that the minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit. 20 It is a condition sine qua non that the corporation be impleaded as a party because not only is the corporation an indispensable party, but it is also the present rule that it must be served with process. The judgment must be made binding upon the corporation in order that the corporation may get the benefit of the suit and may not bring subsequent suit against the same defendants for the same cause of action. In other words, the corporation must

be joined as party because it is its cause of action that is being litigated and because judgment must be a res adjudicata against it. 21 In the criminal complaint filed by herein respondent, nowhere is it stated that she is filing the same in behalf and for the benefit of the corporation. Thus, the criminal complaint including the civil aspect thereof could not be deemed in the nature of a derivative suit. We turn now to the second issue, is the corporation a proper party in the petition for certiorari under Rule 65 before the RTC? Note that the case was titled "Lydia

C. Hao, in her own behalf and for the benefit of Siena Realty Corporation v. Francis Chua, and the Honorable Hipolito dela Vega, Presiding Judge, Branch 22, Metropolitan Trial Court of Manila." Petitioner before us now claims that the
corporation is not a private complainant in Criminal Case No. 285721, and thus cannot be included as appellant in SCA No. 99-94846. Petitioner invokes the case of Ciudad Real & Devt. Corporation v. Court of Appeals. 22 In Ciudad Real, it was ruled that the Court of Appeals committed grave abuse of discretion when it upheld the standing of Magdiwang Realty Corporation as a party to the petition for certiorari, even though it was not a party-in-interest in the civil case before the lower court. In the present case, respondent claims that the complaint was filed by her not only in her personal capacity, but likewise for the benefit of the corporation. Additionally, she avers that she has exhausted all remedies available to her before she instituted the case, not only to claim damages for herself but also to recover the damages caused to the company. Under Rule 65 of the Rules of Civil Procedure, 23 when a trial court commits a grave abuse of discretion amounting to lack or excess of jurisdiction, the person aggrieved can file a special civil action for certiorari. The aggrieved parties in such a case are the State and the private offended party or complainant. 24

In a string of cases, we consistently ruled that only a party-in-interest or those aggrieved may file certiorari cases. It is settled that the offended parties in criminal cases have sufficient interest and personality as "person(s) aggrieved" to file special civil action of prohibition and certiorari. 25 In Ciudad Real, cited by petitioner, we held that the appellate court committed grave abuse of discretion when it sanctioned the standing of a corporation to join said petition for certiorari, despite the finality of the trial court's denial of its

Motion for Intervention and the subsequent Motion to Substitute and/or Join as Party/Plaintiff. Note, however, that in Pastor, Jr. v. Court of Appeals 26 we held that if aggrieved, even a non-party may institute a petition forcertiorari. In that case, petitioner was the holder in her own right of three mining claims and could file a petition for certiorari, the fastest and most feasible remedy since she could not intervene in the probate of her father-in-laws estate. 27 In the instant case, we find that the recourse of the complainant to the respondent Court of Appeals was proper. The petition was brought in her own name and in behalf of the Corporation. Although, the corporation was not a complainant in the criminal action, the subject of the falsification was the corporation's project and the falsified documents were corporate documents. Therefore, the corporation is a proper party in the petition for certiorari because the proceedings in the criminal case directly and adversely affected the corporation. We turn now to the third issue. Did the Court of Appeals and the lower court err in allowing private prosecutors to actively participate in the trial of Criminal Case No. 285721? Petitioner cites the case of Tan, Jr. v. Gallardo, 28 holding that where from the nature of the offense or where the law defining and punishing the offense charged does not provide for an indemnity, the offended party may not intervene in the prosecution of the offense. Petitioner's contention lacks merit. Generally, the basis of civil liability arising from crime is the fundamental postulate that every man criminally liable is also civilly liable. When a person commits a crime he offends two entities namely (1) the society in which he lives in or the political entity called the State whose law he has violated; and (2) the individual member of the society whose person, right, honor, chastity or property has been actually or directly injured or damaged by the same punishable act or omission. An act or omission is felonious because it is punishable by law, it gives rise to civil liability not so much because it is a crime but because it caused damage to another. Additionally, what gives rise to the civil liability is really the obligation and the moral duty of everyone to repair or make whole the damage caused to another by reason of his own act or omission, whether done intentionally or negligently. The indemnity which a person is sentenced to pay forms an integral part of the penalty imposed by law for the commission of the crime. 29 The civil action involves the civil liability

arising from the offense charged which includes restitution, reparation of the damage caused, and indemnification for consequential damages. 30 Under the Rules, where the civil action for recovery of civil liability is instituted in the criminal action pursuant to Rule 111, the offended party may intervene by counsel in the prosecution of the offense. 31 Rule 111(a) of the Rules of Criminal Procedure provides that, "[w]hen a criminal action is instituted, the civil action arising from the offense charged shall be deemed instituted with the criminal action unless the offended party waives the civil action, reserves the right to institute it separately, or institutes the civil action prior to the criminal action." Private respondent did not waive the civil action, nor did she reserve the right to institute it separately, nor institute the civil action for damages arising from the offense charged. Thus, we find that the private prosecutors can intervene in the trial of the criminal action. Petitioner avers, however, that respondent's testimony in the inferior court did not establish nor prove any damages personally sustained by her as a result of petitioner's alleged acts of falsification. Petitioner adds that since no personal damages were proven therein, then the participation of her counsel as private prosecutors, who were supposed to pursue the civil aspect of a criminal case, is not necessary and is without basis.
IHcTDA

When the civil action is instituted with the criminal action, evidence should be taken of the damages claimed and the court should determine who are the persons entitled to such indemnity. The civil liability arising from the crime may be determined in the criminal proceedings if the offended party does not waive to have it adjudged or does not reserve the right to institute a separate civil action against the defendant. Accordingly, if there is no waiver or reservation of civil liability, evidence should be allowed to establish the extent of injuries suffered. 32 In the case before us, there was neither a waiver nor a reservation made; nor did the offended party institute a separate civil action. It follows that evidence should be allowed in the criminal proceedings to establish the civil liability arising from the offense committed, and the private offended party has the right to intervene through the private prosecutors.

WHEREFORE, the instant petition is DENIED. The Decision, dated June 14, 2001, and the Resolution, dated November 20, 2001, of the Court of Appeals in CAG.R. SP No. 57070, affirming the Order, dated October 5, 1999, of the Regional Trial Court (RTC) of Manila, Branch 19, are AFFIRMED. Accordingly, the private prosecutors are hereby allowed to intervene in behalf of private respondent Lydia Hao in the prosecution of the civil aspect of Criminal Case No. 285721 before Branch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs against petitioner. SO ORDERED.

Davide, Jr., C .J ., Ynares-Santiago, Carpio and Azcuna, JJ ., concur.

Footnotes
43.

SECOND DIVISION
[G.R. No. 152392. May 26, 2005.] EXPERTRAVEL & TOURS, INC., petitioner, vs. COURT OF APPEALS and KOREAN AIRLINES,respondents. DECISION CALLEJO, SR., J :
p

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).

The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the Republic of South Korea and licensed to do business in the Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and his law firm.

On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint 2 against ETI with the Regional Trial Court (RTC) of Manila, for the collection of the principal amount of P260,150.00, plus attorney's fees and exemplary damages. The verification and certification against forum shopping was signed by Atty. Aguinaldo, who indicated therein that he was the resident agent and legal counsel of KAL and had caused the preparation of the complaint. ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was not authorized to execute the verification and certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of Court. KAL opposed the motion, contending that Atty. Aguinaldo was its resident agent and was registered as such with the Securities and Exchange Commission (SEC) as required by the Corporation Code of the Philippines. It was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL. Appended to the said opposition was the identification card of Atty. Aguinaldo, showing that he was the lawyer of KAL. During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been authorized to file the complaint through a resolution of the KAL Board of Directors approved during a special meeting held on June 25, 1999. Upon his motion, KAL was given a period of 10 days within which to submit a copy of the said resolution. The trial court granted the motion. Atty. Aguinaldo subsequently filed other similar motions, which the trial court granted. Finally, KAL submitted on March 6, 2000 an Affidavit 3 of even date, executed by its general manager Suk Kyoo Kim, alleging that the board of directors conducted a special teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also averred that in that same teleconference, the board of directors approved a resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written copy of the aforesaid resolution. On April 12, 2000, the trial court issued an Order 4 denying the motion to dismiss, giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted a teleconference on June 25, 1999, during which it approved a resolution as quoted in the submitted affidavit.
CAacTH

ETI filed a motion for the reconsideration of the Order, contending that it was inappropriate for the court to take judicial notice of the said teleconference

without any prior hearing. The trial court denied the motion in its Order August 8, 2000.

dated

ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC. In its comment on the petition, KAL appended a certificate signed by Atty. Aguinaldo dated January 10, 2000, worded as follows:
SECRETARY'S/RESIDENT AGENT'S CERTIFICATE KNOW ALL MEN BY THESE PRESENTS: I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and appointed Corporate Secretary and Resident Agent of KOREAN AIRLINES, a foreign corporation duly organized and existing under and by virtue of the laws of the Republic of Korea and also duly registered and authorized to do business in the Philippines, with office address at Ground Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village, Makati City, HEREBY CERTIFY that during a special meeting of the Board of Directors of the Corporation held on June 25, 1999 at which a quorum was present, the said Board unanimously passed, voted upon and approved the following resolution which is now in full force and effect, to wit: RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its lawyers are hereby appointed and authorized to take with whatever legal action necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are hereby specifically authorized to prosecute, litigate, defend, sign and execute any document or paper necessary to the filing and prosecution of said claim in Court, attend the Pre-Trial Proceedings and enter into a compromise agreement relative to the above-mentioned claim. IN WITNESS WHEREOF, I have hereunto affixed my signature this 10th day of January, 1999, in the City of Manila, Philippines. (Sgd.) MARIO A. AGUINALDO Resident Agent

SUBSCRIBED AND SWORN to before me this 10th day of January, 1999, Atty. Mario A. Aguinaldo exhibiting to me his Community Tax Certificate No. 14914545, issued on January 7, 2000 at Manila, Philippines. (Sgd.) Doc. No. 119;ATTY. HENRY D. ADASA Page No. 25;Notary Public Book No. XXIVUntil December 31, 2000 Series of 2000.PTR #889583/MLA 1/3/2000
6

On December 18, 2001, the CA rendered judgment dismissing the petition, ruling that the verification and certificate of non-forum shopping executed by Atty. Aguinaldo was sufficient compliance with the Rules of Court. According to the appellate court, Atty. Aguinaldo had been duly authorized by the board resolution approved on June 25, 1999, and was the resident agent of KAL. As such, the RTC could not be faulted for taking judicial notice of the said teleconference of the KAL Board of Directors. ETI filed a motion for reconsideration of the said decision, which the CA denied. Thus, ETI, now the petitioner, comes to the Court by way of petition for review on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED DECISION AND WHEN IT ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANT PETITION? 7

The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of Court can be determined only from the contents of the complaint and not by documents or pleadings outside thereof. Hence, the trial court committed grave abuse of discretion amounting to excess of jurisdiction, and the CA erred in considering the affidavit of the respondent's general manager, as well as the Secretary's/Resident Agent's Certification and the resolution of the board of directors contained therein, as proof of compliance with the requirements of Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that the RTC cannot take judicial notice of the said teleconference without prior hearing, nor any motion therefor. The petitioner reiterates its submission that the

teleconference and the resolution adverted to by the respondent was a mere fabrication. The respondent, for its part, avers that the issue of whether modern technology is used in the field of business is a factual issue; hence, cannot be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. On the merits of the petition, it insists that Atty. Aguinaldo, as the resident agent and corporate secretary, is authorized to sign and execute the certificate of nonforum shopping required by Section 5, Rule 7 of the Rules of Court, on top of the board resolution approved during the teleconference of June 25, 1999. The respondent insists that "technological advances in this time and age are as commonplace as daybreak." Hence, the courts may take judicial notice that the Philippine Long Distance Telephone Company, Inc. had provided a record of corporate conferences and meetings through FiberNet using fiber-optic transmission technology, and that such technology facilitates voice and image transmission with ease; this makes constant communication between a foreignbased office and its Philippine-based branches faster and easier, allowing for cost-cutting in terms of travel concerns. It points out that even the E-Commerce Law has recognized this modern technology. The respondent posits that the courts are aware of this development in technology; hence, may take judicial notice thereof without need of hearings. Even if such hearing is required, the requirement is nevertheless satisfied if a party is allowed to file pleadings by way of comment or opposition thereto.
DHSaCA

In its reply, the petitioner pointed out that there are no rulings on the matter of teleconferencing as a means of conducting meetings of board of directors for purposes of passing a resolution; until and after teleconferencing is recognized as a legitimate means of gathering a quorum of board of directors, such cannot be taken judicial notice of by the court. It asserts that safeguards must first be set up to prevent any mischief on the public or to protect the general public from any possible fraud. It further proposes possible amendments to the Corporation Code to give recognition to such manner of board meetings to transact business for the corporation, or other related corporate matters; until then, the petitioner asserts, teleconferencing cannot be the subject of judicial notice. The petitioner further avers that the supposed holding of a special meeting on June 25, 1999 through teleconferencing where Atty. Aguinaldo was supposedly given such an authority is a farce, considering that there was no mention of where it was held, whether in this country or elsewhere. It insists that the Corporation Code requires board resolutions of corporations to be submitted to

the SEC. Even assuming that there was such a teleconference, it would be against the provisions of the Corporation Code not to have any record thereof.

The petitioner insists that the teleconference and resolution adverted to by the respondent in its pleadings were mere fabrications foisted by the respondent and its counsel on the RTC, the CA and this Court. The petition is meritorious. Section 5, Rule 7 of the Rules of Court provides:
SEC. 5.Certification against forum shopping. The plaintiff or principal party shall certify under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not theretofore commenced any action or filed any claim involving the same issues in any court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other action or claim is pending therein; (b) if there is such other pending action or claim, a complete statement of the present status thereof; and (c) if he should thereafter learn that the same or similar action or claim has been filed or is pending, he shall report that fact within five (5) days therefrom to the court wherein his aforesaid complaint or initiatory pleading has been filed. Failure to comply with the foregoing requirements shall not be curable by mere amendment of the complaint or other initiatory pleading but shall be cause for the dismissal of the case without prejudice, unless otherwise provided, upon motion and after hearing. The submission of a false certification or non-compliance with any of the undertakings therein shall constitute indirect contempt of court, without prejudice to the corresponding administrative and criminal actions. If the acts of the party or his counsel clearly constitute willful and deliberate forum shopping, the same shall be ground for summary dismissal with prejudice and shall constitute direct contempt, as well as a cause for administrative sanctions.

It is settled that the requirement to file a certificate of non-forum shopping is mandatory 8 and that the failure to comply with this requirement cannot be excused. The certification is a peculiar and personal responsibility of the party, an assurance given to the court or other tribunal that there are no other pending cases involving basically the same parties, issues and causes of action. Hence,

the certification must be accomplished by the party himself because he has actual knowledge of whether or not he has initiated similar actions or proceedings in different courts or tribunals. Even his counsel may be unaware of such facts. 9Hence, the requisite certification executed by the plaintiff's counsel will not suffice. 10 In a case where the plaintiff is a private corporation, the certification may be signed, for and on behalf of the said corporation, by a specifically authorized person, including its retained counsel, who has personal knowledge of the facts required to be established by the documents. The reason was explained by the Court in National Steel Corporation v. Court of Appeals, 11 as follows:
Unlike natural persons, corporations may perform physical actions only through properly delegated individuals; namely, its officers and/or agents. xxx xxx xxx The corporation, such as the petitioner, has no powers except those expressly conferred on it by the Corporation Code and those that are implied by or are incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its dulyauthorized officers and agents. Physical acts, like the signing of documents, can be performed only by natural persons duly-authorized for the purpose by corporate by-laws or by specific act of the board of directors. "All acts within the powers of a corporation may be performed by agents of its selection; and except so far as limitations or restrictions which may be imposed by special charter, by-law, or statutory provisions, the same general principles of law which govern the relation of agency for a natural person govern the officer or agent of a corporation, of whatever status or rank, in respect to his power to act for the corporation; and agents once appointed, or members acting in their stead, are subject to the same rules, liabilities and incapacities as are agents of individuals and private persons."
ECTSDa

xxx xxx xxx . . . For who else knows of the circumstances required in the Certificate but its own retained counsel. Its regular officers, like its board chairman and president, may not even know the details required therein.

Indeed, the certificate of non-forum shopping may be incorporated in the complaint or appended thereto as an integral part of the complaint. The rule is

that compliance with the rule after the filing of the complaint, or the dismissal of a complaint based on its non-compliance with the rule, is impermissible. However, in exceptional circumstances, the court may allow subsequent compliance with the rule. 12 If the authority of a party's counsel to execute a certificate of non-forum shopping is disputed by the adverse party, the former is required to show proof of such authority or representation. In this case, the petitioner, as the defendant in the RTC, assailed the authority of Atty. Aguinaldo to execute the requisite verification and certificate of non-forum shopping as the resident agent and counsel of the respondent. It was, thus, incumbent upon the respondent, as the plaintiff, to allege and establish that Atty. Aguinaldo had such authority to execute the requisite verification and certification for and in its behalf. The respondent, however, failed to do so. The verification and certificate of non-forum shopping which was incorporated in the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, after having sworn to in accordance with law hereby deposes and say: THAT 1.I am the Resident Agent and Legal Counsel of the plaintiff in the above entitled case and have caused the preparation of the above complaint; 2.I have read the complaint and that all the allegations contained therein are true and correct based on the records on files; 3.I hereby further certify that I have not commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency. If I subsequently learned that a similar action or proceeding has been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or any tribunal or agency, I will notify the court, tribunal or agency within five (5) days from such notice/knowledge. (Sgd.)

MARIO A. AGUINALDO Affiant CITY OF MANILA SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999, affiant exhibiting to me his Community Tax Certificate No. 00671047 issued on January 7, 1999 at Manila, Philippines. (Sgd.) Doc. No. 1005;ATTY. HENRY D. ADASA Page No. 198;Notary Public Book No. XXIUntil December 31, 2000 Series of 1999.PTR No. 320501 Mla 1/4/99
13

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

persons who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly-authorized officers of the foreign corporation as its home office. 14

Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of Court. This is because while a resident agent may be aware of actions filed against his principal (a foreign corporation doing business in the Philippines), such resident may not be aware of actions initiated by its principal, whether in the Philippines against a domestic corporation or private individual, or in the country where such corporation was organized and registered, against a Philippine registered corporation or a Filipino citizen.
cDSAEI

The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not specifically authorized to execute the said certification. It attempted to show its compliance with the rule subsequent to the filing of its complaint by submitting, on March 6, 2000, a resolution purporting to have been approved by its Board of Directors during a teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo and Suk Kyoo Kim in attendance. However, such attempt of the respondent casts veritable doubt not only on its claim that such a teleconference was held, but also on the approval by the Board of Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping.

In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of modern technology, persons in one location may confer with other persons in other places, and, based on the said premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo had a teleconference with the respondent's Board of Directors in South Korea on June 25, 1999. The CA, likewise, gave credence to the respondent's claim that such a teleconference took place, as contained in the affidavit of Suk Kyoo Kim, as well as Atty. Aguinaldo's certification. Generally speaking, matters of judicial notice have three material requisites: (1) the matter must be one of common and general knowledge; (2) it must be well and authoritatively settled and not doubtful or uncertain; and (3) it must be known to be within the limits of the jurisdiction of the court. The principal guide in determining what facts may be assumed to be judicially known is that of

notoriety. Hence, it can be said that judicial notice is limited to facts evidenced by public records and facts of general notoriety. 15 Moreover, a judicially noticed fact must be one not subject to a reasonable dispute in that it is either: (1) generally known within the territorial jurisdiction of the trial court; or (2) capable of accurate and ready determination by resorting to sources whose accuracy cannot reasonably be questionable. 16 Things of "common knowledge," of which courts take judicial matters coming to the knowledge of men generally in the course of the ordinary experiences of life, or they may be matters which are generally accepted by mankind as true and are capable of ready and unquestioned demonstration. Thus, facts which are universally known, and which may be found in encyclopedias, dictionaries or other publications, are judicially noticed, provided, they are of such universal notoriety and so generally understood that they may be regarded as forming part of the common knowledge of every person. As the common knowledge of man ranges far and wide, a wide variety of particular facts have been judicially noticed as being matters of common knowledge. But a court cannot take judicial

notice of any fact which, in part, is dependent on the existence or non-existence of a fact of which the court has no constructive knowledge. 17

In this age of modern technology, the courts may take judicial notice that business transactions may be made by individuals through teleconferencing. Teleconferencing is interactive group communication (three or more people in two or more locations) through an electronic medium. In general terms, teleconferencing can bring people together under one roof even though they are separated by hundreds of miles. 18 This type of group communication may be used in a number of ways, and have three basic types: (1) video conferencing television-like communication augmented with sound; (2) computer conferencing printed communication through keyboard terminals, and (3) audioconferencing-verbal communication via the telephone with optional capacity for telewriting or telecopying. 19 A teleconference represents a unique alternative to face-to-face (FTF) meetings. It was first introduced in the 1960's with American Telephone and Telegraph's Picturephone. At that time, however, no demand existed for the new technology. Travel costs were reasonable and consumers were unwilling to pay the monthly service charge for using the picturephone, which was regarded as more of a novelty than as an actual means for everyday communication. 20 In time, people found it advantageous to hold teleconferencing in the course of business and corporate governance, because of the money saved, among other advantages include:

1.People (including outside guest speakers) who wouldn't normally attend a distant FTF meeting can participate. 2.Follow-up to earlier meetings can be done with relative ease and little expense. 3.Socializing is minimal compared to an FTF meeting; therefore, meetings are shorter and more oriented to the primary purpose of the meeting. 4.Some routine meetings are more effective since one can audioconference from any location equipped with a telephone. 5.Communication between the home office and field staffs is maximized. 6.Severe climate and/or unreliable transportation may necessitate teleconferencing. 7.Participants are generally better prepared than for FTF meetings. 8.It is particularly satisfactory for simple problem-solving, information exchange, and procedural tasks. 9.Group members participate more equally in well-moderated teleconferences than an FTF meeting. 21

On the other hand, other private corporations opt not to hold teleconferences because of the following disadvantages:
1.Technical failures with equipment, including connections that aren't made. 2.Unsatisfactory for complex interpersonal communication, such as negotiation or bargaining. 3.Impersonal, less easy to create an atmosphere of group rapport. 4.Lack of participant familiarity with the equipment, the medium itself, and meeting skills. 5.Acoustical problems within the teleconferencing rooms. 6.Difficulty in determining participant speaking order; frequently one person monopolizes the meeting.

7.Greater participant preparation time needed.

HCDAac

8.Informal, one-to-one, social interaction not possible.

22

Indeed, teleconferencing can only facilitate the linking of people; it does not alter the complexity of group communication. Although it may be easier to communicate via teleconferencing, it may also be easier to miscommunicate. Teleconferencing cannot satisfy the individual needs of every type of meeting. 23 In the Philippines, teleconferencing and videoconferencing of members of board of directors of private corporations is a reality, in light of Republic Act No. 8792. The Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on November 30, 2001, providing the guidelines to be complied with related to such conferences. 24 Thus, the Court agrees with the RTC that persons in the Philippines may have a teleconference with a group of persons in South Korea relating to business transactions or corporate governance. Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a teleconference along with the respondent's Board of Directors, the Court is not convinced that one was conducted; even if there had been one, the Court is not inclined to believe that a board resolution was duly passed specifically authorizing Atty. Aguinaldo to file the complaint and execute the required certification against forum shopping. The records show that the petitioner filed a motion to dismiss the complaint on the ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of Court. The respondent opposed the motion on December 1, 1999, on its contention that Atty. Aguinaldo, its resident agent, was duly authorized to sue in its behalf. The respondent, however, failed to establish its claim that Atty. Aguinaldo was its resident agent in the Philippines. Even the identification card 25 of Atty. Aguinaldo which the respondent appended to its pleading merely showed that he is the company lawyer of the respondent's Manila Regional Office. The respondent, through Atty. Aguinaldo, announced the holding of the teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo then prayed for ten days, or until February 8, 2000, within which to submit the board resolution purportedly authorizing him to file the complaint and execute the required certification against forum shopping. The court granted the motion.26 The respondent, however, failed to comply, and instead prayed for 15 more days to submit the said resolution, contending that it was with its main

office in Korea. The court granted the motion per its Order 27 dated February 11, 2000. The respondent again prayed for an extension within which to submit the said resolution, until March 6, 2000. 28 It was on the said date that the respondent submitted an affidavit of its general manager Suk Kyoo Kim, stating, inter alia, that he and Atty. Aguinaldo attended the said teleconference on June 25, 1999, where the Board of Directors supposedly approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of its lawyers are hereby appointed and authorized to take with whatever legal action necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are hereby specifically authorized to prosecute, litigate, defend, sign and execute any document or paper necessary to the filing and prosecution of said claim in Court, attend the Pre-trial Proceedings and enter into a compromise agreement relative to the above-mentioned claim. 29

But then, in the same affidavit, Suk Kyoo Kim declared that the respondent "do[es] not keep a written copy of the aforesaid Resolution" because no records of board resolutions approved during teleconferences were kept. This belied the respondent's earlier allegation in its February 10, 2000 motion for extension of time to submit the questioned resolution that it was in the custody of its main office in Korea. The respondent gave the trial court the impression that it needed time to secure a copy of the resolution kept in Korea, only to allege later ( via the affidavit of Suk Kyoo Kim) that it had no such written copy. Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was embodied in the Secretary's/Resident Agent's Certificate signed by Atty. Aguinaldo. However, no such resolution was appended to the said certificate. The respondent's allegation that its board of directors conducted a teleconference on June 25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is incredible, given the additional fact that no such allegation was made in the complaint. If the resolution had indeed been approved on June 25, 1999, long before the complaint was filed, the respondent should have incorporated it in its complaint, or at least appended a copy thereof. The respondent failed to do so. It was only on January 28, 2000 that the respondent claimed, for the first time, that there was such a meeting of the Board of Directors held on June 25, 1999; it even represented to the Court that a copy of its resolution was with its main office in Korea, only to allege later that no written copy existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that the meeting of the Board of Directors where the resolution was approved was held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a Secretary's/Resident Agent's Certificate alleging that the board of directors held a teleconference on June 25, 1999. No such certificate was appended to the complaint, which was filed on September 6, 1999. More importantly, the respondent did not explain why the said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and yet was notarized one year later (on January 10, 2000); it also did not explain its failure to append the said certificate to the complaint, as well as to its Compliance dated March 6, 2000. It was only on January 26, 2001 when the respondent filed its comment in the CA that it submitted the Secretary's/Resident Agent's Certificate30 dated January 10, 2000. The Court is, thus, more inclined to believe that the alleged teleconference on June 25, 1999 never took place, and that the resolution allegedly approved by the respondent's Board of Directors during the said teleconference was a mere concoction purposefully foisted on the RTC, the CA and this Court, to avert the dismissal of its complaint against the petitioner. IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The Regional Trial Court of Manila is hereby ORDERED to dismiss, without prejudice, the complaint of the respondent.
DCAEcS

SO ORDERED.

Puno, Austria-Martinez and Chico-Nazario, JJ., concur. Tinga, J., is out of the country.

Footnotes
44.

THIRD DIVISION
[G.R. No. 93695. February 4, 1992.]

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners, vs. THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR. and TOMAS GONZALES, respondents.

Cayanga, Zuniga & Angel Law Offices for petitioners. Timbol & Associates for private respondents.
SYLLABUS 1.COMMERCIAL LAW; CORPORATIONS; VOTING TRUST; DEFINED. Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a more definite meaning may be gathered. The said provision partly reads: "Section 59. Voting Trusts One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any one time: Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement." 2.ID.; ID.; VOTING TRUST AGREEMENT; DEFINED. By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite period of time; and (3) that

the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5 Fletcher, Cylopedia of the Law on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538) 3.ID.; ID.; ID.; EFFECT AS TO VOTING RIGHTS; CRITERIA TO DISTINGUISH IT FROM OTHER AGREEMENTS. The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan. 4.ID.; ID.; ID.; LIMITATIONS THEREON. Under section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also other rights pertaining to his shares as long as the voting trust agreement is not entered "for the purpose of circumventing the law against monopolies and illegal combinations in restraint of trade or used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code). Thus, the traditional concept of a voting trust agreement primarily intended to single out a stockholder's right to vote from his other rights as such and made irrevocable for a limited duration may in practice become a legal device whereby a transfer of the stockholders shares is effected subject to the specific provision of the voting trust agreement. The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other hand. 5.ID.; ID.; ID.; EFFECT THEREOF ON THE STATUS OF TRANSFERRING STOCKHOLDERS. Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution from legal title holder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, the Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981 ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536.

6.ID.; ID.; ID.; RIGHTS GRANTED THEREIN AUTOMATICALLY EXPIRE AT THE END OF AGREED PERIOD. The 6th paragraph of section 59 of the new Corporation Code which reads: "Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors." 7.ID.; ID.; ID.; ELIGIBILITY OF A DIRECTOR UNDER THE OLD CORPORATION CODE AND UNDER THE NEW CORPORATION CODE. Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided under the old Corporation Code. With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not the beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized (see Campos and LopezCampos, supra, p. 296). Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051). 8.ID.; ID.; REPRESENTATIVES THEREOF AUTHORIZED TO RECEIVE COURT PROCESSES ON ITS BEHALF; RATIONALE. Under section 13, Rule 14 of the Revised Rules of Court, it is provided that: "Section. 13. Service upon private domestic corporation or partnership. If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent or any of its directors. It is a basic principle in Corporation Law that a corporation has a personality separate and distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above role on service of processes on a corporation enumerates the representatives of a corporation who can validly receive court processes on its behalf. Not every stockholder or officer can bind the corporation considering the existence of a corporate entity separate from those who compose it. The rationale of the aforecited rule is that service must be

made on a representative so integrated with the corporation sued as to make it a priori supposable that he will realize his responsibilities and know what he should do with any legal papers served on him. (Far Corporation v. Francisco, 146 SCRA 197 1986] citing Villa Rey Transit, Inc. v. Far East Motor Corp., 81 SCRA 303 [1978]). 9.ID.; ID.; BOUND ONLY BY ACTS WITHIN THE SCOPE OF ITS OFFICER'S OR AGENT'S AUTHORITY. The general principle that a corporation can only be bound by such acts which are within the scope of its officers' or agents' authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]) DECISION GUTIERREZ, JR., J :
p

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

On July 18, 1988, the petitioners filed their answer to the third party complaint. Meanwhile, on July 12, 1988, the trial issued an order requiring the issuance of an alias summons upon ALFA through the DBP as a consequence of the petitioners' letter informing the court that the summons for ALFA was erroneously served upon them considering that the management of ALFA had been transferred to the DBP. In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a separate and distinct corporate personality and existence. On August 4, 1988, the trial court issued an order advising the private respondents to take the appropriate steps to serve the summons to ALFA. On August 16, 1988, the private respondents filed a Manifestation and Motion for the Declaration of Proper Service of Summons which the trial court granted on August 17, 1988. On September 12, 1988, the petitioners filed a motion for reconsideration submitting that the Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no longer officers of ALFA and the private respondents should have availed of another mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect proper service upon ALFA. In their Comment to the Motion for Reconsideration dated September 27, 1988, the private respondents argued that the voting trust agreement dated March 11, 1981 did not divest the petitioners of their positions as president and executive vice-president of ALFA so that service of summons upon ALFA through the petitioners as corporate officers was proper. On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA through the petitioners, thus, denying the latter's motion for reconsideration and requiring ALFA to file its answer through the petitioners as its corporate officers. On January 19, 1989, a second motion for reconsideration was filed by the petitioners reiterating their stand that by virtue of the voting trust agreement they ceased to be officers and directors of ALFA, hence, they could no longer receive summons or any court processes for or on behalf of ALFA. In support of

their second motion for reconsideration, the petitioners attached thereto a copy of the voting trust agreement between all the stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the other hand, whereby the management and control of ALFA became vested upon the DBP. On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated January 2, 1989 and declared that service upon the petitioners who were no longer corporate officers of ALFA cannot be considered as proper service of summons on ALFA. On May 15, 1989, the private respondents moved for a reconsideration of the above Order which was affirmed by the court in its Order dated August 14, 1989 denying the private respondents' motion for reconsideration. On September 18, 1989, a petition for certiorari was belatedly submitted by the private respondent before the public respondent which, nonetheless, resolved to give due course thereto on September 21, 1989. On October 17, 1989, the trial court, not having been notified of the pending petition for certiorari with the public respondent issued an Order declaring as final the Order dated April 25, 1989. The private respondents in the said Order were required to take positive steps in prosecuting the third party complaint in order that the court would not be constrained to dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private respondents filed a motion for reconsideration on which the trial court took no further action. On March 19, 1990, after the petitioners filed their answer to the private respondents' petition for certiorari, the public respondent rendered its decision, the dispositive portion of which reads:
"WHEREFORE, in view of the foregoing, the orders of respondent judge dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and respondent corporation is ordered to file its answer within the reglementary period." (CA Decision, p. 8; Rollo, p. 24)

On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners filed this certiorari petition imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the public respondent in reversing the questioned Orders dated April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper service of summons on ALFA through the petitioners.

In the meantime, the public respondent inadvertently made an entry of judgment on July 16, 1990 erroneously applying the rule that the period during which a motion for reconsideration has been pending must be deducted from the 15-day period to appeal. However, in its Resolution dated January 3, 1991, the public respondent set aside the aforestated entry of judgment after further considering that the rule it relied on applies to appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals from its decision to us pursuant to our ruling in the case of Refractories Corporation of the Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250) In their memorandum, the petitioners present the following arguments, to wit:
"(1)that the execution of the voting trust agreement by a stockholder whereby all his shares to the corporation have been transferred to the trustee deprives the stockholder of his position as director of the corporation; to rule otherwise, as the respondent Court of Appeals did, would be violative of section 23 of the Corporation Code (Rollo, pp. 270273); and (2)that the petitioners were no longer acting or holding any of the positions provided under Rule 14, Section 13 of the Rules of Court authorized to receive service of summons for and in behalf of the private domestic corporation so that the service of summons on ALFA effected through the petitioners is not valid and ineffective; to maintain the respondent Court of Appeals' position that ALFA was properly served its summons through the petitioners would be contrary to the general principle that a corporation can only be bound by such acts which are within the scope of its officers' or agents' authority (Rollo, pp. 273-275)

In resolving the issue of the propriety of the service of summons in the instant case, we dwell first on the nature of a voting trust agreement and the consequent effects upon its creation in the light of the provisions of the Corporation Code. A voting trust is defined in Ballentine's Law Dictionary as follows:
"(a)trust created by an agreement between a group of the stockholders of a corporation and the trustee or by a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all

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

Under Section 59 of the new Corporation Code which expressly recognizes voting trust agreements, a more definite meaning may be gathered. The said provision partly reads:
"Section 59.Voting Trusts. One or more stockholders of a stock corporation may create a voting trust for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any one time: Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said voting trust may be for a period exceeding (5) years but shall automatically expire upon full payment of the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement. In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is made pursuant to said voting trust agreement."

By its very nature, a voting trust agreement results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends, the right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to which a stockholder may be entitled until the liquidation of the corporation. However, in order to distinguish a voting trust agreement from proxies and other voting pools and agreements, it must pass three criteria or tests, namely: (1) that the voting rights of the stock are separated from the other attributes of ownership; (2) that the voting rights granted are intended to be irrevocable for a definite period of time; and (3) that the principal purpose of the grant of voting rights is to acquire voting control of the corporation. (5 Fletcher, Cylopedia of the Law on Private Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374 F. Supp. 538) Under Section 59 of the Corporation Code, supra, a voting trust agreement may confer upon a trustee not only the stockholder's voting rights but also other

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

The execution of a voting trust agreement, therefore, may create a dichotomy between the equitable or beneficial ownership of the corporate shares of a stockholder, on the one hand, and the legal title thereto on the other hand. The law simply provides that a voting trust agreement is an agreement in writing whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five year-period may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the period is made contingent upon full payment of the loan. In the instant case, the point of controversy arises from the effects of the creation of the voting trust agreement. The petitioners maintain that with the execution of the voting trust agreement between them and the other stockholders of ALFA, as one party, and the DBP, as the other party, the former assigned and transferred all their shares in ALFA to DBP, as trustee. They argue that by virtue of the voting trust agreement the petitioners can no longer be considered directors of ALFA. In support of their contention, the petitioners invoke section 23 of the Corporation Code which provides, in part, that:
"Every director must own at least one (1) share of the capital stock of the corporation of which he is a director which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital stock of the corporation of which he is a director shall thereby cease to be director. x x x." (Rollo, p. 270)

The private respondents, on the contrary, insist that the voting trust agreement between ALFA and the DBP had all the more safeguarded the petitioners'

continuance as officers and directors of ALFA inasmuch as the general object of voting trust is to insure permanency of the tenure of the directors of a corporation. They cited the commentaries by Prof. Aguedo Agbayani on the right and status of the transferring stockholder, to wit:
"The 'transferring stockholder', also called the 'depositing stockholder', is equitable owner of the stocks represented by the voting trust certificates and the stock reversible on termination of the trust by surrender. It is said that the voting trust agreement does not destroy the status of the transferring stockholders as such, and thus render them ineligible as directors. But a more accurate statement seems to be that for some purposes the depositing stockholder holding voting trust certificates in lieu of his stock and being the beneficial owner thereof, remains and is treated as a stockholder. It seems to be deducible from the case that he may sue as a stockholder if the suit is in equity or is of an equitable nature, such as, a technical stockholders' suit in right of the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3, pp. 492-493, citing 5 Fletcher 326, 327]" (Rollo, p. 291)

We find the petitioners' position meritorious. Both under the old and the new Corporation Codes there is no dispute as to the most immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution from legal title-holder or owner of the shares subject of the voting trust agreement, he becomes the equitable or beneficial owner. (Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and Carlos, the Law on Private Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code; Comments, Notes & Selected Cases, 1981 ed., p. 386; Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the change in his status deprives the stockholder of the right to qualify as a director under section 23 of the present Corporation Code which deletes the phrase "in his own right." Section 30 of the old Code states that:
"Every director must own in his own right at least one share of the capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books of the corporation. A director who ceases to be the owner of at least one share of the capital stock of a stock corporation of which is a director shall thereby cease to be a director . . .." (Underlining supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be adversely affected by the simple act of such director being a party to a voting trust agreement inasmuch as he remains owner (although beneficial or equitable only) of the shares subject of the voting trust agreement pursuant to which a transfer of the stockholder's shares in favor of the trustee is required (section 36 of the old Corporation Code). No disqualification arises by virtue of the phrase "in his own right" provided under the old Corporation Code. With the omission of the phrase "in his own right" the election of trustees and other persons who in fact are not the beneficial owners of the shares registered in their names on the books of the corporation becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296). Hence, this is a clear indication that in order to be eligible as a director, what is material is the legal title to, not beneficial ownership of, the stock as appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051). The facts of this case show that the petitioners, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code. They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions as directors of ALFA. The transfer of shares from the stockholders of ALFA to the DBP is the essence of the subject voting trust agreement as evident from the following stipulations:
"1.The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of the shares of stocks owned by them respectively and shall do all things necessary for the transfer of their respective shares to the TRUSTEE on the books of ALFA. 2.The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for the number of shares transferred, which shall be transferable in the same manner and with the same effect as certificates of stock subject to the provisions of this agreement; 3.The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA, annual or special, upon any resolution, matter or business that may be submitted to any such meeting, and shall possess in that respect

the same powers as owners of the equitable as well as the legal title to the stock; 4.The TRUSTEE may cause to be transferred to any person one share of stock for the purpose of qualifying such person as director of ALFA, and cause a certificate of stock evidencing the share so transferred to be issued in the name of such person; xxx xxx xxx 9.Any stockholder not entering into this agreement may transfer his shares to the same trustee, without the need of revising this agreement, and this agreement shall have the same force and effect upon that said stockholder." (CARollo, pp. 137-138; Underlining supplied)

Considering that the voting trust agreement between ALFA and the DBP transferred legal ownership of the stocks covered by the agreement to the DBP as trustee, the latter became the stockholder of record with respect to the said shares of stocks. In the absence of a showing that the DBP had caused to be transferred in their names one share of stock for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have retained their status as officers of ALFA which was the case before the execution of the subject voting trust agreement. There appears to be no dispute from the records that DBP has taken over full control and management of the firm. Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa A. Guevarra, Vice-President of its Special Accounts Department II, Remedial Management Group, the petitioners were no longer included in the list of officers of ALFA "as of April 1982". (CA Rollo, pp. 140-142) Inasmuch as the private respondents in this case failed to substantiate their claim that the subject voting trust agreement did not deprive the petitioners of their position as directors of ALFA, the public respondent committed a reversible error when it ruled that:
". . . while the individual respondents (petitioners Lee and Lacdao) may have ceased to be president and vice-president, respectively, of the corporation at the time of service of summons on them on August 21, 1987, they were at least up to that time, still directors . . .".

The aforequoted statement is quite inaccurate in the light of the express terms of Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the DBP, were aware at the time of the execution of the agreement that by

virtue of the transfer of shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions as such. There can be no reliance on the inference that the five-year period of the voting trust agreement in question had lapsed in 1986 so that the legal title to the stocks covered by the said voting trust agreement ipso facto reverted to the petitioners as beneficial owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:

"Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the end of the agreed period, and the voting trust certificates as well as the certificates of stock in the name of the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in the name of the transferors."

On the contrary, it is manifestly clear from the terms of the voting trust agreement between ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of certain obligations of ALFA with the DBP. This is shown by the following portions of the agreement.
"WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is secured by a first mortgage on the manufacturing plant of said company; WHEREAS, ALFA is also indebted to other creditors for various financial accommodations and because of the burden of these obligations is encountering very serious difficulties in continuing with its operations. WHEREAS, in consideration of additional accommodations from the TRUSTEE, ALFA has offered and the TRUSTEE has accepted participation in the management and control of the company and to assure the aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to execute a voting trust covering their shareholding in ALFA in favor of the TRUSTEE; AND WHEREAS, DBP, is willing to accept the trust for the purpose aforementioned. NOW, THEREFORE, it is hereby agreed as follows: xxx xxx xxx

6.This Agreement shall last for a period of Five (5) years, and is renewable for as long as the obligations of ALFA with DBP, or any portion thereof, remains outstanding;' (CA Rollo, pp. 137-138)

Had the five-year period of the voting trust agreement expired in 1986, the DBP would not have transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the national government through the Asset Privatization Trust (APT) as attested to in a Certification dated January 24, 1989 of the Vice President of the DBP's Special Accounts Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had handled APT's account which included ALFA's assets pursuant to a management agreement by and between the DBP and APT. (CA Rollo, p. 142) Hence, there is evidence on record that at the time of the service of summons on ALFA through the petitioners on August 21, 1987, the voting trust agreement in question was not yet terminated so that the legal title to the stocks of ALFA, then, still belonged to the DBP. In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA through the petitioners is readily answered in the negative. Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
"Sec. 13.Service upon private domestic corporation or partnership. If the defendant is a corporation organized under the laws of the Philippines or a partnership duly registered, service may be made on the president, manager, secretary, cashier, agent or any of its directors."

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

The petitioners in this case do not fall under any of the enumerated officers. The service of summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise, as correctly argued by the petitioners, will contravene the general principle that a corporation can only be bound by such acts which are within the scope of the officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973].) WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED. SO ORDERED.

Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.

45.

SPECIAL SECOND DIVISION

[G.R. No. 144476. April 8, 2003.] ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE COMMISSION, respondents. [G.R. No. 144629. April 8, 2003.] DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG,

WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents.

Feria Feria Lugtu La O'Noche for petitioners. Estelito P. Mendoza for petitioners. Gonzales Batiller Bilog & Asso. for W. Ong. Tan Acut & Lopez for respondents. Aquilino L. Pimentel III for Landlink, etc. Arturo Santos for Masagana.
SYNOPSIS In these consolidated petitions, the Ongs moved for reconsideration of the February 1, 2002 Decision of the Supreme Court affirming with modification the October 5, 1999 Decision of the Court of Appeals, which in turn upheld, likewise with modification, the decision of the SEC en banc dated September 11, 1998, which confirmed the unilateral rescission by the Tius of the Pre-Subscription Agreement between them and the Ongs. The Tius, on the other hand, moved for the issuance of a writ of execution of the February 1, 2002 decision of the Court. Movants Ong argued that specific performance and not rescission was the proper remedy under the premises. According to them, their alleged breach of the PreSubscription Agreement was, at most casual, which did not justify the rescission of the contract. They claimed that it was the Tius who were guilty of fundamental violation in failing to remit funds to FLADC and diverting the same to their MATTERCO account. They alleged that in view of the findings that both parties were guilty of violating their Agreement, neither of them could resort to rescission under the principle of pari delicto. The Ongs further argued that assuming rescission to be proper, they should be given the proportionate share of the mall. In reversing itself, the Court ruled that the Tius could not legally rescind the PreSubscription Agreement. According to the Court, although the Tius were adversely affected by the Ong's unwillingness to let them assume the positions of Vice-President and Treasurer of the Corporation, rescission due to breach of

contract was definitely a wrong remedy for their personal grievances. The Corporation Code, SEC rules and even the Rules of Court provide for appropriate adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, especially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. Hence, the Court held that the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of the subscription contract. Moreover, the Court found that Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. Without the Ongs, the Tius would have lost everything they originally invested in said mall. Thus, it would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interest on petty and tenuous grounds. Accordingly, the Court declared null and void the unilateral rescission by the Tius of the subject Pre-Subscription Agreement. It denied Tius' motion for issuance of a writ of execution for being moot.
EHTIcD

SYLLABUS 1.REMEDIAL LAW; MOTIONS; MOTION FOR RECONSIDERATION; NOT PROFORMA FOR THE REASON ALONE THAT IT REITERATES THE ARGUMENTS EARLIER PASSED UPON AND REJECTED BY THE APPELLATE COURT. The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious motions for reconsideration. As long as the same adequately raises a valid ground (i.e., the decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca, we ruled that a motion for reconsideration is not pro forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court. We explained there that a movant may raise the same arguments, if only to convince this Court that its ruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs' arguments. For instance, no clear ruling was made on why an order distributing corporate assets

and property to the stockholders would not violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for reconsideration since some important issues therein, although mere repetitions, were not considered or clearly resolved by this Court. 2.COMMERCIAL LAW; CORPORATION LAW; CORPORATIONS; SUBSCRIPTION CONTRACT; A PARTY WHO HAS NOT TAKEN PART IN THE TRANSACTION CANNOT SUE OR BE SUED FOR PERFORMANCE OR FOR CANCELLATION THEREOF, UNLESS HE SHOWS THAT HE HAS A REAL INTEREST AFFECTED THEREBY. A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated by the parties as Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own shares to them. It was FLADC that did. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius m their personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that "contracts take effect only between the parties, their assigns and heirs. . ." Therefore, a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby. 3.ID.; ID.; ID.; ID.; RESCISSION BASED ON BREACH OF CONTRACT NOT PROPER REMEDY WHERE PARTY ASKING FOR IT HAS NO LEGAL PERSONALITY TO DO SO AND THE REQUIREMENTS OF THE LAW THEREFOR HAVE NOT BEEN MET. However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume their positions, rescission due to breach of contract is definitely the wrong remedy for their personal grievances. The

Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has
no legal personality to do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground because

it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code. Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of subscription contract. Not only are they not parties to the subscription contract between the Ongs and FLADC; they also have other available and effective remedies under the law. 4.ID.; ID.; ID.; ID.; RESCISSION THEREOF WILL RESULT IN THE PREMATURE LIQUIDATION OF THE CORPORATION IN CASE AT BAR. Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation Code. The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions. We wish it were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its creditors and the Ongs.
DAcaIE

5.ID.; ID.; ID.; ID.; RESCISSION THEREOF UNWARRANTED IN CASE AT BAR. After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts about it. Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this and the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments assuming good faith and honest intentions we cannot allow the rescission of the subject subscription agreement. The Ongs' shortcomings were far from serious and certainly less than substantial; they were in fact remediable and correctable under the law. It would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds.

6.ID.; ID.; ID.; PIERCING THE VEIL OF CORPORATE FICTION; NOT WARRANTED ABSENT PROOF THAT THE CORPORATION IS BEING USED AS A

CLOAK OR COVER FOR FRAUD OR ILLEGALITY, OR TO WORK INJUSTICE. In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and governing their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding the subscription of the parties to the corporation. They point out that these two component parts form one whole agreement and that their terms and conditions are intrinsically related and dependent on each other. Thus, the breach of the shareholders' agreement, which was allegedly the consideration for the subscription contract, was also a breach of the latter. Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is obviously intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement in which they were personally not parties-in-interest. Assuming arguendo that there were two "subagreements" embodied in the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as the consideration of the subscription contract between FLADC and the Ongs. There was nothing in the PreSubscription Agreement even remotely suggesting such alleged interdependence. Be that as it may, however, the Tius are nevertheless not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to claim that the shareholders agreement between them and the Ongs was what induced FLADC and the Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation is being used "as a cloak or cover for fraud or illegality, or to work injustice." 7.ID.; ID.; ID.; HAS A SEPARATE JURIDICAL PERSONALITY FROM ITS STOCKHOLDERS. The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is breach by FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC.
aDECHI

8.ID.; ID.; ID.; PRESIDENT OF THE CORPORATION IS PROHIBITED FROM ACTING CONCURRENTLY AS TREASURER THEREOF. The Tius allege that they were prevented from participating in the management of the corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu,

from exercising her function as such. The records show that the President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana Citimall; that he ordered the same to be deposited in the bank; and that he held on to the cash and properties of the corporation. Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation. The rationale behind the provision is to ensure the effective monitoring of each officer's separate functions. 9.ID.; ID.; ID.; TRUST FUND DOCTRINE; ELABORATED. All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for to rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera, provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with. 10.ID.; ID.; ID.; DISTRIBUTION OF CORPORATE ASSETS AND PROPERTY CANNOT BE MADE TO DEPEND ON THE WHIMS AND CAPRICES OF THE STOCKHOLDERS, OFFICERS OR DIRECTORS OR EARNEST DESIRE OF THE COURT A QUO TO PREVENT FURTHER SQUABBLES AND FUTURE LITIGATIONS. The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the "corporate peace" laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors' turn to engage in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized

distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. 11.ID.; ID.; ID.; DECREASE OF CAPITAL STOCK; FORMAL REQUIREMENTS; NOT COMPLIED WITH IN CASE AT BAR. The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured. There was no revised treasurer's affidavit and no proof that said decrease will not prejudice the creditors' rights. On the contrary, all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporation's authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. In this case, the Tius are actually not

just asking for a review of the legality and fairness of a corporate decision. They want this Court to make a corporate decision for FLADC. We decline to intervene
and order corporate structural changes not voluntarily agreed upon by its stockholders and directors.
DCSTAH

12.ID.; ID.; ID.; BUSINESS JUDGMENT RULE; EXPLAINED; RATIONALE BEHIND THE RULE; CASE AT BAR. Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's directors and stockholders is a violation of the "business judgment rule" which states that: . . . (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders. The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in corporate law, thus: Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez fairerule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the

businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts. Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock. Ordering the return and distribution of the Ongs' capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any individual stockholder thereof. RESOLUTION CORONA, J :
p

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a reversal of this Court's Decision, 1 dated February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the decision 2 of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise with modification, the decision of the SEC en banc, dated September 11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
DaAETS

A brief recapitulation of the facts shows that: In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the Ongs

were to subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to nominate the President, the Secretary and six directors (including the chairman) to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall. Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800 stock subscription therein. The Ongs paid in another P70 million 3 to FLADC and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190 million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB. The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on February 23, 1996, rescinded the PreSubscription Agreement. The Tius accused the Ongs of (1) refusing to credit to them the FLADC shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them the office spaces agreed upon. According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and perform the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from doing so. Furthermore, the Ongs refused to provide them the space for their executive offices as VicePresident and Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares corresponding to their property contributions of a fourstory building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-Subscription Agreement with the Ongs who allegedly refused to comply with their undertakings. In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the corporation and undertake their management duties but that the Tius shied away

from helping them manage the corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact already have existing executive offices in the mall since they owned it 100% before the Ongs came in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius' property contributions, the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P570,690 for capital gains tax and documentary stamp tax. Without the payment thereof, the SEC would not approve the valuation of the Tius' property contribution (as opposed to cash contribution). This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT) over the property in FLADC's name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new TCT was issued in FLADC's name, they could then be given the corresponding shares of stocks. On the 151 square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed that they could not as yet surrender the TCT because it was "still being reconstituted" by the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality owned the property all along, even before their Pre-Subscription Agreement was executed in 1994. This meant that the 151 square-meter property was at that time already the corporate property of FLADC for which the Tius were not entitled to the issuance of new shares of stock.
TEAICc

The controversy finally came to a head when this case was commenced 4 by the Tius on February 27, 1996 at the Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-Subscription Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and consequently ordering: (a)The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC; (b)FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their contribution for 1,000,000 shares of FLADC;

(c)The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of incorporation of FLADC to conform with this decision; (d)The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325 and 134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void; (e)The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation of the PreSubscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587); (f)The individual defendants, individually and collectively, their agents and representatives, to desist from exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any manner intervene in the management and affairs of FLADC; (g)The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of P8,866,669.00 and all interest payments as well as any payments on principal received from the P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such payment until fully paid; (h)The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from said defendants plus legal interest from the date of receipt of such amount. SO ORDERED.
5

On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs' P70 million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that the imposition of interest on it was correct. 6 Both parties appealed 7 to the SEC en banc which rendered a decision on September 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but reverted to classifying the P70 million paid by the Ongs as premium on capital and not as a loan or advance to FLADC, hence, not entitled to earn interest. 8

On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS: 1.The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in accordance with the following cash and property contributions of the parties therein. (a)Ong Group P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; (b)Tiu Group: 1)P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; 2)A four-storey building described in Transfer Certificate of Title No. 15587 in the name of Intraland Resources and Development Corporation valued at P20,000,000.00 for 200,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share; 3)A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No. 15587 in the name of Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink Asia Development Corporation at a par value of P100.00 per share. 2)Whatever remains of the assets of the First Landlink Asia Development Corporation and the management thereof is (sic) hereby ordered transferred to the Tiu Group. 3)First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70,000,000.00 that was advanced to it by the Ong Group upon the finality of this decision. Should the former

incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code. 4)The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon the finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED.

An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the "height of ingratitude" and as "pulling a fast one" on the Ongs. The CA moreover found the Tius guilty of withholding FLADC funds from the Ongs and diverting corporate income to their own MATTERCO account. 10 These were findings later on affirmed in our own February 1, 2002 Decision which is the subject of the instant motion for reconsideration. 11 But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the Tius were in pari delicto(which would not have legally entitled them to rescission) but, "for practical considerations," that is, their inability to work together, it was best to separate the two groups by rescinding the Pre-Subscription Agreement, returning the original investment of the Ongs and awarding practically everything else to the Tius. Their motions for reconsideration having been denied, both parties filed separate petitions for review before this Court. In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may not properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-Subscription Agreement did not provide for reciprocity of obligations; that the rights over the subject matter of the rescission (capital assets and properties) had been acquired by a third party (FLADC); that they did not commit a substantial and fundamental breach of their agreement since they did not prevent the Tius from assuming the positions of Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property covered by TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the approval of the SEC for the property contribution and, thereafter, the issuance of title in FLADC's name. They also argued that the

liquidation of FLADC may not legally be ordered by the appellate court even for so called "practical considerations" or even to prevent "further squabbles and numerous litigations," since the same are not valid grounds under the Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million advances to FLADC and David S. Tiu, respectively, and to award costs and damages. In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand, contended that the rescission should have been limited to the restitution of the parties' respective investments and not the liquidation of FLADC based on the erroneous perception by the court that: the Masagana Citimall was threatened with incompletion since FLADC was in financial distress; that the Tius invited the Ongs to invest in FLADC to settle its P190 million loan from PNB; that they violated the Pre-Subscription Agreement when it was the Lichaucos and not the Tius who executed the deed of assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC thereby failing to pay the price for the said shares; that they did not turn over to the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease contracts due to FLADC to their own MATTERCO account; that the P70 million paid by the Ongs was an advance and not a premium on capital; and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle away the management of the mall and prevent the Ongs from enjoying the profits of their P190 million investment in FLADC. On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming the assailed decision of the Court of Appeals but with the following modifications:
1.the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum to be computed from the time of judicial demand which is from April 23, 1996; 2.the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be computed from the date of the FLADC Board Resolution which is June 19, 1996; and 3.the Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically, the 151 sq. m. parcel of land.

This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the Pre-Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-President and Treasurer

of the corporation. On the other hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO account. Consequently, it held that rescission was not possible since both parties were in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of specific performance, as espoused by the Ongs, was not practical and sound either and would only lead to further "squabbles and numerous litigations" between the parties. On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of the Tius since the case had been pending for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that the Decision dated February 1, 2002 was not yet final and executory; that no good reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over pending cases involving intra-corporate disputes already submitted for final resolution upon the effectivity of the said law. Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs filed their own "Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision)" on March 15, 2002, raising two main points: (a) that specific performance and not rescission was the proper remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of this Court should be modified to entitle movants to their proportionate share in the mall. On their first point (specific performance and not rescission was the proper remedy), movants Ong argue that their alleged breach of the Pre-Subscription Agreement was, at most, casual which did not justify the rescission of the contract. They stress that providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription Agreement since the said obligation (to provide executive offices) pertained to FLADC itself. Such obligation arose from the relations between the said officers and the corporation and not any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to credit shares of stock in favor of the Tius for their property contributions also pertained to the corporation and not to the Ongs. Just the same, it could not be done in view of the Tius' refusal to pay the necessary transfer taxes which in

turn resulted in the inability to secure SEC approval for the property contributions and the issuance of a new TCT in the name of FLADC.

Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-Subscription Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADC's loan to PNB. Hence, in this light,

the alleged failure to provide office space for the two corporate officers was no more than an inconsequential infringement. For rescission to be justified, the law requires that the breach of contract should be so "substantial or fundamental" as to defeat the primary objective of the parties in making the agreement. At any rate, the Ongs claim that it was the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC and diverting the same to their MATTERCO account. The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating the Pre-Subscription Agreement, neither of them could resort to rescission under the principle of pari delicto. In addition, since the cash and other contributions now sought to be returned already belong to FLADC, an innocent third party, said remedy may no longer be availed of under the law. On their second point (assuming rescission to be proper, the Ongs should be given their proportionate share of the mall), movants Ong vehemently take exception to the second item in the dispositive portion of the questioned Decision insofar as it decreed that whatever remains of the assets of FLADC and the management thereof (after liquidation) shall be transferred to the Tius. They point out that the mall itself, which would have been foreclosed by PNB if not for their timely investment of P190 million in 1994 and which is now worth about P1 billion mainly because of their efforts, should be included in any partition and distribution. They (the Ongs) should not merely be given interest on their capital investments. The said portion of our Decision, according to them, amounted to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the act of the Tius in unilaterally rescinding the agreement was "the height of ingratitude" and an attempt "to pull a fast one" as it would prevent the Ongs from enjoying the fruits of their P190 million investment in FLADC. It also contravenes this Court's assurance in the questioned Decision that the Ongs and Tius "will have a bountiful return of their respective investments derived from the profits of the corporation."

Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8, 2002, pointing out that there was no violation of the Pre-Subscription Agreement on the part of the Ongs; that, after more than seven years since the mall began its operations, rescission had become not only impractical but would also adversely affect the rights of innocent parties; and that it would behighly

inequitable and unfair to simply return the P100 million investment of the Ongs and give the remaining assets now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the arguments therein are a mere re-hash of the contentions in the Ongs' petition for review and previous motion for reconsideration of the Court of Appeals' decision. The Tius compare the arguments in said pleadings to prove that the Ongs do not raise new issues, and, based on well-settled jurisprudence, 12 the Ongs' present motion is therefore pro forma and did not prevent the Decision of this Court from attaining finality.

AISHcD

On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective positions of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their respective memoranda. On February 28, 2003, the Tius submitted their memorandum. We grant the Ongs' motions for reconsideration. This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine Consumers Foundation, Inc. vs. National Telecommunications Commission, 13 this Court, through then Chief Justice Felix V. Makasiar, said that its members may and do change their minds, after a restudy of the facts and the law, illuminated by a mutual exchange of views.14 After a thorough re-examination of the case, we find that our Decision of February 1, 2002 overlooked certain aspects which, if not corrected, will cause extreme and irreparable damage and prejudice to the Ongs, FLADC and its creditors. The procedural rule on pro forma motions pointed out by the Tius should not be blindly applied to meritorious motions for reconsideration. As long as the same adequately raises a valid ground 15 (i.e., the decision or final order is contrary to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining finality. In Security Bank and Trust Company vs. Cuenca, 16 we ruled that a motion for reconsideration is not pro forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court. We explained there that a movant may raise the same

arguments, if only to convince this Court that its ruling was erroneous. Moreover, the rule (that a motion is pro formaif it only repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. In the case at bar, no ruling was made on some of the petitioner Ongs' arguments. For instance, no clear ruling was made on why an order distributing corporate assets and property to the stockholders would not violate the statutory preconditions for corporate dissolution or decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion for reconsideration since some important issues therein, although mere repetitions, were not considered or clearly resolved by this Court. Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription Agreement. We rule that they could not. FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning 450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in FLADC as stockholders, an increase of the authorized capital stock became necessary to give each group equal (5050) shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the parties' Pre-Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal

capacities with the Ongs since they were not selling any of their own shares to them. It was FLADC that did. Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311 of the Civil Code provides that "contracts take effect only between the parties, their assigns and heirs. . ." Therefore, a party who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby. 17 In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the Pre-Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and governing their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding the subscription of the parties to the corporation. They point out that these two component parts form one whole agreement and that their terms and conditions are intrinsically related and dependent on each other. Thus, the breach of the shareholders' agreement, which was allegedly the consideration for the subscription contract, was also a breach of the latter. Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is obviously intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement in which they were personally not parties-in-interest. Assuming arguendo that there were two "sub-agreements" embodied in the Pre-Subscription Agreement, this Court fails to see how the shareholders agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as the consideration of the subscription contract between FLADC and the Ongs. There was nothing in the PreSubscription Agreement even remotely suggesting such alleged interdependence. Be that as it may, however, the Tius are nevertheless not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and the Ongs. Thus, they are not in a position to claim that the shareholders agreement between them and the Ongs was what induced FLADC and the Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though FLADC was represented by the Tius in the subscription

contract, FLADC had a separate juridical personality from the Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation is being used "as a cloak or cover for fraud or illegality, or to work injustice."18 The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is breach by FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC. The Tius allege that they were prevented from participating in the management of the corporation. There is evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her function as such. The records show that the President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana Citimall; 19 that he ordered the same to be deposited in the bank; 20 and that he held on to the cash and properties of the corporation. 21 Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation. The rationale behind the provision is to ensure the effective monitoring of each officer's separate functions. However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume their positions, rescission due to breach of contract is definitely the wrong remedy for their personal grievances. The Corporation Code,

SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than rescission, in situations like this. Rescission

is certainly not one of them, specially if the party asking for it has no legal personality to do so and the requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without complying with the requirements of the Corporation Code.

Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission of the subject agreement based on a less than substantial breach of subscription contract. Not only are they not parties to the subscription contract between the Ongs and FLADC; they also have other available and effective remedies under the law.

All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code. The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera, 22 provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to look for the satisfaction of their claims. 23 This doctrine is the underlying principle in the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, 24 (2) purchase of redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, 25 and (3) dissolution and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own shares 26 and in Section 122 on the prohibition against the distribution of corporate assets and property unless the stringent requirements therefor are complied with.27 The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and procedures for the protection of corporate creditors are followed. Otherwise, the "corporate peace" laudably hoped for by the court will remain nothing but a dream because this time, it will be the creditors' turn to engage in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust Fund Doctrine. In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital assets and property of the corporation is allowed. Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature liquidation of the corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation Code. 28 The

Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash and property contributions. We wish it were that simple. Very noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its creditors and the Ongs. In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not result in an unauthorized liquidation of the corporation because their case is actually a petition to decrease capital stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides that "(e)xcept by decrease of capital stock . . ., no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." The Tius claim that their case for rescission, being a petition to decrease capital stock, does not violate the liquidation procedures under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said decrease. This new argument has no merit. The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such action never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at which the approval of stockholders owning at least twothirds of the outstanding capital stock was secured. There was no revised treasurer's affidavit and no proof that said decrease will not prejudice the creditors' rights. On the contrary, all their pleadings contained were alleged acts of violations by the Ongs to justify an order of rescission. Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporation's authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can make, considering that they are the contracting parties thereto. In this case, the Tius are actually not just asking for

a review of the legality and fairness of a corporate decision. They want this Court to make a corporate decision for FLADC. We decline to intervene and order

corporate structural changes not voluntarily agreed upon by its stockholders and directors. Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's directors and stockholders is a violation of the "business judgment rule" which states that:
. . . (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders. 29

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of the corporate business has been vested in the board and not with courts. 30

Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock. Ordering the return and distribution of the Ongs' capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any individual stockholder thereof. Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If rescission is denied, will injustice be inflicted on any of the parties? The answer is no because the financial interests of both the Tius and the Ongs will remain intact and safe within FLADC. On the other hand, if rescission is granted, will any of the parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the streets with nothing but the money they had in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere

from P450 million to P900 million 31 but will also take over an extremely profitable business without much effort at all. Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1, 2002, stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed breaches of the PreSubscription Agreement. This may be true to a certain extent but, judging from the comparative gravity of the acts separately committed by each group, we find that the Ongs' acts were relatively tame vis--vis those committed by the Tius in not surrendering FLADC funds to the corporation and diverting corporate income to their own MATTERCO account. The Ongs were right in not issuing to the Tius the shares corresponding to the four-story building and the 1,902.30 squaremeter lot because no title for it could be issued in FLADC's name, owing to the Tius' refusal to pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why should FLADC issue additional shares to the Tius for property already owned by the corporation and which, in the final analysis, was already factored into the shareholdings of the Tius before the Ongs came in? We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one" on the Ongs because that was where the problem precisely started. It is clear that, when the finances of FLADC improved considerably after the equity infusion of the Ongs, the Tius started planning to take over the corporation again and exclude the Ongs from it. It appears that the Tius' refusal to pay transfer taxes might not have really been at all unintentional because, by failing to pay that relatively small amount which they could easily afford, the Tius should have expected that they were not going to be given the corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In other words, the Tius created a problem then used that same problem as their pretext for showing their partners the door. In the process, they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs, FLADC and its creditors.

After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts about it. Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this and the fact that this Resolution can truly

pave the way for both groups to enjoy the fruits of their investments assuming good faith and honest intentions we cannot allow the rescission of the subject subscription agreement. The Ongs' shortcomings were far from serious and certainly less than substantial; they were in fact remediable and correctable under the law. It would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous grounds. WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as null and void. The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot. Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision of the Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby REVERSED. Costs against the petitioner Tius. SO ORDERED.

Bellosillo, Quisumbing and Callejo, Sr., JJ., concur.

Footnotes
46.

FIRST DIVISION
[G.R. No. 126891. August 5, 1998.]

LIM TAY, petitioner, vs. COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and ESTATE OF ALFONSO LIM, respondents.

Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles for petitioner. Manuel M. Gonzales for private respondent.
SYNOPSIS Private respondent Sy Guiok and Alfonso Sy Lim secured a loan from petitioner Lim Tay, securing their loans with contracts of pledge covering their respective shares of stock in Go Fay & Company, Inc. Under said contracts of pledge, Guiok and Sy Lim agreed that in the event of their failure to pay the amount within the period agreed upon, the pledgee, Lim Tay, was authorized to foreclose the pledge upon the said shares of stock. Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to Lim Tay. Guiok and Lim, however, failed to pay their respective loans to Lim Tay. Lim Tay filed a petition for mandamus with the Securities and Exchange Commission (SEC) against Go Fay & Company, praying that an order be issued directing the corporate secretary of the company to register the stock transfers and issue new certificates in his favor. Lim Tay alleged in his petition that the controversy between him as stockholder and the company was intra-corporate in view of the obstinate refusal of the corporate secretary of the company to record the transfer of the shares of stock of Guiok and Sy Lim in favor of petitioner. The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. The determination of whether or not a shareholder is entitled to exercise the preceding rights falls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed, then jurisdiction lies with the regular courts. Manifestly, petitioner's complaint by itself did not contain any prima facie showing that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an owner. The

contractual stipulation which was part of the complaint, shows that petitioner was merely authorized to foreclose the pledge upon maturity of the loans, not to own them. Accordingly, it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. SYLLABUS 1.MERCANTILE LAW; CORPORATION LAW; OWNERSHIP OF SHARES OF STOCKS; JURISDICTION LIES WITH REGULAR COURTS AND NOT WITH THE SEC; REASON. The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. The determination of whether or not a shareholder is entitled to exercise the above-mentioned rights falls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed, then jurisdiction lies with the regular courts. As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint. In the present case, however, petitioner's claim that he was the owner of the shares of stock in question has no prima facie basis. In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he became the owner of the shares when the term for the loans expired. However, the contracts of pledge, which were made integral parts of the Complaint, contain this common proviso: In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock . . .." 2.REMEDIAL LAW; CIVIL PROCEDURE; MANDAMUS; MANDAMUS WILL NOT ISSUE TO ESTABLISH A RIGHT. Petitioner has failed to establish a clear legal right. Petitioner's contention that he is the owner of the said shares is completely without merit. Quite the contrary and as already shown, he does not have any ownership rights at all. At the time petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg to stand on. At best, his contention was disputable and uncertain. Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established. 3.CIVIL LAW; CREDIT TRANSACTIONS; PLEDGE; PETITIONER DID NOT ACQUIRE OWNERSHIP OF THE SHARES BY VIRTUE OF THE PLEDGE. There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares

could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code: "Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person." 4.ID.; PRESCRIPTION; PETITIONER'S POSSESSION OF THE SHARES OF STOCK AS A PLEDGEE CANNOT RIPEN INTO OWNERSHIP BY PRESCRIPTION. Petitioner's contention that he can be deemed to have acquired ownership over the certificates of stock through extraordinary prescription, as provided for in Article 1132 of the Civil Code, is untenable. What is required by Article 1132 is possession in the concept of an owner. In the present case, petitioner's possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. His possession as a pledgee cannot ripen into ownership by prescription. 5.ID.; NOVATION; NOVATION OF A CONTRACT MUST NOT BE PRESUMED. Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor." Novation of a contract must not be presumed. "In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point." DECISION PANGANIBAN, J :
p

The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute when a party's claim to being a shareholder is, on the face of the complaint, invalid or inadequate or is

otherwise negated by the very allegations of such complaint. Mandamus will not issue to establish a right, but only to enforce one that is already established.
LibLex

Statement of the Case

These are the principles used by this Court in resolving this Petition for Review on Certiorari before us, assailing the October 24, 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40832, the dispositive portion of which reads:
"IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE COURSE and is hereby DISMISSED. With costs against the [p]etitioner." 3

By the foregoing disposition, the Court of Appeals effectively affirmed the March 7, 1996 Decision 4 of the Securities and Exchange Commission (SEC) en banc:
"WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing the appeal on the ground that mandamus will only issue upon a clear showing of ownership over the assailed shares of stock, [t]he determination of which, on the basis of the foregoing facts, is within the jurisdiction of the regular courts and not with the SEC." 5

The SEC en banc upheld the August 16, 1993 Decision 6 of SEC Hearing Officer Rolando C. Malabonga, which dismissed the action for mandamus filed by petitioner.

The Facts
As found by the Court of Appeals, the facts of the case are as follows:
" . . . On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the [p]etitioner in the amount of P40,000 payable within six (6) months. To secure the payment of the aforesaid loan and interest thereon, Respondent Guiok executed a Contract of Pledge in favor of the [p]etitioner whereby he pledged his three hundred (300) shares of stock in the Go Fay & Company Inc., Respondent Corporation, for brevity's sake. Respondent Guiok obliged himself to pay interest on said loan at the rate of 10% per annum from the date of said contract of pledge. On the same date, Alfonso Sy Lim secured a loan, from the [p]etitioner in the amount of P40,000 payable in six (6) months. To secure the payment of his loan, Sy Lim executed a 'Contract of Pledge' covering his three hundred (300) shares of stock in Respondent Corporation. Under

said contract, Sy Lim obliged himself to pay interest on his loan at the rate of 10% per annum from the date of the execution of said contract. Under said 'Contracts of Pledge,' Respondent[s] Guiok and Sy Lim covenanted, inter alia, that: '3.In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling them same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided;

4.In the event of the foreclosure of this pledge and the sale of the pledged certificate, any surplus remaining in the hands of the PLEDGEE after the payment of the said sum and interest, and the expenses, if any, connected with the foreclosure sale, shall be paid by the PLEDGEE to the PLEDGOR; 5.Upon payment of the said amount and interest in full, the PLEDGEE will, on demand of the PLEDGOR, redeliver to him the said shares of stock by surrendering the certificate delivered to him by the PLEDGOR or by retransferring each share to the PLEDGOR, in the event that the PLEDGEE, under the option hereby granted, shall have caused such shares to be transferred to him upon the books of the issuing company.' (idem, supra) Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and delivered the same to the [p]etitioner." 7 However, Respondent Guiok and Sy Lim failed to pay their respective loans and the accrued interests thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed a 'Petition for Mandamus' against Respondent Corporation, with the SEC entitled 'Lim Tay versus Go Fay & Company. Inc., SEC Case No. 03894', praying that:

'PRAYER WHEREFORE, premises considered, it is respectfully prayed that an order be issued directing the corporate secretary of [R]espondent Go Fay & Co, Inc. to register the stock transfers and issue new certificates in favor of Lim Tay. It is likewise prayed that [R]espondent Go Fay & Co., Inc[.] be ordered to pay all dividends due and unclaimed on the said certificates to [P]laintiff Lim Tay.
cdphil

Plaintiff further prays for such other relief just and equitable in the premises.' (page 34, Rollo) The [p]etitioner alleged, inter alia, in his Petition that the controversy between him as stockholder and the Respondent Corporation was intracorporate in view of the obstinate refusal of the corporate secretary of Respondent Corporation to record the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor of and under the name of the [p]etitioner and to issue new certificates of stock to the [p]etitioner. The Respondent Corporation filed its Answer to the Complaint and alleged, as Affirmative Defense, that: 'AFFIRMATIVE DEFENSE ' 7.Respondent repleads and incorporates herein by reference the foregoing allegations. 8.The Complaint states no cause of action against [r]espondent. 9.Complainant is not a stockholder of [r]espondent. Hence, the Honorable Commission has no jurisdiction to enter the present controversy since their [sic] is no intracorporate relationship between complainant and respondent. 10.Granting arguendo that a pledge was constituted over the shareholdings of Sy Guiok in favor of the complainant and that the former defaulted in the payment of his obligations to the latter, the same did not automatically vest [i]n complainant ownership of the pledged shares.' (page 37, Rollo) In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of Alfonso Sy Lim, represented by Conchita Lim, filed their Answer-InIntervention with the SEC alleging, inter alia, that:

'xxx xxx xxx 3.Deny specifically the allegation under paragraph 5 of the Complaint that, failure to pay the loan within the contract period automatically foreclosed the pledged shares of stocks and that the share of stocks are automatically purchased by the plaintiff, for being false and distorted, the truth being that pursuant to the [sic] paragraph 3 of the contract of pledges, Annexes 'A' and 'B', it is clear that upon failure to pay the amount within the stipulated period, the pledgee is authorized to foreclose the pledge and thereafter, to sell the same to satisfy the loan. [H]owever, to this point in time, plaintiff has not performed any operative act of foreclosing the shares of stocks of [i]ntervenors in accordance with the Chattel Mortgage law, [n]either was there any sale of stocks by way of public or private auction made after foreclosure in favor of the plaintiff to speak about, and therefore, the respondent company could not be force[d] to [sic] by way of mandamus, to transfer the subject shares of stocks from the name of your [i]ntervenors to that of the plaintiff in the absence of clear and legal basis for such; 4.DENY specifically the allegations under paragraphs 6, 7 and 8 of the complaint as to the existence of the alleged intracorporate dispute between plaintiff and company for being without proper and legal basis. In the first place, plaintiff is not a stockholder of the respondent corporation; there was no foreclosure of shares executed in accordance with the Chattel Mortgage Law whatsoever; there were no sales consummated that would transfer to the plaintiff the subject shares of stocks and therefore, any demand to transfer the shares of stocks to the name of the plaintiff has no legal basis. In the second place, [i]ntervenors had been in the past negotiating possible compromise and at the same time, had tendered payment of the loan secured by the subject pledges but plaintiff refused unjustifiably to oblige and accept payment o[r] even agree on the computation of the principal amount of the loan and interest on top of a substantial amount offered just to settle and compromise the indebtedness of [i]ntervenors; II.SPECIAL AFFIRMATIVE DEFENSES Intervenors replead by way of reference all the foregoing allegations to form part of the special affirmative defenses;

5.This Honorable Commission has no jurisdiction over the person of the respondent and nature of the action, plaintiff having no personality at all to compel respondent by way of mandamus to perform certain corporate function[s];
prLL

6.The complaint states no cause of action; 7.That respondent is not [a] real party in interest; 8.The appropriation of the subject shares of stocks by plaintiff, without compliance with the formality of law, amounted to '[p]actum commis[s]orium' therefore, null and void; 9.Granting for the sake of argument only that there was a valid foreclosure and sale of the subject st[o]cks in favor of the plaintiff which [i]ntervenors deny still paragraph 5 of the contract allows redemption, for which intervenors are willing to redeem the share of stocks pledged; 10.Even the Chattel Mortgage law allowed redemption of the [c]hattel foreclosed; 11.As a matter of fact, on several occasions, [i]ntervenors had made representations with the plaintiff for the compromise and settlement of all the obligations secured by the subject pledges even offering to pay compensation over and above the value of the obligations, interest[s] and dividends accruing to the share of stocks but, plaintiff unjustly refused to accept the offer of payment;' ( pages 39-42, Rollo) The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in their favor, as follows:

'IV. PRAYER
It is respectfully prayed to this Honorable Commission after due hearing, to dismiss the case for lack of merit, ordering plaintiff to accept payment for the loans secured by the subject shares of stocks and to pay plaintiff: 1.The sum of P50,000.00, as moral damages; 2.the sum of P50,000.00, as attorneys fees; and, 3.costs of suit.

Other reliefs just and equitable [are] likewise prayed for.' (pages 42-43, Rollo) After due proceedings, the [h]earing [o]fficer promulgated a Decision dismissing [p]etitioner's Complaint on the ground that although the SEC had jurisdiction over the action, pursuant to the Decision of the Supreme Court in the case of'Rural Bank of Salinas et. al. versus Court of Appeals, et al., 210 SCRA 510', he failed to prove the legal basis for the secretary of the Respondent Corporation to be compelled to register stock transfers in favor of the [p]etitioner and to issue new certificates of stock under his name (pages 67-77, Rollo) The [p]etitioner appealed the Decision of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the SEC promulgated a Decision, dismissing [p]etitioner's appeal on the grounds that: (a) the issue between the [p]etitioner and the [r]espondents being one involving the ownership of the shares of stock pledged by Respondent Guiok and Sy Lim the SEC had no jurisdiction over the action filed by the [p]etitioner; (b) the latter had no cause of action for mandamus against the Respondent Corporation, the right of ownership of the [p]etitioner over the 300 shares of stock pledged by Respondent Guiok and Sy Lim not having been as yet, established, preparatory to the institution of said Petition for Mandamus with the SEC."

Ruling of the Court of Appeals

On the issue of jurisdiction, the Court of Appeals ruled:
"In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioner's action, the [a]ppellate [c]ourt must delve into and ascertain: (a) whether or not there is a need to enlist the expertise and technical know-how of the SEC in resolving the issue of the ownership of the shares of stock; (b) the status of the relationships of the parties; [and] (c) the nature of the question that is the subject of the controversy. Where the controversy is purely a civil matter resoluble by civil law principles and there is no need for the application of the expertise and technical know-how of the SEC, then the regular courts have jurisdiction over the action." 8 [citations omitted]

On the issue of whether mandamus can be availed of by the petitioner the Court of Appeals agreed with the SEC, viz:
". . . [T]he [p]etitioner failed to establish a clear and legal right to the writ of mandamus prayed for by him . . .Mandamus will not issue to enforce a right which is in substantial dispute or to which a substantial

doubt exists . . .The principal function of the writ of mandamus is to command and expedite, and not to inquire and adjudicate and, therefore it is not the purpose of the writ to establish a legal right, but to enforce one which has already been established." 9 [citations omitted]
prLL

The Court of Appeals debunked petitioner's claim that he had acquired ownership over the shares by virtue of novation, holding that respondents' indorsement and delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and that petitioner's receipt of dividends was in compliance with Article 2102 of the same Code. Petitioner's claim that he had acquired ownership of the shares by virtue of prescription was likewise dismissed by Respondent Court in this wise:
"The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover the shares of stock from the [p]etitioner accrued only from the time they paid their loans and the interests thereon and [made] a demand for their return. 10

Hence, the petitioner brought before us this Petition for Review on Certiorari in accordance with Rule 45 of the Rules of Court.11

Assignment of Errors
Petitioner submits, for the consideration of this Court, these issues:
12

"(a)Whether the Securities and Exchange Commission had jurisdiction over the complaint filed by the petitioner; and (b)Whether the petitioner is entitled to the relief of mandamus as against the respondent Go Fay & Co., Inc."

In addition, petitioner contends that it has acquired ownership of the shares "through extraordinary prescription," pursuant to Article 1132 of the Civil Code, and through respondents' subsequent acts, which amounted to a novation of the contracts of pledge. Petitioner also claims that there was dacion en pago, in which the shares of stock were deemed sold to petitioner, the consideration for which was the extinguishment of the loans and the interests thereon. Petitioner likewise claims that laches bars respondents from recovering the subject shares.

The Court's Ruling

The petition has no merit.

First Issue: Jurisdiction of the SEC

Claiming that the present controversy is intra-corporate and falls within the exclusive jurisdiction of the SEC, petitioner relies heavily on Abejo v. De La Cruz, 13 which upheld the jurisdiction of the SEC over a suit filed by an unregistered stockholder seeking to enforce his rights. He also seeks support from Rural Bank of Salinas, Inc. v. Court of Appeals, 14 which ruled that the right of a transferee or an assignee to have stocks transferred to his name was an inherent right flowing from his ownership of the said stocks. The registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive dividends which pertain to the said shares are all rights that flow from ownership. The determination of whether or not a shareholder is entitled to exercise the above-mentioned rights falls within the jurisdiction of the SEC. However, if ownership of the shares is not clearly established and is still unresolved at the time the action for mandamus is filed, then jurisdiction lies with the regular courts. Section 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as follows:
"SEC. 5.In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: (a)Devices or schemes employed by or any acts of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of stockholders, partners, members of associations or organizations registered with the Commission; (b)Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the State insofar as it concerns their individual franchise or right to exist as such entity;

(c)Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations; (d)Petitions of corporations, partnerships or associations to be declared in the state of suspension of payments in cases where the corporation, partnership or association possesses property to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or in cases where the corporation, partnership or association has no sufficient assets to cover its liabilities, but is under the Management Committee created pursuant to this decree." 15

Thus, a controversy "among stockholders, partners or associates themselves" 16 is intra-corporate in nature and falls within the jurisdiction of the SEC.
cda

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint.17 in the present case, however, petitioner's claim that he was the owner of the shares of stock in question has no prima faciebasis. In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he became the owner of the shares when the term for the loans expired. The Complaint contained the following pertinent averments:
"xxx xxx xxx 3.On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three hundred (300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as, security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine currency, the sum of which was payable within six (6) months [with interest] at ten percentum (10%) per annum from the date of the execution of the contract; a copy of this Contract of Pledge is attached as Annex "A" and made part hereof ; 4.On the same date January 8, 1980, under a similar Contract of Pledge, Lim Tay received three hundred (300) shares of stock of Go Fay & Co., Inc. from Alfonso Sy Lim as security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine currency, the sum of which was payable within six (6) months [with interest] at ten percentum (10%) per annum from the date of the execution of the contract; copy

of this Contract of Pledge is attached as Annex "B" and made part hereof ;

5.By the express terms of the agreements, upon failure of the borrowers to pay the stated amounts within the contract period, the pledge is foreclosed and the shares of stock are purchased by [p]laintiff, who is expressly authorized and empowered to transfer the duly endorsed shares of stock on the books of the corporation to his own name; . . . 18 (emphasis supplied)

However, the contracts of pledge, which were made integral parts of the Complaint, contain this common proviso:
"3.In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his option, to transfer the said shares of stock on the books of the corporation to his own name and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided; "

This contractual stipulation, which was part of the Complaint, shows that plaintiff was merely authorized to foreclose the pledge upon maturity of the loans, not to own them. Such foreclosure is not automatic, for it must be done in a public or private sale. Nowhere did the Complaint mention that petitioner had in fact foreclosed the pledge and purchased the shares after such foreclosure His status as a mere pledgee does not, under civil law, entitle him to ownership of the subject shares. It is also noteworthy that petitioner's Complaint did not aver that said shares were acquired through extraordinary prescription, novation or laches. Moreover, petitioner's claim, subsequent to the filing of the Complaint, that he acquired ownership of the said shares through these three modes is not indubitable and still has to be resolved. In fact, as will be shown, such allegation has no merit. Manifestly, the Complaint by itself did not contain any prima facie showing that petitioner was the owner of the shares of stocks. Quite the contrary, it demonstrated that he was merely a pledgee, not an owner. Accordingly, it failed to lay down a sufficient basis for the SEC to exercise jurisdiction over the controversy. In fact, the very allegations of the Complaint and its annexes negated the jurisdiction of the SEC. Petitioner's reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo, the Abejo

spouses sold to Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent to such contract of sale, the corporate secretary, Norberto Braga, refused to record the transfer of the shares in the corporate books and instead asked for the annulment of the sale, claiming that he and his wife had a preemptive right over some of the shares, and that his wife's shares were sold without consideration or consent. At the time the Bragas questioned the validity of the sale, the contract had already been perfected, thereby demonstrating that Telectronic Systems, Inc. was already the prima facie owner of the shares and, consequently, a stockholder of Pocket Bell Philippines, Inc. Even if the sale were to be annulled later on, Telectronic Systems, Inc. had, in the meantime, title over the shares from the time the sale was perfected until the time such sale was annulled. The effects of an annulment operate prospectively and do not, as a rule, retroact to the time the sale was made. Therefore, at the time the Bragas questioned the validity of the transfers made by the Abejos, Telectronic Systems, Inc. was already aprima facie shareholder of the corporation, thus making the dispute between the Bragas and the Abejos "intra-corporate" in nature. Hence, the Court held that "the issue is not on ownership of shares but rather the nonperformance by the corporate secretary of the ministerial duty of recording transfers of shares of stock of the corporation of which he is secretary " 19

Unlike Abejo, however, petitioner's ownership over the shares in this case was not yet perfected when the Complaint was filed. The contract of pledge certainly does not make him the owner of the shares pledged. Further, whether prescription effectively transferred ownership of the shares, whether there was a novation of the contracts of pledge, and whether laches had set in were difficult legal issues, which were unpleaded and unresolved when herein petitioner asked the corporate secretary of Go Fay to effect the transfer, in his favor, of the shares pledged to him.
cda

In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the shares in favor of the respondents in that case. When the corporate secretary refused to register the transfer, an action for mandamus was instituted. Subsequently, a motion for intervention was filed, seeking the annulment of the deeds of assignment on the grounds that the same were fictitious and antedated, and that they were in fact donations because the considerations therefor were below the book value of the shares.

Like the Abejo spouses, the respondents in Rural Bank of Salinas were already prima facie shareholders when the deeds of assignment were questioned. If the said deeds were to be annulled later on, respondents would still be considered shareholders of the corporation from the time of the assignment until the annulment of such contracts.

Second Issue: Mandamus Will Not Issue to Establish a Right

Petitioner prays for the issuance of a writ of mandamus, directing the corporate secretary of respondent corporation to have the shares transferred to his name in the corporate books, to issue new certificates of stock and to deliver the corresponding dividends to him. 20 "In order that a writ of mandamus may issue, it is essential that the person petitioning for the same has a clear legal right to the thing demanded and that it is the imperative duty of the respondent to perform the act required. It neither confers powers nor imposes duties and is never issued in doubtful cases. It is simply a command to exercise a power already possessed and to perform a duty already imposed." 21 In the present case, petitioner has failed to establish a clear legal right. Petitioner's contention that he is the owner of the said shares is completely without merit. Quite the contrary and as already shown, he does not have any ownership rights at all. At the time petitioner instituted his suit at the SEC, his ownership claim had no prima facie leg to stand on. At best, his contention was disputable and uncertain. Mandamus will not issue to establish a legal right, but only to enforce one that is already clearly established.

Without Foreclosure and Purchase at Auction, Pledgor Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged had passed to him, upon Respondents Sy Guiok and Sy Lim's failure to pay their respective loans. But on appeal, petitioner claimed that ownership over the shares had passed to him, not via the contracts of pledge, but by virtue of prescription and by respondents' subsequent acts which amounted to a novation of the contracts of pledge. We do not agree.

At the outset, it must be underscored that petitioner did not acquire ownership of the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states:
"The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim."

Furthermore, the contracts of pledge contained a common proviso, which we quote again for the sake of clarity:
"3.In the event of the failure of the PLEDGOR to pay the amount within a period of six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose the pledge upon the said shares of stock hereby created by selling the same at public or private sale with or without notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized and empowered at his option to transfer the said shares of stock on the books of the corporation to his own name, and to hold the certificate issued in lieu thereof under the terms of this pledge, and to sell the said shares to issue to him and to apply the proceeds of the sale to the payment of the said sum and interest, in the manner hereinabove provided;" 22

There is no showing that petitioner made any attempt to foreclose or sell the shares through public or private auction, as stipulated in the contracts of pledge and as required by Article 2112 of the Civil Code. Therefore, ownership of the shares could not have passed to him. The pledgor remains the owner during the pendency of the pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the same Code:
LLphil

"Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may bring the actions which pertain to the owner of the thing pledged in order to recover it from, or defend it against a third person."

No Ownership by Prescription
Petitioner did not acquire the shares by prescription either. The period of prescription of any cause of action is reckoned only from the date the cause of action accrued. "Since a cause of action requires as an essential element not only a legal right of the plaintiff and a correlative obligation of the defendant, but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty." 23 Accordingly, a cause of action on a written contract accrues when a breach or violation thereof occurs. Under the contracts of pledge, private respondents would have a right to ask for the redelivery of their certificates of stock upon payment of their debts to petitioner, consonant with Article 2105 of the Civil Code, which reads:
"The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case." 24

Thus, the right to recover the shares based on the written contract of pledge between petitioner and respondents would arise only upon payment of their respective loans. Therefore, the prescriptive period within which to demand the return of the thing pledged should begin to run only after the payment of the loan and a demand for the thing has been made, because it is only then that respondents acquire a cause of action for the return of the thing pledged. Prescription should not begin to run on the action to demand the return of the thing pledged while the loan still exists. This is because the right to ask for the return of the thing pledged will not arise so long as the loan subsists. In the present case, the prescriptive period did not begin to run when the loan became due. On the other hand, it is petitioner's right to demand payment that may be in danger of prescription. Petitioner contends that he can be deemed to have acquired ownership over the certificates of stock through extraordinary prescription, as provided for in Article 1132 of the Civil Code which states:

"Art. 1132. The ownership of movables prescribes through uninterrupted possession for four years in good faith. The ownership of personal property also prescribes through uninterrupted possession for eight years, without need of any other condition. . . ."

Petitioner's argument is untenable. What is required by Article 1132 is possession in the concept of an owner. In the present case, petitioner's possession of the stock certificates came about because they were delivered to him pursuant to the contracts of pledge. His possession as a pledgee cannot ripen into ownership by prescription. As aptly pointed out by Justice Jose C. Vitug:
"Acquisitive prescription is a mode of acquiring ownership by a possessor through the requisite lapse of time. In order to ripen into ownership, possession must be in the concept of an owner, public, peaceful and uninterrupted. Thus, possession with a juridical title, such as by a usufructory, a trustee, a lessee, agent or a pledgee, not being in the concept of an owner, cannot ripen into ownership by acquisitive prescription unless the juridical relation is first expressly repudiated and such repudiation has been communicated to the other party." 25

Petitioner expressly repudiated the pledge, only when he filed his Complaint and claimed that he was not a mere pledgee, but that he was already the owner of the shares. Based on the foregoing, petitioner has not acquired the certificates of stock through extraordinary prescription.

No Novation in Favor of Petitioner

Neither did petitioner acquire the shares by virtue of a novation of the contract of pledge. Novation is defined as "the extinguishment of an obligation by a subsequent one which terminates it, either by changing its object or principal conditions, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor." 26 Novation of a contract must not be presumed. "In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point." 27 In the present case, novation cannot be presumed by (a) respondents' indorsement and delivery of the certificates of stock covering the 600 shares, (b)

petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not instituted any action to recover the shares since 1980.

Respondents' indorsement and delivery of the certificates of stock were pursuant to paragraph 2 of the contract of pledge which reads:
"2.The said certificates had been delivered by the PLEDGOR endorsed in blank to be held by the PLEDGEE under the pledge as security for the payment of the aforementioned sum and interest thereon accruing." 28

This stipulation did not effect the transfer of ownership to petitioner. It was merely in compliance with Article 2093 of the Civil Code, 29 which requires that the thing pledged be placed in the possession of the creditor or a third person of common agreement; and Article 2095, 30 which states that if the thing pledged are shares of stock, then the "instrument proving the right pledged" must be delivered to the creditor.
cdll

Moreover, the fact that respondents allowed the petitioner to receive dividends pertaining to the shares was not meant to relinquish ownership thereof. As stated by respondent corporation, the same was done pursuant to an agreement between the petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the Civil Code which provides:
"If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and the earnings of the right pledged."

Novation cannot be inferred from the mere fact that petitioner has not, since 1980, instituted any action to recover the shares. Such action is in fact premature, as the loan is still outstanding. Besides, as already pointed out, novation is never presumed inferred.

No Dacion en Pago in Favor of Petitioner

Neither can there be dacion en pago, in which the certificates of stock are deemed sold to petitioner, the consideration for which is the extinguishment of

the loans and the accrued interests thereon. Dacion en pago is a form of novation in which a change takes place in the object involved in the original contract. Absent an explicit agreement, petitioner cannot simply presume dacion en pago.

Laches Not a Bar to Petitioner

Petitioner submits that "the inaction of the individual respondents with respect to the recovery of the shares of stock serves to bar them from asserting rights over said shares on the basis of laches." 31 Laches has been defined as "the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it." 32 In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the time to demand payment of the debt. More important, under the contracts of pledge, petitioner could have foreclosed the pledges as soon as the loans became due. But for still unknown or unexplained reasons, he failed to do so, preferring instead to pursue his baseless claim to ownership. WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. Costs against petitioner.
LLphil

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ ., concur.

Footnotes
47.

FIRST DIVISION
[G.R. No. 124535. September 28, 2001.]

THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE RURAL BANK OF LIPA CITY, INC., petitioners, vs. HONORABLE COURT OF APPEALS, HONORABLE COMMISSION EN BANC, SECURITIES AND EXCHANGE COMMISSION, HONORABLE ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer, REYNALDO VILLANUEVA, SR., AVELINA M. VILLANUEVA, CATALINO VILLANUEVA, ANDRES GONZALES, AURORA LACERNA, CELSO LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA USI, respondents.

Rosales Law Office for petitioners. Amando D. Ignacio and Jose R. Dimayuga for private respondents.
SYNOPSIS This is an appeal from the CA decision which upheld the decision of the SEC which granted the preliminary injunction prayed for by private respondents who claimed that the newly elected officers of petitioner-bank should be enjoined from discharging their duties because private respondents-stockholders of petitioner-bank were not notified of the stockholders' meeting held on January 15, 1994 wherein said new set of officers were elected. The Supreme Court found the appeal meritless, ruling: that while private respondents executed a deed of assignment of their shares in favor of petitioners, there was no effective transfer of shares since the requirements prescribed by the law for a valid transfer of shares of stock have not been complied with. Consequently, petitioner, as mere assignees cannot enjoy the status of stockholders, insofar as the assigned shares are concerned, and private respondents cannot, as yet, be deprived of their rights as stockholders, until the issue of ownership of the shares in question is finally resolved.
IaDcTC

SYLLABUS

1.COMMERCIAL LAW; CORPORATION CODE; TRANSFER OF SHARES OF STOCK; REQUISITES FOR VALIDITY. We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law. The requirements are: (a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) To be valid against third parties, the transfer must be recorded in the books of the corporation. 2.ID.; ID.; ID.; ID.; EFFECT OF NON-COMPLIANCE THEREWITH; CASE AT BAR. While it may be true that there was an assignment of private respondents' shares to the petitioners, said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock by the owners, their attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. Title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. . . . Consequently, the petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares in question is resolved with finality. 3.ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; R.A. NO. 8799; SEC JURISDICTION OVER CASES FALLING UNDER SEC. 5 OF PD NO. 902-A NOW COGNIZABLE BY THE RTC; CASE AT BAR. While this case was pending, Republic Act No. 8799 was enacted, transferring to the courts of general jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A. One of those cases enumerated is any controversy "arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates, between any and/or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity." The instant controversy clearly falls under this category of cases which are now cognizable by the Regional Trial Court.

DECISION YNARES-SANTIAGO, J :
p

Before us is a petition for review on certiorari assailing the Decision of the Court of Appeals dated February 27, 1996, as well as the Resolution dated March 29, 1996, in CA-G.R. SP No. 38861. The instant controversy arose from a dispute between the Rural Bank of Lipa City, Incorporated (hereinafter referred to as the Bank), represented by its officers and members of its Board of Directors, and certain stockholders of the said bank. The records reveal the following antecedent facts: Private respondent Reynaldo Villanueva, Sr., a stockholder of the Rural Bank of Lipa City, executed a Deed of Assignment, 1wherein he assigned his shares, as well as those of eight (8) other shareholders under his control with a total of 10,467 shares, in favor of the stockholders of the Bank represented by its directors Bernardo Bautista, Jaime Custodio and Octavio Katigbak. Sometime thereafter, Reynaldo Villanueva, Sr. and his wife, Avelina, executed an Agreement 2 wherein they acknowledged their indebtedness to the Bank in the amount of Four Million Pesos (P4,000,000.00), and stipulated that said debt will be paid out of the proceeds of the sale of their real property described in the Agreement. At a meeting of the Board of Directors of the Bank on November 15, 1993, the Villanueva spouses assured the Board that their debt would be paid on or before December 31 of that same year; otherwise, the Bank would be entitled to liquidate their shareholdings, including those under their control. In such an event, should the proceeds of the sale of said shares fail to satisfy in full the obligation, the unpaid balance shall be secured by other collateral sufficient therefor. When the Villanueva spouses failed to settle their obligation to the Bank on the due date, the Board sent them a letter 3demanding: (1) the surrender of all the stock certificates issued to them; and (2) the delivery of sufficient collateral to secure the balance of their debt amounting to P3,346,898.54. The Villanuevas ignored the bank's demands, whereupon their shares of stock were converted into Treasury Stocks. Later, the Villanuevas, through their counsel, questioned the legality of the conversion of their shares. 4

On January 15, 1994, the stockholders of the Bank met to elect the new directors and set of officers for the year 1994. The Villanuevas were not notified of said meeting. In a letter dated January 19, 1994, Atty. Amado Ignacio, counsel for the Villanueva spouses, questioned the legality of the said stockholders' meeting and the validity of all the proceedings therein. In reply, the new set of officers of the Bank informed Atty. Ignacio that the Villanuevas were no longer entitled to notice of the said meeting since they had relinquished their rights as stockholders in favor of the Bank. Consequently, the Villanueva spouses filed with the Securities and Exchange Commission (SEC), a petition for annulment of the stockholders' meeting and election of directors and officers on January 15, 1994, with damages and prayer for preliminary injunction 5 , docketed as SEC Case No. 02-94-4683. Joining them as co-petitioners were Catalino Villanueva, Andres Gonzales, Aurora Lacerna, Celso Laygo, Edgardo Reyes, Alejandro Tonogan, and Elena Usi. Named respondents were the newly-elected officers and directors of the Rural Bank, namely: Bernardo Bautista, Jaime Custodio, Octavio Katigbak, Francisco Custodio and Juanita Bautista. The Villanuevas' main contention was that the stockholders' meeting and election of officers and directors held on January 15, 1994 were invalid because: (1) they were conducted in violation of the by-laws of the Rural Bank; (2) they were not given due notice of said meeting and election notwithstanding the fact that they had not waived their right to notice; (3) they were deprived of their right to vote despite their being holders of common stock with corresponding voting rights; (4) their names were irregularly excluded from the list of stockholders; and (5) the candidacy of petitioner Avelina Villanueva for directorship was arbitrarily disregarded by respondent Bernardo Bautista and company during the said meeting. On February 16, 1994, the SEC issued a temporary restraining order enjoining the respondents, petitioners herein, from acting as directors and officers of the Bank, and from performing their duties and functions as such. 6 In their joint Answer,
7

the respondents therein raised the following defenses:

1)The petitioners have no legal capacity to sue; 2)The petition states no cause of action; 3)The complaint is insufficient;

4)The petitioners' claims had already been paid, waived, abandoned, or otherwise extinguished; 5)The petitioners are estopped from challenging the conversion of their shares. Petitioners, respondents therein, thus moved for the lifting of the temporary restraining order and the dismissal of the petition for lack of merit, and for the upholding of the validity of the stockholders' meeting and election of directors and officers held on January 15, 1994. By way of counterclaim, petitioners prayed for actual, moral and exemplary damages. On April 6, 1994, the Villanuevas' application for the issuance of a writ of preliminary injunction was denied by the SEC Hearing Officer on the ground of lack of sufficient basis for the issuance thereof. However, a motion for reconsideration 8 was granted on December 16, 1994, upon finding that since the Villanuevas' have not disposed of their shares, whether voluntarily or involuntarily, they were still stockholders entitled to notice of the annual stockholders' meeting was sustained by the SEC. Accordingly, a writ of preliminary injunction was issued enjoining the petitioners from acting as directors and officers of the bank.9

Thereafter, petitioners filed an urgent motion to quash the writ of preliminary injunction, 10 challenging the propriety of the said writ considering that they had not yet received a copy of the order granting the application for the writ of preliminary injunction. With the impending 1995 annual stockholders' meeting only nine (9) days away, the Villanuevas filed an Omnibus Motion 11praying that the said meeting and election of officers scheduled on January 14, 1995 be suspended or held in abeyance, and that the 1993 Board of Directors be allowed, in the meantime, to act as such. One (1) day before the scheduled stockholders meeting, the SEC Hearing Officer granted the Omnibus Motion by issuing a temporary restraining order preventing petitioners from holding the stockholders meeting and electing the board of directors and officers of the Bank. 12 A petition for Certiorari and Annulment with Damages was filed by the Rural Bank, its directors and officers before the SEC en banc, 13 naming as respondents therein SEC Hearing Officer Enrique L. Flores, Jr., and the Villanuevas, erstwhile petitioners in SEC Case No. 02-94-4683. The said petition

alleged that the orders dated December 16, 1994 and January 13, 1995, which allowed the issuance of the writ of preliminary injunction and prevented the bank from holding its 1995 annual stockholders' meeting, respectively, were issued by the SEC Hearing Officer with grave abuse of discretion amounting to lack or excess of jurisdiction. Corollarily, the Bank, its directors and its officers questioned the SEC Hearing Officer's right to restrain the stockholders' meeting and election of officers and directors considering that the Villanueva spouses and the other petitioners in SEC Case No. 02-94-4683 were no longer stockholders with voting rights, having already assigned all their shares to the Bank. In their Comment/Opposition, the Villanuevas and other private respondents argued that the filing of the petition for certiorari was premature and there was no grave abuse of discretion on the part of the SEC Hearing Officer, nor did he act without or in excess of his jurisdiction. On June 7, 1995, the SEC en banc denied the petition for certiorari in an Order, 14 which stated:
In the case now before us, petitioners could not show any proof of despotic or arbitrary exercise of discretion committed by the hearing officer in issuing the assailed orders save and except the allegation that the private respondents have already transferred their stockholdings in favor of the stockholders of the Bank. This, however, is the very issue of the controversy in the case a quo and which, to our mind, should rightfully be litigated and proven before the hearing officer. This is so because of the undisputed fact the (sic) private respondents are still in possession of the stock certificates evidencing their stockholdings and as held by the Supreme Court in Embassy Farms, Inc. v. Court of Appeals, et al., 188 SCRA 492, citing Nava v. Peers Marketing Corp., the nondelivery of the stock certificate does not make the transfer of the shares of stock effective. For an effective transfer of stock, the mode of transfer as prescribed by law must be followed. We likewise find that the provision of the Corporation Code cited by the herein petitioner, particularly Section 83 thereof, to support the claim that the private respondents are no longer stockholders of the Bank is misplaced. The said law applies to acquisition of shares of stock by the corporation in the exercise of a stockholder's right of appraisal or when the said stockholder opts to dissent on a specific corporate act in those instances provided by law and demands the payment of the fair value of his shares. It does not contemplate a "transfer" whereby the stockholder, in the exercise of his right to dispose of his shares (jus disponendi) sells or assigns his stockholdings in favor of another person

where the provisions of Section 63 of the same Code should be complied with. The hearing officer, therefore, had a basis in issuing the questioned orders since the private respondents' rights as stockholders may be prejudiced should the writ of injunction not be issued. The private respondents are presumably stockholders of the Bank in view of the fact that they have in their possession the stock certificates evidencing their stockholdings. Until proven otherwise, they remain to be such and the hearing officer, being the one directly confronted with the facts and pieces of evidence in the case, may issue such orders and resolutions which may be necessary or reasonable relative thereto to protect their rights and interest in the meantime that the said case is still pending trial on the merits.

A subsequent motion for reconsideration 15 was likewise denied by the SEC en banc in a Resolution 16 dated September 29, 1995. A petition for review was thus filed before the Court of Appeals, which was docketed as CA-G.R. SP No. 38861, assailing the Order dated June 7, 1995 and the Resolution dated September 29, 1995 of the SEC en banc in SEC EB No. 440. The ultimate issue raised before the Court of Appeals was whether or not the SEC en banc erred in finding:
1.That the Hon. Hearing Officer in SEC Case No. 02-94-4683 did not commit any grave abuse of discretion that would warrant the filing of a petition for certiorari; 2.That the private respondents are still stockholders of the subject bank and further stated that "it does not contemplate a transfer" whereby the stockholders, in the exercise of his right to dispose of his shares (Jus Disponendi) sells or assigns his stockholdings in favor of another person where the provisions of Sec. 63 of the same Code should be complied with; and 3.That the private respondents are presumably stockholders of the bank in view of the fact that they have in their possession the stock certificates evidencing their stockholdings.

On February 27, 1996, the Court of Appeals rendered the assailed Decision 17 dismissing the petition for review for lack of merit. The appellate court found that:

The public respondent is correct in holding that the Hearing Officer did not commit grave abuse of discretion. The officer, in exercising his judicial functions, did not exercise his judgment in a capricious, whimsical, arbitrary or despotic manner. The questioned Orders issued by the Hearing Officer were based on pertinent law and the facts of the case. Section 63 of the Corporation Code states: ". . . Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner . . . . No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred." In the case at bench, when private respondents executed a deed of assignment of their shares of stocks in favor of the Stockholders of the Rural Bank of Lipa City, represented by Bernardo Bautista, Jaime Custodio and Octavio Katigbak, title to such shares will not be effective unless the duly indorsed certificate of stock is delivered to them. For an effective transfer of shares of stock, the mode and manner of transfer as prescribed by law should be followed. Private respondents are still presumed to be the owners of the shares and to be stockholders of the Rural Bank. We find no reversible error in the questioned orders.

Petitioners' motion for reconsideration was likewise denied by the Court of Appeals in an Order 18 dated March 29, 1996. Hence, the instant petition for review seeking to annul the Court of Appeals' decision dated February 27, 1996 and the resolution dated March 29, 1996. In particular, the decision is challenged for its ruling that notwithstanding the execution of the deed of assignment in favor of the petitioners, transfer of title to such shares is ineffective until and unless the duly indorsed certificate of stock is delivered to them. Moreover, petitioners faulted the Court of Appeals for not taking into consideration the acts of disloyalty committed by the Villanueva spouses against the Bank. We find no merit in the instant petition.

The Court of Appeals did not err or abuse its discretion in affirming the order of the SEC en banc, which in turn upheld the order of the SEC Hearing Officer, for the said rulings were in accordance with law and jurisprudence. The Corporation Code specifically provides:
SECTION 63.Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of

stocks so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. (Emphasis ours)

Petitioners argue that by virtue of the Deed of Assignment, 19 private respondents had relinquished to them any and all rights they may have had as stockholders of the Bank. While it may be true that there was an assignment of private respondents' shares to the petitioners, said assignment was not sufficient to effect the transfer of shares since there was no endorsement of the certificates of stock by the owners, their attorneys-in-fact or any other person legally authorized to make the transfer. Moreover, petitioners admit that the assignment of shares was not coupled with delivery, the absence of which is a fatal defect. The rule is that the delivery of the stock certificate duly endorsed by the owner is the operative act of transfer of shares from the lawful owner to the transferee. 20 Thus, title may be vested in the transferee only by delivery of the duly indorsed certificate of stock. 21

We have uniformly held that for a valid transfer of stocks, there must be strict compliance with the mode of transfer prescribed by law. 22 The requirements are: (a) There must be delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or other persons legally authorized to make the transfer; and (c) To be valid against third parties, the

transfer must be recorded in the books of the corporation. As it is, compliance with any of these requisites has not been clearly and sufficiently shown. It may be argued that despite non-compliance with the requisite endorsement and delivery, the assignment was valid between the parties, meaning the private respondents as assignors and the petitioners as assignees. While the assignment may be valid and binding on the petitioners and private respondents, it does not necessarily make the transfer effective. Consequently, the petitioners, as mere assignees, cannot enjoy the status of a stockholder, cannot vote nor be voted for, and will not be entitled to dividends, insofar as the assigned shares are concerned. Parenthetically, the private respondents cannot, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of the shares in question is resolved with finality. There being no showing that any of the requisites mandated by law 23 was complied with, the SEC Hearing Officer did not abuse his discretion in granting the issuance of the preliminary injunction prayed for by petitioners in SEC Case No. 02-94-4683 (herein private respondents). Accordingly, the order of the SEC en banc affirming the ruling of the SEC Hearing Officer, and the Court of Appeals decision upholding the SEC en banc order, are valid and in accordance with law and jurisprudence, thus warranting the denial of the instant petition for review. To enable the shareholders of the Rural Bank of Lipa City, Inc. to meet and elect their directors, the temporary restraining order issued by the SEC Hearing Officer on January 13, 1995 must be lifted. However, private respondents shall be notified of the meeting and be allowed to exercise their rights as stockholders thereat. While this case was pending, Republic Act No. 8799 24 was enacted, transferring to the courts of general jurisdiction or the appropriate Regional Trial Court the SEC's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A. 25 One of those cases enumerated is any controversy "arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates, between any and/or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity." The instant controversy clearly falls under this category of cases which are now cognizable by the Regional Trial Court.

Pursuant to Section 5.2 of R.A. No. 8799, this Court designated specific branches of the Regional Trial Courts to try and decide cases formerly cognizable by the SEC. For the Fourth Judicial Region, specifically in the Province of Batangas, the RTC of Batangas City, Branch 32 is the designated court. 26 WHEREFORE, in view of all the foregoing, the instant petition for review on certiorari is DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. SP No. 38861 are hereby AFFIRMED. The case is ordered REMANDED to the Regional Trial Court of Batangas City, Branch 32, for proper disposition. The temporary restraining order issued by the SEC Hearing Officer dated January 13, 1995 is ordered LIFTED. SO ORDERED.

Davide, Jr., C.J., Kapunan and Pardo, JJ., concur. Puno, J., concurs in the result.

Footnotes
48.

SECOND DIVISION
[G.R. No. 139802. December 10, 2002.] VICENTE C. PONCE, petitioner, vs. ALSONS CEMENT CORPORATION, and FRANCISCO M. GIRON, JR., respondents.

Quiason Makalintal Barot Torres and Ibarra for petitioner. Estelito P. Mendoza for respondents.
SYNOPSIS Petitioner herein filed a complaint with the SEC for mandamus and damages against respondents. With his allegations, petitioner prayed for the SEC to issue in his name certificates of stocks covering the 239,500 shares of stocks and its

legal increments and for the corporation to pay him damages. Respondent moved to dismiss the complaint on the ground, among others, that it states no cause of action. After respondents filed their reply, the SEC hearing officer granted the motion to dismiss. According to the hearing officer, insofar as the issuance of stock certificates is concerned, the real party-in-interest was Fausto G. Gaid, or his estate, or his heirs. Gaid was an incorporator and an original stockholder of the respondent corporation who subscribed and fully paid for 239,500 shares of stock. The petitioner tried to step into the shoes of Gaid and thereby become a stockholder of the defendant corporation by demanding the issuance of the stock certificate in his name. The SEC hearing officer decided that the petitioner could not do as he prayed because there was no record of any assignment or transfer in the books of the respondent corporation and there was neither instruction nor authority from the transferor for such assignment or transfer. Petitioner appealed the order of dismissal. The Commission en banc reversed the decision of the hearing officer. The motion for reconsideration having been denied, the respondents appealed to the Court of Appeals. The Court of Appeals held that in the absence of any allegations that the transfer of shares between Fausto Gaid and the petitioner was registered in the stock and transfer book of respondent corporation, petitioner failed to state a cause of action. Thus, the CA dismissed the complaint formandamus for failure to state a cause of action. Hence, the instant petition for review on certiorari. At issue herein was whether the Court of Appeals erred in holding that herein petitioner had no cause of action for a writ of mandamus. The Supreme Court ruled that petitioner had no cause of action and that his petition for mandamus was properly dismissed. From the corporation's point of view, the transfer is not effective until it is recorded. As between the corporation, on one hand, and its stockholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its stockholders are.
cSCADE

SYLLABUS 1.MERCANTILE LAW; CORPORATION CODE; TRANSFER OF SHARES OF STOCKS; SHOULD BE RECORDED IN THE STOCK AND TRANSFER BOOK OF A CORPORATION; EFFECT OF FAILURE; APPLICATION IN CASE AT BAR. Pursuant to Sec. 63 of the Corporation Code, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to

its books for the purpose of determining who its shareholders are. It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises. Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 of the Corporation Code. This is the import of Section 63 which states that "No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred." Unless and until such recording is made the demand for the issuance of stock certificates to the alleged transferee has no legal basis. 2.ID.; ID.; CERTIFICATE OF STOCK, A TANGIBLE EVIDENCE OF THE STOCK ITSELF AND OF THE VARIOUS INTERESTS THEREIN; IMPORTANCE OF CERTIFICATE OF STOCK, CONSTRUED. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. In fact, it rests on the will of the stockholder whether he wants to be issued stock certificates, and a stockholder may opt not to be issued a certificate. 3.REMEDIAL LAW; SPECIAL CIVIL ACTIONS; PETITION FOR MANDAMUS; WHEN NOT PROPER TO COMPEL THE REGISTRATION OF STOCK TRANSFER; APPLICATION IN CASE AT BAR. The deed of undertaking with indorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer. . . . In Rivera vs.Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the supposed owners of the

stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer, while this case is one for issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. With more reason, in our view, a corporate secretary may not be compelled to issue stock certificates without such registration. . . . Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation that can be imposed upon the respondent corporate secretary, so as to justify the issuance of the writ of mandamus to compel him to perform the transfer of the shares to petitioner. The test of sufficiency of the facts alleged in a petition is whether or not, admitting the facts alleged, the court could render a valid judgment thereon in accordance with the prayer of the petition. This test would not be satisfied if, as in this case, not all the elements of a cause of action are alleged in the complaint. Where the corporate secretary is under no clear legal duty to issue stock certificates because of the petitioner's failure to record earlier the transfer of shares, one of the elements of the cause of action for mandamus is clearly missing.
IaHDcT

DECISION QUISUMBING, J :
p

This petition for review seeks to annul the decision 1 of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside the decision 2 of the Securities and Exchange Commission (SEC) En Banc in SEC-AC No. 545 and reinstated the order 3 of the Hearing Officer dismissing herein petitioner's complaint. Also assailed is the CA's resolution 4 of August 10, 1999, denying petitioner's motion for reconsideration.
DTAaCE

On January 25, 1996, plaintiff (now petitioner) Vicente C. Ponce, filed a complaint 5 with the SEC for mandamus and damages against defendants (now

respondents) Alsons Cement Corporation and its corporate secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others, that: xxx xxx xxx
5.The late Fausto G. Gaid was an incorporator of Victory Cement Corporation (VCC), having subscribed to and fully paid 239,500 shares of said corporation. 6.On February 8, 1968, plaintiff and Fausto Gaid executed a "Deed of Undertaking" and "Indorsement" whereby the latter acknowledges that the former is the owner of said shares and he was therefore assigning/endorsing the same to the plaintiff. A copy of the said deed/indorsement is attached as Annex "A". 7.On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for brevity). 8.On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of which is attached as Annex "B". 9.From the time of incorporation of VCC up to the present, no certificates of stock corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in the name of Fausto G. Gaid and/or the plaintiff. 10.Despite repeated demands, the defendants refused and continue to refuse without any justifiable reason to issue to plaintiff the certificates of stocks corresponding to the 239,500 shares of Gaid, in violation of plaintiff's right to secure the corresponding certificate of stock in his name. 6

Attached to the complaint was the Deed of Undertaking and Indorsement 7 upon which petitioner based his petition formandamus. Said deed and indorsement read as follows:
DEED OF UNDERTAKING
KNOW ALL MEN BY THESE PRESENTS:

I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid does not have any liability whatsoever on the subscription agreement in favor of Victory Cement Corporation. (SGD.) VICENTE C. PONCE February 8, 1968 CONFORME: (SGD.) FAUSTO GAID

INDORSEMENT
I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY-NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement Corporation to VICENTE C. PONCE.

(SGD.) FAUSTO GAID With these allegations, petitioner prayed that judgment be rendered ordering respondents (a) to issue in his name certificates of stocks covering the 239,500 shares of stocks and its legal increments and (b) to pay him damages. 8 Instead of filing an answer, respondents moved to dismiss the complaint on the grounds that: (a) the complaint states no cause of action; mandamus is improper and not available to petitioner; (b) the petitioner is not the real party in interest; (c) the cause of action is barred by the statute of limitations; and (d) in any case, the petitioner's cause of action is barred by laches. 9 They argued, inter alia, that there being no allegation that the alleged "INDORSEMENT" was recorded in the books of the corporation, said indorsement by Gaid to the plaintiff of the shares of stock in question assuming that the indorsement was in fact a transfer of stocks was not valid against third persons such as ALSONS under Section 63 of the Corporation Code. 10 There was, therefore, no specific legal duty on the part of the respondents to issue the corresponding certificates of stock, andmandamus will not lie. 11 Petitioner filed his opposition to the motion to dismiss on February 19, 1996 contending that: (1) mandamus is the proper remedy when a corporation and its corporate secretary wrongfully refuse to record a transfer of shares and issue the corresponding certificates of stocks; (2) he is the proper party-in-interest since

he stands to be benefited or injured by a judgment in the case; (3) the statute of limitations did not begin to run until defendant refused to issue the certificates of stock in favor of the plaintiff on April 13, 1992. After respondents filed their reply, SEC Hearing Officer Enrique L. Flores, Jr. granted the motion to dismiss in an Order dated February 29, 1996, which held that:
xxx xxx xxx Insofar as the issuance of certificates of stock is concerned, the real party in interest is Fausto G. Gaid, or his estate or his heirs. Gaid was an incorporator and an original stockholder of the defendant corporation who subscribed and fully paid for 239,500 shares of stock (Annex "B"). In accordance with Section 37 of the old Corporation Law (Act No. 1459) obtaining in 1968 when the defendant corporation was incorporated, as well as Section 64 of the present Corporation Code (Batas Pambansa Blg. 68), a stockholder who has fully paid for his subscription together with interest and expenses in case of delinquent shares, is entitled to the issuance of a certificate of stock for his shares. According to paragraph 9 of the Complaint, no stock certificate was issued to Gaid. Comes now the plaintiff who seeks to step into the shoes of Gaid and thereby become a stockholder of the defendant corporation by demanding issuance of the certificates of stock in his name. This he cannot do, for two reasons: there is no record of any assignment or transfer in the books of the defendant corporation, and there is no instruction or authority from the transferor (Gaid) for such assignment or transfer. Indeed, nothing is alleged in the complaint on these two points. xxx xxx xxx In the present case, there is not even any indorsement of any stock certificate to speak of. What the plaintiff possesses is a document by which Gaid supposedly transferred the shares to him. Assuming the document has this effect, nevertheless there is neither any allegation nor any showing that it is recorded in the books of the defendant corporation, such recording being a prerequisite to the issuance of a stock certificate in favor of the transferee. 12

Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En Banc reversed the appealed Order and directed the Hearing Officer to proceed with the case. In ruling that a transfer or assignment of stocks

need not be registered first before it can take cognizance of the case to enforce the petitioner's rights as a stockholder, the Commission En Banc cited our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987) to the effect that:
. . . As the SEC maintains, "There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder". This is because the SEC by express mandate has "absolute jurisdiction, supervision and control over all corporations" and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious regular court procedure. . . . Applying this principle in the case on hand, a transfer or assignment of stocks need not be registered first before the Commission can take cognizance of the case to enforce his rights as a stockholder. Also, the problem encountered in securing the certificates of stock made by the buyer must be expeditiously taken up through the so-called administrative mandamus proceedings with the SEC than in the regular courts. 13

The Commission En Banc also found that the Hearing Officer erred in holding that petitioner is not the real party in interest.
xxx xxx xxx As appearing in the allegations of the complaint, plaintiff-appellant is the transferee of the shares of stock of Gaid and is therefore entitled to avail of the suit to obtain the proper remedy to make him the rightful owner and holder of a stock certificate to be issued in his name. Moreover, defendant-appellees failed to show that the transferor nor his heirs have refuted the ownership of the transferee. Assuming these allegations to be true, the corporation has a mere ministerial duty to register in its stock and transfer book the shares of stock in the name of the plaintiffappellant subject to the determination of the validity of the deed of assignment in the proper tribunal. 14

Their motion for reconsideration having been denied, herein respondents appealed the decision 15 of the SEC En Banc and the resolution 16 denying their motion for reconsideration to the Court of Appeals. In its decision, the Court of Appeals held that in the absence of any allegation that the transfer of the shares between Fausto Gaid and Vicente C. Ponce was registered in the stock and transfer book of ALSONS, Ponce failed to state a cause of action. Thus, said the CA, "the complaint for mandamus should be dismissed for failure to state a cause of action." 17 Petitioner's motion for reconsideration was likewise denied in a resolution 18 dated August 10, 1999. Hence, the instant petition for review on certiorari alleging that:
I.. . . THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK FILED BY PETITIONER FAILED TO STATE A CAUSE OF ACTION BECAUSE IT DID NOT ALLEGE THAT THE TRANSFER OF THE SHARES (SUBJECT MATTER OF THE COMPLAINT) WAS REGISTERED IN THE STOCK AND TRANSFER BOOK OF THE CORPORATION, CITING SECTION 63 OF THE CORPORATION CODE. II.. . . THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE CASES OF "ABEJO VS. DE LA CRUZ", 149 SCRA 654 AND "RURAL BANK OF SALINAS, INC., ET AL. VS. COURT OF APPEALS, ET AL.", G.R. NO. 96674, JUNE 26, 1992. III.. . . THE HONORABLE COURT OF APPEALS ERRED IN APPLYING A 1911 CASE, "HAGER VS. BRYAN", 19 PHIL. 138, TO DISMISS THE COMPLAINT FOR ISSUANCE OF A CERTIFICATE OF STOCK. 19

At issue is whether the Court of Appeals erred in holding that herein petitioner has no cause of action for a writ of mandamus.
HECaTD

Petitioner first contends that the act of recording the transfer of shares in the stock and transfer book and that of issuing a certificate of stock for the transferred shares involves only one continuous process. Thus, when a corporate secretary is presented with a document of transfer of fully paid shares, it is his duty to record the transfer in the stock and transfer book of the corporation, issue a new stock certificate in the name of the transferee, and cancel the old one. A transferee who requests for the issuance of a stock certificate need not spell out each and every act that needs to be done by the corporate secretary, as a request for issuance of stock certificates necessarily includes a request for

the recording of the transfer. Ergo, the failure to record the transfer does not mean that the transferee cannot ask for the issuance of stock certificates. Secondly, according to petitioner, there is no law, rule or regulation requiring a transferor of shares of stock to first issue express instructions or execute a power of attorney for the transfer of said shares before a certificate of stock is issued in the name of the transferee and the transfer registered in the books of the corporation. He contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144 SCRA 643 (1986), cited by respondents, do not apply to this case. These cases contemplate a situation where a certificate of stock has been issued by the company whereas in this case at bar, no stock certificates have been issued even in the name of the original stockholder, Fausto Gaid.

Finally, petitioner maintains that since he is under no compulsion to register the transfer or to secure stock certificates in. his name, his cause of action is deemed not to have accrued until respondent ALSONS denied his request. Respondents, in their comment, maintain that the transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent in so far as the corporation is concerned and no certificate of stock can be issued in the name of the transferee. Until the recording is made, the transfer cannot be the basis of issuance of a certificate of stock. They add that petitioner is not the real party-in-interest, the real party-in-interest being Fausto Gaid since it is his name that appears in the records of the corporation. They conclude that petitioner's cause of action is barred by prescription and laches since 24 years elapsed before he made any demand upon ALSONS. We find the instant petition without merit. The Court of Appeals did not err in ruling that petitioner had no cause of action, and that his petition for mandamus was properly dismissed. There is no question that Fausto Gaid was an original subscriber of respondent corporation's 239,500 shares. This is clear from the numerous pleadings filed by either party. It is also clear from the Amended Articles of Incorporation 20 approved on April 9, 1995 21 that each share had a par value of P1.00 per share. And, it is undisputed that petitioners had not made a previous request upon the corporate secretary of ALSONS, respondent Francisco M. Giron Jr., to record the alleged transfer of stocks.

The Corporation Code states that:

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, sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

Pursuant to the foregoing provision, a transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-existent as far as the corporation is concerned. 22 As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. 23 It is only when the transfer has been recorded in the stock and transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by law to recognize arises.
HcISTE

Hence, without such recording, the transferee may not be regarded by the corporation as one among its stockholders and the corporation may legally refuse the issuance of stock certificates in the name of the transferee even when there has been compliance with the requirements of Section 64 24 of the Corporation Code. This is the import of Section 63 which states that "No transfer, however, shall be valid, except between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred." The situation would be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third party, for then he would be entitled to the remedy of mandamus. 25

From 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. As between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. 26 In other words, the 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. It follows that, as held by the Court of Appeals:
. . . until registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. Thus, in the absence of any allegation that the transfer of the shares between Gaid and the private respondent [herein petitioner] was registered in the stock and transfer book of the petitioner corporation, the private respondent has failed to state a cause of action. 27

Petitioner insists that it is precisely the duty of the corporate secretary, when presented with the document of fully paid shares, to effect the transfer by recording the transfer in the stock and transfer book of the corporation and to issue stock certificates in the name of the transferee. On this point, the SEC En Banc cited Rural Bank of Salinas, Inc. vs. Court of Appeals, 28 where we held that:
For the petitioner Rural Bank of Salinas to refuse registration of the transferred shares in its stock and transfer book, which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code. Thus, respondent Court of Appeals did not err in upholding the decision of respondent SEC affirming the Decision of its Hearing Officer directing the registration of the 473 shares in the stock and transfer book in the names of private respondents. At all events, the registration is without prejudice to the proceedings in court to determine the validity of the Deeds of Assignment of the shares of stock in question.
AcHEaS

In Rural Bank of Salinas, Inc., however, private respondent Melania Guerrero had a Special Power of Attorney executed in her favor by Clemente Guerrero, the registered stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473 shares of stock registered in Clemente's name and to execute the

proper documents therefor. Pursuant to the authority so given, Melania assigned the 473 shares of stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of assignment covering the assigned shares. Melania Guerrero prayed for the transfer of the stocks in the stock and transfer book and the issuance of stock certificates in the name of the new owners thereof. Based on those circumstances, there was a clear duty on the part of the corporate secretary to register the 473 shares in favor of the new owners, since the person who sought the transfer of shares had express instructions from and specific authority given by the registered stockholder to cause the disposition of stocks registered in his name. That cannot be said of this case. The deed of undertaking with indorsement presented by petitioner does not establish, on its face, his right to demand for the registration of the transfer and the issuance of certificates of stocks. In Hager vs. Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state a cause of action where it appears that the petitioner is not the registered stockholder and there is no allegation that he holds any power of attorney from the registered stockholder, from whom he obtained the stocks, to make the transfer, thus:
It appears, however, from the original as well as the amended petition, that this petitioner is not the registered owner of the stock which he seeks to have transferred, and except in so far as he alleges that he is the owner of the stock and that it was "indorsed" to him on February 5 by the Bryan-Landon Company, in whose name it is registered on the books of the Visayan Electric Company, there is no allegation that the petitioner holds any power of attorney from the Bryan-Landon Company authorizing him to make demand on the secretary of the Visayan Electric Company to make the transfer, which petitioner seeks to have made through the medium of the mandamus of this court. Without discussing or deciding the respective rights of the parties which might be properly asserted in an ordinary action or an action in the nature of an equitable suit, we are all agreed that in a case such as that

at bar, a mandamus should not issue to compel the secretary of a corporation to make a transfer of the stock on the books of the company, unless it affirmatively appears that he has failed or refused so to do, upon the demand either of the person in whose name the stock is registered, or of some person holding a power of attorney for that purpose from the registered owner of the stock. There is no allegation in
the petition that the petitioner or anyone else holds a power of attorney from the Bryan-Landon Company authorizing a demand for the transfer of the stock, or that the Bryan-Landon Company has ever itself made

such demand upon the Visayan Electric Company, and in the absence of such allegation we are not able to say that there was such a clear indisputable duty, such a clear legal obligation upon the respondent, as to justify the issuance of the writ to compel him to perform it.

Under the provisions of our statute touching the transfer of stock (Secs. 35 and 36 of Act No. 1459), 29 the mere indorsement of stock certificates does not in itself give to the indorsee such a right to have a transfer of the shares of stock on the books of the company as will entitle him to the writ of mandamus to compel the company and its officers to make such transfer at his demand, because, under such circumstances the duty, the legal obligation, is not so clear and indisputable as to justify the issuance of the writ. As a general rule and especially under the above-cited statute, as between the corporation on the one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are, so that a mere indorsee of a stock certificate, claiming to be the owner, will not necessarily be recognized as such by the corporation and its officers, in the absence of express instructions of the registered owner to make such transfer to the indorsee, or a power of attorney authorizing such transfer. 30

In Rivera vs. Florendo, 144 SCRA 643, 657 (1986), we reiterated that a mere indorsement by the supposed owners of the stock, in the absence of express instructions from them, cannot be the basis of an action for mandamus and that the rights of the parties have to be threshed out in an ordinary action. That Hager and Rivera involved petitions for mandamus to compel the registration of the transfer, while this case is one for issuance of stock, is of no moment. It has been made clear, thus far, that before a transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary may not be compelled to register transfers of shares on the basis merely of an indorsement of stock certificates. With more reason, in our view, a corporate secretary may not be compelled to issue stock certificates without such registration. 31 Petitioner's reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654 (1987), that notice given to the corporation of the sale of the shares and presentation of the certificates for transfer is equivalent to registration is misplaced. In this case there is no allegation in the complaint that petitioner ever gave notice to respondents of the alleged transfer in his favor. Moreover, that case arose

between and among the principal stockholders of the corporation, Pocket Bell, due to the refusal of the corporate secretary to record the transfers in favor of Telectronics of the corporation's controlling 56% shares of stock which were covered by duly endorsed stock certificates. As aforesaid, the request for the recording of a transfer is different from the request for the issuance of stock certificates in the transferee's name. Finally, in Abejo we did not say that transfer of shares need not be recorded in the books of the corporation before the transferee may ask for the issuance of stock certificates. The Court's statement, that "there is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder among which is the stock purchaser's right to secure the corresponding certificate in his name," 32 was addressed to the issue of jurisdiction, which is not pertinent to the issue at hand. Absent an allegation that the transfer of shares is recorded in the stock and transfer book of respondent ALSONS, there appears no basis for a clear and indisputable duty or clear legal obligation that can be imposed upon the respondent corporate secretary, so as to justify the issuance of the writ of mandamus to compel him to perform the transfer of the shares to petitioner. The test of sufficiency of the facts alleged in a petition is whether or not, admitting the facts alleged, the court could render a valid judgment thereon in accordance with the prayer of the petition. 33 This test would not be satisfied if, as in this case, not all the elements of a cause of action are alleged in the complaint. 34 Where the corporate secretary is under no clear legal duty to issue stock certificates because of the petitioner's failure to record earlier the transfer of shares, one of the elements of the cause of action for mandamus is clearly missing.
AaSCTD

That petitioner was under no obligation to request for the registration of the transfer is not in issue. It has no pertinence in this controversy. One may own shares of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA 740 (1992), we had occasion to declare that a certificate of stock is not necessary to render one a stockholder in a corporation. But a certificate of stock is the tangible evidence of the stock itself and of the various interests therein. The certificate is the evidence of the holder's interest and status in the corporation, his ownership of the share represented thereby. The certificate is in law, so to speak, an equivalent of such ownership. It expresses the contract between the corporation and the stockholder, but it is not essential to the existence of a share in stock or the creation of the relation of shareholder to the corporation. 35 In fact, it rests on the will of the stockholder whether he wants to

be issued stock certificates, and a stockholder may opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club, Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a period within which the registration should be effected, the action to enforce the right does not accrue until there has been a demand and a refusal concerning the transfer. In the present case, petitioner's complaint formandamus must fail, not because of laches or estoppel, but because he had alleged no cause of action sufficient for the issuance of the writ. WHEREFORE, the petition is DENIED for lack of merit. The decision of the Court of Appeals, in CA-G.R. SP No. 46692, which set aside that of the Securities and Exchange Commission En Banc in SEC-AC No. 545 and reinstated the order of the Hearing Officer, is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

Bellosillo, Mendoza, Austria-Martinez and Callejo, Sr., JJ., concur.

Footnotes
49.

FIRST DIVISION
[G.R. No. L-33320. May 30, 1983.] RAMON A. GONZALES, petitioner, vs. THE PHILIPPINE NATIONAL BANK, respondent.

Ramon A. Gonzales in his own behalf. Juan Diaz for respondent.

SYLLABUS 1.COMMERCIAL LAW; CORPORATION CODE; LIMITATIONS OF RIGHT OF INSPECTION UNDER THE NEW CODE (B.P. BLG. 68). As may be noted,

among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following: the records must be kept at the principal office of the corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the corporation to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination, and that the person asking for such examinations must be "acting in good faith and for a legitimate purpose in making his demand." 2.ID.; ID.; ID.; UNQUALIFIED PROVISION UNDER THE PREVIOUS LAW, NOW DISSIPATED BY THE CLEAR PROVISION OF SECTION 74 OF B.P. BLG. 68. The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same, it now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg. 68. 3.ID.; ID.; ID.; MODE OF ACQUISITION OF ONE SHARE OF STOCK, AS EVIDENCE OF BAD FAITH AND ULTERIOR MOTIVE. Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which be desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civil

consciousness, but it could not be said that his purpose is germane to his interest as a stockholder. 4.ID.; ID.; PROVIDES THAT CORPORATIONS CREATED BY CHARTERS SHALL BE GOVERNED PRIMARILY BY SAID CHARTERS; RESPONDENT BANK WITH A CHARTER OF ITS OWN IS NOT GOVERNED BY THE CORPORATION CODE. The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides: "SEC. 4. Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable." The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the above-quoted provisions of the charter of the bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank. DECISION VASQUEZ, J :
p

Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a special civil action for mandamus against the herein respondent praying that the latter be ordered to allow him to look into the books and records of the respondent bank in order to satisfy himself as to the truth of the published reports that the respondent has guaranteed the obligation of Southern Negros Development Corporation in the purchase of a US$23 million sugar-mill to be financed by Japanese suppliers and financiers; that the respondent is financing the construction of the P21 million Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron Philippines, Inc., as well as to inquire into the validity of said transactions. The petitioner has alleged had his written request for such examination was denied by the respondent. The trial court having dismissed the petition for mandamus, the instant appeal to review the said dismissal was filed.
LLjur

The facts that gave rise to the subject controversy have been set forth by the trial court in the decision herein sought to be reviewed, as follows:
"'Briefly stated, the following facts gathered from the stipulation of the parties served as the backdrop of this proceeding. 'Previous to the present action, the petitioner instituted several cases in this Court questioning different transactions entered into by the Bank with other parties. First among them is Civil Case No. 69345 filed on April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza of Public Works and Communications, the Commissioner of Public Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber Corporation, Allis Chalmers and General Motors Corporation. In the course of the hearing of said case on August 3, 1967, the personality of herein petitioner to sue the bank and question the letters of credit it has extended for the importation by the Republic of the Philippines of public works equipment intended for the massive development program of the President was raised. In view thereof, he expressed and made known his intention to acquire one share of stock from Congressman Justiniano Montano which, on the following day, August 30, 1967, was transferred in his name in the books of the Bank. 'Subsequent to his aforementioned acquisition of one share of stock of the Bank, petitioner, in his dual capacity as a taxpayer and stockholder, filed the following cases involving the bank or the members of its Board of Directors to wit: '1.On October 18, 1967, Civil Case No. 71044 versus the Board of Directors of the Bank; the National Investment and Development Corp., Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia; '2.On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and Batangas Sugar Central Inc.; '3.On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and the Directors of both the PNB and DBP; 'On January 11, 1969, however, petitioner addressed a letter to the President of the Bank (Annex A, Pet.), requesting submission to look into the records of its transactions covering the purchase of a sugar central

by the Southern Negros Development Corp. to be financed by Japanese suppliers and financiers; its financing of the Cebu-Mactan Bridge to be constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice President and Legal Counsel of the Bank answered petitioner's letter denying his request for being not germane to his interest as a one share stockholder and for the cloud of doubt as to his real intention and purpose in acquiring said share. (Annex B, Pet.) In view of the Bank's refusal, the petitioner instituted this action.'" (Rollo, pp. 16-18.)

The petitioner has adopted the above finding of facts made by the trial court in its brief which he characterized as having been "correctly stated." (PetitionerAppellant's Brief, pp. 5-7.)
LLjur

The court a quo denied the prayer of the petitioner that he be allowed to examine and inspect the books and records of the respondent bank regarding the transactions mentioned on the grounds that the right of a stockholder to inspect the record of the business transactions of a corporation granted under Section 51 of the former Corporation Law (Act No. 1459, as amended) is not absolute, but is limited to purposes reasonably related to the interest of the stockholder, must be asked for in good faith for a specific and honest purpose and not gratify curiosity or for speculative or vicious purposes; that such examination would violate the confidentiality of the records of the respondent bank as provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that the petitioner has not exhausted his administrative remedies. Assailing the conclusions of the lower court, the petitioner has assigned the single error to the lower court of having ruled that his alleged improper motive in asking for an examination of the books and records of the respondent bank disqualifies him to exercise the right of a stockholder to such inspection under Section 51 of Act No. 1459, as amended. Said provision reads in part as follows:

"Sec. 51.. . . The record of all business transactions of the corporation and the minutes of any meeting shall be open to the inspection of any director, member or stockholder of the corporation at reasonable hours."

Petitioner maintains that the above-quoted provision does not justify the qualification made by the lower court that the inspection of corporate records may be denied on the ground that it is intended for an improper motive or purpose, the law having granted such right to a stockholder in clear and

unconditional terms. He further argues that, assuming that a proper motive or purpose for the desired examination is necessary for its exercise, there is nothing improper in his purpose for asking for the examination and inspection herein involved. Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as amended, regarding the right of a stockholder to inspect and examine the books and records of a corporation. The former Corporation Law (Act No. 1459, as amended) has been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of the Philippines." The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has been retained, but with some modifications. The second and third paragraphs of Section 74 of Batas Pambansa Blg. 68 provide the following:
"The records of all business transactions of the corporation and the minutes of any meeting shall be open to inspection by any director, trustee, stockholder or member of the corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts from said records or minutes, at his expense. Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder or member of the corporation to examine and copy excerpts from its records or minutes, in accordance with the provisions of this Code, shall be liable to such director, trustee, stockholder or member for damages, and in addition, shall be guilty of an offense which shall be punishable under Section 144 of this Code: Provided, That if such refusal is made pursuant to a resolution or order of the board of directors or trustees, the liability under this section for such action shall be imposed upon the directors or trustees who voted for such refusal: and Provided, further, That it shall be a defense to any action under this section that the person demanding to examine and copy excerpts from the corporation's records and minutes has improperly used any information secured through any prior examination of the records or minutes of such corporation or of any other corporation, or was not acting in good faith or for a legitimate purpose in making his demand."

As may be noted from the above-quoted provisions, among the changes introduced in the new Code with respect to the right of inspection granted to a stockholder are the following the records must be kept at the principal office of the corporation; the inspection must be made on business days; the stockholder may demand a copy of the excerpts of the records or minutes; and the refusal to allow such inspection shall subject the erring officer or agent of the corporation

to civil and criminal liabilities. However, while seemingly enlarging the right of inspection, the new Code has prescribed limitations to the same. It is now expressly required as a condition for such examination that the one requesting it must not have been guilty of using improperly any information secured through a prior examination, and that the person asking for such examination must be "acting in good faith and for a legitimate purpose in making his demand." The unqualified provision on the right of inspection previously contained in Section 51, Act No. 1459, as amended, no longer holds true under the provisions of the present law. The argument of the petitioner that the right granted to him under Section 51 of the former Corporation Law should not be dependent on the propriety of his motive or purpose in asking for the inspection of the books of the respondent bank loses whatever validity it might have had before the amendment of the law. If there is any doubt in the correctness of the ruling of the trial court that the right of inspection granted under Section 51 of the old Corporation Law must be dependent on a showing of proper motive on the part of the stockholder demanding the same, it is now dissipated by the clear language of the pertinent provision contained in Section 74 of Batas Pambansa Blg 68. Although the petitioner has claimed that he has justifiable motives in seeking the inspection of the books of the respondent bank, he has not set forth the reasons and the purposes for which he desires such inspection, except to satisfy himself as to the truth of published reports regarding certain transactions entered into by the respondent bank and to inquire into their validity. The circumstances under which he acquired one share of stock in the respondent bank purposely to exercise the right of inspection do not argue in favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in order to pry into transactions entered into by the respondent bank even before he became a stockholder. His obvious purpose was to arm himself with materials which he can use against the respondent bank for acts done by the latter when the petitioner was a total stranger to the same. He could have been impelled by a laudable sense of civic consciousness, but it could not be said that his purpose is germane to his interest as a stockholder. We also find merit in the contention of the respondent bank that the inspection sought to be exercised by the petitioner would be violative of the provisions of its charter. (Republic Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide respectively as follows:

"'Sec. 15.Inspection by Department of Supervision and Examination of the Central Bank. The National Bank shall be subject to inspection by the Department of Supervision and Examination of the Central Bank.' 'Sec. 16.Confidential information. The Superintendent of Banks and the Auditor General, or other officers designated by law to inspect or investigate the condition of the National Bank, shall not reveal to any person other than the President of the Philippines, the Secretary of Finance, and the Board of Directors the details of the inspection or investigation, nor shall they give any information relative to the funds in its custody, its current accounts or deposits belonging to private individuals, corporations, or any other entity, except by order of a Court of competent jurisdiction.' 'Sec. 30.Penalties for violation of the provisions of this Act. Any director, officer, employee, or agent of the Bank, who violates or permits the violation of any of the provisions of this Act, or any person aiding or abetting the violations of any of the provisions of this Act, shall be punished by a fine not to exceed ten thousand pesos or by imprisonment of not more than five years, or both such fine and imprisonment.'"

The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said Code provides:
"SEC. 4.Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable."

The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with respect to the right of a stockholder to demand an inspection or examination of the books of the corporation may not be reconciled with the above quoted provisions of the charter of the respondent bank. It is not correct to claim, therefore, that the right of inspection under Section 74 of the new Corporation Code may apply in a supplementary capacity to the charter of the respondent bank.
cdrep

WHEREFORE, the petition is hereby DISMISSED, without costs.

Melencio-Herrera, Plana and Gutierrez, Jr., JJ., concur.

Teehankee, concurs in the result.

Relova J., is on leave.