CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant, vs.

TEODORO SANDIKO, defendant-appellee. ................................................ 2

RIZAL LIGHT & ICE CO., INC., petitioner, vs. THE MUNICIPALITY OF
MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents. ...................................................................... 4
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners vs. THE
HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents. ........................................................................ 12
C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs. EDMUNDO S.
PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN,
EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the
Far Eastern Lumber and Commercial Co., Inc.,respondents. .................. 14
MANUELA T. VDA. DE SALVATIERRA, petitioner, vs. HON. LORENZO C.
GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
Branch II, and SEGUNDINO REFUERZO, respondents. .......................... 16
MARIANO A. ALBERT, plaintiff-appellant, vs. UNIVERSITY
PUBLISHING CO., INC., defendant-appellee. .......................................... 18
ASIA BANKING CORPORATION, plaintiff-appellee, vs. STANDARD
PRODUCTS, CO., INC., defendant-appellant. .......................................... 20
LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR
INDUSTRIES, INC., respondent. .............................................................. 21
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. ................. 26

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving
the defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of
Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title
No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To
guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14,
1929, executed in favor of the Philippine National Bank a first mortgage on the four
parcels of land above-mentioned. A second mortgage in favor of the same bank was in
April of 1930 executed by Tabora over the same lands to guarantee the payment of
another loan amounting to P7,000. A third mortgage on the same lands was executed
on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum
of P2,9000. These mortgages were registered and annotations thereof appear at the
back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de
Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of
land owned by him was sold to the plaintiff company, said to under process of
incorporation, in consideration of one peso (P1) subject to the mortgages in favor of
the Philippine National Bank and Severina Buzon and, to the condition that the
certificate of title to said lands shall not be transferred to the name of the plaintiff
company until the latter has fully and completely paid Tabora's indebtedness to the
Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and
Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board
of directors of said company adopted a resolution (Exhibit G) authorizing its
president, Jose Ventura, to sell the four parcels of lands in question to Teodoro
Sandiko for P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit
B is a deed of sale executed before a notary public by the terms of which the plaintiff
sold ceded and transferred to the defendant all its right, titles, and interest in and to
the four parcels of land described in transfer certificate in turn obligated himself to
shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note
for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year
from the date thereof. Exhibit D is a deed of mortgage executed before a notary public
in accordance with which the four parcels of land were given a security for the
payment of the promissory note, Exhibit C. All these three instrument were dated
February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on
January 25, 1934, brought this action in the Court of First Instance of Manila praying
that judgment be rendered against the defendant for the sum of P25,300, with
interest at legal rate from the date of the filing of the complaint, and the costs of the
suits. After trial, the court below, on December 18, 1934, rendered judgment absolving
the defendant, with costs against the plaintiff. Plaintiff presented a motion for new
trial on January 14, 1935, which motion was denied by the trial court on January 19 of
the same year. After due exception and notice, plaintiff has appealed to this court and
makes an assignment of various errors.
In dismissing the complaint against the defendant, the court below, reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law.
While we do not agree with this conclusion, we have however voted to affirm the
judgment appealed from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff
herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said
company was affected later on October 22, 1930 (Exhibit 2). In other words, the
transfer was made almost five months before the incorporation of the company.
Unquestionably, a duly organized corporation has the power to purchase and hold
such real property as the purposes for which such corporation was formed may permit
and for this purpose may enter into such contracts as may be necessary (sec. 13, pars.
5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully
organized, many things have to be done. Among other things, the law requires the
filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a
presumption that all the requirements of law have been complied with (sec. 334, par.
31 Code of Civil Procedure), in the case before us it can not be denied that the plaintiff
was not yet incorporated when it entered into a contract of sale, Exhibit A. The
contract itself referred to the plaintiff as "una sociedad en vias de incorporacion." It
was not even a de facto corporation at the time. Not being in legal existence then, it
did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner
prescribed by law. As has already been stated, general law authorizing the formation
of corporations are general offers to any persons who may bring themselves within
their provisions; and if conditions precedent are prescribed in the statute, or certain
acts are required to be done, they are terms of the offer, and must be complied with
substantially before legal corporate existence can be acquired. (14 C. J., sec. 111, p.
118.)
That a corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business, would
seem to be self evident. . . . A corporation, until organized, has no being, franchises or
faculties. Nor do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation nor does it
possess franchise or faculties for it or others to exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107
Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel
Tabora as owner of the four parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporations on the other hand.
For reasons that are self-evident, these promoters could not have acted as agent for a
projected corporation since that which no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties. It is, as it were, a
child in ventre sa mere. This is not saying that under no circumstances may the acts
of promoters of a corporation be ratified by the corporation if and when subsequently
organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent
edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and circumstances
of the present case we decline to extend the doctrine of ratification which would result
in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule,
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St.
Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223;
78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E.,
54.) It should be observed that Manuel Tabora was the registered owner of the four
parcels of land, which he succeeded in mortgaging to the Philippine National Bank so
that he might have the necessary funds with which to convert and develop them into
fishery. He appeared to have met with financial reverses. He formed a corporation
composed of himself, his wife, and a few others. From the articles of incorporation,
Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed,
P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q.
de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to
appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were
directors and the latter was treasurer as well. In fact, to this day, the lands remain
inscribed in Tabora's name. The defendant always regarded Tabora as the owner of
the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff
corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff.
Even the Philippine National Bank, mortgagee of the four parcels of land, always
treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits (Nos.
1931 and 38641) were brought against Tabora in the Court of First Instance of Manila
and in both cases a writ of attachment against the four parcels of land was issued. The
Philippine National Bank threatened to foreclose its mortgages. Tabora approached
the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D
and in making him, among other things, assume the payment of Tabora's
indebtedness to the Philippine National Bank. The promisory note, Exhibit C, was
made payable to the plaintiff company so that it may not attached by Tabora's
creditors, two of whom had obtained writs of attachment against the four parcels of
land.
If the plaintiff corporation could not and did not acquire the four parcels of land here
involved, it follows that it did not possess any resultant right to dispose of them by
sale to the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from
Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is
evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva),
namely, the payment of the mortgage debt of said Tabora to the Philippine National
Bank, and that this condition not having been complied with by the Cagayan Fishing
Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise
& Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having
arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing
Development Company, Inc. was null because at the time it was affected the
corporation was non-existent, we deem it unnecessary to discuss this
point.lawphil.net
The decision of the lower court is accordingly affirmed, with costs against the
appellant. So Ordered.
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

RIZAL LIGHT & ICE CO., INC., petitioner,
vs. THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents.

ZALDIVAR, J.:
These two cases, being interrelated, are decided together.
Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review
and set aside the orders of respondent Public Service Commission,
1
dated August 20,
1962, and February 15, 1963, in PSC Case No. 39716, cancelling and revoking the
certificate of public convenience and necessity and forfeiting the franchise of said
petitioner. In the same petition, the petitioner prayed for the issuance of a writ of
preliminary injunction ex parte suspending the effectivity of said orders and/or
enjoining respondents Commission and/or Municipality of Morong, Rizal, from
enforcing in any way the cancellation and revocation of petitioner's franchise and
certificate of public convenience during the pendency of this appeal. By resolution of
March 12, 1963, this Court denied the petition for injunction, for lack of merit.
Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to
review and set aside the decision of the Commission dated March 13, 1963 in PSC
Case No. 62-5143 granting a certificate of public convenience and necessity to
respondent Morong Electric Co., Inc.
2
to operate an electric light, heat and power
service in the municipality of Morong, Rizal. In the petition Rizal Light & Ice Co., Inc.
also prayed for the issuance of a writ of preliminary injunction ex parte suspending
the effectivity of said decision. Per resolution of this Court, dated May 6, 1963, said
petition for injunction was denied.
The facts, as they appear in the records of both cases, are as follows:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business
address at Morong, Rizal. On August 15, 1949, it was granted by the Commission a
certificate of public convenience and necessity for the installation, operation and
maintenance of an electric light, heat and power service in the municipality of
Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to
appear before it on February 18, 1957 to show cause why it should not be penalized for
violation of the conditions of its certificate of public convenience and the regulations
of the Commission, and for failure to comply with the directives to raise its service
voltage and maintain them within the limits prescribed in the Revised Order No. 1 of
the Commission, and to acquire and install a kilowattmeter to indcate the load in
kilowatts at any particular time of the generating unit.
3

For failure of the petitioner to appear at the hearing on February 18, 1957, the
Commission ordered the cancellation and revocation of petitioner's certificate of
public convenience and necessity and the forfeiture of its franchise. Petitioner moved
for reconsideration of said order on the ground that its manager, Juan D. Francisco,
was not aware of said hearing. Respondent municipality opposed the motion alleging
that petitioner has not rendered efficient and satisfactory service and has not
complied with the requirements of the Commission for the improvement of its
service. The motion was set for hearing and Mr. Pedro S. Talavera, Chief, Industrial
Division of the Commission, was authorized to conduct the hearing for the reception
of the evidence of the parties.
4

Finding that the failure of the petitioner to appear at the hearing set for
February 18, 1957 the sole basis of the revocation of petitioner's certificate was
really due to the illness of its manager, Juan D. Francisco, the Commission set aside
its order of revocation. Respondent municipality moved for reconsideration of this
order of reinstatement of the certificate, but the motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent
municipality formally asked the Commission to revoke petitioner's certificate of
public convenience and to forfeit its franchise on the ground, among other things, that
it failed to comply with the conditions of said certificate and franchise. Said petition
was set for hearing jointly with the order to show cause. The hearings had been
postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and
installations by the engineers of the Commission, as follows: April 15, 1958 by
Engineer Antonio M. Alli; September 18, 1959, July 12-13, 1960, and June 21-24, 1961,
by Engineer Meliton S. Martinez. The inspection on June 21-24, 1961 was made upon
the request of the petitioner who manifested during the hearing on December 15,
1960 that improvements have been made on its service since the inspection on July
12-13, 1960, and that, on the basis of the inspection report to be submitted, it would
agree to the submission of the case for decision without further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear.
Respondent municipality was then allowed to present its documentary evidence, and
thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground
that it had not been furnished with a copy of the report of the June 21-24, 1961
inspection for it to reply as previously agreed. In an order dated August 25, 1961,
petitioner was granted a period of ten (10) days within which to submit its written
reply to said inspection report, on condition that should it fail to do so within the said
period the case would be considered submitted for decision. Petitioner failed to file
the reply. In consonance with the order of August 25, 1961, therefore, the Commission
proceeded to decide the case. On July 29, 1962 petitioner's electric plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the
inspection reports of its aforenamed engineers, found that the petitioner had failed to
comply with the directives contained in its letters dated May 21, 1954 and September
4, 1954, and had violated the conditions of its certificate of public convenience as well
as the rules and regulations of the Commission. The Commission concluded that the
petitioner "cannot render the efficient, adequate and satisfactory electric service
required by its certificate and that it is against public interest to allow it to continue its
operation." Accordingly, it ordered the cancellation and revocation of petitioner's
certificate of public convenience and the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision,
alleging that before its electric plant was burned on July 29, 1962, its service was
greatly improved and that it had still existing investment which the Commission
should protect. But eight days before said motion for reconsideration was filed, or on
September 10, 1962, Morong Electric, having been granted a municipal franchise on
May 6, 1962 by respondent municipality to install, operate and maintain an electric
heat, light and power service in said municipality approved by the Provincial Board
of Rizal on August 31, 1962 filed with the Commission an application for a
certificate of public convenience and necessity for said service. Said application was
entitled "Morong Electric Co., Inc., Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of Morong Electric, alleging among
other things, that it is a holder of a certificate of public convenience to operate an
electric light, heat and power service in the same municipality of Morong, Rizal, and
that the approval of said application would not promote public convenience, but
would only cause ruinous and wasteful competition. Although the opposition is dated
October 6, 1962, it was actually received by the Commission on November 8, 1962, or
twenty four days after the order of general default was issued in open court when the
application was first called for hearing on October 15, 1962. On November 12, 1962,
however, the petitioner filed a motion to lift said order of default. But before said
motion could be resolved, petitioner filed another motion, dated January 4, 1963, this
time asking for the dismissal of the application upon the ground that applicant
Morong Electric had no legal personality when it filed its application on September
10, 1962, because its certificate of incorporation was issued by the Securities and
Exchange Commission only on October 17, 1962. This motion to dismiss was denied
by the Commission in a formal order issued on January 17, 1963 on the premise that
applicant Morong Electric was a de facto corporation. Consequently, the case was
heard on the merits and both parties presented their respective evidence. On the basis
of the evidence adduced, the Commission, in its decision dated March 13, 1963, found
that there was an absence of electric service in the municipality of Morong and that
applicant Morong Electric, a Filipino-owned corporation duly organized and existing
under the laws of the Philippines, has the financial capacity to maintain said service.
These circumstances, considered together with the denial of the motion for
reconsideration filed by petitioner in Case No. 39715 on February, 15, 1963, such that
as far as the Commission was concerned the certificate of the petitioner was already
declared revoked and cancelled, the Commission approved the application of Morong
Electric and ordered the issuance in its favor of the corresponding certificate of public
convenience and necessity.1awphl.nt
On March 8, 1963, petitioner filed with this Court a petition to review the
decision in Case No. 39715 (now G. R. No. L-20993). Then on April 26, 1963,
petitioner also filed a petition to review the decision in Case No. 62-5143 (now G. R.
No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner
contends: (1) that the Commission acted without or in excess of its jurisdiction when
it delegated the hearing of the case and the reception of evidence to Mr. Pedro S.
Talavera who is not allowed by law to hear the same; (2) that the cancellation of
petitioner's certificate of public convenience was unwarranted because no sufficient
evidence was adduced against the petitioner and that petitioner was not able to
present evidence in its defense; (3) that the Commission failed to give protection to
petitioner's investment; and (4) that the Commission erred in imposing the extreme
penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the
Commission erred in denying petitioner's motion to dismiss and proceeding with the
hearing of the application of the Morong Electric; (2) that the Commission erred in
granting Morong Electric a certificate of public convenience and necessity since it is
not financially capable to render the service; (3) that the Commission erred when it
made findings of facts that are not supported by the evidence adduced by the parties
at the trial; and (4) that the Commission erred when it did not give to petitioner
protection to its investment a reiteration of the third assignment of error in the
other case.1awphl.nt
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro
S. Talavera, who conducted the hearings of the case below, is a division chief, he is not
a lawyer. As such, under Section 32 of Commonwealth Act No. 146, as amended, the
Commission should not have delegated to him the authority to conduct the hearings
for the reception of evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer.
5
Under the second paragraph
of Section 32 of Commonwealth Act No. 146, as amended,
6
the Commission can only
authorize a division chief to hear and investigate a case filed before it if he is a lawyer.
However, the petitioner is raising this question for the first time in this appeal. The
record discloses that petitioner never made any objection to the authority of Mr.
Talavera to hear the case and to receive the evidence of the parties. On the contrary,
we find that petitioner had appeared and submitted evidence at the hearings
conducted by Mr. Talavera, particularly the hearings relative to the motion for
reconsideration of the order of February 18, 1957 cancelling and revoking its
certificate. We also find that, through counsel, petitioner had entered into agreements
with Mr. Talavera, as hearing officer, and the counsel for respondent municipality,
regarding procedure in order to abbreviate the proceedings.
7
It is only after the
decision in the case turned out to be adverse to it that petitioner questioned the
proceedings held before Mr. Talavera.
This Court in several cases has ruled that objection to the delegation of authority
to hear a case filed before the Commission and to receive the evidence in connection
therewith is a procedural, not a jurisdictional point, and is waived by failure to
interpose timely the objection and the case had been decided by the
Commission.
8
Since petitioner has never raised any objection to the authority of Mr.
Talavera before the Commission, it should be deemed to have waived such procedural
defect, and consonant with the precedents on the matter, petitioner's claim that the
Commission acted without or in excess of jurisdiction in so authorizing Mr. Talavera
should be dismissed.
9

2. Anent the second assigned error, the gist of petitioner's contention is that the
evidence consisting of inspection reports upon which the Commission based its
decision is insufficient and untrustworthy in that (1) the authors of said reports had
not been put to test by way of cross-examination; (2) the reports constitute only one
side of the picture as petitioner was not able to present evidence in its defense; (3)
judicial notice was not taken of the testimony of Mr. Harry B. Bernardino, former
mayor of respondent municipality, in PSC Case No. 625143 (the other case, G. R. No.
L-21221) to the effect that the petitioner had improved its service before its electric
power plant was burned on July 29, 1962 which testimony contradicts the
inspection reports; and (4) the Commission acted both as prosecutor and judge
passing judgment over the very same evidence presented by it as prosecutor a
situation "not conducive to the arrival at just and equitable decisions."
Settled is the rule that in reviewing the decision of the Public Service
Commission this Court is not required to examine the proof de novo and determine
for itself whether or not the preponderance of evidence really justifies the decision.
The only function of this Court is to determine whether or not there is evidence before
the Commission upon which its decision might reasonably be based. This Court will
not substitute its discretion for that of the Commission on questions of fact and will
not interfere in the latter's decision unless it clearly appears that there is no evidence
to support it.
10
Inasmuch as the only function of this Court in reviewing the decision
of the Commission is to determine whether there is sufficient evidence before the
Commission upon which its decision can reasonably be based, as it is not required to
examine the proof de novo, the evidence that should be made the basis of this Court's
determination should be only those presented in this case before the Commission.
What then was the evidence presented before the Commission and made the basis of
its decision subject of the present appeal? As stated earlier, the Commission based its
decision on the inspection reports submitted by its engineers who conducted the
inspection of petitioner's electric service upon orders of the Commission.
11
Said
inspection reports specify in detail the deficiencies incurred, and violations
committed, by the petitioner resulting in the inadequacy of its service. We consider
that said reports are sufficient to serve reasonably as bases of the decision in question.
It should be emphasized, in this connection that said reports, are not mere
documentary proofs presented for the consideration of the Commission, but are the
results of the Commission's own observations and investigations which it can
rightfully take into consideration,
12
particularly in this case where the petitioner had
not presented any evidence in its defense, and speaking of petitioner's failure to
present evidence, as well as its failure to cross-examine the authors of the inspection
reports, petitioner should not complain because it had waived not only its right to
cross-examine but also its right to present evidence. Quoted hereunder are the
pertinent portions of the transcripts of the proceedings where the petitioner, through
counsel, manifested in clear language said waiver and its decision to abide by the last
inspection report of Engineer Martinez:
Proceedings of December 15, 1960
COMMISSION:
It appears at the last hearing of this case on September 23, 1960, that an
engineer of this Commission has been ordered to make an inspection of all electric
services in the province of Rizal and on that date the engineer of this Commission is
still undertaking that inspection and it appears that the said engineer had actually
made that inspection on July 12 and 13, 1960. The engineer has submitted his report
on November 18, 1960 which is attached to the records of this case.
ATTY. LUQUE (Councel for Petitioner):
... (W)e respectfully state that while the report is, as I see it attached to the
records, clear and very thorough, it was made sometime July of this year and I
understand from the respondent that there is some improvement since this report
was made ... we respectfully request that an up-to-date inspection be made ... . An
inspector of this Commission can be sent to the plant and considering that the
engineer of this Commission, Engineer Meliton Martinez, is very acquainted to the
points involved we pray that his report will be used by us for the reason that he is a
technical man and he knows well as he has done a good job and I think our
proposition would expedite the matter. We sincerely believe that the inspection report
will be the best evidence to decide this matter.
x x x x x x x x x
ATTY. LUQUE:
... This is a very important matter and to show the good faith of respondent in
this case we will not even cross-examine the engineer when he makes a new report.
We will agree to the findings and, your honor please, considering as we have
manifested before that Engineer Martinez is an experienced engineer of this
Commission and the points reported by Engineer Martinez on the situation of the
plant now will prevent the necessity of having a hearing, of us bringing new evidence
and complainant bringing new evidence. ... .
x x x x x x x x x
COMMISSION (to Atty. Luque):
Q Does the Commission understand from the counsel for applicant that if the
motion is granted he will submit this order to show cause for decision without any
further hearing and the decision will be based on the report of the engineer of this
Commission?
A We respectfully reply in this manner that we be allowed or be given an
opportunity just to read the report and 99%, we will agree that the report will be the
basis of that decision. We just want to find out the contents of the report, however, we
request that we be furnished with a copy of the report before the hearing so that we
will just make a manifestation that we will agree.
COMMISSION (to Atty. Luque):
Q In order to prevent the delay of the disposition of this case the Commission
will allow counsel for the applicant to submit his written reply to the report that the
engineer of this Commission. Will he submit this case without further hearing upon
the receipt of that written reply?
A Yes, your honor.
Proceedings of August 25, 1961
ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration of this case we are respectfully
move (sic) that instead of our witnesses testifying under oath that we will submit a
written reply under oath together with the memorandum within fifteen (15) days and
we will furnish a copy and upon our submission of said written reply under oath and
memorandum we consider this case submitted. This suggestion is to abbreviate the
necessity of presenting witnesses here which may prolong the resolution of this case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the
action to reopen the case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully
submit to this Commission our motion to submit a written reply together with a
memorandum. Also as stated to expedite the case and to avoid further hearing we will
just submit our written reply. According to our records we are furnished with a copy
of the report of July 17, 1961. We submit your honor.
x x x x x x x x x
COMMISSION:
To give applicant a chance to have a day in court the Commission grants the
request of applicant that it be given 10 days within which to submit a written reply on
the report of the engineer of the Commission who inspected the electric service, in the
municipality of Morong, Rizal, and after the submission of the said written reply
within 10 days from today this case will be considered submitted for decision.
The above-quoted manifestation of counsel for the petitioner, specifically the
statement referring to the inspection report of Engineer Martinez as the "best
evidence to decide this matter," can serve as an argument against petitioner's claim
that the Commision should have taken into consideration the testimony of Mr.
Bernardino. But the primary reasons why the Commission could not have taken
judicial cognizance of said testimony are: first, it is not a proper subject of judicial
notice, as it is not a "known" fact that is, well established and authoritatively
settled, without qualification and contention;
13
second, it was given in a subsequent
and distinct case after the petitioner's motion for reconsideration was heard by the
Commission en banc and submitted for decision,
14
and third, it was not brought to
the attention of the Commission in this case through an appropriate pleading.
15

Regarding the contention of petitioner that the Commission had acted both as
prosecutor and judge, it should be considered that there are two matters that had to
be decided in this case, namely, the order to show cause dated December 19, 1956,
and the petition or complaint by respondent municipality dated June 25, 1958. Both
matters were heard jointly, and the record shows that respondent municipality had
been allowed to present its evidence to substantiate its complaint. It can not be said,
therefore, that in this case the Commission had acted as prosecutor and judge. But
even assuming, for the sake of argument, that there was a commingling of the
prosecuting and investigating functions, this exercise of dual function is authorized by
Section 17(a) of Commonwealth Act No. 146, as amended, under which the
Commission has power "to investigate, upon its own initiative or upon complaint in
writing, any matter concerning any public service as regards matters under its
jurisdiction; to, require any public service to furnish safe, adequate, and proper
service as the public interest may require and warrant; to enforce compliance with
any standard, rule, regulation, order or other requirement of this Act or of the
Commission ... ." Thus, in the case of Collector of Internal Revenue vs. Estate of F. P.
Buan, L-11438, July 31, 1958, this Court held that the power of the Commission to
cancel and revoke a certificate of public convenience and necessity may be exercised
by it even without a formal charge filed by any interested party, with the only
limitation that the holder of the certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties are
delegated by statute to an administrative body, as in the case of the Public Service
Commission, said body may take steps it believes appropriate for the proper exercise
of said duties, particularly in the manner of informing itself whether there is probable
violation of the law and/or its rules and regulations. It may initiate an investigation,
file a complaint, and then try the charge as preferred. So long as the respondent is
given a day in court, there can be no denial of due process, and objections to said
procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-
investment rule" enunciated by this Court in Batangas Transportation Co. vs.
Orlanes
16
in this wise:
The Government having taken over the control and supervision of all public
utilities, so long as an operator under a prior license complies with the terms and
conditions of his license and reasonable rules and regulations for its operation and
meets the reasonable demands of the public, it is the duty of the Commission to
protect rather than to destroy his investment by the granting of the second license to
another person for the same thing over the same route of travel. The granting of such
a license does not serve its convenience or promote the interests of the public.
The above-quoted rule, however, is not absolute, for nobody has exclusive right
to secure a franchise or a certificate of public convenience.
17
Where, as in the present
case, it has been shown by ample evidence that the petitioner, despite ample time and
opportunity given to it by the Commission, had failed to render adequate, sufficient
and satisfactory service and had violated the important conditions of its certificate as
well as the directives and the rules and regulations of the Commission, the rule cannot
apply. To apply that rule unqualifiedly is to encourage violation or disregard of the
terms and conditions of the certificate and the Commission's directives and
regulations, and would close the door to other applicants who could establish, operate
and provide adequate, efficient and satisfactory service for the benefit and
convenience of the inhabitants. It should be emphasized that the paramount
consideration should always be the public interest and public convenience. The duty
of the Commission to protect investment of a public utility operator refers only to
operators of good standing those who comply with the laws, rules and regulations
and not to operators who are unconcerned with the public interest and whose
investments have failed or deteriorated because of their own fault.
18

4. The last assignment of error assails the propriety of the penalty imposed by
the Commission on the petitioner that is, the revocation of the certificate and the
forfeiture of the franchise. Petitioner contends that the imposition of a fine would
have been sufficient, as had been done by the Commission in cases of a similar nature.
It should be observed that Section 16(n) of Commonwealth Act No. 146, as
amended, confers upon the Commission ample power and discretion to order the
cancellation and revocation of any certificate of public convenience issued to an
operator who has violated, or has willfully and contumaciously refused to comply
with, any order, rule or regulation of the Commission or any provision of law. What
matters is that there is evidence to support the action of the Commission. In the
instant case, as shown by the evidence, the contumacious refusal of the petitioner
since 1954 to comply with the directives, rules and regulations of the Commission, its
violation of the conditions of its certificate and its incapability to comply with its
commitment as shown by its inadequate service, were the circumstances that
warranted the action of the Commission in not merely imposing a fine but in revoking
altogether petitioner's certificate. To allow petitioner to continue its operation would
be to sacrifice public interest and convenience in favor of private interest.
A grant of a certificate of public convenience confers no property rights but is a
mere license or privilege, and such privilege is forfeited when the grantee fails to
comply with his commitments behind which lies the paramount interest of the public,
for public necessity cannot be made to wait, nor sacrificed for private convenience.
(Collector of Internal Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago
Sambrano, et al. v. PSC, et al., L-11439 & L-11542-46, July 31, 1958)
(T)he Public Service Commission, ... has the power to specify and define the
terms and conditions upon which the public utility shall be operated, and to make
reasonable rules and regulations for its operation and the compensation which the
utility shall receive for its services to the public, and for any failure to comply with
such rules and regulations or the violation of any of the terms and conditions for
which the license was granted, the Commission has ample power to enforce the
provisions of the license or even to revoke it, for any failure or neglect to comply
with any of its terms and provisions. (Batangas Trans. Co. v. Orlanes, 52 Phil. 455,
460; emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No.
146, as amended, which provides that a public utility operator violating or failing to
comply with the terms and conditions of any certificate, or any orders, decisions or
regulations of the Commission, shall be subject to a fine and that the Commission is
authorized and empowered to impose such fine, after due notice and hearing. It
should be noted, however, that the last sentence of said section states that the remedy
provided therein "shall not be a bar to, or affect any other remedy provided in this Act
but shall be cumulative and additional to such remedy or remedies." In other words,
the imposition of a fine may only be one of the remedies which the Commission may
resort to, in its discretion. But that remedy is not exclusive of, or has preference over,
the other remedies. And this Court will not substitute its discretion for that of the
Commission, as long as there is evidence to support the exercise of that discretion by
the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any
certificate may be granted, authorizing the operation of a public service, three
requisites must be complied with, namely: (1) the applicant must be a citizen of the
Philippines or of the United States, or a corporation or co-partnership, association or
joint-stock company constituted and organized under the laws of the Philippines,
sixty per centum at least of the stock or paid-up capital of which belongs entirely to
citizens of the Philippines or of the United States;
19
(2) the applicant must be
financially capable of undertaking the proposed service and meeting the
responsibilities incident to its operation;
20
and (3) the applicant must prove that the
operation of the public service proposed and the authorization to do business will
promote the public interest in a proper and suitable manner.
21

As stated earlier, in the decision appealed from, the Commission found that
Morong Electric is a corporation duly organized and existing under the laws of the
Philippines, the stockholders of which are Filipino citizens, that it is financially
capable of operating an electric light, heat and power service, and that at the time the
decision was rendered there was absence of electric service in Morong, Rizal. While
the petitioner does not dispute the need of an electric service in Morong, Rizal,
22
it
claims, in effect, that Morong Electric should not have been granted the certificate of
public convenience and necessity because (1) it did not have a corporate personality at
the time it was granted a franchise and when it applied for said certificate; (2) it is not
financially capable of undertaking an electric service, and (3) petitioner was rendering
efficient service before its electric plant was burned, and therefore, being a prior
operator its investment should be protected and no new party should be granted a
franchise and certificate of public convenience and necessity to operate an electric
service in the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong Electric
dwells on the proposition that since a franchise is a contract,
23
at least two competent
parties are necessary to the execution thereof, and parties are not competent except
when they are in being. Hence, it is contended that until a corporation has come into
being, in this jurisdiction, by the issuance of a certificate of incorporation by the
Securities and Exchange Commission (SEC) it cannot enter into any contract as a
corporation. The certificate of incorporation of the Morong Electric was issued by the
SEC on October 17, 1962, so only from that date, not before, did it acquire juridical
personality and legal existence. Petitioner concludes that the franchise granted to
Morong Electric on May 6, 1962 when it was not yet in esse is null and void and
cannot be the subject of the Commission's consideration. On the other hand, Morong
Electric argues, and to which argument the Commission agrees, that it was a de
factocorporation at the time the franchise was granted and, as such, it was not
incapacitated to enter into any contract or to apply for and accept a franchise. Not
having been incapacitated, Morong Electric maintains that the franchise granted to it
is valid and the approval or disapproval thereof can be properly determined by the
Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality
on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical
personality and legal existence of Morong Electric began only on October 17, 1962
when its certificate of incorporation was issued by the SEC.
24
Before that date, or
pending the issuance of said certificate of incorporation, the incorporators cannot be
considered as de factocorporation.
25
But the fact that Morong Electric had no
corporate existence on the day the franchise was granted in its name does not render
the franchise invalid, because later Morong Electric obtained its certificate of
incorporation and then accepted the franchise in accordance with the terms and
conditions thereof. This view is sustained by eminent American authorities. Thus,
McQuiuin says:
The fact that a company is not completely incorporated at the time the grant is
made to it by a municipality to use the streets does not, in most jurisdictions, affect
the validity of the grant. But such grant cannot take effect until the corporation is
organized. And in Illinois it has been decided that the ordinance granting the
franchise may be presented before the corporation grantee is fully organized, where
the organization is completed before the passage and acceptance. (McQuillin,
Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is organized,
the franchise may, nevertheless, be applied for before the company is fully organized.
A grant of a street franchise is valid although the corporation is not created until
afterwards. (Fletcher, Cyclopedia Corp. Permanent Edition, Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous in
support of the proposition that an ordinance granting a privilege to a corporation is
not void because the beneficiary of the ordinance is not fully organized at the time of
the introduction of the ordinance. It is enough that organization is complete prior to
the passage and acceptance of the ordinance. The reason is that a privilege of this
character is a mere license to the corporation until it accepts the grant and complies
with its terms and conditions. (Thompson on Corporations, Vol. 4, 3rd Ed., Sec.
2929)
26

The incorporation of Morong Electric on October 17, 1962 and its acceptance of
the franchise as shown by its action in prosecuting the application filed with the
Commission for the approval of said franchise, not only perfected a contract between
the respondent municipality and Morong Electric but also cured the deficiency
pointed out by the petitioner in the application of Morong EIectric. Thus, the
Commission did not err in denying petitioner's motion to dismiss said application and
in proceeding to hear the same. The efficacy of the franchise, however, arose only
upon its approval by the Commission on March 13, 1963. The reason is that
Under Act No. 667, as amended by Act No. 1022, a municipal council has the
power to grant electric franchises, subject to the approval of the provincial board and
the President. However, under Section 16(b) of Commonwealth Act No. 146, as
amended, the Public Service Commission is empowered "to approve, subject to
constitutional limitations any franchise or privilege granted under the provisions of
Act No. 667, as amended by Act No. 1022, by any political subdivision of the
Philippines when, in the judgment of the Commission, such franchise or privilege will
properly conserve the public interests and the Commission shall in so approving
impose such conditions as to construction, equipment, maintenance, service, or
operation as the public interests and convenience may reasonably require, and to
issue certificates of public convenience and necessity when such is required or
provided by any law or franchise." Thus, the efficacy of a municipal electric franchise
arises, therefore, only after the approval of the Public Service Commission.
(Almendras vs. Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted to
Morong Electric is not incompatible with the holding of this Court in Cagayan
Fishing Development Co., Inc. vs. Teodoro Sandiko
27
upon which the petitioner leans
heavily in support of its position. In said case this Court held that a corporation
should have a full and complete organization and existence as an entity before it can
enter into any kind of a contract or transact any business. It should be pointed out,
however, that this Court did not say in that case that the rule is absolute or that under
no circumstances may the acts of promoters of a corporation be ratified or accepted
by the corporation if and when subsequently organized. Of course, there are
exceptions. It will be noted that American courts generally hold that a contract made
by the promoters of a corporation on its behalf may be adopted, accepted or ratified
by the corporation when organized.
28

2. The validity of the franchise and the corporate personality of Morong Electric
to accept the same having been shown, the next question to be resolved is whether
said company has the financial qualification to operate an electric light, heat and
power service. Petitioner challenges the financial capability of Morong Electric, by
pointing out the inconsistencies in the testimony of Mr. Jose P. Ingal, president of
said company, regarding its assets and the amount of its initial investment for the
electric plant. In this connection it should be stated that on the basis of the evidence
presented on the matter, the Commission has found the Morong Electric to be
"financially qualified to install, maintain and operate the proposed electric light, heat
and power service." This is essentially a factual determination which, in a number of
cases, this Court has said it will not disturb unless patently unsupported by evidence.
An examination of the record of this case readily shows that the testimony of Mr.
Ingal and the documents he presented to establish the financial capability of Morong
Electric provide reasonable grounds for the above finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings and
conclusions of fact made by the Public Service Commission, after weighing the
evidence adduced by the parties in a public service case, will not be disturbed by the
Supreme Court unless those findings and conclusions appear not to be reasonably
supported by evidence. (La Mallorca and Pampanga Bus Co. vs. Mercado, L-19120,
November 29, 1965)
For purposes of appeal, what is decisive is that said testimonial evidence
provides reasonable support for the Public Service Commission's findings of financial
capacity on the part of applicants, rendering such findings beyond our power to
disturb. (Del Pilar Transit vs. Silva, L-21547, July 15, 1966)
It may be worthwhile to mention in this connection that per inspection report
dated January 20, 1964
29
of Mr. Meliton Martinez of the Commission, who inspected
the electric service of Morong on January 15-16, 1964, Morong Electric "is serving
electric service to the entire area covered by its approved plan and has constructed its
line in accordance with the plans and specifications approved by the Commission." By
reason thereof, it was recommended that the requests of Morong Electric (1) for the
withdrawal of its deposit in the amount of P1,000.00 with the Treasurer of the
Philippines, and (2) for the approval of Resolution No. 160 of the Municipal Council
of Morong, Rizal, exempting the operator from making the additional P9,000.00
deposit mentioned in its petition, dated September 16, 1963, be granted. This report
removes any doubt as to the financial capability of Morong Electric to operate and
maintain an electric light, heat and power service.
3. With the financial qualification of Morong Electric beyond doubt, the
remaining question to be resolved is whether, or not, the findings of fact of the
Commission regarding petitioner's service are supported by evidence. It is the
contention of the petitioner that the Commission made some findings of fact
prejudicial to its position but which do not find support from the evidence presented
in this case. Specifically, petitioner refers to the statements or findings that its service
had "turned from bad to worse," that it miserably failed to comply with the oft-
repeated promises to bring about the needed improvement, that its equipment is
unserviceable, and that it has no longer any plant site and, therefore, has discredited
itself. Petitioner further states that such statements are not only devoid of evidentiary
support but contrary to the testimony of its witness, Mr. Harry Bernardino, who
testified that petitioner was rendering efficient and satisfactory service before its
electric plant was burned on July 29, 1962.
On the face of the decision appealed from, it is obvious that the Commission in
describing the kind of service petitioner was rendering before its certificate was
ordered revoked and cancelled, took judicial notice of the records of the previous case
(PSC Case No. 39715) where the quality of petitioner's service had been squarely put
in issue. It will be noted that the findings of the Commission were made
notwithstanding the fact that the aforementioned testimony of Mr. Bernardino had
been emphasized and pointed out in petitioner's Memorandum to the
Commission.
30
The implication is simple: that as between the testimony of Mr.
Bernardino and the inspection reports of the engineers of the Commission, which
served as the basis of the revocation order, the Commission gave credence to the
latter. Naturally, whatever conclusion or finding of fact that the Commission arrived
at regarding the quality of petitioner's service are not borne out by the evidence
presented in this case but by evidence in the previous case.
31
In this connection, we
repeat, the conclusion, arrived at by the Commission after weighing the conflicting
evidence in the two related cases, is a conclusion of fact which this Court will not
disturb.
And it has been held time and again that where the Commission has reached a
conclusion of fact after weighing the conflicting evidence, that conclusion must be
respected, and the Supreme Court will not interfere unless it clearly appears that
there is no evidence to support the decision of the Commission. (La Mallorca and
Pampanga Bus Co., Inc. vs. Mercado, L-19120, November 29, 1965 citing Pangasinan
Trans. Co., Inc. vs. Dela Cruz, 96 Phil. 278)
For that matter, petitioner's pretension that it has a prior right to the operation
of an electric service in Morong, Rizal, is not tenable; and its plea for protection of its
investment, as in the previous case, cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed
from, should be, as they are hereby affirmed, with costs in the two cases against
petitioner Rizal Light & Ice Co., Inc. It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and
Fernando, JJ., concur.

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.

CRUZ, J.:
We gave limited due course to this petition on the question of the solidary liability of
the petitioners with their co-defendants in the lower court 1 because of the challenge
to the following paragraph in the dispositive portion of the decision of the respondent
court: *
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount
of P50,000.00 for the preparation of the project study and his technical services that
led to the organization of the defendant corporation, plus P10,000.00 attorney's
fees;
2

The petitioners claim that this order has no support in fact and law because they had
no contract whatsoever with the private respondent regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation that
was later created, they should not be held solidarily liable with the Filipinas Orient
Airways, a separate juridical entity, and with Barretto and Garcia, their co-defendants
in the lower court, ** who were the ones who requested the said services from the
private respondent.
3

We are not concerned here with the petitioners' co-defendants, who have not
appealed the decision of the respondent court and may, for this reason, be presumed
to have accepted the same. For purposes of resolving this case before us, it is not
necessary to determine whether it is the promoters of the proposed corporation, or
the corporation itself after its organization, that shall be responsible for the expenses
incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners themselves
are also and personallyliable for such expenses and, if so, to what extent.
The reasons for the said order are given by the respondent court in its decision in this
wise:
As to the 4th assigned error we hold that as to the remuneration due the plaintiff for
the preparation of the project study and the pre-organizational services in the amount
of P50,000.00, not only the defendant corporation but the other defendants including
defendants Caram should be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and Garcia that plaintiff
handled the preparation of the project study which project study was presented to
defendant Caram so the latter was convinced to invest in the proposed airlines. The
project study was revised for purposes of presentation to financiers and the banks. It
was on the basis of this study that defendant corporation was actually organized and
rendered operational. Defendants Garcia and Caram, and Barretto became members
of the Board and/or officers of defendant corporation. Thus, not only the defendant
corporation but all the other defendants who were involved in the preparatory stages
of the incorporation, who caused the preparation and/or benefited from the project
study and the technical services of plaintiff must be liable.
4

It would appear from the above justification that the petitioners were not really
involved in the initial steps that finally led to the incorporation of the Filipinas Orient
Airways. Elsewhere in the decision, Barretto was described as "the moving spirit." The
finding of the respondent court is that the project study was undertaken by the private
respondent at the request of Barretto and Garcia who, upon its completion, presented
it to the petitioners to induce them to invest in the proposed airline. The study could
have been presented to other prospective investors. At any rate, the airline was
eventually organized on the basis of the project study with the petitioners as major
stockholders and, together with Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-organization work of
defendant corporation based on his experience and expertise, hence he was logically
compensated in the amount of P200,000.00 shares of stock not as industrial partner
but more for his technical services that brought to fruition the defendant corporation.
By the same token, We find no reason why the plaintiff should not be similarly
compensated not only for having actively participated in the preparation of the project
study for several months and its subsequent revision but also in his having been
involved in the pre-organization of the defendant corporation, in the preparation of
the franchise, in inviting the interest of the financiers and in the training and
screening of personnel. We agree that for these special services of the plaintiff the
amount of P50,000.00 as compensation is reasonable.
5

The above finding bolsters the conclusion that the petitioners were not involved in the
initial stages of the organization of the airline, which were being directed by Barretto
as the main promoter. It was he who was putting all the pieces together, so to speak.
The petitioners were merely among the financiers whose interest was to be invited
and who were in fact persuaded, on the strength of the project study, to invest in the
proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify making the
petitioners, as principal stockholders thereof, responsible for its obligations. As
a bona fide corporation, the Filipinas Orient Airways should alone be liable for its
corporate acts as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in the
proposed airline. The most that can be said is that they benefited from such services,
but that surely is no justification to hold them personally liable therefor. Otherwise,
all the other stockholders of the corporation, including those who came in later, and
regardless of the amount of their share holdings, would be equally and personally
liable also with the petitioners for the claims of the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition of solidary responsibility upon the
Carams but seems to be willing, in a vague, unexpressed offer of compromise, to
accept joint liability. While it is true that it does here and there disclaim total liability,
the thrust of the petition seems to be against the imposition of solidary liability only
rather than against any liability at all, which is what it should have categorically
argued.
Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly
and severally, under the first paragraph of the dispositive portion of the challenged
decision. So holding, we find it unnecessary to examine at this time the rules on
solidary obligations, which the parties-needlessly, as it turns out have belabored unto
death.
WHEREFORE, the petition is granted. The petitioners are declared not liable under
the challenged decision, which is hereby modified accordingly. It is so ordered.
Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.
Gancayco, J., took no part.


C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED
BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as
receiver of the Far Eastern Lumber and Commercial Co.,
Inc.,respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of
First Instance of Leyte and to enjoin the respondent judge from further acting upon
the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella,
signed and acknowledged in Leyte, the article of incorporation of the Far Eastern
Lumber and Commercial Co., Inc., organized to engage in a general lumber business
to carry on as general contractors, operators and managers, etc. Attached to the article
was an affidavit of the treasurer stating that 23,428 shares of stock had been
subscribed and fully paid with certain properties transferred to the corporation
described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation
proceeded to do business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of
the Securities and Exchange Commissioner, for the issuance of the corresponding
certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the
aforesaid governmental office, the respondents Fred Brown, Emma Brown, Hipolita
D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Leyte
the civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.",
alleging among other things that the Far Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to have it dissolved because of bitter
dissension among the members, mismanagement and fraud by the managers and
heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a
motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause
of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of
the company; and at the request of plaintiffs, appointed of the properties thereof,
upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the
discharge of the receiver, but the respondent judge refused to accept the offer and to
discharge the receiver. Whereupon, the present special civil action was instituted in
this court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the
company, because it being ade facto corporation, dissolution thereof may only be
ordered in a quo warranto proceeding instituted in accordance with section 19 of the
Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are
informed that the Securities and Exchange Commission has not, so far, issued the
corresponding certificate of incorporation. All of them know, or sought to know, that
the personality of a corporation begins to exist only from the moment such certificate
is issued not before (sec. 11, Corporation Law). The complaining associates have not
represented to the others that they were incorporated any more than the latter had
made similar representations to them. And as nobody was led to believe anything to
his prejudice and damage, the principle of estoppel does not apply. Obviously this is
not an instance requiring the enforcement of contracts with the corporation through
the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far
Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the
Corporation Law applies, and therefore the court had not jurisdiction to take
cognizance of said civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a
corporation under this Act and its right to exercise corporate powers shall not be
inquired into collaterally in any private suit to which the corporation may be a party,
but such inquiry may be had at the suit of the Insular Government on information of
the Attorney-General.
There are least two reasons why this section does not govern the situation. Not having
obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co.
even its stockholders may not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a
certificate of incorporation by the Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity if collateral attack is granted to
corporations "claiming in good faith to be a corporation under this act." Such a claim
is compatible with the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident attempt to comply
with the law the claim to be a corporation "under this act" could not be made "in good
faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a private
suit for its dissolution between stockholders, without the intervention of the state.
There might be room for argument on the right of minority stockholders to sue for
dissolution;
1
but that question does not affect the court's jurisdiction, and is a matter
for decision by the judge, subject to review on appeal. Whkch brings us to one
principal reason why this petition may not prosper, namely: the petitioners have their
remedy by appealing the order of dissolution at the proper time.
There is a secondary issue in connection with the appointment of a receiver. But it
must be admitted that receivership is proper in proceedings for dissolution of a
company or corporation, and it was no error to reject the counter-bond, the court
having declared the dissolution. As to the amount of the bond to be demanded of the
receiver, much depends upon the discretion of the trial court, which in this instance
we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary
injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.


MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of
First Instance of Leyte, Branch II, and SEGUNDINO
REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to
nullify the order of the Court of First Instance of Leyte in Civil Case No. 1912, dated
March 21, 1956, relieving Segundino Refuerzo of liability for the contract entered into
between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo
is the president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at
Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into
a contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a
corporation "duly organized and existing under the laws of the Philippines, domiciled
at Burauen, Leyte, Philippines, and with business address therein, represented in this
instance by Mr. Segundino Q. Refuerzo, the President". It was provided in said
contract, among other things, that the lifetime of the lease would be for a period of 10
years; that the land would be planted to kenaf, ramie or other crops suitable to the
soil; that the lessor would be entitled to 30 per cent of the net income accruing from
the harvest of any, crop without being responsible for the cost of production thereof;
and that after every harvest, the lessee was bound to declare at the earliest possible
time the income derived therefrom and to deliver the corresponding share due the
lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation were
not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with
the Court of First Instance of Leyte a complaint against the Philippine Fibers
Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and
damages (Civil Case No. 1912). She averred that sometime in April, 1954, defendants
planted kenaf on 3 hectares of the leased property which crop was, at the time of the
commencement of the action, already harvested, processed and sold by defendants;
that notwithstanding that fact, defendants refused to render an accounting of the
income derived therefrom and to deliver the lessor's share; that the estimated gross
income was P4,500, and the deductible expenses amounted to P1,000; that as
defendants' refusal to undertake such task was in violation of the terms of the
covenant entered into between the plaintiff and defendant corporation, a rescission
was but proper.
As defendants apparently failed to file their answer to the complaint, of which they
were allegedly notified, the Court declared them in default and proceeded to receive
plaintiff's evidence. On June 8, 1955, the lower Court rendered judgment granting
plaintiff's prayer, and required defendants to render a complete accounting of the
harvest of the land subject of the proceeding within 15 days from receipt of the
decision and to deliver 30 per cent of the net income realized from the last harvest to
plaintiff, with legal interest from the date defendants received payment for said crop.
It was further provide that upon defendants' failure to abide by the said requirement,
the gross income would be fixed at P4,200 or a net income of P3,200 after deducting
the expenses for production, 30 per cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned contract of lease, which was declared
rescinded.
No appeal therefrom having been perfected within the reglementary period, the
Court, upon motion of plaintiff, issued a writ of execution, in virtue of which the
Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered in the
name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co.,
Inc., was found available for attachment. On January 31, 1956, defendant Segundino
Refuerzo filed a motion claiming that the decision rendered in said Civil Case No. 1912
was null and void with respect to him, there being no allegation in the complaint
pointing to his personal liability and thus prayed that an order be issued limiting such
liability to defendant corporation. Over plaintiff's opposition, the Court a quo granted
the same and ordered the Provincial Sheriff of Leyte to release all properties
belonging to the movant that might have already been attached, after finding that the
evidence on record made no mention or referred to any fact which might hold movant
personally liable therein. As plaintiff's petition for relief from said order was denied,
Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial
Judge in issuing the order complained of, acted with grave abuse of discretion and
prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be nullified
was issued by tile respondent Judge upon motion of defendant Refuerzo, obviously
pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however, in
providing for the period within which such a motion may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. A petition
provided for in either of the preceding sections of this rule must be verified,
filed within sixty days after the petitioner learns of the judgment, order, or other
proceeding to be set aside, and not more than six months after such judgment or
order was entered, or such proceeding was taken; and must be must be accompanied
with affidavit showing the fraud, accident, mistake, or excusable negligence relied
upon, and the facts constituting the petitioner is good and substantial cause of action
or defense, as the case may be, which he may prove if his petition be granted". (Rule
38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of
the judgment, and not more than 6 months after the judgment or order was rendered,
both of which must be satisfied. As the decision in the case at bar was under date of
June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31,
1956, or after the lapse of 7 months and 23 days, the filing of the aforementioned
motion was clearly made beyond the prescriptive period provided for by the rules. The
remedy allowed by Rule 38 to a party adversely affected by a decision or order is
certainly an alert of grace or benevolence intended to afford said litigant a
penultimate opportunity to protect his interest. Considering the nature of such relief
and the purpose behind it, the periods fixed by said rule are non-extendible and never
interrupted; nor could it be subjected to any condition or contingency because it is of
itself devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-
4513, January 31, 1952). On this score alone, therefore, the petition for a writ
of certiorari filed herein may be granted. However, taking note of the question
presented by the motion for relief involved herein, We deem it wise to delve in and
pass upon the merit of the same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-
fulfillment of the obligation imposed on defendant Philippine Fibers Producers Co.,
Inc., interposed the defense that the complaint filed with the lower court contained no
allegation which would hold him liable personally, for while it was stated therein that
he was a signatory to the lease contract, he did so in his capacity as president of the
corporation. And this allegation was found by the Court a quo to be supported by the
records. Plaintiff on the other hand tried to refute this averment by contending that
her failure to specify defendant's personal liability was due to the fact that all the time
she was under the impression that the Philippine Fibers Producers Co., Inc.,
represented by Refuerzo was a duly registered corporation as appearing in the
contract, but a subsequent inquiry from the Securities and Exchange Commission
yielded otherwise. While as a general rule a person who has contracted or dealt with
an association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction or
dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114;
Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs.
Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable
where fraud takes a part in the said transaction. In the instant case, on plaintiff's
charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc.,
had no juridical personality, defendant Refuerzo gave no confirmation or denial and
the circumstances surrounding the execution of the contract lead to the inescapable
conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe
that such corporation was duly organized in accordance with law.
There can be no question that a corporation with registered has a juridical personality
separate and distinct from its component members or stockholders and officers such
that a corporation cannot be held liable for the personal indebtedness of a stockholder
even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420)
and conversely, a stockholder or member cannot be held personally liable for any
financial obligation be, the corporation in excess of his unpaid subscription. But this
rule is understood to refer merely to registered corporations and cannot be made
applicable to the liability of members of an unincorporated association. The reason
behind this doctrine is obvious-since an organization which before the law is non-
existent has no personality and would be incompetent to act and appropriate for itself
the powers and attribute of a corporation as provided by law; it cannot create agents
or confer authority on another to act in its behalf; thus, those who act or purport to
act as its representatives or agents do so without authority and at their own risk. And
as it is an elementary principle of law that a person who acts as an agent without
authority or without a principal is himself regarded as the principal, possessed of all
the rights and subject to all the liabilities of a principal, a person acting or purporting
to act on behalf of a corporation which has no valid existence assumes such privileges
and obligations and comes personally liable for contracts entered into or for other acts
performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II
Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering
that defendant Refuerzo, as president of the unregistered corporation Philippine
Fibers Producers Co., Inc., was the moving spirit behind the consummation of the
lease agreement by acting as its representative, his liability cannot be limited or
restricted that imposed upon corporate shareholders. In acting on behalf of a
corporation which he knew to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous
decision on this matter and ordering the Provincial Sheriff of Leyte to release any and
all properties of movant therein which might have been attached in the execution of
such judgment, is hereby set aside and nullified as if it had never been issued. With
costs against respondent Segundino Refuerzo. It is so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

MARIANO A. ALBERT, plaintiff-appellant,
vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found
plaintiff entitled to damages (for breach of contract) but reduced the amount from
P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held
that the judgment for P15,000.00 which had become final and executory, should be
executed to its full amount, since in fixing it, payment already made had been
considered.
Now we are asked whether the judgment may be executed against Jose M. Aruego,
supposed President of University Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University
Publishing Co., Inc. Plaintiff allegedinter alia that defendant was a corporation duly
organized and existing under the laws of the Philippines; that on July 19, 1948,
defendant, through Jose M. Aruego, its President, entered into a contract with
plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for the
exclusive right to publish his revised Commentaries on the Revised Penal Code and
for his share in previous sales of the book's first edition; that defendant had
undertaken to pay in eight quarterly installments of P3,750.00 starting July 15, 1948;
that per contract failure to pay one installment would render the rest due; and that
defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted
the execution and terms of the contract dated July 19, 1948; but alleged that it was
plaintiff who breached their contract by failing to deliver his manuscript.
Furthermore, defendant counterclaimed for damages.1wph1.t
Plaintiff died before trial and Justo R. Albert, his estate's administrator, was
substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954,
stating in the dispositive portion
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the
plaintiff and against the defendant the University Publishing Co., Inc., ordering the
defendant to pay the administrator Justo R. Albert, the sum of P23,000.00 with legal
[rate] of interest from the date of the filing of this complaint until the whole amount
shall have been fully paid. The defendant shall also pay the costs. The counterclaim of
the defendant is hereby dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full.
Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution writ
against University Publishing Co., Inc. Plaintiff, however, on August 10, 1961,
petitioned for a writ of execution against Jose M. Aruego, as the real defendant,
stating, "plaintiff's counsel and the Sheriff of Manila discovered that there is no such
entity as University Publishing Co., Inc." Plaintiff annexed to his petition a
certification from the securities and Exchange Commission dated July 31, 1961,
attesting: "The records of this Commission do not show the registration of
UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership."
"University Publishing Co., Inc." countered by filing, through counsel (Jose M.
Aruego's own law firm), a "manifestation" stating that "Jose M. Aruego is not a party
to this case," and that, therefore, plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.,"
through counsel, would not want Jose M. Aruego to be considered a party to the
present case: should a separate action be now instituted against Jose M. Aruego, the
plaintiff will have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this,
plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and
Exchange Commission has not been disputed. Defendant would only raise the point
that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant;
thereby assuming that "University Publishing Co., Inc." is an existing corporation with
an independent juridical personality. Precisely, however, on account of the non-
registration it cannot be considered a corporation, not even a corporation de
facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose
M. Aruego; it cannot be sued independently.
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-existent entity and induced not only the
plaintiff but even the court to believe in such representation. He signed the contract as
"President" of "University Publishing Co., Inc.," stating that this was "a corporation
duly organized and existing under the laws of the Philippines," and obviously misled
plaintiff (Mariano A. Albert) into believing the same. One who has induced another to
act upon his wilful misrepresentation that a corporation was duly organized and
existing under the law, cannot thereafter set up against his victim the principle of
corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the complaint
and litigating upon the merits. But as stated, "University Publishing Co., Inc." has no
independent personality; it is just a name. Jose M. Aruego was, in reality, the one who
answered and litigated, through his own law firm as counsel. He was in fact, if not, in
name, the defendant.
Even with regard to corporations duly organized and existing under the law, we have
in many a case pierced the veil of corporate fiction to administer the ends of
justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or
purporting to act on behalf of a corporation which has no valid existence assumes
such privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent." Had Jose M. Aruego been named as
party defendant instead of, or together with, "University Publishing Co., Inc.," there
would be no room for debate as to his personal liability. Since he was not so named,
the matters of "day in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who have a
right to control the proceedings, to make defense, to adduce and cross-examine
witnesses, and to appeal from a decision" (67 C.J.S. 887) and Aruego was, in reality,
the person who had and exercised these rights. Clearly, then, Aruego had his day in
court as the real defendant; and due process of law has been substantially observed.
By "due process of law" we mean " "a law which hears before it condemns; which
proceeds upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S.
518, 581.)"; or, as this Court has said, " "Due process of law" contemplates notice and
opportunity to be heard before judgment is rendered, affecting one's person or
property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023,
Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process"
clause of the Constitution is designed to secure justice as a living reality; not to
sacrifice it by paying undue homage to formality. For substance must prevail
over form. It may now be trite, but none the less apt, to quote what long ago we said
in Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other. It
is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing side as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that Justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There should be no vested
rights in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative of a non-
existent principal, was the real party to the contract sued upon; that he was the one
who reaped the benefits resulting from it, so much so that partial payments of the
consideration were made by him; that he violated its terms, thereby precipitating the
suit in question; and that in the litigation he was the real defendant. Perforce, in line
with the ends of justice, responsibility under the judgment falls on him.
We need hardly state that should there be persons who under the law are liable to
Aruego for reimbursement or contribution with respect to the payment he makes
under the judgment in question, he may, of course, proceed against them through
proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and the case
remanded ordering the lower court to hold supplementary proceedings for the
purpose of carrying the judgment into effect against University Publishing Co., Inc.
and/or Jose M. Aruego. So ordered.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala,
Makalintal and Zaldivar, JJ., concur.
Bautista Angelo, J., took no part.

ASIA BANKING CORPORATION, plaintiff-appellee,
vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.
Charles C. De Selms for appellant.
Gibbs & McDonough and Roman Ozaeta for appellee.
OSTRAND, J.:
This action is brought to recover the sum of P24,736.47, the balance due on the
following promissory note:
P37,757.22
MANILA, P. I., Nov. 28, 1921.
MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to pay to the Asia Banking Corporation, or order,
the sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their
office in Manila, for value received, together with interest at the rate of ten per cent
per annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER
By President
The court below rendered judgment in favor of the plaintiff for the sum demanded in
the complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the
rate of 10 per cent per annum, and the costs. From this judgment the defendant
appeals to this court.
At the trial of the case the plaintiff failed to prove affirmatively the corporate existence
of the parties and the appellant insists that under these circumstances the court erred
in finding that the parties were corporations with juridical personality and assigns
same as reversible error.
There is no merit whatever in the appellant's contention. The general rule is that in
the absence of fraud a person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless its existence is attacked for
cause which have arisen since making the contract or other dealing relied on as an
estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227;
Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore
estopped to deny said plaintiff's corporate existence. It is, of course, also estopped
from denying its own corporate existence. Under these circumstances it was
unnecessary for the plaintiff to present other evidence of the corporate existence of
either of the parties. It may be noted that there is no evidence showing circumstances
taking the case out of the rules stated.
The judgment appealed from is affirmed, with the costs against the appellant. So
ordered.
Street, Malcolm, Avancea, Villamor and Romualdez, JJ., concur.

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR
INDUSTRIES, INC., respondent.
D E C I S I O N
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money to
pursue a business and to divide the profits or losses that may arise therefrom, even if
it is shown that they have not contributed any capital of their own to a "common
fund." Their contribution may be in the form of credit or industry, not necessarily
cash or fixed assets. Being partners, they are all liable for debts incurred by or on
behalf of the partnership. The liability for a contract entered into on behalf of an
unincorporated association or ostensible corporation may lie in a person who may not
have directly transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
November 26, 1998 Decision of the Court of Appeals in CA-GR CV 41477,[1] which
disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is
hereby affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court
on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to
the modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered
by the Agreement plus P68,000.00 representing the unpaid price of the floats not
covered by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on
their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount of P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the
plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the
nets during the pendency of this case, it was ordered sold at public auction for not less
thanP900,000.00 for which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount
of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as stipulated in the invoices;
hence, in effect, the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff to guaranty
damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid
for by plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount
of P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess to
the defendants who are not entitled to damages and who did not put up a single
centavo to raise the amount ofP900,000.00 aside from the fact that they are not the
owners of the nets and floats. For this reason, the defendants are hereby relieved
from any and all liabilities arising from the monetary judgment obligation
enumerated above and for plaintiff to retain possession and ownership of the nets and
floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of
Court.
SO ORDERED. [3]
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered
into a Contract dated February 7, 1990, for the purchase of fishing nets of various
sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent). They
claimed that they were engaged in a business venture with Petitioner Lim Tong Lim,
who however was not a signatory to the agreement. The total price of the nets
amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold
to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with
a prayer for a writ of preliminary attachment. The suit was brought against the three
in their capacities as general partners, on the allegation that Ocean Quest Fishing
Corporation was a nonexistent corporation as shown by a Certification from the
Securities and Exchange Commission.[5] On September 20, 1990, the lower court
issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the
fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability
and requesting a reasonable time within which to pay. He also turned over to
respondent some of the nets which were in his possession. Peter Yao filed an Answer,
after which he was deemed to have waived his right to cross-examine witnesses and to
present evidence on his behalf, because of his failure to appear in subsequent
hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and
Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court
maintained the Writ, and upon motion of private respondent, ordered the sale of the
fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding
and deposited with the said court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao
and Lim, as general partners, were jointly liable to pay respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on
the testimonies of the witnesses presented and (2) on a Compromise Agreement
executed by the three[9] in Civil Case No. 1492-MN which Chua and Yao had brought
against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of
commercial documents; (b) a reformation of contracts; (c) a declaration of ownership
of fishing boats; (d) an injunction and (e) damages.[10] The Compromise Agreement
provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels
sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00
shall be applied as full payment for P3,250,000.00 in favor of JL Holdings
Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong
Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding Corporation by
1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement was silent as to the nature of
their obligations, but that joint liability could be presumed from the equal distribution
of the profit and loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao
in a fishing business and may thus be held liable as a such for the fishing nets and
floats purchased by and for the use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong
Lim undertook a partnership for a specific undertaking, that is for commercial fishing
x x x. Obviously, the ultimate undertaking of the defendants was to divide the profits
among themselves which is what a partnership essentially is x x x. By a contract of
partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the profits among
themselves (Article 1767, New Civil Code).[13]
Hence, petitioner brought this recourse before this Court.[14]
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision
on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM
ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT
EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING
FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS
FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN
IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIMS GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats
purchased from respondent, the Court must resolve this key issue: whether by their
acts, Lim, Chua and Yao could be deemed to have entered into a partnership.
This Courts Ruling
The Petition is devoid of merit.
First and Second Issues: Existence of a Partnership and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed between
him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the
Compromise Agreement alone. Furthermore, he disclaims any direct participation in
the purchase of the nets, alleging that the negotiations were conducted by Chua and
Yao only, and that he has not even met the representatives of the respondent
company. Petitioner further argues that he was a lessor, not a partner, of Chua and
Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had merely
leased to the two the main asset of the purported partnership -- the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25
percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two
lower courts clearly showed that there existed a partnership among Chua, Yao and
him, pursuant to Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based
on the following factual findings:[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve
as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing,
dry docking and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to
the partnership in the amount of P1 million secured by a check, because of which, Yao
and Chua entrusted the ownership papers of two other boats, Chuas FB Lady Anne
Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch
72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity
of commercial documents; (b) reformation of contracts; (c) declaration of ownership
of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which they started by buying boats
worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioners
brother. In their Compromise Agreement, they subsequently revealed their intention
to pay the loan with the proceeds of the sale of the boats, and to divide equally among
them the excess or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term common fund under Article
1767. The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry. That the parties agreed that any loss or profit from
the sale and operation of the boats would be divided equally among them also shows
that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the
boat, but also to that of the nets and the floats. The fishing nets and the floats, both
essential to fishing, were obviously acquired in furtherance of their business. It would
have been inconceivable for Lim to involve himself so much in buying the boat but not
in the acquisition of the aforesaid equipment, without which the business could not
have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which
constituted the main assets of the partnership, and they agreed that the proceeds from
the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve
only questions of law. Thus, the foregoing factual findings of the RTC and the CA are
binding on this Court, absent any cogent proof that the present action is embraced by
one of the exceptions to the rule.[16] In assailing the factual findings of the two lower
courts, petitioner effectively goes beyond the bounds of a petition for review under
Rule 45.
Compromise Agreement Not the Sole Basis of Partnership
Petitioner argues that the appellate courts sole basis for assuming the existence of a
partnership was the Compromise Agreement. He also claims that the settlement was
entered into only to end the dispute among them, but not to adjudicate their
preexisting rights and obligations. His arguments are baseless. The Agreement was
but an embodiment of the relationship extant among the parties prior to its
execution.
A proper adjudication of claimants rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have
found, correctly, a preexisting partnership among the parties. In implying that the
lower courts have decided on the basis of one piece of document alone, petitioner fails
to appreciate that the CA and the RTC delved into the history of the document and
explored all the possible consequential combinations in harmony with law, logic and
fairness. Verily, the two lower courts factual findings mentioned above nullified
petitioners argument that the existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly
finds support in the Contract of Lease and the registration papers showing that he was
the owner of the boats, including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess
of the proceeds to be divided among the three of them. No lessor would do what
petitioner did. Indeed, his consent to the sale proved that there was a preexisting
partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with
Chua and Yao, in which debts were undertaken in order to finance the acquisition and
the upgrading of the vessels which would be used in their fishing business. The sale of
the boats, as well as the division among the three of the balance remaining after the
payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his
name, was not his own property but an asset of the partnership. It is not uncommon
to register the properties acquired from a loan in the name of the person the lender
trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his
property to pay a debt he did not incur, if the relationship among the three of them
was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however,That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a
party may be estopped from denying its corporate existence. The reason behind this
doctrine is obvious - an unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes of a corporation
as provided by law; it cannot create agents or confer authority on another to act in its
behalf; thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is himself
regarded as the principal, possessed of all the right and subject to all the liabilities of a
principal, a person acting or purporting to act on behalf of a corporation which has no
valid existence assumes such privileges and obligations and becomes personally liable
for contracts entered into or for other acts performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a
third party. In the first instance, an unincorporated association, which represented
itself to be a corporation, will be estopped from denying its corporate capacity in a suit
against it by a third person who relied in good faith on such representation. It cannot
allege lack of personality to be sued to evade its responsibility for a contract it entered
into and by virtue of which it received advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the
ostensible corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled
to be paid for the nets it sold. The only question here is whether petitioner should be
held jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting
that only those who dealt in the name of the ostensible corporation should be held
liable. Since his name does not appear on any of the contracts and since he never
directly transacted with the respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B
Lourdes, the boat which has earlier been proven to be an asset of the partnership. He
in fact questions the attachment of the nets, because the Writ has effectively stopped
his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to
form a corporation. Although it was never legally formed for unknown reasons, this
fact alone does not preclude the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on estoppel, those acting on behalf of a
corporation and those benefited by it, knowing it to be without valid existence, are
held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by
persons with whom he previously had an existing relationship, he is deemed to be
part of said association and is covered by the scope of the doctrine of corporation by
estoppel. We reiterate the ruling of the Court in Alonso v. Villamor:[19]
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position , entraps and destroys the other. It
is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapiers
thrust. Technicality, when it deserts its proper office as an aid to justice and becomes
its great hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued against
the nets. We agree with the Court of Appeals that this issue is now moot and
academic. As previously discussed, F/B Lourdes was an asset of the partnership and
that it was placed in the name of petitioner, only to assure payment of the debt he and
his partners owed. The nets and the floats were specifically manufactured and tailor-
made according to their own design, and were bought and used in the fishing venture
they agreed upon. Hence, the issuance of the Writ to assure the payment of the price
stipulated in the invoices is proper. Besides, by specific agreement, ownership of the
nets remained with Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.

HALLEY, petitioner v. PRINTWELL, respondent

D E C I S I O N


BERSAMIN, J:


Stockholders of a corporation are liable for the debts of the corporation up to the
extent of their unpaid subscriptions. They cannot invoke the veil of corporate identity
as a shield from liability, because the veil may be lifted to avoid defrauding corporate
creditors.


Weaffirm with modification the decisionpromulgated on August 14,
2002,
[1]
whereby the Court of Appeals(CA) upheld thedecision of the Regional Trial
Court, Branch 71, in Pasig City (RTC),
[2]
ordering the defendants (including the
petitioner)to pay to Printwell, Inc. (Printwell) the principal sum of P291,342.76 plus
interest.

Antecedents

The petitioner wasan incorporator and original director of Business Media
Philippines, Inc. (BMPI), which, at its incorporation on November 12, 1987,
[3]
had an
authorized capital stock of P3,000,000.00 divided into 300,000 shares each with a
par value of P10.00,of which 75,000 were initially subscribed, to wit:

Subscriber No. of
shares
Total subscription Amount paid
Donnina C. Halley 35,000 P 350,000.00 P87,500.00
Roberto V. Cabrera,
Jr.
18,000 P 180,000.00 P45,000.00
Albert T. Yu 18,000 P 180,000.00 P45,000.00
Zenaida V. Yu 2,000 P 20,000.00 P5,000.00
Rizalino C. Vineza 2,000 P 20,000.00 P5,000.00
TOTAL 75,000 P750,000.00 P187,500.00


Printwellengaged in commercial and industrial printing.BMPI
commissioned Printwell for the printing of the magazine Philippines, Inc. (together
with wrappers and subscription cards) that BMPI published and sold. For that
purpose, Printwell extended 30-day credit accommodations to BMPI.

In the period from October 11, 1988 until July 12, 1989, BMPI placedwith
Printwell several orders on credit, evidenced byinvoices and delivery receipts
totalingP316,342.76.Considering that BMPI paidonlyP25,000.00,Printwell
suedBMPIon January 26, 1990 for the collection of the unpaid balance of P291,342.76
in the RTC.
[4]


On February 8, 1990,Printwell amended thecomplaint in order to implead as
defendants all the original stockholders and incorporators to recover on theirunpaid
subscriptions, as follows:
[5]


Name Unpaid Shares
Donnina C. Halley P 262,500.00
Roberto V. Cabrera, Jr. P135,000.00
Albert T. Yu P135,000.00
Zenaida V. Yu P15,000.00
Rizalino C. Vieza P15,000.00
TOTAL P 562,500.00


The defendants filed a consolidated answer,
[6]
averring that they all had paid
their subscriptions in full; that BMPI had a separate personality from those of its
stockholders; thatRizalino C. Vieza had assigned his fully-paid up sharesto a certain
Gerardo R. Jacinto in 1989; andthat the directors and stockholders of BMPI had
resolved to dissolve BMPI during the annual meetingheld on February 5, 1990.

To prove payment of their subscriptions, the defendantstockholderssubmitted in
evidenceBMPI official receipt (OR) no. 217, OR no. 218, OR no. 220,OR no. 221, OR
no. 222, OR no. 223, andOR no. 227,to wit:

Receipt No. Date Name Amount
217 November 5, 1987 Albert T. Yu P 45,000.00
218 May 13, 1988 Albert T. Yu P 135,000.00
220 May 13, 1988 Roberto V. Cabrera,
Jr.
P 135,000.00
221 November 5, 1987 Roberto V. Cabrera,
Jr.
P 45,000.00
222 November 5, 1987 Zenaida V. Yu P 5,000.00
223 May 13, 1988 Zenaida V. Yu P 15,000.00
227 May 13, 1988 Donnina C. Halley P 262,500.00


In addition, the stockholderssubmitted other documentsin evidence, namely:(a)
an audit report dated March 30, 1989 prepared by Ilagan, Cepillo & Associates
(submitted to the SEC and the BIR);
[7]
(b) BMPIbalance sheet
[8]
and income
statement
[9]
as of December 31, 1988; (c) BMPI income tax return for the year 1988
(stamped received by the BIR);
[10]
(d) journal vouchers;
[11]
(e) cash deposit
slips;
[12]
and(f)Bank of the Philippine Islands (BPI) savings account passbookin the
name of BMPI.
[13]


Ruling of the RTC


On November 3, 1993, the RTC rendereda decision in favor of Printwell,
rejecting the allegation of payment in full of the subscriptions in view of an
irregularity in the issuance of the ORs and observingthat the defendants had used
BMPIs corporate personality to evade payment and create injustice, viz:

The claim of individual defendants that they have fully paid
their subscriptions to defend[a]nt corporation, is not worthy of
consideration, because:

a) in the case of defendants-spouses Albert and Zenaida Yu,
it will be noted that the alleged payment made on May 13,
1988 amounting to P135,000.00, is covered by Official
Receipt No. 218 (Exh. 2), whereas the alleged payment
made earlier on November 5, 1987, amounting
to P5,000.00, is covered by Official Receipt No. 222 (Exh.
3). This is cogent proof that said receipts were belatedly
issued just to suit their theory since in the ordinary course
of business, a receipt issued earlier must have serial
numbers lower than those issued on a later date. But in the
case at bar, the receipt issued on November 5, 1987 has
serial numbers (222) higher than those issued on a later
date (May 13, 1988).

b) The claim that since there was no call by the Board of
Directors of defendant corporation for the payment of
unpaid subscriptions will not be a valid excuse to free
individual defendants from liability. Since the individual
defendants are members of the Board of Directors of
defendantcorporation, it was within their exclusive power
to prevent the fulfillment of the condition, by simply not
making a call for the payment of the unpaid subscriptions.
Their inaction should not work to their benefit and unjust
enrichment at the expense of plaintiff.

Assuming arguendo that the individual defendants have paid
their unpaid subscriptions, still, it is very apparent that individual
defendants merely used the corporate fiction as a cloak or cover to
create an injustice; hence, the alleged separate personality of
defendant corporation should be disregarded (Tan Boon Bee & Co.,
Inc. vs. Judge Jarencio, G.R. No. 41337, 30 June 1988).
[14]

Applying the trust fund doctrine, the RTC declared the defendant stockholders
liable to Printwell pro rata, thusly:

Defendant Business Media, Inc. is a registered corporation
(Exhibits A, A-1 to A-9), and, as appearing from the Articles of
Incorporation, individual defendants have the following unpaid
subscriptions:

Names Unpaid Subscription
Donnina C. Halley P262,500.00
Roberto V. Cabrera, Jr. 135.000.00
Albert T. Yu 135,000.00
Zenaida V. Yu 15,000.00
Rizalino V. Vineza 15,000.00
--------------------
Total P562,500.00

and it is an established doctrine that subscriptions to the capital
stock of a corporation constitute a fund to which creditors have a
right to look for satisfaction of their claims (Philippine National
Bank vs. Bitulok Sawmill, Inc., 23 SCRA 1366) and, in fact, a
corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares, and any
agreement to this effect is invalid (Velasco vs. Poizat, 37 Phil. 802).

The liability of the individual stockholders in the instant case
shall be pro-rated as follows:

Names Amount
Donnina C. Halley P149,955.65
Roberto V. Cabrera, Jr. 77,144.55
Albert T. Yu 77,144.55
Zenaida V. Yu 8,579.00
Rizalino V. Vineza 8,579.00
------------------
Total P321,342.75
[15]



The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff
and against defendants, ordering defendants to pay to plaintiff the
amount of P291,342.76, as principal, with interest thereon at 20%
per annum, from date of default, until fully paid, plus P30,000.00
as attorneys fees, plus costs of suit.

Defendants counterclaims are ordered dismissed for lack of
merit.

SO ORDERED.
[16]


Ruling of the CA


All the defendants, except BMPI, appealed.

Spouses Donnina and Simon Halley, andRizalinoVieza defined the
following errors committed by the RTC, as follows:

I.
THE TRIAL COURT ERRED IN HOLDING APPELLANTS-
STOCKHOLDERS LIABLE FOR THE LIABILITIES OF THE
DEFENDANT CORPORATION.

II.
ASSUMING ARGUENDO THAT APPELLANTS MAY BE LIABLE
TO THE EXTENT OF THEIR UNPAID SUBSCRIPTION OF
SHARES OF STOCK, IF ANY, THE TRIAL COURT
NONETHELESS ERRED IN NOT FINDING THAT APPELLANTS-
STOCKHOLDERS HAVE, AT THE TIME THE SUIT WAS FILED,
NO SUCH UNPAID SUBSCRIPTIONS.

On their part, Spouses Albert and Zenaida Yu averred:

I.
THE RTC ERRED IN REFUSING TO GIVE CREDENCE AND
WEIGHT TO DEFENDANTS-APPELLANTS SPOUSES ALBERT
AND ZENAIDA YUS EXHIBITS 2 AND 3 DESPITE THE
UNREBUTTED TESTIMONY THEREON BY APPELLANT ALBERT
YU AND THE ABSENCE OF PROOF CONTROVERTING THEM.

II.
THE RTC ERRED IN HOLDING DEFENDANTS-APPELLANTS
SPOUSES ALBERT AND ZENAIDA YU PERSONALLY LIABLE
FOR THE CONTRACTUAL OBLIGATION OF BUSINESS MEDIA
PHILS., INC. DESPITE FULL PAYMENT BY SAID DEFENDANTS-
APPELLANTS OF THEIR RESPECTIVE SUBSCRIPTIONS TO THE
CAPITAL STOCK OF BUSINESS MEDIA PHILS., INC.

Roberto V. Cabrera, Jr. argued:

I.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO
APPLY THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE PERSONALITY IN ABSENCE OF ANY SHOWING
OF EXTRA-ORDINARY CIRCUMSTANCES THAT WOULD
JUSTIFY RESORT THERETO.

II.
IT IS GRAVE ERROR ON THE PART OF THE COURT A QUO TO
RULE THAT INDIVIDUAL DEFENDANTS ARE LIABLE TO PAY
THE PLAINTIFF-APPELLEES CLAIM BASED ON THEIR
RESPECTIVE SUBSCRIPTION. NOTWITHSTANDING
OVERWHELMING EVIDENCE SHOWING FULL SETTLEMENT
OF SUBSCRIBED CAPITAL BY THE INDIVIDUAL DEFENDANTS.


On August 14, 2002, the CA affirmed the RTC, holding that the defendants
resort to the corporate personality would createan injustice becausePrintwell would
thereby be at a loss against whom it would assert the right to collect, viz:

Settled is the rule that when the veil of corporate fiction is used
as a means of perpetrating fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes,
the achievements or perfection of monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers
and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an
aggregation of individuals (First Philippine International Bank vs.
Court of Appeals, 252 SCRA 259). Moreover, under this doctrine,
the corporate existence may be disregarded where the entity is
formed or used for non-legitimate purposes, such as to evade a just
and due obligations or to justify wrong (Claparols vs. CIR, 65 SCRA
613).

In the case at bench, it is undisputed that BMPI made several
orders on credit from appellee PRINTWELL involving the printing
of business magazines, wrappers and subscription cards, in the total
amount of P291,342.76 (Record pp. 3-5, Annex A) which facts
were never denied by appellants stockholders that they owe
appellee the amount of P291,342.76. The said goods were delivered
to and received by BMPI but it failed to pay its overdue account to
appellee as well as the interest thereon, at the rate of 20% per
annum until fully paid. It was also during this time that appellants
stockholders were in charge of the operation of BMPI despite the
fact that they were not able to pay their unpaid subscriptions to
BMPI yet greatly benefited from said transactions. In view of the
unpaid subscriptions, BMPI failed to pay appellee of its liability,
hence appellee in order to protect its right can collect from the
appellants stockholders regarding their unpaid subscriptions. To
deny appellee from recovering from appellants would place appellee
in a limbo on where to assert their right to collect from BMPI since
the stockholders who are appellants herein are availing the defense
of corporate fiction to evade payment of its obligations.
[17]



Further, the CA concurred with the RTC on theapplicability of thetrust fund
doctrine, under which corporate debtors might look to the unpaid subscriptions for
the satisfaction of unpaid corporate debts, stating thus:

It is an established doctrine that subscription to the capital
stock of a corporation constitute a fund to which creditors have a
right to look up to for satisfaction of their claims, and that the
assignee in insolvency can maintain an action upon any unpaid
stock subscription in order to realize assets for the payment of its
debts (PNB vs. Bitulok Sawmill, 23 SCRA 1366).

Premised on the above-doctrine, an inference could be made
that the funds, which consists of the payment of subscriptions of the
stockholders, is where the creditors can claim monetary
considerations for the satisfaction of their claims. If these funds
which ought to be fully subscribed by the stockholders were not
paid or remain an unpaid subscription of the corporation then the
creditors have no other recourse to collect from the corporation of
its liability. Such occurrence was evident in the case at bar wherein
the appellants as stockholders failed to fully pay their unpaid
subscriptions, which left the creditors helpless in collecting their
claim due to insufficiency of funds of the corporation. Likewise, the
claim of appellants that they already paid the unpaid subscriptions
could not be given weight because said payment did not reflect in
the Articles of Incorporations of BMPI that the unpaid
subscriptions were fully paid by the appellants stockholders. For it
is a rule that a stockholder may be sued directly by creditors to the
extent of their unpaid subscriptions to the corporation (Keller vs.
COB Marketing, 141 SCRA 86).

Moreover, a corporation has no power to release a subscription
or its capital stock, without valuable consideration for such releases,
and as against creditors, a reduction of the capital stock can take
place only in the manner and under the conditions prescribed by
the statute or the charter or the Articles of Incorporation. (PNB vs.
Bitulok Sawmill, 23 SCRA 1366).
[18]


The CAdeclared thatthe inconsistency in the issuance of the ORs rendered the
claim of full payment of the subscriptions to the capital stock unworthy of
consideration; andheld that the veil of corporate fiction could be pierced when it was
used as a shield to perpetrate a fraud or to confuse legitimate issues, to wit:

Finally, appellants SPS YU, argued that the fact of full
payment for the unpaid subscriptions was incontrovertibly
established by competent testimonial and documentary evidence,
namely Exhibits 1, 2, 3 & 4, which were never disputed by
appellee, clearly shows that they should not be held liable for
payment of the said unpaid subscriptions of BMPI.

The reliance is misplaced.

We are hereby reproducing the contents of the above-
mentioned exhibits, to wit:

Exh: 1 YU Official Receipt No. 217
dated November 5, 1987 amounting to P45,000.00 allegedly
representing the initial payment of subscriptions of
stockholder Albert Yu.
Exh: 2 YU Official Receipt No. 218 dated May 13,
1988 amounting to P135,000.00 allegedly representing full
payment of balance of subscriptions of stockholder Albert
Yu. (Record p. 352).
Exh: 3 YU Official Receipt No. 222
dated November 5, 1987 amounting to P5,000.00 allegedly
representing the initial payment of subscriptions of
stockholder Zenaida Yu.
Exh: 4 YU Official Receipt No. 223 dated May 13,
1988 amounting to P15,000.00 allegedly representing the
full payment of balance of subscriptions of stockholder
Zenaida Yu. (Record p. 353).

Based on the above exhibits, we are in accord with the lower
courts findings that the claim of the individual appellants that they
fully paid their subscription to the defendant BMPI is not worthy of
consideration, because, in the case of appellants SPS. YU, there is
an inconsistency regarding the issuance of the official receipt since
the alleged payment made on May 13, 1988 amounting
to P135,000.00 was covered by Official Receipt No. 218 (Record, p.
352), whereas the alleged payment made earlier on November 5,
1987 amounting to P5,000.00 is covered by Official Receipt No. 222
(Record, p. 353). Such issuance is a clear indication that said
receipts were belatedly issued just to suit their claim that they have
fully paid the unpaid subscriptions since in the ordinary course of
business, a receipt is issued earlier must have serial numbers lower
than those issued on a later date. But in the case at bar, the receipt
issued on November 5, 1987 had a serial number (222) higher than
those issued on May 13, 1988 (218). And even assuming arguendo
that the individual appellants have paid their unpaid subscriptions,
still, it is very apparent that the veil of corporate fiction may be
pierced when made as a shield to perpetuate fraud and/or confuse
legitimate issues. (Jacinto vs. Court of Appeals, 198 SCRA 211).
[19]


Spouses Halley and Vieza moved for a reconsideration, but the CA denied
their motion for reconsideration.




Issues


Only Donnina Halley has come to the Court to seek a further review, positing
the following for our consideration and resolution, to wit:

I.
THE COURT OF APPEALS ERRED IN AFFIRMING IN TOTO THE
DECISION THAT DID NOTSTATE THE FACTS AND THE LAW
UPON WHICH THE JUDGMENT WAS BASED BUT MERELY
COPIED THE CONTENTS OF RESPONDENTS MEMORANDUM
ADOPTING THE SAME AS THE REASON FOR THE DECISION

II.
THE COURT OF APPEALS ERRED IN AFFIRMING THE
DECISION OF THE REGIONAL TRIAL COURT WHICH
ESSENTIALLY ALLOWED THE PIERCING OF THE VEIL OF
CORPORATE FICTION

III.
THE HONORABLE COURT OF APPEALS ERRED IN APPLYING
THE TRUST FUND DOCTRINE WHEN THE GROUNDS
THEREFOR HAVE NOT BEEN SATISFIED.


On the first error, the petitioner contends that the RTC lifted verbatim from the
memorandum of Printwell; and submits that the RTCthereby violatedthe requirement
imposed in Section 14, Article VIII of the Constitution
[20]
as well as in Section 1,Rule
36 of the Rules of Court,
[21]
to the effect that a judgment or final order of a court
should state clearly and distinctly the facts and the law on which it is based. The
petitioner claims that the RTCs violation indicated that the RTC did not analyze the
case before rendering its decision, thus denying her the opportunity to analyze the
decision; andthat a suspicion of partiality arose from the fact that the RTC decision
was but a replica of Printwells memorandum.She cites Francisco v. Permskul,
[22]
in
which the Court has stated that the reason underlying the constitutional requirement,
that every decision should clearly and distinctly state the facts and the law on which it
is based, is to inform the reader of how the court has reached its decision and thereby
give the losing party an opportunity to study and analyze the decision and enable such
party to appropriately assign the errors committed therein on appeal.

On the second and third errors, the petitioner maintains that the CA and the
RTC erroneously pierced the veil of corporate fiction despite the absence of cogent
proof showing that she, as stockholder of BMPI, had any hand in transacting with
Printwell; thatthe CA and the RTC failed to appreciate the evidence that she had fully
paid her subscriptions; and the CA and the RTCwrongly relied on the articles of
incorporation in determining the current list of unpaid subscriptions despite
the articles of incorporationbeing at best reflectiveonly of the pre-incorporation
status of BMPI.

As her submissions indicate, the petitioner assails the decisions of the CA on: (a)
the propriety of disregarding the separate personalities of BMPI and its
stockholdersby piercing the thin veil that separated them; and (b) the application of
the trust fund doctrine.

Ruling


The petition for review fails.

I
The RTC did not violate
the Constitution and the Rules of Court


The contention of the petitioner, that the RTC merely copied the
memorandum of Printwell in writing its decision, and did not analyze the records on
its own, thereby manifesting a bias in favor of Printwell, is unfounded.

It is noted that the petition for review merely generally alleges that starting
from its page 5, the decision of the RTC copied verbatim the allegations of herein
Respondents in its Memorandum before the said court, as if the Memorandum was
the draft of the Decision of the Regional Trial Court of Pasig,
[23]
but fails to specify
either the portions allegedly lifted verbatim from the memorandum, or why she
regards the decision as copied. The omission renders thepetition for review
insufficient to support her contention, considering that the mere similarityin language
or thought between Printwells memorandum and the trial courts decisiondid not
necessarily justify the conclusion that the RTC simply lifted verbatim or copied from
thememorandum.

It is to be observed in this connection that a trial or appellate judge may
occasionally viewa partys memorandum or brief as worthy of due consideration
either entirely or partly. When he does so, the judgemay adopt and incorporatein his
adjudicationthe memorandum or the parts of it he deems suitable,and yet not be
guilty of the accusation of lifting or copying from the memorandum.
[24]
This isbecause
ofthe avowed objective of the memorandum to contribute in the proper illumination
and correct determination of the controversy.Nor is there anything untoward in the
congruence of ideas and views about the legal issues between himself and the party
drafting the memorandum.The frequency of similarities in argumentation,
phraseology, expression, and citation of authorities between the decisions of the
courts and the memoranda of the parties, which may be great or small, can be fairly
attributable tothe adherence by our courts of law and the legal profession to widely
knownor universally accepted precedents set in earlier judicial actions with identical
factual milieus or posing related judicial dilemmas.

We also do not agree with the petitioner that the RTCs manner of writing
the decisiondeprivedher ofthe opportunity to analyze its decisionas to be able to
assign errors on appeal. The contrary appears, considering that she was able to
impute and assignerrors to the RTCthat she extensively discussed in her appeal in the
CA, indicating her thorough analysis ofthe decision of the RTC.

Our own readingof the trial courts decision persuasively shows that the RTC
did comply with the requirements regarding the content and the manner of writing a
decision prescribed in the Constitution and the Rules of Court. The decision of the
RTC contained clear and distinct findings of facts, and stated the applicablelaw and
jurisprudence, fully explaining why the defendants were being held liable to the
plaintiff. In short, the reader was at once informed of the factual and legal reasons for
the ultimate result.

II
Corporate personality not to be used to foster injustice


Printwell impleaded the petitioner and the other stockholders of BMPI for
two reasons, namely: (a) to reach the unpaid subscriptions because it appeared that
such subscriptions were the remaining visible assets of BMPI; and (b) to avoid
multiplicity of suits.
[25]


The petitionersubmits that she had no participation in the transaction
between BMPI and Printwell;that BMPI acted on its own; and that shehad no hand in
persuading BMPI to renege on its obligation to pay. Hence, she should not be
personally liable.

We rule against the petitioners submission.

Although a corporation has a personality separate and distinct from those of
its stockholders, directors, or officers,
[26]
such separate and distinct personality is
merely a fiction created by law for the sake of convenience and to promote the ends of
justice.
[27]
The corporate personality may be disregarded, and the individuals
composing the corporation will be treated as individuals, if the corporate entity is
being used as a cloak or cover for fraud or illegality;as a justification for a wrong; as
an alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.
[28]
As a general rule, a corporation is looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. Thus,the courts always
presume good faith, andfor that reason accord prime importance to the separate
personality of the corporation, disregarding the corporate personality only after the
wrongdoing is first clearly and convincingly established.
[29]
It thus behooves the courts
to be careful in assessing the milieu where the piercing of the corporate veil shall be
done.
[30]


Although nowhere in Printwells amended complaint or in the testimonies
Printwell offered can it be read or inferred from that the petitioner was instrumental
in persuading BMPI to renege onits obligation to pay; or that sheinduced Printwell to
extend the credit accommodation by misrepresenting the solvency of BMPI
toPrintwell, her personal liability, together with that of her co-defendants,
remainedbecause the CA found her and the other defendant stockholders to be in
charge of the operations of BMPI at the time the unpaid obligation was transacted and
incurred, to wit:
In the case at bench, it is undisputed that BMPI made
several orders on credit from appellee PRINTWELL involving the
printing of business magazines, wrappers and subscription cards, in
the total amount of P291,342.76 (Record pp. 3-5, Annex A) which
facts were never denied by appellants stockholders that they
owe(d) appellee the amount of P291,342.76. The said goods were
delivered to and received by BMPI but it failed to pay its overdue
account to appellee as well as the interest thereon, at the rate of
20% per annum until fully paid. It was also during this time that
appellants stockholders were in charge of the operation of BMPI
despite the fact that they were not able to pay their unpaid
subscriptions to BMPI yet greatly benefited from said transactions.
In view of the unpaid subscriptions, BMPI failed to pay appellee of
its liability, hence appellee in order to protect its right can collect
from the appellants stockholders regarding their unpaid
subscriptions. To deny appellee from recovering from appellants
would place appellee in a limbo on where to assert their right to
collect from BMPI since the stockholders who are appellants herein
are availing the defense of corporate fiction to evade payment of its
obligations.
[31]



It follows, therefore, that whether or not the petitioner persuaded BMPI to
renege on its obligations to pay, and whether or not she induced Printwell to transact
with BMPI were not gooddefensesin the suit.

III
Unpaid creditor may satisfy its claim from
unpaid subscriptions;stockholders must
prove full payment oftheir subscriptions


Both the RTC and the CA applied the trust fund doctrineagainst the
defendant stockholders, including the petitioner.

The petitionerargues, however,that the trust fund doctrinewas
inapplicablebecause she had already fully paid her subscriptions to the capital stock of
BMPI. She thus insiststhat both lower courts erred in disregarding the evidence on
the complete payment of the subscription, like receipts, income tax returns, and
relevant financial statements.

The petitioners argumentis devoid of substance.

The trust fund doctrineenunciates a

xxx rule that the property of a corporation is a trust fund for
the payment of creditors, but such property can be called a trust
fund only by way of analogy or metaphor. As between the
corporation itself and its creditors it is a simple debtor, and as
between its creditors and stockholders its assets are in equity a fund
for the payment of its debts.
[32]


The trust fund doctrine, first enunciated in the American case of Wood v.
Dummer,
[33]
was adopted in our jurisdiction in Philippine Trust Co. v.
Rivera,
[34]
where thisCourt declared that:

It is established doctrine that subscriptions to the capital of a
corporation constitute a fund to which creditors have a right to look
for satisfaction of their claims and that the assignee in insolvency
can maintain an action upon any unpaid stock subscription in order
to realize assets for the payment of its debts. (Velasco vs. Poizat, 37
Phil., 802) xxx
[35]


We clarify that the trust fund doctrineis not limited to reaching the
stockholders unpaid subscriptions. The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock, but also other property and assets
generally regarded in equity as a trust fund for the payment of corporate debts.
[36]
All
assets and property belonging to the corporation held in trust for the benefit of
creditors thatwere distributed or in the possession of the stockholders, regardless of
full paymentof their subscriptions, may be reached by the creditor in satisfaction of its
claim.

Also, under the trust fund doctrine,a corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation of paying for his
shares, in whole or in part,
[37]
without a valuable consideration,
[38]
or fraudulently, to
the prejudice of creditors.
[39]
The creditor is allowed to maintain an action upon any
unpaid subscriptions and thereby steps into the shoes of the corporation for the
satisfaction of its debt.
[40]
To make out a prima facie case in a suit against
stockholders of an insolvent corporation to compel them to contribute to the payment
of its debts by making good unpaid balances upon their subscriptions, it is only
necessary to establish that thestockholders have not in good faith paid the par value of
the stocks of the corporation.
[41]


The petitionerposits that the finding of irregularity attending the issuance of
the receipts (ORs) issued to the other stockholders/subscribers should not affect her
becauseher receipt did not suffer similar irregularity.

Notwithstanding that the RTC and the CA did not find any irregularity in the
OR issued in her favor,we still cannot sustain the petitioners defense of full payment
of her subscription.

In civil cases, theparty who pleads payment has the burden of proving it, that
even where the plaintiff must allege nonpayment, the general rule is that the burden
rests on the defendant to prove payment, rather than on the plaintiff to prove
nonpayment. In other words, the debtor bears the burden of showing with legal
certainty that the obligation has been discharged by payment.
[42]


Apparently, the petitioner failed to discharge her burden.

A receipt is the written acknowledgment of the fact of payment in money or
other settlement between the seller and the buyer of goods, thedebtor or thecreditor,
or theperson rendering services, and theclient or thecustomer.
[43]
Althougha receipt is
the best evidence of the fact of payment, it isnot conclusive, but merely
presumptive;nor is it exclusive evidence,considering thatparole evidence may also
establishthe fact of payment.
[44]


The petitioners ORNo. 227,presentedto prove the payment of the balance of
her subscription, indicated that her supposed payment had beenmade by means of a
check. Thus, to discharge theburden to prove payment of her subscription, she had to
adduce evidence satisfactorily proving that her payment by check wasregardedas
payment under the law.

Paymentis defined as the delivery of money.
[45]
Yet, because a check is not
money and only substitutes for money, the delivery of a check does not operate as
payment and does not discharge the obligation under a judgment.
[46]
The delivery of a
bill of exchange only produces the fact of payment when the bill has been
encashed.
[47]
The following passage fromBank of Philippine Islands v. Royeca
[48]
is
enlightening:

Settled is the rule that payment must be made in legal
tender. A check is not legal tender and, therefore, cannot
constitute a valid tender of payment. Since a negotiable
instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself,
operate as payment. Mere delivery of checks does not
discharge the obligation under a judgment. The obligation
is not extinguished and remains suspended until the
payment by commercial document is actually realized.

To establish their defense, the respondents
therefore had to present proof, not only that they
delivered the checks to the petitioner, but also that the
checks were encashed. The respondents failed to do so. Had
the checks been actually encashed, the respondents could
have easily produced the cancelled checks as evidence to
prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed
because they were not notified of the dishonor of the
checks and three years had already lapsed since they
issued the checks.

Because of this failure of the respondents to present
sufficient proof of payment, it was no longer necessary for the
petitioner to prove non-payment, particularly proof that the checks
were dishonored. The burden of evidence is shifted only if the party
upon whom it is lodged was able to adduce preponderant evidence
to prove its claim.

Ostensibly, therefore, the petitioners mere submission of the receipt issued
in exchange of the check did not satisfactorily establish her allegation of full payment
of her subscription. Indeed, she could not even inform the trial court about the
identity of her drawee bank,
[49]
and about whether the check was cleared and its
amount paid to BMPI.
[50]
In fact, she did not present the check itself.

Theincome tax return (ITR) and statement of assets and liabilities of BMPI,
albeit presented, had no bearing on the issue of payment of the subscription because
they did not by themselves prove payment. ITRsestablish ataxpayers liability for
taxes or a taxpayers claim for refund. In the same manner, the deposit slips and
entries in the passbook issued in the name of BMPI were hardly relevant due to their
not reflecting the alleged payments.

It is notable, too, that the petitioner and her co-stockholders did not support
their allegation of complete payment of their respective subscriptions with the stock
and transfer book of BMPI. Indeed, books and records of a corporation (including the
stock and transfer book) are admissible in evidence in favor of or against the
corporation and its members to prove the corporate acts, its financial status and other
matters (like the status of the stockholders), and are ordinarily the best evidence of
corporate acts and proceedings.
[51]
Specifically, a stock and transfer book is necessary
as a measure of precaution, expediency, and convenience because it provides the only
certain and accurate method of establishing the various corporate acts and
transactions and of showing the ownership of stock and like matters.
[52]
That she
tendered no explanation why the stock and transfer book was not presented warrants
the inference that the book did not reflect the actual payment of her subscription.

Nor did the petitioner present any certificate of stock issued by BMPI to her.
Such a certificate covering her subscription might have been a reliable evidence of full
payment of the subscriptions, considering that under Section 65 of the Corporation
Code a certificate of stock issues only to a subscriber who has fully paid his
subscription. The lack of any explanation for the absence of a stock certificate in her
favor likewise warrants an unfavorable inference on the issue of payment.

Lastly, the petitioner maintains that both lower courts erred in relying on
the articles of incorporationas proof of the liabilities of the stockholders subscribing
to BMPIs stocks, averring that the articles of incorporationdid not reflect the latest
subscription status of BMPI.

Although the articles of incorporation may possibly reflect only the pre-
incorporation status of a corporation, the lower courts reliance on that document to
determine whether the original subscribersalready fully paid their subscriptions or
not was neither unwarranted nor erroneous. As earlier explained, the burden of
establishing the fact of full payment belonged not to Printwell even if it was the
plaintiff, but to the stockholders like the petitioner who, as the defendants, averredfull
payment of their subscriptions as a defense. Their failure to substantiate their
averment of full payment, as well as their failure to counter the reliance on the recitals
found in the articles of incorporation simply meant their failure or inability to
satisfactorily prove their defense of full payment of the subscriptions.

To reiterate, the petitionerwas liablepursuant to the trust fund doctrine for
the corporate obligation of BMPI by virtue of her subscription being still unpaid.
Printwell, as BMPIs creditor,had a right to reachher unpaid subscription in
satisfaction of its claim.

IV
Liability of stockholders for corporate debts isup
to the extentof their unpaid subscription


The RTC declared the stockholders pro rata liable for the debt(based on the
proportion to their shares in the capital stock of BMPI); and held the
petitionerpersonally liable onlyin the amount ofP149,955.65.

We do not agree. The RTC lacked the legal and factual support for its
prorating the liability. Hence, we need to modify the extent of the petitioners
personal liability to Printwell. The prevailing rule is that a stockholder is personally
liable for the financial obligations of the corporation to the extent of his unpaid
subscription.
[53]
In view ofthe petitioners unpaid subscription being
worth P262,500.00, shewas liable up to that amount.

Interest is also imposable on the unpaid obligation. Absent any stipulation,
interest is fixed at 12% per annum from the date the amended complaint was filed on
February 8, 1990 until the obligation (i.e., to the extent of the petitioners personal
liability of P262,500.00) is fully paid.
[54]


Lastly, we find no basis togrant attorneys fees, the award for which must be
supported by findings of fact and of law as provided under Article 2208 of the Civil
Code
[55]
incorporated in the body of decision of the trial court. The absence of the
requisite findings from the RTC decision warrants the deletion of the attorneys fees.

ACCORDINGLY, we deny the petition for review on certiorari;and affirm
with modification the decision promulgated on August 14, 2002by ordering the
petitionerto pay to Printwell, Inc. the sum ofP262,500.00, plus interest of 12% per
annum to be computed from February 8, 1990 until full payment.

The petitioner shall paycost of suit in this appeal.

SO ORDERED.


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.
R E S O L U T I O N
CORONA, J.:
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 Courts
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.
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 Pre-Subscription
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 Vice-President and
Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story 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 P 570,690 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
FLADCs 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 FLADCs 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.
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 Pre-Subscription 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.[9]
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 FLADCs
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 FLADCs 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 Courts 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 be highly 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.
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 re-study 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-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.
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 (50-50)
shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized
capital stock was thus increased from 500,000 shares to 2,000,000 shares with a par
value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to
549,800 more shares in addition to their 450,200 shares to complete 1,000,000
shares. Thus, the subject matter of the contract was the 1,000,000 unissued shares of
FLADC stock allocated to the Ongs. Since these were unissued shares, the parties Pre-
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 shareholders 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 Pre-Subscription 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 officers 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 two-thirds of the outstanding
capital stock was secured. There was no revised treasurers 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 corporations 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 FLADCs
directors and stockholders is a violation of the business judgment rule which states
that:
xxx xxx xxx (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 Pre-
Subscription 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 square-meter lot because
no title for it could be issued in FLADCs 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, (Chairman), Quisumbing, and Callejo, Sr., JJ., concur.