FIRST DIVISION

G.R. Nos. 172045-46 June 16, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
FIRST EXPRESS PAWNSHOP COMPANY, INC., Respondent.
D E C I S I O N
CARPIO, J .:
The Case
The Commissioner of Internal Revenue (petitioner) filed this Petition for Review
1
to reverse the Court of
Tax Appeals Decision
2
dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62. In
the assailed decision, the Court of Tax Appeals (CTA) En Banc partially reconsidered the CTA First
Divisions Decision
3
dated 24 September 2004.
The Facts
On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera of Revenue
Region 6 Manila, issued the following assessment notices against First Express Pawnshop Company, Inc.
(respondent):
a. Assessment No. 31-1-98
4
for deficiency income tax of P20,712.58 with compromise penalty of P3,000;
b. Assessment No. 31-14-000053-98
5
for deficiency value-added tax (VAT) of P601,220.18 with
compromise penalty of P16,000;
c. Assessment No. 31-14-000053-98
6
for deficiency documentary stamp tax (DST) of P12,328.45 on
deposit on subscription with compromise penalty of P2,000; and
d. Assessment No. 31-1-000053-98
7
for deficiency DST of P62,128.87 on pawn tickets with compromise
penalty of P8,500.
Respondent received the assessment notices on 3 January 2002. On 1 February 2002, respondent filed its
written protest on the above assessments. Since petitioner did not act on the protest during the 180-day
period,
8
respondent filed a petition before the CTA on 28 August 2002.
9

Respondent contended that petitioner did not consider the supporting documents on the interest expenses
and donations which resulted in the deficiency income tax.
10
Respondent maintained that pawnshops are
not lending investors whose services are subject to VAT, hence it was not liable for deficiency VAT.
11

Respondent also alleged that no deficiency DST was due because Section 180
12
of the National Internal
Revenue Code (Tax Code) does not cover any document or transaction which relates to respondent.
Respondent also argued that the issuance of a pawn ticket did not constitute a pledge under Section 195
13

of the Tax Code.
14

In its Answer filed before the CTA, petitioner alleged that the assessment was valid and correct and the
taxpayer had the burden of proof to impugn its validity or correctness. Petitioner maintained that
respondent is subject to 10% VAT based on its gross receipts pursuant to Republic Act No. 7716, or the
Expanded Value-Added Tax Law (EVAT). Petitioner also cited BIR Ruling No. 221-91 which provides
that pawnshop tickets are subject to DST.
15

On 1 July 2003, respondent paid P27,744.88 as deficiency income tax inclusive of interest.
16

After trial on the merits, the CTA First Division ruled, thus:
IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY GRANTED.
Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in the amount of Sixty-Two
Thousand One Hundred Twenty-Eight Pesos and 87/100 (P62,128.87) and Assessment No. 31-14-
000053-98 for deficiency documentary stamp tax on deposits on subscription in the amount of Twelve
Thousand Three Hundred Twenty-Eight Pesos and 45/100 (P12,328.45) are CANCELLED and SET
ASIDE. However, Assessment No. 31-14-000053-98 is hereby AFFIRMED except the imposition of
compromise penalty in the absence of showing that petitioner consented thereto (UST vs. Collector, 104
SCRA 1062; Exquisite Pawnshop Jewelry, Inc. vs. Jaime B. Santiago, et al., supra).
Accordingly petitioner is ORDERED to PAY the deficiency value added tax in the amount of Six
Hundred One Thousand Two Hundred Twenty Pesos and 18/100 (P601,220.18) inclusive of deficiency
interest for the year 1998. In addition, petitioner is ORDERED to PAY 25% surcharge and 20%
delinquency interest per annum from February 12, 2002 until fully paid pursuant to Sections 248 and 249
of the 1997 Tax Code.
SO ORDERED.
17
(Boldfacing in the original)
Both parties filed their Motions for Reconsideration which were denied by the CTA First Division for lack
of merit. Thereafter, both parties filed their respective Petitions for Review under Section 11 of Republic
Act No. 9282 (RA 9282) with the CTA En Banc.
18

On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondents liability to pay the
VAT and ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found that
respondents deposit on subscription was not subject to DST.
19

Aggrieved by the CTA En Bancs Decision which ruled that respondents deposit on subscription was not
subject to DST, petitioner elevated the case before this Court.
The Ruling of the Court of Tax Appeals
On the taxability of deposit on subscription, the CTA, citing First Southern Philippines Enterprises, Inc.
v. Commissioner of Internal Revenue,
20
pointed out that deposit on subscription is not subject to DST in
the absence of proof that an equivalent amount of shares was subscribed or issued in consideration for the
deposit. Expressed otherwise, deposit on stock subscription is not subject to DST if: (1) there is no
agreement to subscribe; (2) there are no shares issued or any additional subscription in the restructuring
plan; and (3) there is no proof that the issued shares can be considered as issued certificates of stock.
21

The CTA ruled that Section 175
22
of the Tax Code contemplates a subscription agreement. The CTA
explained that there can be subscription only with reference to shares of stock which have been unissued,
in the following cases: (a) the original issuance from authorized capital stock at the time of incorporation;
(b) the opening, during the life of the corporation, of the portion of the original authorized capital stock
previously unissued; or (c) the increase of authorized capital stock achieved through a formal amendment
of the articles of incorporation and registration of the articles of incorporation with the Securities and
Exchange Commission.
23

The CTA held that in this case, there was no subscription or any contract for the acquisition of unissued
stock for P800,000 in the taxable year assessed. The General Information Sheet (GIS) of respondent
showed only a capital structure of P500,000 as Subscribed Capital Stock and P250,000 as Paid-up Capital
Stock and did not include the assessed amount. Mere reliance on the presumption that the assessment was
correct and done in good faith was unavailing vis--vis the evidence presented by respondent. Thus, the
CTA ruled that the assessment for deficiency DST on deposit on subscription has not become final.
24

The Issue
Petitioner submits this sole issue for our consideration: whether the CTA erred on a question of law in
disregarding the rule on finality of assessments prescribed under Section 228 of the Tax Code. Corollarily,
petitioner raises the issue on whether respondent is liable to pay P12,328.45 as DST on deposit on
subscription of capital stock.
The Ruling of the Court
Petitioner contends that the CTA erred in disregarding the rule on the finality of assessments prescribed
under Section 228 of the Tax Code.
25
Petitioner asserts that even if respondent filed a protest, it did not
offer evidence to prove its claim that the deposit on subscription was an "advance" made by respondents
stockholders.
26
Petitioner alleges that respondents failure to submit supporting documents within 60 days
from the filing of its protest as required under Section 228 of the Tax Code caused the assessment of
P12,328.45 for deposit on subscription to become final and unassailable.
27

Petitioner alleges that revenue officers are afforded the presumption of regularity in the performance of
their official functions, since they have the distinct opportunity, aside from competence, to peruse records
of the assessments. Petitioner invokes the principle that by reason of the expertise of administrative
agencies over matters falling under their jurisdiction, they are in a better position to pass judgment
thereon; thus, their findings of fact are generally accorded great respect, if not finality, by the courts.
Hence, without the supporting documents to establish the non-inclusion from DST of the deposit on
subscription, petitioners assessment pursuant to Section 228 of the Tax Code had become final and
unassailable.
28

Respondent, citing Standard Chartered Bank-Philippine Branches v. Commissioner of Internal Revenue,
29

asserts that the submission of all the relevant supporting documents within the 60-day period from filing
of the protest is directory.
Respondent claims that petitioner requested for additional documents in petitioners letter dated 12 March
2002, to wit: (1) loan agreement from lender banks; (2) official receipts of interest payments issued to
respondent; (3) documentary evidence to substantiate donations claimed; and (4) proof of payment of DST
on subscription.
30
It must be noted that the only document requested in connection with respondents DST
assessment on deposit on subscription is proof of DST payment. However, respondent could not produce
any proof of DST payment because it was not required to pay the same under the law considering that the
deposit on subscription was an advance made by its stockholders for future subscription, and no stock
certificates were issued.
31
Respondent insists that petitioner could have issued a subpoena requiring
respondent to submit other documents to determine if the latter is liable for DST on deposit on
subscription pursuant to Section 5(c) of the Tax Code.
32

Respondent argues that deposit on future subscription is not subject to DST under Section 175 of the Tax
Code. Respondent explains:
It must be noted that deposits on subscription represent advances made by the stockholders and are in the
nature of liabilities for which stocks may be issued in the future. Absent any express agreement between
the stockholders and petitioner to convert said advances/deposits to capital stock, either through a
subscription agreement or any other document, these deposits remain as liabilities owed by respondent to
its stockholders. For these deposits to be subject to DST, it is necessary that a conversion/subscription
agreement be made by First Express and its stockholders. Absent such conversion, no DST can be
imposed on said deposits under Section 175 of the Tax Code.
33
(Underscoring in the original)
Respondent contends that by presenting its GIS and financial statements, it had already sufficiently proved
that the amount sought to be taxed is deposit on future subscription, which is not subject to DST.
34

Respondent claims that it cannot be required to submit proof of DST payment on subscription because
such payment is non-existent. Thus, the burden of proving that there was an agreement to subscribe and
that certificates of stock were issued for the deposit on subscription rests on petitioner and his examiners.
Respondent states that absent any proof, the deficiency assessment has no basis and should be cancelled.
35

On theTaxabilityof Deposit on Stock Subscription
DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance,
assignment, sale or transfer of an obligation, right or property incident thereto. DST is actually an excise
tax because it is imposed on the transaction rather than on the document.
36
DST is also levied on the
exercise by persons of certain privileges conferred by law for the creation, revision, or termination of
specific legal relationships through the execution of specific instruments.
37
The Tax Code provisions on
DST relating to shares or certificates of stock state:
Section 175. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on
organization, reorganization or for any lawful purpose, of shares of stock by any association, company or
corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred
pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the
case of the original issue of shares of stock without par value the amount of the documentary stamp tax
herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock:
Provided, further, That in the case of stock dividends, on the actual value represented by each share.
38

Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Due-
bills, Certificates of Obligation, or Shares or Certificates of Stock. - On all sales, or agreements to sell, or
memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or
certificates of stock in any association, company or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of
transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of
obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill,
certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty
centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such
due-bill, certificate of obligation or stock: Provided, That only one tax shall be collected on each sale or
transfer of stock or securities from one person to another, regardless of whether or not a certificate of
stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: And provided,
further, That in the case of stock without par value the amount of the documentary stamp tax herein
prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the
original issue of said stock.
39

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an
excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock. In
Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,
40
this Court explained that the
DST attaches upon acceptance of the stockholders subscription in the corporations capital stock
regardless of actual or constructive delivery of the certificates of stock. Citing Philippine Consolidated
Coconut Ind., Inc. v. Collector of Internal Revenue,
41
the Court held:
The documentary stamp tax under this provision of the law may be levied only once, that is upon the
original issue of the certificate. The crucial point therefore, in the case before Us is the proper
interpretation of the word issue. In other words, when is the certificate of stock deemed issued for the
purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are printed, at
the time they are filled up (in whose name the stocks represented in the certificate appear as certified by
the proper officials of the corporation), at the time they are released by the corporation, or at the time they
are in the possession (actual or constructive) of the stockholders owning them?
x x x
Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the
corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the
attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the dividends
or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. The
certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive
possession of the stockholder, is considered issued because it is with value and hence the documentary
stamp tax must be paid as imposed by Section 212 of the National Internal Revenue Code, as amended.
In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of sales,
deliveries or transfer of shares or certificates of stock in any association, company, or corporation, or
transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the
benefit of such certificates of stock, or to secure the future payment of money, or for the future transfer of
certificates of stock. In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue,
this Court held that under Section 176 of the Tax Code, sales to secure the future transfer of due-bills,
certificates of obligation or certificates of stock are subject to documentary stamp tax.
42

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate stock
documentary stamp tax program. RMO 08-98 states that:
1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return, if
applicable when DST is still due on the subscribed share issued by the corporation, on or before the
tenth day of the month following publication of this Order.
x x x
3. All existing corporations with authorization for increased capital stock shall file their Corporate Stock
DST Declaration, together with the DST Return, if applicable when DST is due on subscriptions made
after the authorization, on or before the tenth day of the month following the date of authorization.
(Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that what is
being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the
shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and
may exercise attributes of ownership over the stocks.
As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement
in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for
the acquisition of unissued stocks in an existing corporation or a corporation still to be formed.
43
A stock
subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital
stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same.
44

In this case, respondents Stockholders Equity section of its Balance Sheet as of 31 December 1998
45

shows:
Stockholders Equity 1998 1997
Authorized Capital Stock P 2,000,000.00 P 2,000,000.00
Paid-up Capital Stock 250,000.00 250,000.00
Deposit on Subscription 800,000.00
Retained Earnings 62,820.34 209,607.20
Net Income (858,498.38) (146,786.86)
Total P 254,321.96 P 312,820.34
The GIS submitted to the Securities and Exchange Commission on 31 March 1999 shows the following
Capital Structure:
46

B. Financial Profile
1. Capital Structure :
AUTHORIZED - P2,000,000.00
SUBSCRIBED - 500,000.00
PAID-UP - 250,000.00
These entries were explained by Miguel Rosario, Jr. (Rosario), respondents external auditor, during the
hearing before the CTA on 11 June 2003. Rosario testified in this wise:
Atty. Napiza
Q. Mr. Rosario, I refer you to the balance sheet of First Express for the year 1998 particularly the entry of
deposit on subscription in the amount of P800 thousand, will you please tell us what is (sic) this entry
represents?
Mr. Rosario Jr.
A. This amount of P800 thousand represents the case given by the stockholders to the company but
does not necessarily made (sic) payment to subscribed portion.
Atty. Napiza
Q. What is (sic) that payment stands for?
Mr. Rosario Jr.
A. This payment stands as (sic) for the deposit for future subscription.
Atty. Napiza
Q. Would you know if First Express issued corresponding shares pertinent to the amount being deposited?
Mr. Rosario Jr.
A. No.
Atty. Napiza
Q. What do you mean by no? Did they or they did not?
Mr. Rosario Jr.
A. They did not issue any shares because that is not the payment of subscription. That is just a mere
deposit.
Atty. Napiza
Q. Would you know, Mr. Rosario, how much is the Subscribed Capital of First Express Pawnshop?
Mr. Rosario Jr.
A. The Subscribed Capital of First Express Pawnshop Company, Inc. for the year 1998 is P500 thousand.
Atty. Napiza
Q. How about the Paid Up Capital?
Mr. Rosario Jr.
A. The Paid Up Capital is P250 thousand.
Atty. Napiza
Q. Are (sic) all those figures appear in the balance sheet?
Mr. Rosario Jr.
A. The Paid Up Capital appeared here but the Subscribed Portion was not stated. (Boldfacing supplied)
Based on Rosarios testimony and respondents financial statements as of 1998, there was no agreement to
subscribe to the unissued shares. Here, the deposit on stock subscription refers to an amount of money
received by the corporation as a deposit with the possibility of applying the same as payment for the future
issuance of capital stock.
47
In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,
48

we held:
We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp
tax only on those stock certificates duly issued, or wherein the stockholders can freely exercise the
attributes of ownership and with value at the time they are originally issued. As regards those certificates
of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when
released from said conditions, for then and only then shall they truly acquire any practical value for
their owners.lavvphil (Boldfacing supplied)
Clearly, the deposit on stock subscription as reflected in respondents Balance Sheet as of 1998 is not a
subscription agreement subject to the payment of DST. There is no P800,000 worth of subscribed capital
stock that is reflected in respondents GIS. The deposit on stock subscription is merely an amount of
money received by a corporation with a view of applying the same as payment for additional issuance of
shares in the future, an event which may or may not happen. The person making a deposit on stock
subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights
or other prerogatives and attributes of a stockholder. Hence, respondent is not liable for the payment of
DST on its deposit on subscription for the reason that there is yet no subscription that creates rights and
obligations between the subscriber and the corporation.
On the Finality of Assessment as Prescribed
under Section 228 of theTax Code
Section 228 of the Tax Code provides:
SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided,
however, That a preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted
by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a
taxable period was determined to have carried over and automatically applied the same amount claimed
against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-
exempt persons.
The taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to
respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the assessment shall become
final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the
Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one
hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable.
(Boldfacing supplied)
Section 228 of the Tax Code
49
provides the remedy to dispute a tax assessment within a certain period of
time. It states that an assessment may be protested by filing a request for reconsideration or reinvestigation
within 30 days from receipt of the assessment by the taxpayer. Within 60 days from filing of the protest,
all relevant supporting documents shall have been submitted; otherwise, the assessment shall become
final.
In this case, respondent received the tax assessment on 3 January 2002 and it had until 2 February 2002 to
submit its protest. On 1 February 2002, respondent submitted its protest and attached the GIS and Balance
Sheet as of 31 December 1998. Respondent explained that it received P800,000 as a deposit with the
possibility of applying the same as payment for the future issuance of capital stock.
Within 60 days from the filing of protest or until 2 April 2002, respondent should submit relevant
supporting documents. Respondent, having submitted the supporting documents together with its
protest, did not present additional documents anymore.
In a letter dated 12 March 2002, petitioner requested respondent to present proof of payment of DST on
subscription. In a letter-reply, respondent stated that it could not produce any proof of DST payment
because it was not required to pay DST under the law considering that the deposit on subscription was an
advance made by its stockholders for future subscription, and no stock certificates were issued.
Since respondent has not allegedly submitted any relevant supporting documents, petitioner now claims
that the assessment has become final, executory and demandable, hence, unappealable.
We reject petitioners view that the assessment has become final and unappealable. It cannot be said that
respondent failed to submit relevant supporting documents that would render the assessment final because
when respondent submitted its protest, respondent attached the GIS and Balance Sheet. Further, petitioner
cannot insist on the submission of proof of DST payment because such document does not exist as
respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription.
The term "relevant supporting documents" should be understood as those documents necessary to support
the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the
taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents
should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the
production of documents that a taxpayer cannot submit.1awphi1
After respondent submitted its letter-reply stating that it could not comply with the presentation of the
proof of DST payment, no reply was received from petitioner.
Section 228 states that if the protest is not acted upon within 180 days from submission of documents, the
taxpayer adversely affected by the inaction may appeal to the CTA within 30 days from the lapse of the
180-day period. Respondent, having submitted its supporting documents on the same day the protest was
filed, had until 31 July 2002 to wait for petitioners reply to its protest. On 28 August 2002 or within 30
days after the lapse of the 180-day period counted from the filing of the protest as the supporting
documents were simultaneously filed, respondent filed a petition before the CTA.
Respondent has complied with the requisites in disputing an assessment pursuant to Section 228 of the
Tax Code. Hence, the tax assessment cannot be considered as final, executory and demandable. Further,
respondents deposit on subscription is not subject to the payment of DST. Consequently, respondent is
not liable to pay the deficiency DST of P12,328.45.
Wherefore, we DENY the petition. We AFFIRM the Court of Tax Appeals Decision dated 24 March
2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62.
SO ORDERED.














G.R. No. L-4824 June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant,
vs.
IRINEO BALTAZAR, defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-6244 June 30, 1953
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee,
vs.
IRINEO BALTAZAR, defendant and appellant.
Manuel L. Fernandez for appellant.
Sofronio C. Quimson and daniel C. Macaraeg for appellee.
MONTEMAYOR, J .:
These two cases here on appeal stem from the same case, that of civil case No. 10944 of the Court of First
Instance of Pangasinan. From the trial court's decision, plaintiff Lingayen Gulf Electric Power Company,
Inc. appealed directly to this court under G.R. No. L-4824. Defendant Irineo Baltazar appealed to the
Court of Appeals. By a resolution of that appellate tribunal, the appeal was certified to this court pursuant
to section 17, (5) and (6) of the Judiciary Act of 1948, and is now listed here under G.R. No. L-6344.
The main facts of the case are not disputed, and we are reproducing and making our own the relation of
facts contained in the decision appealed from.
The plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an authorized capital
stock of P300,000 divided into 3,000 shares with a par value of P100 per share. The defendant, Irineo
Baltazar appears to have subscribed for 600 shares on account of which he had paid upon the organization
of the corporation the sum of P15,000. (See Exhibit A, page 2). After incorporation, the defendant made
further payments on account of his subscription, leaving a balance of P18,500 unpaid for, which amount,
the plaintiff now claims in this action.
On July 23, 1946, a majority of the stockholders of the corporation, among them the herein defendant,
held a meeting and adopted stockholders' resolution No. 17. By said resolution, it was agreed upon by the
stockholders present to call the balance of all unpaid subscribed capital stock as of July 23, 1946, the first
50 per cent payable within 60 days beginnning August 1, 1946, and the remaining 50 per cent payable
within 60 days beginning October 1, 1946. The resolution also provided, that all unpaid subscription after
the due dates of both calls would be subject to 12 per cent interest per annum. Lastly, the resolution
provided, that after the expiration of 60 days' grace which would be on December 1, 1946, for the first
call, and on February 1, 1947, for the second call, all subscribed stocks remaining unpaid would revert to
the corporation. (See Exhibit F and Exhibit I).
On September 22, 1946, the plaintiff corporation wrote a letter to the defendant reminding him that the
first 50 per cent of his unpaid subscription would be due on October 1, 1946. The plaintiff requested the
defendant to "kindly advise the company thru the undersigned your decision regarding this matter." (See
Exhibit 4). The defendant answered on September 25, 1946, asking the corporation that he be allowed to
pay his unpaid subscription by February 1, 1947. In his answer, the defendant also agreed that if he could
not pay the balance of his subscription by February 1, 1947, his unpaid subscription would be reverted to
the corporation. (See Exhibit 5).
On December 19, 1947, the defendant wrote another letter to the members of the Board of Directors of the
plaintiff corporation, offering to withdraw completely from the corporation by selling out to the
corporation all his shares of stock in the total amount of P23,000. (See Exhibit 8). Apparently this offer of
the defendant was left unacted upon by the plaintiff.
On April 17, 1948, the Board of Directors of the plaintiff corporation held a meeting, and in the course of
the said meeting they adopted Resolution No. 17. This resolution in effect set aside the stockholders
resolution approved on June 23, 1946 (Exhibit D), on the ground that said stockholders' resolution was
null and void, and because the plaintiff corporation was not in a financial position to absorb the unpaid
balance of the subscribed capital stock. At the said meeting the directors also decided to call 50 per cent of
the unpaid subscription within 30 days from April 17, 1948, the call payable within 60 days from receipt
of notice from the Secretary-Treasurer. This resolution also authorized legal counsel of the company to
take all the necessary legal steps for the collection of the payment of the call. (See Exhibit E-2).
On June 10, 1949, the stockholders of the corporation held another meeting in which the stockholders
were all present, either in person or by proxy. At such meeting, the stockholders adopted resolution No. 4,
whereby it was agreed to revalue the stocks and assets of the company so as to attract outside investors to
put in money for the rehabilitation of the company. The president was authorized to make all arrangement
for such appraisal and the Secretary to call a meeting upon completion of the reassessment. (See Exhibit
2).
It was admitted by the defendant that he received notice from the Secretary-Treasurer of the company,
demanding payment of the unpaid balance of his subscription. It was agreed by the parties that the call of
the Board of Directors was not published in a newspaper of general circulation as required by section 40
of the Corporation Law.
On September 28, 1949, the legal counsel of the plaintiff corporation wrote a letter to the defendant,
demanding the payment of the unpaid balance of his subscription amounting to P18,500. Copy of this
letter was sent by registered mail to the defendant on September 29,1 949. (See Exhibit G). The defendant
ignored the said demand. Hence this action.
The defendant, in his answer, disclaims liability tot he plaintiff corporation on the following grounds:
1. That the plaintiffs' action is premature because there was no valid call; and
2. That granting that there was a valid call, he was released from the obligation of the balance of his
subscription by stockholders' resolution No. 17 and No. 4.
By way of counterclaim, the defendant also claims from the plaintiff a reasonable compensation at the rate
of P700 per month as president of the company, for the period from March 1, 1946 to December 31, 1948.
In the light of the foregoing undisputed facts, the only questions are as follows:
1. Was the call Exhibit E-2 valid?
2. Was the defendant released from the obligation of the unpaid balance of his subscription by virtue of
stockholders' resolution Nos. 17 and 4?
3. Is the defendant entitled to compensation as president of the plaintiff corporation?
In an exhaustive and well prepared decision, Judge M. Mejia of the lower court found that the call for
payment embodied in resolution No. 17 of July 23, 1946 was null and void for lack of publication;
consequently, he dismissed the complaint as premature. He further held said resolution null and void in so
far as it tried to relieve the defend- ant from liability on his unpaid subscription, on the ground that the
resolution was not approved by all the stockholders of the corporation. He also dismissed the defendant's
counterclaim for compensation as president of the corporation.
Inasmuch as in the two appeals, the assignment of errors are related to each other, and because they refer
to the same case, we propose to determine both appeals in one single decision.
We agree with the lower court that the law requires that notice of any call for the payment of unpaid
subscription should be made not only personally but also by publication. This is clear from the provisions
of section 40 of the Corporation Law, Act No. 1459, as amended, which reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon each stockholder or
deposited in the post office, postage prepaid, addressed to him at his place of residence, if known, and if
not known, addressed to the place where the principal office of the corporation is situated. The notice must
also be published once a week for four successive weeks in some newspaper of general circulation
devoted to the publication of general news published at the place where the principal office of the
corporation is established or located, and posted in some prominent place at the works of the corporation
if any such there be. If there be no newspaper published at the place where the principal office of the
corporation is established or located, then such notice may be published in any newspaper of general news
in the Philippines.
It will be noted that section 40 is mandatory as regards publication, using the word "must". As correctly
stated by the trial court, the reason for the mandatory provision is not only to assure notice to all
subscribers, but also to assure equality and uniformity in the assessment on stockholders. (14 C.J. 639).
This rule finds support in authorities on corporation law, such as, Thompson on Corporations, Vol. 5, 3rd
edition, pages 588-590, from which we make the following quotation:
SEC. 3744. Provisions requiring notice of calls. The governing statute, charter or by-laws usually
require that notice of calls be given the subscriber or stockholder. If any particular notice or demand is
required by either of these, or by the contract of subscription, then such notice or demand must be given,
and must be alleged and proved in order to maintain an action for the call.
x x x x x x x x x
SEC. 3745. Notice. Compliance with requirements-From what has preceded it is clear that where any
particular form or kind of notice is required, such form or kind must be given-the requirement must be
complied with. Thus, where the charter expressly required notice to be given in certain newspapers for a
certain number of days, the corporation must show compliance with the conditions before recovery on the
call. An action is ordinarily made effective by notice thereof to the subscribers, in accordance with the by-
laws or general regulations of the corporation in that regard. So, where there are statutory or other
regulations as to the form and sufficiency of the notice, these must be followed. Thus, where such a notice
was required to be signed by the directors, a notice with the names of the directors signed by a clerk, was
held insufficient. These cases and others proceed on the theory that where the manner of giving notice is
prescribed by law every condition precedent must be strictly and literally complied with. (Thompson on
Corporations, Vol. 5, 3rd ed.)
This view is shared by Justice Fisher. In his book "The Philippine Law on Stock Corporations" he says:
"Not only must personal notice be given in one of these manners, but the notice must also be published
once a week, for four consecutive weeks, in some newspaper." (p. 110.).
We find the citation of authorities made by the plaintiff and appellant inapplicable. In the case of Velasco
vs. Poizat(37 Phil. 805), the corporation involved was insolvent, in which case all unpaid stock
subscriptions become payable on demand and are immediately recoverable in an action instituted by the
assignee. Said the court in that case:
. . . . it is now quite well settled that when the corporation becomes insolvent, with proceedings instituted
by creditors to wind up and distribute its assets, no call or assessment is necessary before the institution of
suits to collect unpaid balance on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit was not proceeded by a call or assessment
against the defendant as a subscriber, and that until this is done no right of action accrues. In a suit by a
solvent going corporation to collect a subscription, and in certain suits provided by statute this would be
true;. . . . . (Id.)
Going to the claim of defendant and appellant that Resolution No. 17 of 1946 released him from the
obligation to pay for his unpaid subscription, the authorities are generally agreed that in order to effect the
release, there must be unanimous consent of the stockholders of the corporation. We quote some
authorities:
Subject to certain exceptions, considered in subdivision (3) of this section, the general rule is that a valid
and binding subscription for stock of a corporation cannot be cancelled so as to release the subscriber from
liability thereon without the consent of all the stockholders or subscribers. Furthermore, a subscription
cannot be cancelled by the company, even under a secret or collateral agreement for cancellation made
with the subscriber at the time of the subscription, as against persons who subsequently subscribed or
purchased without notice of such agreement. (18 C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide compromise, or to set off a debt
due from the corporation, a release, supported by consideration, will be effectual as against dissenting
stockholders and subsequent and existing creditors. A release which might originally have been held
invalid may be sustained after a considerable lapse of time. (18 C.J.S. 874).
In the present case, the release claimed by defendant and appellant does not fall under the exception above
referred to, because it was not given pursuant to a bona fide compromise, or to set off a debt due from the
corporation, and there was no consideration for it.
Another authority:
SEC. 850. Unanimous consent of stockholders necessary to release subscriber. It may be asserted as
the first rule under this proposition that, after a valid subscription to the capital stock of a corporation has
been made and accepted, there can be no cancellation or release from the obligation without the consent of
the corporation and all the stockholders; . . . . (2 Thompson on Corporation, p. 186).
He states the reason for the rule as follows:
SEC. 855. Right to withdraw as against subscribers. A contract of subscription is, at least in the sense
which creates as estoppel, a contract among the several subscribers. For this reason no one of the
subscribers can withdraw from the contract without the consent of all the others, and thereby diminish,
without the universal consent, the common fund in which all have acquired an interest. . . . (2 Thompson
on Corporations, p. 194.).
As already found by the trial court, the release attempted in Resolution No. 17 of 1946 was not valid for
lack of a unanimous vote. If found that at least seven stockholders were absent from the meeting when
said resolution was approved.
Defendant and appellant, however, contends that after dismissing the complaint for being premature, there
was no necessity or reason for the trial court to go further and say that defendant was not validly released
from the payment for his unpaid subscription. It must be borne in mind, however, that this was one of the
principal issues involved in the case and the trial court was called upon to pass upon it, because unless so
passed upon and deter- mined, it might decisively affect the case on appeal. Supposing that on appeal the
appellate court decides that the call was valid, then it would be important to know whether or not in spite
of the validity of the call, defendant was nevertheless not liable because he had been validly released by a
resolution of the corporation. If that question was not decided by the trial court, and naturally was not
touched upon in the appeal, then the appellate court would have no occasion to pass upon it, and it might
be necessary to bring another action to determine the point, which means multiplicity of suits. Moreover,
the authority given to the courts to render judgments for declaratory relief in order to determine the rights
or duties of parties over a certain transaction or under a certain written instrument, or to remove the
uncertainty or controversy over the same (Rule 66 of the Rules of Court), justified the trial court in
passing upon this question of release.
As regards the compensation of President claimed by defendant and appellant, it is clear that he is not
entitled to the same. The by-laws of the company are silent as to the salary of the President. And, while
resolutions of the incorporators and stockholders (Exhibits G-1 and I-1) provide salaries for the general
manager, secretary-treasurer and other employees, there was no provision for the salary of the President.
On the other hand, other resolutions (Exhibits H-1 and J-3) provide for per diems to be paid to the
President and the directors of each meeting attended, P10 for the President and P8 for each director, which
were later increased to P25 and P15, respectively. This leads to the conclusions that the President and the
board of directors were expected to serve without salary, and that the per diems paid to them were
sufficient compensation for their services. Furthermore, for defendant's several years of service as
President and up to the filing of the action against him, he never filed a claim for salary. He thought of
claiming it only when this suit was brought against him.
In conclusion we hold that under the Corporation Law, notice of call for payment for unpaid subscribed
stock must be published, except when the corporation is insolvent, in which case, payment is immediately
demandable. We also rule that release from such payment must be made by all the stockholders.
In view of the foregoing and finding no reversible error in the decision appealed, the same is hereby
affirmed.
No pronouncement as to costs.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes, Jugo, Bautista Angelo and Labrador, JJ., concur.
G.R. No. 80039 April 18, 1989
ERNESTO M. APODACA, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, JOSE M. MIRASOL and INTRANS PHILS.,
INC., respondents.
Diego O. Untalan for petitioner.
The Solicitor General for public respondent.
Barcelona, Perlas, Joven & Academia Law Offices for private respondents.

GANCAYCO, J .:
Does the National Labor Relations Commission (NLRC) have jurisdiction to resolve a claim for non-
payment of stock subscriptions to a corporation? Assuming that it has, can an obligation arising therefrom
be offset against a money claim of an employee against the employer? These are the issues brought to this
court through this petition for review of a decision of the NLRC dated September 18, 1987.
The only remedy provided for by law from such a decision is a special civil action for certiorari under
Rule 65 of the Rules of Court based on jurisdictional grounds or on alleged grave abuse of discretion
amounting to lack or excess of jurisdiction, not by way of an appeal by certiorari. Nevertheless, in the
interest of justice, this petition is treated as a special civil action for certiorari.
Petitioner was employed in respondent corporation. On August 28, 1985, respondent Jose M. Mirasol
persuaded petitioner to subscribe to 1,500 shares of respondent corporation at P100.00 per share or a total
of P150,000.00. He made an initial payment of P37,500.00. On September 1, 1975, petitioner was
appointed President and General Manager of the respondent corporation. However, on January 2, 1986, he
resigned.
On December 19, 1986, petitioner instituted with the NLRC a complaint against private respondents for
the payment of his unpaid wages, his cost of living allowance, the balance of his gasoline and
representation expenses and his bonus compensation for 1986. Petitioner and private respondents
submitted their position papers to the labor arbiter. Private respondents admitted that there is due to
petitioner the amount of P17,060.07 but this was applied to the unpaid balance of his subscription in the
amount of P95,439.93. Petitioner questioned the set-off alleging that there was no call or notice for the
payment of the unpaid subscription and that, accordingly, the alleged obligation is not enforceable.
In a decision dated April 28, 1987, the labor arbiter sustained the claim of petitioner for P17,060.07 on the
ground that the employer has no right to withhold payment of wages already earned under Article 103 of
the Labor Code. Upon the appeal of the private respondents to public respondent NLRC, the decision of
the labor arbiter was reversed in a decision dated September 18, 1987. The NLRC held that a stockholder
who fails to pay his unpaid subscription on call becomes a debtor of the corporation and that the set-off of
said obligation against the wages and others due to petitioner is not contrary to law, morals and public
policy.
Hence, the instant petition.
The petition is impressed with merit.
Firstly, the NLRC has no jurisdiction to determine such intra-corporate dispute between the stockholder
and the corporation as in the matter of unpaid subscriptions. This controversy is within the exclusive
jurisdiction of the Securities and Exchange Commission.
1

Secondly, assuming arguendo that the NLRC may exercise jurisdiction over the said subject matter under
the circumstances of this case, the unpaid subscriptions are not due and payable until a call is made by the
corporation for payment.
2
Private respondents have not presented a resolution of the board of directors of
respondent corporation calling for the payment of the unpaid subscriptions. It does not even appear that a
notice of such call has been sent to petitioner by the respondent corporation.
What the records show is that the respondent corporation deducted the amount due to petitioner from the
amount receivable from him for the unpaid subscriptions.
3
No doubt such set-off was without lawful
basis, if not premature. As there was no notice or call for the payment of unpaid subscriptions, the same is
not yet due and payable.
Lastly, assuming further that there was a call for payment of the unpaid subscription, the NLRC cannot
validly set it off against the wages and other benefits due petitioner. Article 113 of the Labor Code allows
such a deduction from the wages of the employees by the employer, only in three instances, to wit:
ART. 113. Wage Deduction. No employer, in his own behalf or in behalf of any
person, shall make any deduction from the wages of his employees, except:
(a) In cases where the worker is insured with his consent by the employer, and the
deduction is to recompense the employer for the amount paid by him as premium
on the insurance;
(b) For union dues, in cases where the right of the worker or his union to checkoff
has been recognized by the employer or authorized in writing by the individual
worker concerned; and
(c) In cases where the employer is authorized by law or regulations issued by the
Secretary of Labor.
4

WHEREFORE, the petition is GRANTED and the questioned decision of the NLRC dated September 18,
1987 is hereby set aside and another judgment is hereby rendered ordering private respondents to pay
petitioner the amount of P17,060.07 plus legal interest computed from the time of the filing of the
complaint on December 19, 1986, with costs against private respondents.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.


















G.R. No. L-68097 January 16, 1986
EDWARD A. KELLER & CO., LTD., petitioner-appellant,
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO, JOHNNY DE
LA FUENTE, SERGIO C. ORDOEZ, TRINIDAD C. ORDOEZ, MAGNO C. ORDOEZ,
ADORACION C. ORDOEZ, TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES
P. ADAO, ASUNCION MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-
appellees.
Sycip, Salazar, Feliciano & Hernandez Law Office for petitioner.
Vicente G. Gregorio for private respondents.
Roberto P. Vega for respondent Asuncion Manahan.

AQUINO, C.J .:
This case is about the liability of a marketing distributor under its sales agreements with the owner of the
products. The petitioner presented its evidence before Judges Castro Bartolome and Benipayo.
Respondents presented their evidence before Judge Tamayo who decided the case.
A review of the record shows that Judge Tamayo acted under a misapprehension of facts and his findings
are contradicted by the evidence. The Appellate Court adopted the findings of Judge Tamayo. This is a
case where this Court is not bound by the factual findings of the Appellate Court. (See Director of Lands
vs. Zartiga, L-46068-69, September 30, 1982, 117 SCRA 346, 355).
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive distributor of its
household products, Brite and Nuvan in Panay and Negros, as shown in the sales agreement dated March
14, 1970 (32-33 RA). Under that agreement Keller sold on credit its products to COB Group Marketing.
As security for COB Group Marketing's credit purchases up to the amount of P35,000, one Asuncion
Manahan mortgaged her land to Keller. Manahan assumed solidarily with COB Group Marketing the
faithful performance of all the terms and conditions of the sales agreement (Exh. D).
In July, 1970 the parties executed a second sales agreement whereby COB Group Marketing's territory
was extended to Northern and Southern Luzon. As security for the credit purchases up to P25,000 of COB
Group Marketing for that area, Tomas C. Lorenzo, Jr. and his father Tomas, Sr. (now deceased) executed
a mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with COB
Group Marketing for its obligations under the sales agreement (Exh. E).
The credit purchases of COB Group Marketing, which started on October 15, 1969, limited up to January
22, 1971. On May 8, the board of directors of COB Group Marketing were apprised by Jose E. Bax the
firm's president and general manager, that the firm owed Keller about P179,000. Bax was authorized to
negotiate with Keller for the settlement of his firm's liability (Exh. 1, minutes of the meeting).
On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB
Group Marketing's liability, Exhibit J, reproduced as follows:
This formalizes our conditions for the settlement of C.O.B.'s account with Edward
Keller Ltd.
1. Increase of mortgaged collaterals to the full market value (estimated by Edak at
P90,000.00).
2. Turn-over of receivables (estimated outstandings P70,000.00 to P80,000.00).
3. Turn-over of 4 (four) trucks for outright sale to Edak, to be credited against
C.0.B.'s account.
4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B will continue operation
with these 8 trucks. They win be returned to COB after settlement of full account.
5. C.O.B has to put up securities totalling P200,000.00. P100,000.00 has to be
liquidated within one year. The remaining P100,000.00 has to be settled within the
second year.
6. Edak wig agree to allow C.O.B. to buy goods to the value of the difference
between P200,000.00 and their outstandings, provided C.O.B. is in a position to put
up securities amounting to P200,000.00.
Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through Bax executed two second chattel
mortgages over its 12 trucks (already mortgaged to Northern Motors, Inc.) as security for its obligation to
Keller amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ). However, the second mortgages
did not become effective because the first mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the liability COB Group Marketing to Keller.
The stockholders of COB Group Marketing, Moises P. Adao and Tomas C. Lorenzo, Jr., in a letter dated
July 24, 1971 to Keller's counsel, proposed to pay Keller P5,000 on November 30, 1971 and thereafter
every thirtieth day of the month for three years until COB Group Marketing's mortgage obligation had
been fully satisfied. They also proposed to substitute the Manahan mortgage with a mortgage on Adao's
lot at 72 7th Avenue, Cubao, Quezon City (Exh. L).
These pieces of documentary evidence are sufficient to prove the liability of COB Group Marketing and to
justify the foreclosure of the two mortgages executed by Manahan and Lorenzo (Exh. D and E).
Section 22, Rule 130 of the Rules of Court provides that the act, declaration or omission of a party as to a
relevant fact may be given in evidence against him "as admissions of a party".
The admissions of Bax are supported by the documentary evidence. It is noteworthy that all the invoices,
with delivery receipts, were presented in evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-149-
a, together with a tabulation thereof, Exhibit KK, covering the period from October 15, 1969 to January
22, 1971. Victor A. Mayo, Keller's finance manager, submitted a statement of account showing that COB
Group Marketing owed Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is reflected in the
customer's ledger, Exhibit M.
On the other hand, Bax although not an accountant, presented his own reconciliation statements wherein
he showed that COB Group Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed
overpayment although in his answer he did not allege at all that there was an overpayment to Keller.
The statement of the Appellate Court that COB Group Marketing alleged in its answer that it overpaid
Keller P100,596.72 is manifestly erroneous first, because COB Group Marketing did not file any answer,
having been declared in default, and second, because Bax and the other stockholders, who filed an
answer, did not allege any overpayment. As already stated, even before they filed their answer, Bax
admitted that COB Group Marketing owed Keller around P179,000 (Exh. 1).
Keller sued on September 16, 1971 COB Group Marketing, its stockholders and the mortgagors, Manahan
and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were declared in default (290
Record on Appeal).
After trial, the lower court (1) dismissed the complaint; (2) ordered Keller to pay COB Group Marketing
the sum of P100,596.72 with 6% interest a year from August 1, 1971 until the amount is fully paid: (3)
ordered Keller to pay P100,000 as moral damages to be allocated among the stockholders of COB Group
Marketing in proportion to their unpaid capital subscriptions; (4) ordered the petitioner to pay Manahan
P20,000 as moral damages; (5) ordered the petitioner to pay P20,000 as attomey's fees to be divided
among the lawyers of all the answering defendants and to pay the costs of the suit; (6) declared void the
mortgages executed by Manahan and Lorenzo and the cancellation of the annotation of said mortgages on
the Torrens titles thereof, and (7) dismissed Manahan's cross-claim for lack of merit.
The petitioner appealed. The Appellate Court affirmed said judgment except the award of P20,000 as
moral damages which it eliminated. The petitioner appealed to this Court.
Bax and the other respondents quoted the six assignments of error made by the petitioner in the Appellate
Court, not the four assignments of error in its brief herein. Manahan did not file any appellee's brief.
We find that the lower courts erred in nullifying the admissions of liability made in 1971 by Bax as
president and general manager of COB Group Marketing and in giving credence to the alleged
overpayment computed by Bax .
The lower courts not only allowed Bax to nullify his admissions as to the liability of COB Group
Marketing but they also erroneously rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact that COB Group Marketing was
declared in default and did not file any counterclaim for the supposed overpayment.
The lower courts harped on Keller's alleged failure to thresh out with representatives of COB Group
Marketing their "diverse statements of credits and payments". This contention has no factual basis. In
Exhibit J, quoted above, it is stated by Bax and Keller's Oefeli that "discussion (was) held on May 8,
1971."
That means that there was a conference on the COB Group Marketing's liability. Bax in that discussion
did not present his reconciliation statements to show overpayment. His Exhibits 7 and 8 were an
afterthought. He presented them long after the case was filed. The petitioner regards them as "fabricated"
(p. 28, Appellant's Brief).
Bax admitted that Keller sent his company monthly statements of accounts (20-21 tsn, September 2, 1976)
but he could not produce any formal protest against the supposed inaccuracy of the said statements (22).
He lamely explained that he would have to dig up his company's records for the formal protest (23-24). He
did not make any written demand for reconciliation of accounts (27-28).
As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial
obligations of a corporation to the extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103
Phil. 757, 763; 18 CJs 1311-2).
While the evidence shows that the amount due from COB Group Marketing is P184,509.60 as of July 31,
1971 or P186,354.70 as of August 31, 1971 (Exh. JJ), the amount prayed for in Keller's complaint
is P182,994.60 as of July 31, 1971 (18-19 Record on Appeal). This latter amount should be the one
awarded to Keller because a judgment entered against a party in default cannot exceed the amount prayed
for (Sec. 5, Rule 18, Rules of Court).
WHEREFORE, the decisions of the trial court and the Appellate Court are reversed and set aside.
COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the sum of P182,994.60 with
12% interest per annum from August 1, 1971 up to the date of payment plus P20,000 as attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay solidarity with COB Group Marketing
the sums of P35,000 and P25,000, respectively.
The following respondents are solidarity liable with COB Group Marketing up to the amounts of their
unpaid subscription to be applied to the company's liability herein: Jose E. Bax P36,000; Francisco C. de
Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez, P12,000; Trinidad C. Ordonez,
P3,000; Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and
Luz M. Aguilar-Adao, P6,000.
If after ninety (90) days from notice of the finality of the judgment in this case the judgment against COB
Group Marketing has not been satisfied fully, then the mortgages executed by Manahan and Lorenzo
should be foreclosed and the proceeds of the sales applied to the obligation of COB Group Marketing.
Said mortgage obligations should bear six percent legal interest per annum after the expiration of the said
90-day period. Costs against the private respondents.
SO ORDERED.
Concepcion, Jr. (Chairman), Escolin, Cuevas and Alampay, JJ., concur.
Abad Santos, J., took no part.




































G.R. No. L-35961 December 2, 1932
ROMANA MIRANDA, in her capacity as judicial administratrix of the intestate estate of her
deceased father, Alberto Miranda, plaintiff-appellant,
vs.
THE TARLAC RICE MILL CO., INC., defendant-appellee.
Fausto and Ramos for appellant.
Enrique Maglanoc for appellee.

VICKERS, J .:
This is an appeal by the plaintiff from a decision of Judge A. M. Recto of the Court of First Instance of
Tarlac, dismissing the case without a special finding as to costs.
The case was tried on the following agreed statement of facts:
Comparecen las partes la demandante, asistida de su infrascrito abogado, y la demandada,
por medio de su presidente y abogado que subscriben y para abreviar la vista de esta causa y
sin perjuicio de practicarse pruebas adicionales sobre hechos en los que las partes no estan de
acuerdo, respetuosamente someten, para la decision de esta causa, las siguientes estipulaciones:
1. Que la demandante Romana Miranda es la administradora judicial, debidamente nombrada,
del Intestado del finado Don Alberto Miranda, Civil No. 3090, de este mismo Juzgado; y la
entidad demandada es una corporacion debidamente organizada de acuerdo con las leyes en
vigor en estas Islas, teniendo su domicilio legal, lo mismo que la demandante, en esta cabecera
de Tarlac, Provincia de Tarlac;
2. Que, con fecha 8 de junio de 1926, el hoy difunto Don Alberto Miranda de cuyo intestado
es administradora judicial la aqui demandante subscribo acciones de la corporacion
demandada, otorgando al efecto un contrato de subscripcion, copia auntentica del cual se une al
presente y se hace parte integrante del mismo, como exhibit A;
3. Que, en relacion con el contrato de subcripcion Exhibit A, a que se contrae el parrafo que
precede, Don Alberto Miranda otorgo luego una escritura de poder a favor de la demandada,
cuyo original se une asimismo al presente, haciendose parte integrante del mismo, como
Exhibit B;
4. Que, por virtud de los documentos a que se contraen los dos parrafos inmediatamente
anteriores la corporacion demandada contrajo una deuda de P10,000 a los Sres. Mariano
Tablante y Carmen Gueco, de Angeles, Pampanga, como se acredita por la escritura de
prestamo hipotecario otorgada al efecto, que tambien se adjunta a la presente, como Exhibits C
y C-1;
5. Que la demandada no ha pagado en ningun tiempo ni el capital, ni los intereses, del
prestamo arriba mencionado, motivo por el cual el referido Don Alberto Miranda hubo de
entrar en arreglo amistoso con los acreedores, al expirar el plazo convenido para el pago,
satisfaciendo dicho prestamo y sus intereses devengados, segun consta en la carta de pago
extendida al efecto, que se hace parte integrante del presente convenio como Anexo o Exhibt
D;
6. Que, a partir desde el ano 1928 hasta esta fecha, la demandada ha dejado de hacer negocios
y operaciones de ninguna clase;
7. Que, con excepcion del citado Don Alberto Miranda, ninguno de las otras accionistas y
directores de la corporacion demandada ha pagado o se le ha hecho pagar, conforme los
terminos de los contratos de subscripcion otorgados al efecto, el importe de sus respectivas
acciones, y a pesar de esta morosidad de los fereridos accionistas y directores, la corporacion
demandada no ha dado, hasta la fecha, ningun paso tendente a compeler la efectividad de las
referidas acciones morosas.
The only additional evidence presented was the testimony of Marciano David, which is of no consequence
in our view of the case.
The appellant makes the following assignment of errors:
The trial court erred:
1. In declaring that the defendant corporation did not violate the terms of the power of attorney
Exhibit B, for the plaintiff, when she obtained the loan Exhibit C;
2. In declaring that "all responsibility originating in the execution by the officers of the
defendant corporation of the mortgage contract Exhibit C has already ceased";
3. In pretending to base the decision in this case upon theories neither presented by the
pleadings of the parties nor deduced from the evidence produced by the parties;
4. In denying the motion for new trial of the plaintiff-appellant; and
5. In not sentencing the defendant to pay the plaintiff the sum of P10,000, with interest thereon
at P1,200 a year, from the year 1927 until paid, plus the sum of P1,500, which the principal had
to pay in the form of a penal clause for the violation of the terms of the mortgage contract
Exhibit C, aside from the legal interests of all these amounts from the presentation of the
present complaint, and the costs of the suit.
It appears from the evidence that on June 8, 1926 Alberto Miranda executed a written contract whereby he
subscribed for 100 shares of the capital stock of a corporation to be organized under the laws of the
Philippine Islands for the purpose of operating a rice mill in Tarlac, said corporation to be known as
Tarlac Rice Mill Company, Inc., that the par value of each share was P100; and that Alberto Miranda
obligated himself to pay to the treasurer of the corporation or its assign the sum of P10,000 as follows:
On or before September 21, 1926 P1,000.00
On or before January 21, 1927 2,000.00
On or before January 21, 1928 2,000.00
On or before January 21, 1929 2,500.00
On or before January 21, 1930 2,500.00
On July 10, 1926 Alberto Miranda by means of a public document "assigned" mortgaged, or transferred in
lieu of cash for the benefit and to the credit of the Tarlac Rice Mill Company, Inc., a corporation to be
organized and to exist under and by virtue of the laws of the Philippine Islands", the parcel of land
described in certificate No. 751 in the land records of the Province of Tarlac; and "to carry out the true
intent, meaning, and purposes thereof I have hereby further voluntarily made, constituted, and appointed
and by these presents do make, constitute and appoint, either jointly, Evaristo Magbag, duly elected
President and Treasurer of said Company, Eusebio R. Cabrera and Marcos P. Puno, duly elected Vice-
Presidents of the same company, or anyone of the three named elected officers of the Tarlac Rice Mill
Company, Inc., jointly with C. M. Dizon to be my true and lawful attorney-in-fact, for me and in my
name, in my behalf to transfer, mortgage, convey or confirm or in any way convenient to them to any
local or foreign bank, firm or individual in order to obtain, secure or solicit credit against my above
described property in an amount not to exceed ten thousand pesos (P10,000), Philippine currency, in
accordance with the subscription contract voluntary executed by me, for or to increase the capital of the
said Tarlac Rice Mill Company, Inc., in order to carry out the purposes for which such firm is to be
organized.
That for the foregoing purposes, I hereby transfer my right and interest in the said described
properties, and by these presents do hereby give and grant unto my said attorneys-in fact full
power and authority to do and perform all and every act and thing whatsoever requisite and
necessary to be done in all about the premises as fully to all intents and purposes as I might or
could do if personally present with full power of substitution or revocation, hereby ratify and
confirm all that my said attorneys-in-fact, anyone or all of the three Evaristo Magbag, Eusebio
R. Cabrera, and Marcos P. Puno, jointly with C. M. Dizon or their substitutes shall lawfully do
or cause to be done by virtue of these presents.
On February 19, 1927 the president and vice-president of the Tarlac Rice Mill Company, Inc., and C. M.
Dizon, acting on behalf of said corporation and Alberto Miranda, borrowed P10,000 from Mariano
Tablante, and agreed to repay said sum on or before February 19, 1928, with interest at 12 per cent per
annum, and to pay a further sum of 25 per cent of the principal for attorney's fees and expenses of
collection in case the promissory note should not be paid at maturity. Marcos Puno, Evaristo Magbag, and
Dizon & Co., Inc., jointly and severally guaranteed the payment of this sum; and the president and vice-
president of the Tarlac Rice Mill Company, Inc., and C. M. Dizon as attorneys-in-fact of Alberto Miranda
mortgaged to Mariano Tablante the aforementioned parcel of land to secure the payment of said
promissory note.
The sum of P10,000 obtained from Mariano Tablante was retained by the corporation. When the
promissory note became due, Alberto Miranda arranged for an extension of time in which to pay it, and on
July 19, 1929 he sold the aforementioned parcel of land under pacto de retro to Vicente Panlilio for
P10,000, and paid Mariano Tablante.
According to an allegation in the complaint, Alberto Miranda died on May 24, 1930.
It is agreed that the defendant corporation ceased to do business from the year 1928, and that the other
stockholders have not paid for their shares in accordance with their subscription agreement, and that no
action has been taken by the corporation to require them to do so.
The principal contention of the appellant is that the officers of the corporation violated the terms of the
power of attorney in mortgaging the land on February 19, 1927 for P10,000, because the only sum then
due and payable by Alberto Miranda to the corporation was P3,000, and that when the remaining
instalments of the stock subscription became due, Alberto Miranda was under no obligation to pay them,
because the corporation had already ceased to do business, and it had taken no steps to compel the other
stockholders to pay for the shares for which they had subscribed.
No question as to the validity of subscription agreement is raised, and no fraud on the part of the officers
of the corporation is alleged or proved. We shall therefore confine ourselves to the issues raised by the
pleading.
It is true that when the property was mortgaged on February 19, 1927 the amount due from Alberto
Miranda in accordance with the subscription agreement was only P3,000, and it is likewise true that it
does not appear from the evidence that any call was issued by the directors for the payment of any
subscriptions.
The fact that Alberto Miranda agreed on June 8, 1926 to pay the amount of his subscription installments
on certain fixed dates did not, of course prevent him from authorizing the officers of the corporation as his
attorneys-in-fact to pay his subscription prior to the dates fixed in the subscription agreement. Great stress
is laid by the appellant upon the fact that in one paragraph of the power of attorney it is stated that the
attorneys-in-fact of Alberto Miranda are authorized to mortgage or convey the property in any way
convenient to them in the amount not to exceed P10,000 in accordance with the subscription contract, but
the phrase "in accordance with the subscription contract" is followed by the following words "for or to
increase the capital of the said Tarlac Rice Mill Company, Inc., in order to carry out the purposes for
which said firm is to be organized." Under the circumstances, it seems to us that it would be a strained
construction of the power of attorney, taking into consideration the whole document, to hold that the
officers of the corporation acting as attorneys-in-fact- of Alberto Miranda were authorized to mortgage or
convey the land for only the amount then due from Alberto Miranda in accordance with the subscription
agreement. It can hardly be contended that the power of attorney contemplated that the property should be
mortgaged three times, that is, each time that an instalment became due. We are inclined to the view that it
was the intention of the parties that the property should be mortgaged immediately for a sum not to exceed
P10,000, not only for the purpose of paying the subscription agreement of Alberto Miranda, but also for
the purpose, as stated in the power of attorney, of increasing the capital of the corporation, not the capital
stock, in order to carry out the purposes for which it was to be organized. This view of the matter is
confirmed by the subsequent conduct of the parties. Although the corporation retained the full amount of
the loan obtained from Mariano Tablante, and Alberto Miranda had to pay that obligation, he never
sought, so far as the record shows, to recover from the corporation any part of the sum of P10,000. As we
have already stated, the mortgage was executed on February 19, 1927; it was satisfied by Alberto Miranda
on July 19, 1929, and he lived until May 24, 1930. It does not appear that he ever sought to evade the
satisfaction of the mortgage by alleging that his attorneys-in-fact exceeded their authority in mortgaging
the property on February 19, 1927 for P10,000. On the contrary he repaid to Mariano Tablante the amount
which the officers of the corporation had borrowed. The fact that he at no time sought to recover from the
corporation any part of the sum borrowed by the officers of the corporation in his name certainly tends to
show that he acquiesced in the action taken by them. The phrase "in accordance with the subscription
contract" found in the power of attorney probably was intended to mean "in pursuance of the subscription
agreement", that is, it referred to the obligation, and had no particular reference to the dates when the
different installments were to be paid.
Section 38 of the Corporation Law provides that the board of directors of every corporation may at any
time declare due and payable to the corporation unpaid subscriptions to the capital stock and may collect
the same with interest accrued thereon or such percentage of said unpaid subscriptions as it may deem
necessary. In his work, "The Philippine Law of Stock Corporations", page 97, Justice Fisher expresses the
opinion that this power of the directors is absolute and cannot be limited by the subscription contract, but
this does not mean that the directors may not rely on the subscription contract if they see fit to do so.
No call is necessary when a subscription is payable, not upon call or demand by the directors
or stockholders, but immediately, or on specified day, or on or before a specified day, or when
it is payable in installments at specified times. In such cases it is the duty of the subscriber to
pay the subscription or instalment thereof as soon as it is due, without any call or demand, and,
if he fails to do so, an action may be brought at any time. (Fletcher: Cyclopedia of the Law of
Private Corporations, vol. 2, page 1509.)
When this action was filed on September 2, 1930, the last of the instalments had already become payable
in accordance with the subscription agreement. it must be borne in mind that this is not an action by the
corporation to recover on a subscription agreement, but an action by the administratrix of a stockholder to
recover what was paid in to the corporation by the stockholder. It does not appear from the evidence
whether or not the corporation has any debts. Neither the fact that the corporation has ceased to do
business nor the fact that the other stockholders have not been required to pay for their shares in
accordance with their subscription agreement justifies us in ordering the corporation to return to the
plaintiff the amount paid in by Alberto Miranda. If the directors have failed to perform their duty with
respect to the other stockholders, the law provides a remedy therefor.
In the case of Velasco vs. Poizat (37 Phil., 802), this court held that a stock subscription is a contract
between the corporation and the subscriber, and courts will enforce it for or against either; that a
corporation has no legal capacity to release a subscriber to its capital stock from the obligation to pay for
his shares, and that any agreement to this effect is invalid.
In the case at bar it is not contended that Alberto Miranda cancelled his subscription agreement, or that the
corporation attempted to release him therefrom.
For the foregoing reasons, the decision appealed from is affirmed, with the costs against the appellant.
Street, Malcolm, Ostrand and Imperial, JJ., concur.
Separate Opinions
ABAD SANTOS, J ., dissenting:
The power of attorney, Exhibit B, was given for the purpose of carrying out the subscription agreement,
Exhibit A. The two documents should, therefore, be construed together. The authority to mortgage the
property described in Exhibit B was granted in order to pay the amount or amounts that might become due
and payable on the subscription agreement. Now, under our law unpaid subscriptions to the capital stock
of a corporation do not become due and payable until so declared by the board of directors. Section 38 of
the Corporation Law provides: "The board of directors or trustees of any stock corporation formed,
organized, or existing under this Act may at any time declare due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same with interest accrued thereon or such
percentage of said unpaid subscription as it may deem necessary.
The order of the board of directors declaring payable any unpaid subscription to the capital
stock shall state what percentage of the unpaid subscription is due and payable, when, where,
and to whom payable, the date of delinquency, which must be subsequent to the full terms of
publication of the notice of call for unpaid subscriptions and not less than thirty days nor more
than sixty days from the date of the order of the board calling for the payment of unpaid
subscriptions, and the date on which the delinquent stock will be sold, which must not be less
than fifty days nor more than sixty days from the date the stock becomes delinquent.
Section 40 further provides: "Notice of call for unpaid subscriptions must be either personally served upon
each stockholder or deposited in the post-office, postage prepaid, addressed to him at his place of
residence, if known, and, if not known, addressed to the place where the principal office of the corporation
is situated. The notice must also be published once a week for four successive weeks in some newspaper
of general circulation devoted to the publication of general news published at the place where the principal
office of the corporation is established or located, and posted in some prominent place at the works of the
corporation if any such there be. If there be no newspaper published at the place where the principal office
of the corporation is established or located, then such notice may be published in any newspaper of
general circulation devoted to the publication of general news in the Islands.
The provisions of law above quoted are clear and specific, and by their very language compliance with
them is mandatory. The reasons for the enactment of such specific and mandatory provisions are not far to
seek. They are based upon sound considerations of public policy. They are intended to safeguard the rights
of stockholders and to subject them only to quality of assessment. As stated by the court in Germania Iron
Mining Co. vs. King (36 L. R. A., 51, 52): "The statute under consideration recognizes the necessity of a
call, and that a notice thereof is necessary. A call without notice to the subscriber is practically no call at
all. A call can not be made so as to affect a party only of the subscribers; it must be made on all alike, or it
will be void. (Pike vs. Bangor & C. Short Line R. Co., 68 Me., 445; Great Western Teleg. Co. vs.
Burnham, 79 Wis., 47-51.) And it seems that it has been held that a call need not indicate where or to
whom, or where payment is required to be made; that these are to be stated in the notice. (Cook, Stock,
Stockholders, & Corp. Law, secs. 114, 115.) Unless a uniform call or notice is made or given, it is
apparent that the directors may practice favoritism and act oppressively."
Considering the reasons behind the provisions of law under consideration, which, to my mind, account for
their mandatory character, the rule followed in some jurisdictions that no call is necessary when a
subscription is payable in instalments at specified times, should not be applied here.
In the case at bar, we can not even indulge in the presumption that there was a call for subscriptions, for it
is agreed by the parties that, with the exception of Alberto Miranda, none of the other stockholders of the
defendant corporation has paid or been required to pay on his subscription. Thus we see here practiced by
the directors of the defendant corporation the very favoritism which the statutory provisions above
mentioned seek to avert. And yet this court is going to sanction such an evil practice.
I am of the opinion that, under article 1895 of the Civil Code, the appellant is entitled to recover of the
appellee the sum of ten thousand peso with legal interest from September 2, 1930, the date of the filing of
the complaint herein.
Villa-Real and Butte, JJ., concur.
April 21, 1939










































G.R. No. L-11528 March 15, 1918
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co. (Ltd.), plaintiff-appellant,
vs.
JEAN M. POIZAT, defendant-appellee.
Vicente Rodriguez for appellant.
A. J. Burke for appellee.
STREET, J .:
From the amended complaint filed in this cause upon February 5, 1915, it appears that the plaintiff, as
assignee in insolvency of "The Philippine Chemical Product Company" (Ltd.) is seeking to recover of the
defendant, Jean M. Poizat, the sum of P1,500, upon a subscription made by him to the corporate stock of
said company. It appears that the corporation in question was originally organized by several residents of
the city of Manila, where the company had its principal place of business, with a capital of P50,000,
divided into 500 shares. The defendant subscribed for 20 shares of the stock of the company, an paid in
upon his subscription the sum of P500, the par value of 5 shares . The action was brought to recover the
amount subscribed upon the remaining shares.
It appears that the defendant was a stock holder in the company from the inception of the enterprise, and
for sometime acted as its treasurer and manager. While serving in this capacity he called in and collected
all subscriptions to the capital stock of the company, except the aforesaid 15 shares subscribed by himself
and another 15 shares owned by Jose R. Infante.
Upon July 13, 1914, a meeting of the board of directors of the company was held at which a majority of
the stock was presented. Up[on this occasion two resolutions, important to be here noted, were adopted.
The first was a proposal that the directors, or shareholders, of the company should make good by new
subscriptions, in proportion to their respective holdings, 15 shares which had been surrendered by Infante.
It seems that this shareholder had already paid 25 per cent of his subscription upon 20 shares, leaving 15
shares unpaid for, and an understanding had been reached by him and the management by which he was to
be released from the obligation of his subscription, it being understood that what he had already paid
should not be refunded. Accordingly the directors present at this meeting subscribed P1,200 toward taking
up his shares, leaving a deficiency of P300 to be recovered by voluntary subscriptions from stockholders
not present at the meeting.
The other proposition was o the effect that Juan [Jean] M. Poizat, who was absent, should be required to
pay the amount of his subscription upon the 15 shares for which he was still indebted to the company. The
resolution further provided that, in case he should refuse to make such payment, the management of the
corporation should be authorized to undertake judicial proceedings against him. When notification of this
resolution reached Poizat through the mail it evoked from him a manifestation of surprise and pain, which
found expression in a letter written by him in reply, dated July 27, 1914, and addressed to Velasco, as
treasurer and administrator. In this letter Poizat states that he had been given to understand by some
member of the board of directors that he was to be relieved from his subscription upon the terms conceded
to Infante; and he added:
My desire to be relieved from the payment of the remaining 75 per cent arises from the poor
opinion which I entertain of the business and the faint hope of ever recovering any money
invested. In consequence, I prefer to lose the whole of the 25 per cent I have already paid
rather than to continue investing more money in what I consider to be ruinous proposition.
Within a short while the unfavorable opinion entertained by Poizat as to the prospect of the company was
found to be fully justified, as the company soon went into voluntary insolvency, Velasco being named as
the assignee. He qualified at once by giving bond, and was duly inducted into the office of assignee upon
November 25, 1914, by virtue of a formal transfer executed by the clerk in pursuance of section 32 of Act
No. 1956.
The answer of the defendant consisted of a general denial and a so-called special defense, consisting of a
concatenation of statements more appropriate for a demurrer than as material for a special defense. The
principal contention is that the call made by the board of directors of the company on July 13, 1914 , was
not made pursuant to the requirements of sections 37 and 38 of the Corporation Law (Act No. 1459), and
in particular that the action was instituted before the expiration of the 30 days specified in section 38.
At the hearing of the Court of First Instance, judgment was rendered in favor of the defendant, and the
complaint was dismissed. From this action the plaintiff has appealed.
We think that Poizat is liable upon this subscription. A stock subscription is a contract between the
corporation on one side, and the subscriber on the other, and courts will enforce it for or against either. It
is a rule, accepted by the Supreme Court of the United States, that a subscription for shares of stock does
not require an express promise to pay the amount subscribed, as the law implies a promise to pay on the
part of the subscriber. (7 Ruling Case Law, sec. 191.) Section 36 of the Corporation Law clearly
recognizes that a stock subscription is subsisting liability from the time the subscription is made, since it
requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by
the by-laws of the corporation. The subscriber is as much bound to pay the amount of the share subscribed
by him as he would be to pay any other debt, and the right of the company to demand payment is no less
incontestable.
The provisions of the Corporation Law (Act No. 1459) given recognition of two remedies for the
enforcement of stock subscriptions. The first and most special remedy given by the statute consists in
permitting the corporation to put up the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber. In this case the provisions of section 38 to 48, inclusive , of the Corporation Law
are applicable and must be followed. The other remedy is by action in court, concerning which we find in
section 49 the following provision:
Nothing in this Act shall prevent the directors from collecting, by action in any court of proper
jurisdiction, the amount due on any unpaid subscription, together with accrued interest and
costs and expenses incurred.
It is generally accepted doctrine that the statutory right to sell the subscriber's stock is merely a remedy in
addition to that which proceeds by action in court; and it has been held that the ordinary legal remedy by
action exists even though no express mention thereof is made in the statute. (Instone vs. Frankfort Bridge
Co., 2 Bibb [Ky.], 576; 5 Am. Dec., 638.)
No attempt is made in the Corporation Law to define the precise conditions under which an action may be
maintained upon a stock subscription, as such conditions should be determined with reference to the rules
governing contract liability in general; and where it appears as in this case that a matured stock
subscription is unpaid, none of the provisions contained in section 38 to 48, inclusive, of Act No. 1459 can
be permitted to obstruct or impede the action to recover thereon. By virtue of the first subsection of
section 36 of the Insolvency Law (Act No. 1956) the assignee of the insolvent corporation succeeds to all
the corporate rights of action vested in the corporation prior to its insolvency; and the assignee therefore
has the same freedom with respect to suing upon the stock subscription as the directors themselves would
have had under section 49 above cited.
But there is another reason why the present plaintiff must prevail in this case, even supposing that the
failure of the directors to comply with the requirements of the provisions of sections 38 to 48, inclusive, of
Act No. 1459 might have been an obstacle to a recovery by the corporation itself. That reason is this:
When insolvency supervenes upon a corporation and the court assumes jurisdiction to wind up, all unpaid
stock subscriptions become payable on demand, and are at once recoverable in an action instituted by the
assignee or receiver appointed by the court. This rule apparently had origin in a recognition of the
principle that a court of equity, having jurisdiction of the insolvency proceedings, could, if necessary,
make the call itself, in its capacity as successor to the powers exercised by the board of directors of the
defunct company. Later a further rule gained recognition to the effect that the receiver or assignee, in an
action instituted by proper authority, could himself proceed to collect the subscription without the
necessity of any prior call whatever. This conclusion is well supported by reference to the following
authorities:
. . . a court of equity may enforce payment of the stock subscriptions, although there have been
no calls for them by the company. (Hatch vs. Dana, 101 U. S., 205.)
It is again insisted that the plaintiffs cannot recover because the suit was not preceded by a call
or assessment against no right of action accrues. In a suit by a solvent going corporation to
collect a subscription, and in certain suits provided by the statute this would be true; but it is
now quite well settled that when the corporation becomes insolvent, with proceedings
instituted by creditors to wind up and distribute its assets, no call or assessment is necessary
before the institution of suits to collect unpaid balances on subscription. (Ross-Meehan Shoe F.
Co. vs. Southern Malleable Iron Co., 72 Fed., 957, 960;see also Henry vs. Vermillion etc. R. R.
Co., 17 Ohio, 187, and Thompson on Corporations 2d ed., vol. 3, sec. 2697.)
It evidently cannot be permitted that a subscriber should escape from his lawful obligation by reason of
the failure of the officers of the corporation to perform their duty in making a call; and when the original
model of making the call becomes impracticable, the obligation must be treated as due upon demand. If
the corporation must be treated still an active entity, and this action should be dismissed for irregularity in
the making of the call, other steps could be taken by the board to cure the defect and another action could
be brought; but where the company is being wound up, no such procedure would be practicable. The
better doctrine is that when insolvency supervenes all unpaid subscriptions become at once due and
enforceable.
The printed bill of exceptions in this cause does not contain the original complaint, nor does it state who
was plaintiff therein or the date when the action was instituted. It may, however, be gathered from the
papers transmitted to this court that the action was originally instituted in the name of the Philippine
Chemical Product Co. (Ltd.), prior to its insolvency, and that later the assignee was substituted as plaintiff
and then filed the amended complaint, with the permission of the court. Now, if we concede that no right
of action existed when the original complaint was filed, a right of action certainly existed when the
assignee filed his amended complaint; and as the bill of exceptions fails to show that any exception was
taken to the action of the court in allowing the amended complaint to be filed, no objection would be here
entertained on the ground that the action was prematurely brought.
The circumstance that the board of directors in their meeting of July 13, 1914, resolved to release Infante
from his obligation upon a subscription for 15 shares is no wise prejudicial to the right of the corporation
or its assignee to recover from Poizat upon a subscription made by him. In releasing Infante the board
transcended its powers, and he no doubt still remained liable on such of his shares as were not taken up
and paid for by other persons.
The general doctrine is that the 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, .
. . (10 Cyc., 450.)
The suggestion contained in Poizat's letter of July 27, 1914, to the effect that he understood that he was to
be relieved upon the same terms as Infante is, for the same reason, of no merit as matter of defense, even
if an agreement to that effect had been duly proved.
From what has been said it is manifest that the defendant is liable for P1,500, the amount of his
subscription upon the unpaid shares. Under section 36 of the Corporation Law he is also liable for interest
at the lawful rate from the date of his subscription, unless relieved from this liability by the by-laws of the
company. These by-laws have not been introduced in evidence and there is no proof showing the exact
date upon which the subscription was made, though it is alleged in the original complaint that the
company was organized upon March 23, 1914. This allegation is not admitted in the agreed statement of
facts. The defendant, however, inferentially admits in his letter of July 27, 1914, that his subscription had
been made prior to July 13, 1914. It resulted that in our opinion he should be held liable for interest from
that date.
The judgment of the lower court is therefore reversed, and judgment will be rendered in favor of the
plaintiff and against the defendant for the sum of one thousand five hundred pesos (P1,500), with interest
from July 13, 1014, and costs of both instances. So ordered.
Arellano, C.J., Torres, Johnson, Carson, Araullo, Malcolm, Avancea and Fisher, JJ., concur.








































G.R. Nos. L-24177-85 June 29, 1968
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA MADRE LUMBER
CO., INC., NASIPIT LUMBER CO., INC., WOODWORKS, INC., GONZALO PUYAT, TOMAS
B. MORATO, FINDLAY MILLAR LUMBER CO., INC., ET AL., INSULAR LUMBER CO.,
ANAKAN LUMBER CO., AND CANTILAN LUMBER CO., INC., defendants-appellees.
FERNANDO, J .:
In the face of a statutory norm, which, as interpreted in a uniform line of decisions by this Court, speaks
unequivocally and is free from doubt, the lower court with full recognition that the case for the plaintiff
creditor, Philippine National Bank, "is meritorious strictly from the legal standpoint"
1
but apparently
unable to "close its eyes to the equity of the case"
2
dismissed nine (9) cases filed by it, seeking "to recover
from the defendant lumber producers [Bitulok Sawmill, Inc.; Dingalan Lumber Co., Inc., Sierra Madre
Lumber Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay
Millar Lumber Co., Inc.; Insular Lumber Co., Inc.; Anakan Lumber Co., Inc.; and Cantilan Lumber Co.,
Inc.] the balance of their stock subscriptions to the Philippine Lumber Distributing Agency, Inc."
3
In
essence then, the crucial question posed by this appeal from such a decision of the lower court is
adherence to the rule of law. Otherwise stated, would non-compliance with a plain statutory command,
considering the persuasiveness of the plea that defendants-appellees would "not have subscribed to [the]
capital stock" of the Philippine Lumber Distributing Agency "were it not for the assurance of the [then]
President of the Republic of the Philippines that the Government would back [it] up by investing P9.00 for
every peso"
4
subscribed, a condition which was not fulfilled, such commitment not having been complied
with, be justified? The answer must be in the negative.
It cannot be otherwise even if an element of unfairness and injustice could be predicated, as the lower
court, in a rather sympathetic mood, did find in the plaintiff bank, as creditor, compelling defendant
lumber producers under the above circumstances to pay the balance of their subscriptions. For a plain and
statutory command, if applicable, must be respected. The rule of law cannot be satisfied with anything
less. The appeal must be sustained.
In these various suits decided jointly, the Philippine National Bank, as creditor, and therefore the real
party in interest, was allowed by the lower court to substitute the receiver of the Philippine Lumber
Distributing Agency in these respective actions for the recovery from defendant lumber producers the
balance of their stock subscriptions. The amount sought to be collected from defendants-appellees Bitulok
Sawmill, Inc., Dingalan Lumber Co., Inc., and Sierra Madre Lumber Co., Inc., is P5,000.00, defendants-
appellees having made a partial payment of P15,000.00 of their total subscription worth P20,000.00; from
defendant-appellee Nasipit Lumber Co., Inc., the sum of P10,000.00, defendant-appellee having made a
partial payment of P10,000.00 of its total subscription worth P20,000.00; from defendant-appellee
Woodworks, Inc., the sum of P10,886.00, defendant-appellee having made a partial payment of P9,114.00
of its total subscription worth P20,000.00; from defendant-appellee Gonzalo Puyat the sum of P10,000.00,
defendant-appellee having made a partial payment of P10,000.00 of his total subscription worth
P20,000.00; from defendant-appellee Tomas Morato the sum of P10,000.00, defendant-appellee having
made a partial payment of P10,000.00 of his total subscription worth P20,000.00; from defendant-appellee
Findlay Millar Lumber Co., Inc., the sum of P10,000.00, defendant-appellee having made a partial
payment of P10,000.00 of its total subscription worth P20,000.00; from defendant-appellee Insular
Lumber Co., Inc., the sum of P5,000.00, defendant-appellee having made a partial payment of P15,000.00
of its total subscription worth P20,000.00; from defendant-appellee Anakan Lumber Co., Inc., the sum of
P15,000.00, defendant-appellee having made a partial payment of P5,000.00 of its total subscription worth
P20,000.00; and from defendant-appellee Cantilan Lumber Co., Inc., the sum of P7,500.00, defendant-
appellee having made a partial payment of P2,500.00 of its total subscription worth P10,000.00, plus
interest at the legal rate from the filing of the suits and the costs of the suits in all the nine (9) cases.
The Philippine Lumber Distributing Agency, Inc., according to the lower court, "was organized sometime
in the early part of 1947 upon the initiative and insistence of the late President Manuel Roxas of the
Republic of the Philippines who for the purpose, had called several conferences between him and the
subscribers and organizers of the Philippine Lumber Distributing Agency, Inc."
5
The purpose was
praiseworthy, to insure a steady supply of lumber, which could be sold at reasonable prices to enable the
war sufferers to rehabilitate their devastated homes. The decision continues: "He convinced the lumber
producers to form a lumber cooperative and to pool their sources together in order to wrest, particularly,
the retail trade from aliens who were acting as middlemen in the distribution of lumber. At the beginning,
the lumber producers were reluctant to organize the cooperative agency as they believed that it would not
be easy to eliminate from the retail trade the alien middlemen who had been in this business from time
immemorial, but because the late President Roxas made it clear that such a cooperative agency would not
be successful without a substantial working capital which the lumber producers could not entirely
shoulder, and as an inducement he promised and agreed to finance the agency by making the Government
invest P9.00 by way of counterpart for every peso that the members would invest therein,...."
6

This was the assurance relied upon according to the decision, which stated that the amount thus
contributed by such lumber producers was not enough for the operation of its business especially having
in mind the primary purpose of putting an end to alien domination in the retail trade of lumber products.
Nor was there any appropriation by the legislature of the counterpart fund to be put up by the Government,
namely, P9.00 for every peso invested by defendant lumber producers. Accordingly, "the late President
Roxas instructed the Hon. Emilio Abello, then Executive Secretary and Chairman of the Board of
Directors of the Philippine National Bank, for the latter to grant said agency an overdraft in the original
sum of P250,000.00 which was later increased to P350,000.00, which was approved by said Board of
Directors of the Philippine National Bank on July 28, 1947, payable on or before April 30, 1958, with
interest at the rate of 6% per annum, and secured by the chattel mortgages on the stock of lumber of said
agency."
7
The Philippine Government did not invest the P9.00 for every peso coming from defendant
lumber producers. The loan extended to the Philippine Lumber Distributing Agency by the Philippine
National Bank was not paid. Hence, these suits.
For the lower court, the above facts sufficed for their dismissal. To its mind "it is grossly unfair and unjust
for the plaintiff bank now to compel the lumber producers to pay the balance of their subscriptions ....
Indeed, when the late President Roxas made representations to the plaintiff bank, thru the Hon. Emilio
Abello, who was then the Executive Secretary and Chairman of its Board of Directors, to grant said
overdraft to the agency, it was the only way by which President Roxas could make good his commitment
that the Government would invest in said agency to the extent already mentioned because, according to
said late President Roxas, the legislature had not appropriated any amount for such counterpart.
Consequently, viewing from all considerations of equity in the case, the Court finds that plaintiff bank
should not collect any more from the defendants the balance of their subscriptions to the capital stock of
the Philippine Lumber Distributing Agency, Inc."
8

Even with the case for defendant lumber producers being put forth in its strongest possible light in the
appealed decision, the plaintiff creditor, the Philippine National Bank, should have been the prevailing
party. On the law as it stands, the judgment reached by the lower court cannot be sustained. The appeal, as
earlier made clear, possesses merit.
In Philippine Trust Co. v. Rivera,
9
citing the leading case of Velasco v. Poizat,
10
this Court held: "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 debt.... A
corporation has no power to release an original subscriber to its capital stock from the obligation of paying
for his shares, without a valuable consideration for such release; 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. Moreover, strict compliance with the statutory regulations is
necessary...." The Poizat doctrine found acceptance in later cases.
11
One of the latest cases, Lingayen Gulf
Electric Power v. Baltazar,
12
Speaks to this effect: "In the case of Velasco v. Poizat,
13
the corporation
involved was insolvent, in which case all unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee."
It would be unwarranted to ascribe to the late President Roxas the view that the payment of the stock
subscriptions, as thus required by law, could be condoned in the event that the counterpart fund to be
invested by the Government would not be available. Even if such were the case, however, and such a
promise were in fact made, to further the laudable purpose to which the proposed corporation would be
devoted and the possibility that the lumber producers would lose money in the process, still the plain and
specific wording of the applicable legal provision as interpreted by this Court must be controlling. It is a
well-settled principle that with all the vast powers lodged in the Executive, he is still devoid of the
prerogative of suspending the operation of any statute or any of its terms.
The emphatic and categorical language of an American decision cited by the late Justice Laurel, in People
v. Vera,
14
comes to mind: "By the twentieth article of the declaration of rights in the constitution of this
commonwealth, it is declared that the power of suspending the laws, or the execution of the laws, ought
never to be exercised but by the legislature, or by authority derived from it, to be exercised in such
particular cases only as the legislature shall expressly provide for...." Nor could it be otherwise
considering that the Constitution specifically enjoins the President to see to it that all laws be faithfully
executed.
15
There may be a discretion as to what a particular legal provision requires; there can be none
whatsoever as to the enforcement and application thereof once its meaning has been ascertained. What it
decrees must be followed; what it commands must be obeyed. It must be respected, the wishes of the
President, to the contrary notwithstanding, even if impelled by the most worthy of motives and the most
persuasive equitable considerations. To repeat, such is not the case here. For at no time did President
Roxas ever give defendant lumber producers to understand that the failure of the Government for any
reason to put up the counterpart fund could terminate their statutory liability.
Such is not the law. Unfortunately, the lower court was of a different mind. That is not to pay homage to
the rule of law. Its decision then, one it is to be repeated influenced by what it considered to be the "equity
of the case", is not legally impeccable.
WHEREFORE, the decision of the lower court is reversed and the cases remanded to the lower court for
judgment according to law, with full consideration of the legal defenses raised by defendants-appellees,
Bitulok Sawmill, Inc.; Dingalan Lumber Co., Inc.; Sierra Madre Lumber Co., Inc.; Nasipit Lumber Co.,
Inc.; Woodworks, Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay Millar Lumber Co., Inc.; Anakan
Lumber Co., Inc.; and Cantilan Lumber Co., Inc. No pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez and Angeles, JJ., concur.
Castro, J., took no part.
G.R. No. L-19761 January 29, 1923
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval
Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.
Araneta and Zaragoza for appellant.
Ross and Lawrence for appellee.
STREET, J .:
This action was instituted on November 21, 1921, in the Court of First Instance of Manila, by the
Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval Filipina, against Marciano
Rivera, for the purpose of recovering a balance of P22,500, alleged to be due upon defendant's
subscription to the capital stock of said insolvent corporation. The trial judge having given judgment in
favor of the plaintiff for the amount sued for, the defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated under the laws
of the Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par value of
P100 each. Among the incorporators of this company was numbered the defendant Mariano Rivera, who
subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by other
persons. The articles of incorporation were duly registered in the Bureau of Commerce and Industry on
October 30 of the same year.
In the course of time the company became insolvent and went into the hands of the Philippine Trust
Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the stock
subscription of the defendant, which admittedly has never been paid.
The reason given for the failure of the defendant to pay the entire subscription is, that not long after
theCooperativa Naval Filipina had been incorporated, a meeting of its stockholders occurred, at which a
resolution was adopted to the effect that the capital should be reduced by 50 per centum and the
subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per
centum of the same. As a result of this resolution it seems to have been supposed that the subscription of
the various shareholders had been cancelled to the extent stated; and fully paid certificate were issued to
each shareholders for one-half of his subscription. It does not appear that the formalities prescribed in
section 17 of the Corporation Law (Act No. 1459), as amended, relative to the reduction of capital stock in
corporations were observed, and in particular it does not appear that any certificate was at any time filed in
the Bureau of Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the defendant was without effect
and that the defendant was still liable for the unpaid balance of his subscription. In this we think his Honor
was clearly right.
It is established doctrine that subscription to the capital of a corporation constitute a find 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.) A corporation has no power to release an original subscriber to
its capital stock from the obligation of paying for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital stock can take place only in the manner an under
the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict
compliance with the statutory regulations is necessary (14 C. J., 498, 620).
In the case before us the resolution releasing the shareholders from their obligation to pay 50 per centum
of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon
which the company's creditors were entitled ultimately to rely and, having been effected without
compliance with the statutory requirements, was wholly ineffectual.
The judgment will be affirmed with cost, and it is so ordered.
Araullo, C. J., Malcolm, Avancea, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.



















G.R. No. 127937. July 28, 1999]
NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner, vs. HONORABLE COURT
OF APPEALS and PHILIPPINE LONG DISTANCE TELEPHONE
COMPANY, respondents.
D E C I S I O N
PURISIMA, J .:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking
to modify the October 30, 1996 Decision
[1]
and the January 27, 1997 Resolution
[2]
of the Court of
Appeals
[3]
in CA-G.R. SP No. 34063.
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on the Philippine
Long Distance Telephone Company (PLDT) the following assessment notices and demands for payment:
1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e) of the PSA for the
said year, 1988, computed at P0.50 per P100.00 of the Protestants (PLDT) outstanding capital stock as at
December 31, 1987 which then consisted of Serial Preferred Stock amounting to P1,277,934,390.00
(Billion) and Common Stock of P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).
2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the approval of the
protestants increase of its authorized capital stock from P2.7 Billion to P4.5 Billion; and
3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40 (g) of the PSA in
connection with the Commissions decisions in NTC Cases Nos. 86-13 and 87-008 respectively,
approving the Protestants equity participation in the Fiber Optic Interpacific Cable systems and X-5
Service Improvement and Expansion Program.
[4]

In its two letter-protests
[5]
dated February 23, 1988 and July 14, 1988, and position papers
[6]
dated
November 8, 1990 and March 12, 1991, respectively, the PLDT challenged the aforesaid assessments,
theorizing inter alia that:
(a) The assessments were being made to raise revenues and not as mere reimbursements for ctual
regulatory expenses in violation of the doctrine in PLDT vs. PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par values of private
respondents outstanding capital stock;
(c) Petitioner has no authority to compel private respondents payment of the assessed fees under Section
40 (f) for the increase of its authorized capital stock since petitioner did not render any supervisory or
regulatory activity and incurred no expenses in relation thereto.
x x x
[7]

On September 29, 1993, the NTC rendered a Decision
[8]
in NTC Case No. 90-223, denying the
protest of PLDT and disposing thus:
FOR ALL THE FOREGOING, finding PLDTs protest to be without merit, the Commission has no
alternative but to uphold the law and DENIES the protest of PLDT. Unless otherwise restrained by a
competent court of law, the Common Carrier Authorization Department (CCAD) is hereby directed to
update its assessments and collections on PLDT and all public telecommunications carriers for the
payment of the fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised NTC
Schedule of Fees and Charges.
This decision takes effect immediately.
SO ORDERED.
On October 22, 1993, PLDT interposed a Motion for Reconsideration,
[9]
which was denied by
NTC in an Order
[10]
issued on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which came out
with its questioned Decision of October 30, 1996, modifying the disposition of NTC as follows:
"WHEREFORE, the assailed decision and order of the respondent Commission dated September 29, 1993
and May 03, 1994, respectively, in NTC Case No. 90-223 are hereby MODIFIED. The Commission is
ordered to recompute its assessments and demands for payment from petitioner PLDT as follows:
A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the Public Service Act, as
amended, they should be computed at fifty centavos for each one hundred pesos or fraction thereof of the
par value of the capital stock subscribed or paid excluding stock dividends, premiums or capital in excess
of par.
B. For permit fees for the approval of petitioners increase of authorized capital stock under Section 40
(f) of the same Act, they should be computed at fifty for each one hundred pesos or fraction thereof,
regardless of any regulatory service or expense incurred by respondent.
On November 20, 1996, NTC moved for partial reconsideration of the abovementioned Decision,
with respect to the basis of the assessment under Section 40(e), i.e., par value of the subscribed capital
stock. It also sought a partial reconsideration of the fee of fifty (P0.50) centavos for the issuance or
increasing of the capital stock under Section 40 (f).
[11]

With the denial of its motions for reconsideration by the Resolution of the Court of Appeals dated
January 27, 1997, petitioner found its way to this Court via the present Petition; posing as sole issue:
WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPUTATION
OF SUPERVISION AND REGULATION FEES UNDER SECTION 40 (F) OF THE PUBLIC
SERVICE ACT SHOULD BE BASED ON THE PAR VALUE OF THE SUBSCRIBED
CAPITAL STOCK.
Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on
the market value of PLDTs outstanding capital stock inclusive of stock dividends and premium, and not
on the par value of PLDTs capital stock excluding stock dividends and premium, as contended by
PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance Telephone
Company vs. Public Service Commission, 66 SCRA 341, that the basis for computation of the fee to be
charged by NTC on PLDT, is the capital stock subscribed or paid and not, alternatively, the property
and equipment.
The law in point is clear and categorical. There is no room for construction. It simply calls for
application. To repeat, the fee in question is based on the capital stock subscribed or paid, nothing less
nothing more.
It bears stressing that it is not the NTC that imposed such a fee. It is the legislature itself. Since
Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and
Taxation, the distinction between police power and the power to tax, which could be significant if the
exercising authority were mere political subdivisions (since delegation by it to such political subdivisions
of one power does not necessarily include the other), would not be of any moment when, as in the case
under consideration, Congress itself exercises the power. All that is to be done would be to apply and
enforce the law when sufficiently definitive and not constitutional infirm.
The term capital and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly, capital refers
to the value of the property or assets of a corporation. The capital subscribed is the total amount of the
capital that persons (subscribers or shareholders) have agreed to take and pay for, which need not
necessarily be, and can be more than, the par value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premiums if any, in consideration of the original issuance of the
shares. In the case of stock dividends, it is the amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can loosely be termed as the trust fund of the
corporation. The Trust Fund doctrine considers this subscribed capital as a trust fund for the payment of
the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or released to the stockholder (except in the
redemption of redeemable shares) without violating this principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot be condoned or remitted; nor can the corporation
buy its own shares using the subscribed capital as the consideration therefor.
[12]

In the same way that the Court in PLDT vs. PSC has rejected the value of the property and
equipment as being the proper basis for the fee imposed by Section 40(e) of the Public Service Act, as
amended by Republic Act No. 3792, so also must the Court disallow the idea of computing the fee on the
par value of [PLDTs] capital stock subscribed or paid excluding stock dividends, premiums, or capital in
excess of par. Neither, however, is the assessment made by the National Telecommunications
Commission on the basis of the market value of the subscribed or paid-in capital stock acceptable since it
is itself a deviation from the explicit language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision and regulation
fee under Section 40(e) made by NTC for 1988, computed at P0.50 per 100 of PLDTs outstanding
capital stock as of December 31, 1987, amounted to P7,495,161.00. The same was based on the amount
of P1,277,934,390.00 of serial preferred stocks and P221,097,785.00 of common stocks or a total of
P1,499,032,175.00. The assessment was reported to include stock dividends, premium on issued common
shares and premium on preferred shares converted into common stock.
[13]
The actual capital paid or the
amount of capital stock paid and for which PLDT received actual payments were not disclosed or extant in
the records before the Court. The only other item available is the amount assessed by petitioner from
PLDT, which had been based on market value of the outstanding capital stock on given dates.
[14]

All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case of
Philippine Long Distance Telephone Company vs. Public Service Commission, it should be reiterated that
the proper basis for the computation of subject fee under Section 40(e) of the Public Service Act, as
amended by Republic Act No. 3792, is the capital stock subscribed or paid and not, alternatively, the
property and equipment.
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its Resolution,
dated January 27, 1997, in CA G.R. SP No. 34063, as well as the decision of the National
Telecommunication Commission, dated September 29, 1993, and Order, dated May 3, 1994, in NTC case
No. 90-223, are hereby SET ASIDE and the National Telecommunication Commission is hereby ordered
to make a re-computation of the fee to be imposed on Philippine Long Distance Telephone Company on
the basis of the latters capital stock subscribed or paid and strictly in accordance with the foregoing
disquisition and conclusion.
No pronouncement as to costs.
SO ORDERED.
















































[G.R. No. 144476. April 8, 2003]
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG,
WILLIE T. ONG, and JULIE ONG ALONZO, petitioners, vs. DAVID S. TIU, CELY Y.
TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU, LOURDES
C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA
TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES
AND EXCHANGE COMMISSION, respondents.
[G.R. No. 144629. April 8, 2003]
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN
YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners, vs. ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L.
ONG, WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO,respondents.
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 atP100.00 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 theP190 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 oneas 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 fairerule or the free enterprise system prevailing in our
social and economic set-up dictates that it is better for the State and its organs to leave business to the
businessmen; especially so, when courts are ill-equipped to make business decisions. More importantly,
the social contract in the corporate family to decide the course of the corporate business has been vested in
the board and not with courts.
[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.















THIRD DIVISION
G.R. No. 157479 November 24, 2010
PHI LI P TURNER and ELNORA TURNER, Petitioners,
vs.
LORENZO SHI PPI NG CORPORATI ON, Respondent.
D E C I S I O N
BERSAMI N, J .:
This case concerns the right of dissenting stockholders to demand payment of the value of their
shareholdings.
In the stockholders suit to recover the value of their shareholdings from the corporation, the
Regional Trial Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the
corporation, herein respondent, to pay. Execution was partially carried out against the respondent. On
the respondents petition for certiorari, however, the Court of Appeals (CA) corrected the RTC and
dismissed the petitioners suit on the ground that their cause of action for collection had not yet accrued
due to the lack of unrestricted retained earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CAs decision promulgated on
March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S.
Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al.
1

Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged
primarily in cargo shipping activities. In June 1999, the respondent decided to amend its articles of
incorporation to remove the stockholders pre-emptive rights to newly issued shares of stock. Feeling that
the corporate move would be prejudicial to their interest as stockholders, the petitioners voted against the
amendment and demanded payment of their shares at the rate of P2.276/share based on the book value of
the shares, or a total of P2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners unacceptable. It
insisted that the market value on the date before the action to remove the pre-emptive right was taken
should be the value, or P0.41/share (or a total of P414,100.00), considering that its shares were listed in
the Philippine Stock Exchange, and that the payment could be made only if the respondent had
unrestricted retained earnings in its books to cover the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal
committee pursuant to Section 82 of the Corporation Code, each of them nominating a representative,
who together then nominated the third member who would be chairman of the appraisal committee. Thus,
the appraisal committee came to be made up of Reynaldo Yatco, the petitioners nominee; Atty. Antonio
Acyatan, the respondents nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third
member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of P2.54/share, for an
aggregate value of P2,565,400.00 for the petitioners.
2

Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee,
plus 2%/month penalty from the date of their original demand for payment, as well as the reimbursement
of the amounts advanced as professional fees to the appraisers.
3

In its letter to the petitioners dated January 2, 2001,
4
the respondent refused the petitioners
demand, explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their
appraisal rights could be paid only when the corporation had unrestricted retained earnings to cover the
fair value of the shares, but that it had no retained earnings at the time of the petitioners demand, as
borne out by its Financial Statements for Fiscal Year 1999 showing a deficit of P72,973,114.00 as of
December 31, 1999.
Upon the respondents refusal to pay, the petitioners sued the respondent for collection and
damages in the RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086,
was initially assigned to Branch 132.
5

On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION
NINE HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS,
Philippine Currency, evidenced by its Financial Statement as of the Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final,
that the same cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a matter
of right, to a summary judgment. xxx
6

The respondent opposed the motion for partial summary judgment, stating that the determination of
the unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that
the petitioners did not have a cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the Presiding Judge of
Branch 133 transmitted the records to the Clerk of Court for re-raffling to any of the RTCs special
commercial courts in Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No.
01-086 was re-raffled to Branch 142.
Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086
was ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon,
7

pursuant to the Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring
intra-corporate cases to be brought in the RTC exercising jurisdiction over the place where the principal
office of the corporation was found.
After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners
counsel did not attend, Judge Tipon issued an order,
8
granting the petitioners motion for partial summary
judgment, stating:
As to the motion for partial summary judgment, there is no question that the 3-man committee
mandated to appraise the shareholdings of plaintiff submitted its recommendation on October 27, 2000
fixing the fair value of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the
Corporation Code:
"The findings of the majority of the appraisers shall be final, and the award shall be paid by the
corporation within thirty (30) days after the award is made."
"The only restriction imposed by the Corporation Code is"
"That no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earning in its books to cover such payment."
The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to
the Securities and Exchange Commission, the defendant has retained earnings of P11,975,490 as of
March 21, 2002. This is not disputed by the defendant. Its only argument against paying is that there must
be unrestricted retained earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not
say that the unrestricted retained earnings must exist at the time of the demand. Even if there are no
retained earnings at the time the demand is made if there are retained earnings later, the fair value of
such stocks must be paid. The only restriction is that there must be sufficient funds to cover the creditors
after the dissenting stockholder is paid. No such allegations have been made by the defendant.
9

On November 12, 2002, the respondent filed a motion for reconsideration.
On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners
filed a motion for immediate execution and a motion to strike out motion for reconsideration. In the latter
motion, they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim
Rules. Thus, also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted
the petitioners motion for immediate execution.
10

Subsequently, on November 28, 2002, the RTC issued a writ of execution.
11

Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge
the two aforecited orders of Judge Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT
TO THE SPOUSES TURNER, BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC HAD
NO RETAINED EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING
ANY RIGHTS OF THE SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF
THEIR LSC SHARES. ANY RETAINED EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS
FILED ARE IRRELEVANT TO THE SPOUSES TURNERS RIGHT TO RECOVER UNDER THE
"COMPLAINT", BECAUSE THE WELL-SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE
TIPONS ATTENTION, IS "IF NO RIGHT EXISTED AT THE TIME (T)HE ACTION WAS
COMMENCED THE SUIT CANNOT BE MAINTAINED, ALTHOUGH SUCH RIGHT OF ACTION MAY
HAVE ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS
DISCRETION, WHEN HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF EXECUTION"
DIRECTING THE EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE
SPOUSES TURNER, BECAUSE THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1
OF RULE 39 OF THE RULES OF COURT AND THEREFORE CANNOT BE SUBJECT OF
EXECUTION UNDER THE SUPREME COURTS CATEGORICAL HOLDING IN PROVINCE OF
PANGASINAN VS. COURT OF APPEALS.
Upon the respondents application, the CA issued a temporary restraining order (TRO), enjoining
the petitioners, and their agents and representatives from enforcing the writ of execution. By then,
however, the writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution.
Thereupon, the sheriff resumed the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4, 2003,
12
pertinently holding:
However, it is clear from the foregoing that the Turners appraisal right is subject to the legal
condition that no payment shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment. Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors. The reason is that creditors of a corporation are
preferred over the stockholders in the distribution of corporate assets. There can be no distribution of
assets among the stockholders without first paying corporate creditors. Hence, any disposition of
corporate funds to the prejudice of creditors is null and void. Creditors of a corporation have the right to
assume that so long as there are outstanding debts and liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock.
In the instant case, it was established that there were no unrestricted retained earnings when the
Turners filed their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that
payment of their shares could only be made if it had unrestricted earnings in its books to cover the same.
Petitioner reiterated this in a letter dated 2 January 2001 which further informed the Turners that its
Financial Statement for fiscal year 1999 shows that its retained earnings ending December 31, 1999 was
at a deficit in the amount of P72,973,114.00, a matter which has not been disputed by private respondents.
Hence, in accordance with the second paragraph of sec. 82, BP 68 supra, the Turners right to payment
had not yet accrued when they filed their Complaint on January 22, 2001, albeit their appraisal right
already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court
declared that:
Now, before an action can properly be commenced all the essential elements of the cause of action
must be in existence, that is, the cause of action must be complete. All valid conditions precedent to the
institution of the particular action, whether prescribed by statute, fixed by agreement of the parties or
implied by law must be performed or complied with before commencing the action, unless the conduct of
the adverse party has been such as to prevent or waive performance or excuse non-performance of the
condition.
It bears restating that a right of action is the right to presently enforce a cause of action, while a
cause of action consists of the operative facts which give rise to such right of action. The right of action
does not arise until the performance of all conditions precedent to the action and may be taken away by
the running of the statute of limitations, through estoppel, or by other circumstances which do not affect
the cause of action. Performance or fulfillment of all conditions precedent upon which a right of action
depends must be sufficiently alleged, considering that the burden of proof to show that a party has a right
of action is upon the person initiating the suit.
The Turners right of action arose only when petitioner had already retained earnings in the
amount of P11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001
when they filed the Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by law, an action commenced
before the cause of action has accrued is prematurely brought and should be dismissed. The fact that the
cause of action accrues after the action is commenced and while it is pending is of no moment. It is a rule
of law to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must
be some cause of action at the commencement of the suit. There are reasons of public policy why there
should be no needless haste in bringing up litigation, and why people who are in no default and against
whom there is as yet no cause of action should not be summoned before the public tribunals to answer
complaints which are groundless. An action prematurely brought is a groundless suit. Unless the plaintiff
has a valid and subsisting cause of action at the time his action is commenced, the defect cannot be cured
or remedied by the acquisition or accrual of one while the action is pending, and a supplemental
complaint or an amendment setting up such after-accrued cause of action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals.
The Turners apprehension that their claim for payment may prescribe if they wait for the
petitioner to have unrestricted retained earnings is misplaced. It is the legal possibility of bringing the
action that determines the starting point for the computation of the period of prescription. Stated
otherwise, the prescriptive period is to be reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the
herein Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or
outside the limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that
the act although within the general power of the judge, is not authorized and therefore void, with respect
to the particular case, because the conditions which authorize the exercise of his general power in that
particular case are wanting, and hence, the judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the
corresponding Writs of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered
DISMISSED without prejudice to refiling by the private respondents of the action for enforcement of their
right to payment as withdrawing stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the CAs decision, submitting
that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED
THE PETITION FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT
ACT BEYOND ITS JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE
MOTION FOR PARTIAL SUMMARY JUDGMENT AND IN GRANTING THE MOTION FOR
IMMEDIATE EXECUTION OF JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED
THE DISMISSAL OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE
ANNULMENT OF THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT
AND OF THE ORDER GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF THE
JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT
THEREFORE DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT
IN ACCORD WITH LAW OR WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the
petitioners complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ
of execution.
A.
Stockholders Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to demand payment of the
fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in
Section 81 of the Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to
those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter
or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless
objectionable corporate action is taken.
13
It serves the purpose of enabling the dissenting stockholder to
have his interests purchased and to retire from the corporation.
14
1avvphil
Under the common law, there were originally conflicting views on whether a corporation had the
power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase
its issued stocks because such purchase was an indirect method of reducing capital (which was statutorily
restricted), aside from being inconsistent with the privilege of limited liability to creditors.
15
Only a few
American jurisdictions adopted by decision or statute the strict English rule forbidding a corporation
from purchasing its own shares. In some American states where the English rule used to be adopted,
statutes granting authority to purchase out of surplus funds were enacted, while in others, shares might be
purchased even out of capital provided the rights of creditors were not prejudiced.
16
The reason
underlying the limitation of share purchases sprang from the necessity of imposing safeguards against the
depletion by a corporation of its assets and against the impairment of its capital needed for the protection
of creditors.
17

Now, however, a corporation can purchase its own shares, provided payment is made out of
surplus profits and the acquisition is for a legitimate corporate purpose.
18
In the Philippines, this new rule
is embodied in Section 41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription,
in a delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the implications of
the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the proposed
corporate action by making a written demand on the corporation within 30 days after the date on which
the vote was taken for the payment of the fair value of his shares. The failure to make the demand within
the period is deemed a waiver of the appraisal right.
19

2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares
within a period of 60 days from the date the stockholders approved the corporate action, the fair value
shall be determined and appraised by three disinterested persons, one of whom shall be named by the
stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of
the majority of the appraisers shall be final, and the corporation shall pay their award within 30 days
after the award is made. Upon payment by the corporation of the agreed or awarded price, the
stockholder shall forthwith transfer his or her shares to the corporation.
20

3. All rights accruing to the withdrawing stockholders shares, including voting and dividend
rights, shall be suspended from the time of demand for the payment of the fair value of the shares until
either the abandonment of the corporate action involved or the purchase of the shares by the corporation,
except the right of such stockholder to receive payment of the fair value of the shares.
21

4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall
submit to the corporation the certificates of stock representing his shares for notation thereon that such
shares are dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights
under this Title X of the Corporation Code. If shares represented by the certificates bearing such notation
are transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the rights of a regular
stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the
transferee.
22

5. If the proposed corporate action is implemented or effected, the corporation shall pay to such
stockholder, upon the surrender of the certificates of stock representing his shares, the fair value thereof
as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in
anticipation of such corporate action.
23

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover the payment. In case the corporation
has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides
that if the dissenting stockholder is not paid the value of his shares within 30 days after the award, his
voting and dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the
payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock,
property, and other assets of a corporation are regarded as equity in trust for the payment of corporate
creditors, who are preferred in the distribution of corporate assets.
24
The creditors of a corporation have
the right to assume that the board of directors will not use the assets of the corporation to purchase its
own stock for as long as the corporation has outstanding debts and liabilities.
25
There can be no
distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition
of corporate funds and assets to the prejudice of creditors is null and void.
26

B.
Petitioners cause of action was premature
That the respondent had indisputably no unrestricted retained earnings in its books at the time the
petitioners commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondents legal
obligation to pay the value of the petitioners shares did not yet arise. Thus, the CA did not err in holding
that the petitioners had no cause of action, and in ruling that the RTC did not validly render the partial
summary judgment.
A cause of action is the act or omission by which a party violates a right of another.
27
The essential
elements of a cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a
correlative legal duty of the defendant to respect such right; and (c) an act or omission by such defendant
in violation of the right of the plaintiff with a resulting injury or damage to the plaintiff for which the
latter may maintain an action for the recovery of relief from the defendant.
28
Although the first two
elements may exist, a cause of action arises only upon the occurrence of the last element, giving the
plaintiff the right to maintain an action in court for recovery of damages or other appropriate relief.
29

Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a
cause of action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without
any cause of action.
The RTC concluded that the respondents obligation to pay had accrued by its having the
unrestricted retained earnings after the making of the demand by the petitioners. It based its conclusion
on the fact that the Corporation Code did not provide that the unrestricted retained earnings must already
exist at the time of the demand.
The RTCs construal of the Corporation Code was unsustainable, because it did not take into
account the petitioners lack of a cause of action against the respondent. In order to give rise to any
obligation to pay on the part of the respondent, the petitioners should first make a valid demand that the
respondent refused to pay despite having unrestricted retained earnings. Otherwise, the respondent could
not be said to be guilty of any actionable omission that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after the filing of the
complaint cure the lack of cause of action in Civil Case No. 01-086. The petitioners right of action could
only spring from an existing cause of action. Thus, a complaint whose cause of action has not yet accrued
cannot be cured by an amended or supplemental pleading alleging the existence or accrual of a cause of
action during the pendency of the action.
30
For, only when there is an invasion of primary rights, not
before, does the adjective or remedial law become operative.
31
Verily, a premature invocation of the
courts intervention renders the complaint without a cause of action and dismissible on such ground.
32
In
short, Civil Case No. 01-086, being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more than sufficient to
cover the petitioners claims on June 26, 2002 (when they filed their motion for partial summary
judgment) did not rectify the absence of the cause of action at the time of the commencement of Civil Case
No. 01-086. The motion for partial summary judgment, being a mere application for relief other than by a
pleading,
33
was not the same as the complaint in Civil Case No. 01-086. Thereby, the petitioners did not
meet the requirement of the Rules of Court that a cause of action must exist at the commencement of an
action, which is "commenced by the filing of the original complaint in court."
34

The petitioners claim that the respondents petition for certiorari sought only the annulment of the
assailed orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for
immediate execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondents petition for certiorari targeted only the RTCs orders granting the
motion for partial summary judgment and the motion for immediate execution, the CAs directive for the
dismissal of Civil Case No. 01-086 was not an abuse of discretion, least of all grave, because such
dismissal was the only proper thing to be done under the circumstances. According to Surigao Mine
Exploration Co., Inc. v. Harris:
35

Subject to certain qualification, and except as otherwise provided by law, an action commenced
beforethecauseof action has accrued is prematurely brought and should bedismissed. The fact that
the cause of action accrues after the action is commenced and while the case is pending is of no moment.
It is a rule of law to which there is, perhaps no exception, either in law or in equity, that to recover at all
there must be some cause of action at the commencement of the suit. There are reasons of public policy
why there should be no needless haste in bringing up litigation, and why people who are in no default and
against whom there is as yet no cause of action should not be summoned before the public tribunals to
answer complaints which are groundless. An action prematurely brought is a groundless suit. Unless the
plaintiff has a valid and subsisting cause of action at the time his action is commenced, the defect
cannot be cured or remedied by theacquisition or accrual of one whilethe action is pending, and a
supplemental complaint or an amendment setting up such after-accrued cause of action is not permissible.
Lastly, the petitioners argue that the respondents recourse of a special action for certiorari was
the wrong remedy, in view of the fact that the granting of the motion for partial summary judgment
constituted only an error of law correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it
exceeded its jurisdiction by taking cognizance of the complaint that was not based on an existing cause of
action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo
Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the
Regional Trial Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.















THIRD DIVISION
G.R. No. 157549 May 30, 2011
DONNINA C. HALLEY, Petitioner,
vs.
PRINTWELL, INC., 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
Amou
nt
Donnina C. Halley P149,9
55.65
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 P321,3
42.75
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.1avvphi1
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 of
P149,955.65.
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 of
P262,500.00, 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.





















































[G.R. No. 131394. March 28, 2005]
JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, petitioners,
vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE OF
FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL,
INC., respondents.
D E C I S I O N
TINGA, J .:
Presented in the case at bar is the apparently straight-forward but complicated question: What
should be the basis of quorum for a stockholders meetingthe outstanding capital stock as indicated in
the articles of incorporation or that contained in the companys stock and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 41473
[1]

promulgated on 18 August 1997, affirming the SECOrder dated 20 June 1996, and the Resolution
[2]
of the
Court of Appeals dated 31 October 1997 which denied petitioners motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven
hundred (700) founders shares and seventy-six (76) common shares as its initial capital stock subscription
reflected in the articles of incorporation. However, private respondents and their predecessors who were
in control of PMMSI registered the companys stock and transfer book for the first time in 1978,
recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI.
Sometime in 1979, a special stockholders meeting was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3) of
the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the
Securities and Exchange Commission (SEC) for the registration of their property rights over one hundred
(120) founders shares and twelve (12) common shares owned by their father. The SEC hearing officer
held that the heirs of Acayan were entitled to the claimed shares and called for a special stockholders
meeting to elect a new set of officers.
[3]
The SEC En Banc affirmed the decision. As a result, the shares of
Acayan were recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors. Private
respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992
stockholders meeting, alleging that the quorum for the said meeting should not be based on the 165
issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock
of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The petition
was dismissed.
[4]
Appeal was made to the SEC En Banc, which granted said appeal, holding that the
shares of the deceased incorporators should be duly represented by their respective administrators or heirs
concerned. The SEC directed the parties to call for a stockholders meeting on the basis of the
stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for
the corporation.
[5]

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of
Appeals.
[6]
Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and
directors of PMMSI, earlier filed another petition for review of the same SEC En Bancs orders. The
petitions were thereafter consolidated.
[7]
The consolidated petitions essentially raised the following
issues, viz: (a) whether the basis the outstanding capital stock and accordingly also for determining the
quorum at stockholders meetings it should be the 1978 stock and transfer book or if it should be the 1952
articles of incorporation; and (b) whether the Court of Appeals gravely erred in applying the Espejo
Decision to the benefit of respondents.
[8]
The Espejo Decision is the decision of the SEC en banc in
SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and transfer
book.
The Court of Appeals held that for purposes of transacting business, the quorum should be based on
the outstanding capital stock as found in the articles of incorporation.
[9]
As to the second issue, the Court
of Appeals held that the ruling in the Acayan case would ipso facto benefit the private respondents, since
to require a separate judicial declaration to recognize the shares of the original incorporators would entail
unnecessary delay and expense. Besides, the Court of Appeals added, the incorporators have already
proved their stockholdings through the provisions of the articles of incorporation.
[10]

In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and legal.
They submit that reliance on the 1952 articles of incorporation for determining the quorum negates the
existence and validity of the stock and transfer book which private respondents themselves prepared. In
addition, they posit that private respondents cannot avail of the benefits secured by the heirs of Acayan, as
private respondents must show and prove entitlement to the founders and common shares in a separate and
independent action/proceeding.
In private respondents Memorandum
[11]
dated 08 March 2000, they point out that the instant
petition raises the same facts and issues as those raised in G.R. No. 131315
[12]
, which was denied by the
First Division of this Court on 18 January 1999 for failure to show that the Court of Appeals committed
any reversible error. They add that as a logical consequence, the instant petition should be dismissed on
the ground ofres judicata. Furthermore, private respondents claim that in view of the applicability of the
rule on res judicata, petitioners counsel should be cited for contempt for violating the rule against forum-
shopping.
[13]

For their part, petitioners claim that the principle of res judicata does not apply to the instant case.
They argue that the instant petition is separate and distinct from G.R. No. 131315, there being no identity
of parties, and more importantly, the parties in the two petitions have their own distinct rights and interests
in relation to the subject matter in litigation. For the same reasons, they claim that counsel for petitioners
cannot be found guilty of forum-shopping.
[14]

In their Manifestation and Motion
[15]
dated 22 September 2004, private respondents moved for the
dismissal of the instant petition in view of the dismissal of G.R. No. 131315. Attached to the said
manifestation is a copy of the Entry of Judgment
[16]
issued by the First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No.
131315 it fails to impute reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter
settled by judgment.
[17]
The doctrine ofres judicata provides that a final judgment, on the merits rendered
by a court of competent jurisdiction is conclusive as to the rights of the parties and their privies and
constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of
action.
[18]
The elements of res judicata are (a) identity of parties or at least such as representing the same
interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the
same facts; and (c) the identity in the two (2) particulars is such that any judgment which may be rendered
in the other action will, regardless of which party is successful, amount to res judicata in the action under
consideration.
[19]

There is no dispute as to the identity of subject matter since the crucial point in both cases is the
propriety of including the still unproven shares of respondents for purposes of determining the quorum.
Petitioners, however, deny that there is identity of parties and causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain whether the
same facts or evidence would support and establish the former and present causes of action.
[20]
More
significantly, there is identity of causes of action when the judgment sought will be inconsistent with the
prior judgment.
[21]
In both petitions, petitioners assert that the Court of Appeals Decision effectively
negates the existence and validity of the stock and transfer book, as well as automatically grants private
respondents shares of stocks which they do not own, or the ownership of which remains to be unproved.
Petitioners in the two petitions rely on the entries in the stock and transfer book as the proper basis for
computing the quorum, and consequently determine the degree of control one has over the company.
Essentially, the affirmance of the SEC Order had the effect of diminishing their control and interests in
the company, as it allowed the participation of the individual private respondents in the election of officers
of the corporation.
Absolute identity of parties is not a condition sine qua non for res judicata to applya shared
identity of interest is sufficient to invoke the coverage of the principle.
[22]
However, there is no identity of
parties between the two cases. The parties in the two petitions have their own rights and interests in
relation to the subject matter in litigation. As stated by petitioners in their Reply to Respondents
Memorandum,
[23]
there are no two separate actions filed, but rather, two separate petitions for review
on certiorari filed by two distinct parties with the Court and represented by their own counsels, arising
from an adverse consolidated decision promulgated by the Court of Appeals in one action or
proceeding.
[24]
As such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules
against forum-shopping. In theVerification/Certification
[25]
portion of the petition, petitioners clearly
stated that there was then a pending motion for reconsideration of the 18 August 1997 Decision of the
Court of Appeals in the consolidated cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by
the Abuids, as well as a motion for clarification. Moreover, the records indicate that petitioners filed
their Manifestation
[26]
dated 20 January 1998, informing the Court of their receipt of the petition in G.R.
No. 131315 in compliance with their duty to inform the Court of the pendency of another similar petition.
The Court finds that petitioners substantially complied with the rules against forum-shopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and arguments as
those in G.R. No. 131315 which the First Division has long denied with finality. The First Division found
the petition before it inadequate in failing to raise any reversible error on the part of the Court of Appeals.
We reach a similar conclusion as regards the present petition.
The crucial issue in this case is whether it is the companys stock and transfer book, or its 1952
Articles of Incorporation, which determines stockholders shareholdings, and provides the basis for
computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the charter of the corporation
and the contractual relationships between the State and the corporation, the stockholders and the State, and
between the corporation and its stockholders.
[27]
When PMMSI was incorporated, the prevailing law was
Act No. 1459, otherwise known as The Corporation Law. Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines,
may form a private corporation for any lawful purpose or purposes by filing with the Securities and
Exchange Commission articles of incorporation duly executed and acknowledged before a notary public,
setting forth:
. . . .
(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the
number of shares into which it is divided, and if such stock be in whole or in part without par value then
such fact shall be stated; Provided, however, That as to stock without par value the articles of
incorporation need only state the number of shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually
subscribed, the amount or number of shares of no-par stock subscribed by each and the sum paid by each
on his subscription. . . .
[28]

A review of PMMSIs articles of incorporation
[29]
shows that the corporation complied with the
requirements laid down by Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided
into two classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
. . . .
8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE
THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the
number of shares and amount of capital stock set out after their respective names:
SUBSCRIBER SUBSCRIBED AMOUNT SUBSCRIBED
No. of Shares Par Value
Crispulo J. Onrubia 120 Founders P 2,400.00
Juan H. Acayan 120 " 2, 400.00
Martin P. Sagarbarria 100 " 2, 000.00
Mauricio G. Gallaga 50 " 1, 000.00
Luis Renteria 50 " 1, 000.00
Faustina M. de Onrubia 140 " 2, 800.00
Mrs. Ramon Araneta 40 " 800.00
Carlos M. Onrubia 80 " 1,600.00
700 P 14,000.00

SUBSCRIBER SUBSCRIBED
No. of Shares
AMOUNT SUBSCRIBED
Par Value

Crispulo J. Onrubia 12 Common P 1,200.00
Juan H. Acayan 12 " 1,200.00
Martin P. Sagarbarria 8 " 800.00
Mauricio G. Gallaga 8 " 800.00
Luis Renteria 8 " 800.00
Faustina M. de Onrubia 12 " 1,200.00
Mrs. Ramon Araneta 8 " 800.00
Carlos M. Onrubia 8 " 800.00
76 P 7,600.00
[30]


There is no gainsaying that the contents of the articles of incorporation are binding, not only on the
corporation, but also on its shareholders. In the instant case, the articles of incorporation indicate that at
the time of incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders
shares and seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and
outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and addresses of
all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which
subscription has been made, and the date of payment thereof; a statement of every alienation, sale or
transfer of stock made, the date thereof and by and to whom made; and such other entries as may be
prescribed by law.
[31]
A stock and transfer book is necessary as a measure of precaution, expediency and
convenience since 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.
[32]
However, a stock and
transfer book, like other corporate books and records, is not in any sense a public record, and thus is not
exclusive evidence of the matters and things which ordinarily are or should be written therein.
[33]
In fact, it
is generally held that the records and minutes of a corporation are not conclusive even against the
corporation but are prima facie evidence only,
[34]
and may be impeached or even contradicted by other
competent evidence.
[35]
Thus, parol evidence may be admitted to supply omissions in the records or
explain ambiguities, or to contradict such records.
[36]

In 1980, Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines
supplanted Act No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there must be present,
either in person or by representative authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum
shall consist of the stockholders representing a majority of the outstanding capital stock or majority of the
members in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term outstanding capital stock as used in this code,
means the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid
(as long as there is binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether
it be founders shares or common shares.
[37]
In the instant case, two figures are being pitted against each
other those contained in the articles of incorporation, and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and
transfer book, and completely disregarding the issued and outstanding shares as indicated in the articles of
incorporation would work injustice to the owners and/or successors in interest of the said shares. This
case is one instance where resort to documents other than the stock and transfer books is necessary. The
stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does
not reflect the totality of shares which have been subscribed, more so when the articles of incorporation
show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock
and transfer book. As aptly stated by the SEC in its Order dated 15 July 1996:
[38]

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock
and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the
company of its own shares, in which it becomes treasury shares, would not affect the total number of
shares in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares
but not as to the amount of shares already subscribed.
This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the
shares, which were not recorded in the Stock and Transfer Book, but were recorded in the Articles of
Iincorporation just vanish into thin air? . . . .
[39]

As shown above, at the time the corporation was set-up, there were already seven hundred seventy-
six (776) issued and outstanding shares as reflected in the articles of incorporation. No proof was adduced
as to any transaction effected on these shares from the time PMMSI was incorporated up to the time the
instant petition was filed, except for the thirty-three (33) shares which were recorded in the stock and
transfer book in 1978, and the additional one hundred thirty-two (132) in 1982. But obviously, the shares
so ordered recorded in the stock and transfer book are among the shares reflected in the articles of
incorporation as the shares subscribed to by the incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation merely
because the corporate officers failed to keep its records accurately.
[40]
A corporations records are not the
only evidence of the ownership of stock in a corporation.
[41]
In an American case,
[42]
persons claiming
shareholders status in a professional corporation were listed as stockholders in the amendment to the
articles of incorporation. On that basis, they were in all respects treated as shareholders. In fact, the acts
and conduct of the parties may even constitute sufficient evidence of ones status as a shareholder or
member.
[43]
In the instant case, no less than the articles of incorporation declare the incorporators to have
in their name the founders and several common shares. Thus, to disregard the contents of the articles of
incorporation would be to pretend that the basic document which legally triggered the creation of the
corporation does not exist and accordingly to allow great injustice to be caused to the incorporators and
their heirs.
Petitioners argue that the Court of Appeals gravely erred in applying the Espejo decision to the
benefit of respondents. The Court believes that the more precise statement of the issue is whether in its
assailed Decision, the Court of Appeals can declare private respondents as the heirs of the incorporators,
and consequently register the founders shares in their name. However, this issue as recast is not actually
determinative of the present controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares
in PMMSI as recorded in the stock and transfer book and instantly created inexistent shares in favor of
private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the shares of
the original incorporators would entail unnecessary delay and expense on the part of the litigants,
considering that the incorporators had already proved ownership of such shares as shown in the articles of
incorporation.
[44]
There was no declaration of who the individual owners of these shares were on the date
of the promulgation of the Decision. As properly stated by the SEC in its Order dated 20 June 1996, to
which the appellate courts Decision should be related, if at all, the ownership of these shares should only
be subjected to the proper judicial (probate) or extrajudicial proceedings in order to determine the
respective shares of the legal heirs of the deceased incorporators.
[45]

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against
petitioners.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.












FIRST DIVISION
G.R. No. 164588 October 19, 2005
NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME HOLDINGS, INC. and
FERNANDO R. ARGUELLES, JR., Petitioners
vs.
ROBERTO C. YUMUL, Respondent.
D E C I S I O N
YNARES-SANTIAGO, J .:
Petitioners assail the September 26, 2001 Decision
1
of the Court of Appeals in CA-G.R. SP No. 61919,
affirming in toto the Decision of the Securities and Exchange Commission (SEC) En Banc in SEC Case
No. 10-96-5455, as well as the July 16, 2004 Resolution
2
denying the motion for reconsideration.
The facts of the case show that Nautica Canning Corporation (Nautica) was organized and incorporated on
May 11, 1994 with an authorized capital stock of P40,000,000 divided into 400,000 shares with a par
value of P100.00 per share. It had a subscribed capital stock of P10,000,000 with paid-in subscriptions
from its incorporators as follows:
3

Name No. of Shares Amount Subscribed Amount Paid
ALVIN Y. DEE 89,991 P8,999,100 P4,499,100
JONATHAN Y. DEE 2 200 200
JOANNA D. LAUREL 2 200 200
DARLENE EDSA MARIE
GONZALES 2 200 200
JENNIFER Y. DEE 2 200 200
ROBERTO C. YUMUL 1 100 100
JERRY ANGPING 10,000 1,000,000 500,000
-------------- -------------------- -------------------
100,000 P10,000,000 P5,000,000
On December 19, 1994, respondent Roberto C. Yumul was appointed Chief Operating Officer/General
Manager of Nautica with a monthly compensation of P85,000 and an additional compensation equal to 5%
of the companys operating profit for the calendar year.
4
On the same date, First Dominion Prime
Holdings, Inc., Nauticas parent company, through its Chairman Alvin Y. Dee, granted Yumul an Option
to Purchase
5
up to 15% of the total stocks it subscribed from Nautica.
On June 22, 1995, a Deed of Trust and Assignment
6
was executed between First Dominion Prime
Holdings, Inc. and Yumul whereby the former assigned 14,999 of its subscribed shares in Nautica to the
latter. The deed stated that the 14,999 "shares were acquired and paid for in the name of the ASSIGNOR
only for convenience, but actually executed in behalf of and in trust for the ASSIGNEE."
In March 1996, Nautica declared a P35,000,000 cash dividend, P8,250,000 of which was paid to Yumul
representing his 15% share.
After Yumuls resignation from Nautica on August 5, 1996, he wrote a letter
7
to Dee requesting the latter
to formalize his offer to buy Yumuls 15% share in Nautica on or before August 20, 1996; and demanding
the issuance of the corresponding certificate of shares in his name should Dee refuse to buy the same. Dee,
through Atty. Fernando R. Arguelles, Jr., Nauticas corporate secretary, denied the request claiming that
Yumul was not a stockholder of Nautica.
On September 6, 1996
8
and September 9, 1996,
9
Yumul requested that the Deed of Trust and Assignment
be recorded in the Stock and Transfer Book of Nautica, and that he, as a stockholder, be allowed to inspect
its books and records.
Yumuls requests were denied allegedly because he neither exercised the option to purchase the shares nor
paid for the acquisition price of the 14,999 shares. Atty. Arguelles maintained that the cash dividend
received by Yumul is held by him only in trust for First Dominion Prime Holdings, Inc.
Thus, Yumul filed on October 3, 1996, before the SEC a petition for mandamus with damages, with
prayer that the Deed of Trust and Assignment be recorded in the Stock and Transfer Book of Nautica and
that the certificate of stocks corresponding thereto be issued in his name.
10

On October 12, 2000, the SEC En Banc rendered the Decision,
11
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondents, as
follows:
1. Declaring petitioner as a stockholder of respondent Nautica;
2. Declaring petitioner as beneficial owner of 14,999 shares of Nautica under the Deed of Trust and
Assignment dated June 22, 1995
3. Declaring petitioner to be entitled to the right of inspection of the books of the corporation pursuant to
the pertinent provisions of the Corporation Code; and
4. Directing the Corporate Secretary of Nautica to recognize and register the Deed of Trust and
Assignment dated June 22, 1995.
SO ORDERED.
12

On appeal, the Court of Appeals affirmed the decision of the SEC En Banc. Petitioners motion for
reconsideration was denied in a Resolution dated July 16, 2004.
Hence, this petition.
At the outset, we note that petitioners recourse to this Court via a "combined" petition under Rule 65 and
an appeal under Rule 45 of the Rules of Court is irregular. A petition for review under Rule 45 is the
proper remedy of a party aggrieved by a decision of the Court of Appeals, which is not identical to a
petition for certiorari under Rule 65. Under Rule 45, decisions, final orders or resolutions of the Court of
Appeals is appealed by filing a petition for review, which is a continuation of the appellate process over
the original case.
13
On the other hand, the writ of certiorari under Rule 65 is filed when petitioner has no
plain, speedy and adequate remedy in the ordinary course of law against its perceived grievance. A
remedy is considered "plain, speedy and adequate" if it will promptly relieve the petitioner from the
injurious effects of the judgment and the acts of the lower court or agency.
In this case, petitioners speedy, available and adequate remedy is appeal via Rule 45, and not certiorari
under Rule 65. Notwithstanding petitioners procedural lapse, we shall treat the petition as one filed under
Rule 45.
The petition is partly meritorious.
Petitioners contend that Yumul was not a stockholder of Nautica; that he was just a nominal owner of one
share as the beneficial ownership belonged to Dee who paid for said share when Nautica was
incorporated. They presented China Banking Corporation Check No. A2620636 and Citibank Check No.
B82642 as proof of payment by Dee; a letter by Dee dated July 15, 1994 requesting the corporate
secretary of Nautica to issue a certificate of stock in Yumuls name but in trust for Dee; and Stock
Certificate No. 6 with annotation "ITF Alvin Y. Dee" which means that respondent held said stock "In
Trust For Alvin Y. Dee".
We are not persuaded.
Indeed, it is possible for a business to be wholly owned by one individual. The validity of its incorporation
is not affected when such individual gives nominal ownership of only one share of stock to each of the
other four incorporators. This is not necessarily illegal.
14
But, this is valid only between or among the
incorporators privy to the agreement. It does bind the corporation which, at the time the agreement is
made, was non-existent. Thus, incorporators continue to be stockholders of a corporation unless,
subsequent to the incorporation, they have validly transferred their subscriptions to the real parties in
interest. As between the corporation on the one hand, and its shareholders and third persons on the other,
the corporation looks only to its books for the purpose of determining who its shareholders are.
15

In the case at bar, the SEC and the Court of Appeals correctly found Yumul to be a stockholder of
Nautica, of one share of stock recorded in Yumuls name, although allegedly held in trust for Dee.
Nauticas Articles of Incorporation and By-laws, as well as the General Information Sheet filed with the
SEC indicated that Yumul was an incorporator and subscriber of one share.
16
Even granting that there was
an agreement between Yumul and Dee whereby the former is holding the share in trust for Dee, the same
is binding only as between them. From the corporations vantage point, Yumul is its stockholder with one
share, considering that there is no showing that Yumul transferred his subscription to Dee, the alleged real
owner of the share, after Nauticas incorporation.
We held in Ponce v. Alsons Cement Corp.
17
that:
... [A] transfer of shares of stock not recorded in the stock and transfer book of the corporation is non-
existent as far as the corporation is concerned. As between the corporation on one hand, and its
shareholders and third persons on the other, the corporation looks only to its books for the purpose of
determining who its shareholders are. It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the corporation to recognize such rights as it is mandated by
law to recognize arises.
Hence, without such recording, the transferee may not be regarded by the corporation as one among its
stockholders and the corporation may legally refuse the issuance of stock certificates[.]
Moreover, the contents of the articles of incorporation bind the corporation and its stockholders. Its
contents cannot be disregarded considering that it was the basic document which legally triggered the
creation of the corporation.
18

The Court of Appeals, in affirming the factual findings of SEC, held that:
The evidence submitted by petitioners to establish trust is palpably incompetent, consisting mainly of the
self-serving allegations by the petitioners and the China Banking Corporation checks issued as payment
for the shares of stock of Nautica. Dee did not testify on the supposed trust relationship between him and
Yumul. While Atty. Arguelles testified, his testimony is barren of probative value since he had no first-
hand knowledge of the relationship in question. The isolated fact that Dee might have paid for the share in
the name of Yumul did not by itself make the latter a man of straw. Such act of payment is so nebulous
and equivocal that it can not yield the meaning which the petitioners would want to squeeze from it
without the clarificatory testimony of Dee.
19

We see no cogent reason to set aside the factual findings of the SEC, as upheld by the Court of Appeals.
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded respect and even finality
by the Supreme Court, if supported by substantial evidence, in recognition of their expertise on the
specific matters under their consideration,
20
moreso if the same has been upheld by the appellate court, as
in this case.
Besides, other than petitioners self-serving assertion that the beneficial ownership belongs to Dee, they
failed to show that the subscription was transferred to Dee after Nauticas incorporation. The conduct of
the parties also constitute sufficient proof of Yumuls status as a stockholder. On April 4, 1995, Yumul
was elected during the regular annual stockholders meeting as a Director of Nauticas Board of
Directors.
21
Thereafter, he was elected as president of Nautica.
22
Thus, Nautica and its stockholders
knowingly held respondent out to the public as an officer and a stockholder of the corporation.
Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code of the Philippines requires that
every director must own at least one share of the capital stock of the corporation of which he is a director.
Before one may be elected president of the corporation, he must be a director.
23
Since Yumul was elected
as Nauticas Director and as President thereof, it follows that he must have owned at least one share of the
corporations capital stock.
Thus, from the point of view of the corporation, Yumul was the owner of one share of stock. As such, the
SEC correctly ruled that he has the right to inspect the books and records of Nautica,
24
pursuant to Section
74 of BP Blg. 68 which states that the records of all business transactions of the corporation and the
minutes of any meetings shall be open to inspection by any director, trustee, stockholder or member of the
corporation at reasonable hours on business days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
As to whether or not Yumul is the beneficial owner of the 14,999 shares of stocks of Nautica, petitioners
allege that Yumul was given the option to purchase shares of stocks in Nautica under the Option to
Purchase dated December 19, 1994. However, he failed to exercise the option, thus there was no cause or
consideration for the Deed of Trust and Assignment, which makes it void for being simulated or
fictitious.
25

Anent this issue, the SEC did not make a categorical finding on whether Yumul exercised his option and
also on the validity of the Deed of Trust and Assignment. Instead, it held that:
... Although unsubstantiated, the apparent objective of the respondents allegation was to refute petitioners
claim over the shares covered by the Deed of Trust and Assignment. This must therefore be deemed as
nothing but a ploy to deprive petitioner of his right over the shares in question, which to us should not be
countenanced.
26

Neither did the Court of Appeals rule on the issue as it only held that:
Petitioners also contend that the Deed is a simulated contract.
Simulation is "the declaration of a fictitious will, deliberately made by agreement of the parties, in order to
produce, for the purposes of deception, the appearances of a judicial act which does not exist or is
different with that which was really executed." The characteristic of simulation is that the apparent
contract is not really desired or intended to produce legal effect or in any way alter the juridical situation
of the parties.
The requisites for simulation are: (a) an outward declaration of will different from the will of the parties;
(b) the false appearance must have been intended by mutual agreement; and (c) the purpose is to deceive
third persons. These requisites have not been proven in this case.
27

Thus, other than defining and enumerating the requisites of a simulated contract or deed, the Court of
Appeals did not make a determination whether the SEC has the jurisdiction to resolve the issue and
whether the questioned deed was fictitious or simulated.
In Intestate Estate of Alexander T. Ty v. Court of Appeals,
28
we held that:
The question raised in the complaints is whether or not there was indeed a sale in the absence of cause
or consideration. The proper forum for such a dispute is a regular trial court. The Court agrees with the
ruling of the Court of Appeals that no special corporate skill is necessary in resolving the issue of the
validity of the transfer of shares from one stockholder to another of the same corporation. Both actions,
although involving different property, sought to declare the nullity of the transfers of said property to the
decedent on the ground that they were not supported by any cause or consideration, and thus, are
considered void ab initio for being absolutely simulated or fictitious. The determination whether a
contract is simulated or not is an issue that could be resolved by applying pertinent provisions of the
Civil Code, particularly those relative to obligations and contracts. Disputes concerning the
application of the Civil Code are properly cognizable by courts of general jurisdiction. No special
skill is necessary that would require the technical expertise of the SEC. (Emphasis supplied)
Thus, when the controversy involves matters purely civil in character, it is beyond the ambit of the limited
jurisdiction of the SEC. As held in Viray v. Court of Appeals,
29
the better policy in determining which
body has jurisdiction over a case would be to consider not only the status or relationship of the parties, but
also the nature of the question that is the subject of their controversy. This, however, is now moot and
academic due to the passage of Republic Act No. 8799 or The Securities Regulation Code which took
effect on August 8, 2000. The Act transferred from the SEC to the regional trial court jurisdiction over
cases involving intra-corporate disputes. Thus, whether or not the issue is intra-corporate, it is now the
regional trial court and no longer the SEC that takes cognizance of the controversy.
Considering that the issue of the validity of the Deed of Trust and Assignment is civil in nature, thus,
under the competence of the regular courts, and the failure of the SEC and the Court of Appeals to make a
determinative finding as to its validity, we are constrained to refrain from ruling on whether or not Yumul
can compel the corporate secretary to register said deed. It is only after an appropriate case is filed and
decision rendered thereon by the proper forum can the issue be resolved.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 26, 2001 Decision of the
Court of Appeals in CA-G.R. SP No. 61919, is AFFIRMED insofar as it declares respondent Roberto C.
Yumul as a subscriber and stockholder of one share of stock of Nautica Canning Corporation. The
Decision is REVERSED and SET ASIDE insofar as it affirms the validity of the Deed of Trust and
Assignment and orders its registration in the Stock and Transfer Book of Nautica Canning Corporation.
SO ORDERED.































































G.R. No. 101897. March 5, 1993.
LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI,
LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC.,
LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM
OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN
PANGASINAN LYCEUM, INC., respondents.
Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.
Froilan Siobal for Western Pangasinan Lyceum.
SYLLABUS
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH
IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION,
PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE
APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". The Articles of
Incorporation of a corporation must, among other things, set out the name of the corporation. Section 18
of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned: "Section
18. Corporate name. No corporate name may be allowed by the Securities an Exchange Commission if
the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an amended certificate of
incorporation under the amended name." The policy underlying the prohibition in Section 18 against the
registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any
existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing
laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity
concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration
and supervision over corporations. We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent entities all carry the word "Lyceum" but
confusion and deception are effectively precluded by the appending of geographic names to the word
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for
the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the
Lyceum of the Philippines.
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT
ATTENDED WITH EXCLUSIVITY. It is claimed, however, by petitioner that the word "Lyceum" has
acquired a secondary meaning in relation to petitioner with the result that word, although originally a
generic, has become appropriable by petitioner to the exclusion of other institutions like private
respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its
application has, however, been extended to corporate names sine the right to use a corporate name to the
exclusion of others is based upon the same principle which underlies the right to use a particular
trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of
secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable of
exclusive appropriation with reference to an article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so exclusively by one producer with reference
to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to
mean that the article was his product." The question which arises, therefore, is whether or not the use by
petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as
to have become associated or identified with the petitioner institution in the mind of the general public (or
at least that portion of the general public which has to do with schools). The Court of Appeals recognized
this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or phrase
originally incapable of exclusive appropriation with reference to an article in the market, because
geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by
one producer with reference to this article that, in that trade and to that group of the purchasing public, the
word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into which the name or phrase has
evolved through the substantial and exclusive use of the same for a considerable period of time. . . . No
evidence was ever presented in the hearing before the Commission which sufficiently proved that the
word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this
kind, the same tend to prove only that the appellant had been using the disputed word for a long period of
time. . . . In other words, while the appellant may have proved that it had been using the word 'Lyceum' for
a long period of time, this fact alone did not amount to mean that the said word had acquired secondary
meaning in its favor because the appellant failed to prove that it had been using the same word all by itself
to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely
arise if the same word were to be used by other educational institutions. Consequently, the allegations of
the appellant in its first two assigned errors must necessarily fail." We agree with the Court of Appeals.
The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the
word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of
secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with
the Western Pangasinan Lyceum and a little later with other private respondent institutions which
registered with the SEC using "Lyceum" as part of their corporation names. There may well be other
schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not
adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY
ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S
NAME. petitioner institution is not entitled to a legally enforceable exclusive right to use the word
"Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate
names. To determine whether a given corporate name is "identical" or "confusingly or deceptively
similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety and when the name of
petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
D E C I S I O N
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and Exchange Commission
("SEC"). When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum
of the Philippines, Inc. and has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents,
which are also educational institutions, to delete the word "Lyceum" from their corporate names and
permanently to enjoin them from using "Lyceum" as part of their respective names.
Some of the private respondents actively participated in the proceedings before the SEC. These are the
following, the dates of their original SEC registration being set out below opposite their respective names:
Western Pangasinan Lyceum 27 October 1950
Lyceum of Cabagan 31 October 1962
Lyceum of Lallo, Inc. 26 March 1972
Lyceum of Aparri 28 March 1972
Lyceum of Tuao, Inc. 28 March 1972
Lyceum of Camalaniugan 28 March 1972
The following private respondents were declared in default for failure to file an answer despite service of
summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of
Marbel, for failure to serve summons upon these two (2) entities. The case against the Liceum of Araullo
was dismissed when that school motu proprio change its corporate name to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had sometime before commenced in
the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its
corporate name and to adopt another name not "similar [to] or identical" with that of petitioner. In an
Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the corporate name of petitioner
and that of the Lyceum of Baguio, Inc. were substantially identical because of the presence of a
"dominant" word, i.e., "Lyceum," the name of the geographical location of the campus being the only
word which distinguished one from the other corporate name. The SEC also noted that petitioner had
registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to
change its name to another name "not similar or identical [with]" the names of previously registered
entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as
G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for
Review for lack of merit. Entry of judgment in that case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational
institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to
discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse had
failed, petitioner instituted before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its
proprietary right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining
petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC
ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the word "Lyceum" was
capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use of that
word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was
reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so
identified with petitioner as to render use thereof by other institutions as productive of confusion about the
identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En
Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to
distinguish the schools from one another, especially in view of the fact that the campuses of petitioner and
those of the private respondents were physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however, the
Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for
reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595
did not constitute stare decisis as to apply to this case and in not holding that said Resolution bound
subsequent determinations on the right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was
incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning in
favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the
petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting
that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in
respect of the case at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only
because the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum of
Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the
Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out the name of the
corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names
are concerned:
"SECTION 18. Corporate name. No corporate name may be allowed by the Securities an Exchange
Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive, confusing or contrary
to existing laws. When a change in the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a corporate name which is
"identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently
deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public
which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties,
and the reduction of difficulties of administration and supervision over corporations. 7
We do not consider that the corporate names of private respondent institutions are "identical with, or
deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names
of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively
precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the
"Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a
locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned
with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for
exercise and by the philosopher Aristotle and his followers for teaching." 8 In time, the word "Lyceum"
became associated with schools and other institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of learning.
While the Latin word "lyceum" has been incorporated into the English language, the word is also found in
Spanish (liceo) and in French (lycee). As the Court of Appeals noted in its Decision, Roman Catholic
schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo
de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In
the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places, however,
"Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be (though
this is a question of fact which we need not resolve) that the use of the word "Lyceum" may not yet be as
widespread as the use of "university," but it is clear that a not inconsiderable number of educational
institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or
"Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an
entity which is organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation
to petitioner with the result that that word, although originally a generic, has become appropriable by
petitioner to the exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its application has, however,
been extended to corporate names sine the right to use a corporate name to the exclusion of others is based
upon the same principle which underlies the right to use a particular trademark or tradename. 10 In
Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was
elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been used so long and
so exclusively by one producer with reference to his article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to mean that the article was his product." 12
The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate
name has been for such length of time and with such exclusivity as to have become associated or
identified with the petitioner institution in the mind of the general public (or at least that portion of the
general public which has to do with schools). The Court of Appeals recognized this issue and answered it
in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive
appropriation with reference to an article in the market, because geographical or otherwise descriptive
might nevertheless have been used so long and so exclusively by one producer with reference to this
article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean
that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has evolved through the substantial and
exclusive use of the same for a considerable period of time. Consequently, the same doctrine or principle
cannot be made to apply where the evidence did not prove that the business (of the plaintiff) has continued
for so long a time that it has become of consequence and acquired a good will of considerable value such
that its articles and produce have acquired a well-known reputation, and confusion will result by the use of
the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned
requisites. No evidence was ever presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there
was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a
long period of time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never
established or proven as in fact the evidence tend to convey that the cross-claimant was already using the
word 'Lyceum' seventeen (17) years prior to the date the appellant started using the same word in its
corporate name. Furthermore, educational institutions of the Roman Catholic Church had been using the
same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,'
'Liceo de Albay' long before appellant started using the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with its educational institution that confusion will surely
arise in the minds of the public if the same word were to be used by other educational institutions.
In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long
period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning
in its favor because the appellant failed to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if
the same word were to be used by other educational institutions. Consequently, the allegations of the
appellant in its first two assigned errors must necessarily fail." 13 (Underscoring partly in the original and
partly supplied)
We agree with the Court of Appeals. The number alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of
the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen
(17) years before the petitioner registered its own corporate name with the SEC and began using the word
"Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum," that
institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.
In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to
reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which records
had been destroyed during World War II, Western Pangasinan Lyceum should be deemed to have lost all
rights it may have acquired by virtue of its past registration. It might be noted that the Western Pangasinan
Lyceum, Inc. registered with the SEC soon after petitioner had filed its own registration on 21 September
1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its
original 1933 registration, appears to us to be quite secondary in importance; we refer to this earlier
registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither the first
use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other
private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation
names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the
SEC because they have not adopted the corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to
use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their
corporate names. To determine whether a given corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of
"Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the
name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded
as "identical" or "confusingly or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the part of the public
respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of
the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ ., concur.
Gutierrez, Jr., J ., on terminal leave.
Footnotes
1. Rollo, pp. 54-61.
2. Id., pp. 62-63.
3. Records, pp. 6-8, 10-16.
4. Rollo, pp. 42-51.
5. Petition for Review, p. 8; Rollo, p. 16.
6. Section 14, Corporation Code.
7. Red Line Transportation Co. v. Rural Transit Co., 60 Phil. 549 (1934). See also Universal Mills Corp.
v. Universal Textile Mills, Inc., 78 SCRA 62 (1977); and Philippine First Insurance Co., Inc. v. Hartigan,
34 SCRA 252 (1970).
8. Webster's Geographical Dictionary, p. 643 (1949).
9. Decision, Court of Appeals, Rollo, p. 46. In the preceding century, "Liceo" was also used to designate
an association devoted to the promotion of the arts and literature; as in the "Liceo Artistico Literario de
Manila." (see L.M. Guerrero, "The First Filipino: A Biography of Jose Rizal" 73 [1969]).
10. 6 Fletcher, Cyclopedia of Corporations, Section 2423 (Permanent ed., 1968); Burnside Veneer Co. v.
New Burnside Veneer Co. 247 S.W. 2d. 524 (1952); Economy Food Products Co. v. Economy Grocery
Stores Corp., 183 N.E. 49 1932).
11. 65 SCRA 575 (1975).
12. 65 SCRA at 576.
13. Rollo, pp. 46-47.





G.R. No. 96161 February 21, 1992
PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC.,petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS
CORPORATION,respondents.
Emeterio V. Soliven & Associates for petitioners.
Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J .:
Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067,
upholding the Order of the Securities and Exchange Commission, dated 2 January 1990, in SEC-AC No.
202, dismissing petitioners' prayer for the cancellation or removal of the word "PHILIPS" from private
respondent's corporate name.
Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands,
although not engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS
SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-1674, respectively issued by
the Philippine Patents Office (presently known as the Bureau of Patents, Trademarks and Technology
Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial
Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks PHILIPS and
PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25 May 1956, respectively. All
petitioner corporations belong to the PHILIPS Group of Companies.
Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of
Registration by respondent Commission on 19 May 1982.
On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange Commission
(SEC) asking for the cancellation of the word "PHILIPS" from Private Respondent's corporate name in
view of the prior registration with the Bureau of Patents of the trademark "PHILIPS" and the logo
"PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the previous registration of
Petitioners Philips Electrical and Philips Industrial with the SEC.
As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the
SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance of a Writ of
Preliminary Injunction, alleging, among others, that Private Respondent's use of the word PHILIPS
amounts to an infringement and clear violation of Petitioners' exclusive right to use the same considering
that both parties engage in the same business.
In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal
capacity to sue; that its use of its corporate name is not at all similar to Petitioners' trademark PHILIPS
when considered in its entirety; and that its products consisting of chain rollers, belts, bearings and cutting
saw are grossly different from Petitioners' electrical products.
After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27
September 1985, ruled against the issuance of such Writ.
On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the
latter declared that inasmuch as the SEC found no sufficient ground for the granting of injunctive relief on
the basis of the testimonial and documentary evidence presented, it cannot order the removal or
cancellation of the word "PHILIPS" from Private Respondent's corporate name on the basis of the same
evidence adopted in toto during trial on the merits. Besides, Section 18 of the Corporation Code (infra) is
applicable only when the corporate names in question are identical. Here, there is no confusing similarity
between Petitioners' and Private Respondent's corporate names as those of the Petitioners contain at least
two words different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise
denied on 17 June 1987.
On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and
Private Respondent hardly breed confusion inasmuch as each contains at least two different words and,
therefore, rules out any possibility of confusing one for the other.
On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review
on Certiorari before this Court, which Petition was later referred to the Court of Appeals in a Resolution
dated 12 February 1990.
In deciding to dismiss the petition on 31 July 1990, the Court of
Appeals
1
swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v.
Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147 SCRA 154),
the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same constitutes
a dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed that
the Converse case is not four-square with the present case inasmuch as the contending parties
in Converse are engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the
SEC, the Appellate Court concluded that "private respondents' products consisting of chain rollers, belts,
bearings and cutting saw are unrelated and non-competing with petitioners' products i.e. electrical lamps
such that consumers would not in any probability mistake one as the source or origin of the product of the
other."
The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this
Petition which was given due course on 22 April 1991, after which the parties were required to submit
their memoranda, the latest of which was received on 2 July 1991. In December 1991, the SEC was also
required to elevate its records for the perusal of this Court, the same not having been apparently before
respondent Court of Appeals.
We find basis for petitioners' plea.
As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a
corporation's right to use its corporate and trade name is a property right, a right in rem, which it may
assert and protect against the world in the same manner as it may protect its tangible property, real or
personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one
which cannot be impaired or defeated by subsequent appropriation by another corporation in the same
field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).
A name is peculiarly important as necessary to the very existence of a corporation (American Steel
Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30
Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its
attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The
general rule as to corporations is that each corporation must have a name by which it is to sue and be sued
and do all legal acts. The name of a corporation in this respect designates the corporation in the same
manner as the name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky
356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate
name is as much a part of the corporate franchise as any other privilege granted (Federal Secur. Co. vs.
Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial
Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a name identical with or similar to one
already appropriated by a senior corporation while an individual's name is thrust upon him (See Standard
Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no
more use a corporate name in violation of the rights of others than an individual can use his name legally
acquired so as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).
Our own Corporation Code, in its Section 18, expressly provides that:
No corporate name may be allowed by the Securities and Exchange Commission if
the proposed name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing law.Where a change in a corporate
name is approved, the commission shall issue an amended certificate of
incorporation under the amended name. (Emphasis supplied)
The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven,
namely:
(1) that the complainant corporation acquired a prior right over the use of such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar
to that of any existing corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with freedom from infringement by similarity is
determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63, 88
Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no
doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name.
Petitioners Philips Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May
1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 12 April
1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also used the trademark "PHILIPS"
on electrical lamps of all types and their accessories since 30 September 1922, as evidenced by Certificate
of Registration No. 1651.
The second requisite no less exists in this case. In determining the existence of confusing similarity in
corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and
discrimination. In so doing, the Court must look to the record as well as the names themselves (Ohio Nat.
Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private
Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V.,
PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably
leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or
associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS
Group of Companies.
Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or
deception of the public much less a single purchaser of their product who has been deceived or confused
or showed any likelihood of confusion. It is settled, however, that proof of actual confusion need not be
shown. It suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108,
enumerating a long line of cases).
It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like, while
petitioners deal principally with electrical products. It is significant to note, however, that even the
Director of Patents had denied Private Respondent's application for registration of the trademarks
"Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw. That office held that
PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines and their parts which fall
under international class where "chains, rollers, belts, bearings and cutting saw," the goods in connection
with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case
No. 2010, June 17, 1988, SEC Rollo).
Furthermore, the records show that among Private Respondent's primary purposes in its Articles of
Incorporation (Annex D, Petition p. 37, Rollo) are the following:
To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire,
dispose of, and deal in and deal with any kind of goods, wares, and merchandise
such as but not limited to plastics, carbon products, office stationery and supplies,
hardware parts, electrical wiring devices, electrical component parts, and/or
complement of industrial, agricultural or commercial machineries, constructive
supplies, electrical supplies and other merchandise which are or may become
articles of commerce except food, drugs and cosmetics and to carry on such
business as manufacturer, distributor, dealer, indentor, factor, manufacturer's
representative capacity for domestic or foreign companies. (emphasis ours)
For its part, Philips Electrical also includes, among its primary purposes, the following:
To develop manufacture and deal in electrical products, including electronic,
mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743)
Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing
in the same line of business of electrical devices, products or supplies which fall under its primary
purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for
fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others,
Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25,
1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its
corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention
to ride on the popularity and established goodwill of said petitioner's business throughout the world"
(Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto usually seeks
an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold
Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).
In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the
corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC. contain at least two words different from that of the corporate name of
respondent STANDARD PHILIPS CORPORATION, which words will readily identify Private
Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC,
the proposed name "should not be similar to one already used by another corporation or partnership. If the
proposed name contains a word already used as part of the firm name or style of a registered company; the
proposed name must contain two other words different from the company already registered" (Emphasis
ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have two words
different from that of Private Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far
back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any
infringement by similarity. A corporation has an exclusive right to the use of its name, which may be
protected by injunction upon a principle similar to that upon which persons are protected in the use of
trademarks and tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on
the corporation which has acquired a right to that name and perhaps carried on its business thereunder,
that another should attempt to use the same name, or the same name with a slight variation in such a way
as to induce persons to deal with it in the belief that they are dealing with the corporation which has given
a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citingBorden Ice Cream Co. v. Borden's
Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually contains only a single
word, that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term
"Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from partnerships
and other business organizations.
The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as
part of their corporate names is no defense and does not warrant the use by Private Respondent of such
word which constitutes an essential feature of Petitioners' corporate name previously adopted and
registered and-having acquired the status of a well-known mark in the Philippines and internationally as
well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records).
In support of its application for the registration of its Articles of Incorporation with the SEC, Private
Respondent had submitted an undertaking "manifesting its willingness to change its corporate name in the
event another person, firm or entity has acquired a prior right to the use of the said firm name or one
deceptively or confusingly similar to it." Private respondent must now be held to its undertaking.
As a general rule, parties organizing a corporation must choose a name at their
peril; and the use of a name similar to one adopted by another corporation, whether
a business or a nonbusiness or non-profit organization if misleading and likely to
injure it in the exercise in its corporate functions, regardless of intent, may be
prevented by the corporation having the prior right, by a suit for injunction against
the new corporation to prevent the use of the name (American Gold Star Mothers,
Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d
948).
WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20
November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from using
"PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange Commission
to amend private respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate
name of private respondent.
No costs.
SO ORDERED.
Paras, Padilla, Regalado and Nocon, JJ., concur.

Footnotes
1 Second Division, composed of Justice Jose A. R. Melo, Chairman, Justice
Antonio M. Martinez,Ponente, and Justice Nicolas P. Lapea, Jr., Member.



























































G.R. No. L-26370 July 31, 1970
PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-appellant,
vs.
MARIA CARMEN HARTIGAN, CGH, and O. ENGKEE, defendants-appellees.
Bausa, Ampil & Suarez for plaintiff-appellant.
Nicasio E. Martin for defendants-appellees.

BARREDO, J .:
Appeal from the decision dated 6 October 1962 of the Court of First Instance of Manila dismissing the
action in its Civil Case No. 48925 brought by the herein plaintiff-appellant Philippine First Insurance
Co., Inc. to the Court of Appeals which could, upon finding that the said appeal raises purely questions of
law, declared itself without jurisdiction to entertain the same and, in its resolution dated 15 July 1966,
certified the records thereof to this Court for proper determination.
The antecedent facts are set forth in the pertinent portions of the resolution of the Court of Appeals
referred to as follows:
According to the complaint, plaintiff was originally organized as an insurance
corporation under the name of 'The Yek Tong Lin Fire and Marine Insurance Co.,
Ltd.' The articles of incorporation originally presented before the Security and
Exchange Commissioner and acknowledged before Notary Public Mr. E. D. Ignacio
on June 1, 1953 state that the name of the corporation was 'The Yek Tong Lin Fire
and Marine Insurance Co., Ltd.' On May 26, 1961 the articles of incorporation were
amended pursuant to a certificate of the Board of Directors dated March 8, 1961
changing the name of the corporation to 'Philippine First Insurance Co., Inc.'.
The complaint alleges that the plaintiff Philippine First Insurance Co., Inc., doing
business under the name of 'The Yek Tong Lin Fire and Marine Insurance Co., Lt.'
signed as co-maker together with defendant Maria Carmen Hartigan, CGH, a
promissory note for P5,000.00 in favor of the China Banking Corporation payable
within 30 days after the date of the promissory note with the usual banking interest;
that the plaintiff agreed to act as such co-maker of the promissory note upon the
application of the defendant Maria Carmen Hartigan, CGH, who together with
Antonio F. Chua and Chang Ka Fu, signed an indemnity agreement in favor of the
plaintiff, undertaking jointly and severally, to pay the plaintiff damages, losses or
expenses of whatever kind or nature, including attorney's fees and legal costs,
which the plaintiff may sustain as a result of the execution by the plaintiff and co-
maker of Maria Carmen Hartigan, CGH, of the promissory note above-referred to;
that as a result of the execution of the promissory note by the plaintiff and Maria
Carmen Hartigan, CGH, the China Banking Corporation delivered to the defendant
Maria Carmen Hartigan, CGH, the sum of P5,000.00 which said defendant failed to
pay in full, such that on August 31, 1961 the same was. renewed and as of
November 27, 1961 there was due on account of the promissory note the sum of
P4,559.50 including interest. The complaint ends with a prayer for judgment against
the defendants, jointly and severally, for the sum of P4,559.50 with interest at the
rate of 12% per annum from November 23, 1961 plus P911.90 by way of attorney's
fees and costs.
Although O. Engkee was made as party defendant in the caption of the complaint,
his name is not mentioned in the body of said complaint. However, his name
Appears in the Annex A attached to the complaint which is the counter indemnity
agreement supposed to have been signed according to the complaint by Maria
Carmen Hartigan, CGH, Antonio F. Chua and Chang Ka Fu.
In their answer the defendants deny the allegation that the plaintiff formerly
conducted business under the name and style of 'The Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' They admit the execution of the indemnity agreement but they
claim that they signed said agreement in favor of the Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' and not in favor of the plaintiff. They likewise admit that they
failed to pay the promissory note when it fell due but they allege that since their
obligation with the China Banking Corporation based on the promissory note still
subsists, the surety who co-signed the promissory note is not entitled to collect the
value thereof from the defendants otherwise they will be liable for double amount
of their obligation, there being no allegation that the surety has paid the obligation
to the creditor.
By way of special defense, defendants claim that there is no privity of contract
between the plaintiff and the defendants and consequently, the plaintiff has no cause
of action against them, considering that the complaint does not allege that the
plaintiff and the 'Yek Tong Lin Fire and Marine Insurance Co., Ltd.' are one and the
same or that the plaintiff has acquired the rights of the latter. The parties after the
admission of Exhibit A which is the amended articles of incorporation and Exhibit 1
which is a demand letter dated August 16, 1962 signed by the manager of the loans
and discount department of the China Banking Corporation showing that the
promissory note up to said date in the sum of P4,500.00 was still unpaid, submitted
the case for decision based on the pleadings.
Under date of 6 October 1962, the Court of First Instance of Manila rendered the decision appealed. It
dismissed the action with costs against the plaintiff Philippine First Insurance Co., Inc., reasoning as
follows:
... With these undisputed facts in mind, the parties correctly concluded that the
issues for resolution by this Court are as follows:
(a) Whether or not the plaintiff is the real party in interest that may validly sue on
the indemnity agreement signed by the defendants and the Yek Tong Lin Fire &
Marine Insurance Co., Ltd. (Annex A to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or reimbursement may under said indemnity
agreement prosper without plaintiff having yet paid the amount due under said
promissory note.
In the first place, the change of name of the Yek Tong Lin Fire & Marine Insurance
Co., Ltd. to the Philippines First Insurance Co., Inc. is of dubious validity. Such
change of name in effect dissolved the original corporation by a process of
dissolution not authorized by our corporation law (see Secs. 62 and 67, inclusive, of
our Corporation Law). Moreover, said change of name, amounting to a dissolution
of the Yek Tong Lin Fire & Marine Insurance Co., Ltd., does not appear to have
been effected with the written note or assent of stockholders representing at least
two-thirds of the subscribed capital stock of the corporation, a voting proportion
required not only for the dissolution of a corporation but also for any amendment of
its articles of incorporation (Secs. 18 and 62, Corporation Law). Furthermore, such
change of corporate name appears to be against public policy and may be effected
only by express authority of law (Red Line Transportation Co. v. Rural Transit Co.,
Ltd., 60 Phil. 549, 555; Cincinnati Cooperage Co., Ltd. vs. Vate, 26 SW 538, 539;
Pilsen Brewing Co. vs. Wallace, 125 NE 714), but there is nothing in our
corporation law authorizing the change of corporate name in this jurisdiction.
In the second place, assuming that the change of name of the Yek Tong Lin Fire &
Marine Insurance Co. Ltd., to Philippines pine First Insurance Co., Inc., as
accomplished on March 8, 1961, is valid, that would mean that the original
corporation, the Yek Tong Lin Fire & Marine Insurance Co., Ltd., became
dissolved and of no further existence since March 8, 1961, so that on May 15, 1961,
the date the indemnity agreement, Annex A, was executed, said original corporation
bad no more power to enter into any agreement with the defendants, and the
agreement entered into by it was ineffective for lack of capacity of said dissolved
corporation to enter into said agreement. At any rate, even if we hold that said
change of name is valid, the fact remains that there is no evidence showing that the
new entity, the Philippine First Insurance Co., Inc. has with the consent of the
original parties, assumed the obligations or was assigned the rights of action in the
original corporation, the Yek Tong Lin Fire & Marine Insurance Co., Ltd. In other
words, there is no evidence of conventional subrogation of the Plaintiffs in the
rights of the Yek Tong Lin Fire & Marine Insurance Co., Ltd. under said indemnity
agreement (Arts. 1300, 1301, New Civil Code). without such subrogation
assignment of rights, the herein plaintiff has no cause of action against the
defendants, and is, therefore, not the right party in interest as plaintiff.
Last, but not least, assuming that the said change of name was legal and operated to
dissolve the original corporation, the dissolved corporation, must pursuant to Sec.
77 of our corporation law, be deemed as continuing as a body corporate for three
(3) years from March 8, 1961 for the purpose of prosecuting and defending suits. It
is, therefore, the Yek Tong Lin Fire & Marine Insurance Co., Ltd. that is the proper
party to sue the defendants under said indemnity agreement up to March 8, 1964.
Having arrived at the foregoing conclusions, this Court need not squarely pass upon
issue (b) formulated above.
WHEREFORE, plaintiff's action is hereby dismissed, with costs against the
plaintiff.
In due time, the Philippine First Insurance Company, Inc. moved for reconsideration of the decision
aforesaid, but said motion was denied on December 3, 1962 in an order worded thus:
The motion for reconsideration, dated November 8, 1962, raises no new issue that
we failed to consider in rendering our decision of October 6, 1962. However, it
gives us an opportunity to amplify our decision as regards the question of change of
name of a corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing a change of name of a
corporation organized pursuant to its provisions. Sec. 18 of the Corporation Law
authorizes, in our opinion, amendment to the Articles of Incorporation of a
corporation only as to matters other than its corporate name. Once a corporation is
organized in this jurisdiction by the execution and registration of its Articles of
Incorporation, it shall continue to exist under its corporate name for the lifetime of
its corporate existence fixed in its Articles of Incorporation, unless sooner legally
dissolved (Sec. 11, Corp. Law). Significantly, change of name is not one of the
methods of dissolution of corporations expressly authorized by our Corporation
Law. Also significant is the fact that the power to change its corporate name is not
one of the general powers conferred on corporations in this jurisdiction (Sec. 13,
Corp. Law). The enumeration of corporate powers made in our Corporation Law
implies the exclusion of all others (Thomas v. West Jersey R. Co., 101 U.S. 71, 25
L. ed. 950). It is obvious, in this connection, that change of name is not one of the
powers necessary to the exercise of the powers conferred on corporations by said
Sec. 13 (see Sec. 14, Corp. Law).
To rule that Sec. 18 of our Corporation Law authorizes the change of name of a
corporation by amendment of its Articles of Incorporation is to indulge in judicial
legislation. We have examined the cases cited in Volume 13 of American
Jurisprudence in support of the proposition that the general power to alter or amend
the charter of a corporation necessarily includes the power to alter the name of a
corporation, and find no justification for said conclusion arrived at by the editors of
American Jurisprudence. On the contrary, the annotations in favor of plaintiff's
view appear to have been based on decisions in cases where the statute itself
expressly authorizes change of corporate name by amendment of its Articles of
Incorporation. The correct rule in harmony with the provisions of our Corporation
Law is well expressed in an English case as follows:
After a company has been completely register without defect
or omission, so as to be incorporated by the name set forth in
the deed of settlement, such incorporated company has not
the power to change its name ... Although the King by his
prerogative might incorporate by a new name, and the newly
named corporation might retain former rights, and sometimes
its former name also, ... it never appears to be such an act as
the corporation could do by itself, but required the same
power as created the corporation. (Reg. v. Registrar of Joint
Stock Cos 10 Q.B. 839, 59 E.C.L. 839).
The contrary view appears to represent the minority doctrine, judging from the
annotations on decided cases on the matter.
The movant invokes as persuasive precedent the action of the Securities
Commissioner in tacitly approving the Amended, Articles of Incorporation on May
26, 1961. We regret that we cannot in good conscience lend approval to this action
of the Securities and Exchange Commissioner. We find no justification, legal,
moral, or practical, for adhering to the view taken by the Securities and Exchange
Commissioner that the name of a corporation in the Philippines may be changed by
mere amendment of its Articles of Incorporation as to its corporate name. A change
of corporate name would serve no useful purpose, but on the contrary would most
probably cause confusion. Only a dubious purpose could inspire a change of a
corporate. name which, unlike a natural person's name, was chosen by the
incorporators themselves; and our Courts should not lend their assistance to the
accomplishment of dubious purposes.
WHEREFORE, we hereby deny plaintiff's motion for reconsideration, dated
November 8, 1962, for lack of merit.
In this appeal appellant contends that
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS JURISDICTION,
THERE IS NOTHING IN OUR CORPORATION LAW AUTHORIZING THE
CHANGE OF CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF
CORPORATE NAME APPEARS TO BE AGAINST PUBLIC POLICY;
III
THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF
CORPORATE NAME HAS THE LEGAL EFFECT OF DISSOLVING THE
ORIGINAL CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF NAME
OF THE YEK TONG LIN FIRE & MARINE INSURANCE CO., LTD. IS OF
DUBIOUS VALIDITY;
V
THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT HEREIN
IS NOT THE RIGHT PARTY INTEREST TO SUE DEFENDANTS-
APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE COMPLAINT.
Appellant's Position is correct; all the above assignments of error are well taken. The whole case,
however, revolves around only one question. May a Philippine corporation change its name and still retain
its original personality and individuality as such?
The answer is not difficult to find. True, under Section 6 of the Corporation Law, the first thing required
to be stated in the Articles of Incorporation of any corn corporation is its name, but it is only one among
many matters equally if not more important, that must be stated therein. Thus, it is also required, for
example, to state the number and names of and residences of the incorporators and the residence or
location of the principal office of the corporation, its term of existence, the amount of its capital stock and
the number of shares into which it is divided, etc., etc.
On the other hand, Section 18 explicitly permits the articles of incorporation to be amended thus:
Sec. 18. Any corporation may for legitimate corporate purpose or purposes,
amend its articles of incorporation by a majority vote of its board of directors or
trustees and the vote or written assent of two-thirds of its members, if it be a
nonstock corporation or, if it be a stock corporation, by the vote or written assent of
the stockholders representing at least two-thirds of the subscribed capital stock of
the corporation Provided, however, That if such amendment to the articles of
incorporation should consist in extending the corporate existence or in any change
in the rights of holders of shares of any class, or would authorize shares with
preferences in any respect superior to those of outstanding shares of any class, or
would restrict the rights of any stockholder, then any stockholder who did not vote
for such corporate action may, within forty days after the date upon which such
action was authorized, object thereto in writing and demand Payment for his shares.
If, after such a demand by a stockholder, the corporation and the stockholder cannot
agree upon the value of his share or shares at the time such corporate action was
authorized, such values all be ascertained by three disinterested persons, one of
whom shall be named by the stockholder, another by the corporation, and the third
by the two thus chosen. The findings of the appraisers shall be final, and if their
award is not paid by the corporation within thirty days after it is made, it may be
recovered in an action by the stockholder against the corporation. Upon payment by
the corporation to the stockholder of the agreed or awarded price of his share or
shares, the stockholder shall forthwith transfer and assign the share or shares held
by him as directed by the corporation: Provided, however, That their own shares of
stock purchased or otherwise acquired by banks, trust companies, and insurance
companies, should be disposed of within six months after acquiring title thereto.
Unless and until such amendment to the articles of incorporation shall have been
abandoned or the action rescinded, the stockholder making such demand in writing
shall cease to be a stockholder and shall have no rights with respect to such shares,
except the right to receive payment therefor as aforesaid.
A stockholder shall not be entitled to payment for his shares under the provisions of
this section unless the value of the corporate assets which would remain after such
payment would be at least equal to the aggregate amount of its debts and liabilities
and the aggregate par value and/or issued value of the remaining subscribed capital
stock.
A copy of the articles of incorporation as amended, duly certified to be correct by
the president and the secretary of the corporation and a majority of the board of
directors or trustees, shall be filed with the Securities and Exchange Commissioner,
who shall attach the same to the original articles of incorporation, on file in his
office. From the time of filing such copy of the amended articles of incorporation,
the corporation shall have the same powers and it and the members and
stockholders thereof shall thereafter be subject to the same liabilities as if such
amendment had been embraced in the original articles of incorporation: Provided,
however, That should the amendment consist in extending the corporate life, the
extension shall not exceed 50 years in any one instance. Provided, further, That the
original articles and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation: And provided, further, That
nothing in this section shall be construed to authorize any corporation to increase or
diminish its capital stock or so as to effect any rights or actions which accrued to
others between the time of filing the original articles of incorporation and the filing
of the amended articles.
The Securities and, Exchange Commissioner shall be entitled to collect and receive the sum of ten pesos
for filing said copy of the amended articles of incorporation. Provided, however, That when the
amendment consists in extending the term of corporate existence, the Securities and Exchange
Commissioner shall be entitled to collect and receive for the filing of its amended articles of incorporation
the same fees collectible under existing law for the filing of articles of incorporation. The Securities &
Exchange Commissioner shall not hereafter file any amendment to the articles of incorporation of any
bank, banking institution, or building and loan association unless accompanied by a certificate of the
Monetary Board (of the Central Bank) to the effect that such amendment is in accordance with law. (As
further amended by Act No. 3610, Sec. 2 and Sec. 9. R.A. No. 337 and R.A. No. 3531.)
It can be gleaned at once that this section does not only authorize corporations to amend their charter; it
also lays down the procedure for such amendment; and, what is more relevant to the present discussion, it
contains provisos restricting the power to amend when it comes to the term of their existence and the
increase or decrease of the capital stock. There is no prohibition therein against the change of name. The
inference is clear that such a change is allowed, for if the legislature had intended to enjoin corporations
from changing names, it would have expressly stated so in this section or in any other provision of the
law.
No doubt, "(the) name (of a corporation) is peculiarly important as necessary to the very existence of a
corporation. The general rule as to corporations is that each corporation shall have a name by which it is to
sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation
in the same manner as the name of an individual designates the person."
1
Since an individual has the right
to change his name under certain conditions, there is no compelling reason why a corporation may not
enjoy the same right. There is nothing sacrosanct in a name when it comes to artificial beings. The
sentimental considerations which individuals attach to their names are not present in corporations and
partnerships. Of course, as in the case of an individual, such change may not be made exclusively. by the
corporation's own act. It has to follow the procedure prescribed by law for the purpose; and this is what is
important and indispensably prescribed strict adherence to such procedure.
Local well known corporation law commentators are unanimous in the view that a corporation may
change its name by merely amending its charter in the manner prescribed by law.
2
American authorities
which have persuasive force here in this regard because our corporation law is of American origin, the
same being a sort of codification of American corporate law,
3
are of the same opinion.
A general power to alter or amend the charter of a corporation necessarily includes
the power to alter the name of the corporation. Ft. Pitt Bldg., etc., Assoc. v. Model
Plan Bldg., etc., Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity Mut. Aid
Assoc., 12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa. Co. Ct. 184; Wetherill Steel
Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec. 7, relating to an increase of
the capital stock of a corporation, it is provided that 'such agreement may be
amended in any other particular, excepting as provided in the following section',
which relates to a decrease of the capital stock This section has been held to
authorize a change in the name of a corporation. Armington v. Palmer, 21 R.I. 109,
42 Atl. 308, 43, L.R.A. 95, 79 Am. St. Rep. 786. (Vol. 19, American and English
Annotated Cases, p. 1239.)
Fletcher, a standard authority on American an corporation law also says:
Statutes are to be found in the various jurisdictions dealing with the matter of
change in corporate names. Such statutes have been subjected to judicial
construction and have, in the main, been upheld as constitutional. In direct terms or
by necessary implication, they authorize corporations new names and prescribe the
mode of procedure for that purpose. The same steps must be taken under some
statutes to effect a change in a corporate name, as when any other amendment of the
corporate charter is sought .... When the general law thus deals with the subject, a
corporation can change its name only in the manner provided. (6 Fletcher,
Cyclopedia of the Law of Private Corporations, 1968 Revised Volume, pp. 212-
213.) (Emphasis supplied)
The learned trial judge held that the above-quoted proposition are not supported by the weight of authority
because they are based on decisions in cases where the statutes expressly authorize change of corporate
name by amendment of the articles of incorporation. We have carefully examined these authorities and
We are satisfied of their relevance. Even Lord Denman who has been quoted by His Honor from In Reg. v.
Registrar of Joint Stock Cos. 10, Q.B., 59 E.C.L. maintains merely that the change of its name never
appears to be such an act as the corporation could do for itself, but required ;the same Power as created a
corporation." What seems to have been overlooked, therefore, is that the procedure prescribes by Section
18 of our Corporation Law for the amendment of corporate charters is practically identical with that for
the incorporation itself of a corporation.
In the appealed order of dismissal, the trial court, made the observation that, according to this Court in Red
Line Transportation Co. v. Rural Transit Co., Ltd., 60 Phil, 549, 555, change of name of a corporation is
against public policy. We must clarify that such is not the import of Our said decision. What this Court
held in that case is simply that:
We know of no law that empowers the Public Service Commission or any court in
this jurisdiction to authorize one corporation to assume the name of another
corporation as a trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and the very law of their
creation and continued existence requires each to adopt and certify a distinctive
name. The incorporators 'constitute a body politic and corporate under the name
stated in the certificate.' (Section 11, Act No. 1459, as amended.) A corporation has
the power 'of succession by its corporate name.' (Section 13, ibid.) The name of a
corporation is therefore essential to its existence. It cannot change its name except
in the manner provided by the statute. By that name alone is it authorized to transact
business. The law gives a corporation no express or implied authority to assume
another name that is unappropriated; still less that of another corporation, which is
expressly set apart for it and protected by the law. If any corporation could assume
at pleasure as an unregistered trade name the name of another corporation, this
practice would result in confusion and open the door to frauds and evasions and
difficulties of administration and supervision. The policy of the law as expressed
our corporation statute and the Code of Commerce is clearly against such a practice.
(Cf. Scarsdale Pub. Co. Colonial Press vs. Carter, 116 New York Supplement,
731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois [Appellate Courts],
428, 434.)
In other words, what We have held to be contrary to public policy is the use by one corporation of the
name of another corporation as its trade name. We are certain no one will disagree that such an act can
only "result in confusion and open the door to frauds and evasions and difficulties of administration and
supervision." Surely, the Red Line case was not one of change of name.
Neither can We share the posture of His Honor that the change of name of a corporation results in its
dissolution. There is unanimity of authorities to the contrary.
An authorized change in the name of a corporation has no more effect upon its
identity as a corporation than a change of name of a natural person has upon his
identity. It does not affect the rights of the corporation or lessen or add to its
obligations. After a corporation has effected a change in its name it should sue and
be sued in its new name .... (13 Am. Jur. 276-277, citing cases.)
A mere change in the name of a corporation, either by the legislature or by the
corporators or stockholders under legislative authority, does not, generally
speaking, affect the identity of the corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or incurred by it. Indeed, it has been
said that a change of name by a corporation has no more effect upon the identity of
the corporation than a change of name by a natural person has upon the identity of
such person. The corporation, upon such change in its name, is in no sense a new
corporation, nor the successor of the original one, but remains and continues to be
the original corporation. It is the same corporation with a different name, and its
character is in no respect changed. ... (6 Fletcher, Cyclopedia of the Law of Private
Corporations, 224-225, citing cases.)
The change in the name of a corporation has no more effect upon its identity as a
corporation than a change of name of a natural person has upon his identity. It does
not affect the rights of the corporation, or lessen or add to its obligations.
England. Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L. J. Exch. 418.
United States. Metropolitan Nat. Bank v. Claggett, 141 U.S. 520, 12 S. Ct. 60,
35 U.S. (L. ed.) 841.
Alabama. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So. 670; North
Birmingham Lumber Co. v. Sims, 157 Ala. 595, 48 So. 84.
Connecticut. Trinity Church v. Hall, 22 Com. 125.
Illinois. Mt. Palatine Academy v. Kleinschnitz 28 III, 133; St. Louis etc. R. Co. v.
Miller, 43 Ill. 199;Reading v. Wedder, 66 III. 80.
Indiana. Rosenthal v. Madison etc., Plank Road Co., 10 Ind. 358.
Kentucky. Cahill v. Bigger, 8 B. Mon. 211; Wilhite v. Convent of Good
Shepherd, 177 Ky. 251, 78 S. W. 138.
Maryland. Phinney v. Sheppard & Enoch Pratt Hospital, 88 Md. 633, 42 Atl. 58,
writ of error dismissed, 177 U.S. 170, 20 S. Ct. 573, 44 U.S. (L. ed.) 720.
Missouri. Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W. 334. New York
First Soc of M.E. Church v. Brownell, 5 Hun 464.
Pennsylvania. Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. South Carolina Mut Ins. Co. v. Price 67 S.C. 207, 45 S.E. 173.
Virginia. Wilson v. Chesapeake etc., R. Co., 21 Gratt 654; Wright-Caesar
Tobacco Co. v. Hoen,105 Va. 327, 54 S.E. 309.
Washington. King v. Ilwaco R. etc., Co., 1 Wash. 127. 23 Pac. 924.
Wisconsin. Racine Country Bank v. Ayers, 12 Wis. 512.
The fact that the corporation by its old name makes a format transfer of its property
to the corporation by its new name does not of itself show that the change in name
has affected a change in the identity of the corporation. Palfrey v. Association for
Relief, etc., 110 La. 452, 34 So. 600. The fact that a corporation organized as a state
bank afterwards becomes a national bank by complying with the provisions of the
National Banking Act, and changes its name accordingly, has no effect on its right
to sue upon obligations or liabilities incurred to it by its former name. Michigan Ins.
Bank v. Eldred 143 U.S. 293, 12 S. Ct. 450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has been held not to be affected by
the fact that the church afterwards took a different name. Cahill v. Bigger, 8 B. Mon
(ky) 211.
A change in the name of a corporation is not a divestiture of title or such a change
as requires a regular transfer of title to property, whether real or personal, from the
corporation under one name to the same corporation under another
name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649. (19 American and English
Annotated Cases 1242-1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538, "The changing of the
name of a corporation is no more the creation of a corporation than the changing of
the name of a natural person is the begetting of a natural person. The act, in both
cases, would seem to be what the language which we use to designate it imports
a change of name, and not a change of being.
Having arrived at the above conclusion, We have agree with appellant's pose that the lower court also
erred in holding that it is not the right party in interest to sue defendants-appellees.
4
As correctly pointed
out by appellant, the approval by the stockholders of the amendment of its articles of incorporation
changing the name "The Yek Tong Lin Fire & Marine Insurance Co., Ltd." to "Philippine First Insurance
Co., Inc." on March 8, 1961, did not automatically change the name of said corporation on that date. To be
effective, Section 18 of the Corporation Law, earlier quoted, requires that "a copy of the articles of
incorporation as amended, duly certified to be correct by the president and the secretary of the corporation
and a majority of the board of directors or trustees, shall be filed with the Securities & Exchange
Commissioner", and it is only from the time of such filing, that "the corporation shall have the same
powers and it and the members and stockholders thereof shall thereafter be subject to the same liabilities
as if such amendment had been embraced in the original articles of incorporation." It goes without saying
then that appellant rightly acted in its old name when on May 15, 1961, it entered into the indemnity
agreement, Annex A, with the defendant-appellees; for only after the filing of the amended articles of
incorporation with the Securities & Exchange Commission on May 26, 1961, did appellant legally acquire
its new name; and it was perfectly right for it to file the present case In that new name on December 6,
1961. Such is, but the logical effect of the change of name of the corporation upon its actions.
Actions brought by a corporation after it has changed its name should be brought
under the new name although for the enforcement of rights existing at the time the
change was made. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So.
670: Newlan v. Lombard University, 62 III. 195; Thomas v. Visitor of Frederick
County School, 7 Gill & J (Md.) 388; Delaware, etc., R. Co. v. Trick, 23 N. J. L.
321; Northumberland Country Bank v. Eyer, 60 Pa. St. 436; Wilson v. Chesapeake
etc., R. Co., 21 Gratt (Va.) 654.
The change in the name of the corporation does not affect its right to bring an action
on a note given to the corporation under its former name. Cumberland College v.
Ish, 22. Cal. 641; Northwestern College v. Schwagler, 37 Ia. 577. (19 American and
English Annotated Cases 1243.)
In consequence, We hold that the lower court erred in dismissing appellant's complaint. We take this
opportunity, however, to express the Court's feeling that it is apparent that appellee's position is more
technical than otherwise. Nowhere in the record is it seriously pretended that the indebtedness sued upon
has already been paid. If appellees entertained any fear that they might again be made liable to Yek Tong
Lin Fire & Marine Insurance Co. Ltd., or to someone else in its behalf, a cursory examination of the
records of the Securities & Exchange Commission would have sufficed to clear up the fact that Yek Tong
Lin had just changed its name but it had not ceased to be their creditor. Everyone should realize that when
the time of the courts is utilized for cases which do not involve substantial questions and the claim of one
of the parties, therein is based on pure technicality that can at most delay only the ultimate outcome
necessarily adverse to such party because it has no real cause on the merits, grave injustice is committed to
numberless litigants whose meritorious cases cannot be given all the needed time by the courts. We
address this appeal once more to all members of the bar, in particular, since it is their bounden duty to the
profession and to our country and people at large to help ease as fast as possible the clogged dockets of the
courts. Let us not wait until the people resort to other means to secure speedy, just and inexpensive
determination of their cases.
WHEREFORE, judgment of the lower court is reversed, and this case is remanded to the trial court for
further proceedings consistent herewith With costs against appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee and Villamor,
JJ., concur.

# Footnotes
1 13 Am. Jur. 268, See. 131.
2 Pineda & Carlos, The Law on Private Corps. & Corp. Practice, (1960 ed.), p, 30;
3 Agbayani, Commercial Laws of the Phil. (1964 ed.) p. 1266; Salonga, Phil. Law
on Private Corps. (1952 ed.), p. 68; 4 Martin, Commentaries & Jurisprudence on
Phil. Commercial Laws' (1961 Revised Edition with 1964 Supplement), p. 1505.
3 Harden vs. Benguet Consolidated Mining Company, 58 Phil. 141, 146.
4 See fifth assignment of error. The fourth assigned error regarding the validity of
appellant's change of name has been sufficiently discussed earlier.



























G.R. No. L-10510 March 17, 1961
M. MC CONNEL, W. P. COCHRANE, RICARDO RODRIGUEZ, ET AL., petitioners,
vs.
THE COURT OF APPEALS and DOMINGA DE LOS REYES, assisted by her husband, SABINO
PADILLA,respondents.
Jesus B. Santos and Cornelio Antiquera for petitioners.
Teodoro Padilla for respondents.
REYES, J.B.L., J .:
The issue before us in the correctness of the decision of the Court of Appeals that, under the circumstances
of record, there was justification for disregarding the corporate entity of the Park Rite Co., Inc., and
holding its controlling stockholders personally responsible for a judgment against the corporation.
The Court of Appeals found that the Park Rite Co., Inc., a Philippine corporation, was originally organized
on or about April 15, 1947, with a capital stock of 1,500 shares at P1.00 a share. The corporation leased
from Rafael Perez Rosales y Samanillo a vacant lot on Juan Luna street (Manila) which it used for parking
motor vehicles for a consideration.
It turned out that in operating its parking business, the corporation occupied and used not only the
Samanillo lot it had leased but also an adjacent lot belonging to the respondents-appellees Padilla, without
the owners' knowledge and consent. When the latter discovered the truth around October of 1947, they
demanded payment for the use and occupation of the lot.
The corporation (then controlled by petitioners Cirilo Parades and Ursula Tolentino, who had purchased
and held 1,496 of its 1,500 shares) disclaimed liability, blaming the original incorporators, McConnel,
Rodriguez and Cochrane. Whereupon, the lot owners filed against it a complaint for forcible entry in the
Municipal Court of Manila on 7 October 1947 (Civil Case No. 4031).
Judgment was rendered in due course on 13 November 1947, ordering the Park Rite Co., Inc. to pay
P7,410.00 plus legal interest as damages from April 15, 1947 until return of the lot. Restitution not having
been made until 31 January 1948, the entire judgment amounted to P11,732.50. Upon execution, the
corporation was found without any assets other than P550.00 deposited in Court. After their application to
the judgment credit, there remained a balance of P11,182.50 outstanding and unsatisfied.
The judgment creditors then filed suit in the Court of First Instance of Manila against the corporation and
its past and present stockholders, to recover from them, jointly and severally, the unsatisfied balance of the
judgment, plus legal interest and costs. The Court of First Instance denied recovery; but on appeal, the
Court of Appeals (CA-G.R. No. 8434-R) reversed, finding that the corporation was a mere alter ego or
business conduit of the principal stockholders that controlled it for their own benefit, and adjudged them
responsible for the amounts demanded by the lot owners, as follows:
WHEREFORE, premises considered, the decision appealed from is reversed. Defendants-
appellees Cirilo Paredes and Ursula Tolentino are hereby declared liable to the plaintiffs-
appellants for the rentals due on the lot in question from August 22, 1947 to January 31, 1948
at the rate of P1,235.00 a month, with legal interest thereon from the time of the filing of the
complaint. Deducting the P550.00 which was paid at the time when the corporation was
already acquired by the said defendants-appellees Cirilo Paredes and Ursula Tolentino, they are
hereby ordered to pay to plaintiffs-appellants Dominga de los Reyes and Sabino Padilla the
sum of P6,036.66 with legal interest therein from the time of the filing of the complaint until
fully paid.
Defendant-appellee RICARDO RODRIGUEZ is hereby ordered to pay to the plaintiffs-
appellants Dominga de los Reyes and Sabino Padilla the sum of P1,742.64 with legal interest
thereon from the time of the filing of the complaint and until it is fully paid. In addition thereto
the defendants-appellees Cirilo Paredes, Ursula Tolentino and Ricardo Rodriguez shall pay the
costs proportionately in both instances.
IT IS SO ORDERED.
Cirilo Paredes and Ursula Tolentino then resorted to this court. We granted certiorari.
On the main issue whether the individual stockholders maybe held liable for obligations contracted by the
corporation, this Court has already answered the question in the affirmative wherever circumstances have
shown that the corporate entity is being used as an alter ego or business conduit for the sole benefit of the
stockholders, or else to defeat public convenience, justify wrong, protect fraud, or defend crime (Koppel
[Phil.] Inc. vs. Yatco, 77 Phil. 496; Arnold vs. Willits and Patterson, 44 Phil. 364).
The Court of Appeals has made express findings to the following effect:
There is no question that a wrong has been committed by the so-called Park Rite Co., Inc.,
upon the plaintiffs when it occupied the lot of the latter without its prior knowledge and
consent and without paying the reasonable rentals for the occupation of said lot. There is also
no doubt in our mind that the corporationwas a mere alter ego or business conduit of the
defendants Cirilo Paredes and Ursula Tolentino, and before them the defendants M.
McConnel, W. P. Cochrane, and Ricardo Rodriguez. The evidence clearly shows that
these persons completely dominated and controlled the corporation and that the functions of
the corporation were solely for their benefits.
When it was originally organized on or about April 15, 1947, the original incorporators were
M. McConnel, W. P. Cochrane, Ricardo Rodriguez, Benedicto M. Dario and Aurea Ordrecio
with a capital stock of P1,500.00 divided into 1,500 shares at P1.00 a share. McConnel and
Cochrane each owned 500 shares, Ricardo Rodriguez 408 shares, and Dario and Ordrecio 1
share each. It is obvious that the shares of the last two named persons were merely qualifying
shares. Then or about August 22, 1947 the defendants Cirilo Paredes and Ursula Tolentino
purchased 1,496 shares of the said corporation and the remaining four shares were acquired by
Bienvenido J. Claudio, Quintin C. Paredes, Segundo Tarictican, and Paulino Marquez at one
share each. It is obvious that the last four shares bought by these four persons were merely
qualifying shares and that to all intents and purposes the spouses Cirilo Paredes and Ursula
Tolentino composed the so-called Park Rite Co., Inc. That the corporation was a mere
extension of their personality is shown by the fact that the office of Cirilo Paredes and that of
Park Rite Co., Inc. were located in the same building, in the same floor and in the same room
at 507 Wilson Building. This is further shown by the fact that the funds of the corporation
were kept by Cirilo Paredes in his own name (p. 14, November 8, 1950, T.S.N.) The
corporation itself had no visible assets, as correctly found by the trial court, except perhaps the
toll house, the wire fence around the lot and the signs thereon. It was for this reason that the
judgment against it could not be fully satisfied. (Emphasis supplied).
The facts thus found can not be varied by us, and conclusively show that the corporation is a mere
instrumentality of the individual stockholder's, hence the latter must individually answer for the corporate
obligations. While the mere ownership of all or nearly all of the capital stock of a corporation is a mere
business conduit of the stockholder, that conclusion is amply justified where it is shown, as in the case
before us, that the operations of the corporation were so merged with those of the stockholders as to be
practically indistinguishable from them. To hold the latter liable for the corporation's obligations is not to
ignore the corporation's separate entity, but merely to apply the established principle that such entity can
not be invoked or used for purposes that could not have been intended by the law that created that separate
personality.
The petitioners-appellants insist that the Court could have no jurisdiction over an action to enforce a
judgment within five (5) years from its rendition, since the Rules of Court provide for enforcement by
mere motion during those five years. The error of this stand is apparent, because the second action,
originally begun in the Court of First Instance, was not an action to enforce the judgment of the Municipal
Court, but an action to have non-parties to the judgment held responsible for its payment.
Finding no error in the judgment appealed from, the same is hereby affirmed, with costs against
petitioners-appellants Cirilo Paredes and Ursula Tolentino.
Bengzon, Actg. C.J., Bautista, Angelo, Labrador, Barrera and Dizon, JJ., concur.
Concepcion and Paredes, JJ., took no part.